S.E.C. v. Cuban

• Citation: 634 F.Supp.2d 713
• Decision Date: 17 July 2009
• Docket Number: Civil Action No. 3:08-CV-2050-D.
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Mark CUBAN, Defendant.
• Court: U.S. District Court — Northern District of Texas

634 F.Supp.2d 713

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Mark CUBAN, Defendant.

Civil Action No. 3:08-CV-2050-D.

United States District Court, N.D. Texas, Dallas Division.

July 17, 2009.

Opinion Dismissing Action With Prejudice August 13, 2009.

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Kevin P. O'Rourke (argued), Adam S. Aderton, and Julie M. Riewe, U.S. Securities and Exchange Commission, Washington, DC, and Toby M. Galloway, U.S. Securities and Exchange Commission, Fort Worth, TX, for plaintiff.

Lyle Roberts, Ralph C. Ferrara (argued), Stephen A. Best, and Henry W. Asbill, Dewey & LeBoeuf LLP, Washington, DC, Christopher J. Clark, Dewey & LeBoeuf LLP, New York City, and Stephen M. Ryan, Dewey & LeBoeuf LLP, Houston, TX, and Paul E. Coggins and Kip Mendrygal, Fish & Richardson PC, Dallas, TX, for defendant.

Allen Ferrell, Harvard Law School, Cambridge, MA, Stephen Bainbridge, UCLA Law School, Los Angeles, CA, M. Todd Henderson, University of Chicago Law School, Chicago, IL, Alan R. Bromberg, SMU Dedman School of Law, Dallas, TX, and Jonathan R. Macey, Yale Law School, New Haven, CT, amici curiae in support of defendant.

MEMORANDUM OPINION AND ORDER

SIDNEY A. FITZWATER, Chief Judge.

The dispositive question presented by defendant Mark Cuban's ("Cuban's") motion to dismiss is whether plaintiff Securities and Exchange Commission ("SEC") has adequately alleged that Cuban undertook a duty of non-use of information required to establish liability under the misappropriation theory of insider trading. Concluding that it has not, the court grants Cuban's motion to dismiss, but it also allows the SEC to replead.

I

A

This is a suit brought by the SEC against Cuban under the misappropriation theory of insider trading. The SEC alleges that, after Cuban agreed to maintain the confidentiality of material, nonpublic information concerning a planned private investment in public equity ("PIPE") offering by Mamma.com Inc. ("Mamma.com"),¹ he sold his stock in the company without first disclosing to Mamma.com that he intended to trade on this information, thereby avoiding substantial losses when the stock price declined after the PIPE was publicly announced. The SEC maintains that Cuban is liable for violating § 17(a) of the Securities Act of 1933 ("Securities Act"), § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 promulgated thereunder.²

According to the SEC's complaint, in March 2004 Cuban purchased 600,000 shares, or a 6.3% stake, in Mamma.com, a Canadian company that operated an Internet search engine and traded on the NASDAQ. In the spring of 2004, Mamma.com decided to raise capital through a PIPE offering. As the PIPE offering progressed toward closing, the company decided to inform Cuban, its then-largest known shareholder, of the offering and to invite him to participate. The CEO of Mamma.com spoke with Cuban by telephone.

The CEO prefaced the call by informing Cuban that he had confidential information to convey to him, and Cuban agreed that he would keep whatever information the CEO intended to share with him confidential. The CEO, in reliance on Cuban's agreement to keep the information confidential, proceeded to tell Cuban about the PIPE offering.

Compl. ¶ 14. As Mamma.com "anticipated," Cuban reacted angrily to this news, stating that he did not like PIPE offerings because they dilute the existing shareholders. Id. at ¶ 15. At the end of the call Cuban said: "Well, now I'm screwed. I can't sell." Id. at ¶ 14. Two internal company emails quoted in the complaint indicate that the executive chairman of Mamma.com may have expected that Cuban would not sell his shares until after the PIPE was announced. See id. at ¶ 15 ("[Cuban] said he would sell his shares (recognizing that he was not able to do anything until we announce the equity)[.]"); id. at ¶ 20 ("[Cuban's] answers were: he would not invest, he does not want the company to make acquisitions, he will sell his shares which he can not [sic] do until after we announce.").

