SEC accuses Mavs owner Cuban of insider trading

Updated: November 18, 2008, 1:00 PM ET
ESPN.com news services

WASHINGTON -- Federal regulators have accused billionaire Dallas Mavericks owner Mark Cuban of insider trading for allegedly using confidential information on a stock sale to avoid more than $750,000 in losses.

The Securities and Exchange Commission filed a civil lawsuit against Cuban on Monday in federal court in Dallas. The agency said that in June 2004, Cuban was invited to get in on the coming stock offering by Mamma.com Inc. after he agreed to keep the information private.

The SEC said Cuban knew his stake -- pegged at 600,000 shares, or 6 percent ownership in the company -- would be sold below the current market price after learning that Mamma.com was raising money through a private investment in a public entity (also known as a PIPE).

A few hours after receiving the information, Cuban told his broker to sell all shares in the search engine company, according to the suit.

After the stock sale

In his own words, Mark Cuban mentioned Mamma.com in a March 2005 entry on his own blog, blogmaverick.com, explaining his decision to sell off his stock in the company.

Finally, and this has nothing to do with Naked Shorting, I wanted to reference Mamma.com. I had purchased stock in Mamma.com in hope that it could be an up and coming search engine. I thought I had done some level of due diligence. Talked to the company management. Talked to some employees who worked in sales. Read the SEC Filings. I knew that they had a checkered past and had been linked to stock promoter Irving Kott, and that their law firm still handled some of Kotts business, but the CEO, Chairman, lawyers all said that things were reformed and the company was focused on its business.

Then the company did a PIPE financing. Im not going to discuss the good or bad of PIPE financing other than to say that to me its a huge red flag and I dont want to own stock in companies that use this method of financing . Why? Because I dont like the idea of selling in a private placement, stock for less than the market price, and then to make matters worse, pushing the price lower with the issuance of warrants.So I sold the stock.

I bring all of this up now, because in one of the comments in the Naked Shorting thread, a poster mentioned Lines Overseas Management of Bermuda and how there had been allegations made against them . That rang a bell. Turns out this was the same company that Mamma.com's current CFO used for a private placement for Mamma.

I said at the top that I found out some interesting things in this thread, this was probably the most interesting. I will leave you to make your own decision as to whether this connection matters or not. Im glad I sold my stock.

The Commission is seeking to impose financial penalties and confiscate gains from the trades. It is up to the U.S. Attorney in Dallas to determine whether Cuban should face criminal charges.

"As we allege in the complaint, Mamma.com entrusted Mr. Cuban with nonpublic information after he promised to keep the information confidential. Less than four hours later, Mr. Cuban betrayed that trust by placing an order to sell all of his shares," Scott W. Friestad, deputy director of the SEC's Division of Enforcement, said in a statement. "It is fundamentally unfair for someone to use access to nonpublic information to improperly gain an edge on the market."

According to the Wall Street Journal, Christopher Clark, a lawyer for Cuban, said, "We're shocked. We find it incredible that given all the important issues that the SEC has to address with regard to today's economy they've sought to bring a $750,000 case relating to a he-said she-said about one trade against a person whose integrity has never been questioned before with regard to the securities markets."

Clark also said he was "further shocked because the whole enforcement process was tainted by express bias by enforcement officials and certain other misconduct that we will happily detail to the judge in this case."

In a statement posted on Cuban's blog, blogmaverick.com, attorney Ralph C. Ferrara said Cuban would challenge the suit.

"This matter, which has been pending before the Commission for nearly two years, has no merit and is a product of gross abuse of prosecutorial discretion," Ferrara said. "Mr. Cuban intends to contest the allegations and to demonstrate that the Commission's claims are infected by the misconduct of the staff of its Enforcement Division."

In the same statement, Cuban said, "I am disappointed that the Commission chose to bring this case based upon its Enforcement staff's win-at-any-cost ambitions. The staff's process was result-oriented, facts be damned. The government's claims are false and they will be proven to be so."

According to the SEC, the complaint seeks to permanently enjoin Cuban from future violations of the federal securities laws, disgorgement (with prejudgment interest), and a financial penalty.

"Insider trading cases are a high priority for the Commission," Linda Chatman Thomsen, director of the SEC's Division of Enforcement, said in the statement. "This case demonstrates yet again that the Commission will aggressively pursue illegal insider trading whenever it occurs."

Cuban's situation is drawing comparisons to Martha Stewart's involvement in insider trading in 2001. Stewart was also charged with obstruction for lying to FBI investigators. She was convicted in March 2004 on charges of conspiracy, obstruction of justice, and two counts of making false statements and was sentenced to prison.

Mamma.com, a Canadian company, merged with Copernic Technologies in December 2005. Copernic also offers search software and online advertising services. Mamma.com now trades under Copernic's ticker, CNIC.

The NBA had no comment.

Information from The Associated Press was used in this report.