Cuban accused of insider trading

[Raji]

WASHINGTON -- Federal regulators have accused billionaire Dallas Mavericks owner Mark Cuban of insider trading for allegedly using confidential information on a stock sale to avoid more than $750,000 in losses.

The Securities and Exchange Commission filed a civil lawsuit against Cuban on Monday in federal court in Dallas. The agency said that in June 2004, Cuban was invited to get in on the coming stock offering by Mamma.com Inc. after he agreed to keep the information private.

The SEC said Cuban knew his stake -- pegged at 600,000 shares, or 6 percent ownership in the company -- would be sold below the current market price after learning that Mamma.com was raising money through a private investment in a public entity (also known as a PIPE).

A few hours after receiving the information, Cuban told his broker to sell all shares in the search engine company, according to the suit.

After the stock sale

In his own words, Mark Cuban mentioned Mamma.com in a March 2005 entry on his own blog, blogmaverick.com, explaining his decision to sell off his stock in the company.

Finally, and this has nothing to do with Naked Shorting, I wanted to reference Mamma.com. I had purchased stock in Mamma.com in hope that it could be an up and coming search engine. I thought I had done some level of due diligence. Talked to the company management. Talked to some employees who worked in sales. Read the SEC Filings. I knew that they had a checkered past and had been linked to stock promoter Irving Kott, and that their law firm still handled some of Kotts business, but the CEO, Chairman, lawyers all said that things were reformed and the company was focused on its business.

Then the company did a PIPE financing. Im not going to discuss the good or bad of PIPE financing other than to say that to me its a huge red flag and I dont want to own stock in companies that use this method of financing . Why? Because I dont 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.

I bring all of this up now, because in one of the comments in the Naked Shorting thread, a poster mentioned Lines Overseas Management of Bermuda and how there had been allegations made against them . That rang a bell. Turns out this was the same company that Mamma.com's current CFO used for a private placement for Mamma.

I said at the top that I found out some interesting things in this thread, this was probably the most interesting. I will leave you to make your own decision as to whether this connection matters or not. Im glad I sold my stock.

The commission is seeking to impose financial penalties and confiscate gains from the trades. It is up to the U.S. Attorney in Dallas to determine whether Cuban should face criminal charges.

"As we allege in the complaint, Mamma.com entrusted Mr. Cuban with nonpublic information after he promised to keep the information confidential. Less than four hours later, Mr. Cuban betrayed that trust by placing an order to sell all of his shares," Scott W. Friestad, deputy director of the SEC's Division of Enforcement, said in a statement. "It is fundamentally unfair for someone to use access to nonpublic information to improperly gain an edge on the market."

According to the Wall Street Journal, Christopher Clark, a lawyer for Cuban, said, "We're shocked. We find it incredible that given all the important issues that the SEC has to address with regard to today's economy they've sought to bring a $750,000 case relating to a he-said she-said about one trade against a person whose integrity has never been questioned before with regard to the securities markets."

Clark also said he was "further shocked because the whole enforcement process was tainted by express bias by enforcement officials and certain other misconduct that we will happily detail to the judge in this case."

In a statement posted on Cuban's blog, blogmaverick.com, attorney Ralph C. Ferrara said Cuban would challenge the suit.

"This matter, which has been pending before the Commission for nearly two years, has no merit and is a product of gross abuse of prosecutorial discretion," Ferrara said. "Mr. Cuban intends to contest the allegations and to demonstrate that the Commission's claims are infected by the misconduct of the staff of its Enforcement Division."

In the same statement, Cuban said, "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."

According to the SEC, the complaint seeks to permanently enjoin Cuban from future violations of the federal securities laws, disgorgement (with prejudgment interest), and a financial penalty.

"Insider trading cases are a high priority for the Commission," Linda Chatman Thomsen, director of the SEC's Division of Enforcement, said in the statement. "This case demonstrates yet again that the Commission will aggressively pursue illegal insider trading whenever it occurs."

