IN THE UNITED STATES DISTRICT COURT FOR THE …amlawdaily.typepad.com/cubansecuncleanmotionresponse.pdf · Case 3:08-cv-02050-D Document 94 Filed 03/16/11 Page 1 of 21 ... SEC v

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

SECURITIES AND EXCHANGE ) COMMISSION, ) ) Plaintiff ) ) v. ) Civil Action No. 3:08-cv-02050 (SAF) ) MARK CUBAN, ) ) Defendant. ) ____________________________________)

DEFENDANT MARK CUBAN’S OPPOSITION TO PLAINTIFF SECURITIES AND EXCHANGE COMMISSION’S MOTION TO STRIKE THE

AFFIRMATIVE DEFENSE OF UNCLEAN HANDS

Case 3:08-cv-02050-D Document 94 Filed 03/16/11 Page 1 of 21 PageID 2238

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TABLE OF CONTENTS

Page

INTRODUCTION ...............................................................................................................1

ARGUMENT.......................................................................................................................2

I. Standard of Review..................................................................................................2

II. The Equitable Defense of Unclean Hands is Available Against the Government..............................................................................................................3

III. Mr. Cuban Has Provided the SEC with Fair Notice of His Unclean Hands Defense ....................................................................................................................7

A. Mr. Cuban Has Adequately Alleged both Misconduct and Prejudice ......................................................................................................8

B. The SEC Applies the Wrong Legal Standard and Improperly Seeks to Litigate the Facts......................................................................................9

IV. Mr. Cuban’s Unclean Hands Defense Cannot Be Struck Based on Any Supposed Prejudice to the SEC .............................................................................13

CONCLUSION..................................................................................................................14


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TABLE OF AUTHORITIES

CASES Page(s) Ashcroft v. Iqbal,

129 S.Ct. 1937 (2009)....................................................................................................3

Augustus v. Bd. of Public Instruction, 306 F.2d 862 (5th Cir. 1962) ...................................................................................2, 14

Capital One, Nat’l Ass’n v. Swisher-35, Ltd., No. 3:08-CV-1040-D, 2008 WL 5157845 (N.D. Tex. Dec. 8, 2008)............................2

EEOC v. Courtesy Bldg. Servs. Inc., No. 3:10-CV-1911-D, 2011 WL 208408 (N.D. Tex. Jan. 21, 2011).............................2

FDIC v. Niblo, 821 F. Supp. 441 (N.D. Tex. 1993) .........................................................................2, 14

Healthpoint, Ltd. v. Ethex, Corp., 273 F. Supp. 2d 817 (W.D. Tex. 2001)....................................................................3, 10

Heckler v. Cmty. Health Servs. Inc., 467 U.S. 51 (1984).........................................................................................................4

Lacy v. US ex rel. and for Use of Tennessee Valley Authority, 216 F.2d 223 (5th Cir. 1954)....................................................................................5, 10

Magnolia Springs Apts., Inc. v. United States, 323 F.2d 726 (5th Cir. 1963) .........................................................................................5

OKC Corp. v. Williams, 461 F. Supp. 540 (N.D. Tex. 1978) .......................................................................11, 13

Olmstead v. United States, 277 U.S. 438 (1928).......................................................................................................6

Pan-Am. Petrol. & Transp. Co v. United States, 273 U.S. 456 (1927)...................................................................................................3, 4

Pierce v. Vision Invs., 779 F.2d 302 (5th Cir. 1986) .........................................................................................7

Precision Instrument Mfg. Co. v. Automotive Maint. Mach. Co., 324 U.S. 806 (1945).......................................................................................................3

SEC v. Downe, No. 92 CIV. 4092 (PKL), 1994 WL 67826 (S.D.N.Y. March 3, 1994) ........................9


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SEC v. Elecs. Warehouse, Inc., 689 F. Supp. 53 (D. Conn. 1988).....................................................................10, 11, 13

SEC v. ESM Gov’t Secs., Inc., 645 F.2d 310 (5th Cir. 1981) .........................................................................................6

SEC v. Hayes, No. CA 3-90-1054-T, 1991 U.S. Dist. LEXIS 19859 (N.D. Tex. 1991).......................7

SEC v. Huffman, 996 F.2d 800 (5th Cir. 1993) .........................................................................................7

SEC v. Keating, No. CV 91-6785 (SVW) 1992 WL 207918 (C.D. Cal. July 23, 1992) .........................9

SEC v. Mintz, No. 4:07-cv-01027, 2008 WL 850112 (S.D. Tex. Mar. 26, 2008) ............................6, 9

SEC v. Nacchio, 438 F. Supp. 2d 1266 (D. Colo. 2006)...........................................................................9

