Case 7: SEC v. Cuban, 620 F.3d 551 (5 th Cir. 2010) (CP 14, p. 1185, Mallor 15 t

Question

Case 7: SEC v. Cuban, 620 F.3d 551 (5th Cir. 2010) (CP 14, p. 1185, Mallor 15th Ed.)

In March 2004, Internet broadcasting pioneer and Dallas Mavericks owner Mark Cuban acquired 600,000 shares, a 6.3 percent stake, of Mamma.com, but he was not an officer or director of the company. Later that spring, Mamma.com decided to sell more of its shares through a PIPE [private investment in public equity] offering. Shares issued in PIPE offerings are typically sold below the market price of the shares. Mamma.com's CEO called Cuban to invite him to participate. Before telling Cuban about the offering of shares, the CEO told Cuban he had confidential information for him, and Cuban agreed to keep whatever information the CEO shared confidential. The CEO then told Cuban about the PIPE offering. Cuban became very upset and said, among other things, that he did not like PIPEs because they dilute the existing shareholders. At the end of the call, Cuban told the CEO “Well, now I'm screwed. I can't sell.” The CEO then sent Cuban a follow-up e-mail, encouraging him to contact Mamma.com's investment banker handling the offering. Cuban called the banker and spoke for eight minutes. During that call, the banker supplied Cuban with additional confidential details about the PIPE. In response to Cuban's questions, the banker told him that the PIPE was being sold at a discount to the market price and that the offering included other incentives for the PIPE investors. With that information and one minute after speaking with the investment banker, Cuban called his broker and instructed him to sell his entire stake in Mamma.com. Cuban sold 10,000 shares during the evening of June 28, 2004, and the remainder during regular trading the next day.

True or False and why

1. Mark Cuban qualifies as an “insider” for the purpose Section 16 of the Securities Exchange Act of 1934.

2. If Mark Cuban wrongfully engaged in insider trading, he can be sued by other Mamma.com shareholders for disgorgement of profits and the SEC may also bring criminal charges against him.

3. If Mamma.com’s PIPE offering complies with all Federal Securities Laws, the company does not have to comply with any State’s Blue Sky Laws.

4. If Mamma.com (as the Issuer) filed a Registration Statement with the SEC in connection with its PIPE issuance and the Registration Statement contained material misstatements of fact and material omissions, then Mamma.com can avoid liability under the 1933 Act if it can satisfy the Due Diligence defense.

1. Mark Cuban qualifies as an “insider” for the purpose Section 16 of the Securities Exchange Act of 1934.

2. If Mark Cuban wrongfully engaged in insider trading, he can be sued by other Mamma.com shareholders for disgorgement of profits and the SEC may also bring criminal charges against him.

3. If Mamma.com’s PIPE offering complies with all Federal Securities Laws, the company does not have to comply with any State’s Blue Sky Laws.

4. If Mamma.com (as the Issuer) filed a Registration Statement with the SEC in connection with its PIPE issuance and the Registration Statement contained material misstatements of fact and material omissions, then Mamma.com can avoid liability under the 1933 Act if it can satisfy the Due Diligence defense.

Explanation / Answer

1. False

SEC filed suit against Mr. Cuban under misappropriation theory, alleging insider trading in violation of securities exchange act of 1934. Under misappropriation theory a person misappropriates confidential information for securities trading purposes, in breach of duty owned to the source of the information, while court describe this duty as duty of trust and confidence.

2. True

Other Mama.com shareholders also have the right to file case against Mr. Cuban for disgorgement of profits by using an illegal process, along with that SEC have right to file criminal case for the loss to small shareholders and the company if they proved that Mr Cuban use an illegal method.

3. True

Yes the company comply with Federal securities laws to introduce new ways to promote their investment. Each state have their different local laws for the companies registered with their state tock exchange, while such MNC`s needs to follow federal laws that is applicable to all states.

4. True

If they are registered for that with SEC, clearly contain material misstatements of fact and material omissions then Mamma.com can avoid liability.

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