How did the SEC get it this wrong? The judge throws out the Mark Cuban insider trading charges
I have not been a fan of the SEC – but on preliminary evidence I am forming a better opinion of Mary Schapiro than most. However as a tag-end of an era of grotesque incompetence the SEC has had the charges of insider trading it pushed against Mark Cuban thrown out of court.
The charges of insider trading against Mark Cuban were always stupid. I blogged about those charges here. I noted the (public) evidence was only that the CEO of a cash strapped company (Mamma.com) had phoned him and told him that he was cash strapped. Mark Cuban sold his shares. The SEC charged him with insider trading but did not present any evidence that he was an insider. I noted that:
To make him an insider he needs to have agreed to be an insider. He needs to have agreed with the CEO that he will take information confidentially. In other words the case hinges almost entirely on the contents of a phone call between the CEO of a failing dot.com and Mark Cuban – and the call is meant to have taken place in 2004. Nobody is going to credibly remember it. If it came to a criminal charge (which required absence of reasonable doubt) then you would have to acquit Cuban because at best this case will be two people saying “he said” and the other saying “no I did not” about a conversation years ago. As far as I know there is nothing in writing in which Mark Cuban agrees to be an insider (though something in writing is what is required). It is telling that there was no criminal charge filed with the civil charge. The criminal charge wouldn’t fly.
Well guess what – the Judge said that the SEC did not provide evidence that Mark Cuban had agreed to accept the information in confidence and hence did not provide evidence that he was an insider.
And that was obvious from the start. Unless the SEC had something in writing (which they did not) they were stuffed in this case and incompetent in bringing it.
The real issue now is how the SEC got this bad? I spot serious frauds at the rate of better than one per month – and they are rarely prosecuted. Madoff sat in front of the SEC’s face for years. However the SEC went on a wild-goose-chase against Mark Cuban on a case that was flimsy from a distance of 9000 miles (Atlanta to Sydney).
Getting trust in the financial system back is critical to economic recovery. With the SEC so far off its game that will be difficult. Mary Schapiro appears to be doing better than her predecessor. One day I hope to be blogging on SEC successes.
Read more at John Hempton's Weblog
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Cuban financed a movie critical of the official 9/11 story:
http://video.google.com/videoplay?docid=-2144933190875239407&ei=uGFjSojQIc7qlAedvtke&q=fabled+enemies+full&hl=en
July 19, 2009 2:34 PM | Reply | Permalink
The SEC can justifiably be accused of incompetence, but was there a political element in bringing the prosecution of Mark Cuban?
Is this just a case of the Bush administration using SEC appointments as patronage jobs for any available ideological conservative no matter how incompetent, or is it actually a case of the Bush administration's politicizing of the federal government over the last eight years? I don't know enough about Cuban to know if he would have been a likely target for right-wing ire.
My bet is that one of those two things, and maybe both, caused the prosecution in the first place. Similarly, much of the lack of prosecution of rather clear scams is a direct response of the SEC to the political atmosphere of a conservative government.
As they say, a fish rots from the head down.
July 19, 2009 5:05 PM | Reply | Permalink
What wasn't much reported regarding Cuban is that the company he had shorted had a terrible governance history, including linkages to a Canadian financier who was a business associate of Stratton Oakmont, the stock manipulating penny stock bank that was the subject of the movie Boiler Room.
That the SEC went after Cuban for shorting such a questionable company is itself questionable.
July 19, 2009 10:02 PM | Reply | Permalink
This post leaves me a little confused. Why was Martha Stewart indicted and convicted for insider trading? She apparently acted on verbal information. What did she leave in writing acknowledging that she was an insider?
July 19, 2009 10:17 PM | Reply | Permalink
To your main question - which John didn't answer but perhaps he will correct me if I get things wrong in this post - the issue of having a signed statement acknowledging that you are an insider is relevant for SEC when they look at whether to pursue a criminal or civil action.
Absent a signed unequivocal statement from Cuban saying he agreed to be insided - by the way, something neither he nor the CEO, if they had half-decent lawyers, would have done - John is saying the SEC would not go down the criminal route because the burden of proof would be too high.
