SEC Charges Mark Cuban With Insider Trading | Hacker News Reader

SEC Charges Mark Cuban With Insider Trading

online.wsj.com

84 pointsnickb77 comments

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Cuban is 50? WTF dude looks like he is 35-40 tops.

Also look at how efficient our government is...you break a law and it takes them 4 years to investigate it

He lost 50 lbs participating in Dancing with the Stars.

Where does it state they've been actively investigating this since the event occurred?

Do you think the SEC is like Yoda and feels a disturbance in the Force when someone engages in insider trading?

They probably flagged it during the quarter following the transaction. And if they haven't started actively investigating it right away, that seems even worse somehow

I wouldn't be surprised to hear a government agency is inefficient, but I hope idle speculation doesn't become a substitute for facts around here.

Historically regulators (such as the SEC and FSA in the UK) have had to look at the data after the fact to search for evidence of insider trading.

They are in the midst of adopting technologies that will allow them to monitor in real time, and potentially even stop the trades (though I'm not sure it would have help in this case). Apama is helping do this in the UK:

http://apama.typepad.com/my_weblog/2007/06/the_financial_s.h... http://www.progress.com/apama/index.ssp

Disclaimer: I used to work for these guys, but back in 2000 when the plan was to become a location-aware social web service (like loopt)

I can't wait until they reveal their findings about Bear Stearn's insider trading. I heard it was going under one week before it happened; it was the worst kept secret on Wall Street.

I remember the day before the stock tanked. The volume vs. open interest on way OTM puts was absurd. Traders made several thousand percentages on their positions.

Edit: picked up some historical data. 40k volume on front month 25 puts for .275 a contract. Finished next day at 4.25, and the day after (Monday) at 20.30. This one gives you about a 7400% gain.

"Worst kept secret" approximates "public information" at the limit.

I don't know. Does it? A relatively small number of people made a ton of money off of it while a relatively large number of people got burned.

I was assuming that your measure of badness was "the more people who know this secret, the worse kept it is". By that measure, the limit of a poorly kept secret is exactly public information.

I'm having a hard time coming up with any other continuous measure of "badness" of secret keeping.

Me too. It will be interesting to watch this play out.

So now can we all agree to stop up voting his pseudo economic theories and investing advice?

The first rule of investing - don't get arrested.

Just because he might be guilty of possibly believing he was above the law, doesn't necessarily mean all of his ideas are untrue. It's possible he's just a hypocrite.

It's also possible that he's innocent.

My understanding of the SEC has evolved since I just finished the Snowball Warren Buffet book (http://www.amazon.com/Snowball-Warren-Buffett-Business-Life/...). There is a section that discusses his run in with the SEC and there is a behind the scenes discussion before charges are pressed (in WB's case, not pressed). I think Cuban has already had a chance to defend himself behind the scenes, and despite this the SEC is still deciding to prosecute. This has example written all over it.

Read the statement of facts in the PDF as well: (http://sec.gov/litigation/complaints/2008/comp20810.pdf). After reading it, chances seem slim that he's innocent.

Aside from the timing of the trade and the fact that the calls took place, everything in that report is based on the word of the CEO of Mamma.com. I honestly don't know if that matters, I'm not a lawyer and I don't play one on tv. But if it does matter, if the line between legal and illegal is whether the other party told you that you were receiving private information, then it's pretty shitty that you could be found guilty based only on that other party's say-so, don't you think?

I'd say the timing is a pretty strong indicator, although you're right, this isn't the same as proof.

"On June 29,2004, Cuban sold his remaining 590,000 Mamma.com shares during regular trading at an average cost per share of $13.2937.

On June 29,2004, at 6:00 p.m. after the markets had closed, Mamma.com publicly announced the PIPE offering."

Lester Munson gives his take:

http://sports.espn.go.com/nba/columns/story?columnist=munson...

"... It's also possible that he's (Mark Cuban) innocent. ..."

Yes, until proven guilty.

From his blog: "If you are going to trade stocks, you just have to follow one rule and remember one thing. That rule is always have a definite knowledge advantage about the company you are trading, and always remember that every stock transaction has a sucker, and you have to know whether its you or the person on the other side of the trade. No one buys a stock from your, or sells one to you knowing they are leaving money on the table."

Sounds to me like he was taking his own advice. He just didn't mention that Rule #2 of trading stocks is to not get caught with your better-than-average information.

