SEC v. Mark Cuban – The Complaint

In a complaint filed on November 7, 2008 (the “Complaint”), the SEC charged Mark Cuban with committing securities fraud by engaging in unlawful insider trading. According to the Complaint, Cuban violated §17(a) of the Securities Act, §10(b) of the Exchange Act and Rule 10b-5 thereunder because he used material, nonpublic information to avoid losses in excess of $750,000 when he sold shares of Mamma.com Inc. The Complaint seeks a judgment enjoining Cuban from engaging in future violations of the antifraud provisions of the federal securities laws; ordering Cuban to disgorge the losses avoided; and ordering Cuban to pay a civil money penalty pursuant to §21A of the Exchange Act.  

The Complaint makes the following assertions. Mamma.com wanted to raise money through a private investment in public equity (PIPE) offering. The CEO of Mamma.com called Cuban to invite him to participate in the PIPE offering. At this time, Cuban owned 6.3% of the company and was the company’s largest shareholder. The CEO prefaced the conversation by saying that the information disclosed is confidential and Cuban agreed to the keep the information confidential. The CEO, in reliance on Cuban’s agreement, told Cuban about the PIPE offering. Cuban became angry after hearing the news and said he did not like PIPEs because, among other reasons, they dilute the existing shareholders. Near the end of the conversation, Cuban told the CEO “Well, now I’m screwed. I can’t sell.”  

Although angry about the PIPE, Cuban asked to see the terms and conditions of the offering. The CEO sent an email to Cuban providing contact information for the sales representative at the investment bank advising Mamma.com on the offering. Cuban called the sales representative on June 28, 2004 and received additional confidential details about the PIPE. Specifically, the salesman told Cuban the PIPE was being sold at a discount to the market price and included many other incentives for investors.  

One minute after this phone conversation with the sales representative, Cuban called his broker and directed him to sell his whole position in Mamma.com, which totaled 600,000 shares. During after-hours trading on June 28, 2004, Cuban sold 10,000 of his shares at an average of $13.499 per share. The following morning of June 29, 2004, Cuban sold his remaining 590,000 shares at an average cost of $13.2937 per share. After the markets closed on June 29, 2004, Mamma.com publicly announced the PIPE offering. On the first trading day following this announcement, Mamma.com opened at $11.89 (down $1.215 from the June 29, 2004 closing price of $13.105). Mamma.com continued to decline, closing at $8.00 on July 8, 2004.

Based on these allegations, the SEC asserts that Cuban sold his Mamma.com shares based on material, non-public information that he received from the CEO and investment banker allowing him to avoid losses in excess $750,000. Further, while selling based on this information, Cuban knew or was reckless in not knowing that he possessed material, nonpublic information and he breached a duty of trust and confidence that he owed to Mamma.com. As a result, the SEC asserts that Cuban violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.  

Professor Bainbridge wrote a post about the SEC’s charges against Cuban here. In his post, Professor Bainbridge describes the central legal issue in this case as “whether Cuban assumed a fiduciary obligation of confidentiality with respect to Mamma.com.” In other words, the issue is whether Cuban is a “constructive insider.”  

We will follow up with an in-depth post on the legal issues that exist in this case.  The primary materials for the post are available on the DU Corporate Governance Website.

If you enjoy our publication, please show your support by donating to our organization.