By his own admission, Mark Cuban sold his shares in Mamma.com Inc., now Copernic Inc.(CNIC), after receiving non-public information from a senior officer of the company. However, insider trading is notoriously hard to prove, for a variety of reasons. One can only imagine that the SEC is very confident in their case; surely aware of the press this charge would generate and Mr. Cuban’s financial means for a legal battle. Even if convicted, because this is a civil suit, Mr. Cuban will not face jail time. Instead, he would be required to hand over a few million dollars, which is pocket change for him. This is not to say that the SEC should not aggressively pursue this case. This whole incident merely illustrates Mr. Cuban’s solipsism and disregard for the principles of the marketplace the same marketplace that allowed him to amass his staggering wealth in the first place.
Let’s consider the incidents that led to this charge. The CEO of Mamma.com Inc, approached Mr. Cuban, the largest shareholder with a 6% stake, with a request for financing through a PIPE (private investment in public equity) offering, at a discount to market. Mr. Cuban expressed no interest in the PIPE offering, and in fact, was upset that the senior management of the company was considering such an offer. A PIPE offering is dilutive to the pre-existing shareholder equity.
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According to the CEO of Mamma.com, Mr. Cuban agreed to keep the conversation confidential prior to the request for capital. Upon this, hangs the case of the SEC. If Mr. Cuban entered into a confidential conversation with senior management regarding the company’s internal finances, he may be guilty of the charge. It seems that Cuban was aware of these constraints on his trading actions, as he expressed frustration over the fact that he could not sell his shares. Despite his knowledge that these trades were in violation of the SEC’s rules, Mr. Cuban, in his notoriously brash style, dumped his entire position over the course of the next 24 hours or so.
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And, what did the billionaire, Mr. Cuban, gain through his nefarious insider trading? Nothing. He simply avoided a $750,000 loss; liquidating his position before the stock fell 9.3%, upon the public announcement of the PIPE. It is hard to imagine that this monetary loss, nor the cost of fines, should he be prosecuted and found guilty, factored into his decision when dumping his position.
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Mr. Cuban acted on principle. This principle being that Mark Cuban can do whatever he likes. Though the decision by Mamma.com to use a PIPE offering in order to raise capital does a disservice to its shareholders, it is a completely legal means of raising capital in the marketplace. Mr. Cuban, on the other hand, chose a course of action that was both a disservice to shareholders and in contravention to the rules designed to ensure that the floor of the marketplace stays level.
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Though the PIPE offering may not have been in the shareholders’ best interest, neither is dumping such a large position over such a brief period. Liquidating a 6% position in the course of 24 hours is likely to drive down share price, even in the absence of news that might make investors wary. Rather than play by the rules, wait until the offering was announced, and then react as a common shareholder, Cuban decided to use the confidential information to which he was privy in order to duck the loss. Rather than play by the rules, Cuban decided to stick it to the shareholders twice as hard.
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Not every investor is privy to insider information as Mark Cuban was with Mamma.com, but every investor can take advantage of stock options to protect themselves from corporate malfeasance. Investors can use stock options to protect their investments, for example a put option can be used as “stock insurance“. Additionally, married put investing is a method of investing where investors are exposed to very little downside risk and are capable of participating in unlimited upside return. Married puts can also be combined with other stock options strategies to develop an income generating method with limited downside risk.
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[tags] Mark Cuban, Mamma.com, insider trading, SEC, PIPE, CNIC, Copernic Inc., covered call investment strategy, investment strategy, iron condor, poweroptions, stock insurance, stock option trading, stock options [/tags]