Yesterday Mark Cuban, a 55 year old billionaire, left a federal courthouse in Texas a free man after a jury found him 'not guilty' of insider trading charges. Cuban has gained notoriety over the years after selling a tech business and purchased the Dallas Mavericks NBA basketball team and recently has been appearing on the ABC hit television show 'Shark Tank'.
Before the trial began, Cuban is quoted as saying, “I am excited about this, to finally come to court. I won’t be bullied. That’s the key element.” The Security and Exchange Commission (SEC) charged Cuban in November, 2008 of selling 600,000 shares of stock in mamma.com (now Copernic, Inc.) after the CEO of the company offered him to participate in an upcoming private placement which would have a dilution effect on all shareholders, for which Cuban was the largest shareholder at the time. Mamma.com is a search engine website like Google.com. Once the information was made public, mamma.com shares dropped 9.3%, saving Cuban $750,000 since he already sold his shares.
This case, and many before it, have led many libertarian-minded Americans to question if insider trading laws should be repealed or modified. Economist Milton Friedman once said, "You should want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that." Markets run on information, analysis and the connecting of dots to determine when prices are too high or too low.
Cuban admitted during the trial part of his decision to sell his shares was related to the upcoming dilution, however it was mostly finding out that the business was manipulating its stock. What came out during the trial was that Cuban found out the information of the manipulation through the SEC, as he had been working with the SEC in their investigation of mamma.com as early as 2004. Then in 2008, the SEC turns on Cuban, charging him. The SEC offered him a settlement agreement which Cuban promptly refused and challenged the SEC to take him to court. In retrospect, the government should have never brought the case to trial as it was quickly dismissed in 2009, however greedy bureaucrats in the SEC had the taste of Mark Cuban headlines and couldn't resist an appeal. The case that ended yesterday was the appeal, which the SEC lost embarrassingly so.
Politicians enjoy the perks of insider trading, regardless of the grandstanding Congress did after being exposed in a 60 Minutes piece. The public was outraged to learn members of Congress and their friends would profit from information they had whether certain bills would pass or not pass into law, which was not public information. Members of Congress and their friends would trade on this information before going public with it which was perfectly legal. As often the case, legal for a member of Congress, ordinary American taxpayers go to jail for this sort of thing. Shortly after the airing of their dirty laundry on 60 Minutes, Congress passed the Stop Trading on Congressional Knowledge Act (STOCK) which was supposed to end the behavior. However, it wasn't long before Congress and President Obama colluded to quietly gut nearly the entire legislation earlier this year.
Cuban was not an insider, but and outside shareholder. When mamma.com CEO, Guy Faure, told Cuban the company was going to be diluting his shares via the private placement, the decision had already been made. Cuban was not involved in the decision making for the private placement and was clearly an outsider getting the information after the fact. It was Faure who gave the tip to Cuban, so it was Faure who was the insider in this case, and some would argue the extortionist. Faure viewed Cuban as a big fish and the private placement has been seen by many as a persuasive way to convince Cuban to put more money into the company since Cuban would otherwise lose a percentage of his holdings and the value of his shares would be lower. As noted by Alexander R. Cohen of The Atlas Society, "Notice what role this gives the SEC in the transaction: the role of enforcer for a company that made a demand that—given the insider trading law—bore a distinct resemblance to extortion. Mamma.com threatened to reduce Cuban’s stake in the company and its value unless Cuban forked over more money—and the SEC was prepared to do even greater harm to Cuban if he tried to escape by selling the stock. (Its case against Cuban is now in progress.) Notice also that without the insider trading laws, Mamma.com’s offer to Cuban would have been entirely positive: it would have given Cuban the chance either to expand his holdings or to protect himself from the effects of the company’s plan."