When you are a billionaire and you know a stock is going to down, your instinct might be to sell it. But if you know that the stock is going to tank because you are privy to insider information, it’s probably not a good idea to sell that stock. Entrepreneur Mark Cuban, who owns the Dallas Mavericks and is chairman of HDNet, finds himself facing insider trading charges from the SEC because of doing just that. Back in June, 2004, he sold 600,000 shares of search engine Mamma.com after he was asked by the company to participate in a dilutive follow-on offering.
Maybe he didn’t read the boilerplate agreement he (presumably) signed that characterized the details of the follow-on as insider information. But once he got that information, the SEC says he was not legally allowed to act on it until it became public. According to an SEC press release:
The Commission’s complaint, filed in the U.S. District Court for the Northern District of Texas, alleges that in June 2004, Mamma.com Inc. invited Cuban to participate in the stock offering after he agreed to keep the information confidential. The complaint further alleges that Cuban knew that the offering would be conducted at a discount to the prevailing market price and that it would be dilutive to existing shareholders.
Within hours of receiving this information, according to the complaint, Cuban called his broker and instructed him to sell Cuban’s entire position in the company. When the offering was publicly announced, Mamma.com’s stock price opened at $11.89, down $1.215 or 9.3 percent from the prior day’s closing price of $13.105. According to the complaint, Cuban avoided losses in excess of $750,000 by selling his stock prior to the public announcement of the offering.
Cuban’s profit on the trade was only $750,000. He’s likely going to spend a lot more than that on legal fees. Why did he do it? His normally voluble blog is silent on the SEC charges, but back in 2004 he did write a post on why he bought the shares. And then in 2005, in a post about another topic, he had this to say about why he sold Mamma.com as an aside:
. . . 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 [sic] 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 [sic] want to own stock in companies that use this method of financing .
Why? Because I dont [sic] 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.
He is pretty clear about why he sold the stock. He saw the PIPE financing as a red flag. Did he even consider that knowledge to be insider information? Only he can tell us. Why did he do it? The title of the top post on his blog right now, which is about the Mavs, kind of says it all: “I Hate To Lose”
Update: Cuban has posted on his blog the statement below. He is obviously limited in what he can say for legal reasons:
I wish I could say more, but I will have to leave it to this, and let the judicial process do its job.
November 17, 2008
RE: SEC Civil Action in the United States Districtfor the Northern District of Texas, Dallas Division
Mark Cuban today responded to a civil complaint filed by the United States Securities and Exchange Commission in the United States District for the Northern District of Texas, Dallas Division. In its complaint, the Commission charges that Mr. Cuban engaged in violations of the federal securities laws in connection with transactions in the securities of Mamma.com Inc.
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 the staff of its Enforcement Division.
Mr. Cuban stated, “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.”
Wow, it took the SEC two years to make its case. Maybe it’s not so open-and-shut.
losing the cubs sweepstakes, mavs off to a 3-7 start (and needing OT to beat the lowly knicks last night), his brother bring banned on digg….oh wait, thats not news…anyways, maybe 2009 will bring better things for Mr. Cuban…if he’s not in jail that is.
So, Martha Stewart did 5 months for about $45K in losses avoided. Time to start the Mark Cuban prison pool. I’ll take 10 months in the Big House and 6 months of confinement to his own big house. Oh and the max fine of 3 times losses avoided: about $2.25 million.
they don’t appear to be looking for prison time.
Lucky for Mark, then. I’m sure he’d miss a lot of Mavs games if he went to prison. There’ll probably still be a fairly sizable fine though, which I’m sure he’d be happy to pay if he can avoid doing time.
Martha did 5 years because she lied to the feds about what she did. Cuban will cop a plea, pay a fine, and avoid jail time.
Oops. I meant 5 months.
And why does the SEC wait 4 years to charge him? Sounds fishy.
Good luck Mark. I trust your judgment and honesty and am with you until proven guilty.
I don’t even believe “guilty” should necessarily be a morally bad thing. Insider trading laws are sketchy. It looks to me like Charman is bucking for a promotion.
“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.
Wait a sec. Here’s a billionaire, who had insider information that the stock was going down, then decided that he’ll just use the information to let some other poor schmuck take the loss. And Michael, you don’t see this as a morally bad thing?