Several hours after they spoke by telephone, the CEO sent Cuban a follow-up email in which he provided contact information for the investment bank conducting the offering, in case Cuban wanted more information about the PIPE. Cuban then contacted the sales representative, who "supplied Cuban with additional confidential details about the PIPE." Id. at ¶ 17. One minute after ending this call, Cuban telephoned his broker and directed the broker to sell all 600,000 of his Mamma.com shares. The broker sold a small amount of the shares during after-hours trading on June 28, 2004, and sold the remainder during regular trading hours on June 29, 2004. Cuban did not inform Mamma.com of his intention to trade on the information that he had been given in confidence and that he had agreed to keep confidential. See id. at ¶ 25 ("Cuban never disclosed to Mamma.com that he was going to sell his shares prior to the public announcement of the PIPE."). After the markets had closed on June 29, 2004, Mamma.com publicly announced the PIPE offering. Trading in the company's stock opened substantially lower the next day and continued to decline in the days following. Cuban avoided losses in excess of $750,000 by selling his shares prior to the public announcement of the PIPE. After the sale, Cuban filed the required disclosure statement with the SEC and "publicly stated that he had sold his Mamma.com shares because the company was conducting a PIPE[.]" Id.

Based on Cuban's alleged violation of § 17(a) of the Securities Act, § 10(b) of the Exchange Act, and Rule 10b-5, the SEC seeks a permanent injunction against future violations, disgorgement of losses avoided, prejudgment interest, and imposition of a civil monetary penalty.

B

Cuban, supported by five law professors as amici curiae, moves to dismiss the complaint under Fed.R.Civ.P. 12(b)(6) for failure to state a claim on which relief can be granted, and under Rule 9(b) for failing to plead fraud with particularity.³ Cuban maintains that, to establish liability for insider trading, the SEC must demonstrate that his conduct was deceptive under § 10(b), which he asserts the SEC has not done under the facts pleaded. Specifically, Cuban contends that the SEC has alleged merely that he entered into a confidentiality agreement, which is of itself insufficient to establish misappropriation theory liability because the agreement must arise in the context of a preexisting fiduciary or fiduciary-like relationship, or create a relationship that bears all the hallmarks of a traditional fiduciary relationship; the existence of a fiduciary or fiduciary-like relationship is governed exclusively by state law and, under Texas law, the facts pleaded do not demonstrate that he had such a relationship with Mamma.com; even if the court applies federal common law, the facts pleaded still fail to show such a relationship; and the SEC cannot rely on Rule 10b5-2(b)(1) to supply the requisite duty because the Rule applies only in the context of family or personal relationships, and, if the Rule does create liability in the absence of a preexisting fiduciary or fiduciary-like relationship, it exceeds the SEC's § 10(b) rulemaking authority and cannot be applied against him.

II

Under Rule 8(a)(2), a pleading must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." While "the pleading standard Rule 8 announces does not require `detailed factual allegations,'" it demands more than "`labels and conclusions.'" Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). And "`a formulaic recitation of the elements of a cause of action will not do.'" Id. (quoting Bell Atl., 550 U.S. at 555, 127 S.Ct. 1955).

In deciding a Rule 12(b)(6) motion to dismiss for failure to state a claim, "[t]he `court accepts all well-pleaded facts as true, viewing them in the light most favorable to the plaintiff.'" In re Katrina Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir.2007) (internal quotation marks omitted) (quoting Martin K. Eby Constr. Co. v. Dallas Area Rapid Transit, 369 F.3d 464, 467 (5th Cir.2004)). To survive the motion, a plaintiff must plead "enough facts to state a claim to relief that is plausible on its face." (Bell Atl., 550 U.S. at 570, 127 S.Ct. 1955). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 129 S.Ct. at 1949. "The plausibility standard is not akin to a `probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id.; see also Bell Atl., 550 U.S. at 555, 127 S.Ct. 1955 ("Factual allegations must be enough to raise a right to relief above the speculative level[.]"). "[W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged—but it has not `shown'—that the pleader is entitled to relief." Iqbal, 129 S.Ct. at 1950 (quoting Rule 8(a)(2) (alteration omitted)).

III

A

Section 10(b) of the Exchange Act makes it unlawful

for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—... [t]o use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

15 U.S.C. § 78j(b).

Rule 10b-5, promulgated pursuant to the SEC's § 10(b) rulemaking authority, provides:

It shall be unlawful for any person, directly or indirectly, by the use of any means or...