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Mark Cuban

Mark Cuban Charged with Insider Trading

November 17, 2008 01:27 PM
by Isabel Cowles
The SEC charged Dallas Mavericks owner Mark Cuban on Monday with insider trading for shares of Mamma.com stock he sold in 2004.

SEC Says Cuban Saved $750,000 by Dumping Stock Unlawfully

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The Securities and Exchange Commission (SEC) has charged Dallas Mavericks owner and Internet entrepreneur Mark Cuban with insider trading.

According to a report by The Wall Street Journal, the SEC is seeking civil action against Cuban for selling his 6% ownership of Mamma.com on June 28, 2004, allegedly after learning that the company was raising money through a private investment in a public entity (PIPE). The day after Cuban sold his shares, Mamma.com announced its PIPE plans and the company’s stock price dropped by more than 10%. The SEC alleges that Cuban saved approximately $750,000 by preemptively selling his shares.

A press release on the SEC Web site explains that the organization “seeks to permanently enjoin Cuban from future violations of the federal securities laws, disgorgement (with prejudgment interest), and a financial penalty.” In short, the SEC is demanding that Cuban pay his avoided losses as well as other monetary fines; he does not face criminal charges, however.

The complaint against Cuban is the latest in a series of complaints brought by the SEC in connection with open market trading that occurred prior to the announcement of a private offering in a public entity. The announcement of a PIPE offering usually causes a company’s stock to fall, whether because the terms of the offering dilute existing shares or reflect poorly on the company’s prospects, or because the purchasers of the PIPE will eventually sell their shares.

When a company decides to sell a PIPE, potential investors as well as company insiders are advised of the proposed terms of the offering. The SEC regards such information as material, undisclosed information, and holds that the recipients of the information are prohibited from trading in the company’s shares until the PIPE is announced or abandoned. The SEC has previously brought at least five cases against hedge funds that, it alleges, were advised of a pending PIPE and prematurely sold shares in the company that was to issue the PIPE.

In March of 2005, Cuban wrote on his finance and investing blog that he actively avoids owning shares in companies that use PIPE, calling it a “huge red flag.” “I don’t like the idea of selling in a private placement, stock for less than the market price, and then to make matters worse, pushing the price lower with the issuance of warrants. So I sold the stock,” Cuban said, referring specifically why he sold stock in Mamma.com after learning of the company’s intention to use PIPE financing.

Key Player: Mark Cuban

Cuban made his initial fortune by founding, and later selling, the Web site Broadcast.com. He has invested heavily in Internet and Web technology and currently serves as the majority partner of sharesleuth.com, “which purports to expose securities fraud,” according to a blog post on Wired magazine.

Cuban is also the current owner of the NBA’s Dallas Mavericks, which he purchased in January 2000 after 11 straight seasons in which they missed the playoffs. Despite the team’s poor performance so far this season, Cuban is largely credited for turning the Mavericks into a winning team. His passion and outspokenness as the team’s owner have caused tension between him and the league but have endeared him to many basketball fans. According to his biography on the team’s official Web site, “Cuban’s whatever-it-takes attitude and commitment to winning has everyone’s attention.”

In addition to owning the Mavericks, Cuban has also sought ownership of the Chicago Cubs. Last summer it was announced that Cuban was the highest bidder for the team, though some sports analysts doubted that Major League Baseball would welcome such a controversial owner. Cubs owner Sam Zell has not yet commented on the SEC charges against Cuban.

Related Topic: Mamma.com in suit over public filing disclosures

Mamma.com was the subject of a class-action lawsuit regarding its public disclosures over a period ending in February 2005. The company settled the lawsuit for approximately $3 million in November 2006 and has changed its name to Copernic following an ongoing investigation by the SEC of its financial filings.
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