Final exam for business law class

1. 1
Signature Assignment: SEC vs. Mark Cuban
(3-08CV2050-D, 09-10996 and Litigation Release Order 22855)
Stacey Troup
Business Law/MGT-320
April 13, 2017
Dr. Adriana Reza

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Case Assignment: SEC vs. Mark Cuban
For this Week 8 Signature Assignment, I will be performing an IRAC evaluation (Issue,
Rule, Application, Conclusion) of the SEC v. Mark Cuban case. In addition to this evaluation, a
review of the applicable laws which the SEC insists were violated when his shares in
Mamma.com were liquidated. Over the course of these three trials, it will be proven why the
case against Mr. Cuban was completely exculpatory and why he ultimately found favor against
these egregious and circumstantial charges.
The Issue
In 2008, the SEC asserted that Mark Cuban violated SEC Regulation M, Rule 101 and
102 by committing insider trading violations when liquidating his position in Mamma.com after
being offered a PIPE investment by the CEO (Private Investment/Public Equity) (Snell &
Wilmer, LLC, N.D.). Specifically, the issue that the SEC stands firm on is the fact that after Mr.
Cuban found out about the PIPE offering, he immediately sold his shares in the company. The
SEC refers to this as insider trading because they believe he was offered information not
available to the public (Complaint: Mark Cuban, 2008). In addition, they sought monetary
compensation for their belief that he violated Section 17(a) of the Securities Act of 1933, Section
10(b) of the Exchange Act of 1934, and rule 10b-5 of same.
The Rule(s)
The SEC contends several rule violations within their original docket filing including
violations of SEC Regulation M, inclusive of Rule 101 and 102 within same, 17(a) violations of
the Securities Act of 1933, 10(b) violations of the Exchange Act of 1934, including rule 10b-5
within, and charges of insider trading (Complaint: Mark Cuban, 2008).

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SEC Regulation M contains provisions for the conduct of traders in an attempt to prevent
manipulation of stocks or other conduct which could improperly influence the stock market or
“offered security” (Regulation M Filings, N.D.). Violations cited by the SEC which were
contained in the original complaint against Cuban included those of Rule 101 and 102,
respectively. Rule 101 “prohibits distribution participants and their affiliated purchasers from
bidding for, purchasing or attempting to induce any person to bid for or purchase a covered
security of a distribution during a restricted period” (Pinedo, Harmetz, & Berman, 2016).
“Restricted Period” for the purposes of Rule 101 is variable depending upon the type and value
of the covered security (Pinedo, Harmetz, & Berman, 2016).
Rule 102 of Regulation M is similar to that of Rule 101 as it “prohibits the same activities
during the same restricted period” (Pinedo, Harmetz, & Berman, 2016). Within Rule 102,
exemptions are present but are limited due to the SEC viewpoint that “issuers, selling
shareholders and their respective affiliated purchasers, as having a more direct stake in
distribution” exists (Pinedo, Harmetz, & Berman, 2016).
Congress adopted Rule 10b-5 and 10b5-2 in an attempt to “resolve insider trading issues
where courts have disagreed” within the Securities Exchange Act of 1934 (Securities Exchange
Act of 1934). Rule 10b5-1 provides that “a person who trades on basis of material non-public
information if the trader is aware of same when making sale” is guilty of Insider Trading (Insider
Trading, N.D.). Rule 10b5-2 clarifies “how the misappropriation theory applies to certain non-
business relationships”. Specifically, the rule provides that “a person who receives confidential
information under circumstances specified in the Rule would owe a “duty of trust” or confidence
and thus could be liable under the misappropriation theory” (Insider Trading, N.D.) (Securities
Exchange Act of 1934).

