SEC insider-trading suit: How billionaire Mark Cuban (illegally) saved $750,000

Dallas Mavericks owner and billionaire Mark Cuban is famous for his temper tantrums.

Now a fit he had 4 1/2 years ago has landed him in court with the Securities and Exchange Commission.

The SEC today charged Cuban, 50, with insider trading in his June 2004 sale of 600,000 shares of Internet search company Mamma.com.

Cuban, who is trying to expand his sports empire with a bid for the Chicago Cubs, issued a statement saying he would fight the allegations. He accused the SEC's enforcement staff of having "win-at-any-cost ambitions," and said the staff's process was "result-oriented, facts be damned."

[UPDATE: Later Monday, the New York Times' Floyd Norris reported that Cuban had been taunted in 2007 by an SEC lawyer over the billionaire's support for a film that was critical of the Bush administration. See this post.]

Here’s the gist of the SEC’s relatively short (nine-page) civil complaint:

-- In March 2004, Cuban bought 600,000 shares of Mamma.com, a 6.3% stake.

-- That spring, the company decided to raise capital via a private-placement stock offering.

-- At the end of June 2004, the company decided to invite Cuban, as its largest shareholder, to buy more stock through the private-placement offering. So the company’s CEO called Cuban on June 28.

-- The Mamma.com CEO prefaced the conversation "by informing Cuban that he had confidential information to convey to him, and Cuban agreed that he would keep whatever information the CEO intended to share with him confidential," according to the SEC complaint.

-- Cuban didn’t like what he heard. A stock offering would, of course, dilute his holdings unless he bought more shares. And news of the offering could drive the stock lower in the market as other investors reacted to the dilution issue.

Cuban "became very upset and angry during the conversation," the SEC suit says. "At the end of the call, Cuban told the CEO, 'Well, now I’m screwed. I can’t sell' " -- presumably because Cuban knew he now had information that he had agreed to keep secret.

At the invitation of the CEO, Cuban then spoke with the investment banking firm handling the private-placement deal. Cuban "was very upset and angry about the [stock offering] during the call" with the banker, the complaint says.

-- One minute after hanging up with the banker, "Cuban called his broker in Dallas and told the broker to sell his entire 600,000-share Mamma.com position," according to the complaint.

The broker sold 10,000 shares in after-hours trading on June 28 at an average price of $13.50. On June 29, Cuban sold the remaining 590,000 shares at an average price of $13.29.

-- After markets closed on June 29, Mamma.com announced the private-placement deal. The stock plunged to $11.99 on June 30, and by July 8 had fallen to $8.

-- So Cuban, by trading on "material, non-public information" he got from Mamma.com’s CEO, avoided losses of at least $750,000, the SEC says.

The SEC wants that money back, plus a penalty.

Cuban's lawyers today issued a statement saying: "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. Mr. Cuban intends to contest the allegations and to demonstrate that the Commission's claims are infected by the misconduct of staff of its Enforcement Division."

Cuban's full statement: "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 so."

Mamma.com now is known as Copernic Inc. The shares trade for about 26 cents.

Cuban is among the bidders for the baseball Cubs, which Tribune Co., parent of the Los Angeles Times, is trying to sell. The SEC suit, although a civil rather than criminal case, could complicate Cuban's offer by raising questions about whether other baseball team owners would approve him as an owner.

Photo: Mark Cuban, cheerful as usual at courtside. Credit: Rhona Wise / European Pressphoto Agency

Comments

[biobot]

Bye bye Mark. Can you say Martha Stewart? If guilty, he should get the same punishment as Stewart. Little shmos like me don't have contacts like so we just get burned and frequently lose our entire retirement.

[jordan]

martha stewart was not sent to jail for insider trading, she was jailed for obstruction of justice and conspiracy for lying to the feds. This is a textbook case of insider trading though, he must return his profits and payback up to 3 times the amount in fines.

[Joe Texas]

This sounds like Mark Cuban is on the wrong end of a witch hunt. Just because he is an outspoken public figure does not mean he deserves a witch hunt. The way the Mavs are playing this season is bad enough. By the way, this is a civil case, there is no evidence of criminal wrong doing, or else Cuban would have been arrested. SEC can Suck Enormous Cajones.

