Lessons Learned From The Mark Cuban Insider Trading Trial

Friday, March 21, 2014 - 15:40

The Editor interviews Fish & Richardson Principal Thomas Melsheimer, who served as lead trial counsel for long-time client Mark Cuban in his SEC insider-trading lawsuit. In addition to trying white collar, large commercial litigation and patent cases, Mr. Melsheimer serves as Managing Principal of Fish’s Dallas, TX office.

Editor: Share a little bit with us about your practice at Fish & Richardson and some of your most recent successes.

Melsheimer: I have a broad, national trial practice focused on business and IP litigation, with much of my work in Texas. I’ve been fortunate to be involved in many different areas of the law on both sides of the docket. I don’t really have a strong preference for either side, but as a former federal prosecutor, I do like the advantages of speaking first and last.

After the Cuban verdict came in, I was quietly celebrating with a good friend who happens to be a judge in Dallas who joked that I had “peaked too early.” We laughed, but it reminded me how fortunate I’ve been to be on the winning side of so many potentially “career-changing” cases. One was the trial with the Texas Attorney General against Johnson & Johnson over the illegal marketing of the antipsychotic drug Risperdal. We ended up settling during the trial for what remains the largest Medicaid fraud settlement in Texas history. A year earlier, I was lead trial counsel for a group of airlines and ticketing companies in a case where we successfully obtained an invalidity verdict in a multiple patent case in the plaintiff-friendly Eastern District of Texas.

Editor: Tell us more about your huge win last year in the SEC insider trading lawsuit against Texas billionaire Mark Cuban. As lead trial counsel in the case, can you tell us what was so remarkable about this high-profile case?

Melsheimer: It was remarkable in many different ways. First, the celebrity of Mark Cuban drew media attention from all over the country. Many observers offered all kinds of theories about how to try the case or what was important, but we couldn’t let that influence how we had decided to try the case.

Second, we all felt tremendous pressure to win. We had some of the best securities lawyers in the business on the team, including Steve Best and Chris Clark. I was brought in late because I knew how to try a case in Texas and because of my experience with Mark and his general counsel, Robert Hart. The bulk of the stand-up work in trial fell to me, and, though I am always driven to win, there was additional pressure because I did not want to disappoint this client in an extremely high-profile case.

Finally, every securities fraud trial is inherently complex, and this trial was no exception. We had to keep our eye on the ball, on the story we wanted the jury to understand and accept, and avoid getting bogged down in minutiae. That’s every lawyer’s goal, but often it’s not achieved.

Editor: Conventional wisdom says a billionaire like Mark Cuban would fare poorly in front of a jury. Why did this case defy conventional wisdom?

Melsheimer: Mark is a unique individual. He is “every man’s billionaire” because in many ways he’s a regular guy. He’s not someone who was born on third base and thinks he hit a triple. He has put in a lot of hard work, but he knows he has been lucky too. That attitude infuses his personality, and people find it charming.

But we didn’t take anything for granted. I believe deeply in witness preparation, more so than many lawyers. That may sound counterintuitive. Almost every trial lawyer will acknowledge the importance of witness preparation, but a lot of trial lawyers don’t spend enough time working with witnesses and putting them through the grind of anticipated cross-examination. Many lawyers “talk” their witnesses through expected questions instead of doing the hard work of preparing witnesses for the cross they will face from opposing counsel, and putting the witness through it over and over. I know I’ve succeeded when my practice cross is better than the trial cross. And that was certainly true in Mark’s case.

Clients sometimes think trial lawyering is only about what happens in the courtroom. That’s a big part of it, but at least half the “magic” of being a good trial lawyer takes place in a lawyer’s office, not in front of the jury.

We also did the kind of pre-trial jury research I do in every case. We tested the SEC’s position and we tested our own. As is almost always the case, the reactions we received from “mock jurors” were insightful and caused us to adjust our actual trial presentation. We learned, for example, that the mock jurors were very moved by the proof that the alleged confidential information that Cuban possessed was, in fact, publicly known information.