Cuban's situation is drawing comparisons to Martha Stewart's involvement in insider trading in 2001. Stewart was also charged with obstruction for lying to FBI investigators. She was convicted in March 2004 on charges of conspiracy, obstruction of justice, and two counts of making false statements and was sentenced to prison.

Mamma.com, a Canadian company, merged with Copernic Technologies in December 2005. Copernic also offers search software and online advertising services. Mamma.com now trades under Copernic's ticker, CNIC.

The NBA had no comment.

Raji

[Raji]

As ESPN.com news services report, Mark Cuban has been charged with insider trading that netted him roughly $750,000 he allegedly should not have earned.

The Securities and Exchange Commission filed a civil lawsuit against Cuban on Monday in federal court in Dallas. The agency says that in June 2004, Cuban was invited to get in on the coming stock offering by Mamma.com Inc. after he agreed to keep the information private.

The SEC says Cuban knew the shares would be sold below the current market price, and a few hours after receiving the information, told his broker to sell all shares in the search-engine company.Mark Cuban

"As we allege in the complaint, Mamma.com entrusted Mr. Cuban with nonpublic information after he promised to keep the information confidential. Less than four hours later, Mr. Cuban betrayed that trust by placing an order to sell all of his shares," Scott W. Friestad, deputy director of the SEC's Division of Enforcement, said in a statement. "It is fundamentally unfair for someone to use access to nonpublic information to improperly gain an edge on the market."

Long before he was charged with any wrongdoing, Mark Cuban described the transaction on his blog, BlogMaverick (in 2005).

I had purchased stock in Mamma.com in hope that it could be an up and coming search engine. I thought I had done some level of due diligence. Talked to the company management. Talked to some employees who worked in sales. Read the SEC Filings.

I knew that they had a checkered past and had been linked to stock promoter Irving Kott, and that their law firm still handled some of Kotts business, but the CEO, Chairman, lawyers all said that things were reformed and the company was focused on its business.

Then the company did a PIPE financing. Im not going to discuss the good or bad of PIPE financing other than to say that to me its a huge red flag and I dont want to own stock in companies that use this method of financing. Why?

Because 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.

Randy Shain is a Vice President of First Advantage Investigative Services and the author of a book and several articles and book chapters on Wall Street investigations.

He has read the SEC's complaint, and agreed to comment on it:

What is Mark Cuban being accused of here?
These are all allegations. Mark Cuban may very well have a defense that we don't know about.

But the SEC is saying that an investment bank recommended to the head of Mamma.com that they invite Mark Cuban to be a private investor in their PIPE investment vehicle.

A PIPE is a Private Investment in a Public Entity. It's a way for a public company to raise money -- fair or not, the view is that a lot of them are done when a company is getting a little desperate for cash, which tends to make the market a little nervous.

The CEO allegedly reached Cuban, told him the call was confidential, and then told him about the PIPE. Cuban didn't like it, and allegedly told the CEO that he was screwed, and now would not be allowed to sell. And, according to the rules of stock trading, that was exactly right. He had insider information and could not sell. But then the record shows he did sell.

It's not hard to sympathize with Cuban's desire to sell. I agree with him, about PIPEs. He must have felt screwed, having bought the stock, and then learning that the price was likely to go down.

But it's too bad. If you don't own the majority of the company, they might make decisions you don't like. It's a risk.

Do we know if Cuban knew he wasn't allowed to use that information to trade? Did he know he was breaking the rules?
The company is alleging that they told him on that call -- that the CEO said this information is confidential and we're trusting you to keep it confidential.

He may dispute that. But that's probably not going to cut it. That's a bit like the Martha Stewart case -- you can say you didn't know it wasn't allowed, but you sort of have to know. He's pretty sophisticated. It's hard to make clear you're smart, for so long, then suddenly pretend you're dumb.

So what is the penalty likely to be?
Mark Cuban's going to have to write a big check. The complaint calls for "disgorgement of profits" which is government talk for giving back the money that you should not have made. With the $750,000 he reportedly made, plus some fines, my guess is that might be a million dollars.