United States v. Am. Elec. Power Serv. Corp., 218 F. Supp. 2d 931 (S.D. Ohio 2002) ..........................................................................5

United States v. Cushman & Wakefield, 275 F. Supp. 2d 763 (N.D. Tex. 2002) ..........................................................................7

United States v. Martell, 844 F. Supp. 454 (N.D. Ind. 1994) ................................................................................5

United States v. Second Nat’l Bank, 502 F.2d 535 (5th Cir. 1974) .........................................................................5, 6, 10, 14

Wellman v. Dickinson, 79 F.R.D. 341 (S.D.N.Y. 1978) .....................................................................................9

Woodfield v. Bowman, 193 F.3d 354 (5th Cir. 1999) .........................................................................................2

FEDERAL RULES OF CIVIL PROCEDURE

Rule 8(e)...............................................................................................................................7

Rule 12(f) .............................................................................................................................2

Rule 56 ...............................................................................................................................13


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INTRODUCTION

Mark Cuban's Amended Answer (“Answer”) raises an unclean hands defense and

offers detailed factual allegations in support of that defense. In response, the SEC has

filed a motion to strike that misstates the controlling law, ignores the applicable pleading

standards for affirmative defenses set forth by this Court in a decision issued earlier this

year, and makes arguments regarding the factual merits of the defense that have no place

in a motion to strike. The real question is not whether the SEC has engaged in

misconduct and overreaching in this case, but when it will stop.

The SEC’s motion to strike rests on a pair of deeply-flawed assertions.

First, the SEC contends that under controlling case law the defense of unclean

hands cannot be asserted against the government. In fact, the Fifth Circuit has repeatedly

held that the government, including the SEC, is subject to the defense of unclean hands.

Mr. Cuban’s counsel informed the SEC of this controlling case law as part of the meet-

and-confer process for the SEC’s motion. Nevertheless, the SEC proceeded with the

motion and fails to address the relevant cases.

Second, the SEC contends that even if an unclean hands defense is available

against the government (which it is), Mr. Cuban has failed to establish the existence of

any SEC misconduct or that he has suffered prejudice. As this Court has recently held,

however, an affirmative defense is adequately pled if the defendant alleges sufficient

facts to give the plaintiff fair notice of the nature of the defense and prevent unfair

surprise. Mr. Cuban’s Answer provides extensive factual allegations concerning the SEC

staff’s misconduct related to this case and specifically alleges that this misconduct (a)

prevented Mr. Cuban from successfully persuading the Commission not to bring the

action and (b) was intended to prevent Mr. Cuban from being able to mount an effective

defense. In short, Mr. Cuban’s Answer provides the SEC with more than sufficient

notice of his unclean hands defense. The SEC’s lengthy, fact-based arguments about

why it supposedly does not have unclean hands are premature and improper.


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There is no mystery about why the SEC wants the Court to strike Mr. Cuban’s

unclean hands defense. The limited discovery obtained by Mr. Cuban to date confirms

that the SEC staff has engaged in conduct that would meet anyone’s reasonable definition

of inappropriate behavior. Given what the tip of the iceberg looks like, the SEC staff is

apparently desperate to prevent Mr. Cuban (and this Court) from learning what

misconduct lies below the surface. Yet the only way the SEC’s motion could succeed is

if there were a rule exempting the SEC from an unclean hands defense and no such rule

exists in the Fifth Circuit. Mr. Cuban respectfully submits that the Court should deny the

SEC’s motion to strike.

ARGUMENT I. Standard of Review

Motions to strike are disfavored and infrequently granted. Augustus v. Bd. of

Public Instruction, 306 F.2d 862, 868 (5th Cir. 1962); FDIC v. Niblo, 821 F. Supp. 441,

449 (N.D. Tex. 1993) (“Both because striking a portion of a pleading is a drastic remedy,

and because it is often sought by the movant simply as a dilatory tactic, motions under

Federal Rule of Civil Procedure ("FRCP") Rule 12(f) are viewed with disfavor and

infrequently granted.”) A court must deny a motion to strike an affirmative defense if it

raises any question of law or fact. Niblo, 821 F. Supp. at 449; see also Capital One, Nat’l

Ass’n v. Swisher-35, Ltd., No. 3:08-CV-1040-D, 2008 WL 5157845, *1-*2 (N.D. Tex.

Dec. 8, 2008) (Fitzwater, C.J.). Thus, to succeed, a movant must meet the heavy burden

of showing “that the allegations being challenged are so unrelated to plaintiff’s claims as

to be unworthy of any consideration as a defense and that their presence in the pleading

throughout the proceeding will be prejudicial to the moving party.” Niblo, 821 F. Supp.

at 449 (emphasis added).

