i lost respect for cuban's stock-picking abilities when he went long this POS. it had been, and was long after, a favorite of mine for short-term short selling....

Mamma.com said knock you out.

So if you find this info out what are you supposed to do? Just sit there and take it? I'm not trying to be snarky, it's just something I've never really understood. I completely get why you want to guard against insider trading but in a case where someone learns something without really trying to (hypothetically, say) what the hell are they supposed to do? What if they were going to sell anyway?

I suppose it's just ignorance on my part.

Mamma told me not to com.

bunyon - in this specific case, yes, they are supposed to do nothing.

if i read on a msg board that company ABC will be taken over, and i have nothing special, i'm ok.
if i get an email from someone i know, and they say "i know for sure that company ABC will be taken over, i've seen the paperwork, etc" then i can get busted for trading on non-public information, even if i don't know anyone at the company.

No, bunyon. I should know the answer to this through taking the Series 7 and Series 24 but I don't. In fairness to me, I took those exams around 1999 or 2000.

So if you find this info out what are you supposed to do? Just sit there and take it?

Until the info is made public, yes. The rules about this are very, very clear.

So if you find this info out what are you supposed to do? Just sit there and take it?

If you are an "insider" YES.

What if they were going to sell anyway?

'
If you can PROVE it (Martha couldn't) that's a defense.

The insider trading laws are supposed to address the situation where an "insider" (officer/board member) knows something that will positively or negatively affect share values- and said officer/board member owes a fiduciary duty to act in the shareholders' (all of them not just themselves) best interests.

If the CEO knows something that will boost value, keeping it secret so he can buy stock cheaply violates his fiduciary duty to those he's buying from...

The laws are written broadly though- you don't have to be an insider- you just have to know one...

So if you find this info out what are you supposed to do? Just sit there and take it?

Yes. Making you sit there and take it is the whole point of insider rules.

It's greed vs. fear of prison. Greed doesn't lose all the time, though.

Three points:

1. This is a civil action, and not a criminal proceeding.
2. 750K is chump change to Mark Cuban. Why, man, why?
3. If this is the worst he's done, he's pure as the driven snow compared to most other MLB owners. Really, really bad timing for him, though.

I had never heard of mamma.com before this article was posted. Do people use other search engines anymore?

you don't have to be an insider- you just have to know one

Or you could be a foreman back around 1990 or so who works in a warehouse that distributes Business Week and buy companies that have cover stories before the public gets the magazine. That's one case that I remember.

I had never heard of mamma.com before this article was posted. Do people use other search engines anymore?

I still use Yahoo! in addition to Google. I'm not sure how many people do the same. Sometimes, I like their feature that prefills search terms. Other times I find it counterproductive.

From the complaint, it doesn't look like Cuban has much of a case that he came across the information from non-insider sources. The specificity suggests that others involved are cooperating with the SEC. From the complaint (numbered paragraphs as in original):

12. At the end of June 2004, as the PIPE progressed toward closing, Mamma.com, at
Merriman’s suggestion, decided to invite Cuban, the company’s then-largest known shareholder,
to participate in the PIPE. The CEO was instructed to contact Cuban and to preface the
conversation by informing Cuban that he had confidential information to convey to him in order
to make sure that Cuban understood – before the information was conveyed to him – that he
would have to keep the information confidential.

13. On June 28, 2004, the CEO sent an email message to Cuban titled “Call me pls,”
in which he asked Cuban to call him “ASAP” and provided both his cellular and office telephone
numbers. Cuban called four minutes later from the American Airlines Center in Dallas, home of
the NBA’s Dallas Mavericks, and spoke to the CEO for eight minutes and thirty-five seconds.
14. The CEO prefaced the call by informing Cuban that he had confidential information to convey to him, and Cuban agreed that he would keep whatever information the
CEO intended to share with him confidential. The CEO, in reliance on Cuban’s agreement to
keep the information confidential, proceeded to tell Cuban about the PIPE offering. Cuban
became very upset and angry during the conversation, and said, among other things, that he did
not like PIPEs because they dilute the existing shareholders. At the end of the call, Cuban told the CEO “Well, now I’m screwed. I can’t sell.”