But it is certainly not the case that the SEC needs signed statements etc, they do however need incontrovertible proof that someone accused of insider dealing is an insider. This can generally take one of two forms - undisputable documentary evidence that the suspect is an insider, or the information passed over was so transparently material non-public information that the recipient would know it was inside information.
You can perhaps see why the SEC baulks at criminal prosecutions, when the burden of proving beyond reasonable doubt is brought to bear on these sorts of cases.
So the short answer is the evidence can be verbal - but whether it is or not, the main criterion is that it is bullet-proof.
July 20, 2009 10:02 AM | Reply | Permalink
She was not convicted of insider trading. The judge threw that charge out for lack of evidence. She was charged with obstruction of justice - for example, they charged her with obstruction for telling the press she was innocent. Like Cuban, this was a trumped up case, but the prosecution made her sound like a bitch so they convicted her for bitchiness, and for being a prominent Democratic party fundraiser.
And Cuban - a vocal anti-Bush critic - of course they went after him.
July 20, 2009 3:13 PM | Reply | Permalink
Martha Stewart was convicted for lying to officials under oath - not for insider trading.
If she had exercised her right to remain silent she would never have gone to jail. She did not insider trade.
John
July 20, 2009 1:15 AM | Reply | Permalink
Excellent point. In the end, Stewart fell for what a LOT of criminal defendants fall for... she thought she'd do better if the authorities thought she was cooperating, not realizing that they'll go for any angle they can.
The Martha thing is, in retrospect, really regrettable. Yeah, she lied to investigators. But she lied to investigators about an investigation that shouldn't even be happening.
July 20, 2009 9:11 AM | Reply | Permalink
"But she lied to investigators about an investigation that shouldn't even be happening."
No way, can't agree at all.
This is a case that the SEC absolutely should have investigated. The Waksal family was up to its eyeballs in insider dealing in Imclone - a bunch of them pled guilty and went to prison - the stock itself stunk to high heaven. Martha Stewart's conversations with her Merrill broker leading up to her sale of ImClone stock, the day before significant negative news, were easily suspicious enough to warrant questioning.
Whether the investigations should have ended up with a prosecution, there I can see the arguments for and against. But I can understand why the SEC went ahead; with Cuban, not so much, the evidence I have seen suggests they didn't have a great case here.
July 20, 2009 9:40 AM | Reply | Permalink
The litmus test for insider trading hinges on whether you have a fiduciary duty to the company whose stock you hold. Martha Stewart had no fiduciary duty, she was not a board member and she was not an employee.
She was first contacted by her broker, informing her that there was high activity with Imclone with a rush to sell stocks. She tried to contact Waksal and never talked to him - he never called her back. She sold her stock and avoided a loss of 45,000.00. Neither Waksal's father or his daughter were ever charged with securities fraud, although it was the sale of their stock that triggered the activity.
She was indicted for securities fraud,(among nine other counts) but the judge threw out that charge the first day of the trial. She was convicted of making false statements and obstructing justice as was her broker, both charges I find ridiculous - she claimed she had a standing order with her broker that when the stock fell below 60. a share, he had orders to sell and changing a record of her phone calls which she immediately changed back to its proper place.
These charges were made for publicity and her heavy contributions to the democratic party and of course, because she was a bitch.
July 20, 2009 11:41 AM | Reply | Permalink
You can read my post below where I suggest the Martha Stewart prosecution was quite significantly motivated by the publicity it would generate. As to the merits of the jury's decisions, you are free to your opinion.
But you should know that the litmus test for insider dealing is trading securities on the basis of material non-public information. Fiduciary responsibility, on its own, does not enter the equation.
July 20, 2009 12:36 PM | Reply | Permalink
"She did not insider trade."
She of course wasn't convicted of insider dealing, there is however a pretty decent body of circumstantial evidence that she did. Certainly to my mind the evidence is much stronger in her case than it is in this one with Marc Cuban.