An affirmative defense need only be pled with enough specificity to give the

plaintiff “fair notice” of the defense being advanced and prevent unfair surprise.

Woodfield v. Bowman, 193 F.3d 354, 362 (5th Cir. 1999); see also EEOC v. Courtesy


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Bldg. Servs. Inc., No. 3:10-CV-1911-D, 2011 WL 208408, at *1-*2 (N.D. Tex. Jan. 21,

2011) (Fitzwater, C.J.).1 Accordingly, in pleading the defense of unclean hands, a

defendant is only required to allege in short and plain terms how the plaintiff acted “with

inequitableness or bad faith relative to the matter in which [the plaintiff] seeks relief” and

how the defendant was injured by that conduct. Healthpoint, Ltd. v. Ethex, Corp., 273 F.

Supp. 2d 817, 847 (W.D. Tex. 2001) (quoting Precision Instrument Mfg. Co. v.

Automotive Maint. Mach. Co., 324 U.S. 806, 814 (1945)). II. The Equitable Defense of Unclean Hands is Available Against the

Government

The SEC’s core argument is that there is a controlling “rule” that precludes

defendants from asserting the equitable defense of unclean hands against the government.

SEC Mem. at 3-4. In fact, as the SEC must know, there is a line of Fifth Circuit cases

establishing that equitable defenses, including the defense of unclean hands, are available

against the government.2 The SEC’s pursuit of its motion in the face of this controlling

precedent – compounded by its failure to acknowledge that precedent in its opening

memorandum – is further evidence of the agency’s continued bad faith in this case.

In an early case addressing an equitable defense brought against the government,

the Supreme Court held that equitable principles generally should “not be applied to

frustrate the purpose of [the laws of the United States] or to thwart public policy.” Pan-

Am. Petrol. & Transp. Co v. United States, 273 U.S. 456, 506 (1927). In Pan-American,

1 As this Court has noted, it is not clear whether the pleading of an affirmative defense must meet the “plausibility” standard set forth by the Supreme Court in Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009). EEOC, 2011 WL 208408 at *2 (declining to apply standard “in the absence of complete briefing and guidance from the Fifth Circuit or the Supreme Court”). The SEC failed to raise the issue in its opening memorandum and it therefore should be deemed to have waived this argument. Even if the Iqbal standard applied, however, Mr. Cuban’s Answer contains detailed factual allegations that are more than sufficient to establish the “plausibility” of his unclean hands defense. 2 Mr. Cuban gave the SEC citations to the Fifth Circuit cases discussed herein as part of the meet-and-confer on this motion. (Ex. 1, App. 5-6).


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the Court addressed a case where the defendants fraudulently obtained contracts related

to naval oil reserves. The defendants argued, pursuant to an unjust enrichment theory,

that they were entitled to the costs of certain expenditures they had made in connection

with the contracts. The Court held that the defendants could “not insist on payment of

the cost to them or the value to the government of the improvements made or fuel oil

furnished as all were done without authority and as means to circumvent the law and

wrongfully to obtain the leases in question.” Id. at 509. There is nothing in the Pan-

American decision, however, suggesting that the Court intended to bar the assertion of

equitable defenses in government actions brought in the public interest.

Indeed, in a much more recent decision, the Supreme Court has expressly

declined to hold that the equitable defense of estoppel, for example, cannot be asserted

against the government. See Heckler v. Cmty. Health Servs. Inc., 467 U.S. 51, 60-61

(1984). As stated by the Court, in a passage that is particularly relevant here, “we are

hesitant . . . to say that there are no cases in which the public interest in ensuring that the

Government can enforce the law free from estoppel might be outweighed by the

countervailing interest of citizens in some minimum standard of decency, honor, and

reliability in their dealings with their Government.” Id. at 60-61. The fact that the SEC

chooses to cite Heckler as supporting its position that the equitable defense of unclean

hands cannot be asserted against the government beggars belief. See SEC Mem. at 3.

Despite the confirmation in Heckler that equitable defenses remain available

against the government (unless expressly barred) even when the government’s

enforcement of the relevant law is in the “public interest,”3 the SEC seeks refuge in the

3 In light of Heckler, the SEC’s reliance on the fact that it has a “congressional mandate to protect the public interest” is misplaced. SEC Mem. at 4-5. In any event, Mr. Cuban’s unclean hands defense asserts, inter alia, that this action arose because the SEC unfairly targeted and prejudged him. If this defense were proven (as Mr. Cuban believes it will be), that would obviously belie any notion that this suit was brought in the “public interest.” As such, the SEC puts the cart before the horse in suggesting that this suit was brought in the “public interest.”


