S.E.C. Accuses Mark Cuban of Insider Trading
November 17, 2008, 11:49 am
The Securities and Exchange Commission said Monday that it had charged Mark Cuban, the billionaire Internet entrepreneur and owner of the Dallas Mavericks basketball team, with insider trading for selling 600,000 shares of an Internet search engine company.
The S.E.C. said Mr. Cuban sold the stock in the company, Mamma.com, based on nonpublic information about an impending stock offering. The commission asserted that Mr. Cuban avoided losses in excess of $750,000 by selling his stock prior to the public announcement of the offering.
The commission filed a civil lawsuit against Mr. Cuban in Federal District Court for the Northern District of Texas, accusing him of violating federal securities laws. It said it was seeking to impose financial penalties and confiscate gains from the trades.
“As we allege in the complaint, Mamma.com entrusted Mr. Cuban with nonpublic information after he promised to keep the information confidential,” Scott W. Friestad, deputy director of the S.E.C.’s enforcement division, said in a statement. “Less than four hours later, Mr. Cuban betrayed that trust by placing an order to sell all of his shares. It is fundamentally unfair for someone to use access to nonpublic information to improperly gain an edge on the market.”
Mr. Cuban’s lawyer, Ralph C. Ferrara of Dewey & LeBoeuf, argued that the S.E.C.’s lawsuit “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. Ferrara said in a statement posted on Mr. Cuban’s blog.
The statement quoted Mr. Cuban as saying: “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.”
In an aside, Mr. Cuban said on his blog, “I wish I could say more, but I will have to leave it to this, and let the judicial process do its job.”
In its complaint, the S.E.C. asserted that Mamma.com invited Mr. Cuban to participate in the stock offering in June 2004 after he agreed to keep the information confidential. The S.E.C.’s complaint asserted that Mr. 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, the S.E.C. alleged in its complaint, Mr. Cuban called his broker and instructed him to sell his entire position in the company.
When the offering was publicly announced, the commission said, 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.
Mamma.com is now owned by Copernic, a Montreal-based company that provides search software and online advertising services.
“Insider trading cases are a high priority for the commission,” Linda Chatman Thomsen, director of the commission’s enforcement division, said in the S.E.C. statement. “This case demonstrates yet again that the commission will aggressively pursue illegal insider trading whenever it occurs.”
A lawyer familiar with securities law and insider trading cases said the commission must think it has a strong case against Mr. Cuban. “It does take a fair amount of time to develop these cases,” said Phil Stern, the co-chairman of white-collar criminal, regulatory and internal investigative services at the law firm of Neal Gerber Eisenberg. “They felt they had the case. If anything, they would be more cautious with a high-profile person.”
Another lawyer who previously worked at the S.E.C. said the commission’s action on Monday was “the beginning of a long process.”
“There is going to have to be discovery, depositions, lots of conferences with the court, pretrial hearings,” said John Carney, a partner at the law firm of Baker Hostetler and a former senior counsel at the S.E.C. and a former chief of the securities fraud unit of the United States attorney’s office in New Jersey. “A trial in a case like this could drag out for years.”
Earlier this year, Mr. Cuban made a bid to buy the Chicago Cubs, reportedly offering $1.3 billion. It was not immediately clear how the S.E.C.’s charges would affect his chances of being approved by Major League Baseball if his bid were to succeed.
But Mr. Stern of Neal Gerber Eisenberg said the charges would hurt Mr. Cuban’s chances to buy the Cubs.
Mr. Cuban, whose properties include the HDNet cable television network, is already a controversial basketball team owner. He is known for sitting conspicuously behind his own bench in a Mavericks T-shirt and arguing against the referees.
Off the court and on his own blog, Mr. Cuban has been a frequent critic of the National Basketball Association and its commissioner, David Stern, particularly on the issue of officiating, where he once claimed the chief of referees could not run a Dairy Queen. Mr. Cuban then ran a Dairy Queen for a day; even in retribution, he was seeking attention.
Asked about the S.E.C.’s allegations against Mr. Cuban, Mike Bass, an N.B.A. spokesman said, “We don’t comment on matters such as this.”
Mr. Cuban was the first N.B.A. owner to write a blog, posting his opinions almost daily, from topics as diverse as appeals to fans, criticism of the opposing team (particularly the Mavericks’ rival San Antonio Spurs), and treatises on business and politics. A recent post discusses hedge funds.
Although he has been both insightful and contentious within league ownership circles, in eight years since being approved owner of the N.B.A.’s Dallas Mavericks, Mr. Cuban did transform the franchise from a laughingstock to an N.B.A. championship contender. The Mavericks made the finals in 2006, only to collapse and lose the final four games to the Miami Heat.
During those 2006 playoffs, Mr. Cuban was fined $450,000, including $250,000 for several acts of misconduct after the penultimate loss, including yelling at a referee, staring down Mr. Stern and for uttering profanities to reporters in two separate post-game tirades.
In his eight years of ownership, Mr. Cuban has amassed nearly $1.7 million in fines. He has also matched each fine with a donation to charity.
Mr. Cuban has outfitted his team’s spiffy locker rooms in the American Airlines Center with the latest technology (televisions, computers) to attract free agents to come to Dallas. Mr. Cuban often worked out in his team’s weight room before games, talking to reporters with sweat dripping down his body as he climbed a Stairmaster and challenged reporters’ views.
The image seemed a parallel to his own life as a suburban Pittsburgh-born self-made billionaire.
– Jack Lynch and Liz Robbins
