Commentary

Insider trading charge could get more serious for Cuban

Originally Published: November 17, 2008
By Lester Munson | ESPN.com

In a civil complaint filed Monday in federal court in Dallas, the U.S. Securities and Exchange Commission accused Dallas Mavericks owner Mark Cuban of insider trading in the sale of his stock in Mamma.com, a search engine company, in June 2004. The SEC's allegations raise legal questions that may affect Cuban's future, his attempt to purchase the Chicago Cubs and his ownership of the Mavericks. Here are some of the questions and their answers:

How important are these charges of insider trading against Cuban?

Although the charges involved only $750,000 and a few minutes of Cuban's life, his sale of this stock could become a life-altering event. The insider trading charges are remarkably similar to the SEC charges against Martha Stewart. In her case, Stewart also was charged with obstruction for lying to FBI investigators, leading to a jury trial, a conviction and five months in a federal penitentiary.

The legal action filed Monday is a civil action that seeks only an injunction and a repayment of the money Cuban allegedly saved with his insider information. But the fact alleged by the SEC easily could become a set of criminal charges in Dallas or in New York. Like Stewart, Cuban used private insider information to avoid losing money on a stock investment. He promised Mamma.com that he would keep information about a new stock offering confidential. The new stock offering would reduce the value of his investment. Moments after he promised he would not use the information, Cuban arranged to sell his stock.

Will there be criminal charges against Cuban?

At this point, we don't know. It is entirely possible that the U.S. attorney in Dallas is already investigating. The SEC complaint states that Cuban sold his stock on June 28 and 29, 2004 after learning of company actions that would reduce its value. A spokesman for the federal prosecutor in Dallas has not yet responded to an ESPN.com query, but federal authorities rarely discuss an investigation until a formal charge has been made. If there are to be criminal charges against Cuban, they must be filed within five years of the 2004 trade. The deadline for charges is June 27, 2009.

How will Cuban respond to the charges?

Cuban could argue that because so little was involved ($750,000), he should be permitted to settle with a mere fine and repayment of the money he saved. He also could suggest that it is the kind of thing that happens all the time in the stock markets and that he has been singled out because of his notoriety as the owner of the Dallas Mavericks. But that is exactly what Stewart said, and it did not work for her.

What is the effect of the insider trading allegations on Cuban's bid to purchase the Chicago Cubs?

The charges and their timing easily could be the end of Cuban's attempt to buy the Cubs. The allegation of insider trading, particularly if it results in an indictment, is exactly what some MLB owners will use to veto his purchase. Even if Cuban is the highest bidder for the team and the Cubs' billionaire owner, Sam Zell, wants to sell to Cuban, MLB owners must approve the sale. Zell might put up a fight for the high bid, but the insider trading charges will give MLB owners the high ground. The charges come at the worst possible time for Cuban in that context. Zell will consider bids before Cuban can even begin to fight the charges. And, with the turmoil in the economy thanks to the Wall Street meltdown, it is a bad time to be seen as a cutthroat capitalist trading on inside information.

Cuban's lawyer, Ralph C. Ferrara, said in a statement on Cuban's blog, blogmaverick.com, that the SEC is guilty of a "gross abuse of prosecutorial discretion" and "misconduct" in filing its complaint against Cuban. Will the comments help or hurt Cuban?

The statements can only hurt. At a time when Cuban should be trying to settle things with the SEC, this is an attack on its integrity. It does not take much to trigger Cuban's righteous indignation, but these statements might be a big mistake. Unlike NBA referees, federal investigators and prosecutors are not accustomed to melodramatic attacks on their decision-making. They do not take kindly to any kind of criticism, and they do not forget it. It would be in Cuban's interest to find a way to compromise with the SEC and bring this to an end. Whatever chance he might have had to settle things amicably disappeared when he and his lawyer decided to accuse them of misconduct.

Lester Munson, a Chicago lawyer and journalist who reports on investigative and legal issues in the sports industry, is a senior writer for ESPN.com.

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