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Even So, Mark Cuban Is Probably Glad He Got Rid Of His Stock

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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 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:

  • was planning to sell some stock in a PIPE offering which would, inevitably, drive down its stock price;
  •'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,’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'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, 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" my hide too - it's really just a 3rd person singular - but as a vague old-timey indicator its use has expanded beyond its

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:


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
  • Investor: No I certainly do not!
  • Banker: Okay, pleasure not doing business with you!
  • Investor: [Hangs up, sells all stock]

But that's the price you pay for certainty.


After The STOCK Act It Will Still Be Legal To Trade On Congressional Inside Information*

Here's a sort of touching monologue from David Einhorn's call with Punch: If you’ve done the analysis, and come to the conclusion that on it’s own, the company is not going to make it, it makes all of the sense in the world to raise equity at whatever the price is, so that you can know that the company, you know, is – is going to make it. Now, what that brings to my mind though is, you know, obviously we haven’t done your analysis, we haven’t done -- signed an NDA; I don’t know that we’re going to sign an NDA, because we prefer to just remain investors, but from my perspective, and I’ll be just straight up with you, is that gives a lot of signalling value. And the signalling value that comes from figuring out the company has figured out that it’s not going to make it on it’s own is that we’ve just grossly misassessed the -- you know what’s going on here. And -- and that, that will cause us to have to just reconsider what we’re doing, which is not the end of the world to you. You will continue on even if we don’t continue on with you. You could sort of see why the FSA read that to mean that he was insider trading. Like ... (1) You have told me something with signalling value. Sorry - "a lot of signalling value." (2) I will now act on that signal. (3) Don't be mad. "Signalling value" sure sounds like it means "material nonpublic information," doesn't it? Now as we've discussed before, trading on that information would not be enough to make Einhorn guilty of insider trading in the US, though maybe it wouldn't be exactly a great idea here either. Why? Because in our weird but sort of sensible insider trading laws, it's just not illegal to trade on material nonpublic information. It's only illegal to trade based on material nonpublic information that was obtained in violation of some sort of duty of confidence. Since Einhorn didn't sign an NDA, he had no duty of confidence. And since the Punch CEO and bankers weren't tipping him for nefarious purposes, but were instead sounding him out on the company's behalf as a shareholder and potential investor in a new capital raise, they weren't breaching their duty of confidence. You could quibble with the details of that but it's basically the law here. In England not so much. That also seems to be the law for our friends in Congress, who recently passed a law making it illegal for them to insider trade, which is worrying some people who make their living from trading on Congressional inside information: