Mark Cuban Can’t Nix Inside Trading Charges

DALLAS (CN) - A federal judge paved for the Securities and Exchange Commission to take billionaire Mark Cuban to trial on inside-trading charges.

"Although the question whether Cuban is entitled to summary judgment is in some respects a close one, the court concludes that the SEC is entitled to present its case to a jury," U.S. District Judge Sidney Fitzwater wrote on March 5.

In a 2008 complaint, the SEC claimed that Cuban sold his shares in metasearch engine operator Mamma.com in breach of a confidentiality agreement. The agency said Cuban sold after Mamma.com CEO Guy Faure confided in him that the company was preparing to make a private investment in public equity offering (PIPE).

Cuban told Faure at the end of the call, "Well, now I'm screwed. I can't sell," according to court records. He nevertheless avoided losing $750,000 by selling 600,000 shares, a 6.3 percent stake in the company, according to the complaint.

In a bid for summary judgment, Cuban said there was no proof that the offering information was confidential. He said the information was widely distributed to prospective investors without confidentiality restrictions and that the company itself had disclosed a possible offering. He also said the company disclaimed that the PIPE information was confidential.

Cuban argued further that any agreement to keep the information confidential would be invalid under the contract doctrine of mutual mistake of fact. A reasonable jury could only find "that the information was not confidential and therefore could not have formed the basis of a valid agreement to maintain its confidentiality," he said.

Fitzwater disagreed.

"Because the concepts of confidential information and nonpublic information essentially have the same meaning, evidence that the PIPE information was nonpublic supports the finding that the information was confidential, so as to defeat Cuban's motion on this ground," the 28-page opinion states.

Cuban's "can't sell" statement "would enable a reasonable jury to find that Cuban at least implicitly agreed to keep the information confidential," Fitzwater wrote.

"This is because the jury could at least reasonably infer that Cuban would not have considered himself foreclosed from trading unless he believed he had agreed to treat the information as confidential," the opinion states. "Cuban is therefore not entitled to summary judgment on this basis."

Cuban also failed to show that there is "uncontroverted evidence" he made full disclosure of his intention to trade, according to the ruling, which gives little weight to deposition testimony in which Cuban discussed the offering with the investment bankers handling it, telling them he was not going to participate in the offering and that he would sell his shares.

"The court holds that a reasonable jury could find from the evidence in the summary judgment record that Cuban merely disclosed that he 'was going to sell,' not that he specified that he would sell before Mamma.com announced the PIPE," Fitzwater wrote. "Accordingly, Cuban is not entitled to summary judgment on this basis."

Cuban's reliance on the offering's Form 20-F filing for foreign private issuers does not shield him from liability either, the judge said, saying the argument "lacks force."

The investment bank's engagement letter referred to the offering only as "one of several possible investment banking services" the bank might provide for Mamma.com, according to the ruling.

"Cuban's reliance on the PIPE's Securities Purchase Agreement is also misplaced," Fitzwater wrote. "The SPA stated that Mamma.com had not provided any of the purchasers any material, nonpublic information. But this statement does not refer to the terms of the SPA itself, i.e., the PIPE offering information. This language instead means that Mamma.com did not provide the purchasers material, nonpublic information about the company itself, beyond what federal securities law generally requires."

The allegations against Cuban were already brought back from the brink in 2010 after the 5th Circuit said they "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."

A year earlier, Fitzwater had dismissed the suit after concluding that the agency never accused Cuban of promising not to trade based on confidential information. He ruled the confidentiality agreement in place did not bar Cuban from trading, but he found Cuban could have owed the company a fiduciary duty.

Follow @davejourno

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