- Lester Munson, Legal Analyst
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Shortly before noon on a Monday in June 2004 in his office in the American Airlines Center, Mark Cuban saw an email from Guy Faure, the CEO of an Internet search company in which Cuban was the biggest shareholder. Faure wanted Cuban to call him immediately. Cuban made the call, and as soon as Faure realized it was Cuban, Faure said, "I've got some confidential information for you."
For the next eight minutes, Cuban and Faure discussed Faure's revelation that the company, then known as Mamma.com and now known as Copernic Inc., was preparing to announce a new stock offering that would likely cut the value of shares owned by shareholders -- including Cuban.
That phone conversation will be the focus of a jury trial that begins Monday in federal district court in Dallas and will determine whether Cuban violated federal stock trading laws when, based on Faure's "confidential information," he sold all of his stock and avoided a loss of at least $750,000.
The U.S. Securities Exchange Commission in a civil lawsuit it filed against Cuban argues that the telephone call and Cuban's quick sale of his 600,000 shares of stock (6.3 percent of the company) violated what are known as insider trading laws, a set of rules that bar company insiders' use of information to obtain a trading edge. If the jury agrees with the SEC, Cuban could be forced to pay the $750,000 loss he avoided, nine years of interest, and a fine of as much as $2.25 million.
Faure and Cuban will describe their versions of the call to the jury of 10 citizens from the Dallas area. Faure and Cuban agree that the stock offering would instantly dilute and reduce the value of Cuban's stock as ownership would spread among additional investors, and they agree that Cuban was not happy about it. But after that initial agreement, they offer different stories.
Faure, whose testimony is recorded on video because he resides in Montreal and could not be subpoenaed into the trial, says that an angry Cuban responded to Faure's news of the stock offering by saying, "I'm screwed, I can't sell." In the course of his video testimony, Faure repeats three times his assertion that Cuban knew he could not sell after Faure gave him the confidential information.
Cuban, who will enjoy the advantage of testifying live in a market where he has become a celebrity owner of the popular Dallas Mavericks, will claim, according to court papers and pretrial deposition testimony, that he does not remember saying he was "screwed" or saying he could not sell his stake in the company. He does not deny the statements that Faure describes, he'll tell the jury, but he does not specifically remember them.
Cuban's testimony is part of a vigorous and expensive defense to the SEC's charges. Although the billionaire (Yahoo paid him $5.9 billion for his startup company known as Broadcast.com in 1999) could have easily settled with the SEC, he has orchestrated an all-out assault on the SEC, its lawyers, and its investigators. His attacks on the SEC and its staff make his attacks on NBA referees look benign.
His legal team for the trial will include seven lawyers from five firms, all of them experts in the law that governs stock trading and all of them highly expensive. Cuban and his lawyers have fought the SEC vigorously for nearly five years in litigation that has produced every pretrial maneuver permitted under the rules that govern such cases and nearly 12,000 pages of court documents. His legal team has prepared 282 exhibits for the trial.
While the SEC contends that Cuban knew that Faure's information on the stock offering was confidential and that Cuban agreed not to use the inside information until it was made public to all investors, Cuban has attacked the integrity of the SEC attorneys and has accused them of a "pre-existing bias" against him and of "bad faith in bringing an utterly meritless case against him."
Cuban denies every statement that the SEC has made in its complaint against him. He denies that he agreed not to trade on the inside information and has even denied that the inside information from the company's CEO was inside information. His legal team is prepared to present an expert witness who will assert that the information Faure gave Cuban in the phone call was not "material," the legal term for inside information that would have an effect on the price of the company's stock.
Soon after Faure gave Cuban the "confidential information" on June 28, 2004, Cuban demanded more details on the new stock offering. Did the offering, for example, include discounts for current shareholders, Cuban asked. Faure connected Cuban to an investment banker who was responsible for selling the new stock. Only 1 minute after Cuban's conversation with the investment banker, Cuban called his broker to order an immediate sale of his nearly $8 million in stock. The broker managed to sell 10,000 shares that afternoon and sold the remaining shares the next day at an average price of $13.29 per share.
Faure and the company announced the new offering on June 29, 2004, as scheduled after the close of trading and after Cuban had sold his entire stake. The next morning, as Cuban anticipated, the stock opened at a price of $11.89, a drop in value of more than 9 percent. During the next few days, the value of the shares dropped further to $8 per share, a loss of 39 percent.
By selling his stock before the public announcement prompted a drop in the value of Mamma.com shares, Cuban avoided a loss of $1.25 per share on his 600,000 shares, or $750,000, according to the SEC.
Against the scorched-earth approach from Cuban, the SEC's legal team of Kevin O'Rourke, Jan Folena, Duane Thompson and Adam Aderton has thus far met every challenge. When U.S. District Court Judge Sidney A. Fitzwater made a surprising and bizarre decision to dismiss the case in 2009 (the judge followed a theory of law that had not been offered by either side in more than 100 pages of briefs), the SEC lawyers did not hesitate to appeal to the U.S. Court of Appeals in New Orleans and won a dramatic reversal.
In a court brief, O'Rourke calls Cuban's selling of shares an "act of brazen subterfuge" and an "out-and-out deception."
O'Rourke concluded in the brief that "Cuban's argument that a person can promise confidentiality and then deliberately and furtively break that promise by trading on the confidential information is shameless."
Judge Fitzwater, who has presided over the litigation for its entire five-year history, says in one of his opinions that it's going to be "a close call."
After five years of litigation, an appeal to a higher court, the preparation and filing of nearly 12,000 pages in court documents, and countless hours of work by SEC lawyers and Cuban's legal team, the decision and a portion of Cuban's legacy will turn on that eight-minute telephone conversation on what seemed to be just another Monday afternoon.
9hMichael C. Wright