With pressure mounting to crack down on manipulative trading, the federal government is hunting some big game these days.
In the cross hairs now: Mark Cuban, the billionaire owner of the Dallas Mavericks. Cuban faces insider trading charges for avoiding a $750,000 loss on an investment in an Internet search company.
The Securities and Exchange Commission filed the civil charges Monday in a federal court in Texas. The agency accuses Cuban of selling 600,000 shares of Mamma.com, the Internet search company, using material but non-public information.
Mark Cuban did not immediately return an e-mail seeking comment. On his blog, blogmaverick.com, Cuban writes, "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."
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Cuban owned 6 per cent of Mamma.com in 2004 when he was invited to invest in a secondary offering known as a PIPE, or private investment in public equity. In those deals, the new investors typically buy stakes in a company at a value below the prevailing market price, which is bad for existing investors.
As Mamma.com's largest stakeholder, Cuban was invited to join the PIPE deal in June 2004 by the company's chief executive, who the SEC alleges told Cuban he had confidential information to give him.
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Cuban had the conversation with the chief executive, the SEC's complaint says, and "became very upset and angry" because he was not a fan of PIPE transactions. He later talked to the investment banker handling the deal.
One minute after talking to the investment banker, Cuban contacted his broker in Dallas and instructed him to sell his entire 600,000 investment in the company, the SEC alleges. The selling occurred the day before and the day of the public announcement of the PIPE deal.
Cuban has been criticised before for skirting the edge. He started a Web site, sharesleuth.com, in 2006 and hired a professional journalist to uncover faulty finances at small publicly traded companies. Trouble was, Cuban made no secret of betting against those companies as a short-seller. That, of course, led to criticism that he could manipulate stocks to his advantage using the Web site.
Sharesleuth has since morphed into bailoutsleuth.com, which is tracking the government's bailout of the financial industry.
In May 2005, Cuban posted a blog entry about his sale of shares in Mamma.com but didn't mention that he had been invited to participate in the PIPE deal and had confidential information in advance of its public disclosure.
In the blog, Cuban writes, "I'm not going to discuss the good or bad of PIPE financing other than to say that to me it is a huge red flag, and I don't want to own stock in companies that use this method of financing.
"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."