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decisions of some district courts that have wrongly interpreted Pan-American to mean

that the defense of unclean hands cannot be asserted in government actions. See, e.g.,

United States v. Am. Elec. Power Serv. Corp., 218 F. Supp. 2d 931, 938 (S.D. Ohio

2002)). Those cases are neither controlling nor, Mr. Cuban respectfully submits,

correctly decided.4 Indeed, the U.S. Court of Appeals for the Fifth Circuit has rejected

the interpretation of the Pan-American decision adopted in those cases.

The Fifth Circuit has held that when the government seeks equitable relief it “is as

much bound to do equity as is a private litigant.” Lacy v. US ex rel. and for Use of

Tennessee Valley Authority, 216 F.2d 223, 225 (5th Cir. 1954). In accordance with that

view, the Fifth Circuit has allowed defendants to raise the defense of “unclean hands”

against the government. See Magnolia Springs Apts., Inc. v. United States, 323 F.2d 726,

728 (5th Cir. 1963); United States v. Second Nat’l Bank, 502 F.2d 535, 548 (5th Cir.

1974) (citing and quoting Pan-American). In Second National Bank, the defendants

argued that the government should be denied the equitable relief it sought because agents

of the Internal Revenue Service had engaged in misconduct in procuring and seeking to

enforce a lien. The Fifth Circuit held that “the United States is no more immune to the

general principles of equity than any other litigant.” Id. Although these general

principles of equity “will not be applied to frustrate the purpose of its laws or to thwart

public policy,” under the unclean hands doctrine the government cannot obtain equitable

relief if it “did something which in good conscience it should not have done, or failed to

do something fair dealing required it to do.” Id. (internal quotations and citations

omitted). Having established that the defense of unclean hands was properly raised as a

4 It also is worth noting, as the SEC is forced to concede in the second part of its memorandum, that numerous other district courts have held that the unclean hands defense is available against the government. See, e.g., United States v. Martell, 844 F. Supp. 454, 458 (N.D. Ind. 1994) (unclean hands defense “not prohibited as a matter of law”).


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matter of law, the court then went on to evaluate whether, in fact, the IRS had “acted with

sufficient good faith,” ultimately declining to disturb the district court’s ruling that it had.

Id.

As the Fifth Circuit has noted in a case alleging SEC investigative misconduct,

the application of the unclean hands doctrine to the government is particularly

appropriate because “a private person has the right to expect that the government, when

acting in its own name, will behave honorably.” SEC v. ESM Gov’t Secs., Inc., 645 F.2d

310, 316 (5th Cir. 1981). In ESM Government Securities, the defendant sought the denial

of the enforcement of an SEC administrative subpoena, arguing that the SEC had

deceived the company into providing information that led to the issuance of the

subpoena. The Fifth Circuit remanded the case for further evaluation, stating: “The

governing principle has long been settled. It is that a court will not redress a wrong when

he who invokes its aid has unclean hands . . . . Where the Government is the actor, the

reasons for applying it are even more persuasive.” Id. at 316 (quoting Olmstead v. United

States, 277 U.S. 438, 483-84 (1928) (Brandeis, J., dissenting) (emphasis added)).

The SEC selectively ignores not only Fifth Circuit decisions, but relevant district

court cases in which it was a party. For example, in a recent SEC enforcement action

brought in the S.D. of Texas, the agency asserted (as it does here) that the unclean hands

defense could not be invoked against a government agency. In response, the defendant

pointed out that an unclean hands defense clearly was permitted under Second National

Bank and, moreover, there was evidence that the SEC had engaged in investigative

misconduct. Defendant Jordan H. Mintz's First Amended Brief in Opposition to

Plaintiff's Motion to Strike Defendant's Affirmative Defenses at 6-7, SEC v. Mintz, No.

4:07-cv-01027, 2008 WL 850112 (S.D. Tex. Mar. 26, 2008) (Ex. 2, App. 8-16). Judge

Hoyt denied the SEC’s motion to strike. Order, SEC v. Mintz, No. 4:07-cv-01027 (S.D.

Tex. Apr. 9, 2008) (Ex. 3, App. 18) (“Mintz Order”). Although the Mintz Order does not


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provide the court’s reasoning, Judge Hoyt implicitly held that the unclean hands defense

was not barred as a matter of law (or he would have had to grant the SEC’s motion).

