Credibility. It is all about credibility. Building an effective enforcement program is all about credibility. For the SEC’s enforcement program credibility begins with winning in the courtroom. If the program is going to flourish it must be able to win at trial. Courtroom wins permits the agency to tell would be defendants in pre-filing settlement negotiations that the best offer is on the table, it is fair, and if not accepted the case will be successfully litigated. Courtroom wins in major cases make the would be defendant think twice before spurning that offer in the hope of escaping through trial.
Being willing to take the case to trial is important but not enough. When faced with going to trial those who do not have the resources to litigate with a government agency may make a business decision to settle; others may simply plod through the trial and lose. Those with the resources, however, will not be compelled to settle when faced with the prospect of trial if the agency’s claim is not backed by courtroom wins that create credibility.
SEC v. Cuban, Civil Action No. 3-08-CV-2050 (N.D. Tx.) is the high stakes insider trading case against the owner of the Dallas Mavericks. The jury returned a verdict yesterday against the SEC and in favor of Mr. Cuban. This is another loss in another major courtroom battle for the Commission.
To be sure, the case was challenging from the beginning. The SEC’s complaint claimed that Mr. Cuban engaged in fraudulent, insider trading when he sold a large stake in Mamma.com and avoided what later would have been a loss of about $700,000. The sale followed phone calls with Mamma officials in which Mr. Cuban, as the firm’s largest shareholder, was told about a coming PIPE offering. Those officials claimed that Mr. Cuban was told the information was confidential. There were remarks by Mr. Cuban, according to the complaint, which suggested he understood he could not trade. Yet the district court dismissed the complaint while offering the SEC an opportunity to file an amended action.
The Commission stood firm on its complaint, declined to amend and appealed. The Fifth Circuit Court of appeals rewarded that perseverance, reversing the dismissal. The Court’s opinion was little more than a re-read and re-interpretation of the allegations penned by SEC in its complaint. What the district court saw as insufficient the Court of Appeals found to be adequate to move forward.
The jury concurred with the district court – the allegations were not enough. This is a significant loss in a high profile case for the Commission. It is difficult to view it as not undercutting recent efforts to embolden the SEC enforcement program.
To be sure the SEC recently won a significant victory in the its action against former Goldman Sachs employee Fabrice Touree. That victory, however, was preceded by losses in two major market crisis cases — one against Bruce Bent and others from Primary Reserve Fund and the other against Brian Stoker, former Citigroup employee. One win in four major cases is not a formula for bolstering an enforcement program. That record will not compel potential defendants to settle on the SEC’s terms rather than risk trial. That record does not create credibility. And, in the end, it is all about credibility.