Insider Trading: What Did Mark Cuban Do?

Blogger: Cuban's defense could be that the trading information he received was not 'material'

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So the SEC charged Dallas media mogul and Mavericks owner Mark Cuban with insider trading. At issue: he allegedly sold 600,000 shares of the stock of online search engine Mamma.com "on the basis of material, non-public information concerning an impending stock offering," according to the SEC filing.

Regulators say that in 2004, Cuban sold his entire stake in Mamma.com four hours after the company tipped him off that it was planning to sell shares below its trading price. As a result, he avoided more than $750,000 in losses, according to the SEC. How so? When the stock offering was publicly announced, Mamma.com's shares opened nearly 10 percent down from the previous day's closing price of just over $13.

So what constitutes insider trading? Insider trading is legal when it involves the buying and selling of a company's stock by corporate insiders--when they report the trades to the SEC. In other words, when it's not a secret.

On the other hand, insider trading is illegal when a person stealthily trades stock on information not available to the public. In that case, it's also illegal to be the tipster.

Some insight from Silicon Alley Insider:

"To commit insider trading, you need only trade while in possession of material non-public information that you received under a duty of confidentiality. Assuming Mark Cuban did know about this offering before selling his stock, as the SEC has alleged, he will probably take the position that it was not material (the 'non-public' condition would seem to have to be met). The definition of 'material,' however, is a low standard: Information is 'material' if a reasonable investor would consider it relevant when making a trading decision. Most investors would probably consider a secondary stock offering relevant to a trading decision. That said, if the story were as clear-cut as this, Mark probably would already have settled. So we assume there's another side to this."