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Congress adopted SEC 17(a) to the Securities Act of 1933 in an attempt to “provide
investors with full disclosure of material information concerning public offerings of securities in
commerce, to protect investors against fraud, and through the imposition of specified civil
liabilities, to promote ethical standards of honesty and fair dealing (Section 17(a) of the
Securities Act of 1933: Unanswered Questions, 2013). SEC 17(a) is narrower in scope due to
the fact that “charges may be based on negligent conduct but 10b requires proof of scienter”
(Section 17(a) of the Securities Act of 1933: Unanswered Questions, 2013)
The “Standard for Negligence” under 17(a) has “no major jury induction treatise offers a
model instruction on the definition of negligence specifically in the context of 17(a)(2) or (a)(3)
claims”. The trend within courts seems to favor “expanding the scope of evidence that can be
considered in determining whether the conduct was negligent” (Section 17(a) of the Securities
Act of 1933: Unanswered Questions, 2013).
Insider Trading violations happen when an investor becomes aware of information from
inside a company (which is not available to the public) they are invested in which may positively
or negatively affect stock prices. When an investor is in possession of this information and
subsequently makes a purchase of the company’s stock or sells his/her position of their existing
stock, the Insider Trading violation exists (Insider Trading, N.D.). The charge is due to the fact
that they made a decision based on non-public information and is charged under 17 CFR
240.10b5-1of the Securities Act of 1933 (Rule 10b-5, N.D.).

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Application
The SEC contends that Mr. Cuban violated Insider Trading rules when he sold his
600,000 shares of Mamma.com following being offered a PIPE investment in the company (SEC
v. Mark Cuban, 2008) (Complaint: Mark Cuban, 2008).
Deposition from the CEO of Mamma.com reveals the contention that the CEO told Mr.
Cuban that the information in the call was “confidential” and that once being offered an
investment in the firm’s PIPE offering, Cuban stated he disliked PIPE’s because they “dilute
shareholders”. This transaction and conversation took place during June 2004. Cuban’s original
acquisition of 600,000 shares of the company came in March 2004 which gave him a 6.3% stake
in the company (Complaint: Mark Cuban, 2008).
In the spring of 2004, Merriman Curhan Ford & Co. advised Mamma.com CEO that a
PIPE investment would be a suitable solution to help raise funds for their company. Toward the
end of 2004, as the PIPE offering was near closing, the CEO and Chairman of Mamma.com
reached out to Cuban to offer this investment to him. Cuban, however, expressed his disdain for
PIPE’s and subsequently made a call to his broker to dump his position in the company
(Complaint: Mark Cuban, 2008).
During the course of the original case, it was revealed that Mamma.com referred
investors to Merriman for more information on the PIPE offering and Cuban, having contacted
them for same, was alerted that Mamma.com PIPE was being sold at a discount to investors by
the brokerage house and its agent. It was at this point that Cuban, clearly concerned over what
the broker had revealed, decided to dissolve his position in the company. Over the next 2 days,
he was successful in dumping his position at ($13.4990 and $13.297 per share, respectively)
(SEC v. Mark Cuban (Appeal), 2013) (SEC Appellate Brief: Mark Cuban, 2010).

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The SEC contends that because Cuban sold his shares after learning of the PIPE
investment, he had violated Insider Trading laws in accordance with Regulation M, Section 101
& 102 as well as significant violations under the Securities Act of 1933 and the Exchange Act of
1934 (Complaint: Mark Cuban, 2008).
During the first trial, one of the lawyers for the SEC was fired from the trial due to
discovered emails he had sent to Mr. Cuban relating to his public support of Bush Administration
opponents (Browning, 2014). The bias of these emails as well as the failure of the SEC to prove
that Cuban had violated trade rules when he liquidated his position in Mamma.com resulted in
the charges being dismissed against Cuban under Civil Procedure 12(b)(6) (SEC Appellate Brief:
Mark Cuban, 2010).
In January 2010, the SEC filed an appeal of the original decision to vacate the charges
against Mr. Cuban. The SEC challenged the original court’s decision that they failed to provide
evidentiary support for their case against Mr. Cuban. The 5th Circuit Court approved the
reinstatement of the case (through reversal of original decision) and an Appeal began (SEC
Appellate Brief: Mark Cuban, 2010).
Though Cuban cannot specifically recall the exact conversation that transpired between
the CEO and himself during the PIPE announcement, he contends that at no point was the
statement made that everything in the call would be “confidential” in nature. Rather, it is Mr.
Cuban’s position that he was one of the last investors called for this PIPE offering and the
brokerage house had given him advice which was also public at the time of its release and this
led to his decision to dissolve his interest in Mamma.com (Browning, 2014).
Though the original case contends that Mr. Cuban had violated Insider Trading rules by
selling his shares after obtaining knowledge of this PIPE offering, and the original court vacated

