The Securities and Exchange Commission has accused media and sports entrepreneur Mark Cuban of insider trading.
Cuban illegally sold 600,000 shares of an Internet search engine company after receiving confidential proprietary information about an impending stock offering, the SEC charged Monday.
The owner of the NBA’s Dallas Mavericks and founder of HDNet dismissed the charges as the result of prosecutorial misconduct and vowed to fight them.
According to the SEC complaint, Mamma.com approached Cuban in June 2004 “to participate in (a special) stock offering after he agreed to keep the information confidential.” The offering, known as a private investment in public equity or PIPE, was an attempt by the Montreal-based company to raise capital by giving investors a discounted price.
Already an owner of 600,000 shares of Mamma.com — about 6.3%, making him the largest shareholder — Cuban was thus offered a chance to buy more shares at the discounted rate, the SEC alleged.
But Cuban knew that the offering “would be dilutive to existing shareholders,” and instead of taking part, he “called his broker within hours of receiving this information and instructed him to sell Cuban’s entire position in the company,” the complaint said.
The day before Mamma.com announced its stock offering, the single share price closed at $13.105. The day after, it was down 9.3% to $11.89. Cuban’s pre-announcement sale allowed him to avoid a $750,000 loss, the SEC said.
“Mamma.com entrusted Mr. Cuban with nonpublic information after he promised to keep the information confidential. 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,” said Scott W. Friestad, deputy director of the SEC’s enforcement division, in a statement.
On his blog, Blogmaverick.com, Cuban posted a statement Monday 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.”
Included in Cuban’s statement was one from his attorney, Ralph C. Ferrara, who alleged that his client was a victim of prosecutorial misconduct.
“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,” Ferrara said. Many insider trading cases are settled before the SEC issues a formal charge, as it has against Cuban, said Julia Anne McDonough, an attorney with the law firm Bryan Cave’s securities litigation group. A legal proceeding is typically long and usually expensive for both sides, and cases tend to depend heavily on circumstantial evidence.
That both the SEC and Cuban are willing to go to court suggests that “each side believes it’s got a strong narrative,” McDonough said.
According to the SEC complaint, after learning of the planned PIPE offering in a phone call from Mamma.com’s chief exec, “Cuban became very upset and angry during the conversation, and said, among other things, that he did not like PIPEs because they dilute the existing shareholders. At the end of the call, Cuban told the CEO ‘Well, now I’m screwed. I can’t sell.’ ”
But Cuban then called his broker and said, “Sell what you can tonight and just get me out the next day,” the complaint said.
Still, the claim of prosecutorial conduct could resonate, McDonough said, because in the past the SEC has been accused of bringing (or not bringing) cases based less on evidence than on the nature of relationships with the individuals involved.
Cuban, 50, has a net worth of $2.8 billion, as estimated by Forbes magazine in March 2007. He began building his fortune with a computer company, MicroSolutions, and later with Broadcast.com, both of which he eventually sold to Yahoo. In addition to founding the cable channel HDNet, he also owns Landmark Theaters and has partnered with helmer Steven Soderbergh to make digital films. He was also a contestant on ABC’s “Dancing With the Stars.”