Monday, November 17, 2008

Crazy Cuban in Trouble With SEC For Insider Trading

It looks like Mark Cuban's bid to buy the Cubs may have hit a major road block:

Mamma.com is some sort of lame search engine that no one has ever used ever. Way back in 2004, Cuban made a sizeable investment in the company that made him its largest shareholder. (About 600,000 shares.) Later that year, Mamma decided to raise cash using something called PIPE financing. This would essentially create more shares for the public to buy, which raises cash for the company to use, but reduces the value of all existing shares.

The company called Cuban in for a meeting and told him what they were planning. (The hope was that he would buy many of these new shares, in order to maintain his investment and interest in the company.) This is totally allowed, but only with the understanding that any information the person is given must be kept confidential and they may not act on that information until it is revealed to the general public. The CEO of Mamma and others involved in the situation say that Cuban was well aware that the information was confidential and that he would not be able to act on it. This is allegedly well-documented, too.

Cuban did not approve of the PIPE strategy and wanted out. However, once the PIPE was announced the value of his shares would have gone down no matter what, so he instructed his broker to sell all of his shares immediately, which he did. By selling the shares before the announcement was made (and before the price could drop) he saved himself about $750,000. Cuban's reported net worth is a little over $2 billion.

If the allegations are true, this is textbook insider trading. The SEC has charged him with a civil complaint and if he is found guilty, he would likely have to forfeit the profits from the trades, plus pay a penalty which can be up to three times that amount. Also, if his actions can be shown to have hurt other investors, he can face additional penalties that can skyrocket depending on how much damage was allegedly done.

At the moment, this is only a civil action and not a criminal action, which means he will not face jail time. That could change in the future, but it is unlikely unless some new information comes to light. The most famous insider trading case in recent memory is Martha Stewart, but remember—she did not go to jail for trading. She went to jail for obstruction of justice and conspiracy, because she lied to federal investigators about the case.

And just in case anyone is wondering how this is related to the sale of the Cubs, I was informed by a reliable source this morning (some old crazy guy in the booth next to me at Lou Mitchell's) that his daughter works for the Tribune and the Tribune purposely leaked this information about Cuban to take him out of the running to buy the Cubs. I don't know how likely that is, but either way it doesn't look good for people hoping Cuban would be the next owner.

Somewhere, Sam Zell is menacingly cackling in a smoky back room.

1 comment:

JFKFC said...

Lou Mitchell's? You fatass.

But seriously, that coffee is so delicious...

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