(CN) – Mark Cuban cannot claim that the Securities and Exchange Commission acted with prejudice, or “unclean hands,” by accusing him of using inside information to trade shares on a Canadian search engine, a Dallas federal judge ruled.
The SEC charged Cuban with insider trading in November 2008 alleging that Cuban saved himself $750,000 four years earlier by dumping shares in Mamma.com after the company’s CEO told him it would be issuing discounted shares to raise money.
Cuban defended himself aggressively against the charges, filing a Freedom of Information Act complaint in June 2009 to force the SEC to produce documents about their investigation against him, including any applications for rewards for tips provided by informants in the case.
A month later, U.S. District Judge Sidney A. Fitzwater dismissed the SEC’s case because the confidentiality agreement between Mamma.com and Cuban – who owned just over 6 percent of the company – did not explicitly bar Cuban from trading under securities laws.
The SEC appealed to the 5th Circuit, which reinstated the case. “The allegations, taken in their entirety, provide more than a plausible basis to find that the understanding between the CEO and Cuban was that he was not to trade, that it was more than a simple confidentiality agreement,” the September 2010 decision states.
On Monday, Fitzwater said Cuban had failed to allege any misconduct on the part of the SEC that “resulted in prejudice to his defense … that rises to a constitutional level and is established through a direct nexus between the misconduct and the constitutional injury.”
“This is fatal to his unclean hands defense,” Fitzwater wrote.
Cuban, who owns the Dallas Mavericks, claimed he was entitled to the affirmative “unclean hands” defense because SEC investigators were biased against him personally, because they committed to bringing an enforcement action against him before they had concluded their investigation, and because they engaged in “outright investigative and litigation misconduct” to prejudice the case against him.
Fitzwater was dismissive of Cuban’s first two grounds and said the third claim alone – allegations of misconduct – warranted discussion.
Cuban said SEC investigators discouraged witnesses from talking to his lawyers and senior staff never investigated his report of this conduct.
Fitzwater said Cuban failed to “allege that this resulted in any prejudice in his defense of this enforcement action much less prejudice that rises to a constitutional level.”
The judge also brushed aside Cuban’s allegation that SEC staff threatened the same witness with perjury when he was unable during sworn testimony to clearly recall certain statements he had supposedly made to the commission.
“Cuban does not allege that the SEC’s conduct in any way impaired his ability to defend the enforcement action – for example, that he was thereafter unable to obtain truthful, favorable evidence from the witness,” Fitzwater wrote.
Cuban had also accused the SEC of closing its separate investigation of Mamma.com to induce then-CEO Guy Fauré to change his earlier testimony concerning a phone call with Cuban. Fitzwater noted, however, that Cuban did not claim Fauré actually changed his tune nor did he show how any “changed testimony impaired his ability to defend the enforcement action, or, critically, that this resulted in prejudice that rose to a constitutional level.”