[Digitalsleep]

Martha Stewart went to jail for covering up what she did. Not because she did it. She lied to investigators, which lead to her conviction. There is no criminal case here, he broke a rule and should pay for it. Really bad timing for this to come to light. They really don't want him to have the Cubs.

[mh]

What about all the 'insider trading' and other financial shenanigans going on in the US banking industry? Energy industry? Current Administration? Mortgage Industry? 9-11 insider trading with the airlines and businesses housed in the WTC? The corruption is so broad and widespread that this Mark Cuban ordeal seems like a waste of time ... period!

[debra]

I hope they do to Cuban what they did to Martha Stewart since he profited way more than Martha did!!!!

[Edward S Bumgarner]

I have heard that the Cubs don't want Cuban buying them, so sounds to me like some "inside crap" by the Cubs and MLB trying to keep Cuban from buying them, at all costs. These govt officials remind me of NBA referees, never make the right call.

[boont]

What a great way to stop a large share holder from selling your stock. Just tell them some inside information.

Now they can't sell.

What a great trick.

[Jacob]

Let's see. Pay back the $75k. Tack on another $2.25M as penalty. So to a billionaire paying $3M would just be chump change, I think.

[john]

All that money has stripes on it. The kind of stripes you get on your shirt and pants once convicted.

You should be able to pick your tennis game at Allen Wood, perhaps even make a set of pot holders for Christmas gifts.

[charles]

It's seems proof enough surprised they can't make it stick.

[Willie]

A pox on all their houses: Cuban, the Company, the Underwriters, Lawyers, Accountants and the Feds. Martha Stewart has more class than all of them put together because she took responsibility for her actions, while these guys squeal like greedy pigs and point their greasy fingers at each other.

[Al]

This charge is a joke. All of the theft happening on Wall Street, and they go after Mark Cuban avoiding a potential $750k loss? They should have much bigger issues to deal with. All he did was realize that the new stock offering was going to cause his shares to lose value, so he sold. It is called good business sense. The timing of this is convenient for Major League Baseball, as they are shutting him out of the bidding for the Cubs, though he has proven to be the best of the bunch. The old boy network of MLB doesn't want to let him in, and now they have a built in excuse to deny him entrance. He will fight this & should win. This is nothing but a grandstand play by the SEC to distract from the real problems that they are not dealing with.

[rb]

ex post facto-
if the company had gone on to be a huge success then the exact same behaviour on the part of mark cuban would have different consequences:
when you buy or sell something - you dont know whether the future price will rise or fall.
Mark Cuban could not have known at the time he made his sale - the nature of the future direction of the stock price.

[Al]

To poster Willie, Martha did not take responsibility for her actions. He sentence was not for insider trading, but for obstruction of justice for lying about it & attempting to bury evidence. I don't believe that she should have done time though. She was used as a pawn by the SEC. They made a grandstand play like they are doing with Cuban. All in an attempt to deflect the fact that they are letting are not doing their job. This country is being looted by the bankers & the SEC is worried about Mark Cuban avoiding a small loss.

[Kay]

I believe Martha Stewart's bathroom mop is ready for Mr. Cuban when he spends time in a country club prison for insider trading. Does this mean that Sam Zell will not sell the Cubs to Cuban?

[Crash%20and%20Burn]

Does being a billionaire instead of a millionaire entitle him to only go to civil and not criminal court? Wake up people insider trading is against the law and has criminal penalties just like robbing from the cookie jar. From the SEC, “The enforcement program includes both civil and criminal prosecution of insider trading cases.”

It would seem such an alleged obvious violation of the law would be prosecuted criminally. If the allegations our true, its hard to see how announcing you know something is illegal, and then executing it is a “whitch hunt”. I guess his bank account is over the magic number for immunity. The next time someone robs a bank is the FBI going to say, “OK we’ll let you go and be cool now if you give the money back plus 10K on top”. Unbelievable. This is the reason why he has a zillion dollars and you all are poor. He isn’t a genius, he is a thief.