A High Profile Insider Trading Case Based On A PIPE Offering

The SEC filing another insider trading case based on a private investment in public equity offering or a “PIPE” offering. This high profile case named as a defendant Mark Cuban, owner of the Dallas Mavericks, HDNet, Landmark Theaters and a possible bidder for the Chicago Cubs baseball team. SEC v. Cuban, Civil Action No. 3-08-CV-2050 (N.D. TX Filed Nov. 17, 2008).

The claims in the complaint are based on a PIPE offering made by Mamma.com Inc., a NASDAQ traded company based in Montreal, Quebec. According to the Commission, in 2004, when the company was planning the offering, Mr. Cuban was its largest known shareholder. He was contacted by the company and offered the opportunity to participate in the upcoming offering. Before company officials made that offer however, Mr. Cuban was advised that the information he was about to be furnished was confidential. As a condition of receiving the information, Mr. Cuban agreed to maintain its confidentiality, according to the SEC.

According to the complaint, Mr. Cuban became very upset after learning about the PIPE offering because it would dilute his holdings. In additional conversations with the company about the PIPE, he learned more details about the offering and was furnished with materials about it. In each instance, Mr. Cuban expressed his opposition to the offering. He also acknowledged an obligation to keep the information confidential. In one conversation, according to the SEC, Mr. Cuban noted that he could not sell his shares until after the public announcement.

Following his last conversation with a company official about the proposed offering, Mr. Cuban called his broker and directed that his 600,000 share stake in the company be sold. Over a two-day period his shares were sold. The sales were completed the day before the announcement of the PIPE.

Following the public announcement of the offering, the share price of the company fell about 9.3%. That price continued to fall over the next week. According to the complaint, Mr. Cuban avoided losses in excess of $750,000 by selling before the announcement. The complaint alleges violations of Section 10(b) and 17(a).

This case differs from earlier PIPE cases that the SEC has litigated. In those cases
Involved Section 5 and insider trading claims based on short sale before the announcement of the offering. In each of the three litigated cases, the SEC’s Section 5 claim was dismissed on a motion to dismiss. In one, SEC v. Mangan, Civil Action No. 06-CV-531 (W.D.N.C. Dec. 28, 2006), the court also denied the SEC’s subsequent motion for summary judgment on the remaining insider trading claim, but granted the motion of defendant as discussed here. That order, entered on August 20, 2008, has not been appealed. In the other two litigated cases the insider trading claims are pending.

In contrast, the case against Mr. Cuban does not involve a Section 5 claim or short selling. Rather, it is pled as a standard insider trading case, trading on material non-public corporate information. Unlike most defendants in SEC insider trading actions however, Mr. Cuban is litigating the claims. Whether the SEC’s new approach will prove more successful than their earlier one remains to be seen.