Federal Securities Law Blog : Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

The SEC brought its insider trading case against Mark Cuban in November 2008, alleging that, prior to the public announcement of Mamma.com's PIPE offering, Mr. Cuban, who was aware of the planned offering, sold his entire stake in the company, avoiding what the SEC claims was potentially a $750,000 loss. SEC v. Cuban No. 3-08-cv-2050 (N.D. Tex. filed Nov. 17, 2008). Mr. Cuban moved to dismiss the Complaint on the grounds that the SEC did not adequately allege that he owed Mamma.com a fiduciary or similar duty of trust and confidence. The Motion was granted in the District Court, but the Fifth Circuit Court of Appeals reversed and remanded the case to the District Court. SEC v. Cuban, No. 09-10996, slip op. (5th Cir. Sept. 21, 2010).

Mr. Cuban's defense team has mounted a number of interesting arguments, including an affirmative defense that the SEC had "unclean hands" based on the conduct of Division of Enforcement staff members during the investigation. The SEC moved to strike the defense, arguing, among other things that the defense is unavailable as a matter of law in an SEC enforcement action. As discussed here, on July 18, 2011, Judge Sidney Fitzwater, granted the Motion to Strike by the SEC. Although it did strike the defense, the Court rejected the SEC's argument that the defense is barred in SEC enforcement actions as a matter of law, and held that it is available, but "only in strictly limited circumstances."

In addition, in January 2009, Mr. Cuban filed a complaint with the SEC Office of Inspector General, making arguments regarding alleged violations of SEC policy and bias of SEC staff members during the investigation. In a recent Report discussed here, the Office of Inspector General ("OIG") stated that it "did not find sufficient evidence to substantiate any allegations of misconduct."

In late August, 2011, Mr. Cuban filed a motion to compel (the supporting brief is available here) seeking the production of the non-privileged portions of the SEC's investigative file from (including the notes of the Enforcement attorneys taken during the investigations regarding Mr. Cuban and Mamma.com), as well as the production of a privilege log of all documents it withheld from production on grounds of privilege. In late September, Mr. Cuban filed an amended brief (available here) in support of the motion to compel.

The SEC responded to Mr. Cuban's amended brief in mid-October, arguing that "[t]here is no relevant, discoverable material that the SEC has not already produced," and that it has valid objections to requests for "the production of materials that are not within the scope of discovery under the Federal Rules." The SEC also argued that it "the SEC has already undertaken considerable burden in providing an extensive privilege log that substantially overlaps with the log" that is the subject of Mr. Cuban's motion (while also pointing out that Mr. Cuban has refused to produce a privilege log of his own).

In the Motion filed on Tuesday (available here), the SEC argued that Mr. Cuban "has objected to doing that which he asks the Court to compel the SEC to do." The Commission further argued:

If Cuban is right and the SEC is required to produce a privilege log, he must agree that he too must undertake the time-consuming and costly effort of logging thousands of plainly privileged documents. Insisting on a one-way street for discovery, Cuban has refused to satisfy this obligation, and the SEC must file this motion to compel Cuban to produce the required log.

The Commission noted that Mr. Cuban produced a privilege log for a period through December 18, 2006, but has not produced such a log for the period after December 31, 2006, i.e., while the SEC's investigation was underway. The Commission argued that it "has already undertaken the time-consuming task of creating an extensive privilege log that substantially overlaps with the additional logs Cuban now seeks while Cuban has done nothing of the sort."

The case, which remains before Judge Fitzwater, should be an interesting struggle as each side seeks the discovery of information and documents from the investigation – not during the events at issue in the Complaint.