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Mavericks owner accused of insider trading

Securities and Exchange Commission accuses Dallas Mavericks owner Mark Cuban of insider trading.
Image: Mark Cuban
Mark Cuban watches the Chicago Cubs play the Milwaukee Brewers on April 30, 2008. Nonpublic information allegedly allowed Cuban to avoid more than $750,000 in losses.Nam Y. Huh / AP file
/ Source: The Associated Press

Since buying the Dallas Mavericks eight years ago, Mark Cuban has turned the team around and made himself one of the most visible owners in pro sports. Along the way, he’s picked up his share of critics.

Some say he’s a nuisance to the NBA, with more than $1 million in fines held up as evidence. Some Mavs fans say his constant baiting of officials merely leads to more calls against the team. Even his dancing skills have been panned, drawing an early round ousting from “Dancing With The Stars.”

But now Cuban is facing a much more serious allegation: The government saying he’s an inside trader.

Federal regulators filed a civil lawsuit Monday accusing Cuban of using confidential information to bail out of an investment and avoid about $750,000 in losses. Cuban denies doing anything wrong and insists his name will be cleared.

Even if he loses in court, Cuban’s penalties would be strictly financial — perhaps close to $3 million. Martha Stewart settled the civil part of her insider-trading case, but ended up going to prison for criminal charges related to it. Cuban isn’t facing criminal charges.

“It is a fascinating case,” said Harold Degenhardt, who spent nine years prosecuting securities fraud as head of the Fort Worth office of the Securities & Exchange Commission and another 25 defending them in private practice. “This is a very difficult case for the SEC. I don’t think they brought it lightly.”

According to the SEC case, Cuban told his broker to sell all his shares of after the company’s CEO confidentially told him of a stock offering that would dilute the value of all existing shares, including Cuban’s. By selling before the information became public and the price fell, Cuban avoided losses exceeding $750,000, the SEC said in its lawsuit.

However, on Cuban’s blog Tuesday was a statement from his attorneys that cites an interview with the CEO in which he says there was no agreement to keep information confidential.

Thus, Degenhardt said late Tuesday, this could turn into a he-said, she-said trial, and those are always risky.

“What was he told and what did he agree to?” Degenhardt said. “It’s all going to boil down to who is believed.”

However this plays out, it’s a hit on Cuban’s reputation as the Everyman fan who hit the Internet lottery, became a billionaire and bought his favorite team.

He’ll certainly have to endure a new round of trash-talking from rival fans, even if NBA sanctions are uncertain. The league isn’t commenting, but other owners who’ve brought the NBA shame through personal or professional actions haven’t been punished by commissioner David Stern.

To fans of the Chicago Cubs, this case is likely another strike against Cuban’s chances of buying the club. That is, if he hadn’t already struck out.

While plenty of Cubs fans think an infusion of Cuban’s cash and passion is exactly what the team needs to end its now 100-plus-year championship drought, there have been questions ever since Cuban submitted his bid about whether the exclusive club of MLB owners would allow him to join them. They have the power to keep him out, too, because it takes a three-fourth vote to approve any sale — even if Cuban is the highest bidder and current owner Sam Zell wants to sell to him.

Red Sox owner John Henry told The New York Times this summer that “the commissioner’s office abhors owners who speak their minds and fight for the rights of their respective franchises.” But he also told the Times there was “no one better suited to reverse the fortunes of the Cubs for the long term” than Cuban.

Lately, reports have indicated Cuban’s offer is no longer being considered, and the lack of response from the baseball world in the wake of Monday’s accusations suggests that Cuban’s case may not matter because he is not an owner-in-waiting.

“Something like this, those that are against him can use it as additional fodder,” said Phillip L. Stern, a Cubs fan who spent 10 years with the Securities and Exchange Commission in Chicago and now specializes in white-collar crime as a partner for Chicago law firm Neal, Gerber & Eisenberg.

In March 2007, Forbes magazine estimated Cuban’s net worth at $2.3 billion, up from around $1.8 billion near the time of the trade that’s being scrutinized by the SEC. For someone in that financial stratosphere, saving $750,000 doesn’t seem worth the risk of ruining a clean reputation.

Stern and Degenhardt said it happens all the time.

“Many times I wondered, ’Why would a person do this? They don’t need the money,”’ Degenhardt said.

Degenhardt said the SEC has been looking to make an example out of someone involved in a case just like this — a so-called private placement in public equity offering, which is known as a PIPE. He’s curious to see whether they picked the right one.

“It isn’t as if they have a tape they can play and show what transpired during those telephone calls. If they did, they would’ve played it,” Degenhardt said. “This is not like Martha Stewart, who lied to SEC staffers. This is a case where Mr. Cuban disclosed he made trades and he disclosed he made them in a timely fashion.”

The SEC also wrote that Cuban became upset and angry during the conversation with the CEO. At the end of the call, Cuban said, “Well now I’m screwed. I can’t sell.”

Cuban’s anger and defiance also were a central theme in a several-year battle over unpaid compensation for Don Nelson, who was the Mavericks’ coach and general manager when Cuban bought the club. Coincidentally, part of Cuban’s defense was that Nelson used “confidential information” to guide the Golden State Warriors to their historic upset of the top-seeded Mavericks in the first round of the 2007 playoffs.

On Sept. 10, a federal arbitrator issued a final ruling of $7.1 million on Nelson’s behalf. As of Tuesday, Cuban had yet to pay.

“This appears to be another case of ego and pride leading to activities of questionable credibility,” said John O’Connor, Nelson’s San Francisco-based attorney. “I hope for Mark’s sake the allegations are not true, in which case we’re with him 100 percent. But if they are true, he’s lucky he’s not wearing an orange jump suit.”