Former Enron Prosecutor Hueston Calls SEC Case Against Mark Cuban Risky and Flimsy
22 Corporate Crime Reporter 45, November 21, 2008

Risky and flimsy.

That’s how Irell & Manella partner John Hueston described the Securities and Exchange Commission’s insider trading case against Dallas Mavericks owner Mark Cuban.

And the former Enron prosecutor says he would not have charged such a case.

“This is a very aggressive case,” Hueston told Corporate Crime Reporter this week. “In this time period of other seemingly greater priorities, in a vacuum, I would say I would not have brought this case. I see a number of weaknesses with this case, which caused me to question why it was brought at all, even when considering just the merits.”

“For instance, the case really appears to be just a he-said-she-said case,” Hueston said. “And so, I believe Mr. Cuban has a very strong factual defense before he even gets to any legal arguments. For an insider trading case, he's not an insider at all. He is essentially a stockholder, essentially pitched to make an additional investment. He was disgusted by that pitch and the direction of the company and sold his stock. And he did so in a very open way consistent with someone who had nothing to hide.”

“And the SEC in a target-driven matter has now drummed up a case, based on pressured and apparently uncorroborated testimony of one other person on a phone line. That is certainly not a criminal case. And it makes for a risky and flimsy case even under a civil standard. It makes me wonder why the SEC has decided to file this case. And I would not be surprised at all if Mr. Cuban took the SEC to trial over this case.”

The SEC charged Cuban with insider trading for selling 600,000 shares of the stock of an Internet search engine company on the basis of material, non-public information.

The SEC's alleged that in June 2004, Inc. invited Cuban to participate in the stock offering after he agreed to keep the information confidential.

The SEC alleges that Cuban knew that the offering would be conducted at a discount to the prevailing market price and that it would be dilutive to existing shareholders.

The SEC said that within hours of receiving this information, Cuban called his broker and instructed him to sell Cuban's entire position in the company.

When the offering was publicly announced,'s stock price opened at $11.89, down $1.215 or 9.3 percent from the prior day's closing price of $13.105.

Cuban avoided losses in excess of $750,000 by selling his stock prior to the public announcement of the offering.

Cuban says he will fight the charges.

Cuban’s lawyer, Stephen Best, a partner at Dewey & LeBoeuf in New York, posted a statement on Cuban’s blog claiming that “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,” Best wrote. “We interviewed Guy Faure, the former CEO of 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.”

In addition, Cuban and his attorneys are alleging prosecutorial misconduct.

E-mails from Jeffrey Norris, an SEC trial lawyer in Ft. Worth, Texas, to Cuban were published this week by the Wall Street Journal.

According to the Journal, Norris was disturbed by news reports that a Cuban controlled movie company was to distribute a movie – Loose Change – suggesting that the U.S. government was involved in the 911 terrorist attacks.

The movie company – Magnolia – ended up not distributing the film. Cuban says he didn’t believe the film’s content, but accuses Norris of being against “an open market in ideas.”

Norris was scathing in his criticism of Cuban.

“Either you are really an anti-American ideologue or your allegiance to making money is significantly greater than your dedication to your country,” Norris wrote to Cuban.

The SEC says that Norris had no involvement with the insider trading case against Cuban and that that Norris’ actions are being reviewed for possible disciplinary action.

Cuban’s lawyer Best told Corporate Crime Reporter that “there are other allegations of misconduct – by SEC enforcement staff other than Jeffrey Norris.”

“When we make public these allegations, I am sure their will be an Inspector General investigation,” Best said.

Does Best mean that he will be making allegations of misconduct against SEC enforcement staff in Washington?

“All in due time,” Best wrote back. “No more info for now.”

Hueston says that the SEC has taken a hit to its reputation – not just from the Cuban case, but from recent damning reports out of the SEC Inspector General’s office.

“In the public eye, the SEC has been damaged,” Hueston said. “Some of the criticism has not been fair. McCain criticized the SEC for not taking a more active role in the subprime crisis, but that really wasn't their jurisdictional territory.”

“On the other hand, when e-mails like this surface, assuming this is a true e-mail, it does erode the public's confidence in the integrity of the institution. So, I do think the SEC has taken a hit. They have been viewed as one of the entities asleep at the switch during the last crisis. So, the new administration is going to feel challenged to have a revamped and more aggressive SEC on watch.”

As for corporate crime prosecutions generally, Hueston says that the Department of Justice has “effectively withdrawn from the battlefield of traditional corporate indictments.”

“I was working in the Department of the Justice when the Supreme Court's decision in the Arthur Andersen case was announced,” Hueston said. “It shook the Department of Justice to its core. There is great trepidation in the Department of Justice when there is consideration of a corporate indictment. There is concern that an entire industry – like the accounting industry – could be crippled with a misfired indictment. And so, the Department of Justice in recent years has fallen back to negotiating deferred and non prosecution agreements.”

“Corporations today have been too timid in negotiating those agreements. What they often fail to realize is that the sole reason for accepting the government on its facial terms for deferred and non prosecution is the threat of actual indictment. With that threat effectively gone, there is more leverage for companies to negotiate more forcefully – for no monitors, for example, which cost tens of millions of dollars and which raise attorney-client privilege issues. Companies are now in a position to argue against a deferred prosecution agreement in favor of a non prosecution agreement. And likewise, to argue down from a non-prosecution agreement to no prosecution at all – to being declared a witness.”

“I've been surprised to find that companies have been slow to realize their increased power and leverage in these negotiations. But this will play out in the coming few years. I also believe that there is a trend that will not be reversed toward greater protection for the attorney-client privilege. And the Holder memo has evolved – and properly so – to a better recognition of the attorney client privilege. I anticipate that Eric Holder, if he becomes Attorney General, will work to continue to protect that attorney-client privilege.”

[For a complete transcript of the Interview with John Hueston, see 22 Corporate Crime Reporter 45(11), November 24, 2008, print edition only.]


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