Insider Trading

Former Enron Task Force co-lead prosecutor John Hueston says that the SEC’s insider trading case against Mark Cuban is flimsy, that Cuban isn’t an insider, and that he wouldn’t have brought the case:

….the case really appears to be just a he-said-she-said case. And so, I believe Mr. Cuban has a very strong factual defense before he even gets to any legal arguments. For an insider trading case, he’s not an insider at all. He is essentially a stockholder, essentially pitched to make an additional investment. He was disgusted by that pitch and the direction of the company and sold his stock. And he did so in a very open way consistent with someone who had nothing to hide.

And the SEC in a target-driven matter has now drummed up a case, based on pressured and apparently uncorroborated testimony of one other person on a phone line. That is certainly not a criminal case. And it makes for a risky and flimsy case even under a civil standard. It makes me wonder why the SEC has decided to file this case. And I would not be surprised at all if Mr. Cuban took the SEC to trial over this case.

Hueston is now a partner with Irell & Manella (Corporate Crime Reporter).

Attorneys for Mark Cuban on Tuesday fired back at the SEC on Cuban’s Blog Maverick, disputing the SEC’s claim that Cuban agreed to keep confidential the information he was given about a proposed stock sale at Mamma.com Inc. The entry excerpts their transcribed interview with former Mamma.com CEO Guy Faure:

CHRISTOPHER CLARK :

1) Q- We spoke earlier about you were telling Mr. Cuban in words or substance : “I have confidential information for you”.

A- Right.

2) Q- Do you recall anything Mr. Cuban said in response or reply to that statement by you ?

A- No, I do not.

They also ask:

Why did the SEC end their multi-year investigation of Mamma.com Inc. for alleged securities laws violations days before interviewing present and former Mamma.com Inc. executives about this matter? Was the timing a coincidence? We think not.

Reuters has more.

October 13: Mark Cuban launches Bailout Sleuth, a blog which exposes the secrecy surrounding the government TARP bailout and documents the massive giveaway of federal funds.

November 17: The SEC files a civil complaint (.pdf) charging Cuban with insider trading, alleging that he avoided a loss of $750,000 by selling his shares of Mamma.com Inc. based on non-public information.

Coincidence? Cuban’s response on his Blog Maverick claims that the matter has been before the SEC for two years. Why now?

Cuban calls it “a product of gross abuse of prosecutorial discretion.” It’s also pocket change to him. Bloomberg has more.

Mitchel Guttenberg, a former executive director in the equity research department of UBS Securities LLC, was sentenced on Monday to 78 months in prison for insider trading by US District Judge Deborah Batts in Manhattan. Guttenberg pleaded guilty (.pdf) in February to two counts of conspiracy and four counts of securities fraud, admitting that he frequently fed inside information to two clients from 2001 to 2006 (Bloomberg, $WSJ$).

The full US Court of Appeals for the Tenth Circuit in Denver on Thursday heard oral arguments in the appeal of former Qwest CEO Joe Nacchio. The full court had earlier agreed to review the March 17 decision of the three-judge panel which reversed Nacchio’s insider trading convictions on grounds that US District Judge Edward Nottingham improperly excluded testimony from expert defense witness Professor Daniel Fischel.

Although the three-judge panel ruled 2-1 in favor of reversal, news reports from the Rocky Mountain News and Reuters indicate that six of the nine judges who heard the case were overtly critical of Nacchio attorney Maureen Mahoney’s arguments. Chief Judge Robert Henry and the two judges who earlier ruled in favor of reversal appeared to support Nacchio’s claims.

Nacchio was convicted in April 2007 of 19 of 42 counts of insider trading and was sentenced to 72 months in prison. He has been free on bond during his appeal.

The full US Court of Appeals for the Tenth Circuit in Denver on Wednesday agreed to review the March 17 decision of the three-judge panel which reversed the insider trading convictions of former Qwest CEO Joe Nacchio and remanded the case for retrial before a different circuit court judge (earlier). The court will consider only the issue which caused the reversal, US District Judge Edward Nottingham’s exclusion of law professor Daniel Fischel, who would have been the key expert defense witness. Oral arguments are scheduled for September 24. Nacchio remains free on bond (Rocky Mountain News, Reuters).

The US Court of Appeals for the Tenth Circuit in Denver on Monday reversed the convictions of former Qwest CEO Joe Nacchio and remanded the case for retrial before a different circuit court judge. Nacchio was convicted in April 2007 of 19 of 42 counts of insider trading after a jury trial before US District Judge Edward Nottingham in Denver. The charges arose from his sale of $101 million worth of Qwest stock in 2001 while allegedly knowing that Qwest’s outlook was deteriorating. He was sentenced to 72 months in prison in July but has remained free on bail pending appeal. Nacchio had appealed on grounds that the evidence was insufficient to convict him, that the jury instructions were improper and that Judge Nottingham improperly excluded exculpatory evidence: an expert witness and classified information. In overturning the convictions the majority opinion states:

• We agree that the improper exclusion of his expert witness merits a new trial, but we conclude that the evidence before the district court was sufficient for the government to try him again without violating the Double Jeopardy Clause.

Professor Daniel Fischel, an expert on corporate law and economics, was the excluded expert witness. Prosecutors had argued that the defense failed to establish the reliability of Fischel’s opinions. Nottingham excluded Fischel in part because he thought it would not be helpful to the jury. But the appeals court rejected that reasoning:

• This misunderstands the nature of economic expertise. An economic expert is permitted not only to tell the jury that an economic concept “is an issue” but to analyze the concept and offer informed opinions. In other words, expert testimony may “assist the trier of fact to understand the facts already in the record, even if all it does is put those facts in context. ….That is why expert economic testimony is routine when a materiality determination requires the jury to decide the effect of information on the market. ….Armchair economics is not the way to decide complex securities cases [citations omitted].

NYT/Reuters here.

In Manhattan on Monday, a federal jury convicted former Credit Suisse banker Hafiz Muhammad Zubair Naseem on one count of conspiracy and 28 counts of insider trading for tipping off a colleague in Pakistan who traded on inside information of upcoming mergers, resulting in a gain of $7.5 million.  The colleague, Ajaz Rahim, was the chief investment banker at Faysal Bank in Karachi; Rahim is fighting extradition from Pakistan. Naseem was deemed a flight risk and taken into immediate custody pending sentencing. US District Judge Robert Patterson scheduled sentencing for April 7; Naseem faces up to five years in prison on the conspiracy count and up to 20 years in prison on each insider trading count, but prosecutors indicated that sentencing guidelines called for 12 to 15 years total. NYT here, Yahoo/AP here.