On October 16, a federal jury in Dallas, Texas rejected the SEC's claims that Mark Cuban engaged in insider trading. The jury verdict marks the potential ending to the high-profile civil enforcement action brought by the SEC against Cuban in 2008.
In its action against Cuban, the SEC claimed that Cuban misappropriated material, nonpublic information by selling shares of stock in Mamma.com after learning about a planned PIPE (private investment in public equity) offering from the company's CEO. In July 2009, the district court dismissed the SEC's case against Cuban, finding that Cuban agreed only to keep the provided information confidential, and that he did not explicitly agree to refrain from trading based on that information. We reported on the court's 2009 decision in a previous Jones Day Commentary (available here).
The SEC appealed the court's decision, which was eventually vacated on procedural grounds by the court of appeals. On remand to the lower court, Cuban did not prevail on a motion for summary judgment, allowing the SEC to bring its case before a jury. Absent a written agreement to keep the information about the PIPE offering confidential and refrain from trading based on that information, the jury was left to examine, among other things, the competing testimony of the company's CEO and Cuban as to any promises relating to the confidential information. After deliberating for less than four hours, the jury returned a unanimous verdict for Cuban. It is not clear whether the SEC will appeal the verdict.
It has been reported that Cuban spent more than $8 million over a nine-year period defending against the SEC's claims, compared to the $2 million in civil damages sought by the SEC for the alleged violation, making it one of the most expensive individual insider trading cases the SEC has ever taken to trial. These costs are separate from those incurred by the company and its management as a result of their involvement in the investigation and litigation of the Cuban case. Cuban's financial status permitted him to refuse settlement in favor of a jury trial.
Final Observation
It is unlikely that this decision will alter the SEC's enforcement practices with respect to insider trading. The Cuban case, however, again highlights the fact-specific nature of insider trading cases, the challenge faced by the SEC in providing sufficient evidence to prove its allegations of insider trading, and the significant costs involved in taking an insider trading case to trial, which can be shouldered by few individuals.
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