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the charges against him, the Appeal was subsequently lost by Mr. Cuban and he was officially
charged with Insider Trading Violations as well as other statutory infractions (SEC Appellate
Brief: Mark Cuban, 2010).
Dissatisfied with the Appellate Court’s decision, Mr. Cuban launched his own appeal as
he maintained his position that he was not violating any trade regulations by selling his shares
and that the information was, indeed, available to the public. He subsequently provided not only
proof of same but also provided a witness, former SEC Official Dr. Erik Sirri who “undercut the
position of the SEC that information Cuban obtained was available to the public and offered
proof of internet postings of same information including information posted on the SEC’s own
website” (Browning, 2014).
Conclusion
As stated, the result of the first case was that it was vacated by the courts for lack of
evidentiary support (SEC Appellate Brief: Mark Cuban, 2010). Subsequently, the SEC filed an
appeal of the decision to vacate charges and won its case against Mr. Cuban on Appeal. Finally,
in an effort to prove that he was in no way liable for the charges nor was he guilty in any way,
Mr. Cuban filed his own appeal and with the help of former employees of the SEC, proved that
information existed in the public to support his claim that his decision to sell his position in
Mamma.com was in no way in violation of any trade laws (SEC Appellate Brief: Mark Cuban,
2010). The Jurors agreed with Mr. Cuban and after only five hours of deliberation of all
evidence available, the Court rendered a Decision under Litigation Release No. 22855 finding
Mr. Cuban not liable for Insider Trading and releasing him from liability on all charges (Mark
Cuban Release Litigation Order, 2013).

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Conclusion
While the SEC has a duty to the public to enforce insider trading, it has become more and
more evident that their blind persecution of people on the basis of circumstantial evidence needs
to be readdressed less they continue to fail to properly persecute wrongdoers.
In the last few years, the SEC has been on a failing track of charging Insider Trading
violations including SEC v. Cuban, SEC v. Steffes, SEC v. Schvacho, SEC v. Jensen and SEC v.
Kovan (SG Lawyers, 2014). These cases were based on the idea that someone had insider
information and passed it along or made investment decisions based on the information they
received but the SEC lost each of these cases for lack of evidence and rather prosecuted based on
circumstantial evidence (SG Lawyers, 2014).
While Mr. Cuban had received information, it was proven without a shadow of a doubt,
that it was also available to the public at the time of his decision to dissolve his position in
Mamma.com. He stood by his position throughout three trials and spent millions of dollars to
defend his innocence and ultimately proved his case to the courts. He had all charges vacated
and was not only not fined for his actions but avoided both jail time as well as disbarment from
future trading activities by proving himself to a jury of his peers.
The SEC has found favor in some cases, however, as is their responsibility to do less the
public become defrauded by the Securities industry. In the case of SEC v. Stewart, Peter
Bacanovic proved that sometimes, the SEC does, indeed get it right. Ms. Stewart was blatantly
given insider information and executed redemptions of her position to avoid losses as a result.
She was found guilty and served minimal jail time for her part in this Securities Fraud case (SEC
v. Martha Stewart, Peter Bacanovic, 2003).

