When you are a billionaire and you know a stock is going to down, your instinct might be to sell it. But if you know that the stock is going to tank because you are privy to insider information, it’s probably not a good idea to sell that stock. Entrepreneur Mark Cuban, who owns the Dallas Mavericks and is chairman of HDNet, finds himself facing insider trading charges from the SEC because of doing just that. Back in June, 2004, he sold 600,000 shares of search engine Mamma.com after he was asked by the company to participate in a dilutive follow-on offering.
Maybe he didn’t read the boilerplate agreement he (presumably) signed that characterized the details of the follow-on as insider information. But once he got that information, the SEC says he was not legally allowed to act on it until it became public. According to an SEC press release:
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.
Cuban’s profit on the trade was only $750,000. He’s likely going to spend a lot more than that on legal fees. Why did he do it? His normally voluble blog is silent on the SEC charges, but back in 2004 he did write a post on why he bought the shares. And then in 2005, in a post about another topic, he had this to say about why he sold Mamma.com as an aside:
. . . I wanted to reference Mamma.com. I had purchased stock in Mamma.com in hope that it could be an up and coming search engine. I thought I had done some level of due diligence. Talked to the company management. Talked to some employees who worked in sales. Read the SEC Filings. I knew that they had a checkered past and had been linked to stock promoter Irving Kott, and that their law firm still handled some of Kotts business, but the CEO, Chairman, lawyers all said that things were reformed and the company was focused on its business.
Then the company did a PIPE financing. Im [sic] not going to discuss the good or bad of PIPE financing other than to say that to me its a huge red flag and I dont [sic] want to own stock in companies that use this method of financing .
Why? Because I dont [sic] like the idea of selling in a private placement, stock for less than the market price, and then to make matters worse, pushing the price lower with the issuance of warrants.So I sold the stock.
He is pretty clear about why he sold the stock. He saw the PIPE financing as a red flag. Did he even consider that knowledge to be insider information? Only he can tell us. Why did he do it? The title of the top post on his blog right now, which is about the Mavs, kind of says it all: “I Hate To Lose”
Update: Cuban has posted on his blog the statement below. He is obviously limited in what he can say for legal reasons:
I wish I could say more, but I will have to leave it to this, and let the judicial process do its job.
November 17, 2008
RE: SEC Civil Action in the United States District
for the Northern District of Texas, Dallas Division
Mark Cuban today responded to a civil complaint filed by the United States Securities and Exchange Commission in the United States District for the Northern District of Texas, Dallas Division. In its complaint, the Commission charges that Mr. Cuban engaged in violations of the federal securities laws in connection with transactions in the securities of Mamma.com Inc.
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.”
Wow, it took the SEC two years to make its case. Maybe it’s not so open-and-shut.