Verret on Cuban Insider Trading Suit
The Securities and Exchange Commission (SEC) received a serious blow when a federal judge in Dallas dismissed a civil insider-trading suit against Dallas Mavericks owner Mark Cuban, ruling that the SEC could not hold Cuban liable for insider trading absent an allegation that Cuban agreed not to trade stock based on confidential information he had received.
"This was a frontier case for the SEC," said Professor J.W. Verret. "The SEC was straining insider trading beyond its proper scope to catch a big fish, and it lost. It's time for the SEC to go home and lick its wounds."
A representative of the SEC said in a statement that the agency is reviewing the ruling and considering any options it may have.
Judge tosses Cuban insider trading suit, ESPN.com, July 17, 2009.
"Five years ago, Mamma.com Chief Executive Guy Faure told Cuban by phone that the company was planning to raise capital in a so-called private placement in a public equity offering known as a PIPE, the SEC lawsuit said.
"Faure began the conversation by saying he was about to give confidential information and Cuban agreed to keep it to himself, the SEC said. According to the lawsuit, Cuban became angry because he said PIPEs dilute stock value for existing shareholders, and he ended the call by saying, 'Well now I'm screwed. I can't sell.'
"The SEC alleges that Cuban sold his shares hours after the phone call from Faure, before the announcement of the private offering.
"Fitzwater ruled that Cuban's statement can't 'reasonably be understood' as an agreement not to sell based on the information.
"'Thus while the SEC adequately pleads that Cuban entered into a confidentiality agreement, it does not allege that he agreed, expressly or implicitly, to refrain from trading on or otherwise using for his own benefit the information the CEO was about to share,' Fitzwater wrote."