Monday, November 17, 2008

Cuban the latest owner to get into SEC trouble

Things aren't going so well for Mark Cuban, owner of the Dallas Mavericks. First, it's reported that he's out of the running [Matt Snyder, FanHouse] to buy the Chicago Cubs [Al Yellon, Bleed Cubbie Blue], and now it comes out that the SEC has filed charges of insider trading against him [former Journal editor-in-chief Matt Hartley, The Globe and Mail]. As Hartley details, the crucial charge relates to a massive stock sale in Internet search engine company (now Copernic Inc.):

"The SEC alleged in [a] document that Mr. Cuban sold 600,000 shares of Inc. - now known as Copernic Inc. - after learning from executives that the Internet search engine company planned to make a public stock offering.

The documents allege Mr. Cuban, a shareholder in the Canadian company at the time, was invited to participate in the offering provided he kept the information confidential.

The complaint, filed by the U.S. regulator in the U.S. District Court for the Northern District of Texas, states that “within hours” of receiving the information, Mr. Cuban called his broker and instructed him to sell all of his shares of the company."

That's very serious stuff. Cuban apparently plans to contest the charges, as he details on his blog, and it's important to keep in mind that nothing has been proven yet. It will be interesting to see what he uses in his defence, though. My guess would be that he'd either argue that it wasn't made clear that the information was not public at the time of the sale or that the sale was planned as a result of other, publicly available information. Insider trading cases are massively difficult, because timing, motivation and the question of what's "public" information can all be involved. However, formal SEC charges suggest that they have a fair bit of evidence to support their case. I'll be watching this one with interest.

Another element of interest is that this isn't the first time Cuban has been linked to controversial trading decisions. Bill Mann and Tim Hanson of the popular investing site The Motley Fool wrote an article back in July about a curious article on ShareSleuth, an investigative financial blog he runs. Sharesleuth editor Chris Carey wrote a piece back in March linking China Fire and Security to some notorious characters and questioning the company's management practices. In accordance with Sharesleuth policies, Carey disclosed at the time that Cuban had taken a short position in the company (for non-investment types, basically selling shares he didn't own on a gamble that the stock would drop). This paid off big-time, as the stock dropped 65 per cent after publication. What's interesting, though, is that Cuban covered the deal less than four months later, suggesting that these weren't ongoing problems. The stock has since rebounded, making Cuban's moves look mighty smart but also opportunistic. I have no knowledge of this situation beyond what the Motley Fool guys reported and what Wired picked up a little later, but, seen in juxtaposition with these latest charges, it's certainly interesting.

An unfortunate outcome of this is it probably will drive a stake through the heart of Cuban's dying bid to buy the Cubs. I generally like Cuban; he's a progressive, free-thinking owner of an extremely rare type, and I love that he maintains a blog to interact with fans. He'd bring fresh ideas and a great perspective to baseball, which could certainly use it. You can bet that this provides a great excuse for the the moribund traditionalists to keep him out of their club, though. If Cuban is found guilty, he shouldn't be an owner of any pro sports team in my mind, but that's only if he's eventually found guilty. If he is found guilty and leaves the Mavericks, the world of sport will certainly miss him.

Perhaps the most interesting thing about this case is how common it's becoming in the world of pro sports, though. I believe Ottawa Senators owner Eugene Melnyk is still fighting it out with the SEC over this March complaint and litigation [SEC releases here and here], which cited "chronic fraudulent conduct". Melnyk's company, Biovail, settled for $10 million, but the information I found suggests that Melnyk and other company officers still face individual charges [SEC]. Anaheim Ducks owner Henry Samueli was also charged by the SEC back in May (SEC release here), admitted his guilt in June [E. Scott Reckard and Christopher Goffard, Los Angeles Times and was promptly suspended by the NHL [] and then had his plea deal rejected [Reckard, LA Times] in September. It's not unique to North American sports, either: consider all the problems exiled ex-Thai Prime Minister Thaksin Shinawatra had before he sold Manchester City. As the prices of franchises shoot up and up, wealth becomes more of a consideration and character less important, but it's terrible publicity for a league to have owners involved in something like this. Cuban isn't the first owner to get in trouble with the SEC, and I'm quite sure he won't be the last.

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