To get a sense of how old and long-drawn-out the SEC’s insider trading lawsuit against Mark Cuban is, consider this: the company in which he allegedly insider traded was Mamma.com. The .com was right there in the name. Future generations – hell, present generations – will indiscriminately add “.com” to the end of words to create an old-timey feel, the way we doeth with “-eth.”1
Actually it happened in 2004, and I don’t even need the “allegedly”: there’s no dispute that Cuban insider traded. Everyone agrees that:
- Mamma.com was planning to sell some stock in a PIPE offering which would, inevitably, drive down its stock price;
- Mamma.com’s CEO called Cuban and told him about the planned PIPE offering in advance, hoping to get Cuban to buy more stock;
- Cuban instead sold the stock he already had, prior to the public announcement of the PIPE deal; and
- Then the PIPE was announced and the stock dropped.
So he had material nonpublic information, and he traded on it, and he avoided losses by doing so. INSIDER TRADING. The only debate is whether he insider traded illegally, which, as I often find myself reminding people, is a separate question. The SEC’s lawsuit2 turns not on the facts above, but on whether Cuban agreed not to trade before learning the inside information. Here the evidence is less clear, but there’s enough evidence that he did for the SEC to survive summary judgment today and take the case to trial. Here is that evidence:3
There is evidence in the summary judgment record that, on June 28, 2004, on the eve of the PIPE offering, Mamma.com’s CEO, Guy Fauré (“Fauré”), emailed Cuban asking to speak with him as soon as possible. Cuban telephoned within five minutes. When Fauré answered the call, he told Cuban, “I’ve got confidential information.” Cuban responded, “Um hum, go ahead,” or “Okay, uh huh, go ahead,” or something to that effect. Fauré then informed Cuban of the planned PIPE offering. Cuban reacted angrily to this news, and near the end of the conversation said something like, “Now I’m screwed. I can’t sell.”
Fans of American hedge fund managers or British pub chains may recognize a fact pattern similar to that of David Einhorn’s call with Punch Taverns, where Punch asked Einhorn to participate in a capital raise, Einhorn said no, and Einhorn then dumped the stock. This got Einhorn in trouble, which took him by surprise, because he clearly did not promise not to trade – he was asked to, and said no – and in the U.S. that would be enough to keep him out of trouble. In the U.K. it was not, so, live and learn.
Whenever the SEC tenaciously goes after someone for nine years – and they’ve had some real ups and downs in this case – it’s worth asking what important goal they’re trying to accomplish. In the narrow sense, Cuban was at the very least being kind of a dick by dumping Mamma.com’s stock after the CEO came to him asking him to support a capital raise. Of course being a dick is the normal method of operations in the capital markets, so that’s not much to go on, though if the SEC is right and he’d agreed to keep it confidential and knew that meant he couldn’t trade, then, sure, that’s bad and he should get sued.
The broader issue, and it’s an important one, is that big investors shouldn’t be tipped off before PIPE deals and have the opportunity to sell. And this problem is very easily avoided. If you don’t want to have these misunderstandings, just get the confidentiality agreement in writing. This doesn’t need to be a lengthy negotiated agreement; a one-line email saying “you agree to keep this under your hat and not trade on it until it’s public” generally does the trick. And in fact that has become the market standard in the U.S. You don’t call someone up and say “hey, we’re announcing an equity deal tomorrow, want in?” You have your banker call them up and wall-cross them, with a careful log and preferably an email acknowledgement, before you tell them about the deal.4
This has become the market standard in part because of Regulation FD, which forbids companies from telling investors material nonpublic information without getting them to agree to keep it confidential and not trade on it. So, if Cuban is right and the SEC is wrong here, Mamma.com should be in trouble for violating Reg FD by telling him about the PIPE without wall-crossing him. Which I guess gives Fauré et al. some incentive to support the SEC’s story.
But, to be fair, it’s also the market standard in part because of the SEC’s pursuit of Mark Cuban: nine years of litigation isn’t much fun for most investors, so many investors want to be wall-crossed for their own protection nearly as much as issuers want to wall-cross them to prevent them from front-running. Part of the reason that this case looks so old-timey in 2013 is that, just by litigating it for nine years, the SEC has done a lot to solve the problem that caused it.
SEC v. Mark Cuban [N.D. Tex.]
Mark Cuban Loses Bid for Judgment Ending SEC Insider Suit [Bloomberg]
SEC Case Against Mavericks Owner Cuban to Proceed [WSJ]
1. “We doeth” chaps.com my hide too – it’s really just a 3rd person singular – but as a vague old-timey indicator its use has expanded beyond its grammar.com.
2. GUYS. In my travels I discovered that Mark Cuban is named as a defendant in at least two federal lawsuits in the Northern District of Texas. One is this SEC thing. The other thing … requires quotation at length. Its entire length:
SO THERE’S THAT.
3. This evidence is not undisputed; Cuban disagrees and the judge suggests that Fauré’s memory might not be so hot.
4. This is not foolproof:
- Banker: Want to take a wall-cross in Mamma.com?
- Investor: No I certainly do not!
- Banker: Okay, pleasure not doing business with you!
- Investor: [Hangs up, sells all Mamma.com stock]
But that’s the price you pay for certainty.