15. After speaking to Cuban, the CEO told the company’s then-executive chairman
about his conversation with Cuban, including the fact that Cuban was very upset and angry about
the PIPE. Shortly thereafter, the executive chairman sent an email to the other Mamma.com
board members updating them on various PIPE-related items, including the fact that the CEO
had spoken to Cuban:
Today, after much discussion, [the CEO] spoke to Mark Cuban about this equity
raise and whether or not he would be interested in participating. As anticipated
he initially ‘flew off the handle’ and said he would sell his shares (recognizing
that he was not able to do anything until we announce the equity) but then asked
to see the terms and conditions which we have arranged for him to receive from
one of the participating investor groups with which he has dealt in the past.
16. In reliance on Cuban’s acceptance of a duty of confidentiality and his
acknowledgement that he could not sell until after the public announcement, the CEO, several
hours after their conversation, sent Cuban a follow-up email in which he wrote: “If you want
more details about the private placement please contact . . . [Merriman].” In his email, the CEO provided the Merriman sales representative’s telephone number.

17. Using that telephone number, Cuban called the Merriman sales representative
later that afternoon and spoke to him for eight minutes about the PIPE. During that call, the
salesman supplied Cuban with additional confidential details about the PIPE. In response to
Cuban’s questions, the salesman told him that the PIPE was being sold at a discount to the
market price and that the offering included other incentives for the PIPE investors. Cuban was
very upset and angry about the PIPE during the call.

18. One minute after hanging up with the Merriman sales representative, Cuban
called his broker in Dallas and told the broker to sell his entire 600,000 share Mamma.com
position. He told the broker “sell what you can tonight and just get me out the next day.” [emphasis added]

great, something that barely rises to martha stewart levels will sink cuban's possible ownership of the cubs. as a cards fan, i guess i should be relieved that they won't be getting a proactive owner unafraid to spend to win. but as a fan of the game i think its too bad, he would have been fun to have around.

oh, and bud:

so's your mamma.com

#14.

Ouch. Sounds like Cuban is going to need to open his checkbook for a fine a little more substantial than what he's used to getting from David Stern. Just a dumb thing to do.

See, this is why baseball was stupid to leak that "No chance in hell" story a while back. There were legit ways of keeping Cuban out, not that they could have predicted this one.

as long as cuban doesn't lie, he won't get jailtime. but he likely won't get the cubs.

here's what he said in '05:
http://blogmaverick.com/?s=mamma
Then the company did a PIPE financing. Im not going to discuss the good or bad of PIPE financing other than to say
that to me its a huge red flag and I dont want to own stock in companies that use this method of financing .
Why? Because I dont like the idea of selling in a private placement, stock for less than the market
price, and then to make matters worse, pushing the price lower with the issuance of warrants.So I sold the stock.

if that link doesn't work, here's one at archive.org which will work:
http://web.archive.org/web/20070819064426/http://www.blogmaverick.com/2005/03/02/naked-shorts-what-i-have-learned/


interesting enough: he says he sold it because of the pipe, which is what the SEC charges. so all they'd have to do is look at when he sold, verify when the pipe was disclosed, and there's the case.

what took 'em four years, if it's true??

He appears to be incredibly guilty. What an idiot. Why is this not a criminal case?

incidentally, what i don't get is why a PIPE would be bad for share value. it's ultimately an infusion of cash into a company, right? i get that it increases the number of shareholders so there's a temporary glut of shares so to speak, but doesn't participation signal to the market that the company is viable? don't the shares bounce back? or is that the rosy picture painted by the company?

I'm sure that when Selig heard about this story, Bud Jr. saluted.

Let's see if you can get that image out of you brains.

Selig now has a reason to say “no” to Cuban and not look like a complete and total cronyistic douche. Sorry Cubs Fans, but this is the last nail in the coffin for your hopes of Cuban ownership (unless if Fidel has suddenly gotten interested in capitalism).