Pursuant to Second National Bank and the other controlling Fifth Circuit

precedent discussed above, the defense of unclean hands is available in this Court against

the SEC or any other government agency.5 The SEC’s assertion of a contrary “rule” must

be rejected.6

III. Mr. Cuban Has Provided the SEC with Fair Notice of His Unclean Hands Defense

The SEC argues that even if an unclean hands defense is available against the

government (which it is), Mr. Cuban has failed to adequately plead the defense. SEC

Mem. 6-13. The SEC is incorrect. Mr. Cuban was required in his Answer to do no more

than provide the SEC with “fair notice” of his defense by alleging in short and plain

terms how the SEC acted in bad faith in this matter and how the SEC’s misconduct

5 The only two cases from within the Fifth Circuit that the SEC cites to support its erroneous assertion that it is immune from an unclean hands defense - SEC v. Hayes, No. CA 3-90-1054-T, 1991 U.S. Dist. LEXIS 19859 at *3-*4 (N.D. Tex. 1991) and United States v. Cushman & Wakefield, 275 F. Supp. 2d 763, 773-774 (N.D. Tex. 2002) – rely upon the Second National Bank decision. As discussed at length above, however, Second National Bank clearly permits the assertion of an unclean hands defense against the government, although the court ultimately determined that the plaintiff did not act in bad faith. Accordingly, these district court decisions are not persuasive. 6 The SEC tries to make some hay out of the fact that Mr. Cuban’s Answer states that the agency’s unclean hands prevents it from obtaining any “injunctive relief,” arguing that this means the defense is limited to the SEC’s request for an injunction from future violations of the securities laws. SEC Mem. at 4-6. Under Fifth Circuit law, however, disgorgement is an equitable remedy that if ordered creates an obligation “akin to ‘an injunction in the public interest.’” SEC v. Huffman, 996 F.2d 800, 802 (5th Cir. 1993) (quoting Pierce v. Vision Invs., 779 F.2d 302, 307 (5th Cir. 1986)). Mr. Cuban intended “injunctive relief” to cover the SEC’s requests for both an injunction and disgorgement. In any event, the SEC cites no cases suggesting that which equitable claims an unclean hands defense is asserted against has any bearing on whether it is available against the government in a particular case, making this a moot point. Mr. Cuban also would note that FRCP Rule 8(e) mandates that pleadings should be liberally construed so as to do justice and the SEC now has fair notice (if it did not before) that Mr. Cuban intends to assert the equitable defense of unclean hands against any and all of the equitable claims raised by the SEC in its Complaint.


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prejudiced him. See EEOC, 2011 WL 208408 at *1-*2. Mr. Cuban’s Answer more than

meets those requirements. A. Mr. Cuban Has Adequately Alleged both Misconduct and Prejudice

Mr. Cuban provides extensive factual allegations as to the SEC’s bad faith

conduct in three key areas. First, the SEC staff was committed to bringing this action

against Mr. Cuban regardless of what their investigation actually revealed. Mr. Cuban’s

Answer details some of the internal correspondence and SEC staff interactions supporting

this allegation.

Second, the SEC staff deliberately undermined and abused the Wells process.

Mr. Cuban’s Answer provides factual allegations establishing that the SEC staff

(a) presented false information to Mr. Cuban’s counsel, (b) violated the Enforcement

Division’s own procedures by deciding to recommend the Commission bring a civil

enforcement action before the Cuban investigation was substantially complete; and (c)

has refused to affirm that the Commission actually reviewed and considered Mr. Cuban’s

second Wells submission as part of its deliberative process.

Finally, and perhaps most importantly, the SEC staff engaged in acts of outright

investigative and litigation misconduct. Mr. Cuban’s Answer specifically sets forth these

acts, which include (a) discouraging a key witness’s counsel from making the witness

available to speak with Mr. Cuban’s counsel; (b) threatening a witness with perjury

when, during his sworn testimony, we was unable to clearly recall certain statements he

supposedly had made to the SEC in a phone interview conducted ten months before; (c)

closing the Mamma.com investigation less than two weeks before taking the testimony of

Mamma.com’s CEO for a second time in an apparent effort to get him to change his

earlier testimony; and (d) filing a complaint that contained a knowing misrepresentation

concerning the existence of a confidentiality agreement between Mr. Cuban and

Mamma.com’s CEO.


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In addition to extensive factual allegations about the SEC’s misconduct, Mr.

Cuban’s Answer also sets forth how he has been prejudiced. As alleged in Mr. Cuban’s

Answer, the SEC staff’s misconduct prevented Mr. Cuban from successfully persuading

the Commission not to bring the action. Moreover, the SEC staff’s misconduct, which

includes improper interference with the witnesses in this case, may prevent Mr. Cuban

from being able to mount an effective defense to the SEC’s claims.

