Tag: Mark Cuban

Is Cooperman The New Cuban?

The Securities and Exchange Commission brought charges against Mark Cuban for insider trading. The SEC claimed he was an insider based his status as a big shareholder in the company or that he had agreed to not trade on material non-public information disclosed to him.

The SEC brought charges against Leon Cooperman for trading on material non-public information. The SEC is alleging that Cooperman used his status as a big shareholder in Altas Pipeline Partners to obtain confidential details about an upcoming company transaction.

According to the SEC complaint, an executive at Atlas Pipeline shared confidential information with Cooperman believing he would keep in confidential and not trade on that information. That seems a lot like the Cuban facts.

The SEC alleges that the Cooperman explicitly agreed to not use the information to trade. Going back to the Cuban case, he never agreed to keep the information confidential.

The trading activity outlined in the SEC order shows Cooperman making a huge bet on Atlas Pipeline. At one point his activity was 95% of the daily volume of trading on a set of Atlas Pipeline call options.

It looks there was a parallel action of criminal charges. But the Newman case from the Second U.S. Circuit Court of Appeals sets a standard that a recipient of an inside tip must know the confidential information came from an insider and that the insider disclosed the information for a personal benefit.

The Salman case is before the Supreme Court and is looking at the Newman standard for criminal insider trading.  If that standard is upheld, it seems unlikely that Cooperman would be in an orange jumpsuit. According to reports, the DOJ has suspended its investigation into Cooperman until the Salman case is decided.

The civil charges from the SEC is based on misappropriation so it does not need to prove that the tippee received a benefit.

It seems like the case will hinge on the credibility of the Atlas Pipeline executive. That executive is not named in the complaint.

Assuming the SEC case passes the credibility standard, it will need to prove the legal standard that Cooperman’s trading should be illegal.

Given the recent history of the SEC bringing cases in front of its own administrative judges, this case was filed in federal district court.

I see two likely reasons. Cooperman demanded this venue in exchange for agreeing to the tolling of the statue of limitations. (The trading happened in 2010.) Or, the SEC is looking to set legal precedent.

References:

The SEC v. Mark Cuban Insider Trading Case

McDermott Will & Emery put together an excellent peice on insider trading: The SEC v. Mark Cuban Insider Trading Case (.pdf) by Stephen E. Older and Seth T. Goldsamt.

Insider trading under U.S. law has developed through a case-by-case interpretation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 in the federal courts. There are three basic elements to an insider trading claim. The elements include purchasing or selling a security after receiving information that is material, nonpublic, and obtained or used in breach of a fiduciary or similar duty.

There are two major theories of insider trading under federal law flowing from two different types of duties: the “classical” theory and the “misappropriation” theory. Under the classical theory of insider trading, the agents of an issuer of securities may be corporate insiders (e.g., directors, officers, employees or controlling shareholders) or they may be “temporary” insiders by virtue of a professional relationship giving the agent access to nonpublic information about the issuer. A temporary insider is typically a lawyer, banker, accountant or consultant. If someone falls into either category and receives material, nonpublic information, then that person must either disclose such information to his counterparty before trading or abstain from trading. Under the misappropriation theory, a person will be held liable if he or she traded on material, nonpublic information and owed a duty to maintain trust and confidence to the source of that information.

The authors take you through the elements of insider trading and how it relates to the public information about the Mark Cuban case.

They also take us through the industry practice for PIPE transactions.

In a typical PIPE transaction, the placement agent will contact an investment fund’s compliance officer or in-house counsel and disclose limited information about the PIPE issuer. The compliance officer then runs this information against the fund’s restricted list, which is a list of investments in which the fund currently has a position. This is done to ensure that the fund will be able to freely trade investments it has already made. If the compliance officer finds the issuer’s name on the fund’s restricted list, he generally will decline to learn anything further about the offering. If the issuer’s name is not on a restricted list and the potential investor is interested in participating in the PIPE transaction, currently, best practices call for the placement agent either to have such investor sign a confidentiality agreement or a securities purchase agreement that includes a confidentiality provision, or to read a detailed script regarding confidentiality and have the investor consent in the presence of witnesses. This procedure is meant to prevent the circumstances now being litigated between the SEC and Mr. Cuban.

Mark Cuban and Insider Trading

The Wall Street Journal reported that the SEC filed insider trading charges against Mark Cuban (owner of the Dallas Mavericks basketball team): SEC Charges Mark Cuban With Insider Trading. You can read the full text of the complaint against Mark Cuban.

According to the complaint, Cuban owned 600,000 shares in Mamma.com Inc.  (now called Copernic Inc.), whose shares are trded on NASDAQ. Cuban was told of an upcoming PIPE transaction. News of the transaction would likely have a substantial negative impact on the stock of the company. On the day prior to the announcement, Cuban sold all of his shares in the company and avoided losses in excess of $750,000.