Mark Cuban Charged With Insider Trading - by Anne Szkatulski
The SEC today charged controversial entrepreneur and Dallas Mavericks' owner Mark Cuban with insider trading.
The complaint alleges that in June 2004, Cuban sold 600,000 shares in Mamma.com after being invited to participate in a stock offering of the company; knowing that the offering would be conducted at a discount, Cuban allegedly sold his shares within four hours of the invitation.
"Insider trading cases are a high priority for the Commission. This case demonstrates yet again that the Commission will aggressively pursue illegal insider trading whenever it occurs," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement.
The SEC has charged Cuban with violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
The Commission's complaint seeks to permanently enjoin Cuban from future violations of the federal securities laws, disgorgement (with prejudgment interest), and a financial penalty.
Cuban released a statement early this afternoon: "I am disappointed that the (SEC) 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."
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Apparently, the stock offering Cuban was invited to participate in was a PIPE transaction (Private Investment in a Public Entity). Basically, the publicly traded company decided to raise capital through a private offering of shares rather than a public offering. These offerings are less expensive and buyers can be selected by the offering company. Because Cuban was one of the few parties invited to purchase the shares and he was an insider of the company, his knowledge of the upcoming offering was inside information.
A PIPE transaction, like any offering, can dilute the value of already existing shares. Also, PIPE offerings are generally sold at a discount, so the dilution can be even more serious for existing shareholders. Knowing that his shares would drop in value once the offering became public knowledge, Cuban sold everything. As an insider he had a duty to not react to the information or to wait until it was public to trade based on that information.
For more information on the effect of the SEC charges on Cuban's bid for the Chicago Cubs, see this article from Crain's -
http://www.chicagobusiness.com/cgi-bin/news.pl?id=31842
I found the email from the SEC employee interesting. However, there is a question of relevance here. Even if Cuban was targeted for political reasons, his accusation is ultimately null if he did in fact engage in insider trading.
From: Norris, Jeffrey B.
Sent: Saturday, May 05, 2007 2:27 PM
To: Mark Cuban
Cc: Cox, Christopher
Subject: RE: “Lose Change”
I AM SHARING THIS WITH CHAIRMAN COX. NEITHER HE NOR THE COMMISSION ENDORSE MY OPINIONS, BUT IN LIGHT OF YOUR THREAT, I THOUGHT SHOULD SEND THIS TO HIM.
Mark:
If this upsets you, I wonder how George Bush feels. I assume that Mr. Cox would view your involvement with “Loose Change” much as I do. After all, he served his country as a Republican Congressman from Orange County for nearly 20 years and was appointed by President Bush. If you feel like sharing my thoughts with Chairman Cox, be my guest.
Previously, I thought you were merely foolish and naïve. Now, however, I see that you are also a hypocrite. I guess your belief in free speech has severe limitations. If someone else is the victim of an absurd conspiracy theory, you defend your right to participate in smearing the good name of of a patriot like President Bush. But, when you are the subject of a parody of the attack you have endorsed, you suddenly issue threats.
I think I will e-mail this to Chairman Cox myself. I think he will enjoy it. I’m sure he is also a Laker fan.
Since Chairman Cox may not know the background, I will explain. Mark Cuban is the owner of the Dallas Mavericks and has participated in distributing the vicious and absurd documentary, “Loose Change,” which posits that President Bush planned the demolition of the World Trade Center as a pretext for going to war against Iraq. We have had some past exchanges about my opinion the Mr. Cuban’s support for this project is irresponsible and immoral. Below, I parodied his position that every opinion, no matter how absurd and vicious, deserves to be broadly disseminated.
–Michael J. de la Merced
http://dealbook.blogs.nytimes.com/2008/11/17/a-purported-war-of-words-between-cuban-and-the-sec/#more-28366
Another interesting aspect of this - apparently the accusations have been pending (and known to the SEC) for several years. Some suspect, and I imagine Mark Cuban does as well, that this news was leaked in order to give MLB a reason not to allow him to buy the Cubs. These suspicions were further confirmed by a crazy old man I was sitting next to at Lou Mitchell's who claimed his daughter worked for the Tribune co. and admitted that this was what was going on.
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