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September 21, 2010 2:11 PM

Dewey, Mark Cuban Must Fight Insider-Trading Case After All

Posted by Zach Lowe

It appears Mark Cuban, the billionaire owner of the NBA's Dallas Mavericks, will have to fight insider-trading charges after a federal appeals court ruling today reinstated those charges, according to court records and The New York Times. The ruling by the U.S. Court of Appeals for the Fifth Circuit overturns a lower court, which had ruled Cuban violated no laws in selling his 6.3 percent stake in the Internet search company Mamma.com in 2004 after company higher-ups told Cuban they were planning a private offering that would dilute Cuban's stake. 

Cuban and his lawyers at Dewey & LeBoeuf have not been shy in criticizing the Securities and Exchange Commission's case against Cuban. Late last year, when the SEC announced plans to appeal the dismissal of the charges, the Dewey team released a statement labeling the SEC's move "desperate" and calling the case "dead on arrival." The Fifth Circuit panel apparently disagreed. Today the panel ruled there is enough evidence to find it "plausible" that Cuban and Mamma.com officials reached an "understanding" that Cuban was not to trade Mamma.com stock after being tipped off about the coming offering, according to the NYT and Bloomberg. In a phone conversation about the stock sale, Cuban reportedly told Mamma.com's then-CEO, Guy Faure, "Well, now I'm screwed. I can't sell," Bloomberg reports.

Cuban avoided $750,000 in losses by unloading his stake early. 

Cuban's legal team has argued that Cuban was under no obligation to hold onto his Mamma.com stake after receiving the confidential information. Cuban's lawyers argued that insider-trading laws are designed to punish only those shareholders with a pre-existing fiduciary duty to the company involved, and that Cuban had no such duty, according to our prior reporting. A lower court judge sided with Cuban in July 2009, ruling that Cuban agreed only to keep the information about the stock offering confidential, according to Bloomberg. 

Lyle Roberts and Ralph Ferrara, two of the lead lawyers on Cuban's team, did not immediately return calls seeking comment. They released a statement calling the SEC's case "utterly meritless" and vowed to ask for a rehearing at the Fifth Circuit, the NYT says. 

Update (3:10 p.m.): Roberts got back to us and pointed out today's opinion leaves intact the lower court's interpretation that the SEC, to prove insider-trading charges, must prove both that Cuban agreed to keep the information at issue confidential and that he agreed not trade on that information. The lower court judge ruled the SEC could not prove both; the Fifth Circuit today ruled it was "plausible" the SEC could indeed hit both prongs. "It's a very narrow ruling," Roberts tells us. 

He also points out that Cuban's side maintains Cuban never entered into any kind of agreement at all, an argument they are pressing in a motion for sanctions against the SEC. He says the Cuban team is leaning toward asking for an en banc rehearing rather than appealing to the U.S. Supreme Court. 

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