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E-MailMarc I. Steinberg is the Radford Professor of Law at Southern Methodist University Dedman School of Law. This post is based on his recently published book, The Securities and Exchange Commission v. Cuban—A Trial of Insider Trading.
In my recently published book, The Securities and Exchange Commission v. Cuban—A Trial of Insider Trading (Twelve Tables Press 2019) (ISBN 978-1-94607-4249), I focus on the Securities and Exchange Commission’s (SEC) enforcement action against Mark Cuban for allegedly engaging in illegal insider trading. This litigation was far from standard fare. Unlike the vast majority of SEC enforcement actions that are settled pursuant to the consent negotiation process whereby the respondent neither admits nor denies the Commission’s allegations of misconduct, Cuban declined to settle and proceeded to trial. After several years of contentious litigation where he spent $12 million in legal fees, Cuban was vindicated with a favorable jury verdict. The SEC’s case against Cuban raises questions focusing on the scope of this nation’s insider trading laws, the strategic litigation decisions made, the significant costs of defending one’s good reputation, and the proper limits of governmental prosecutorial discretion.
This book addresses many of the complexities of this litigation saga. As an experiential source, the book includes excerpts of pertinent documents from the SEC investigative stage through the entry of judgment. These documents—comprised of pleadings, motions, witness testimony, oral arguments, and jury instructions—are instructive. To add flair, the documents have greater interest due to the contentious nature of this litigation and the identity of the defendant: Mark Cuban, a well-known entrepreneur and investor whose ownership interests include the National Basketball Association’s (NBA) Dallas Mavericks. Mr. Cuban’s media persona includes being a principal investor on the reality television program Shark Tank and performing on Dancing with the Stars.
Being retained as an expert witness on Cuban’s behalf, I experienced this litigation from the playing field rather than as a spectator. I had the opportunity to work with Cuban’s defense team comprised of preeminent securities litigators. As a former SEC enforcement attorney, I also saw this case unfold from some of the questionable litigation decisions made by the Commission.
As examples, questionable SEC strategic decisions included: filing the case in Cuban’s “home” court—the Northern District of Texas while other venues were available—such as the Northern District of California and possibly the Southern District of New York; proceeding to trial having good reason to know far in advance that its “star” witness (Mamma.com’s CEO Guy Fauré who resided in Canada) would refuse to appear in person and thereby having to present his earlier deposition testimony by video at trial; and declining to call its principal expert witness (Dr. Clemens Sialm) to refute the opinions provided by Cuban’s key expert witness (Dr. Erik Sirri). These questionable strategic decisions call for suitable explanation—which will not be forthcoming from the Commission.
The SEC also stretched the contours of the insider trading prohibitions of Section 10(b) in a manner inconsistent with U.S. Supreme Court precedent (see Marc I. Steinberg & William K.S. Wang, Insider Trading (Oxford Univ. Press 3d ed. 2010)). After the complaint’s dismissal by the federal district judge, the Fifth Circuit (620 F.3d 551 (5th Cir. 2010)) surprisingly held that an alleged oral contractual agreement entered into by Cuban that he would not trade on the information conveyed to him by Mamma.com’s CEO Guy Fauré was sufficient to state a claim under Section 10(b). That an oral confidentiality agreement between individuals who are more-or-less strangers becomes transformed into a relationship of trust and confidence—a relationship required by Supreme Court precedent—is perplexing.
The SEC’s embracement of Rule 10b5-2 seeking to effectuate this outcome is no less appealing. Parties to such non-disclosure agreements (NDAs) ordinarily deal at arm’s length seeking to act in their individual or principal’s best interests. Because these parties do not trust one another and do not have a close relationship, they are mindful to execute written agreements to protect the confidentiality of their proprietary information. While violation of such an agreement gives rise to a breach of contract action, it by no means provides a sound basis to recognize the existence of a fiduciary relationship or a relationship of trust and confidence. The determination by the SEC to pursue this rationale, supported by a number of court decisions, contravenes commercial reality and U.S. Supreme Court precedent.
Practical as well as theoretical insights regarding this contentious and highly visible litigation are key objectives of this book. The SEC-Cuban case illustrates that, absent resource to plentiful liquid assets or to an impressive insurance policy, targets of government actions have no viable recourse but to settle on the most practicable terms. In this case, the government met its match. From the outset to its conclusion, the SEC’s case against Cuban was not impressive. Nonetheless, the Commission opted to vigorously pursue this enforcement action and suffered a resounding defeat. This book thus focuses on this intriguing litigation, drawing the reader’s attention as the “story” unfolds.
