SEC Expanding the Scope of Insider Trading

Despite all of the insider trading investigations and cases we have handled there are two aspects of these cases that still amaze us - the convoluted charges that the Commission  sometimes files, and the contortions that some folks go through to avoid detection. For the latter, we recently saw the cases of the middleman who ate the notes with the stock symbol, the investors who thought cell phones would avoid detection, trading in a girlfriend's account to pay alimony Some of these cases involve mere allegations that the SEC cannot prove - like the case against the Florida doctor where attorneys from Sallah Astarita & Cox successfully defended the doctor, and the loss against Mark Cuban, but others involve a poor scheme, or a poor defense strategy.

The SEC has now announced charges in two separate cases against men who allegedly profited by insider trading on confidential information they learned from their wives about Silicon Valley-based tech companies.

"Spouses and other family members may gain access to highly confidential information about public companies as part of their relationship of trust," said Jina L. Choi, director of the SEC's San Francisco Regional Office. "In those circumstances, family members have a duty to protect and safeguard that information, not to trade on it."

It is a questionable legal theory, and a continued expansion, beyond all logical bounds, of 10b-5 liability, but a theory that the SEC continues to pursue.

In the first case the SEC alleges that Tyrone Hawk of Los Gatos, Calif., violated a duty of trust by trading after he overheard work calls made by his wife, a finance manager at Oracle Corp., regarding her company's plan to acquire Acme Packet Inc. Hawk also had a conversation with his wife in which she informed him that there was a blackout window for trading Oracle securities because it was in the process of acquiring another company. According to the SEC's complaint, Hawk bought Acme Packet shares before the acquisition was announced in February 2013, and reaped approximately $150,000 by selling after the stock price rose 23 percent on the news. According to the SEC, Hawk decided not to fight the charges, and without admitting or denying the allegations, agreed to pay more than $300,000 to settle the SEC's charges.

For those of you not familiar with the SEC penalty and disgorgement calculations, that $300,000 is TWICE his alleged profits. The SEC will typicall seek penalties and disgorgement of THREE TIMES their calculation of the profit, in order to force their targets to settle.

In an unrelated case, the SEC alleges that Ching Hwa Chen of San Jose, Calif., profited from gleaning confidential information in mid-2012 that his wife's employer, Informatica Corp., would miss its quarterly earnings target for the first time in 31 consecutive quarters. During a drive to vacation in Reno, Nev., Chen overheard business calls by his wife, who previously advised Chen not to trade in Informatica securities under any circumstances. However, after they returned from Reno, he established securities positions designed to make money if the stock price fell. Informatica's shares declined more than 27 percent after it announced the earnings miss, and Chen realized nearly $140,000 in profits.

According to the SEC, Chen also decided not to fight and without admitting or denying the allegations, agreed to pay approximately $280,000 to settle the SEC's charges, again twice his alleged profits from the trades.

The SEC has brought other insider trading cases involving individuals who traded on material, nonpublic information misappropriated from spouses. For example, last year the SEC charged a Houston man with insider trading ahead of a corporate acquisition based on confidential details that he gleaned from his wife, a partner at a large law firm that was consulted on the deal. In 2011, the SEC charged an Illinois man who bought the stock of an acquisition target of a company where his wife was an executive despite her requests that he keep the merger information confidential. In a different 2011 case, the SEC charged the spouse of a CEO with insider trading on confidential information that he misappropriated from her in advance of company news announcements.

Unfortunately, because these cases settle, the questionable legal theory is not being tested. Is trading on information gleaned from overhearing a spouse's telephone conversation truly a misappropriation of information. While the misappropriation theory of insider trading has turned the securities statutes on its head, it is the law of the land. Now we have additional expansion of this already expanded theory of liability to cases where nothing is stolen or misappropriated.

The SEC is enacting legislation through its enforcement powers. That is unconstitutional and needs to be addressed by Congress.

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The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in representation of brokers and investors in regulatory investigations, including insider trading cases. For a free consultation on any securities regulatory matter, contact Mark Astarita at 212-509-6544 or email us.

SEC Loses Mark Cuban Suit

Years ago, in what we viewed as a far too convenient allegation, the SEC accused billionaire Mark Cuban of insider-trading. The allegations were odd - the SEC alleged that the CEO in question told Mr. Cuban, that he had confidential information to provide to him, and that Mr. Cuban agreed to keep it confidential. That allegation raises the question, can the CEO of a public company voluntarily provide material, non-public information to someone, and prevent that someone from trading? Is so, it is a great way to keep your largest shareholder from selling his stock - call him up and give him some inside information.

