The SEC Responds to Mark Cuban's Motion for Attorney's Fees: The Commission Did Not Act in Bad Faith

On September 30, 2009, the Securities and Exchange Commission (“SEC”) filed a Memorandum of Law in Opposition to Defendant Mark Cuban’s Motion for Attorneys’ Fees and Expenses  (“the Response”) in the Northern District of Texas – Dallas Division.  The Response contends the SEC properly alleged each element of an insider trading claim and that Cuban’s allegations of misconduct by the SEC are baseless; therefore, the court should deny Cuban’s Motion for attorney’s fees.

The federal standard for awarding attorney’s fees as a sanction for egregious behavior is extremely high and reserved for situations where the “very temple of justice has been defiled.”

The SEC alleges that each element of an insider trading claim were properly pled by: (1) Cuban accepting a duty to keep the information confidential, (2) Cuban knowingly breaching that duty, and (3) the information, on the basis of which he sold his Mamma.com shares, was material and nonpublic.

First the Response contends Mamma.com extensively discussed inviting Cuban to participate in the transaction and the need for confidentiality.  Mamma.com executives were aware they would be providing Cuban material, nonpublic information if they invited him to participate.  The board instructed the Mamma.com CEO to contact Cuban and ensure Cuban was aware he must keep the information confidential before the information was conveyed.

Second, the SEC argues Cuban accepted the duty of confidentiality.  Mamma.com’s CEO testified that while he cannot recall the specific words Cuban used in accepting the confidential information, he is certain that Cuban accepted.  Additionally at the end of the conversation Cuban stated, “well now I’m screwed. I can’t sell.” Cuban also e-mailed his broker the morning after he sold his shares seeking cover from possible insider trading allegations.  The SEC states that these facts provide sufficient factual basis for the SEC’s allegation that Cuban accepted a duty of confidentiality.  Furthermore, Cuban did not deny accepting this duty, but rather denied having the eight minute conversation with Mamma.com’s CEO.

Third, the SEC states the facts alleged are legally sufficient to prove an agreement to undertake a duty of confidentiality.  For a duty of confidentiality to attach, an investor must have the opportunity either (i) to accept a duty of confidentiality and its attendant restrictions in order to have access to the information, or (ii) to refuse to accept the duty and information, thereby avoiding any restrictions.  The duty cannot be imposed unilaterally.  The SEC contends the Mamma.com CEO testified under oath that he prefaced the conversation that he had confidential information to convey, and that Cuban accepted the duty of confidentiality.  The SEC states it is irrelevant that the CEO does not remember the explicit words Cuban used to accept the duty, because to reach an enforceable agreement it is not necessary for a recipient to say “I agree” or any specific magic words.

Finally the SEC argues Cuban’s allegations of investigative misconduct are baseless.  The SEC states that the unauthorized e-mails sent by Jeffrey Norris were unrelated to the investigation and litigation.  The investigation had reached an advanced stage before the Norris e-mails were sent and Norris was located in Fort Worth while the investigation was led out of Washington D.C.  Additionally, the SEC contends Cuban’s arguments about the Wells process are meritless because Cuban was not entitled to any “assurances” and Cuban’s untimely Well’s submission was still reviewed.  Also, the closing of the unrelated Mamma.com investigation had no influence on the investigation and was not in exchange for any testimony.  Lastly, the initiation of an internal investigation in response to a complaint from Cuban does not suggest improper conduct, especially when the complaint was part of an aggressive defense strategy.

Because the SEC demonstrated that Cuban’s agreement to maintain the confidentiality of the material, non-public information remains a disputed issue of fact and each of Cuban’s allegations of investigatory misconduct are without merit, the SEC has not acted in bad faith.  Therefore, the SEC argues Cuban’s Motion for attorneys’ fees should be denied.

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