It depends. People sell on insider information all the time, that’s why stocks don’t always lurch on news. The benefit of trades that occur based on insider info is that the stock price adjusts. Happy to write a longer post on this explaining my thoughts if it makes sense.
Please do write a longer post on this. Most people have no idea why stock prices go up let alone how insider trading laws work.
Talking to a lawyer about “morals” and “ethics” is a colossal waste of time!
Lawyers will consider if it is “illegal” and if it is, the “how illegal” is it? The “law” is very elastic for lawyers. Also, we have to remember that judges are lawyers too…. and very “elastic” on their interpretation of the law.
What is the harm (in the big picture)… In Cuban’s case, he will probably pay a fine and nothing else.
You nailed it Michael, this is a case of the SEC, asleep at the wheel as the financial markets got away with covering up their losses with dubious bookkeeping, trying to redeem itself at the eleventh hour.
Why is this article relevant and has been posted to TechCrunch?
Why do you bitch about what’s written here? Go read fucking something else then.
I think my answer to your rhetorical question of the day is:
It has been posted to TechCrunch because it is relevant.
I’ll let you figure out why its relevant yourself.
Because Mark Cuban is a major force online from the past as well as a current angel investor in a slew of silicon valley startups. Why did Mike write about him? He also spoke at the TC 50. It’s relevant.
Damn right it smells fishy. If anyone should be charged it is the CEO of MAMMA who called an investor and told him confidential information that nobody outside of the company should know! As far as I know, Cuban does not hold a seat on the board CORRECT? I don’t blame him at all.
For those that don’t know PIPE:
A private equity firm, mutual fund or other qualified investors’ purchase stock in a company at a discount to the current market value per share for the purpose of raising capital. A traditional PIPE is where stock is issued at a set price to raise capital for the issuer. A structured PIPE, issues convertible debt. PIPEs are great for small- to medium-sized public companies, which have a hard time accessing more traditional forms of equity financing that need money quick and don’t want a ton of regulation.
I wish this guy would just disappear like his reality show did..
Ooo! Burn! Why do you wish he disappeared? How much have you contributed to human history by comparison? I wish you would disappear.
Personally I’m surprised that this took four years. As the CEO of Mamma.com I would think that I would notice 600,000+ shares being sold the day before a announcing they would be diluted with another round of financing, by someone who had been told (and probably signed) in confidence.
I’m curious to know why Mamma.com didn’t raise this red flag earlier (it doesn’t benefit them to hide it) and if they did raise the flag, why the SEC sat on it for so long.
Insider trading laws ARE sketchy, and violators are subjectively pursued and prosecuted.
He won’t do any jail time. This is a “Rich White People” crime, and we all know that Rich White People rarely go to prison.
Wait…you’re right. Martha Stewart is black and poor.
(sigh, banging my head on my table)
Mark has now posted about it. http://blogmave.../11/17/the-sec/
thanks, updated the post.
I’m sure the CEO of Mamma thought he was pulling a really slick move here. By telling Mark Cuban this confidential information he thought he was locking in his investment. Cuban made the mistake of wanting to hear the information. Also he didn’t profit 750k as this write-up states, but rather he would have lost ~750k
None of this is a big surprise after hearing the whole story, anyone who follows the NBA knows Cuban makes ‘emotional’ (stupid) decisions
Blah, whatever. Pay the fine Mark and move on. Mamma probably will be hurt much more about this news than Mark. $1 million fine or whatever is nothing.
Interesting that Mark Cuban is contesting this, saying that the SEC has got its facts wrong. It’s hard to understand how, in this particular case, the facts of this case can be difficult to understand. So, either Mark Cuban or the SEC is going to come out of this looking pretty stupid…
As usual, the lawyers will be the only winners here, no matter what happens.
I am not a lawyer but this is an interesting read: http://is.gd/7QYC It seems from this that the company tried to lock him in, he did not like the idea, they did not listen and he told them to go fuck themselves. May be the reaction was a little too emotional but sometimes it does not feel to good when you are a lion to be put in a cage…
Whatever Cuban did, I want all his money… We must spread the wealth.
Arrington will get his cut, as an ice cream cone…
Haha, I hope his bitch ass rots in jail.
Don’t hope. This is a civil compliant. In a civil compliant, people lose money. If there’s enough evidence, the SEC may file a criminal compliant. That’s a whole different ballpark.
