SEC Accuses Mark Cuban Of Engaging In Illegal Insider Trades

billionaire marc cuban wearing a chicago cubs hat - hoping to buy the team

The Securities and Exchange Commission (SEC) filed a civil suit today in a federal court in Dallas, alleging that Mark Cuban made illegal insider trades 4 years ago in a company called Mamma.com.

Mark Cuban made a name for himself when he sold Broadcast.com to Yahoo! for billions of dollars at the height of the dot-com bubble. This transaction made Cuban a billionaire overnight, and he parlayed these newfound riches into an ownership position in the NBA's Dallas Mavericks franchise. Cuban quickly turned the team around, and the Mavericks are now considered to be one of the NBA's best franchises.

Cuban also used his wealth to invest in a number of different companies that he was interested in, including Mamma.com.

Mark Cuban acquired a 6.3% stake in the company in 2004.

According to the SEC complaint, the CEO of the company sent an email to Cuban in June of 2004, asking Cuban to call him back as soon as possible.

Cuban called, and the CEO informed Cuban that the company was planning on doing a PIPE, which is a private investment in public equity offering. The CEO also asked that the conversation be kept private.

Cuban (according to the complaint), felt that the PIPE offering would dilute his position in the company. He apparently became very angry during the course of the nine-minute call, and apparently ended the conversation with the words "Well, now I'm screwed. I can't sell."

Apparently (according to the SEC) he did sell though. The SEC alleges that Cuban sold his position in the company within hours of the call with the CEO.

If this is indeed what happened, then this is a pretty clear case of insider trading. Cuban would have acted on insider information in order to avoid suffering losses. This is as clear as it gets.

Naturally, Mark Cuban views the situation differently.

He posted an entry today on his blog entitled "The SEC". Cuban posted the response to the lawsuit that his lawyers filed on his behalf. The statement says that the lawssuit has been pending before the Commission for "two years" and "has no merit." It goes on to say that the matter is a "product of gross abuse of prosecutorial discretion."

Cuban closes out the statement by saying that "the government's claims are false and they will be proven to be so."

It will be interesting to see how this case plays out. Many people don't like Mark Cuban, and he is taking an absolute beating in the press today.

I'm sure that this case won't help in Cuban's attempted purchase of the Chicago Cubs - I can't see him getting the OK for a purchase with an insider trading charge hanging over his head.

The SEC is seeking an injunction against Cuban to prevent him from engaging in future violations of securities. They also want him to pay back the $750,000 in total losses that he apparently avoided by selling his position in Mamma.com after the call with the CEO. In addition, they are also seeking payment of an "unspecified" civil penalty (surely to be millions of dollars).

We'll keep an eye on this case and report on any new developments.

securities and exchange commission logo - SEC