The U.S. Securities and Exchange Commission (SEC) has charged Dallas Mavericks owner Mark Cuban with insider trading. Cuban has responded:
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.
The SEC claims that Cuban had advance knowledge that Mamma.com, Inc., a Canadian company in which he owned 600,000 shares (6.3% interest) was going to raise money through a PIPE offering at a discount to the current market price of the stock. The SEC claims that Cuban sold all of his shares in advance of the announcement of the PIPE offering and avoided $750,000 in losses when the price of the company fell following the announcement. The SEC’s complaint is very detailed about telephone conversations in which Cuban allegedly acknowledged that he was not allowed to sell his shares until after the public announcement of the offering.
To prove insider trading, the SEC will have to prove that Cuban traded while in possession of material, nonpublic information. Although it is not yet clear which element(s) of the offense Cuban will claim that the SEC cannot prove, he may argue that the information was not material, i.e. that a PIPE offering is not material. For purposes of federal securities law, “materiality” is determined by considering whether the information would have been important to a reasonable investor. If he takes this tack, Cuban may argue that the 8% drop in the stock price the following day was not caused by the announcement of the PIPE offering, but by other market factors.
From Cubans’ response, it appears that this is shaping up to be a battle royal, steel cage death match. Cuban has the resources to fight the SEC all the way to trial, and apparently intends to put the SEC’s Enforcement Staff on trial. The SEC has the resources of the federal government behind it.
If the SEC proves its case, Cuban could not only have to surrender an amount equal to his losses avoided, but also a civil penalty equal to three times that amount. A federal judge could also bar him from serving as an officer or director of a public company. Most disturbing for Cuban, no doubt, a U.S. Attorney could decide to prosecute Cuban criminally. The civil consequences are likely of little concern to a man as wealthy as Cuban. The prospect of prison, though, is significant for anyone.
Most significant for baseball fans, one wonders what impact this case will have on Cuban’s efforts to buy the Chicago Cubs. The owners of the other MLB teams would have to approve any such sale.
Investor’s Watchblog will continue to follow the case and post updates. Stay tuned.
