Professor Bainbridge...on law, politics, religion, culture & food

Time and Me on the Mark Cuban Insider Trading Case

There is an excellent post on Time.com addressing the legal issues in the SEC’s insider trading case against Dallas Mavericks owner Mark Cuban. I spoke to the reporter at some length and was really impressed with her concern for getting it right, which is reflected in the care and craftsmanship in the article. Unlike a lot of reporters who just want me to give them a quote that fits their pre-existing story plans, she really wanted to understand what was going on in this case.

Did Mark Cuban have a duty to Mamma.com? That question will take center court as the Securities and Exchange Commission (SEC) sues Cuban, an Internet entrepreneur and owner of the Dallas Mavericks basketball team, for selling his stake in the Web company after the CEO slipped him nonpublic information about an additional stock offering. Cuban, known for his outsize personality, has come out swinging against the SEC and what he calls its “win at any cost ambitions,” promising to keep the case — and the murkiness of insider trading law — in the public spotlight in a way not seen since Martha Stewart’s sale of her ImClone shares.

Ms. Kiviat then goes on to review the relevant legal rules concisely and clearly. She concludes:

Stephen Bainbridge, a law professor at UCLA who has followed insider trading law for two decades and written a book on the topic, points out that the case law around whether or not a contract of confidentiality suffices for illegal insider trading “is not as clear as one would like.” Some court findings, he says, suggest that it’s not enough for two parties to merely agree to keep information confidential — they must also have a higher-level relationship, like that of a lawyer and client or a company and employee.

The SEC has brought charges against Cuban under a particular legal theory — but the legal theories around illegal insider trading have a long history of getting rewritten in the courts. “He’s an interesting guy for them to have picked. He’s not going to roll over and play dead,” says Bainbridge. “If he wants to, he has the resources to take this case all the way up to the Supreme Court.” If it comes to that, the case could take on real significance.

FT and me on the Cuban Case

Financial Times:

Litigation experts have exposed weaknesses in the Securities and Exchange Commission’s insider trading case against billionaire investor Mark Cuban, saying current securities laws are ambiguous about whether he would be considered an insider. Whether or not Mr. Cuban gets off, the case shows that private investments in public equity, or PIPEs, are becoming a larger bone of contention for short-term investors. ...

Some, such as UCLA securities law professor Stephen Bainbridge, think the SEC has a good case.

Writing on his blog last week, Mr. Bainbridge said the SEC might try to prove that Mr. Cuban is a “constructive insider.”

In some cases, he said, accountants, lawyers or other outsiders may become fiduciaries if given inside information for corporate purposes. Although Mr. Cuban was a non-controlling shareholder, previous lawsuits have shown that a simple confidentiality agreement could have made Mr. Cuban an insider.

Yes, but. I also said that the SEC will need to “get a court willing to give the rules a liberal construction on one key point”; namely, whether Cuban is a constructive insider. As I explained in the post, I think the precedents supporting the SEC’s position are weak. And, as I explained in a later post, if the facts are as Cuban claims, even those precedents will not justify imposing liability.

Arianna Huffington and me

So I’m standing in line waiting to board the flight that will bring me home to Los Angeles from the Federalist Society convention in DC. An upgrade has me in first class, so I’m happily waiting my turn as # 3 in the red line. Just as boarding started, Arianna Huffington comes dashing up, chatting on her cell self phone, and cuts right in front of me.

I quip, “so much for change we can believe in,” which earns me a dirty look but no apology.

I guess when you’re a Democrat Diva you don’t have to be polite to the little people. Or wait your turn.

Happy Hour is for Putzes

Some media flack sent me an ARC of Happy Hour is for Amateurs: A Lost Decade in the World’s Worst Profession by “The Philadelphia Lawyer.” If the foul mouthed ramblings of a profound narcissist with serious substance abuse problems sounds like a fun read, this is the book for you. As for me, I found The Philadelphia Lawyer to be a deeply unpleasant fellow with a seriously flawed moral compass who blames the legal profession for his own psychological and emotional failures and inadequacies.

Case in point: he shows up for work one day stoned and is asked by a friend to draft a reply to a motion in one of her cases. Instead of doing the right thing and declining politiely, he agrees to do it, hoping that he can squeak by with a “Gentleman’s C.” Setting aside the question of whether The Philadelphia Lawyer would recognize a real gentleman, this is not the act of a friend.

Given the extent to which substance abuse problems are linked to malpractice by lawyers, this is also highly unethical conduct in the professional sense. Worse yet, this is not the only occasion in which his substance abuse put his client’s interests at risk. Later in the book we read of an occasion in which he got stoned on an anti-psychotic drug before an oral argument. He claims he won the argument, but who cares? It’s still a deep violation of the trust placed in our hand by our clients.

In sum, if wallowing in the mental muck of a deeply unhappy and flawed person is your idea of fun, go for it. Otherwise, give it a pass.

(Keep an eye out for sock puppetry in the comments.)

Competitive Federalism and Preemption

At today’s Federalist Society panel, the question came up as to whether a supporter of federalism can consistently with that position also support preemption of state laws, such as NY’s Martin Act, that allow state attorneys general to regulate the national economy through enforcement proceedings. I answering that question affirmatively, I mentioned that the issue had been one of my first blog posts: Can you be a Competitive Federalist and still want Spitzer to shut the #@!% up? Still true today.

At the Federalist Society NLC

I am in Washington DC for the Federalist Society National Lawyers Convention. Tomorrow, Saturday, Nov. 22, I’m moderating the Federalist Society Corporations Practice Group Program on the Role of the SEC in the Financial Services Crisis, which will be held from 10:45 AM to 12:15 PM in the State Room at the Mayflower Hotel. Hope to see some of my readers there.

