Fish & Richardson Partner Thomas Melsheimer on Mark Cuban and the SEC

Last month, the Wall Street Journal ran an opinion piece by the owner of the Dallas Mavericks, billionaire Mark Cuban, and his lawyer, Thomas Melsheimer, titled How the Feds Rig Their Prosecutions.

Melsheimer is a partner at Fish & Richardson in Dallas.

In 2008, the Securities and Exchange Commission (SEC) charged Cuban with insider trading in the stock of

Cuban refused to settle the case. His lawyers urged the SEC to drop the case. And when the SEC didn’t, he took them to trial and won.

How did that happen?

“It was a case brought in 2008 against a high profile defendant in an effort by the SEC to get a quick high profile win,” Melsheimer told Corporate Crime Reporter in an interview last week. “I believe they thought that once they investigated and brought a lawsuit against Mark, that in order to avoid the potential for public criticism that he would quickly resolve the case. It was not a large amount of money. And what ended up happening was that he didn’t do anything of the sort. He fought them tooth and nail. He fought the case at the motions stage. He got the case dismissed. The dismissal was overturned at the Fifth Circuit.”

“We ended up having a trial on whether or not Mark Cuban – in an eight minute phone call with an individual who he never met in person – whether or not Mark had made an agreement to keep certain information confidential about a company called,” Melsheimer said.

In a recent Bitcoin Era review, it was also mentioned that “He also agreed in that same eight minute conversation to refrain from trading on the supposedly confidential information that the man was sharing with him.”

The man with whom Cuban had the conversation Guy Faure.

Here is a report from the New York Times on the matter.

“Cuban agreed to keep the information confidential in a call with the firm’s chief, Guy Faure.”

“In response to hearing that Mr. Faure had ‘confidential information’ to share, according to the SEC, Mr. Cuban replied, ‘Um hum, go ahead.’ And at the end of the call, Mr. Cuban expressed frustration that ‘I can’t sell’ the existing shares because he now had access to inside information.”

“And yet, (the government argued), Mr. Cuban traded anyway, just hours before the information was made public. That move, she said, meant that Mr. Cuban avoided $750,000 in losses.

Mr. Cuban’s lawyers had little trouble casting doubt on Mr. Faure. There was no recording of Mr. Faure’s call with Mr. Cuban.

And Mr. Cuban, who maintained his cool in two days on the witness stand, did not recall the nine-year-old conversation.”

“In closing arguments, Mr. Cuban’s lawyers took direct aim at Mr. Faure. One of the lawyers, Thomas M. Melsheimer, argued that (the government) can repeat Mr. Faure’s testimony ‘until the cows come home,’ but, he added, ‘that doesn’t make it true.’”

“Mr. Melsheimer also noted to the jury that, despite being the SEC’s star witness, Mr. Faure declined to appear in person. Instead, he appeared via a taped video.”

The government was unable to convince the jury that what Mr. Faure was saying was true. Was that the key to this case?

“Yes,” Melsheimer said. “The key to the case was the complete lack of believability of Guy Faure’s testimony of what happened as well as the spin the government tried to put on that testimony.”

“You had a claim of insider trading by so called misappropriation, which requires an agreement to keep the information confidential and an agreement not to trade.”

“We attacked every phase of that allegation, including that the information wasn’t really confidential, that there was not agreement to keep it confidential, and that there was no agreement to refrain from trading.”

“The phone call was obviously a key part of the case. We showed the details of the call, the ambiguity of the statement, the ‘uh huh, all right, go ahead,’ the fact that it was on a cell phone, the fact that the call was dropped after about a minute and had to be restarted, the fact that when Mr. Cuban started talking, he had no idea what Mr. Faure was going to tell him.”

“That ended up being a credibility hurdle for the government to overcome,” Melsheimer said. “But even more profoundly, we put forth the notion that the information was public information, that it wasn’t information that was anyway secret or confidential. The idea that this company was going to do a private funding, a private investment in public equity — that that was well known in the marketplace. They had been reaching out to people who had no obligation to keep that information secret. They had been doing that for months before they called Mr. Cuban. So, whatever they were telling him was already out there. The cat was already out of the bag, so that information could not form the basis for any kind of confidential agreement between Mr. Cuban and the company.”

In the Wall Street Journal article, Cuban and Melsheimer focus on the whole issue of exculpatory evidence in the possession of the government.

“It’s a pretty embarrassing tale for the government — one of the most embarrassing ones I’ve ever been involved in,” Melsheimer said.

“The SEC had been investigating and certain individuals associated with the company as far back as 2004. A couple of days after Mr. Cuban had sold his stock, the SEC reached out to him, telling him they were investigating the company. And he had some real concerns about the company. He had only been an investor for a period of months. And in that period of months, several things were brought to his attention that caused him to worry about how the company was being run. They interviewed him for a couple of hours over the phone. They took extensive notes. They exchanged emails with him. He sent them all of his trading records. He answered all the questions they had. They took notes on everything he said about his trade in the stock, why he sold the stock, the circumstances of his trade.”

