The government's insider trading case against Mark Cuban

The pugilistic Dallas Mavericks owner finally gets his day in court

Mark Cuban, the brash Dallas Mavericks owner, has been fined for going on court during an NBA game. But now, Cuban will be fighting a fine in court as he tries to resolve a federal insider trading investigation nearly a decade in the making.

The case finally went to trial this week after five years of legal wrangling, with jury selection getting underway Monday. The U.S. Securities and Exchange Commission charged Cuban in 2008 with using confidential information to dump his stake in a little-known internet search company, Mamma.com, thereby avoiding a huge loss.

Yet the case goes back even further than that, all the way to June 2004. It was then, the SEC alleged, that Cuban received a tip from Mamma CEO Guy Faure.

"Call me pls," Faure wrote in an email to Cuban, according to the SEC complaint.

In a subsequent eight-minute phone chat — the SEC's key piece of evidence — Faure allegedly told Cuban about a planned stock offering that would have diminished his stake in the company and watered down the value of his shares. At the time, Cuban owned 600,000 shares, good for a 6.3 percent stake in the company.

Faure was supposed to invite Cuban to take part in that stock offering — called a "private investment in public equity," or PIPE — while prefacing that offer by allegedly informing him that the planned PIPE must remain confidential until publicly announced. Cuban, according to the SEC complaint, "became very upset and angry during the conversation," and refused to take part.

"Well, now I'm screwed," he said, according to the SEC complaint. "I can't sell."

Except he did sell — and fast.

One minute after getting off the phone with Faure, Cuban called his broker and ordered him to sell all his shares in Mamma.com. Over two days, June 28th and 29th of 2004, his broker did just that.

After markets closed on the 29th, Mamma.com announced the PIPE. Within a week, its share price had fallen by 39 percent.

By getting out when he did, Cuban avoided taking an estimated $750,000 hit.

"Cuban sold his Mamma.com securities on the basis of material, non-public information he received from the CEO," the SEC complaint alleges.

If a jury sides with the SEC, Cuban could be forced to pay back the loss he avoided plus interest, as well as a fine of up to $2.25 million.

Cuban has never disputed that he received the information. However, he's argued that the intel was not confidential, and that he never agreed to keep it confidential anyway. And his lawyers have argued that he's the target of aggressive SEC overreach because of his high profile and grating demeanor.

"I won't be bullied by the government," he told the Dallas Morning News.

In 2009, a U.S. District judge dismissed the lawsuit, saying the SEC had to prove Cuban both agreed to keep the information under wraps and not make any deals based on it. An appellate court, however, sided with the SEC one year later and allowed the trial to move ahead. A federal judge in March dismissed one last request from Cuban to toss out the suit, clearing the way for the trial to begin.

While Cuban will be on hand to argue his side of the story, Faure, who lives in Canada and could not be subpoenaed, will not. His testimony has been prerecorded.

That leaves Cuban, an expert showman, to offer his take in person, with the help of a very expensive, very aggressive legal team.

From ESPN:

His legal team for the trial will include seven lawyers from five firms, all of them experts in the law that governs stock trading and all of them highly expensive. Cuban and his lawyers have fought the SEC vigorously for nearly five years in litigation that has produced every pretrial maneuver permitted under the rules that govern such cases and nearly 12,000 pages of court documents. His legal team has prepared 282 exhibits for the trial. [ESPN]

Cuban has assembled some flashy basketball teams, putting together a championship-winning squad in 2011. This time, though, he'll be the one starring at center court.


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