Mark Cuban Files Response in Mamma.com Insider Trading Case

In November of 2008, the Securities and Exchange Commission (SEC) brought a civil suit against Mark Cuban, accusing the billionaire of insider trading.

The lawsuit pertains to Cuban's (former) investment in Mamma.com, a company that is now known as Copernic, Inc. (symbol: CNIC)

Back in 2004, Cuban owned 600,000 shares in the Canadian company.

The CEO of the company at the time, Guy Faure, contacted Cuban and requested that he call Faure back immediately. Cuban did so.

Guy Faure then informed Cuban that the company was going to be undertaking a PIPE financing. Pipe financing means a Private Investment in a Public Entity, or PIPE.

Cuban is not a fan of PIPE financing, and wasn't happy when he was informed of the move. Mark had this to say in 2005:

"I'm 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 don't want to own stock in companies that use this method of financing. Why? Because I don't 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."

As mentioned, Cuban wasn't happy about the PIPE financing. He immediately dumped his shares in the company, and a short time later, the stock cratered after announcing the new PIPE financing.

In 2008, the SEC brought their civil suit against Cuban, alleging that he had used confidential insider information to avoid potential losses. They claim that Cuban agreed not to act on the insider information, but did so anyways.

The potential cost to Cuban if he loses the case? Millions of dollars. Not a lot of money to Cuban, but he is more worried about protecting his reputation and good name at this point.

Cuban, as you can imagine, quickly fired back.

His first statement on the matter claimed that the allegations were "false" and that the Commission's claims were "infected by the misconduct of the staff of its Enforcement division."

The next day, Cuban published a transcript of an interview with Guy Faure, the former CEO of the company. In the interview, Guy Faure acknowledges that he can't remember what Mark Cuban said in response to being told that he was going to be hearing some confidential information. The SEC alleges that there was a verbal agreement made between Cuban and Faure - Cuban says otherwise.

Fast forward to January. Cuban and his legal team filed a legal brief in the Federal District Court of Dallas, asking the court to toss out the suit.

Cuban claims that he couldn't have engaged in insider trading because he "owed no fiduciary duty" to Mamma.com. Because of this, they argue, insider trading laws wouldn't apply to Cuban.

He also claims that "there is no general prohibition on the trading of securities based on material, nonpublic information", and that "although the SEC has often argued that any recipient of material, nonpublic information has potential insider trading liability, the U.S. Supreme Court has repeatedly rejected the SEC's view".

Cuban closes out the brief by stating that he still disputes the SEC's charges.

We'll keep an eye on this story - I would expect the SEC to respond to the filing within the next week.

Mark Cuban, in case you didn't know, is a billionaire who made his fortune when he sold Broadcast.com to Yahoo! in the late 90's. He currently owns the Dallas Mavericks and has a number of other holdings in both private and public companies.

Filed under: Stock Market Scandals