“Rule no 1 of any smart investor is don’t get attached.” — Mark Cuban
A lot of information about the Mark Cuban situation is pouring in now, and there will be plenty of time for speculation, recriminations and schadenfreude. Plus, Cuban has just come out on his blog and said he will fight the charges. But right now let’s just figure out what he did, why he did it, and why it’s bad. Just the facts, as we know them:
Mamma.com is some sort of lame search engine that no one has ever used ever. Way back in 2004, Cuban made a sizeable investment in the company that made him its largest shareholder. (About 600,000 shares.) Later that year, Mamma decided to raise cash using something called PIPE financing. This would essentially create more shares for the public to buy, which raises cash for the company to use, but reduces the value of all existing shares.
The company called Cuban in for a meeting and told him what they were planning. (The hope was that he would buy many of these new shares, in order to maintain his investment and interest in the company.) This is totally allowed, but only with the understanding that any information the person is given must be kept confidential and they may not act on that information until it is revealed to the general public. The CEO of Mamma and others involved in the situation say that Cuban was well aware that the information was confidential and that he would not be able to act on it. This is allegedly well-documented, too.
Cuban did not approve of the PIPE strategy and wanted out. However, once the PIPE was announced the value of his shares would have gone down no matter what, so he instructed his broker to sell all of his shares immediately, which he did. By selling the shares before the announcement was made (and before the price could drop) he saved himself about $750,000. Cuban’s reported net worth is a little over $2 billion.
If the allegations are true, this is textbook insider trading. The SEC has charged him with a civil complaint and if he is found guilty, he would likely have to forfeit the profits from the trades, plus pay a penalty which can be up to three times that amount. Also, if his actions can be shown to have hurt other investors, he can face additional penalties that can skyrocket depending on how much damage was allegedly done.
At the moment, this is only a civil action and not a criminal action, which means he will not face jail time. That could change in the future, but it is unlikely unless some new information comes to light. The most famous insider trading case in recent memory is Martha Stewart, but remember—she did not go to jail for trading. She went to jail for obstruction of justice and conspiracy, because she lied to federal investigators about the case.
So any attempt by Cuban to cover up or otherwise deceive investigators could put him in deep trouble. Even worse, if they think he tried to deceive the public through his statements or actions, he could be charged with market manipulation, which is not something the feds take lightly.
In a blog post from March 2005, Cuban fully admits that he sold the stock because of the PIPE financing, which when combined with the testimony of the CEO of Mamma.com makes him look pretty guilty. Unless he can prove that that he disclosed the information before actually placing the sell order, he’s in big trouble and his own blog could be used against him. Or it could help him if the post proves the timing works out in his favor. That’s the key point of the case, and one that is—for the moment—still unclear.
However, in that same post he goes on a rather lengthy rant about how he doesn’t feel that naked short selling is a big problem that needs to be addressed by regulators. You may recall that the SEC essentially banned the practice this year after it led to the failure of Lehman Brothers and other financial companies. Oops. He also admits that he knew Mamma.com had a shady history before he even invested, but chose to put his money in it anyway. Double oops. But I think the last line sums everything up pretty neatly.
“Im glad I sold my stock.”
Yeah, I bet.
Mark Cuban Charged With Insider Trading [The Smoking Gun]
SEC’s Mark Cuban Insider Trading Allegations (Details) [Clusterstock]
Naked Shorts… What I have learned [Blog Maverick]
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