Mark Cuban (“Cuban”) owns the Dallas Mavericks basketball team and tried to buy the Chicago Cubs. In November 2008, the U.S. Securities and Exchange Commission (“SEC”) filed a civil complaint against him alleging he engaged in insider trading in 2004. The complaint alleged he sold shares of Mamma.com, Inc. (“Mamma”) based on material, nonpublic information concerning an upcoming PIPE – “private investment in public equity” – transaction.
More specifically, Cuban owned 6.3% of the shares of Mamma, a small public corporation. In 2004 the CEO of Mamma called Cuban, told him that Mamma was planning a PIPE transaction priced at a discount to market price, and asked him if he wanted to participate. Allegedly he prefaced his statements by telling Cuban that the information was confidential. Cuban did not want to participate because he thought PIPE transactions were dilutive and reflected adversely on a company’s reputation. After the call, Cuban immediately called his broker and sold all of his stock at an average price of $13 per share.
Mamma publicly announced the PIPE transaction the next day. The shares opened at a trading price of $11.89 per share, closed at a trading price of $11.99 per share, and declined for the next week to $8.00 per share.
In its complaint, the SEC claimed that Mr. Cuban avoided more than $750,000 in losses by trading on nonpublic information. The SEC alleged that the Mamma CEO made it clear to Mr. Cuban that the information they discussed in their telephone call was nonpublic information and was to be kept confidential, that Cuban acknowledged the CEO’s statement of confidentiality, and agreed to keep the information confidential, and knew that the PIPE offering would be made at a discount to the prevailing market price.
Cuban claimed that there was no agreement to keep information disclosed in the telephone call confidential. In response to the SEC claim, Cuban published a statement on his website that included his attorney’s interview with Mamma’s CEO in which, in response to the question, “Do you recall anything Mr. Cuban said in response to ‘I have confidential information for you,’” the CEO replied, “No, I do not."
The SEC is of the opinion that the CEO’s offer to provide information about the PIPE offering was conditional on Cuban maintaining the confidentiality of the information. The SEC relied on Rule 10b5(2) Proposing Release, which states the court could find that an implicit understanding of confidentiality existed during the CEO’s and Cuban’s telephone call. Depending upon facts learned in discovery, the SEC may also be able to argue that the CEO and Cuban had a history of confidential communications, and that this call was along the same lines.
Silence isn’t always golden. There may be a duty to speak, or silence may indicate assent. Cuban’s first call should have been to his attorney, not his broker. He now faces not only disgorgement of $750,000, but also a civil penalty in the amount of three times the loss avoided, or $2,250,000. Not to mention the possible bad mark on his reputation that may have caused his bid for the Cubs to be rejected.