Mark Cuban's insider trading case is dismissed

NEW YORK (MarketWatch) -- A federal judge has dismissed the insider-trading case brought by the Securities and Exchange Commission against high-profile investor and owner of the Dallas Mavericks basketball team Mark Cuban, according to media reports Friday. U.S. District Judge Sidney Fitzwater granted Cuban's motion and gave the SEC 30 days to file an amended complaint, the Associated Press said. The SEC had filed suit against Cuban in November, alleging he sold shares of Internet company Mamma.com based on nonpublic information, thus sparing himself hundreds of thousands of dollars in losses.

 

Good for him.

 

Mark Cuban may have earned himself a permanent place in the history of financial regulation today.

Unlike most people accused of insider trading by the SEC, Cuban had the wherewithal and the will to fight back in a highly unconventional way. Cuban didn’t try to deny the facts alleged by the SEC. He challenged the SEC’s legal theory, arguing that trading on information he got from the CEO of Mamma.com was perfectly legitimate.

From the start, Cuban had an advantage. Despite a popular misconception about insider trading, it’s just not true that there’s a rule against trading on corporate secrets—the stuff the legal eagles call “material non-public information.” There’s only a rule against insiders doing it.

Cuban wasn’t an insider in the classical sense because he didn’t work for Mamma.com. The SEC had to argue that the circumstance under which he obtained the non-public information made him an insider. Their argument was that Cuban’s conversations with Mamma.com’s CEO created a relationship of trust that gave rise to a duty of confidentiality. And the SEC believes that once you have a duty not to disclose corporate secrets, you also have a duty not to trade on those secrets.

We expected the case would turn on whether or not Cuban had a duty of confidentiality. And if it ever goes to trial—the SEC has 30 days to refile their case—that will be one of the central contentions. But things never got that far.

The judge put an end to this case early by challenging the SEC’s interpretation of insider trading law. He said that there is a difference between a duty of non-confidentiality and a duty not to use insider information for your own benefit. This means that even if Cuban had a duty of confidentiality, he might not have committed any wrong-doing. After all, he didn’t disclose anything. He just traded on it. And no one ever claimed he also had a duty not to trade on top of the duty of confidentiality.

This is a pretty bold challenge by the judge to the SEC’s view of insider trading. It basically puts a new step in proving insider trading, requiring the SEC to prove both a duty of confidentiality and a duty not to trade. This is an argument that’s been floating around academia for quite some time. But this is the first time I am aware of that it’s be accepted by a federal court.

It also explains why the judge gave the SEC another bite at the apple. There’s no way the SEC could have known its theory of insider trading was wrong. So now they’ll get to submit a new case against Cuban that will claim he had a duty not to trade.

But since no one has ever had to make this kind of case before, it should be really, really interesting.

 

...and I always thought that you had to come across inside information by accident to qualify as being able to trade on it. That seems fair enough.

In this case, Cuban is reported in the article to have gained the information by talking to the ceo of mamma.com. I don't think I like him being able to trade on that.

But that's just me.

 

This area of the law, know as tippee liability, is somewhat muddled. Other than tipping off your girlfriend however, I would have thought tipping a big holder and financier who promptly sold on the info without disclosing it, would be a pretty clear case of liability.

I would expect the SEC to appeal this case and prevail. The theory adopted by the judge here has never been the law, to my understanding.

In passing, I would point out it shows what a jerk Cuban is, if anyone needed confirmation of that. He abused his position to take advantage of other shareholders and market participants who lacked his access. Now somehow he got a judge in his hometown to say it was ok. Nothing there to applaud in my opinion.

 

If Mark Cuban have a conversation with CEO of mama.com, then he sold, than the CEO is the person to give insider information, right?

 

The insider trading charges were probably politically motivated. Mark Cuban had been a vocal and public critic of the SEC prior to the charges being brought against him. Keep in mind, that at the time the charges were being brought against Mark Cuban, multiple people had allready written to the SEC warning about Bernie Madoff and the SEC chose not to pursue an investigation against Madoff. The SEC is such a joke.

 

Hard to know exactly what happened of course, but it's my understanding the CEO tried to play Cuban and force him to hold his shares by calling him and telling him the inside information, knowing damn well Cuban was obligated not to sell or risk the SEC doing exactly what they did. In other words, the CEO maneuvered against one of the company's largest shareholders in an attempt to keep him from dumping his shares once, inevitably, he found out the news through other, and probably just as illegal, channels.

If the story has changed, please post a link. It's an interesting case, one I thought was basically open and shut and see ya in 6 months Mark.

 

Here's the link. (if it works)

http://sec.gov/litigation/complaints/2008/comp20810.pdf

The CEO of mama, called Cuban and asked if he like to buy some more shares at a discount. When Cuban asked what do you mean the CEO told Cuban about the Pipe. Cuban blew his top because he was not asked his opinion on the pipe offering although he was a major holder. Cuban told the CEO he was going to sell all his stock, the CEO said you can't do that. Cuban said watch me and sold shares as soon as he got off the phone. Marks action I think forced an earlier than desired offering date, I think Cuban sold the rest the next day because his broker couldn't sell everything that late in the day.

Just my recollection, don't hold me to this.





The Securities and Exchange Commission filed insider trading charges against Mark Cuban, the outspoken owner of the Dallas Mavericks, for allegedly dumping shares in Mamma.com upon learning it was raising money in a private offering.

The SEC alleges in a civil action that Mr. Cuban sold his entire 6% ownership stake on June 28, 2004, after learning that Mamma.com was raising money through a private investment in a public entity, or PIPE. The next day, on June 29, the company announced the PIPE financing and shares of the company dropped by more than 10%. By selling his stake, the SEC alleges, Mr. Cuban avoided more than $750,000 in losses.

In a PIPE transaction new shares are issued at a discount to the current trading price. An announcement of a PIPE transaction is often followed by a drop in the stock price as shareholders anticipate their stake will be diluted."
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Trading at a solid 0.25 now. Cuban should have kept it!