If the allegations in the SEC’s press release are true and complete, the answer is most likely “yes.” Mark Cuban’s argument is likely to be that he did not break a duty of confidentiality. This is probably why, its statement of fact, the SEC goes to great lengths to suggest that he did.
Here’s the excerpt from the press release. (Read the full Statement of Facts here)
The Commission’s complaint, filed in the U.S. District Court for the Northern District of Texas, alleges that in June 2004, Mamma.com Inc. invited Cuban to participate in the stock offering after he agreed to keep the information confidential. The complaint further alleges that Cuban knew that the offering would be conducted at a discount to the prevailing market price and that it would be dilutive to existing shareholders.
Within hours of receiving this information, according to the complaint, Cuban called his broker and instructed him to sell Cuban’s entire position in the company. When the offering was publicly announced, Mamma.com’s stock price opened at $11.89, down $1.215 or 9.3 per cent from the prior day’s closing price of $13.105. According to the complaint, Cuban avoided losses in excess of $750,000 by selling his stock prior to the public announcement of the offering.
To commit insider trading, you need only trade while in possession of material non-public information that your received under a duty of confidentiality.
Assuming Mark did know about this offering before selling his stock, as the SEC has alleged, he will probably take the position either that it was not material or that the “duty of confidentiality” did not apply–more likely the latter.
The definition of “material” is a low standard: Information is “material” if a reasonable investor would consider it relevant when making a trading decision. Most investors would probably consider a secondary stock offering relevant to a trading decision.
The second alternative is for Mark to argue that he didn’t have a fiduciary relationship with Mamma and doesn’t count as an insider–and, therefore, did not violate a duty of confidentiality. This “duty” condition exists so as not to restrict trading by those who have no insider connection with the company–for example, someone who overhears something in an airport. But the SEC has been very creative when it comes to finding a duty of confidentiality. Here the SEC is saying that Cuban was told that the information was confidential and agreed not to disclose the coming share sale, which would be enough to create on obligation not to trade while the information remained non-public.
Looking forward to hearing Mark’s take on this.
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