"It's about cheap publicity," one of Mark Cuban's lawyers, Stephen Best, said to me over the phone as I tried to grasp the bizarre insider trading charges against Cuban.
"The SEC is suffering from bad publicity because of the way the markets have crumbled around them," said Best. "Mr. Cuban is high profile and they want to move the focus away from the way they have handled the crashing stock market."
I wanted to know who at the SEC he thought might be behind this. "Do you think SEC Commissioner Chris Cox is involved in this?", I asked. "Yes," Best answered without hesitation. (Note: Cox recused himself from the vote on whether Cuban should be charged because of a bizarre series of emails between Cuban and and Fort Worth-based senior SEC trial lawyer, Jeffrey Norris, who called Cuban unpatriotic. “Either you are really an anti-American ideologue or your allegiance to making money is significantly greater than your dedication to your country,” wrote Norris. Cox was cc'd on some of the emails.)
Most people's view of justice in America is that of prosecutors and regulators going after bad guys, after carefully weighing evidence. But some prosecutors indeed have what Cuban was quoted as calling "win-at-any-cost ambitions". And their eyes can get especially big when a high profile name is involved. It's great for the resume when you move on to the private sector and there's nothing like going back home to Thanksgiving dinner when you're the guy at the family table going after the big name.
Two of the SEC lawyers involved in the Cuban case seem to be win at any cost, bragging rights around the Turkey Day dining table, types. Best pointed out to me that one SEC attorney on Cuban's butt is Robert Kaplan. Kaplan was recently under Congressional investigation for possible misconduct. Another SEC attorney involved with the case, Scott Friestad, recently lost a case in North Carolina and the judge found it appropriate to rebuke Friestad's tactics during the trial.
Best promises their will be bombshells coming out about the SEC's conduct in the Cuban case. He points out that the SEC has done a number of things from minor to major that do not follow general SEC policy. On the minor end, the SEC generally calls a client's lawyers when a client is about to be charged by the SEC. The SEC did not extend this standard courtesy to Cuban's lawyers. No calls were made to them by the SEC before the charges were made public.
On a more serious note, the SEC in addition to investigating Cuban was investigating Mamma.com. Mamma.com is the company in which Cuban sold stock that prompted the SEC charges. Best points out a very crucial timeline that is critical to the charges against Cuban. There is no insider trading charges against Cuban unless the president of Mamma.com testifies that he told Cuban he was about to get inside information and that Cuban agreed not to sell any stock.
So Mamma.com is under investigation and the SEC closes the case against Mamma.com just days before the then CEO of Mamma.com, Guy Faure, is to be questioned by the SEC about what was or was not said to and by Cuban. Best certainly is implying this timeline suggests that someone got to the SEC and let them know Faure would deliver Cuban on a platter, if Mamma.com was taken off the platter.
Now to the charge itself.
There are many sound economists who believe that there is nothing at all wrong with insider trading, see here and here. But the charges against Cuban are truly taking the concept of insider trading to a new bizarre outlier that could literally give CEO's the power to halt the selling of any major stockholder at anytime. With CEO's pulling down multi-million dollar salaries that are coming under attack,it shows just how desperate the SEC is to win some kind of case, somewhere against some "name" that they will literally create a tool under which CEO's will be able to freeze shareholders from selling stock whenever they want.
Here's what I mean. The charge against Cuban is that he received a call from Faure when Faure was president of Mamma.com and that Faure said to Cuban that he was about to give him some inside information. The inside information being that Mamma.com was about to sell more stock to raise more money.
Now there is nothing in writing about this, just a "he said , she said" between Cuban and Faure. If Faure really wanted to convey inside information to Cuban, he could have very easily have documented the disclosure by having Cuban sign a standard non-disclosure document. Faure did not do this.
In truth, the way it likely went down is that Faure was desperate for cash and decided to contact big bucks Cuban to see if he would invest more money. Upon hearing Faure's plan, Cuban must have thought this guy is a f#*king idiot and sold his stock. If it went down this way, there is no insider trading case.
There is only a case if the desperate Faure would have spent time, before asking Cuban for money, spouting off legalese about insider trading. How likely is that?
This is where the timeline Best emphasises comes into play. Who knows what the SEC found out about Mamma.com and Faure when they conducted their investigation of Mamma.com or who knows what Faure feared they might discover? So at this point you have an SEC looking for some good publicity and a possibly desperate Faure. If they charge Faure with anything, who is going to pay attention? But if Faure plays ball and suddenly "remembers" he turned into a legal gusher warning Cuban of all sorts of things during their phone call and that he then "remembers" that Cuban acknowledged Faure's gusher of legalese, then the SEC has Cuban as its target and you get regular national news coverage and as a bonus you get coverage on ESPN.
That's the case and it is hard to see how the facts in this case go anywhere near "beyond a reasonable doubt". It will be a major surprise if the SEC wins this case. But let's say they do somehow win. What they will have done is create a tool for fat cat CEO's to stop major shareholders from selling their stock. It will become known as a "Cuban situation."
Suppose a CEO fears a major shareholder may be selling stock or fears he might start selling stock, if the SEC wins its case against Cuban, then all the CEO has to do is call the shareholder up and tell him he is thinking of selling more stock in the company. This will freeze that shareholder from selling stock, as his stockbroker and his lawyer will remind him of what happened to Cuban, who received such information by phone.
The SEC, of late, has been marked by very little in the way of deep thinking. The latest charge against Cuban is more along this line. If the SEC succeeds in this case, it will do nothing but create another tool for fat cat CEOs to use against common shareholders.
UPDATE: Steve Best, one of Cuban's lawyer, writes: "The legal standard of proof in a civil case is beyond a preponderance of the evidence-- you cited the criminal standard."