Risk Management

Maverick Owner Cuban Hit with Insider Charge

SEC says the billionaire who owns the Dallas pro basketball team sold a search-engine company's stock illegally, saving $750,000.
Stephen TaubNovember 17, 2008

Billionaire Mark Cuban, owner of pro basketball’s Dallas Mavericks, was accused by the Securities and Exchange Commission of engaging in illegal insider trading in an effort to save $750,000.

The case stems from his investment in Mamma.com Inc., an Internet search engine company now known as Copernic Inc. According to the complaint, in June 2004 Cuban sold his entire 600,000 share position in Mamma.com four hours after he confidentially learned of an imminent private investment in public equity (PIPE) offering that would dilute his holdings.

The next day, according to the complaint, Mamma.com’s stock price opened down 9.3 percent from the prior day’s closing price. As a result, Cuban avoided losses in excess of $750,000 by selling on the basis of material, non-public information.

Besides his ownership of the Dallas Mavericks franchise, Cuban is an owner of the national high-definition television network HDNet, and Landmark Theaters. He became a billionaire in 1999 when he and his partner presciently sold Broadcast.com to Yahoo for $5.9 billion just before the dot.com bubble burst.

The SEC said that it seeks to permanently enjoin Cuban from future violations of the federal securities laws, disgorgement, with prejudgment interest, and a financial penalty.

In March 2004, Cuban became the Montreal-based Momma.com’s largest shareholder, acquiring 600,000 shares, a 6.3 percent stake. “Cuban…publicly stated that he had sold his Mamma.com shares because the company was conducting a PIPE which issued shares at a discount to the prevailing market price and also would have caused his ownership position to be diluted,” according to the Complaint. “Cuban never disclosed to Mamma.com that he was going to sell his shares prior to the public announcement of the PIPE.”

The SEC alleged that Cuban knew, or was reckless in not knowing, that he had received material nonpublic information from Mamma.com, and that he breached a duty of trust or confidence that he owed to Mamma.com when he sold on the basis of that information.

An attorney for Cuban referred CFO.com to a statement that said: “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.” The statement quoted Cuban as saying that he was “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.”