I have a number of blog posts on the case. All are collected in Mark Cuban SEC. All predicted a loss for the SEC, given the sheer lack of legal weight to the claims.

But that is not often enough. It is an unfortunate part of our society that the government often wins cases simply because the target of its ire does not have the ability to fight back. There are countless examples of small brokerge firms, investors and individual brokers who settle SEC, or FINRA cases simply because they cannot afford to fight, even though they are right.

I had the pleasure to represent a broker who did not back down from a fight with FINRA, who  refused to settle with them when he was right and FINRA was wrong. It was a time consuming and expensive fight, but we won, and FINRA lost.

It was therefore a pleasure to watch Mark Cuban fight back. He certainly has the financial ability, but he also had the nerve to do so. And, after only a few hours of deliberation, much of which was probably discussing football, so as to not embarass the SEC, the jury in federal district court in Dallas said that the Securities and Exchange Commission failed to prove the key elements of its case, including the claim that Cuban agreed to keep certain information confidential and not trade on it.

During an impromptu news conference outside the courthouse, Mark Cuban angrily denounced the SEC and its lead trial attorney, Jan Folena, saying that they lied about the evidence and targeted him because of his fame.

Mr, Cuban acknowledged that  defendants of lesser wealth could have been bullied.

''Hopefully people will start paying attention to how the SEC does business,'' Cuban said. ''I'm the luckiest guy in the world. I'm glad this happened to me. I'm glad I'm able to be the person who can afford to stand up to them.''

For more information - Jury says Cuban did not commit insider trading 

Appellate Court Reinstates SEC vs. Cuban

The Fifth Circuit Court of Appeals reversed the District Court ruling which dismissed the SEC's complaint against Mark Cuban. We previously addressed the merits, or rather the apparent lack of merit, to the SEC's claims here.

However, the appellate court found that there were facts that were in dispute, an that the case should not have been dismissed. The case will proceed back in the District Court. More>>>

SEC Continues Mark Cuban Fight

The SEC is in trouble. We all know that, and they need to show that they are active, aggressive and enforcing the securities laws. So, we get surprise examinations, a flurry of press releases and other assorted activity. Good for them, they need to regroup and recover from their recent failures.

But do you gain respect and reputation by pursuing bad cases? Of course not,and someone needs to tell the decision makers at the Commission. In August the SEC announced that it would not refile a complaint against Cuban, and yesterday the SEC annouced that it will appeal the court decision which tossed out their complaint against Mark Cuban.

The decision was not much of a surprise. The Commission was on thin ice, and stretching the law in the Cuban case, which is why the Court dismissed the complaint. Our analysis is here, and all of our posts related to Mark Cuban are here. The WSJ story on the appeal, with background information is here.

SEC Says It Will Not Re-File Against Mark Cuban

The SEC hold a federal judge yesterday that it will not be re-filing its complaint for insider trading against Mark Cuban. The complaint was dismissed earlier, and the SEC had 30 days to refile.

While this is great news for Mr. Cuban, the party doesn't start until another 30 days passes and we find out if the SEC decides to appeal the dismissal.

More>>>

Court Dismisses SEC vs Mark Cuban Suit

On Friday, the federal district court judge in Texas granted Mark Cuban's motion to dismiss the insider trading charges against him. I have been blogging about the case since it's inception (the posts and analysis are available here).

I am still digesting the opinion, which actually rejects a number of Mr. Cuban's legal arguments, but in the end, agrees with him. I will post a more detailed analysis as soon as my own trial schedule allows, but the short version is that the Court, assuming the SEC's allegations to be true, found that those allegations were not enough. While there may have been an agreement to keep the information confidential, there was no agreement not to trade on the information.

Contrary to the posts of many on the Internet, it is not a total win. The SEC's complaint was dismissed for failing to state a claim. It has 30 days to file a new complaint, and has not said what it will do.

In my experience, the SEC has already taken its best shot. As I discussed in the earlier posts, they stretched their facts about as far as they can be stretched, and I doubt that they will be filing a new complaint. An appeal maybe, but not a new complaint.

Mark Cuban sues SEC over insider trading documents

You gotta love a billionaire who believes he has been wrongly accused and is willing to fight to clear his name. Mark Cuban, named in an insider trading case by the SEC, is striking back.

