SEC charges Mark Cuban with insider trading
Digital media maverick could face up to $3 million in penalties and fines related to questionable 2004 trades of search engine company Mamma.com.
This post was updated at 3:39 p.m. with observations from attorney John Hueston, the former federal co-lead prosecutor in the Enron case.
Digital media maverick Mark Cuban was charged with insider trading by the Securities and Exchange Commission, the agency announced Monday.
Cuban, the founder of Broadcast.com and owner of high-def cable channel HDNet and the Dallas Mavericks, allegedly was invited to participate in a private investment in Internet search engine company Mamma.com back on June 28, 2004. But instead of keeping the information confidential, Cuban, who was Mamma's largest investor, called his broker within hours to sell his entire position in the company, alleges the SEC.
A private investment in a public equity (PIPE) can dilute existing shares, because the issuing company will sell additional shares to an investor at a set price to raise capital. Because of the potential to dilute existing shares, often a company's stock will fall on the news of a PIPE.
According to the SEC complaint, Cuban allegedly told his broker hours after receiving the PIPE invitation to dump all of his 600,000 shares in Mamma.com. That afternoon and through the next day on June 29, 2004, the broker liquidated Cuban's stake in the company, the SEC alleges.
Mamma.com, which is now known as Copernic, informed Wall Street after the markets closed on June 29 that it was offering a PIPE.
When the markets opened the next morning, Mamma.com shares started the trading session down 9.3 percent from the prior day's close.
Cuban allegedly avoided losses of $750,000 by selling the stock before the company released news of its PIPE to the market, according to the SEC.
"As we allege in the complaint, Mamma.com entrusted Mr. Cuban with nonpublic information after he promised to keep the information confidential," Scott Friestad, deputy director of the SEC's enforcement division, said in a statement. "Less than four hours later, Mr. Cuban betrayed that trust by placing an order to sell all of his shares."
Friestad said the SEC learned of the issue last year and has pursued it "aggressively" since then. He declined to elaborate how it came to light last year, but noted it had nothing to do with Mamma.com's reorganization.
Cuban contends the SEC's case has no merits and he plans to contest the allegations.
"I am disappointed that the Commission chose to bring this case based upon its enforcement staff's win-at-any-cost ambitions. The staff's process was result-oriented, facts be damned. The government's claims are false and they will be proven to be so," Cuban said in a statement.
If found liable, Cuban could potentially face civil penalties that call for surrendering any alleged money saved by engaging in the trades in question, as well as fines up to a maximum of three times that amount. Cuban could face a total of $3 million in penalties and fines.
Cuban has been investing in a number of companies since selling his Broadcast.com to Yahoo for $5.7 billion in 1999.
Some of those investments have included CitySquares, a search site for local businesses, Goowy Media, which earlier this year was acquired by AOL and FilesAnywhere.com, an online file storage company.
And among his other ventures, Cuban is involved in ShareSleuth, an online site seeking to uncover the underbelly of corporate securities fraud.
Mark Cuban is the majority partner in Sharesleuth.com. He is co-founder of Broadcast.com and owner of the NBA's Dallas Mavericks. His other holdings include HDNet (a leading high-definition television network), HDNet Films, 2929 Entertainment, Magnolia Pictures and Landmark Theatres.
ShareSleuth's editor referred comments to Cuban's blog.
As strange as it may seem, Cuban may find some comfort in the SEC announcement. That's because it was only an SEC announcement--not a joint statement by the SEC and Department of Justice. If the DOJ were to press criminal charges, it would have likely issued a joint announcement with the SEC, said John Hueston, an attorney with Irell & Manella.
Hueston, who served as the co-lead federal prosecutor in the Enron case, predicted Cuban and the SEC will likely reach a settlement before the case goes to trial, whereby Cuban pays only a small penalty fee, or gives back any of the alleged savings from his Mamma.com trades.
Cuban has a strong case in that he was not an officer or director of Mamma.com when he executed his trades, which means he was under no fiduciary duty to refrain from making the alleged transactions, and he had not signed a confidentially agreement, noted Hueston. The SEC complaint alleges the discussion between Cuban and Mamma.com's CEO was over the phone.
Hueston added that Cuban's case is unusual in that usually insider trading charges are levied against officers or directors of a company, rather than a shareholder. Cuban previously held a 6 percent stake in the company.
The issue of fiduciary duty and confidentially agreements played front and center in the 1980 case Chiarella v. United States. The U.S. Supreme Court reversed a criminal conviction involving a printer of financial documents (such as mergers, acquisitions, and IPOs) who engaged in trades based on information in the documents. The high court ruled that the printer did not defraud the shareholders of the target company, since he held no fiduciary duty to them.