Maverick’s Mark Cuban off the Hook, SEC Compliant Dismissed

17 07 2009

Wall Street Journal is reporting that a federal judge is dismissing an insider trading complaint by the Securities and Exchange Commission. From the Wall Street Journal’s Law Blog:

Cuban denied the allegations and played hard ball with the agency, both in statements on his blog and in court. Cuban even had support from five big-wig law professors, who filed an amicus brief in the case that argued Cuban did no wrong.

The SEC originally filed a complaint stating Cuban sold his shares of upon hearing from the CEO that they would be issuing low-priced shares, a move that would have hurt the value of Cuban’s stock.  While this looks like a textbook insider trading case, it didn’t help that Cuban had amicus briefs filed on his behalf by eminent law professors, Allan Bromburg, Allen Ferrill, Jonathan Macey, Todd Henderson and Stephen Bainbridge.  All of them argued for Cuban stating he did nothing wrong.

A Copy of the SEC Complaint


Yet Another Ponzi Scheme

10 06 2009

This time two it involves California men allegedly involved in a $80million Ponzi scheme.  The SEC is now suing them for fraud.  From Bloomberg:

An important thing to note about Ponzi schemes, especially in trying to avoid them, is that they largely target specific ethnic groups, and are committed by members of that ethnic group.  The imfamous Madoff Ponzi scheme targeted wealthy Jews and their families.  No, Kevin Bacon isn’t Jewish, but his wife Kira Sedgwick is Jewish.  This ponzi scheme was instigated by two Korean-Americans, and targeted the local Korean community.

Others Weigh In on Sotomayor

30 05 2009

Other blogs have weighed in on Supreme Court Nominee Sonia Sotomayor, and her impact thus far on securities law.  Some of them are very interesting.  The National Law Journal has some interesting comments on Sonia Sotomayor and litigation on Rule 10b-5.  Rule 10b-5 is the corner stone of almost all securities litigation.  The rule is a prohibition of fraud and deceit by both act or omission, in connection with any purchase or sale of securities, and has been used in many cases involving insider trading.  For any attorney engaged in securities litigation as a part of their practice, a Supreme Court Justice’s opinion on the rule is important in deciding how to proceed with their case.  From National Law Journal:

Under the business umbrella, for example, “there’s not a corporation out there, as well as the plaintiffs’ bar, that doesn’t know how important and critical is the issue of the private right of action under 10b-5 of the securities law,” said corporate law scholar J. Robert Brown of the University of Denver Sturm College of Law. “But I doubt it will come up.”

Rule 10b-5 is the leading statutory basis for private securities fraud claims, he said. The Supreme Court’s most recent decision in this area — Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc. — was a 5-3 victory for third-party business defendants by the Court’s conservative wing. The decision evinced hostility toward 10b-5 actions and a desire to contain them, said Brown. Just last week the Court agreed to decide another key 10b-5 challenge involving when the statute of limitations begins to run. Merck & Co. Inc. v. Reynolds , No. 08-905.

Retiring Justice David Souter dissented in Stoneridge . Although Sotomayor authored a relatively pro-investor ruling in Merrill Lynch v. Dabit (vacated and remanded by the Supreme Court in 2006), her opinions reflect no discernible philosophy in this area, said Brown and others.

Courthouse News Service has also weighed in on Merrill Lynch v. Dabit, a case covered in a previous post on Lots Stocks and Gavel.

In an interview after the conference, Resident Fellow Theodore Frank of the conservative think tank American Enterprise Institute said the descriptions of Sotomayor as a firm believer in judicial modesty “contradict behavior exhibited by a number of Sotomayor’s actual opinions.”
Frank gave an example, “She went out of her way to give a crabbed anti-business reading of the Securities Litigation Uniform Standards Act that was reversed 8-0 by the Supreme Court.”
Frank here is referring to the 2005 Dabit v. Merrill Lynch case, where investors holding securities argued that misleading statements prompted them to retain securities they otherwise would have sold.
Here, the question rode on whether lawyers bringing the securities class action were able to bring the case in state court as a way of avoiding federal legislation designed to stop the perceived abuse of federal class action securities fraud litigation.
As a member of the Second Circuit Court of Appeals, Sotomayor allowed the suits, but when the case made its way to the Supreme Court, the justices voted 8-0 to reverse the decision, deciding that the act applies in state court cases, as well.

See Also: Sonia Sotomayor and Securities Litigation

Cuban Turns Tables on SEC

29 05 2009

Both the Dallas Morning News and Bloomberg are reporting that Dallas Mavericks owner, and one time Chicago Cubs ownership contender, Mark Cuban, is suing the Securities and Exchange Commission claiming that the government agency is illegaly witholding information he requested through the Freedom of Information Act. From the Dallas Morning News:

The billionaire owner of the Dallas Mavericks is seeking a court order to make the nation’s securities cop turn over documents related to its insider-trading investigation of him.

