Corporate Governance

MARK CUBAN v. SEC: Cuban Seeks Injunction Compelling SEC to Produce Records Under FOIA

By Andrew Woods

Litigation relating to the Securities and Exchange Commission's ('SEC') insider trading case against Mark Cuban ('Cuban') continues.  This blog has followed Cuban's insider trading cases from its genesis in the district court and the current appeal to the 5^th Circuit.  Cuban initiated a parallel proceeding against the SEC to compel production of documents under the Freedom of Information Act.

On May 28, 2009, Cuban filed a complaint against the SEC in the District Court for the District of Columbia to compel compliance with his requests for records under the Freedom of Information Act ('FOIA') and the Privacy Act of 1974 ('Privacy Act').  Cuban sought a declaratory judgment that the SEC unlawfully withheld records under both FOIA and the Privacy Act and an injunction compelling the SEC to produce the records sought. 

On December 19, 2008, Cuban submitted two records requests to the SEC seeking documents and information relating to: (1) any investigation involving Copernic, Inc. (a former Mamma.com subsidiary); (2) any investigation concerning Cuban himself; (3) several of Cuban's business ventures including Shareslueth.com; (4) any 'Application for Award of a Bounty' filed in conjunction with SEC v. Cuban; (5) Cuban's Wells submission to the SEC; (6) any internal investigations of SEC attorney Jeffrey Norris, who sent Cuban a series of unauthorized emails or other SEC personnel involved with any investigation of Cuban, Norris, or Copernic, Inc; and (7) Irving, Ian, or Michael Kott.  The SEC notified Cuban by letter on January 30, 2009 that it received his requests.

In the notification letter, the SEC directed Cuban to request information regarding the SEC's lawsuit against Kott directly from the court clerk. Irving Kott is a Canadian stock promoter with a history of involvement in boiler room schemes. The SEC has investigated Kott and his family on several occasions, and believed Kott had an influence on Mamma.com.

The notification letter further informed Cuban that the SEC did not locate responsive information for Cuban's request for records relating to some of his business ventures, and did not have the means to conduct a 'reasonable search for records' into certain internal matters.  Finally, the SEC claimed it was consulting with Commission staff regarding his other requests. 

Thereafter, the SEC informed Cuban of its decision to withhold documents, pursuant to FOIA Exemption 7(A), for the following requests: (1) any investigation involving Copernic Inc.; (2) any investigation concerning Cuban; (3) any 'Application for Award of a Bounty' filed in conjunction with SEC v. Cuban; (4) those relating to Cuban's Wells Submission; and (5) any records relating to the Kott case.  Exemption 7(A) 'protects from disclosure records compiled for law enforcement purposes.'

Subsequently, on March 5, 2009, the SEC cited FOIA Exemption 5 in withholding sixteen pages of information in response to Cuban's request for records of any investigation of Sharesleuth.com, Cuban's web-based company that investigates and provides public reports on various companies.  Exemption 5 covers records protected by the attorney-client, deliberative process, and attorney work-product privileges.

Cuban first claimed that his FOIA suit was properly before the court. He argued that he exhausted all administrative remedies prior to brining suit, as the SEC failed to respond to his appeals within the statutory period and failed to provide notice of extension.  Next, Cuban argued that the SEC, as a federal agency, is under a duty to conduct a reasonable search for records in response to FOIA requests and failed to do so in this case.  Moreover, Cuban alleged that the SEC did not respond to some of his original requests for records. 

Regarding the records located by the SEC but withheld under Exemption 7(A), Cuban argued that the SEC failed to adequately specify what information it was withholding, how that information was compiled for law enforcement purposes, or explain how releasing the records to Cuban would interfere with law enforcement proceedings.  Specifically, the complaint argued that records relating to Copernic Inc. couldn't reasonably interfere with law enforcement proceedings since the SEC's investigation of Copernic Inc. closed without enforcement action against the company. 

Similarly, Cuban contended, the SEC 'failed to provide any meaningful description' of the sixteen pages relating to Sharesleuth.com withheld under Exemption 5.  Cuban claimed that the SEC's 'stock' and 'conclusory' recitation of the policy underlying the deliberative process privilege did not adequately explain its decision to withhold the information. Moreover, the SEC failed to mention any actual or contemplated litigation that would properly fit the records within the attorney work-product privilege encompassed in FOIA Exemption 5. 

Cuban's final argument is that President Obama issued an Executive Order requiring administrative agencies, including the SEC, to adopt a presumption in favor of disclosure and that this presumption should apply to all decisions involving FOIA requests. Cuban finds support for this argument in an Attorney General memorandum issued to provide guidance to administrative agencies in conjunction with Obama's Executive Order.  The memorandum suggests that agencies should not withhold information that fits within a FOIA exemption simply because they have a legal right to do so. Thus, Cuban argued, the SEC's failure to produce any documents as of the complaint's filing date is contrary to government policy. 

Cuban asked the court to declare that the SEC's failure to: (1) respond to FOIA and Privacy Act requests; (2) assert any exemption under FOIA to justify withholding the requested records; (3) provide details of the searches it undertook to determine that no responsive records existed for certain requests; (4) support its assertion that it had no means to conduct a reasonable search for certain requested; and (5) respond to Cuban's administrative appeals within the statutory time frame is unlawful, and therefore Cuban is entitled to an injunction compelling production of the requested records.

The SEC answered Cuban's complaint by denying all substantive allegations and asserting six affirmative defenses.  The SEC contended that: (1) the complaint fails to state a claim upon which relief can be granted; (2) there is no jurisdiction for the claims in the complaint; (3) Cuban did not fully exhaust his administrative remedies prior to filing suit; (4) Cuban failed to reasonably describe the records he seeks; (5) the agency conducted an adequate search for records; (6) and did not improperly withhold records. 

Subsequent to the filing of Cuban's complaint and the SEC's answer, the SEC filed several pre-trial motions that will be detailed in upcoming posts.

The filings and other primary materials are posted at the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on April 02, 2010 (boomark / email).