A fair reading of the case against him reveals that it is not much of a case. The SEC is seeking to expand the rules against insider trading yet again. Those rules have been stretched so far as to make the rule unrecognizable to the original drafters - the SEC and the courts have actually interpreted the statutes as if a key phrase is missing.

I have blogged about the case in the past, (Mark Cuban and the SEC Improper Trading Investigation, Cuban's Duty of Trust?, and The Cuban Case and Confidentiality), so my views on the case are pretty clear.

Last week, Mark Cuban's attorneys argued a motion to dismiss the SEC complaint in federal court. While I believe his motion has a sound legal basis (I do not believe the SEC's complaint states a valid cause of action), motions to dismiss complaints filed by government entities have a very low success rate, and it is doubtful that the motion will be granted.

But it sets up Mr. Cuban's defense, and shows the weaknesses in the SEC's case, even if the case is not thrown out. A great defensive move, and one that undoubtedly cost some money.

Next we learn that Mr. Cuban is suing the SEC. Now, there is a millionaire who is upset. He has filed a complaint in federal court alleging that the SEC has violated the Freedom of Information Act in connection with his requests to them under the Act.

Having dealt with the SEC and FOIA requests in the past, his allegations do not surprise me. Assuming he can prove what he alleges, the SEC is once again going to have egg on its face, and an additional battle in the insider trading case, as Cuban will be able to argue that they have acted in bad faith in dealing with him. That is if the SEC loses of course.

The press story is linked below. This should be an interesting twist to the case.

Mark Cuban sues SEC over insider trading documents

Mark Cuban and the SEC Improper Trading Investigation

I blogged about the SEC investigation of suspicious trading by its employees. An unusual story, and something that you would excpect a securities attorney to be interested in, and to be blogging about.

But Mark Cuban is blogging about it too! Yes, the billionaire Maverick owner and defendant in an insider trading case is blogging about the investigation.

After complimenting the SEC for "casting such a critical eye at itself" he made a point of repeating, and highlighting, the allegation that the staff engaged in a retaliatory investigation of a company after it publicly complained about naked short selling.

That would get an SEC defendant's attention, and it did.

The SEC « blog maverick

Mark Cuban and the SEC Improper Trading Investigation

I blogged about the SEC investigation of suspicious trading by its employees. An unusual story, and something that you would excpect a securities attorney to be interested in, and to be blogging about.

But Mark Cuban is blogging about it too! Yes, the billionaire Maverick owner and defendant in an insider trading case is blogging about the investigation.

After complimenting the SEC for "casting such a critical eye at itself" he made a point of repeating, and highlighting, the allegation that the staff engaged in a retaliatory investigation of a company after it publicly complained about naked short selling.

That would get an SEC defendant's attention, and it did.

The SEC « blog maverick

Cuban's Duty of Trust?

A bit more information on the Mark Cuban insider trading case. As I discussed here and here, one important part of the SEC's case is that Mr. Cuban breached a duty to keep the information confidential; a duty of trust. In their complaint they attempt to create that duty by alleging that mamma.com's CEO prefaced their conversation by saying that he had confidential information to give Mr. Cuban, and Mr. Cuban agreed to keep it confidential.

It's an oddly worded allegation, as discuss here, but that is the allegation, and without it, the SEC's case is dismissed. And, according to Stephen Best, on of Mr. Cuban's attorneys, it's not true.

Mr. Best has a post at Mr. Cuban's blog, posting a piece of the transcript of "an interview" with the CEO:

1) Q- We spoke earlier about you were telling Mr. Cuban in words or substance : “I have confidential information for you”.

A- Right.

2) Q- Do you recall anything Mr. Cuban said in response or reply to that statement by you ?

A- No, I do not.

Case over.

Of course, one answer in one deposition does not make or break a case (and I am assuming this if from a deposition, since it is a very rare occurance to have a transcript of an "interview" with an adverse witness). But the question asked by Mr, Cuban's lawyers, and which jumps out from this "interview" is "Does the SEC have a different transcript?"

They better hope they do.




SEC P2 « blog maverick

Cuban Case and Confidentiality

There is another interesting aspect to the Cuban insider trading case that I didn't address in detail in my earlier post on the Mark Cuban insider trading case.

