The Securities and Exchange Commission charged billionaire entrepreneur Mark Cuban with insider trading on Monday, alleging he used non-public information to avoid a $750,000 loss on his stake in search engine Mamma.com in 2004.

The SEC alleges Cuban, the owner of the Dallas Mavericks and one of the richest men in the world, sold his 600,000 shares of the company on the basis of “material, non-public information” concerning an impending stock offering that would have diluted his investment.

As of May 2007, Forbes estimated Cuban's net worth at $2.3 billion.

“Insider trading cases are a high priority for the commission. This case demonstrates yet again that the commission will aggressively pursue illegal insider trading whenever it occurs,” said Linda Chatman Thomsen, director of the SEC’s Division of Enforcement in a statement.

In a press release, Cuban's attorneys said he plans to fight the case, which they say has "no merit and is a product of gross abuse of prosecutorial discretion."

Cuban responded defiantly, saying: "I am disappointed that the commission chose to bring this case based upon its enforcement staff’s win-at-any-cost ambitions. The staff’s process was result-oriented, facts be damned. The government's claims are false and they will be proven to be so.”

In a posting at his blog entitled "The SEC," Cuban added, "I wish I could say more, but I will have to leave it to this, and let the judicial process do its job."

The case had been pending before the SEC for nearly two years, Cuban's attorneys said.

According to the SEC complaint, Mamma.com execs said Cuban “flew off the handle” when he learned the company was about to conduct a PIPE, a private sale of illiquid stock that occurs at a discount to market prices.

“Well, now I’m screwed. I can’t sell,” Cuban told the Mamma.com exec, according to the SEC complaint. However, knowing the offering would be dilutive to existing shareholders, Cuban called his broker within hours and instructed him to sell his entire position in the company, the SEC claims.

Cuban had agreed to participate in the stock offering only after pledging to keep the information confidential, the SEC said.
“As we allege in the complaint, Mamma.com entrusted Mr. Cuban with nonpublic information after he promised to keep the information confidential,” said Scott W. Friestad, deputy director of the SEC’s Division of Enforcement in a statement.

“Less than four hours later, Mr. Cuban betrayed that trust by placing an order to sell all of his shares. It is fundamentally unfair for someone to use access to nonpublic information to improperly gain an edge on the market.”

The SEC is seeking a court judgment that Cuban violated provisions of federal securities laws and unspecified financial penalties including restitution of the losses he allegedly avoided.

Mamma.com, which has changed its name to Copernic (CNIC), did not respond to request for comment. The Mavericks organization declined to comment.

“We don’t comment on matters such as these," said Mike Bass, the NBA's senior vice president of marketing communications.

"By filing against Mr. Cuban, they are sending a very clear signal. The warning shot is fired. Other shareholders of other corporations now need to be careful trading on this kind of information," said Charles Whitehead, a visiting law professor at Cornell Law School and securities expert.

At the time of the sale, Cuban was the largest known shareholder of Mamma.com, a Montreal-based company.

Cuban becomes the latest high-profile individual landing in hot water related to alleged insider trading. In 2004, Martha Stewart was convicted of obstructing justice and lying to the government for well-timed stock sales, sending the celebrity to prison for several months.  

The SEC has successfully prosecuted a number of hedge funds in recent years for insider trading related to PIPE sales, or private investment in public equity. These transactions allow companies to quickly raise capital without needing to register new stock with the SEC.

However, they also harm common shareholders because they are sold at a discount since they can't be traded until they are listed with the SEC. Cuban told the Mamma.com exec that he did not like PIPEs for this reason, the SEC complaint alleges.

In addition to his ownership role with the Mavericks, Cuban is co-owner of 2929 Entertainment, chairman and president at HDNet and co-owner of HDNet films.

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