>..That rule is always have a definite knowledge advantage..

>..to not get caught with your better-than-average information..

The difference between information and knowledge is crucial here, though I think the word 'knowledge' is slightly misleading. If we assume that by 'knowledge' he meant 'something that is more than merely a function of information', i.e. belief/ wisdom then his statement holds. I think most traders would like to think that this is the case (whether the are right or not), because it justifies their existence / management fees. If you read it as 'information = knowledge' then it looks very suspicious. I'll give him the benefit of the doubt, because if he had meant 'information' then his post would have been unfeasibly implicating.

This isn't as uncommon as people might think. A number of fairly well known people come to mind: Karl Popper, Marcel Proust.

His blog is about making money. I haven't heard him say anything about ethics. How is he a hypocrite?

So we should stop listening to Soros, too.

So now can we all agree to stop up voting his pseudo economic theories and investing advice?

sure, you can toss out warren buffet and george soros and everyone else too...they've all traded on information that was likely privileged, they might not have even known it

before you downvote me, go look up the rules for what constitutes insider information...like all trading rules, totally byzantine

Probably the least surprising news of the year, and I love Mark Cuban.

Techcrunch has some more information:

http://www.techcrunch.com/2008/11/17/billionaire-mark-cuban-...

Full complaint: http://sec.gov/litigation/complaints/2008/comp20810.pdf

Interesting. I wonder if the key question will come down to how he came across the information. From what I understand, it can only be considered insider trading if it's based on non-public information. Perhaps Mark based his decision on something public that just hadn't really hit most people's radar yet?

Or perhaps he's 100% guilty and got caught red-handed.

The text of the complaint states:

"Despite agreeing in June 2004 to keep material, non-public information about an impending stock offering by Mamma.com Inc. confidential, Cuban sold his entire stake in the company - 600,000 shares - prior to the public announcement of the offering."

If that claim is true, he acted on non-public information.

Not necessarily...perhaps someone else failed to keep the information confidential, in which case it would seem that Cuban would be legally free to sell, correct? Once the news breaks, it's no longer non-public information, right?

It seems likely that the information wasn't already public knowledge or the stock's price would have dropped in advance of the public statement. We've seen this year how fickle the markets can be to public "knowledge" such as when United declared bankruptcy or when Steve Jobs had a heart attack.

I'm a financial trading luddite, so bear with me, but what happens when you do come across some private information that leads you to believe your stock will tumble? Grit your teeth and wait for the knowledge to go public before selling?

I am a financial advisor, but I am not your financial advisor, and this is not financial advice and should not be construed as such.

The answer to your question is yes.

Longer answer: if you have material, non-public information (either first hand or through hearsay), you may not trade on it.

Please correct me if I am wrong, but I believe this depends on what your relationship to the company is. If you overhear the CEO talking to someone then you can sell if the CEO is talking to you then you can't. (Then again if you overhear something then it's more likely for you to get away with it so YMMV.)

You're wrong. It doesn't matter how you hear it - or what your relationship is. If it's material and non-public, you can't trade on it.

There were people who were hanging out at financial printers to find out material, non-public information, which they would then trade on. There's no relationship whatsoever there, but it's insider trading.

No, that's just harder to prove, but just as illegal. Given that, if you're in a position to overhear the CEO, you're probably already governed by a stricter set of rules than the guy on the bus.

Generally if you just "stumble" across confidential, non-public information without warning in advance (the way the CEO of Momma.com apparently told Cuban that he was going to tell him something confidential), someone has probably broken the law or breached a contract or something.

Cuban confuses me sometimes. 50% of the time, he claims that entrepreneurs should work hard, and he's ethical. The other 50% of the time, he's running around talking about how we should ban network neutrality because anyone who innovates on the Internet owes a fee to the guys who control the cables.

Uhh WTF Cuban? Pick one side of the fence and stay on it. Insider trading? I know you've got more productive things to do than save some money by cutting a few corners. Stop preaching about ethics and hard work if you're going to pull this crap.

Wait... you're saying... people can not be pure good or pure evil?

More like outspoken hypocrites. But polarizing the debate works too.

I would probably have more sympathy if he wasn't such a blowhard.

I can't help but wonder if his sound advice for the average Joe not to play the market attracted the ire of the Wall Street dons who need the ponzi machine to keep running.