“Mark Cuban is a busy man. And this incident, this trading, was not something that made a big impact on him. He was stunned years later to find out that he in fact had evolved into a target of the SEC’s investigation. He didn’t recall the details of the conversation with the government. He didn’t recall the details of this eight minute phone call.”

“When they questioned him about it, they used that lack of recall to impeach his credibility, to suggest — well, you are obviously not telling the truth. You are claiming you don’t remember the details. How do you know that Guy Faure is not telling the truth when you can’t even remember what happened?”

“There is actually one point where he is being deposed by one of the SEC lawyers, and trying to struggle to recall something, Mr. Cuban says — ‘You know if you showed me something maybe I could remember more of the details.’ And the SEC lawyer says — ‘No, no, I don’t want to do that.’”

“We did not know at the time that way back in 2004 that the SEC maintained these notes of this contemporaneous conversation with Mark about the very events they were investigating and suing him over.”

“As soon as the SEC filed its lawsuit, we asked for any notes and any record of conversations or interactions with Mr. Cuban. And their response was — we don’t have any. Of course, we suspected that those lawyers had taken notes. But at the end of the day, just like in court proceedings all over the country, at some point, you have to take the other side at their word.”

How did the notes eventually emerge?

“We scheduled the deposition of one of the SEC lawyers in the case who had interviewed Mr. Cuban. It was a lawyer named Alton Turner. Before the deposition, the SEC announced that they had found some notes. They had found the notes of Alton Turner and another SEC lawyer named Kara Brockmeyer. Both had interviewed Mr. Cuban on that day after he sold his stock. And they took multi-page notes of everything he said. They turned those notes over to us after Mr. Cuban had been deposed, but before Mr. Turner and Ms. Brockmeyer had been deposed. We were able to question them about the meaning of their notes. What was revealed was that these notes were taken. They were put in a folder marked Cuban and simply filed away, never to be seen again until right before the deposition of one of the SEC lawyers.”

“The SEC says this lawyer was not working on the Cuban case. He was working on the case. And when that case was closed, his notes were not collected. But certainly he had preserved his notes. It’s almost like the SEC is portraying its records being stored in a big warehouse like in Raiders of the Lost Ark .They are somewhere in this vast cavernous warehouse.”

“But they eventually produced them. And the notes became central to the defense, because they corroborated everything Mr. Cuban had said had occurred. And secondarily, they also helped Mr. Cuban remember things he had not remembered. And it took away the edge that the SEC was trying to put on his lack of recollection by allowing his recollection to be refreshed.”

Would this case have been brought if it wasn’t someone with the name recognition of Mark Cuban?

“I don’t think so,” Melsheimer said. “There is value to bringing high profile cases. I get that. You can sometimes bring a high profile case against one person or one company that will have multiplying deterrent effects because of the high profile nature of that individual or company. There is nothing wrong with doing that. But when you bring a high profile case, you better be doubly sure that you are right, because the consequences of losing are going to be multiplied, just like the consequences of winning will be multiplied.”

Would you say that Mark Cuban was happier at the jury’s decision in this case or at Vince Carter’s three point shot at the buzzer to beat the San Antonio Spurs in the playoffs the other day?

“There is no doubt that Mark Cuban was happier with Vince Carter’s shot than he was with the jury verdict,” Melsheimer said.

“He didn’t feel like he won anything at the trial. He defeated what he believed and what we all believed was an unfair, unjust and unwise pursuit of him. He was pleased to be vindicated. He was pleased that when his kids read the articles about him twenty years from now they are not going to have a statement about him being found to have committed fraud. He’s certainly pleased about that. But there was a different excitement when Carter hit that improbable three pointer.”

How does Cuban’s victory over the SEC stack up compared to the big cases that you have been involved with?

“It’s certainly one of my greatest hits. It may not have been as challenging as Vince Carter’s three pointer as he fell out of bounds. But it was a tough case in its own way. When you win a difficult case, certainly there is satisfaction. We had compelling facts. We had a great story. But remember – the government is bringing a case like this in an atmosphere of hostility to Wall Street, an atmosphere where there are great wealth divisions in the country, with the one percent compared to the 99 percent, the idea that many people hold that people who are wealthy have advantages that the ordinary citizen does not have. That’s a tough atmosphere to represent a billionaire in.”

But at the same time, he’s quite popular in Dallas because of his ownership of the Mavericks. Did that play in his favor?

“There is no doubt that Mark is the everyman’s billionaire. He’s very approachable. People on the street call him by name, call him by his first name. I just don’t get the impression that if Warren Buffett were walking down the street in Dallas, or Houston or Miami, that people would yell out – ‘Hey Warren.’”

“But people yell out to Cuban all the time. He has an appeal, a commonality, a common touch that make him a very effective witness. And make no mistake about this – he was the reason we won the case. If Mark had not been able to tell his story convincingly and compelling on the stand, no matter what the documents showed, no matter what the other evidence showed, we could not have won the case.”

[For the complete q/a transcript of the Interview with Thomas Melsheimer, see 27 Corporate Crime Reporter 18(11), May 5, 2014, print edition only.]

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