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

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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.