I discussed materiality, touched on "non-public" and damages. The last problem for the SEC is whether Cuban had any duty not to trade. Not everyone who has inside information is prohibited from trading. In order for someone to be liable for insider trading, they must have obtained the information in some fraudulent way, or in the breach of a fiduciary duty. Either they have the information because they were an "insider" or because they obtained it illicity from someone else.

I won't go into the details, and as always, Profession Bainbridge from the UCLA School of Law does a great job explaining the legal concepts in his post post, "Insider Trading Charges Against Mark Cuban".

So, in addition to proving that the information was material, and non-public, since Cuban is not an "insider", the SEC will have to prove that Mark Cuban breached a duty to someone in obtaining the information.

That is the reason why, as I noted, the SEC constantly repeats the allegation that the information was given to him AFTER he was told it was confidential, or AFTER he agreed that he would treat it as confidential. The SEC is alleging that there was some sort of agreement between Cuban and the CEO, and that Cuban breached the agreement by trading on the information.

The question becomes, can the CEO of a public company voluntarily provide material, non-public information to someone, and prevent that someone from trading? Is so, it is a great way to keep your largest shareholder from selling his stock - call him up and give him some inside information. He can't sell!

That of course, is not the law, and without an agreement by Cuban to keep the information non-public, the case is a non-starter. Professor Bainbridge goes a step further, and argues that even if Cuban agreed to keep it confidential, his trading would not violate the insider trading laws. But the Professor also says that this theory has not been tested in the courts.

Which means that SEC vs. Cuban might turn out to be a very significant case.

PS - to all of those posting all over the web about Cuban going to jail - he is not going to jail based on this case, this is a civil case, the SEC does not have the authority to put anyone in jail. That could happen in the future, but there is nothing in this case to suggest that there would be a criminal prosecution. Heck, it's not even clear that there is a viable civil case here.

SEC Accused of "Gross Abuse of Prosecutorial Discretion"

That sounds serious, but given the context and timing of the allegation, maybe not. The accusation comes from Mark Cuban, the billionaire owner of the Dallas Mavericks, in response to an SEC complaint charging him with insider trading.

Cuban was the founder of Broadcast.com, which he sold to Yahoo! for some 6 billion dollars back in the Internet stock heyday.

The underlying allegations occurred in 2004 (does the SEC know that it is 2008? Where they heck have they been for 4 years? They get 4 years to investigate, Cuban will get 30 days to respond. Great system we have).

The complaint alleges that Cuban had a 6% stake in search engine Mamma.com, and was approached by the CEO of Mamma to purchase additional shares in a PIPE offering. According to the complaint, which goes to great pains to repeatedly allege that Cuban was told the information was confidential, Cuban became angry during the conversation, because, according to the SEC, PIPEs dilute existing shareholders and told the CEO, "Well now I am screwed. I can't sell." A very convenient allegation.

That allegation is convenient because it is designed by the SEC to show intent - that Cuban knew that he had material nonpublic inside information that he could not use to trade. They attempt to bolster that allegation by quoting an email from the CEO to the Board of Directors of Mamma, which says that Cuban threatened to sell, after the announcement of the PIPE. In fact, that allegation is gratuitously inserted in the complaint in 4 separate places. Perhaps the staff doth protest too much?

The complaint alleges that Cuban had a second conversation with Mamma's investment banker about the PIPE, and he called his broker, ordering a sale of all of his shares. The broker sold 10,000 shares afterhours at $13.50 and sold the rest of his shares the next morning at $13.29. The announcement of the PIPE was made after the close, and on the next day the stock opened at $11.89.

The complaint also alleges that Cuban has publicly stated that he sold because he did not want to be diluted in the PIPE, and that the Cuban didn't tell Mamma that he was selling, implying that he had an obligation to do so. He did not.

This all sounds very damning, and the Internet is abuzz with stories about the case, with most reporters and bloggers having Cuban convicted, fined, penniless and in jail. (Cuban cannot go to jail over this complaint, it is a civil complaint. The SEC cannot put anyone in jail). That is one of the endearing qualities of the Internet. Everyone has an opinion, everyone can express it, regardless of intellect, or the facts. One reporter said it looked like a Martha Stewart case, which demonstrates sheer lack of understanding, since Martha was a defendant in a criminal case, for obstruction of justice, not insider trading.

This is going to be a tough case for the SEC, as it relies solely on the testimony of the CEO of Mamma, and is going to be a classic "he said, she said" type of case, which is not good for the party with the burden of proof, in this instance, the SEC. An important aspect of the case is what information was given to Cuban in those two telephone calls.

