A new case initiated by the Securities and Exchange Commission (SEC) in the US highlights some of these difficulties even in that regime (which has a treasure trove of judicial precedents in insider trading cases). The Deal Professor has an interesting take on the action:
“The S.E.C. complaint alleges that Mr. Cuban learned about a planned PIPE (private investment in public equity) offering by Mamma.com, in which he was the largest individual shareholder with 600,000 shares. PIPE deals are a sure-fire sign that a company’s finances are in bad shape, and the market’s response to such transactions is almost always negative.Aside from the insider trading issue, the report also questions whether securities regulators ought to be focusing on more pressing matters rather than pursuing dated insider trading actions:
According to the commission, although Mr. Cuban was told that the information was confidential, he sold all his shares to avoid the hit they were sure to take after the announcement of the PIPE deal. The “loss avoided” is estimated at $750,000 — a pittance to someone like Mr. Cuban, who made his money by selling Broadcast.com to Yahoo for $1 billion.
Mr. Cuban’s Mamma.com sale occurred in June 2004, more than four years ago. What took so long to bring the case? News reports indicate that the S.E.C. did not learn of the transaction until early 2007, so the case was already old before it got started. No criminal charges have been filed. Indeed, criminal charges can often slow down a securities case because the prosecutors need to conduct their own investigation.”
“The S.E.C. needs to establish its presence as the market policeman, there to protect investors. Yet in recent years the commission, whether by choice or legal restriction, allowed wide swaths of the market to go largely unregulated. The courts rejected the S.E.C.’s assertion of authority to regulate hedge funds. The commission let Wall Street firms increase their leverage and employ their own internal risk assessment models, allowing them to invest heavily in mortgage-backed securities and other real estate investment vehicles. That decision allowed companies like Lehman to put themselves at risk when the housing market cratered. There was no cop within a hundred miles of that decision.
So the commission decides to pick a fight with Mark Cuban in a case that may not be all that easy to win. The typical insider trading case involves someone with a fiduciary responsibility to a company, such as an officer, employee or outside adviser, who trades in the shares. Mr. Cuban was an investor in Mamma.com, and its management sought to interest him in the PIPE deal, which did not make him very happy. But owning shares in a company does not make one a fiduciary, and there are no restrictions on the right to sell one’s shares.”