On the other hand, maybe Bud and Jerry will take a look at this and think, "Well perhaps that Cuban guy could be the kind of owner we're looking for after all".

Question for those with SEC/legal experience.

In the age of the internet, why not just require all insiders to post their intention to buy/sell 24 hrs. in advance of any transaction? This would eliminate any need to police the specifics, as the market could adjust itself.

Thanks all.

See, this is why baseball was stupid to leak that "No chance in hell" story a while back. There were legit ways of keeping Cuban out, not that they could have predicted this one.

The SEC action may have been in the works for some time, with Cuban well aware of it. Perhaps he even disclosed it to MLB or Zell, which may have imposed a duty to notify about government civil or criminal actions. Thus, the SEC action could have been the cause of the "No Chance In Hell" comment even though it wasn't made public until today.

incidentally, what i don't get is why a PIPE would be bad for share value. it's ultimately an infusion of cash into a company, right? i get that it increases the number of shareholders so there's a temporary glut of shares so to speak, but doesn't participation signal to the market that the company is viable? don't the shares bounce back? or is that the rosy picture painted by the company?

I don't know how a PIPE would be seen as worse than just a plain old share offering, but generally investors think that if a company is offering stock then they consider their stock to be overpriced.

I guess in the case of this PIPE, that feeling could be exaggerated if they are selling the shares for a discount, which screams "Our shares aren't worth what you'd have to pay on the market, so here, have them for less."

incidentally, what i don't get is why a PIPE would be bad for share value. it's ultimately an infusion of cash into a company, right? i get that it increases the number of shareholders so there's a temporary glut of shares so to speak, but doesn't participation signal to the market that the company is viable? don't the shares bounce back? or is that the rosy picture painted by the company?

Because they're selling shares below the market price. An existing shareholder should be indifferent to share issues, as long as they are sold at market price. The fact that they don't do a public offering shows that the management thinks the stock is overvalued, i.e. the public market wouldn't absorb the shares close to market price.

I still use Yahoo! fairly frequently. Mostly when looking for porn

PIPE is bad because it:
1) dilutes shares of the company. if the company made profit $1million, and had 1 million shares it would have a earnings per share of $1. if it now has 2 million shares, and still makes the $1 million, its EPS is .50.
2) is usually only done because the company can't get more respectable forms of financing.

there's other reasons, but those are the main ones. when i see a company diluting shares by forms other than a traditional secondary, i'm looking to short that company at any point in the future that it spikes, until it basically proves me wrong. the *product* may be good, but the company's mgmt or its stock aren't. and i only care about the latter part.


(also - people who get shares they can't sell will often go offshore and short the common stock to 'hedge' their registered, unsalable stock).

Why is this not a criminal case?

My understanding is that it's exceedingly rare for the "tippee" (as opposed to the "tipper") to be prosecuted. Sort of a drug dealer/buyer or prostitute/john scenario, I guess.

Mr. Cuban, 50, became a billionaire when Yahoo bought a company he had helped found, Broadcast.com, in 1999. He also founded HDNet, which operates two high-definition cable channels and owns Landmark Theaters. His turn last year on the reality television show "Dancing with the Stars" gave him a high public profile, but he and his professional partner were eliminated after a poor showing in the samba.

Maybe Selig just doesn't want any owners who can't do the samba.

Maybe Selig just doesn't want any owners who can't do the samba.

I'd say that it's because Selig saw Cuban's reality show, except no one saw that.

What if you find out insider info, promptly publicize it (Cuban, e.g., has a blog which many people read, regardless of what they might think of it), and then trade on it? Is that even legal?

The SEC action may have been in the works for some time, with Cuban well aware of it. Perhaps he even disclosed it to MLB or Zell, which may have imposed a duty to notify about government civil or criminal actions. Thus, the SEC action could have been the cause of the "No Chance In Hell" comment even though it wasn't made public until today.

I think #25 sums it up very well, explaining the 'no chance in hell' comment. Not that MLB has N-1A filing requirements (a type of SEC filing to launch a security) but presumably they require prospective owners to submit an application, which would (Should) ask questions, or force the applicant to represent that they ARE/ARE NOT a party to any ongoing criminal/civil matters or have been a party to any criminal/civil matters in the past X months/X years.

