In late 2008, the Securities and Exchange Commission filed insider trading charges against Mark Cuban for selling 600,000 shares of Mamma.com stock.In late 2008, the Securities and Exchange Commission filed insider trading charges against Mark Cuban for selling 600,000 shares of search engine Mamma.com. The SEC said Cuban, owner of the Dallas Mavericks basketball team, sold his shares after receiving "material, non-public information concerning an impending stock offering."

He was allegedly given an invitation to participate in a stock offering and quickly sold the shares he already owned, because he knew the offering would dilute the value of shares outstanding.

Cuban fought these charges hard from the beginning, saying that he never agreed to keep any information about Mamma.com confidential. Therefore, Cuban contended, his sale of stock was not insider trading. He wasn't an insider.

It was an interesting defense from the start. After all, how can you stop someone from telling you important information, even if you don't necessarily want it and you don't agree to keep it secret?

No Case Against Cuban

It's one thing if Cuban had sought out the information about Mamma.com, but the fact that someone else voluntarily presented it to him (and received no promise of secrecy from him) threw a wrench into the SEC's case. Why should he be prohibited from selling a company's stock just because someone invited him to buy more?

Cuban, a billionaire high-tech entrepreneur, spent a ton of money on his defense in this case, and he prevailed. In July 2009, the SEC's case was dismissed in U.S. District Court. The judge went so far as to say that even if the SEC's facts were viewed in the most favorable light, there still wasn't a case against Cuban. The SEC would be required to prove that Cuban "... undertook a duty, expressly or implicitly, not to trade or other otherwise use material, nonpublic information" if they wanted to re-file the case against him.

Most defendants would have been happy just to be off the hook in an expensive and time-consuming legal case. Never one to back down from a good fight, Cuban turned the tables on the SEC and filed a lawsuit against them. The SEC clearly set out to embarrass Cuban, and he wasn't going to let the matter drop.

Cuban Goes After SEC

The suit, filed in May 2009, was an attempt to force the SEC to turn over documents Cuban had requested under the Freedom of Information Act (FOIA) and the Privacy Act of 1974. Cuban demanded a slew of documents in December 2008, including records relating to investigations of companies he owned and internal investigations of SEC employees. The SEC denied Cuban's request, and there were a number of subsequent requests, denials, and appeals in the matter.

Why did Cuban want these documents? He basically says that the SEC pursued their case against him in bad faith, and those documents were going to prove it.

But the SEC didn't want to play fair and turn over what they had, citing various exemptions from FOIA. Most people would throw up their hands in disgust, but feel powerless to do anything about it. But Cuban wasn't going to let them get off so easily.

Things Get Worse for the SEC

As if being sued by a guy with a ton of money weren't enough, now the agency looks even worse. Cuban has filed a motion to compel the SEC to produce more documents. His lawyers say the SEC produced very little documentation -- just 199 documents, including many that were originally provided to them by Cuban. They say an additional 602 documents exist for which the SEC is claiming various law enforcement and attorney-client privilege issues.

The lawyers raise an excellent point: How is Cuban to pursue his claim of bad faith against the SEC if he's not allowed to see most of the documentation relating to the investigation of him?

The motion gets even more interesting because it includes emails between SEC employees that show lack of professionalism at best, and bias against Cuban at worst. Cuban also alleges witness tampering by the SEC, for supposedly encouraging a lawyer for Mamma.com not to give Cuban access to a key witness related to the original investigation.

Cuban goes on to allege that at the time the case was filed against him, the SEC already knew there was no evidence that he agreed to keep information about Mamma.com confidential prior to selling his shares. Ouch.

Implications for Investors

These allegations are all rather serious, and it's no wonder that the SEC doesn't want its documentation to see the light of day. If nothing improper happened, why would the SEC object to turning over to Cuban information on their investigation into his business dealings? They can't claim their probe is none of his business, as clearly it was all about him and his businesses.

This case is interesting because the average American doesn't have the resources to go after a government agency like the SEC. But Cuban, No. 400 on the Forbes richest persons list, does. He can fight with the SEC practically into infinity, and we can live it vicariously.

It's no secret that the SEC has a history of gross incompetence and often chooses the wrong target. We should demand better from agencies funded with our tax dollars. Maybe Cuban's aggressive pursuit of the SEC will be a step in the right direction.

Troublemaker With Nothing to Lose


He has very little to lose. His livelihood isn't dependent on his reputation as it relates to the securities industry or any particular public company. There is no "career damage" he could sustain, no matter what the SEC does. In fact, his reputation as a bit of a troublemaker is likely to be enhanced by his pursuit of the SEC.

(No stranger to controversy or the limelight, Cuban has been fined by the NBA at least $1.6 million for 13 incidences of misconduct, according to ABC News, and has racked up a handful of TV and movie acting credits, often playing himself.)

The SEC got Cuban in their sights and wouldn't let go. Adding insult to injury, they want to prevent him from seeing the records that would show exactly how their vendetta against him played out. That's plain wrong, and I'm happy that someone with vast resources is standing up to incompetence and misguided prosecutions.

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