According to the complaint, filed in a U.S. District Court in Texas, Cuban was charged with selling 600,000 shares of Internet search engine company mamma.com stock based on information he had that the public did not concerning a stock offering.
According to the SEC complaint, Cuban avoided losing $750,000 by selling the stock in advance of the public announcement of the offering.
The SEC wants billionaire Cuban to return the $750,000-with interest--as well as pay a civil penalty, though it was not specified.
Cuban was mamma.com’s largest shareholder at the time of the alleged violation in June 2004, and allegedly sold all 600,000 shares before a public offering of the stock at a discount to the market price that would have lowered the value of the shares.
It's unclear how big a hit if any Cuban has taken, along with just about everyone else, in the economic melt-down, but his net worth was estimated by Forbes at $1.8 billion in mid-September, just as the bottom was starting to drop out.
Cuban had not returned an e-mail for comment at press time.
In addition to HDNet, Cuban owns the Dallas Mavericks and Landmark Theaters.
Charles Whitehead, a securities law expert from Boston University, sees the complaint as part of a larger effort to crack down on trading on nonpublic information on a particular kind of deal.
"I think this is part of a broader focus by the SEC on PIPE transactions (private investment in public equity)," he says, which are often made by smaller public companies with more volatile stocks that offer stock privately to hedge funds or individuals becuase it would take too long to register the stock and sell it publicly.
Because the deal is private, the stock cannot be sold until it is registered with the SEC, so the hedge fund, or individual investor, gets a discount on the price to compensate for having to hold on to the stock for two or three months until it is registered.
He points out that the SEC went after a series of hedge funds for insider trading because they bought a stock at a discount in one of these PIPE transactions, then shorted the stock knowing that the price of the stock would go down when it was eventually registered at a discount and available to be traded publicly.
Having sent that message to hedge funds, Whitehead sees the Cuban complaint as another shot across the bow, this one aimed at individual investors. "I think implicit in this is that the SEC is not a big fan of PIPES deals," says Whitehead, but adds that the SEC "particularly doesn't like hedge funds or other shareholders trading in advance of these deals being made public." And flamboyant billionaire Mark Cuban is an ideal candidate to make a high-profile point.
"If you want to send a message that people should view this kind of information as material, non-public information that you shouldn't trade on, he is as perfect guy to go after," says Whitehead.