The SEC’s memorandum states that “the Commission’s research has identified no

case where a defendant successfully invoked an unclean hands defense to an SEC

injunctive enforcement action.” SEC Mem. at 4. To the extent that the SEC means to

suggest that there are no cases in which a district court has allowed an unclean hands

defense to go forward against the agency, its research is woefully deficient. In at least

five cases, including the recent Mintz case in the S.D. of Texas, district courts have

permitted the defendant to proceed with an unclean hands defense in an SEC action. See

Mintz Order at 1; SEC v. Nacchio, 438 F. Supp. 2d 1266, 1287-88 (D. Colo. 2006); SEC

v. Downe, No. 92 CIV. 4092 (PKL), 1994 WL 67826, *1-*2 (S.D.N.Y. Mar. 3, 1994);

SEC v. Keating, No. CV 91-6785 (SVW) 1992 WL 207918, *1 & n.1 (C.D. Cal. Jul. 23,

1992); Wellman v. Dickinson, 79 F.R.D. 341, 351 (S.D.N.Y. 1978). In each of those

cases, the defendant based its unclean hands defense on SEC investigative misconduct,

typically with much less factual support than what Mr. Cuban has provided in his

Answer. See, e.g., Nacchio, 438 F. Supp. 2d at 1287 (alleging only that the SEC and

Department of Justice improperly commingled their investigations). Accordingly, there

is a significant body of case law that supports Mr. Cuban’s invocation of an unclean

hands defense against the SEC.

B. The SEC Applies the Wrong Legal Standard and Improperly Seeks to Litigate the Facts

The SEC’s response to the Answer’s extensive catalogue of misconduct and

prejudice is to misstate the applicable legal standard and then attempt to address the


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merits of Mr. Cuban’s factual allegations as though the SEC’s motion were a summary

judgment motion. The Court should reject both of these tactics.

The SEC relies heavily on an out-of-circuit district court case – SEC v. Elecs.

Warehouse, Inc., 689 F. Supp. 53, 73 (D. Conn. 1988) – for the proposition that a

defendant invoking the defense against the government must “allege both prejudice rising

to a constitutional level as well as egregious misconduct.” SEC Mem. at 6. Although

this may be the law in the District of Connecticut, it assuredly is not the law in the Fifth

Circuit. The Fifth Circuit repeatedly has stated that equitable defenses are subject to the

same standards whether they are raised against the government or against private

individuals. See Lacy, 216 F.2d at 225 (“The Government when applying for relief in a

court of equity is as much bound to do equity as is a private litigant.”); Second Nat’l

Bank, 502 F.2d at 548 (“Certainly when seeking an equitable remedy the United States is

no more immune to the general principles of equity than any other litigant.”). For

purposes of the unclean hands defense, as the Fifth Circuit made clear in Second National

Bank, this means that the issue is simply whether the SEC “did something which in good

conscience it should not have done, or failed to do something fair dealing required it to

do,” i.e., acted in bad faith. Second Nat’l Bank, 502 F.2d at 548; see also Healthpoint,

273 F. Supp. 2d at 848.

Even if the Electronics Warehouse heightened standard were applicable in this

case (which it is not), the SEC glosses over the fact that the allegations in Mr. Cuban’s

Answer are exactly the type of allegations that the court found would meet that standard.

In Electronics Warehouse, the defendant alleged that the SEC had unclean hands because

its actions had injured the defendant’s business and relationships with his clients. 689 F.

Supp. at 73. The court rejected those allegations as insufficient, noting that the defendant

“does not claim that the SEC has gathered tainted evidence against him for use in these

proceedings or that his ability to litigate this action has been prejudiced by the alleged

improprieties.” Id. Of course, Mr. Cuban is claiming that the SEC has gathered tainted


11

evidence (along with other serious misconduct) and that these improprieties have

prejudiced his ability to litigate this action. Accordingly, Mr. Cuban’s allegations would

satisfy, for pleading purposes, the “egregious misconduct” and “prejudice rising to a

constitutional level” standard.

In the end, the SEC is reduced to arguing that its conduct was not as egregious as

it sounds. SEC Mem. at 7-13. The SEC’s arguments are improper on a motion to strike.

In determining whether a motion to strike should be granted “a court should view all

well-pleaded facts in their most favorable light” and “should not consider matters outside

the pleadings.” OKC Corp. v. Williams, 461 F. Supp. 540, 550 (N.D. Tex. 1978)

(Higginbotham, J.) (motion to strike brought by SEC). To the extent that the movant

raises fact issues, those issues “must be considered to be disputed” and the motion to

strike denied. Id.

The SEC’s memorandum improperly relies on matters outside the pleadings and

highlights numerous factual disputes. By way of example:

First, in response to Mr. Cuban’s allegations concerning the SEC staff’s

improperly threatening a witness with perjury, the SEC asks the Court to examine the

transcript of the testimony and claims that the “questioning was proper and professional.”

SEC Mem. at 8. The transcript is a matter outside the pleadings and whether the

questioning was “proper and professional” is in factual dispute.

