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July Madness: In Maverick Case, the SEC Tosses an Air Ball
Judithe H. Little
On July 17, 2009, sports enthusiast Mark Cuban won a significant victory when a federal trial court in Dallas dismissed the SEC’s insider trading charges against him.
The SEC’s charges were based on a 2004 telephone conversation between Cuban and the CEO of internet search company Mamma.com, a publicly-traded company. At the time, Cuban was the largest shareholder, holding 6.3% of the shares. According to the SEC’s allegations, during the call the CEO told Cuban he had confidential information to discuss, and Cuban agreed to keep the information confidential. The CEO then informed Cuban that the company intended to pursue a private investment in public equity (PIPE) offering and invited Cuban to participate. Upset, Cuban objected to the PIPE offering because of its dilutive effects on existing shareholders. He expressed further displeasure to the CEO saying, “Well, now I’m screwed. I can’t sell.”
After the phone call, Cuban contacted the company’s investment banker for additional non-public information regarding the proposed PIPE transaction. Then, prior to any public announcement of the PIPE offering, Cuban sold 600,000 shares, his entire position, in Mamma.com’s stock.
According to the SEC’s complaint, Cuban’s sale violated the duty of confidentiality he assumed in his conversation with the CEO, and that accordingly Cuban engaged in unlawful insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b5-2 thereunder. The SEC alleged that Cuban avoided losses of $750,000 that he would have incurred when the company’s stock price dropped after it announced the PIPE deal.
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