And everyone is excited about the CEO's comments that Cuban knows he can't trade. Well, those allegations are not only convenient for the SEC, they are convenient for the CEO. Obviously, I don't know what happened here, but there is another senario - there is something called tipee liability, which places responsibility for insider trading on the person who disclosed the information. While it doesn't sound like it would apply, it might, and if it did, the CEO has potential liability. If that were to be true, then he has to claim that this tortured conversation about confidentiality, lest he be charged with tipping Cuban, a charge which could lead to him being removed from the Board, and filed millions of dollars. So, there is a bit of incentive there. Again, I am ruminating here, none of this has been alleged anywhere.

Another interesting twist is that Mamma was the subject of an informal SEC investigation during this time, since March 2004. According to the company itself, the SEC was investigating the trading in the company's stock, its acquisition activity and its reporting activity. Not a good omen for the company.

Assuming the Staff can prove the conversations, they have to prove that the information was material and non-public. Cuban's defense will certainly focus on these two elements. The SEC is going to have a tough time with the materiality argument. While the SEC claims that the PIPE was going to drive the price of the stock down, that is not a foregone conclusion, and the facts could lead to a different conclusion.

The effect of a PIPE on the price of a stock depends on the structure of the PIPE. According to some studies, PIPES have a positive impact on the price of the stock, again, depending on the structure of the offering. In this case, it appears that the PIPE was for common stock and warrants, and the warrants were exercisable at nearly $16 a share, which would drive the price of the stock UP, not down. I am doing this based on SEC filings by the company, and have not seen the PIPE offering memorandum, so this could be off.

A review of the underlying trading in Mamma supports this thesis, and belies the SEC's allegation that the stock was going to go down and Cuban knew it.

If you just read the SEC complaint, you would think that the decline from $13.50 to $11.00 in Mamma was significant or unusual. Take a look at a chart of Mamma during this time frame, there is something going on in the stock, and it has nothing to do with Mark Cuban. On May 12, 2004 the stock closed at $10.43 and traded 2 million shares. The very next day, its volume jumps to 22 million shares, and goes up 30%, closing at $13.21. Someone knew something. It then drops back down to 11.

Then it gets interesting. On June 25 it closes at $11.92, with less than half a million shares trading. Mark Cuban owns more shares that the the entire day's trading volume. The SEC alleges that the PIPE was being processed, but not disclosed, at this time. We know from the complaint that the CEO of Mamma is on the phones on the 28th, trying to get buyers for the PIPE. On the 28th, before Cuban sells a single share, the stock jumps from $11.92 to $13.75!

With that price movement, the Staff is alleging that he was trying to avoid a loss? Every objective indicator says that the stock is going UP, not down. The stock has just moved from $11.00 to $13.00 in two days, the company has sold warrants exercisable at $15.82, and is raising $16 million dollars. There is nothing there to suggest that the PIPE is going to decrease the share value.

The SEC is going to be hard pressed to say that Cuban sold his shares to avoid the resulting loss. Cuban is a maverick (no capital letter) and does what he wants. A fair reading of those allegations is that he sold his stock because he was pissed off, felt he was being mistreated, and was not going to be pushed around by some CEO of some rinky-dink second rate, silly-named search engine. So, he sold his stock, undoubtedly trying to sell all of it in one shot, all 8 million dollars of it.

It looks like he tries to sell it after hours, only gets off 10,000 shares, and then he dumps his 590,000 shares the next morning. Cuban, who is a savvy investor, dumps his entire holdings the next day. His sales alone will push the stock price down, he is selling more than the entire daily volume in the stock on some days. If you want to impute knowledge to Mark Cuban, he knows that putting in an order to sell 600,000 shares of a stock that trades less than a million shares a day, is going to depress the price of the stock. And he doesn't care!

This is not a man looking to avoid a loss. This is a billionaire making a point - don't bully me, don't push me around, and don't try to dilute me. I am out of here.

That is hardly insider trading. That is an aggressive business man, making a point.

And you gotta love him. He response to the SEC's press release?

I am disappointed that the Commission chose to bring this case based upon its Enforcement staff’s win-at-any-cost ambitions. The staff’s process was result-oriented, facts be damned. The government’s claims are false and they will be proven to be so.

The SEC Insider Trading complaint is online at the Commission's website.

Mark Cuban's response is at his blog, under the post "The SEC."

It will be interesting to watch.