And then this could be all done. It's a civil filing at this point. I can't imagine there will be a criminal filing, like what happened in the Martha Stewart case. That tends to only happen if there is a cover-up, which there isn't any suggestion of here.

She went to jail. He's going to be angry, and is likely going to have to pay a million dollars. But at the end of the day: So what?

What's wrong about doing what he did?
In the big picture, there's nothing wrong, of course, with selling a stock that is going down.

But what the SEC, the regulators, are trying to prevent is someone making a trade that benefits them unfairly. In the NBA, you can make a trade sometimes that benefits both parties. In stocks, it's a zero sum game. If I make money on a stock transaction, somebody else loses.

When Mark Cuban found out about the PIPE financing, he apparently believed the stock would go down, and sold his stock. That didn't screw Mamma.com, and it didn't screw the SEC. It screwed the poor schlub who bought that stock from him and presumably didn't know about the PIPE. The SEC's job is to make it so that both parties at least have a shot at knowing the same things before they trade, and if the allegations are true, that's what didn't happen here.


Raji

[Raji]

In a civil complaint filed Monday in federal court in Dallas, the U.S. Securities and Exchange Commission accused Dallas Mavericks owner Mark Cuban of insider trading in the sale of his stock in Mamma.com, a search engine company, in June 2004. The SEC's allegations raise legal questions that may affect Cuban's future, his attempt to purchase the Chicago Cubs and his ownership of the Mavericks. Here are some of the questions and their answers:

How important are these charges of insider trading against Cuban?

Although the charges involved only $750,000 and a few minutes of Cuban's life, his sale of this stock could become a life-altering event. The insider trading charges are remarkably similar to the SEC charges against Martha Stewart. In her case, Stewart also was charged with obstruction for lying to FBI investigators, leading to a jury trial, a conviction and five months in a federal penitentiary.

The legal action filed Monday is a civil action that seeks only an injunction and a repayment of the money Cuban allegedly saved with his insider information. But the fact alleged by the SEC easily could become a set of criminal charges in Dallas or in New York. Like Stewart, Cuban used private insider information to avoid losing money on a stock investment. He promised Mamma.com that he would keep information about a new stock offering confidential. The new stock offering would reduce the value of his investment. Moments after he promised he would not use the information, Cuban arranged to sell his stock.

Will there be criminal charges against Cuban?

At this point, we don't know. It is entirely possible that the U.S. attorney in Dallas is already investigating. The SEC complaint states that Cuban sold his stock on June 28 and 29, 2004 after learning of company actions that would reduce its value. A spokesman for the federal prosecutor in Dallas has not yet responded to an ESPN.com query, but federal authorities rarely discuss an investigation until a formal charge has been made. If there are to be criminal charges against Cuban, they must be filed within five years of the 2004 trade. The deadline for charges is June 27, 2009.

How will Cuban respond to the charges?

Cuban could argue that because so little was involved ($750,000), he should be permitted to settle with a mere fine and repayment of the money he saved. He also could suggest that it is the kind of thing that happens all the time in the stock markets and that he has been singled out because of his notoriety as the owner of the Dallas Mavericks. But that is exactly what Stewart said, and it did not work for her.

What is the effect of the insider trading allegations on Cuban's bid to purchase the Chicago Cubs?

The charges and their timing easily could be the end of Cuban's attempt to buy the Cubs. The allegation of insider trading, particularly if it results in an indictment, is exactly what some MLB owners will use to veto his purchase. Even if Cuban is the highest bidder for the team and the Cubs' billionaire owner, Sam Zell, wants to sell to Cuban, MLB owners must approve the sale. Zell might put up a fight for the high bid, but the insider trading charges will give MLB owners the high ground. The charges come at the worst possible time for Cuban in that context. Zell will consider bids before Cuban can even begin to fight the charges. And, with the turmoil in the economy thanks to the Wall Street meltdown, it is a bad time to be seen as a cutthroat capitalist trading on inside information.

Raji

[MikeOswald]

This will be very interesting for Mr Cuban