I would have preferred that Mark Cuban beat his insider trading charges by having a court rule that SEC Rule 10b5-2 was invalid. I still believe rule 10b5-2 grossly oversteps the SEC's authority and is completely inconsistent with binding Supreme Court precedent. See, e.g., this post and this one too.
It seems, however, that Cuban's defense team persuaded the jury that the information on which Cuban traded was neither material nor nonpiblic:
Dr. Erik Sirri, a Professor of Finance at Babson College and the former Chief Economist and Director of the Division of Trading and Markets at the SEC, testified as an expert witness, poking holes in the SEC’s argument that Cuban violated § 17(a) of the Securities Act of 1933, § 10(b) of the Securities Exchange Act of 1934, and Rule 10b–5. The SEC argued that Cuban “deceived Mamma.com by agreeing to maintain the confidentiality of material, nonpublic information concerning the PIPE and not to trade on the information, and then selling his stock in the company without first disclosing to Mamma.com that he intended to trade on the information.” S.E.C. v. Cuban, 3:08-CV-2050-D, 2013 WL 3809654 (N.D. Tex. July 23, 2013).
However, Dr. Sirri argued that Cuban did not trade on material and non-public information. In his report, the expert witness opined that “the information possessed by Cuban was not material when analyzed using customary economic tests of materiality” and “because of actions by other market participants, the information possessed by Cuban was likely already incorporated into the market price of the Common Stock when he sold his shares.” SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Mark CUBAN, Defendant., 2011 WL 9374207 (N.D.Tex.). Dr. Sirri pointed to the Form 20-F that Mamma.com publicly filed in May 2004 that “conveyed information about the upcoming PIPE offering to the marketplace,” cited “evidence that hedge funds received information about Mamma.com’s PIPE offering approximately three months before it was announced,” and argued the upcoming offering could have been inferred by the pre-borrowing arrangements made by certain hedge funds that ultimately invested in Mamma.com’s PIPE offering.” S.E.C. v Cuban, 3:08-CV-2050-D, 2013 WL 3809654 [ND Tex July 23, 2013].
The SEC had attempted to exclude Dr. Sirri’s testimony and report, but aside from a few minor points, the court allowed the expert witnesses’s argument “that the PIPE offering information Cuban received was immaterial and had become public by the time he sold his shares.” Id. Applying the Daubert reliability test, the court held that Dr. Sirri’s opinions as an expert witness are supported by reliable evidence and “his expertise concerning equity markets.” Id.
Unfortunately, this leaves the rule on the books and cost us our best chance of getting it challenged.
