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Cuban Opinion

Cuban Opinion

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Published by DealBook
Judge Fitzwater's opinion
Judge Fitzwater's opinion

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Categories:Business/Law
Published by: DealBook on Mar 05, 2013
Copyright:Attribution Non-commercial

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03/09/2013

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IN THE UNITED STATES DISTRICT COURTFOR THE NORTHERN DISTRICT OF TEXASDALLAS DIVISIONSECURITIES AND EXCHANGE §COMMISSION, §§Plaintiff, §§ Civil Action No. 3:08-CV-2050-DVS. §§MARK CUBAN, §§Defendant. §MEMORANDUM OPINIONAND ORDERIn this civil enforcement action brought by plaintiff Securities and ExchangeCommission (“SEC”) against defendant Mark Cuban (“Cuban”) under the misappropriationtheory of insider trading, Cuban moves for summary judgment. Although the questionwhether Cuban is entitled to summary judgment is in some respects a close one, the courtconcludes that the SEC is entitled to present its case to a jury. The court therefore deniesCuban’s motion.I The background facts and procedural history of this case are set out in the court’sprior decision addressing Cuban’s motion to dismiss under Fed. R. Civ. P. 12(b)(6) and 9(b),
see SEC v. Cuban
, 634 F.Supp.2d 713, 717-19 (N.D. Tex. 2009) (Fitzwater, C.J.) (“
CubanI
),
vacated
, 620 F.3d 551 (5th Cir. 2010) (“
Cuban II
”), and the Fifth Circuit’s opinion on
Case 3:08-cv-02050-D Document 178 Filed 03/05/13 Page 1 of 28 PageID 9849
 
appeal,
Cuban II
, 620 F.3d at 552-53.
1
The court will therefore summarize the backgroundfacts and procedural history here, and it will discuss the evidence in greater detail whenaddressing below the grounds of Cuban’s summary judgment motion. This is a civil enforcement action brought by the SEC against Cuban under themisappropriation theory of insider trading. The SEC alleges that Cuban violated § 17(a) of the Securities Act of 1933, § 10(b) of the Securities Exchange Act of 1934 (“ExchangeAct”), and Rule 10b-5 promulgated thereunder
2
by selling shares of stock in Mamma.comInc. (“Mamma.com”)
3
after learning material, nonpublic information concerning a plannedprivate investment in public equity (“PIPE”) offering by the company. According to theSEC, Cuban deceived Mamma.com by agreeing to maintain the confidentiality of thematerial, nonpublic information concerning the PIPE, agreeing not to trade on theinformation, but then selling all of his stock in the company without first disclosing toMamma.com that he intended to trade on the information, thereby avoiding substantial losseswhen the stock price declined after the PIPE was publicly announced.In
Cuban I
the court dismissed the SECs complaint under Rule 12(b)(6). It
1
 There is one other published opinion in this case. In
SEC v. Cuban
, 798 F.Supp.2d783 (N.D. Tex. 2011 ) (Fitzwater, C.J.), the court granted the SEC’s motion to strike Cuban’saffirmative defense of unclean hands, holding that Cuban had not adequately pleaded theprejudice prong of the defense.
Id.
at 796-97.
2
 The court will focus its discussion and analysis on § 10(b) and Rule 10b–5 becausethe parties agree that § 17(a) is examined under the same standards.
Cuban I
, 634 F.Supp.2dat 717 n.2.
3
In June 2007 Mamma.com changed its name to Copernic Inc. As in prior opinions,the court will refer to the company as Mamma.com.- 2 -
Case 3:08-cv-02050-D Document 178 Filed 03/05/13 Page 2 of 28 PageID 9850
 
concluded, in pertinent part, that to establish liability under the misappropriation theory of insider trading in the absence of another legal duty to refrain from trading on or otherwiseusing material, nonpublic information for personal benefit (such as a duty arising from afiduciary relationship), the SEC could rely on an express or implied agreement.
Cuban I
, 634F.Supp.2d at 725 (“The court therefore concludes that a duty sufficient to support liabilityunder the misappropriation theory can arise by agreement absent a preexisting fiduciary orfiduciary-like relationship.”). The court also held that the agreement “must consist of morethan an express or implied promise merely to keep information confidential.”
Id.
Therecipient of the information “must agree to maintain the confidentiality of the information
and
not to trade on or otherwise use it.”
Id.
The court assessed whether the SEC hadadequately pleaded that “Cuban entered into an express or implied agreement withMamma.com not to disclose material, nonpublic information about the PIPE offering
and
notto trade on or otherwise use the information.”
Id.
at 727. The court concluded that, “whilethe SEC adequately plead[ed] that Cuban entered into a confidentiality agreement, it [did]not allege that he agreed, expressly or implicitly, to refrain from trading on or otherwiseusing for his own benefit the information the CEO [of Mamma.com] was about to share.”
Id.
at 728;
see also id.
(“[T]he complaint asserts no facts that reasonably suggest that theCEO intended to obtain from Cuban an agreement to refrain from trading on the informationas opposed to an agreement merely to keep it confidential.”). The court dismissed the SECsaction with leave to replead,
id.
at 731, although the SEC opted to appeal rather than amend,
id.
at 732.- 3 -
Case 3:08-cv-02050-D Document 178 Filed 03/05/13 Page 3 of 28 PageID 9851

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