Monday, July 20, 2009

How did the SEC get it this wrong? The judge throws out the Mark Cuban insider trading charges

I have not been a fan of the SEC – but on preliminary evidence I am forming a better opinion of Mary Schapiro than most. However as a tag-end of an era of grotesque incompetence the SEC has had the charges of insider trading it pushed against Mark Cuban thrown out of court.

The charges of insider trading against Mark Cuban were always stupid. I blogged about those charges here. I noted the (public) evidence was only that the CEO of a cash strapped company ( had phoned him and told him that he was cash strapped. Mark Cuban sold his shares. The SEC charged him with insider trading but did not present any evidence that he was an insider. I noted that:

To make him an insider he needs to have agreed to be an insider. He needs to have agreed with the CEO that he will take information confidentially. In other words the case hinges almost entirely on the contents of a phone call between the CEO of a failing and Mark Cuban – and the call is meant to have taken place in 2004. Nobody is going to credibly remember it. If it came to a criminal charge (which required absence of reasonable doubt) then you would have to acquit Cuban because at best this case will be two people saying “he said” and the other saying “no I did not” about a conversation years ago. As far as I know there is nothing in writing in which Mark Cuban agrees to be an insider (though something in writing is what is required). It is telling that there was no criminal charge filed with the civil charge. The criminal charge wouldn’t fly.

Well guess what – the Judge said that the SEC did not provide evidence that Mark Cuban had agreed to accept the information in confidence and hence did not provide evidence that he was an insider.

And that was obvious from the start. Unless the SEC had something in writing (which they did not) they were stuffed in this case and incompetent in bringing it.

The real issue now is how the SEC got this bad? I spot serious frauds at the rate of better than one per month – and they are rarely prosecuted. Madoff sat in front of the SEC’s face for years. However the SEC went on a wild-goose-chase against Mark Cuban on a case that was flimsy from a distance of 9000 miles (Atlanta to Sydney).

Getting trust in the financial system back is critical to economic recovery. With the SEC so far off its game that will be difficult. Mary Schapiro appears to be doing better than her predecessor. One day I hope to be blogging on SEC successes.


Milton Recht said...

Mary Schapiro has a track record at FINRA (formerly NASD). FINRA (NASD) was one of the regulatory bodies that supervised parts of Madoff's operation and was in the position to detect his fraud. FINRA and NASD while she was there did not discover the fraud.

She is the ultimate definition of a captive regulator and political insider who freely moves around regulatory agencies. She offends no one with political power.

Her past accomplishments are non-controversial, minor tweaks in areas where the public perception would squelch any industry objections. They are more cosmetic than substantive.

It is unlikely any real change will occur at the SEC. Some cosmetic and personnel changes will and have occurred, but the end result at the SEC will be the same as before. She is not a boat rocker.

John Hempton said...

Milton - can you send me an email.



Prosecutor From Hell's Kitchen said...

Am not persuaded the SEC got this wrong as Judge Fitzwater didn't dismiss with prejudice. He left the door open for amended charges. The trial counsel on this case (O'Rourke) has a reputation for being the type who dots all of his I's and crosses all of his T's.

What I find fascinating and unfortunate is how Cuban and his supporters used the media to spin a sob story that the SEC was persecuting him. The unfortunate e-mail exchanges between staff attorney Norris and Cuban have absolutely no bearing on this case, yet that's all the media could and still does talk about.

For the best coverage of this case, may I suggest:

Also, Mr. Recht, I believe you will soon come to the conclusion that Schapiro is far more effective than Cox was and may even eclipse David Ruder with respect to being the best Chairperson the SEC ever had. Is Khuzami the next Stanley Sporkin? I believe he, also, will prove to be a far better director of enforcement.

Anonymous said...

Google this. SEC. Matt Brown.

Investorshub. Investorvillage.

Absolute hype sites for professional penny stock hustlers, insiders, and their rump groupies front running for serious players..

I think the SEC are about to get something right.

Anon. Bob Dobb.

Alexandra said...

You must be kidding, right? Written proof of someone agreeing to be an insider.
Surely you will never find something written in such circumstances. Unless the parties are stupid.
If that were the threshold of proof there would never any conviction of anyone.
However, it is very common with prosecutors (it seems to me) to bring a case to court that doesn't hold water. Especially if you have to get active as a prosecutor, but really don't want to bring someone down for one reason or another.
Once the charges are dismissed (usually with prejudice where you have res judicata and can never bring it again) you are done with it.
The prosecutor can claim to have done its job, the perpetrator walks free. See ya later somewhere in the industry they all might be looking for jobs at some point.

John Hempton said...

No I am not kidding.

The purpose of insider trading rules is to prevent BREACH OF TRUST.

I - as a shareholder - appoint management. They are insiders. They abuse their trust of me by using their privaleged position to trade against me.

But a shareholder in did not appoint Mark Cuban. Mark Cuban is entitled to any legal method to find information he wants about

He was given information by the CEO. So what? He trades on it.

What the SEC should have done is prosecuted the CEO for breaching the fair disclosure rules.

Now the CEO can give information to an investment banker or a possible source of capital if they agree not to trade on it. If you pay them (say as an investment bank) then it is implicit in the contract. But if you have no contract with them - and just give to them - then trading is fair game.

Yes - it is the CEO of who should have been prosecuted here.


Alexandra said...

Selectively informing certain shareholders and those shareholders then acting on that material non-public information may already be considered insider trading in some jurisdictions.

If the information Mr Cuban got had been made public it would almost certainly have negatively affected the share price. The information could then be considered material and non-public.

The SECs definition is fairly broad here and would include the case at hand.

However, obviously the party who takes the information must be aware that they are given and are acting on non-public information to make them acting with intent. That didn't seem to be the case here. Thus Mr. Cuban may have been saved only because the SEC couldn't prove the intent, not because his acts could under no circumstances be considered insider trading.

My are you kidding comment was related to your
"As far as I know there is nothing in writing in which Mark Cuban agrees to be an insider (though something in writing is what is required)"
That's not how insider trading works. It is always difficult to prove because more often then not direct evidence will be absent. Participants will be aware that they are breaking the law, so the will take care not to leave a paper trail of their collusion.

But you are right in that there would be bigger fish to fry for the SEC. I am no fan of the SECs performance either.
There is market manipulation, insider trading and outright fraud all over the place and the SEC does nothing.

John Hempton said...

Alexandra - read the original post where I predicted that the SEC would lose.

Cuban would be convicted in Australia. He would not be convicted in the US.

The SEC's definition is irrelevant - and they have just been told by the judge that their interpretation of the law is wrong.

I thought that was obvious by now.


Mike said...

I believe that the only rational reason for the SEC's prosecution of Mark Cuban is what I posted about this fiasco last November.. political influence. Someone personally had it out for Mark Cuban.

It only took me a few minutes after reading the complaint to realize what a farce this was, and I'm only an average-schmo investor.

It's a shame no one at the SEC will be held responsible.

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