Cuban filed a request for the records in December under the Freedom of Information Act.

“The SEC improperly refused to produce any records,” according to Cuban’s lawsuit.

An SEC spokesman was not immediately available for comment.

The Freedom of Information Act (FOIA)  is a law enacted by Congress in 1966 which allows the Federal Government to release information controlled by the government.  The government retains control over the type of information which can be released, and may deny requests based on the sensativity of the information.  The type of information Cuban seeks is very low on the government sensetivity level.  It is doubtful that the investigation of Mark Cuban’s alleged insider trading is a matter of National Security.  Further such documents relating to the investigation should be released through normal disclosure.  Though FOIA applies to the Federal Government, states have their own versions.  Here is an excellent website with more information on FOIA and how to request information.

SEC sues Professor and Lawyer for Securities Fraud

27 05 2009

I am glad I didn’t have this professor for Business Ethics.  To top it all off, it seems as they used their students as employees to further their scheme. From Star-Telegram:

Using forged bank records, the men made it appear that a company they controlled was earning spectacular returns from such trades, the lawsuit says. As a result, the suit says, since at least July 2006 more than 60 investors bought stock in the company, Global One.

The SEC obtained an emergency court order to freeze the assets of Robert D. Watson, who taught at A&M from January to April, and attorney and CPA Daniel J. Petroski of Houston. A court-appointed receiver will try to recover assets.

I will soon get around to writing my large, long awaited article on Ponzi schemes and how to avoid them.  It may seem like old news, but most Ponzi schemes often start when the market is down, so now is a prime opportunity for shifty individuals to take advantage of ordinary people.

Sonia Sotomayor and Securities Litigation

26 05 2009

Today President Obama nominated Sonia Sotomayor for the Supreme Court of the United States vacancy left by Justice David Souter.  It is interesting to note that Judge Sotomayor has had four of her rulings overturned by the very court she is now nominated to sit.   One of these cases dealt with in an interpretation of law dealing with Securities Litigation Uniform Standards Act .

The case, Merrill Lynch, Pierce, Fenner and Smith, Inc., v. Dabit, 547 U.S. 71 (2006) arose out of an investigation of Merrill Lynch by then New York State Attorney General, Eliot Spitzer.  The public investigation alleged that a breach of fiduciary duty ocurred because Merrill Lynch was giving investment advice based on their loyalty to certain large investment banking clients, rather than the best financial interests of individual investors.  Though the public investigation was settled out of court, it spurred a number of private law class action lawsuits against Merrill Lynch.  The suit eventually goes 2nd Circuit, where Sonia Sotomayor is sitting as judge.

So in other words, Merrill Lynch was allegedly in bed with a series of investment bankers, which manipulated the price of stocks.  When the stock prices fell, many investors (Including plaintiff, Dabit) lost the value of their stocks, and the brokers lost their commissions when investors look elsewhere.

Sounds like Merrill Lynch has breached their duty to the people who use them to invest, right?  Can they sue?  Short answer, yes, with a “but”.  The “but” is that in 1998, congress passed the Securities Litigation Uniform Standards Acts.  The effect of the law was to preempt certain class actions alleged under state law from being filed in either state or federal court if the cause of action was “in connection with the purchase or sale” of securities. The main purpose of the law suit was to prevent people from filing frivolous lawsuits against large companies with “deep pockets”, which would have the effect of tying up the judicial system.

When the case came to her, Judge Sotomayor took the opinion that the law did not bar standing for all lawsuits in connection with the sale or purchase of securities, even though the act specifically said it did bar standing.  Citing a 30 year-old case, written long before the Securities Litigation Uniform Standards act,  she opined that the law still allowed for class action law suits to be filled by those who suffered direct loss due to the purchase or sale of securities.  Blue Chip Stamps v Manor Drug Stores, 421 US 723 (1975).

In other words, she took an activist position in favor of an interpretation that would have allowed the suit to go forward, in spite of specific language in the law that would have barred it.

Her ruling was overturned unanimously with the Supreme Courts opinion being authored by one of the most liberal Justices on the Supreme Court, John Paul Stevens.

Stanford cannot afford his own legal defense

1 04 2009

“Sir” Allen Stanford, accused of masterminding the second largest Ponzi scheme in modern times, next to the Bernard Madoff, supposedly cannot afford to pay his own legal defense, due to the seizure of his assets.    According to the Associated Press Article, Standford’s legal issues are not limited to the lawsuit filed by the SEC, he is also facing a divorce.  Stanford has asked that papers relating to the SEC investigation be sent to his divorce attorney, even though he would not be handling his SEC case.  Essentially, Stanford argues that the government cannot seize all his assets and expect him to fight an intense and complicated legal battle without being able to pay for representation.  There is precedent to set aside seized money to pay for a legal defense.  More on Ponzi Schemes later.