More sympathy for a guy who allegedly screwed the rest of the shareholders and broke the law?

Interesting quote from Cuban's blog a few years ago (also noted by TC):

"I had purchased stock in Mamma.com in hope that it could be an up and coming search engine. I thought I had done some level of due diligence. Talked to the company management. Talked to some employees who worked in sales. Read the SEC Filings. I knew that they had a checkered past and had been linked to stock promoter Irving Kott, and that their law firm still handled some of Kotts business, but the CEO, Chairman, lawyers all said that things were reformed and the company was focused on its business.

Then the company did a PIPE financing. Im [sic] not going to discuss the good or bad of PIPE financing other than to say that to me its a huge red flag and I dont [sic] want to own stock in companies that use this method of financing .

Why? Because I dont [sic] like the idea of selling in a private placement, stock for less than the market price, and then to make matters worse, pushing the price lower with the issuance of warrants.So I sold the stock."

My take is that the company was about to do some bush league shit (which is what PIPE financings often are) and he didn't like it. Because he didn't like it, he sold his shares and wasn't very secret about it. Seems reasonable to me. Regardless, I'd like to read more facts.

Unfortunately, "law" isn't always about "right" or "wrong".

Of course he is allowed to sell the stocks if he wants to. But if he knew more than the other shareholders and sold because he knew the stock would plummet, it's neither lawful nor "right".

According to the article, he knew he was not allowed to sell his stake. Maybe he was upset and was not thinking straight, but if the events happened as depicted in the article, there is no other way to describe this than "wrong".

I'm going to let the courts decide before passing judgment. Right now, the only perspective we've heard is the government's.

I have trouble seeing how insider trading is "wrong", myself. Somebody bought or sold stock who was going to buy/sell at that time anyway. How did the actions of the inside trader hurt them?

Life is full of insider advantages. People profit from personal connections and information all over the place. Why should we pretend the stock market is any different? Especially considering how flimsy the charade really is. "Insider trading" is truly rampant and enforcement is an arbitrary joke.

What's almost as bad is how ambiguous the rules are. At one point in my life I studied for the CFA, and the Ethics section (which included Insider Trading among other things) was one of the hardest sections because everything was so cryptic and muddy.

You can't think of it like that, in the context of a single transaction. If an insider has the right to trade on their insider knowledge, they have an incentive to turn around and use their insider influence to create opportunities to benefit from that right.

To me this is exactly the kind of thinking that lead to the financial crisis. People selling shonky investments to people who trusted in them and justifying it the same way that you are.

I believe that the fairer and more transparent systems are the most efficient. The 'no rules' system you describe would quickly degenerate into a scamfest with far less participants and far less liquidity. Better to actually enforce the rules that exist to reduce the 'rampancy' of insider trading in my opinion.

Oh and I don't think I'll be investing in your startup.

I don't think his startup is seeking investment ;p.

I'm very ignorant when it comes to things like this. So Mark invested in a company? He heard they were going to do a PIPE, he sold his shares, and the next day they fell 10%?

How did he break the law?

Def. Insider Trading: "Illegal trading by anyone considered an insider who has access to non-public information, and who attempts to profit from that knowledge."

I understand that sentence, it makes sense to me, but I don't see how this is unlawful? What if you're working for a company that you're also a shareholder of and you get the "feeling" that the company is going to tank, so you sell... Is that illegal? Or are these different things.

knowing for a fact that the stocks will fall is different from a vague feeling. There's nothing wrong if he had based his decision solely on publicly available information, but if he knew more than the next guy, he's got an unfair advantage.

I think the issue here is that he heard they were going to do a PIPE before it became public knowledge. That's the story according to the mamma.com CEO.

Sounds pretty open and shut to me. It'll be interesting to see how this turns out. Given this happened 4 years ago, they probably spent a good amount of time investigating just how he found out.

There's a big difference in "was in a position to know" and "did/a reasonable person would have known".

As soon as I saw the article on another website, I ran to Hacker News...just to read the comments.

Damn, I posted in the wrong thread it seems.

Mamma.com is a company with too much money and no vision - at least that's how they were when someone I knew was dealing with them. I don't know how an "insider" manages to not sell his shares as soon as the opportunity arises.

Just saw link at http://online.wsj.com/article/SB122693827604333637.html

If he is found guilty, and he probably is, lock him up for years. And fine him $1B. Also, I am tired of this guy's pontificating.

