Dallas Mavericks owner Mark Cuban has been a polarizing figure since purchasing a majority stake in the team in 2000. He’s been one of the most outspoken owners in professional sports, but has garnered the respect of not only fellow owners, players, and fans of the NBA, but of businessmen and women around the world. Cuban made his fortune by taking risks and making shrewd business decisions when necessary, most notably selling internet start-up Broadcast.com to Yahoo for $5.7 billion in Yahoo stock in 1999. Recently, one of Cuban’s decisions caught up to him in the form of a civil lawsuit filed against him by the Securities and Exchange Commission (SEC). Fortunately for Cuban, he prevailed in the suit and was found not liable by a Texas jury.
Cuban owned shares of Mamma.com a search software company (now known as Copernic) which he sold off in June 2004. Shortly after Cuban’s trade, the shares price dropped raising suspicions that Cuban had received information that led him to unload his shares before he lost money on them. Specifically the SEC alleged that Cuban was approached by Mamma.com Chief Executive Guy Faure, with information that the company was planning a private offering of the stock which would dilute the shares. The SEC argued that this information allowed Cuban to sell his shares and avoid taking a $750,000 loss.
Here is an overview of why the SEC sued Cuban. Congress enacted the Securities Exchange Act of 1934 (the “Act”) after the stock market crash of 1929. Section 16(b) of the Act prohibits profits from any purchases and sales within any six-month period (short-swing profits) made by corporate directors, officers, or stockholders owning more than 10% of the firms shares. Enforcement of insider trading laws are not limited to directors, officers, or stockholders owning more than 10% however. An “insider” can be anyone who trades shares based on material non-public information in violation of some duty of trust. In this case, the SEC alleged that Cuban was given information by Mr. Faure and was told to keep this information private. The information that the company planned to make a private offering is without question material information as it had a direct effect on the value of all of the shares. In addition, Cuban allegedly used this information to sell his shares prior to the information becoming public. This would make him liable if the SEC were able to prove that the facts above were true.
In insider trading cases, one of the toughest obstacles encountered is proving evidence. The phone conversation between Mr. Faure and Cuban was not recorded and the only evidence of it was Mr. Faure’s testimony. Cuban’s attorneys were able to poke holes in the SEC’s argument by questioning the validity of Mr. Faure’s testimony. Ultimately the jury found Cuban not liable because the SEC failed to prove that the information Cuban received was ‘non-public’ information. Cuban’s attorneys alleged that other investors knew of the private offering because they were approached about participating.
In addition, Cuban had the benefit of the case being prosecuted in Texas where he is well-known and generally well-liked. The SEC was at a tremendous disadvantage from the start and the lack of evidence and home-court advantage (pun intended) Cuban possessed, proved too difficult to overcome.
Cuban could have settled the case for $2 million, however in his typical defiant manner, he was determined to clear his name. In the process he likely spent more than the $2 million settlement in attorneys fees to do so. Also, in line with the way Cuban has commented on NBA referees in the past, Cuban accused SEC lead attorney Jan M. Folena of being a bully and a liar after the verdict was read. In true Cuban-like fashion, Cuban has paid the price, but has come out on top. One can only wonder what he has in store for the NBA now that he can turn his focus to his beloved Mavericks once again.