What if you find out insider info, promptly publicize it (Cuban, e.g., has a blog which many people read, regardless of what they might think of it), and then trade on it? Is that even legal?

No. There are also rules about the proper dissemination of information. Once Cuban told the CEO he would listen to the secret info, he was f#cked and he knew he was. Of course, "f#cked" is relative here because Cuban wasn't at risk of losing that much of his net worth. This looks to me like Cuban was just fed up with the company and sold more out of anger than anything else. (This kind of thing happens.) In short, he blew it.

What if you find out insider info, promptly publicize it (Cuban, e.g., has a blog which many people read, regardless of what they might think of it), and then trade on it? Is that even legal?

That would be a violation of the confidentiality agreement that Cuban reportedly signed.

What he should have done is say "No, I don't want to hear any confidential info", called his broker and sold the shares. What did he expect to find out? I guess maybe he was hoping they would say "Guess what? We've had an acquisition offer for 50% higher than the current share price, we hope you'll vote your stake to accept."

seems da good ole' boy system runs tracks between Washington DC and NY, which doesn't include Chicago.

"Bud Selig reported to be doing backflips"

No, no, he's just trying to stick his head up his ass, like always.

What he should have done is say "No, I don't want to hear any confidential info", called his broker and sold the shares. What did he expect to find out? I guess maybe he was hoping they would say "Guess what? We've had an acquisition offer for 50% higher than the current share price, we hope you'll vote your stake to accept."

Great idea, actually. However, could you think of that in the amount of time Cuban had?

I agree his bid to own the Cubs is officially screwed now, but...what can you do? Maybe he'll get off the pot with regard to his libertarian ideals after getting hosed by government regulation...

I agree his bid to own the Cubs is officially screwed now, but...what can you do? Maybe he'll get off the pot with regard to his libertarian ideals after getting hosed by government regulation...

That onerous government regulation that's in place to protect all of the shareholders of a company, including those that the CEO of the company doesn't have on their speed dial?

What he should have done is put his hands over his ears and shouted LA LA LA LA LA and called his broker and sold the shares.

fixed for funnier mental image.

That onerous government regulation

Spare yourself the redundancy :)

Is it a crime to knowingly violate a stupid law/regulation? Discuss...

Is it a crime to knowingly violate a stupid law/regulation? Discuss...

Please point out a stupid regulation for us to discuss. Insider trading rules aren't stupid. They're annoying--especially in my work--but they aren't stupid.

Is it a crime to knowingly violate a stupid law/regulation? Discuss...

Unless you're working with a different definition of crime, what's there to discuss? Of course it's a crime.

Is it a crime to knowingly violate a stupid law/regulation? Discuss...

Pork Chops,

Let's take Bear Stearns the day before the bottom fell out. Say everything was ok until news came from the CFO that Bear was running out of capital. Do you really think its stupid to prevent the CEO, CFO and all of their friends for being able to sell their share at $55 while your stuck on Monday trying to unload yours for $3, when they are supposed to be working for you?

Wow the misinformation on this thread.

Martha Stewart was never charged with insider trading, and in fact, never committed insider trading. She found out from her broker the CEO was selling, and her sales were completely legal. When interviewed during the investigation she panicked, and lied to the investigator, and got convicted of that.

And the SEC has always tried to make the definition of insider trading as broad as possible to frighten potential wrong doers, and in fact has resisted specific definitions of insider trading in the past to avoid having someone work around the specific definitions. Can you imagine if the definition of theft was just using something you don't own? And if a government agency got to define whether you committed theft and would not tell you how to avoid committing theft when you borrow something from a friend or neighbor?

The SEC often announces charges like these that are settled by a simply promising to not do it again. And the SEC has occasionally been #####-slapped by the court system for trying to stretch the definitions of insider trading. The SEC is a very slow moving organization with a lousy track record of winning any serious cases.

