Dallas Mavericks owner Mark Cuban has been charged by the SEC with insider trading relating to Mamma.com.
The Wall Street Journal reports that the Mark Cuban insider trading charges stem from and allegation that he sold shares of Mamma.com prior to a private offering:
The Securities and Exchange Commission filed insider trading charges against Mark Cuban, the outspoken owner of the Dallas Mavericks, for allegedly dumping shares in Mamma.com upon learning it was raising money in a private offering.
The SEC alleges in a civil action that Mr. Cuban sold his entire 6% ownership stake on June 28, 2004, after learning that Mamma.com was raising money through a private investment in a public entity, or PIPE. The next day, on June 29, the company announced the PIPE financing and shares of the company dropped by more than 10%. By selling his stake, the SEC alleges, Mr. Cuban avoided more than $750,000 in losses.
In a PIPE transaction new shares are issued at a discount to the current trading price. An announcement of a PIPE transaction is often followed by a drop in the stock price as shareholders anticipate their stake will be diluted.
MARK CUBAN FIGHTS BACK
Not long afterward, an official response showed up on Mark Cuban's personal blog, leading in at first with a one-sentence introduction to a legal-sounding letter:
I wish I could say more, but I will have to leave it to this, and let the judicial process do its job.
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."
Mark Cuban's confidentiality agreement was also called into question by a post on his blog, casting into some doubt whether the charges could stick.
Back when it happened, before charges were leveled against him, Mark Cuban's Mamma.com stock sale made news. News reports said that the sale appeared to have a material effect on the stock's value. Cuban explained his rationale for the sale then:
Mamma.com tumbled 15% Friday on news that Internet billionaire Mark Cuban had sold his highly-publicized stake in the company.
Cuban told internetnews.com that he took issue with the company's $16.6 million private placement announced June 29.
"I hate when companies do PIPES-type transactions to raise money," Cuban said in an email. "It's dilutive, and I hate being diluted...that simple."
According to SEC filings, Cuban bought his shares on March 4, when the stock traded between 10.80 and 12.99, and sold on June 29, when it traded between 12.91 and 14.23.
Though the SEC release is lengthy, ZDNet calls out what it says is the most important passage in the Mark Cuban SEC charges. The charges allege that Cuban had the notion that selling might get him in trouble, and was mad not only that Mamma.com was headed for a PIPE offering, but also that he'd been told about it and would be handcuffed by the information:
The CEO prefaced the call 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. The CEO, in reliance on Cuban's agreement to keep the information confidential, proceeded to tell Cuban about the PIPE offering. 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."
After speaking to Cuban, the CEO told the company's then-executive chairman about his conversation with Cuban, including the fact that Cuban was very upset and angry about the PIPE. Shortly thereafter, the executive chairman sent an email to the other Mamma.com board members updating them on various PIPE-related items, including the fact that the CEO had spoken to Cuban:
CUBAN WILL BE CUBAN
Cuban's insider trading charges aren't keeping him from blogging, albeit apparently with the help of a lawyer, but they also aren't keeping him from partying. He was reportedly spotted partying with women and vodka at a popular New York club a few days after the charges were leveled against him.
MAMMA.COM IS NOW COPERNIC (CNIC)
FULL TEXT OF SEC CHARGES AGAINST MARK CUBAN
Here's the full SEC press release on the Mark Cuban insider trading charges:
FOR IMMEDIATE RELEASE
Washington, D.C., Nov. 17, 2008 -- The Securities and Exchange Commission today charged Dallas entrepreneur Mark Cuban with insider trading for selling 600,000 shares of the stock of an Internet search engine company on the basis of material, non-public information concerning an impending stock offering.
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.
"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.
Scott W. Friestad, Deputy Director of the SEC's Division of Enforcement, said, "As we allege in the complaint, 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."
The complaint alleges that Cuban violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission's complaint seeks to permanently enjoin Cuban from future violations of the federal securities laws, disgorgement (with prejudgment interest), and a financial penalty.