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NBA Insider: The Strange Case of Mark Cuban
The dangers of trading with material non-public information
Traders Magazine Online News, December 5, 2008
This is the silly season. One administration is packing their bags, while another waits in the wings. At the SEC, top officials are departing, even though they are not political appointees, anticipating that the new administration will have other people in mind for their jobs. The new people are likely to have other and different theories of regulation to advance.
Meanwhile, a credit crisis of Tyrannosaurus Rex proportions continues to wreak havoc in our economy. Armed with a popgun, the SEC is unlikely to take much action during this interregnum. The job of killing this beast is left with Treasury, the Fed and the next administration.
Fortunately, in these difficult times, Mark Cuban, owner of the Dallas Mavericks basketball franchise, and his attorneys, have provided us with some comic relief.
Cuban is accused by the SEC of trading on the basis of material non-public information. What makes this case more interesting than most is that Cuban has decided to discuss it on his blog, which is something of a pulpit for Cuban to trumpet his libertarian views. Cuban's case would probably be news anyway, due to his prominence as the owner of the NBA basketball Dallas Mavericks, but the blog has created a rich mine for news stories about the case. For purposes of this column, the blog provides us with a rare glimpse into the theory of the case currently held by Cuban and his defense counsel.
Thanks to the blog, the facts are not in dispute, except for one item pounced upon by Cuban's lawyers. Cuban owned about 600,000 shares of Mamma.com Inc., making him the holder of roughly 6.3% of its common stock. In June 2004, Mamma.com's CEO called to inform Cuban that the Company was planning to sell shares in a private placement with a commitment to register the shares as soon as practicable, which would permit purchasers in the private placement to sell their shares quickly. This type of transaction is commonly known as a PIPE (private investment in public equity). The CEO began the conversation by telling Cuban that what he was about to hear would be confidential. He then told Cuban that the Company was planning to do a PIPE and invited him to participate in the offering.
Cuban was not happy to hear about this because the offering would dilute his interest, and being a man of strong opinions, strongly objected to the company's plans. The next day, Cuban sold all of his stock, thereby avoiding losses when the price of the stock fell following the public announcement of the PIPE a few days later.
So far, this would seem to be a typical case of trading on the basis of material non-public information in violation of Rule 10b-5. The SEC has prosecuted successfully several insider trading cases involving PIPES with very similar facts. But, Cuban and his lawyers have seized on one element of the SEC's complaint. The SEC alleges that Cuban agreed to keep the information about the PIPE confidential. Cuban hotly contends that he never agreed to any such thing.
Does Cuban's agreement, or lack thereof, make any difference? That is the question the courts will have to decide. Cuban has the money to finance the litigation; so, my guess is that he will try the case all the way to the Supreme Court. For what it's worth, I think Cuban will lose the case.
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