Why the hell did he would invest in mamamamia is mind boggling.

haha insider trading is like copying assignment answers in college...its not 5% of potential insiders who are doing it...its 5% potential insiders who AREN'T doing it.

its like driving in the carpool lane by yourself...now and then the cops throw a $500 fine at someone during rush hour to deter others from abusing the rules, but the reality is that the other 22 hours a day you can get away with it, and countless people do

Really? Do you have stats to back this up?

Cause I'll tell you that there's so much more money to be made in legal ways that the benefits of insider trading, coupled with the fact that the SEC loves to make examples of people, that insider trading is very rare nowadays. Everything is logged electronically.

(I'm sorry, but this is the sort of "the rich and powerful get away with murder" crap that makes me want to smack a bitch.)

They like to make examples of people, but they also settle a lot, don't have adequate resources and are undermanned. It's a constant cat & mouse game except the SEC is the mouse.

Sachin, you live in Chicago - venture over to the CBOT or talk to some of your friends that work there. While the OP's post is certainly an exaggeration, the rich & connected have access to privy information.

This:

http://www.marginalrevolution.com/marginalrevolution/2004/02...

Is not a coincidence.

Dan, I agree - but to say that "everyone's doing it" is crazy. It's easier to trade on material, non-public information if you're exposed to it on a regular basis because your patterns aren't readily apparent.

That said, there are a lot of people who will trade on rumors that they consider "inside information" that things don't work out as well as you'd think they would. Look at the volatility in stocks right before earnings announcements. It's hysterical.

Agreed, which is why I said the original OP was almost certainly exaggerating.

You can long or short volatility :).

but going back to a point i make...there are also lots of people are indeed trading on insider information but don't even know it, because they don't know the full spectrum of SEC insider rules.

there are millions of trades every day, by individuals, funds, even computers trading on behalf of people. its simply impossible for the SEC to know what each party understands or should understand before they transact. the antidote to this is near-full transparency in financial reporting...instead of trying to keep track of who knows what secrets, the SEC errs on the side of no one having secrets for long (disclosure)

Do you have stats to back this up?

of course! go look at any pivotal event in a stock to the upside or downside...look at the huge trading blocks that take place just before the huge swings (in either direction) just prior...do you think those people are just speculating? do you think you compete with elite trading firms on a level playing field???

http://www.slate.com/id/2203121/pagenum/all

Did people who knew about secret, CIA-led coups use that information to game the stock market? Sure looks like it.

I hate your attitude if that's the case... lawlessness is not something i'll tolerate, no one should. Don't get me wrong, i'm all for helping friends out, but unqualified... i'd flatly say no and have.

Having said that, Mark Cuban is someone i've definitely come to respect because of this community. i'd be a little bummed if he wasn't practicing what he was preaching and holding himself to higher noble truths for which he presents.

I hate your attitude if that's the case... lawlessness is not something i'll tolerate, no one should.

don't confuse my post with advocation.

if insider trading pisses you off, do a little research into corporate taxation...you'll be amazed to know many of the banks getting in line for $700 billion in cash also pay little to no taxes, and some of them indeed exploit loopholes to get tax REBATES in the hundreds of millions. wachovia is one for sure that got hundreds of millions in tax credits.

let me break it down for you:

- poor people pay no taxes

- corporations pay few taxes (via loopholes)

- the rich pay few taxes (via offshoring and loopholes)

- you and i pay all the tax

I realized as much, np. At the very least appreciate what you wrote, but i'll checkout "corporate taxation". Thanks.

How are you coming to these conclusions?

The latest IRS reports show that the wealthiest 10% and large corporations still pay over 60% of all taxes despite loopholes and creative accounting techniques.

Sorry dude, the rich and corporations might not pay all the tax they're supposed to, but they pay the majority of the taxes collected.

http://www.straightdope.com/columns/read/1118/do-the-rich-pa...

Not at my college it wasn't, and I'm proud of it. (I can't speak for the whole college, but those I knew did not copy assignment answers)

well we can talk about our personal experiences all day long, wikipedia cites show 70% of college students have cheated at least once

http://en.wikipedia.org/wiki/Academic_dishonesty

My experience has been the opposite. Usually people are so tight lipped about things because they fear prosecution.

Honestly, it's not really worth it.

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