Did Mark Cuban’s Temper Do Him In?

Professor Stephen Bainbridge analyzes the SEC’s complaint and thinks that Cuban has a problem. After going through the relevant court decisions, he then asks why Cuban exposed himself legally over a mere (to him) $750,000. His take:

In Cuban’s case, however, I suspect it was not greed but rather his legendary temper that did him in. The PIPE transaction Mamma.com planned would have involved the issuance of new shares at a below market price. It would have diluted the economic value and voting rights of Cuban and the other pre-PIPE investors. The complaint makes clear that Cuban was furious about the planned sale. His anger led him to a rash act, which now could result in serious civil fines. Whether the Justice Department will pursue criminal charges, as well, remains to be seen.

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Comments

6 responses to “Did Mark Cuban’s Temper Do Him In?”

  1. Someone who knows Cuban says:

    I think that Professor Bainbridge is correct. Mark didn’t try to game the market and sell his stock before the news of the PIPE depressed the stock price. Rather, he was furious with Mamma’s CEO for pursuing the PIPE, which he thought was a dumb idea, and didn’t want to continue holding stock in the company. The fact that Mark posted what he did on his blog would seem to dispel any notion that Mark believed he had anything to hide.

    His misfortune was acting impetuously. I’m sure in hindsight he recognizes that he should have waited for the public announcement and then sold his stock.

  2. grrgle says:

    I wonder. The one-minute interval during which he apparently made the decision suggests rashness, but perhaps he thinks that insider-trading laws are b.s. and is willing to risk a civil penalty to push a test case into the higher courts.

    Consider: the SEC has charged Cuban with fraud because he traded on non-public information when he sold out of the PIPE. The people who bought into the PIPE, however, are just good citizens who traded on non-public information and um yeah?

    Markets perceive secrecy as damage and route around it. Regulators perceive self-interest as crime and suppress it.

  3. brett says:

    Maybe I’m in the minority, but Cuban did what EVERYONE would do. Why hold on to a stock that is only going to fall in price?!?

    Before someone replies with “because it’s illegal”, I know that, but that doesn’t mean that it’s not something that anyone in that position would do.

    I think what’s wrong here is the fact that the CEO basically baited Cuban into doing this.

  4. Someone who knows Cuban says:

    grrgle:

    Whether or not Mark thinks insider-trading laws are b.s., he wouldn’t knowingly expose himself to potential criminal liability. He’s impetuous, not stupid.

    Rule 10b-5 does not apply to investors who purchased stock in the PIPE, because they bought from the company itself, not from other shareholders. There was equal knowledge on each side of the transaction. In a nutshell, Rule 10b-5 applies when a person buys or sells securities from another person with knowledge of material non-public information that could reasonably be expected to affect the buy or sell decision of the party on the other side of the trade.
    Now the interesting law school exam question is, if you were about to sell your stock in a company and the CEO called you up and said not to sell because the company would later be making an announcement about its sale to another company at a substantial premium, would you be subject to the insider trading laws? The answer (although it has not been tested) is no. Rule 10b-5 only applies to trades.

  5. I like to short short shorts manufacturers. says:

    Someone who knows-
    Nice succinct explanation of the whole deal. Brian?

  6. KRM says:

    I am kind of curious as to how a major 6% shareholder doesn’t foresee financial problems with the company and the likelihood of a dilutive capital raise coming. He should have known that something like the dilutive PIPE was a distinct possibility, and thus, should have sold out much earlier if he was concerned about dilution. Hard to believe he had not clue about the PIPE, or potential thereof, until the CEOs call the day before. Now, if I attempt to put myself in his shoes, I guess it would be damn hard to stay on top of all of your investments if you had a couple billion in the bank. Mark should have known better, but he should keep quiet, tell the truth, and pay the fine. Don’t play games with Uncle Sam because they can ruin your world. This will be interesting to watch unfold.