Second, Mr. Cuban alleges that the SEC discouraged counsel for a witness from

making the witness available to Mr. Cuban’s lawyers. The SEC insists this is “refuted”

by a declaration from the counsel and baldly asserts that Mr. Cuban has suffered no harm

from this conduct. SEC Mem. at 9-10. The declaration actually makes it clear that the

counsel viewed this as a “tamp down” call and was concerned about failing to follow the

SEC’s instructions. See Defendant Mark Cuban’s Memorandum of Law in Support of

Motion to Compel Responses to Interrogatories and Requests for Production of


12

Documents, Tab 3 at ¶¶ 8-9 (ECF No. 66). The declaration is a matter outside the

pleadings and whether this conduct was improper is in factual dispute.

Third, the SEC describes Mr. Cuban’s allegations concerning its closing of the

Mamma.com investigation and subsequent retaking of the testimony of Mamma.com’s

CEO as “baseless” and asserts that the witness’ testimony was entirely consistent with his

earlier testimony. SEC Mem. at 10. The SEC offers no citations in support of this

contention because, in fact, the witness’ testimony changed and the SEC now relies

heavily upon the new testimony to establish the existence of a confidentiality agreement.

See Plaintiff Securities and Exchange Commission's Memorandum of Law in Opposition

to Mark Cuban's Motion for Attorneys' Fees and Expenses at 6-7 (ECF No. 47) (citing

Ex. 2 at SEC-MC0002931). The transcripts of the witness’ testimonies are matters

outside the pleadings and whether the SEC improperly closed the Mamma.com

investigation to influence the witness’ testimony (as well as whether the transcripts are

consistent) is in factual dispute.

Fourth, Mr. Cuban alleges that in its May 2007 Wells call with Mr. Cuban’s

counsel, which took place prior to the testimony of Mamma.com’s CEO upon which the

SEC relies to establish the existence of a confidentiality agreement, the SEC staff made

false statements about the nature of its evidence concerning the existence of a

confidentiality agreement. The SEC now says that it was merely identifying “the

fundamental question to be adjudicated in this action” and that Mr. Cuban’s counsel must

have been laboring under an “apparent misunderstanding” about the contemporaneous

document referred to by the SEC staff on that call. SEC Mem. at 11. The testimony

about the creation of the contemporaneous document cited by the SEC in its

memorandum is a matter outside the pleadings and whether the SEC staff made false

statements to Mr. Cuban’s counsel is in factual dispute.

The SEC also takes frequent issue with whether its misconduct has actually

harmed Mr. Cuban. Investigative misconduct clearly prejudices the target of a


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government action, especially when it leads to tainted evidence. Elecs. Warehouse, 689

F. Supp. at 73. In his Answer, Mr. Cuban alleges that the SEC staff’s misconduct

prevented Mr. Cuban from successfully persuading the Commission not to bring this

action and was intended to prevent Mr. Cuban from being able to mount an effective

defense. These allegations are obviously sufficient to meet Mr. Cuban’s “fair notice”

pleading burden.

In essence, the SEC is attempting to re-litigate its Opposition to Mr. Cuban’s

Attorneys’ Fees Motion and in its memorandum the SEC frequently cites to papers filed

in connection with that Motion. Not only is this improper on a motion to strike, it is a

self-defeating tactic. The Court’s previous reaction to these exact same arguments was to

order the taking of discovery to resolve the outstanding factual disputes. Memorandum

Opinion and Order (ECF No. 50). The same outcome is mandated here. OKC Corp., 461

F. Supp. at 550-551 (“After the parties have completed discovery on this issue, however,

the SEC is free to resubmit its arguments in the form of FRCP Rule 56 motion for

summary judgment.”).7 IV. Mr. Cuban’s Unclean Hands Defense Cannot Be Struck Based Solely on

Supposed Prejudice to the SEC

In a cursory, three-sentence section of its Memorandum, the SEC relies on a

handful of out-of-circuit district court decisions for the dubious proposition that an

increase in the time, expense and complexity of a trial is “prejudice sufficient to strike an

affirmative defense.” SEC Mem. at 13-14. None of the cited decisions actually strikes

7 The SEC also argues that an allegation of lack of evidentiary support is not a proper basis for an unclean hands defense. SEC Mem. at 12-13. Although the SEC correctly states the legal principle, its argument rests on a fundamental misunderstanding of the nature of Mr. Cuban’s allegation concerning the SEC’s complaint. Mr. Cuban is alleging that the SEC staff filed its complaint knowing that it did not have any evidence that Mr. Cuban entered into a confidentiality agreement. The SEC’s alleged misconduct related to its Complaint is obviously relevant to whether the SEC has acted with unclean hands in its pursuit of Mr. Cuban.