A Split Myers-Briggs Personality? Moi?

Typealyzer is a site that purports to figure out your Myers-Briggs type by analyzing your blog. (HT: Sullivan) As the owner of three blogs, I perhaps present a unique opportunity to test it. Here’s the results:

StephenBainbridge.com (punditry)

ISTJ - The Duty Fulfillers: The responsible and hardworking type. They are especially attuned to the details of life and are careful about getting the facts right. Conservative by nature they are often reluctant to take any risks whatsoever.

The Duty Fulfillers are happy to be let alone and to be able to work in their own pace. They know what they have to do and how to do it.

BusinessAssociationsBlog.com (law and corporate governance)

INTJ - The Scientists: The long-range thinking and individualistic type. They are especially good at looking at almost anything and figuring out a way of improving it - often with a highly creative and imaginative touch. They are intellectually curious and daring, but might be pshysically hesitant to try new things.

The Scientists enjoy theoretical work that allows them to use their strong minds and bold creativity. Since they tend to be so abstract and theoretical in their communication they often have a problem communcating their visions to other people and need to learn patience and use conrete examples. Since they are extremly good at concentrating they often have no trouble working alone.

ProfessorBainbridgeOnWine.com (wine and food)

ESTP - The Doers: The active and playful type. They are especially attuned to people and things around them and often full of energy, talking, joking and engaging in physical out-door activities.

The Doers are happiest with action-filled work which craves their full attention and focus. They might be very impulsive and more keen on starting something new than following it through. They might have a problem with sitting still or remaining inactive for any period of time.

*****

Three blogs. Three different result. But the same author. This suggests three possible hypotheses:

1. I have a split personality, with each blog being written by a different psychic persona.
2. Typealyzer is bogus.
3. The whole Myers-Briggs personality typology is a load of crap.

Personally, I’m voting for # 3. In any case, the Typealyzers have anticipated # 2:

A person can have several blogs - and often have different roles for the various blogs - perhaps as a way to live out more sides of themselves. ... Most people are, and therefore the majority of blogs are affected by how we are feeling at the moment in which period we are in. This text analysis gives a snapshot by looking at the communication style of the text.

FWIW, when I’ve taken real Myers-Briggs tests, I almost always come out as INTJ.

Mark Cuban’s Defense

In my blog post analyzing the insider trading charges against Mark Cuban, I noted that a key issue will be whether Cuban agreed, as the complaint alleged, to keep the information about Mamma.com’s forthcoming PIPE transaction confidential. On his blog, Cuban today quotes a press release from his legal counsel claiming there was no such agreement:

The SEC knows their case centers on one telephone conversation between two individuals- 4 years ago. The SEC claims there was an agreement between these parties to the conversation to keep certain information confidential. We interviewed Guy Faure, the former CEO of Mamma.com Inc., with whom the SEC claims Mr. Cuban made an agreement. We had a court reporter transcribe the interview. There was no agreement to keep information confidential.

Cuban’s blog post then goes on to quote from the transcript of the interview.

If there was no confidentiality agreement, Cuban ought to prevail. As I explained in my book on insider trading:

Although [the leading Supreme Court precedent in Dirks v. SEC] clearly requires that the recipient of the information in some way agree to keep it confidential, courts have sometimes overlooked that requirement. In SEC v. Lund, for example, Lund and another businessman discussed a proposed joint venture between their respective companies. In those discussions, Lund received confidential information about the other’s firm. Lund thereafter bought stock in the other’s company. The court determined that by virtue of their close personal and professional relationship, and because of the business context of the discussion, Lund was a constructive insider of the issuer. In doing so, however, the court focused almost solely on the issuer’s expectation of confidentiality. It failed to inquire into whether Lund had agreed to keep the information confidential.

Lund is usefully contrasted with Walton v. Morgan Stanley & Co.  Morgan Stanley represented a company considering acquiring Olinkraft Corporation in a friendly merger. During exploratory negotiations Olinkraft gave Morgan confidential information. Morgan’s client ultimately decided not to pursue the merger, but Morgan allegedly later passed the acquired information to another client planning a tender offer for Olinkraft. In addition, Morgan’s arbitrage department made purchases of Olinkraft stock for its own account. The Second Circuit held that Morgan was not a fiduciary of Olinkraft: “Put bluntly, although, according to the complaint, Olinkraft’s management placed its confidence in Morgan Stanley not to disclose the information, Morgan owed no duty to observe that confidence.” Although Walton was decided under state law, it has been cited approvingly in a number of federal insider trading opinions and is generally regarded as a more accurate statement of the law than Lund.  Indeed, a subsequent case from the same district court as Lund essentially acknowledged that it had been wrongly decided:

What the Court seems to be saying in Lund is that anytime a person is given information by an issuer with an expectation of confidentiality or limited use, he becomes an insider of the issuer. But under Dirks, that is not enough; the individual must have expressly or impliedly entered into a fiduciary relationship with the issuer.

Even this statement does not go far enough, however, because it does not acknowledge the additional requirement of an affirmative assumption of the duty of confidentiality.

So if Cuban’s right on the facts, there should be no liability.

But that raises another question: Should Cuban be conducting his defense in public on his blog?

The SEC told the WSJ that:

Scott Friestad, deputy director of the SEC’s enforcement division, said: “We’re not going to comment on anything Mr. Cuban or his lawyers have to say on Mr. Cuban’s blog and we look forward to presenting our case in court.”

Any defense lawyers out there with thoughts on whether Cuban should be conducting a public defense via his blog?