But my main point here is to offer another reason why the SEC may have pursued the Cuban case. I know first-hand how difficult it is to nail anyone for insider dealing. You get few cases and fewer convictions because unless you have the goods - meaning, the cast iron evidence that the suspect was insided and dealt on the basis of this information - the case is dead on arrival and the SEC knows it.
So much of the calculus at the SEC and other regulators regarding insider dealing prosecutions seems to be around the PR. Is a case worth pursuing simply because of the publicity it will generate? This is not to say I agree with the SEC's strategy, but the pursuit of Martha Stewart (especially) and Marc Cuban, aside from the merits of either case, has a lot to do with the SEC grabbing headlines about its tackling of market abuse.
There's another insider dealing case before the courts, SEC v Rorech and Negrin, which many of us junkies are watching quite closely. Not because there seems to be much doubt about the SEC having the goods, the evidence here is about as good as it gets, but because there is a major doubt around the the validity of the SEC's jurisdiction here. Partly because these trades were credit default swaps, and partly because the reference obligations are European-listed securities.
There's a lot of us who think that on a strictly legal basis, the SEC is on a hiding to nothing by pursuing this case. But look, it's the first ever insider dealing CDS case, and the SEC might earn much needed political kudos for having a run at this. Indeed this kudos, this image of being a vigorous enforcer, may be more important than the outcome itself. At least that's how it seems the SEC often thinks.
July 20, 2009 9:28 AM | Reply | Permalink
"this is a warning to Mark Cuban, who is distributing that film in a few weeks. This is a warning to you Bud, okay, you pull that movie or I’m gonna be your worst nightmare, because this is gonna lead to death." - Bill O'Reilly
http://michaelfury.wordpress.com/2009/05/05/we-will-not-submit/
July 20, 2009 1:32 PM | Reply | Permalink
The Martha Stewart case is quite as simple as this. It does not matter one iota whether Martha was told by Sam Waksal. At least for Martha.
Martha had NO DUTY to not trade on that information. She was not an insider. If Sam Waksal and told her to sell her Imclone shares and she sold them then she is just fine.
She did however lie to investigators (especially about the standing order to sell them). That is not fine.
Also if Sam Waksal told her to sell her imclone shares and allowed her special knowledge then HE IS GUILTY of UNFAIR DISCLOSURE. If he took a bribe for that he is also criminal. But Sam did plead guilty to insider trading. He was an insider.
Martha was not. Martha was terribly advised by her lawyers who understood considerably less American securities law than me - and I live in Sydney Australia. She sacked her legal team part way through the whole investigation. For good reason.
Martha deserved to go to prison. For lying to investigators. In the end she should have pleaded guilty to that. But Martha did not break securities laws.
Nor did Mark Cuban.
Whether these prosecutions were pursued because they were high profile people associated with anti-Republican causes I will let everyone else decide.
J
July 20, 2009 7:16 PM | Reply | Permalink
It does not matter one iota whether Martha was told by Sam Waksal.
In terms of the law, this is strictly true, but from the perspective of an investigator, it is an incredibly important piece of the jigsaw.
Bottom line to me, when you are facing a decision to sell (or buy) securities, there is no upside at all in speaking to an insider. So however poorly Martha Stewart was advised after the fact, her fatal decision was to place a call to Waksal. No good whatsoever could have come from any conversation she may have been able to have with him.
The SEC could not of course prove that she had spoken to him - which is why any Imclone insider dealing case against her could never have been successful - but for for the sake of argument, let's say the SEC could have produced evidence she spoke to Waksal and asked him for the low-down on Imclone. He gave it to her, and she sold the stock.
Imagine then she turned up in court and said, "Yeah, I sought out the CEO, and yeah, your honor, he insided me, but still UNFAIR DISCLOSURE." That sort of argument deserves two responses: (a) Boo Friggin' Hoo, you well-connected cheat; (b) Guilty.
Ps. I have some doubt that her Democratic ties had much to with her prosecution, the fact alone she is so famous made her a very attractive target for the SEC.
July 21, 2009 6:04 AM | Reply | Permalink