WASHINGTON/NEW YORK (Reuters) - Mark Cuban, owner of the Dallas Mavericks basketball team, was charged with insider trading in the shares of search engine company Mamma.com, the Securities and Exchange Commission said Monday.
Cuban, one of the five finalists to buy the Chicago Cubs baseball team, faces civil charges by acting on nonpublic information and selling his entire stake in Mamma.com to avoid more than $750,000 in losses, the SEC alleged.
Cuban, listed by Forbes magazine as one of the 400 richest Americans with an estimated net worth of $2.6 billion, said he intends to contest the allegations. On his blog, Cuban said the matter has no merit and is the result of gross abuse of prosecutorial discretion.
The statement on Cuban’s blog was issued by law firm Dewey & LeBoeuf LLP, which is representing him.
The SEC’s actions are the most high profile since celebrity homemaker Martha Stewart was charged in 2003 with securities fraud and lying to authorities on her sale of stock in drugmaker ImClone Systems Inc.
According to the SEC, Quebec-based Mamma.com invited Cuban in June 2004 to participate in a private placement offering after he agreed to keep the information confidential.
Mamma.com’s chief executive prefaced the call by telling Cuban he had confidential information to convey to him and Cuban agreed to keep the information confidential, according to the complaint.
But when Cuban found out the offering would dilute the holdings of existing shareholders and be sold at a discount to the market price, he became “angry and upset,” the SEC said.
At the end of a call with Mamma.com’s chief executive, Cuban said: “Well, now I’m screwed. I can’t sell,” according to the SEC’s complaint.
Within hours of receiving the information, Cuban told his broker, “Sell what you can tonight and just get me out the next day,” the SEC alleged.
During after-hours trading on June 28, 2004, Cuban sold 10,000 of his 600,000 shares and the following morning sold his remaining stake.
Later that day, after markets closed, Mamma.com publicly announced its private placement offering. When markets reopened the following day, the company’s stock was down 9.3 percent at $11.89.
“It is fundamentally unfair for someone to use access to nonpublic information to improperly gain an edge on the market,” the SEC’s deputy director of enforcement Scott Friestad said in a statement.
According to the complaint, Cuban later publicly said he sold his Mamma.com stake because the company was conducting a private investment in public equity (PIPE), which issued shares at a discount to the prevailing market price and would have caused his ownership position to be diluted.
The complaint alleged Cuban never disclosed to Mamma.com he was going to sell his shares prior to the company’s announcement.
Mamma.com has since changed its name to Copernic Inc. Copernic shares rose 5 cents to 28 cents on Nasdaq on Monday.
Cuban has a range of business interests and also is known for his extracurricular activities. His hot temper when arguing with referees during Mavericks games has earned him almost $1.7 million in fines. His dancing skills landed him on the television show “Dancing With the Stars.”
Cuban also owns HDNet, a national high-definition television network, and Landmark Theatres. Magnolia Pictures, the theatrical and home entertainment distribution company that he co-owns through the company 2929 Entertainment, released the documentary “Enron: Smartest Guys in the Room.”
He also is the majority partner in ShareSleuth.com, a site that reports on “securities fraud and corporate chicanery,” according to its website.
A disclosure on the website says Cuban “will periodically make personal investments based on information we uncover. Those investments will be fully disclosed, so that readers can evaluate any potential conflicts of interest.”
The SEC is seeking to stop Cuban from violating securities laws, as well as civil fines and repayment of the money he made from violating federal laws.
Pursuing insider trading cases is one of the SEC’s priorities. In 2007, it brought high profile cases against a husband and wife in Hong Kong for trades in Dow Jones & Co Inc shares ahead of News Corp’s $5 billion takeover bid.
“You get a lot of bang for your buck when you bring charges against a high profile person like Mark. It sends a message to people who might not even notice,” said Julia McDonough, a lawyer at Bryan Cave, who represents public companies and individuals under investigation by the securities regulators.
Another securities lawyer, John Singer with law firm Singer Deutsch LLP, said the legal injunction the SEC is seeking would not prevent Cuban from buying the Chicago Cubs or serving in his current role.
Still, the charge could make it tough for Cuban to get the team from Tribune Co because it would taint his image in the eyes of Major League Baseball.
“It obliterates his chances for the Cubs,” said Robert Boland, professor of sports management at New York University.
A sports banker who asked not to be identified because he deals with baseball, said it would make him a “nonstarter on the Cubs.”
Reporting by Rachelle Younglai in Washington, Robert MacMillan in New York and Ben Klayman in Chicago; editing by Jeffrey Benkoe and Andre Grenon