Oh Mamma.com: SEC charges Mark Cuban with insider trading; Cuban responds

Updated: The Securities and Exchange Commission said Monday that it has charged Mark Cuban with insider trading for selling 600,000 shares of Mamma.com.

Specifically, the SEC says that search engine Mamma.com, known today as Copernic, invited Cuban--owner of the Dallas Mavericks and former Yahoo and Broadcast.com exec--to participate in a stock offering in June 2004 on the agreement that he would keep the information confidential. The SEC alleges that Cuban "knew that the offering would be conducted at a discount to the prevailing market price and that it would be dilutive to existing shareholders."

On his blog, Cuban said:

“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.”

According to the SEC statement (via WSJ):

Within hours of receiving this information, according to the complaint, Cuban called his broker and instructed him to sell Cuban's entire position in the company. When the offering was publicly announced, Mamma.com's stock price opened at $11.89, down $1.215 or 9.3 percent from the prior day's closing price of $13.105. According to the complaint, Cuban avoided losses in excess of $750,000 by selling his stock prior to the public announcement of the offering.

Here's the time period in question (click to enlarge chart):

The SEC's complaint serves up more detail.

The SEC alleges that Cuban was informed of Mamma.com's planned private investment in public equity (PIPE) offering to raise capital. Cuban was invited to join in the PIPE. Cuban spoke to Mamma.com's CEO about the PIPE deal for a little more than eight minutes on the basis that the information would be confidential.

A lot of the discussion on stock sites I follow note that PIPEs are gray areas when it comes to security laws and that Cuban can make a strong defense.

The key passage of the SEC complaint is below:

The CEO prefaced the call by informing Cuban that he had confidential information to convey to him, and Cuban agreed that he would keep whatever information the CEO intended to share with him confidential. The CEO, in reliance on Cuban's agreement to keep the information confidential, proceeded to tell Cuban about the PIPE offering. Cuban became very upset and angry during the conversation, and said, among other things, that he did not like PIPES because they dilute the existing shareholders. At the end of the call, Cuban told the CEO "Well, now I'm screwed. I can't sell."

After speaking to Cuban, the CEO told the company's then-executive chairman about his conversation with Cuban, including the fact that Cuban was very upset and angry about the PIPE. Shortly thereafter, the executive chairman sent an email to the other Mamma.com board members updating them on various PIPE-related items, including the fact that the CEO had spoken to Cuban:

Today, after much discussion, [the CEO] spoke to Mark Cuban about this equity raise and whether or not he would be interested in participating. As anticipated he initially 'flew off the handle' and said he would sell his shares (recognizing that he was not able to do anything until we announce the equity) but then asked to see the terms and conditions which we have arranged for him to receive from one of the participating investor groups with which he has dealt in the past.

On June 29, 2004 Cuban sold his stake in Mamma.com. After market close Mamma announced the PIPE deal.

The SEC is looking to enjoin Cuban and recover the avoided losses.