SEC Nails Cuban in PIPE Deal

Mark Cuban's dalliance with Mamma.com was bound to end badly. Getting mixed up with Canadian stock promoters is probably questionable to begin with, but trading on material, non-public information is a no-no.

The laws regarding PIPE transactions are clear, and Cuban should have known that the SEC was cracking down on abuses relating to Private Investments in Public Equity.

On June 28th of 2004 the CEO of Mamma.com contacted Cuban, prefacing the communication by stating that he had confidential information to convey. Cuban consented, and in effect went "over the wall" and was restricted from further transactions in the stock, according to securities laws.

After speaking with the Mamma.com CEO over the details of the transaction Cuban allegedly commented "Well, now I'm screwed. I can't sell"

But sell he did, over the next few days.

Cuban knew exactly what he was doing, but his emotions got the better of him.

While securities laws are not my strong point, the SEC’s prior handling of a disputed PIPE transaction might shed some light on how this proceeds.

The SEC has been cracking down on PIPE abuses for years, and a prior case involving a former First New York Securities prop trader/portfolio manager might provide a clue:

May 2005
The Securities and Exchange Commission announced today that it has filed a complaint against Hilary L. Shane in the United States District Court for the Southern District of New York alleging that Shane committed insider trading and registration violations by short selling securities of CompuDyne Corporation prior to the public announcement of a private investment in public equity (PIPE) offering and prior to the effective date of the resale registration statement for the PIPE shares.

Without admitting or denying the allegations in the Commission’s complaint, Shane consented to the entry of a final judgment, subject to the court’s approval, in which she is permanently enjoined from further violations of the antifraud and registration provisions of the federal securities laws and agreed to pay disgorgement of the trading profits, plus prejudgment interest and a civil penalty totaling $1,075,015. Shane also has consented to be barred from the broker-dealer industry and suspended from the investment advisory industry.

The Commission’s complaint alleges that, in September of 2001, Shane was asked to participate in a PIPE offering by CompuDyne. In a PIPE offering, investors commit to purchase a certain number of restricted shares from a company at a specified price and the company agrees, in turn, to file a resale registration statement so that the investors can resell the shares to the public.

The complaint alleges that the PIPE offering was likely to have a significant dilutive effect on the value of existing CompuDyne shares because the PIPE shares would increase the supply of stock in the market by more than 200% and the PIPE shares were offered at $12.00 per share when the current market price was $17.38.... SEC.gov

While the circumstances are different, investors involved with PIPE deals know the rules of the road. The company, which has since been renamed Copernic, Inc (CNIC-NASDAQ), has long had some shady characters involved, and Cuban has no one to blame but himself, given he did not wait for the offering to conclude before selling his shares.

You can read the blow by blow below for the SEC complaint, but Cuban has a major headache on his hands, and can probably kiss his dreams of buying the Chicago Cubs goodbye. I doubt Mark goes to jail, given that this is a civil case, but he had better get out his checkbook.

It is time to pay the Piper. Cuban has many defenders out there, but this case seems pretty straightforward. Although it saved him $750k, it will prove to be the worst trade he has ever made.

Maybe its time for the SEC to nail some bigger Wall Street fish; there are certainly some bottom feeders out there getting away with murder.

Predictably Cuban is fighting, and responds to the charges on his blog maverick

Mr. Cuban stated, “I am disappointed that the Commission chose to bring this case based upon its Enforcement staff’s win-at-any-cost ambitions. The staff’s process was result-oriented, facts be damned. The government’s claims are false and they will be proven to be so.”

_____________________________________________________________________

Civil charges, not criminal, so far. Which means no jail time, for now, although the government might eventually pursue it further.

_______________________________________________________________________

SEC vs Cuban
Complaint

SEC Files Insider Trading Charges Against Mark Cuban
Sec.gov

Mark Cuban Gives the Ball to Fish & Richardson, Dewey & LeBoeuf in Insider Trading Case
The AM Law Daily
__________________________________________________

Broad idea/definintion of “over the wall”

During an offering, the investment banking firm’s analyst is often brought “over the wall.”

In this role, the analyst assists his or her firm’s corporate finance group in positioning the company, preparing the prospectus and, in an initial public offering, determining the offering price. When the
analyst is on the issuer’s side of the “wall”, the analyst will be required to maintain the confidentiality of non-public information, and is a trusted member of the underwriting team.

However, an analyst’s relationship with the company changes once an offering concludes.
________________________________________________________________________________

Definition of an Insider.

The basic principle that trading on inside information violates Rule 10b-5 as well as a test for determining who is an “insider” were established in In re Cady, Roberts, Inc.3 and later expanded in SEC v. Texas Gulf Sulphur, Co.4 Based on Texas Gulf Sulphur and several other cases, federal courts and the SEC have developed a definition of the term “insider” to include any person who, by reason of a fiduciary or confidential relationship to an issuer of securities, has access to non-public material information about that company. A traditional definition of an insider is a person who: (i) possesses inside information, (ii) knows or should know the information is non-public, and (iii) received the information in his or her business capacity and for a legitimate business reason by virtue of a relationship giving access, directly or indirectly, to the information. Examples of corporate insiders might include:

· The issuing corporation itself, its directors, officers and employees, or major security holders;
· Outside professional advisors, including lawyers, accountants, brokers, dealers, financial and investment advisors as well as engineers;
· Business associates, including suppliers, customers, business partners, and parties to a proposed acquisition, divestiture or other transaction; or
· Financial analysts and institutional investors.

This list is necessarily incomplete because a person’s status as an “insider” depends upon his or her relationship with the issuer. It should be noted that directors, officers, employees and controlling shareholders of publicly traded corporations or of a corporation negotiating a major transaction with a publicly-traded corporation, are, by the nature of their positions, usually deemed “insiders.” The SEC, however, typically takes an expansive view of the definition of an insider, and has found that a large variety of persons can be insiders, including: accountants, bankers and lenders, brokers, business associates, competitors, corporate trustees, engineering advisers, escrow agents, family members, finders, institutional investors, investment advisers, investment bankers, lawyers, management consultants, marketing advisers, market makers, merger and acquisition partners, subcontractors, printers, public relations advisers, registrar or
transfer agents, security analysts, stock exchange personnel, testing laboratories, and underwriters. As discussed in subsection 5(a) below, both the recent adoption of the “misappropriation theory” by the United States Supreme Court both supports and codifies the SEC’s expansive view of who an insider may be.

----------------------------------------------------------------------------------------------------------
The content contained in this blog represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Positions

Comments:

<< Back to main