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an affirmative defense solely on that basis. Even more importantly, the standard

employed in the Fifth Circuit and this District makes it clear that prejudice to the movant

(of whatever type) is, by itself, never a sufficient basis upon which to strike an

affirmative defense. Instead, the movant must demonstrate both that “the allegations

being challenged are so unrelated to plaintiffs claims as to be unworthy of any

consideration as a defense and that their presence in the pleading throughout the

proceeding will be prejudicial to the moving party.” Niblo, 821 F. Supp. at 449 (citing

Augustus, 306 F.2d at 868) (emphasis added). Having failed to meet the first prong of

this analysis (see above), the SEC cannot rely on the mere fact that it will have to address

Mr. Cuban’s unclean hands defense in this litigation to avoid its obligation to do so.8

CONCLUSION

As set forth in detail in Mr. Cuban’s Answer, there is evidence that on multiple

occasions during its investigation of Mr. Cuban the SEC “did something which in good

conscience it should not have done, or failed to do something fair dealing required it to

do.” Second Nat’l Bank, 502 F.2d at 548. Accordingly, Mr. Cuban is entitled to raise an

unclean hands defense and the SEC’s motion to strike should be denied.

Dated March 16, 2011 By:

Respectfully submitted, s/ Lyle Roberts

8 Moreover, the SEC fails to provide the court with any facts supporting its bald assertion that Mr. Cuban’s unclean hands defense would “dramatically and unnecessarily increase the time and expense needed for discovery and the complexity of any future trial.” SEC Mem. at 14. As a threshold matter, there is nothing “unnecessary” about Mr. Cuban having the opportunity to obtain discovery concerning his affirmative defenses. Moreover, given that Mr. Cuban’s allegations relate to the merits of the case and the SEC has already collected (but not produced) many of the relevant documents as part of the attorneys’ fees discovery, it is more reasonable to conclude that Mr. Cuban’s unclean hands defense will not add significantly to the time, expense, and complexity of the case.


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Lyle Roberts (pro hac vice) D.C. Bar No. 464789 Ralph C. Ferrara (pro hac vice) D.C. Bar No. 156380 George E. Anhang (pro hac vice) D.C. Bar No. 461936 Leslie A. Maria D.C. Bar No. 484806 DEWEY & LEBOEUF LLP 1101 New York Avenue, NW Washington, D.C. 20005 Telephone: (202) 346-8000 Facsimile: (202) 346-8102 [email protected] [email protected] [email protected] [email protected] Stephen A. Best D.C. Bar No. 428447 BROWNSTEIN HYATT FARBER

SCHRECK LLP 1350 I Street NW, #510 Washington, D.C. 20005 Telephone: (202) 747-0500 Facsimile: (202) 296-7009 [email protected] Christopher J. Clark (pro hac vice) N.Y. Bar No. 2854222 DEWEY & LEBOEUF LLP 1301 Avenue of the Americas New York, New York 10019 Telephone: (212) 259-8000 Facsimile: (212) 259-6333 [email protected] Attorneys for Mark Cuban


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OF COUNSEL: Thomas M. Melsheimer Texas Bar No. 13922550 Steven H. Stodghill Texas Bar No. 19261100 FISH & RICHARDSON P.C. 1717 Main Street, Suite 5000 Dallas, Texas 75201 Telephone: 214-747-5070 Facsimile: 214-747-2091 [email protected] [email protected]


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CERTIFICATE OF SERVICE

On March 16, 2011, I electronically submitted the foregoing document with the Clerk of Court for the U.S. District Court, Northern District of Texas, using the electronic case filing system of the Court. I hereby certify that I have served all counsel and/or pro se parties of record (shown below) electronically or by another manner authorized by Federal Rule of Civil Procedure 5(b)(2). Kevin P. O'Rourke, Esq. Scott W. Friestad, Esq. Robert B. Kaplan, Esq. Daniel T. Chadouin, Esq. Julie M. Riewe, Esq. Adam S. Aderton, Esq. Duane K. Thompson, Esq. Thomas J. Karr U.S. Securities and Exchange Commission 100 F Street, NE Washington, DC 20549 Telephone: (202) 551-4442 (O' Rourke) Facsimile: (202) 772-9246 (O' Rourke) [email protected]

Toby Galloway, Esq. U.S. Securities and Exchange Commission Burnett Plaza Suite 1900 801 Cherry Street, Unit 18 Fort Worth, TX 76102 Telephone: (817) 978-6447 Facsimile: (817) 299-2700 Counsel for Plaintiff Securities and Exchange Commission

s/ Lyle Roberts__________ Lyle Roberts
