Mark Cuban Wants Attorneys' Fees and Expenses for SEC's Bad Faith Lawsuit

On August 28, 2009, Mark Cuban filed a Motion for Attorneys’ Fees and Expenses (“the Motion”) in the Northern District of Texas – Dallas Division.  The Motion contends Cuban is entitled to Attorneys’ fees and expenses he incurred defending against the Securities and Exchange Commission’s (“SEC”) complaint against Cuban for insider trading. Cuban states he should receive these expenses, not because the Court rejected the SEC’s claim but rather because the SEC filed the suit in bad faith.

Cuban argues the court should sanction the SEC because: (1) it can award fees either under inherent power or 28 U.S.C. § 2412(b); (2) the SEC acted in bad faith in bringing the suit; and (3) the fees are appropriate in this case. 

Section 2412(b) permits the court to award  attorneys’ fees and expenses against the government just like any other party.  28 U.S.C. § 2412(b).  This statute has been held to specifically include bad faith conduct both prior to and during litigation.  Bad faith includes abusive conduct that constitutes or is tantamount to bad faith.  Specifically, it is bad faith to institute an action where no reasonable attorney could conclude the elements of the claim could be established.

Cuban argues that the SEC acted in bad faith by  (a) ignoring exculpatory evidence; (b) initiating the Wells process and informing Cuban of plans to bring an action for insider training despite an absence of evidence of a confidentiality agreement; (c) improperly reviewing Cuban’s second Wells Submission; (d) closing its investigation into Mamma.com just days before seeking new testimony from key witnesses; and (e) taking testimony of Mamma.com’s CEO for a second time in hopes of getting him to change prior statements. 

Cuban asserts that the sole support for the SEC’s claim was Cuban’s alleged acknowledgement that information he received from Mamma.com’s CEO regarding its stock was confidential.  The Court addressed this issue in its decision dismissing the case and held there was no evidence of any type of confidentiality agreement.  Cuban contends the SEC brought the action in bad faith by making a factual assertion of this confidentiality agreement knowing the evidence flatly contradicted it.

Third, the Motion argues attorneys’ fees and expenses are appropriate in this case as a sanction to deter frivolous litigation.  Cuban states his attorneys’ fees and expenses have exceeded $1 million and an award of this magnitude will deter the SEC from pursuing future meritless claims.

Because the SEC pursued the insider trading claim against Mark Cuban knowing it lacked evidence of a confidentiality agreement, the SEC acted in bad faith in bring the suit.  Therefore because the SEC acted in bad faith, Cuban contends it is appropriate to sanction the SEC by awarding attorneys’ fees and expenses.

The SEC intends to resond to Cuban’s Motion for Attorneys’ Fees.  The SEC’s brief is due by September 30, 2009.  The blog will post on those arguments once the SEC files with the Court.

The primary materials for this post are available on the DU Corporate Governance website.