Mark Cuban Busted for Insider Trading (UPDATE: Persecution Defense)

Looks like the stock downtown is causing everyone to panic…

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

The SEC alleges in a civil action that Mr. Cuban sold his entire 6% ownership stake on June 28, 2004, after learning that 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.

[full story]

My guess is that is going to cost him a whole lot more than the $750K he saved by cheating, and yes, this is cheating.  This is the whole point about insider trading and using private, confidential information to fleece the “public”.   It *has* to be illegal or it gets abused like nobody’s business (pun intended).

We’ll see how this shakes out, but it’s not going to be good for Cuban.  The Feds don’t go after someone unless they have them dead to rights and they like to make examples out of people (see: Stewart, Martha) as the public humiliation is about the only way to try and influence the super-rich.

BTW, Martha’s insider trading was about a third this size.

The ImClone sale netted multimillionaire Stewart about $229,000, sparked investigations by Congress and the Justice Department and sent the stock of her company into a swoon.

So expect this one to drag on for a while and conclude with the terms “prison” or “house arrest”.

UPDATE: I missed that this was a civil case, and not yet a criminal prosecution.  That takes “prison” out of the picture, for now.   Cuban has decided he is the victim in this case, which is usually not a good idea when it is blatantly obvious you broke the law.

On June 28, 2004, Mr. Cuban called’s chief executive after receiving an e-mail message from the executive, who told him of a planned stock offering and asked if he would like to invest. Such offerings often depress share prices, at least temporarily.

According to the complaint, Mr. Cuban was told the information was confidential.

After the conversation, the chief executive wrote to the company’s chairman in an e-mail message: “As anticipated, he initially ‘flew off the handle’ and said he would sell his shares (recognizing that he was not able to do anything until we announce the equity).”

But within minutes of the call Mr. Cuban began selling his shares, and completed the sales on June 29, according to the lawsuit, fetching an average of $13.24 a share. The next day, after the offering was announced, stock opened at $11.89, sparing him a $750,000 loss. By July 8, the shares had plummeted to $8. On Monday, the stock closed at 28 cents.

So while Cuban avoided losing $750,000 in the transaction, he could have taken that hit and still felt good he didn’t lose the whole $7,000,000+ he pumped into the company.   At the time I believe he was the largest outside shareholder.

Mr. Cuban had purchased 600,000 shares, or a 6.3 percent stake, just three months earlier as the stock was soaring. The share price tripled over a two-day period in early March on volume that totaled more than 12 times the number of outstanding shares. That prompted an S.E.C. investigation that ended without charges being filed.

Then he found out his investment was crap, and tried to dump it.

Now he’s blaming his involvement with movies as the motivating factor behind the prosecution.

A person close to Mr. Cuban provided what he said was one of a series of e-mail messages from Jeffrey B. Norris, an S.E.C. lawyer in Fort Worth, who accused the billionaire of being unpatriotic for helping to finance a movie named “Loose Change.” In the e-mail message, Mr. Norris described the movie as a “vicious and absurd documentary” that “posits that President Bush planned the demolition of the World Trade Center as a pretext for going to war against Iraq.”

In the e-mail message, sent from his S.E.C. e-mail address, Mr. Norris said he was informing Christopher Cox, the chairman of the S.E.C., of Mr. Cuban’s actions.

“If this upsets you, I wonder how George Bush feels,” Mr. Norris wrote. “I assume that Mr. Cox would view your involvement with ‘Loose Change’ much as I do. After all, he served his country as a Republican congressman from Orange County for nearly 20 years and was appointed by President Bush.”

An S.E.C. spokesman said that Mr. Norris had no role in or knowledge of the investigation, which was handled by the S.E.C. in Washington.

He said the e-mail matter was “referred for disciplinary action,” but did not say what action, if any, was taken against Mr. Norris. Mr. Norris did not return a phone call.

The S.E.C. spokesman said Mr. Cox had recused himself when the commission voted to approve filing the complaint.

[full article]

Unfortunately for Mr. Cuban, the fact that the Bush administration has a solid history of abusing power to go after critics isn’t going to erase the fact that he blatantly broke the law, even after acknowledging that he was stuck to the CEO.

If he doth protest too much, he might get that “prison” time after all.  Remember, it was Stewart’s and Clinton’s lying to the Feds that got them in hot water, not their previous actions.