We decided to place more emphasis on the “public information” part of our defense at the real trial and it worked. The actual jury concluded that the information alleged by the SEC to be confidential was not confidential at all. Interestingly, we learned that the SEC did its own version of a mock trial, which is not standard fare in every SEC case. That just highlighted how important a case this was for them.

Editor: Mark Cuban has been a vocal opponent of the SEC and the fact that he was wrongly targeted. What can other people and companies learn from his experience?

Melsheimer: Not everyone has the resources or the will of Mark Cuban. But it’s also true that the government will not target anyone with the same vigor with which they target a high-profile figure. What Mark did in fighting the SEC can be a learning experience for any defendant. If you have done nothing wrong, you can fight back.

And fighting back doesn’t always mean taking a case all the way through a Fifth Circuit appeal and a trial, as we did in Mark’s case. Sometimes it can mean identifying all the issues and the complete factual record early and going to the SEC and convincing them to spend their scarce resources somewhere else. That takes a different set of skills than trying a case and may involve negotiation and a bit of diplomacy.

When I was a prosecutor, I met with many lawyers in advance of an indictment. Some would bluster and bully. Others would plead for mercy. The most successful ones came armed with a pleasant and empathetic disposition, an understanding of the likely proof, and strong legal and factual arguments as to why the case should not proceed. Those are the same tools I try to bring now that I am on the other side.

Editor: You have written that the increase in the use of arbitration and decline in the use of jury trials is bad for corporations. Why?

Melsheimer: I think arbitrations are a mirage for most litigants. There is a prevalent myth that arbitration is a cheaper and quicker way to resolve disputes. Most often, it’s not. The reality is that a lawsuit conducted by able trial counsel, with appropriate limits on discovery and a mutual desire to adopt practices that will make the case more understandable to the jury, is a far superior method to resolve a dispute than a private proceeding with hired judges. Jurors are wiser than most private judges and are more likely to reach a fair result. And if something goes off the tracks legally, the appellate process in a civil lawsuit is a far more effective check on a just result than the limited appeal rights available in an arbitration. Our Seventh Amendment right to a jury trial in a civil case is unique and must be defended not just by trial lawyers, but also by litigants, including corporations.

Editor: Do you think the SEC’s aggressive enforcement tactics are changing the way companies do business? Is this a good or bad thing?

Melsheimer: The SEC performs an important function in keeping the markets operating fairly and honestly. They undoubtedly missed some abuses during the financial crisis, including the biggest Ponzi scheme in history in the Madoff case. So asking them to be more aggressive seems like a sensible approach. But each case must be evaluated on its own facts, and when the SEC or any government agency is more interested in “making a statement” than doing justice, that’s where cases can go very wrong. That is certainly what happened in the Cuban case.

Editor: What should an individual or company do if it finds itself the target of an SEC investigation?

Melsheimer: Companies and individuals need to be “on their toes” in dealing with any government agency, including the SEC. You have to take it with the utmost seriousness. Mark has admitted publicly that one of the early mistakes he made in the SEC investigation was that he didn’t really take it seriously. He thought that since he had done nothing wrong, there was no risk. But there is always risk in dealing with a government agency, including the risk that they will draw the wrong conclusions from the evidence. So it’s important to have trusted legal counsel involved from the very beginning – not because you have anything to hide, but because you may have a lot to lose.

Too many lawyers come in and think the way to impress a client is to be as aggressive as possible and bully the government into accepting your version of events. That almost never works. Government lawyers are just like every other lawyer in one respect: they don’t like to waste their time on a bad case. So my job is to convince them that their case is bad without making them look naïve or foolish. Sometimes that’s simply not in the cards, but it is always worth pursuing a cooperative approach before unleashing the dogs of war.



Please email the interviewee at melsheimer@fr.com with questions about this interview.