Cuban Cleared of Insider Trading (What's Insider Trading?)

Jerome Miron-USA TODAY Sports

A guest post to MavsMoneyball

Author's note: My wife Mary is a lawyer for a mutual fund, where she does SEC compliance. As a result, I asked her if she could explain the recent trial involving Mark Cuban, the Securities and Exchanges Commission, and "insider trading" since a lot of these news articles go right over my pretty little head. What follows are her words.

Dallas owner Mark Cuban often makes headlines, usually for passionately defending his players on and off the court or his record setting fines by the NBA. His most recent headlines have been of a different kind entirely: the powerful Securities Exchange Commission (SEC) accused him of insider trading.

It isn't every day that you see prominent companies and figures like Enron, Martha Stewart or even Mark Cuban, being accused of a crime, but really, insider trading enforcement actions are brought every day. Insider trading is buying or selling stock using non-public information about a company that you believe will impact its stock price. The statute (the Securities Exchange Act of 1934, Provision 10(b)(5), or 15 U.S.C. 78a et. seq., for all of you legal eagles) is enforced by the SEC, and is prosecuted in the federal court system.

The SEC alleged that Cuban illegally sold shares of Mamma.com after learning from CEO Guy Fauré that the company planned to raise capital with a private investment in public equity (PIPE). A PIPE is a way for public companies (those whose shares are traded on stock exchanges) to obtain capital faster and less expensively than in a public offering of new shares that are private (and cannot be traded on stock exchanges). The private investor sees this as a way to obtain an ownership share in a company at a discount to the current trading price on an exchange. An experienced, existing shareholder, like Mark Cuban, would see this private offering of shares at a discount as dilution- a way for the company to reduce their existing shareholder's ownership stake by issuing more shares- therefore making their investment less valuable. PIPE announcements are frequently followed by a sharp drop in stock prices.

The claim arises because Mark Cuban sold more than $7.9 million of Mamma.com stock at an average price of $13.30 per share- a 9.3% increase over $11.89 the share price the morning after the PIPE offering was announced. This sale prevented a $750,000 loss on Cuban's 6% investment in the company.

The determining factor for the case was whether or not Mark Cuban knew that the details of the PIPE investment were classified. Mark Cuban testified that he never agreed to keep information about Mamma.com's stock deal private or refrain from selling his shares. The CEO couldn't recall exactly how Cuban had agreed to keep the information confidential. The jury ultimately found the SEC's evidence and witnesses to be unreliable, because they decided that Mark Cuban did not engage in insider trading by selling his stock in Mamma.com.


(Thanks to David Schechter of WFAA)

So, you might ask, what's the big deal? Insider trading has been a hot button issue with the SEC for some time. Insider trading cases with major public figures, such as Martha Stewart or Mark Cuban, garner positive headlines and popular support for the agency's regulatory and prosecution departments, which are frequently portrayed as villainous, overreaching bureaucracy. An accusation of this kind also seriously jeopardizes the reputation of an investor like Cuban, who is commonly known to be business savvy- his TV show, "Shark Tank" depends on this reputation. And, most importantly, being cleared of insider trading saved Mark Cuban $2.5 million dollars in fines- an investment we would all like to see be put back into the Mavericks this season.

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