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After reading the facts of the trial and seeing the great lengths Mr. Cuban was willing to
go through to defend his innocence, it is evident that he did not perpetrate Insider Trading or
other securities violations as originally charged. He clearly had information that was available to
others and made an investment decision based on his dislike of their present offering and
information received from their broker of choice on the offering.
During the significant review of Reg. M and the other charges, in this case, it appears that
the SEC leaves sections of their statues deliberately vague in order to bring these circumstantial
cases for profit. Personal discussions I had for research purposes of this article resulted in people
being asked who hold Series 7 licenses, as well as either law licenses or CFA designations, could
also not answer specific questions as to PIPE Agreements or their relation to certain statues even
given their history within the industry (much to their own surprise). The SEC really needs to
reevaluate these laws to make them clear and easy to decipher, particularly where Insider
Trading charges are sought due to the extreme prison time one faces as well as loss of license
and significant financial loss as a result of same.
In addition, closing those violators who continue to blatantly violate trade laws while
paying exorbitant fees for their illegal activities (such as HSBC) should be barred from the
Securities Industry going forward as it is clear they have no intention of becoming compliant
(Viswanatha & Wolf, 2012).
It is abundantly clear that Mr. Cuban did not violate trade laws and maintained his
innocence throughout this trial.

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References
Browning, J. G. (2014, 09). How Mark Cuban Beat the SEC. Retrieved from Dmagazine:
https://www.dmagazine.com/publications/d-ceo/2014/september/how-mark-cuban-beat-
the-sec/
Complaint: Mark Cuban. (2008, 11 17). Retrieved from SEC:
https://www.sec.gov/litigation/complaints/2008/comp20810.pdf
Insider Trading. (N.D.). Retrieved from SEC: https://www.sec.gov/fast-
answers/answersinsiderhtm.html
Mark Cuban Release Litigation Order. (2013, 10 23). Retrieved from SEC:
https://www.sec.gov/litigation/litreleases/2013/lr22855.htm
Pinedo, A. T., Harmetz, L. S., & Berman, B. (2016). Frequently Asked Questions About
Regulation M. Retrieved from MOFO: https://media2.mofo.com/documents/faqs-
regulation-m.pdf
Regulation M Filings. (N.D.). Retrieved from FINRA: http://www.finra.org/industry/regulation-
m-filings
Rule 10b-5. (N.D.). Retrieved from SEC.Gov:
http://www.investopedia.com/terms/r/rule10b5.asp
SEC Appellate Brief: Mark Cuban. (2010, 01). Retrieved from SEC:
https://www.sec.gov/litigation/briefs/2010/cubanbrief0110.pdf
SEC v. Mark Cuban (Appeal), 09-10996 (5th Circuit Court 2013).
SEC v. Mark Cuban, 1-3-08CV2050-D (5th Circuit Court 2008).
SEC v. Martha Stewart, Peter Bacanovic, 03 CV 4070 (NRB) (New York District Court 06 04,
2003). Retrieved from https://www.sec.gov/litigation/complaints/comp18169.htm
Section 17(a) of the Securities Act of 1933: Unanswered Questions. (2013, 07 08).
BLOOMBERG BNA SECURITIES REGULATION & LAW REPORT. Retrieved from
Keker.com: http://www.keker.com/news/news-items/Section-17-a-of-the-Securities-Act-
of-1933-Unanswered-Questions-
Securities Exchange Act of 1934. (n.d.). Retrieved from SEC.Gov:
https://www.sec.gov/about/laws/sea34.pdf
SG Lawyers. (2014, 02 10). SEC Loses Four More High-Profile Trials Where it Relied on
Circumstantial Evidence and Questionable Materiality Arguments to Prove Insider
Trading and Fraud. Retrieved from SG Lawyers: http://www.sglawyers.com/sec-loses-
four-more-high-profile-trials-where-it-relied-on-circumstantial-evidence-and-
questionable-materiality-arguments-to-prove-insider-trading-and-fraud/
Snell & Wilmer, LLC. (N.D.). Raising Capital Through a PIPE Transaction. Retrieved from
SEC: https://www.sec.gov/info/smallbus/gbfor25_2006/pidgeon_lewis_pipes.pdf
Viswanatha, A., & Wolf, B. (2012, 12 11). HSBC to pay $1.9 billion U.S. fine in money-
laundering case. Retrieved from Reuters: http://www.reuters.com/article/us-hsbc-probe-
idUSBRE8BA05M20121211