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Mark Cuban and the SEC

11.17.08 at 10:56 am ET
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Just finished reading the complaint against Mark Cuban, owner of the Dallas Mavericks, that was filed by the Securities and Exchange Commission today. The SEC (not the one with Knowshown Moreno and Tim Tebow) is charging Cuban with insider trading and asking for 750K in connection with a PIPE (econ talk for when a public company asks for money).

The gist of the argument is Cuban sold his shares in something called mamma.com (now known as Copernic) before he was legally allowed to divest after learning information about the PIPE. That would be ‘insider trading.’

Government documents are always fun, so let’s see if there’s anything in the complaint that might make our Monday more interesting.

The complaint reads like a bad movie script with a lot of over-acting, but let’s press onward.

According to the government, Cuban learned of the PIPE on June 28, 2004, and he was not in favor of the move. Cuban’s response: “Well now I’m screwed. I can’t sell.” (Imagining a dramatic pause when Cuban throws his Maverick-logo’d cell phone against his Maverick logo’d window.)

Cuban (again according to the government, and allegedly) then learned more details of the plan, and was said to be “very upset and angry.” (What did he do? C’mon guys: show it, don’t say it.)

One minute later, (really, one minute!) Cuban called his broker and told him to sell. “Sell what you can tonight and just get me out the next day.” (Mood lighting, ominous soundtrack, and… scene).

The government alleges that Cuban dumped all of his 600,000 shares on June 29 before the company formally announced the move. Cuban has reportedly retained Paul E. Coggins, a former US Attorney, and so far all is quiet on his front.

But cruising around Cuban’s always-entertaining blog (and for the record, I like the guy) I found a recent post about the dangers of investing in private-equity firms, i.e. hedge funds.

When you are an investor directly into a hedge fund you have 1 single element of leverage on the hedge fund, and that is the ability, often with very stringent limitations, to pull your money from the hedge fund. That is it.

That leverage is mighty however, particularly for the bigger investors in the hedge fund. Why? Because when an investor pulls a significant amount of money from the fund, it creates a cascading series of problems.

That would explain Cuban’s distaste for this kind of financing.

The other issue is whether the NBA will have any sanctions against Cuban, should he be proven guilty. Not that waiting for guilty verdicts has ever stopped the NBA from punishing players before, but you can bet that the labor force of the over-regulated NBA will be watching what transpires.

I am, of course, available to punch up the script, if the movie ever gets made.

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