If you HOPE he rots in hell, tell the SEC to pursue criminal prosecution.
for someone who talks so much shit it looks he like got what he deserves. dont make so many enemies next time douchebag.
I prefer people to make a lot of enemies to induce competition in the marketplace than to collude with each other and drag the marketplace down.
John Doe is an idiot.
Karma, it’s a b***h
Part of doing business. You lose some, you win some. I don’t see there’s any problem with this.
I understand insider trading is illegal. But I just don’t understand how someone can be reasonably expected to keep money invested in something they know is going to tank. How could anyone NOT sell in that situation?
That’s an interesting way to get mamma.com some hits.
SEC is definitely a bit over zealous, but the story I love here is that the brilliant Mark Cuban invested in Mamma.com at all. Further that he has so many times described how Google is flawed. Didn’t he also invest in Mahalo? Wouldn’t that make him 0-2? Genius apparently doesn’t extend to the search category.
Mark Cuban is being railroaded. From MISH blog comments:\”Poor Mark Cuban. Something tells me someone is trying to send him a message. So 4 years later they are charging him with insider trading?
http://sports.y...p&type=lgns
Could it have anything to do with this commentary he wrote last month?
http://www.silv...8/rightnow.html
I guess someone forgot to tell him…having “new” money is not that same as having “old world elitist” money. They are the only one’s permitted to get away with that type of thing.
Maybe Mark can get some tips from Martha.”
Just because they haven’t charged him criminally doesn’t mean they won’t. I would be pretty scared if I was Cuban right now.
By the way, “Mamma.com- Mother of all search engines.” ??!??!??!!? WTF was Cuban thinking???
i think this guy is a nut who makes an ass of himself at games he cant even begin to dream of playng expertly….
hes definetly being targetd but like joe bowers ssaid he hes rich white folk he wont go to jail just get some more pub and a fine….
what a loud mouth he is
Again, real reason Cuban is being targeted from Calculated Risk Blog:
“They prosecuted Mark Cuban 4 years after the fact because he came out heavily against the TARP and also founded bailoutsleuth.com, a site designed to track tarp money and hold the treasury responsible for the use of its funds.
He steps out of line, powerful interests put him away or make his life hell.”
This is politically motivated. The SEC is onto him because of his effort to reveal the hidden accounting practice done by the Treasury and the Fed. Once the people find out about the missing billions and trillions, they will balk at the fact why the rich is getting richer.
This has to come out. I might be next. arrghh i hate the government monitoring everything I write.
Seems clearcut. I wonder why it took them so long to file it though.
Anyway, say oops and surrender the profit and get on with it unless there are other facts.
Cuban is a charlatan. From suckering Yahoo into buying broadcast.com to his idiotic pontifications on his blog to this. Not surprised at all. He has said that the YouTube guys should go to prison for copyright infringement, I think that he should go first. Loser!
Couldn’t have happened to a more humble guy. I feel so sorry for him.
The man is worth a few billion dollars and may soon have “convicted felon” added to his resume.
Greed, greed, greed. $750K is a rounding error for this guy and yet he felt he was untouchable. We will soon find out if that was a good trade or not.
This should be simple:
1) Establish when he was notified of the confidential news
2) Check time of stock trade
Guilty or Not Guilty
why would it take so long to charge. its fishy. thats alot more money than martha got 5 months for. what would make him immune to serving a sentence. if martha couldnt buck the system how can he.
InsiderLocator.com – root issues
Hey Idiots…It’s a civil complaint. Big fine at most. Martha Stewart went to jail for lying to investigators. NOT for insider trading. You don’t go to jail for trading on inside information, the W.ubment fines you more than you made on the trade and moves on. At least consider the facts (understand the law? fuck that, I have a gun permit) before you post.
Seriously, 90% of you are idiots who shouldn’t be allowed to operate a television without supervision, let alone post comments on a website. I simply can’t comprehend how some of you manage to find the IE icon on your desktop, let alone know what the word “submit” means. (As a side note, I’d bet everything I own that every single one of these idiots use IE for their default browser)
BTW, If you think I’m an idiot for saying this…your EXACTLY the person I’m referencing. Now go build something out of your Play-doh.
A bit harsh Dan but…correct.
Hey Dan….
Relax
And here’s a follow up from his blog:
http://blogmave...8/11/18/sec-p2/