Cuban has already mounted his defense, which is that the CEO never told him he could not trade on the information. And it's a pretty damn good defense, because it's not only a "he said- she said" situation, but the CEO has already been deposed and admits he can't remember telling Cuban to keep the information private and not trade on it. The "smoking gun" e-mail could have been written to co er the CEO's behind with his board if he in fact forgot to tell Cuban not to trade. Cuban never signed any confidentiality agreement, and only the SEC would expect an ordinary citizen to know what kinds of corporate information and corporate financing are "material insider information' and which are not.

My guess is Cuban will sign an agreement admitting no guilt, and agreeing not to do it again, without being required to pay any fine. That's a prety typical result for the SEC.

And it gets more interesting in that this is over 3 years old. The Wall Street Journal has reported that the head of the SEC's Dallas office was sending threatening letters to Mark Cuban over his supposed sponsorship of the looney tunes documentary "Loose Change". In the parts of the letter Cuban's people released to the WSJ, the SEC official complained about Cuban impugning a great patriot like President Bush.

It sounds like to me that this is one of hundreds of unimportant enforcement actions that the SEC has declined to pursue for years in order to focus their limited resources on important cases. Once McCain lost the election it sure looks like someone in the SEC decided to front burner this case to humiliate Obama supporter Cuban before Bush's people get pushed out of the SEC. And I say this as a life long republican. The timing is just far too coincidental.

And Mamma.com was investigated for real stock manipulation that was far worse than insider trading. The SEC dropped the charges days before interviewing their execs about Cuban, which looks awfully like quid pro quo.

And PIPES are only for those without any choices. When the CEO told Mark that they were going to do one, it probably meant they were desperately short of cash and had no other options, which is probably 180 degrees from what they had told him before. Often unscrupulous PIPE investors will short the company's stock heavily to drive it down before their investment to both hedge themselves and to maximize the amount of shares they'll get. They aren't supposed to do this, they sign agreements not to, but in the past some have found secret ways, even offshore to do so.

Lastly, there are a lot of academics who believe that insider trading should be legal and that restrictions on it are harmful because they lead to a less efficient market. In Mark Cuban's case when he sold shares before this information was public, he benefited from a higher sales price than he would have gotten if he waited. But the buyers also benefited, because they got a lower purchase price than they would otherwise. Mark's act of selling transferred some of the benefits of the inside information to his buyers. Had mark not sold that day, most of those buyers still would have bought at higher prices and lost more money once the PIPE was announced. Of course, as a shareholder you don't want management personally benefiting from trading company stock with information that is technically owned by the company. But we don't need insider trading laws to prevent that, all the company needs is employment agreements.

What you need to protect investors from is fraud, which is what Mamma.com was accused of, pumping up their stock price with misleading announcements and information so that buyers were paying far more than the company was really worth. That should be a far more important crime than what Mark did, since his actions worked to bring the companies price closer to it's actual value, while a stock pumper works to defraud by getting the naive to pay prices far in excess of actual value. But again, the SEC is really screwed up. It investigated David Einhorn for telling the truth about Lehman, because it's heavily biased against honest short sellers to the point where it always treats dishonest longs with kid gloves.

And for disclosure, I'm a full time investment manager specializing in microcap and small cap stocks, i.e. the crappy stuff where you can't swing a dead cat without hitting a dozen frauds and crappy companies like Mamma.com. I spend a lot of due diligence time making sure a business really exists as it's financials claim at these levels and rarely do I see any SEC actions of any substance against the worst types of stock promoters.

I'm guessing not a lot of folks saw post #47. Beautifully done, explained so even I can understand. Hope my bump leads 'em here.

"The Wall Street Journal has reported that the head of the SEC's Dallas office was sending threatening letters to Mark Cuban over his supposed sponsorship of the looney tunes documentary 'Loose Change'."

I'm disappointed to hear that Cuban would line up with stupid crap like that.

I'm guessing not a lot of folks saw post #47. Beautifully done, explained so even I can understand. Hope my bump leads 'em here.

I just read it, thanks for the bump. Thanks for some of the details on the Cuban case. I respectfully disagree about the need for insider trading laws, however.