Mark Cuban Fights SEC in Insider Trading Civil Lawsuit; Why Is It Even Happening?


Colorful superrich entrepreneur Mark Cuban–you love him on Shark Tank (Friday nights on ABC!)–is going to trial this week in a long-standing civil lawsuit by the Securities and Exchange Commission on an insider trading charge.


Details from Reuters:

The case stems from Cuban's June 2004 sale of 600,000 shares of Mamma.com Inc, soon after he had supposedly learned of an equity offering that could depress the Montreal-based Internet search company's stock price.

The SEC said the sale let Cuban avoid a roughly $750,000 loss on his 6.3 percent stake. It seeks to recoup illegal gains, impose a fine, and win a permanent ban against similar conduct….

Cuban's combativeness has extended to the SEC case, where he accused enforcement staff of targeting him because of his fame and because they disliked his politics. In 2011, SEC Inspector General David Kotz cleared the regulator of misconduct. …

The SEC said Cuban hurriedly unloaded his Mamma.com shares after having become "very upset and angry" when he learned from Chief Executive Guy Fauré on June 28, 2004, that the company planned to raise capital via a private investment in public equity (PIPE) offering.

"Well, now I'm screwed. I can't sell," Cuban told Fauré, according to the SEC.

Within hours, according to the regulator, Cuban instructed his broker to sell his Mamma.com shares, and the $7.98 million sale was completed on June 29.

Mamma.com announced the PIPE offering later that day, and its shares fell 9.3 percent the next morning, to $11.89. Cuban's shares were sold at an average $13.30 each, court papers show.

Cuban has maintained that he had no obligation not to trade, and that there was no evidence that the information he had was confidential or material…..[U.S. District Judge Sidney] Fitzwater [hearing the case] dismissed the SEC lawsuit in 2009, but a federal appeals court revived the case the following year.

A good learning opportunity to revisit some past Reason writing on the contentious issue of insider trading.

See the Washington Post realize that, as I wrote, "that laws against insider trading are silly, don't do any good, and ignore most of what they purport to be preventing by not cracking down on the "crime" of insider non-trading"; and read about "perverse results of keeping those who know the most about companies (theoretically) from helping spread that knowledge and help bake it into the price of stock through the buying and selling of stocks in those companies;" and in 2007 I wondered, cheekily, if some great journalism that Mark Cuban was funding might fall afoul of insider trading laws (as a means of pointing out the silliness of such laws).

In the context of the campaign against Samuel Waksal, the source of the "inside info" that sent Martha Stewart to jail, I wrote:

Stock markets work best when all the relevant information about a company is spread as widely as possible, as quickly as possible. Stock prices represent a constantly shifting amalgamation of everyone's information about and evaluations of a company's value. It helps when those who have accurate information about changing circumstances are permitted to act so that stock prices reflect them.

Someone selling a stock in huge quantities because they know something will happen soon that will lower the stock's value helps spread the knowledge that the price ought to be dropping. Such actions help insure that stock prices do reflect a more accurate assessment of all the relevant facts. That's good in the long run for everyone in the stock market.

What I wrote in USA Today in 2002 about the Martha Stewart case, minus the criminal part (it's a good thing that Cuban isn't facing jail time), is also relevant to Cuban's case:

Every day, brokers advise Americans to buy or sell stocks. Do we really want laws that require us to launch congressional-level inquiries into what "illicit" knowledge our brokers might have had?

Laws that turn legal actions into bureaucratic crimes based on our state of mind—on whether we know what we know or decide what we decide "fairly"—require, as Stewart's case shows, an unsavory degree of government snooping into who said what to whom when. Such complicated insider-trading investigations of those not directly employed by the firm whose stock was sold are rarely pursued. But when the "criminal" is a much-despised high-profile celebrity, government investigators apparently can't resist the loads of publicity and easy pretensions to striking a mighty blow against corporate corruption.

Insider-trading laws turn an act that any American should have a perfect right to perform into a crime, in the name of the impossible standard of equal information. There is no way to make everyone know what everyone else knows, all at the same time.