Mark Cuban, technology entrepreneur, billionaire, Dallas Mavericks owner, and ardent attention-seeker is getting a new title by the US Securities and Exchange Commission (SEC) today: "defendant."
The SEC has charged Cuban with insider trading, accusing him of dumping his entire stock in a start-up Internet search engine company within hours of receiving advanced notice of a deal.
According to the complaint, Cuban owned 600,000 shares of the Montreal-based search engine, Mamma.com, in 2004, making him the then-largest shareholder at the company.
That year, the firm's investment bank convinced Mamma.com that it should raise some quick cash by holding a private investment in public equity (or PIPE) deal. A PIPE involves selling public shares privately to investors at a discount — often bad news for existing shareholders because it dilutes their current stake.
At the bank's suggestion, Mamma.com's CEO contacted Cuban to participate in the PIPE before it was made public, the filing asserts.
"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 complaint states.
As the conversation unfolded, Cuban allegedly became "very upset and angry" and told the CEO he didn't like PIPE deals.
"At the end of the call, Cuban told the CEO "Well now I'm screwed. I can't sell," according to the filing.
The CEO sent a follow-up email to Cuban, including contact information for the investment bank for more details on the private placement. Cuban called the bank's sales representative and allegedly had another "very upset and angry" conversation.
Just one minute after hanging up with the bank's sales representative, the SEC said Cuban called his broker and instructed him to "sell what you can tonight and just get me out the next day," the filing states. Cuban sold 10,000 of his 600,000 Mamma.com shares that evening, and the remaining 590,000 the next morning.
That evening, on June 29, 2004, Mamma.com publicly announced the PIPE offering.
On June 30, the first trading day after the announcement, Mamma.com stock price was down 8.5 per cent at $11.99 from $13.105 the previous day. It continued to decline over the next week, ultimately landing at $8 on July 8.
The SEC claims that by selling his Mamma.com shares before the public announcement, Cuban avoided losses in excess of $750,000. The commission adds that Cuban later publicly stated that he sold his Mamma.com shares because of the PIPE.
"We allege in the complaint, Mamma.com entrusted Mr. Cuban with nonpublic information after he promised to keep the information confidential," said Scott Friestad, Deputy Director of the SEC's Division of Enforcement in a statement. "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."
We should note that in 2004 — when all this was allegedly happening — Mamma.com itself was being investigated by the SEC for stock manipulation after its shares spiked suspiciously for no apparent reason. The investigation later turned into a formal probe, but was dropped by the SEC in 2005. ®