Don't indict Cuban for insider trading just yet
Posted: Tuesday, November 18, 2008 12:26 AM
If baseball owners don’t want to admit Mark Cuban into their fraternity, let them vote down his offer for the Chicago Cubs. I just don’t want to hear them justify their decision by citing the SEC’s allegation that he engaged in insider trading.
For one thing, the suit filed by the SEC is an allegation, not a proven fact. For another, Cuban is not yet charged with a criminal act. He’s being sued, not prosecuted. Criminal charges could yet follow, but that’s up to the Justice Department to decide, not the SEC.
This is a distinction lost on those discussing the charges over on Newsvine, where many are already convicting the flamboyant Dallas Mavericks’ owner before he’s been charged with a crime. And even if he is indicted, Cuban gets to defend himself.
Another issue is that if he is prosecuted, we don’t know that he will be convicted – and we won’t know for a long time.
Finally, baseball has had felons in its midst before and didn’t seem overly upset about it. Way back when, George Steinbrenner was convicted of a felony for making illegal political campaign contributions. He was suspended but worked his way back into the game’s good graces. Years later, he was busted by the commissioner for hiring a low-life named Howie Spira to dig up dirt on one of his players, Dave Winfield. He agreed to a lifetime ban which was later rescinded.
Baseball also was found guilty of collusion in an effort by the owners to control the free agent market. Collusion is a lot like insider trading – owners share information that is mutually beneficial and profit by it.
So, given that Cuban has yet to be charged much less convicted of any crime, baseball might want to come up with reason to reject him as an owner other than this case.
If the charge were murder or child abuse or something similar, I’d say it’s better to be cautious. But take a good look at the lawsuit he’s facing and think real hard about what you would have done if you were in his shoes – and if the government version of events is true.
The SEC claims that Cuban was told that a company he owned a substantial stake in, mamma.com, was going to dilute its stock. The move was going to cost him a lot of money. And even though he wasn’t supposed to act on the insider information that was dropped in his lap, he sold his stock and saved himself $700,000. That’s what the SEC says.
The lawsuit alleges that on hearing that his holdings were about to lose a lot of value, he was angry. I think any of us would be. But he couldn’t do anything about it except watch the company’s chief executive force him to lose money.
Think about it. The owner of a company you have a lot of money in calls to say, “Hey, pal, you can’t tell anybody, and you can’t do anything, but I’m going to issue a bunch of new stock tomorrow, and it’s going to drive down the price of your shares. You’re gonna lose a bundle. But now that I told you, you’re not allowed to sell.”
I don’t know if the SEC version of things is true, but if it is, you’d be ticked, too. And you’d probably sell the stock rather than lose $700,000. It wouldn’t matter that you’ve got a couple of billion more where that came from. That’s a lot of money to just throw away.
The reason you’d do it is because you’ve already dealt in inside information. This is how everyone gets ahead in life – by taking advantage of information that others don’t have.
When we’re young, we might get inside information from friends to find out if a potential date would want to go out with us. If we know our neighbor is having a garage sale, we see if we can pick over the offerings a day early, before anybody else has a chance to beat us to the bargains.
We develop business networks and work our contacts to get inside information about where jobs are coming open before they get posted. People in sales hope for inside information about potential customers. Real estate professionals schmooz with everyone, hoping to get a jump on properties about to go on the market. Everybody who played the market in the boom days always had his or her ears open for a hot tip.
There’s good reason the SEC has rules against insider trading. The biggest is to prevent people from making windfall profits that others don’t. In this case, the SEC isn’t saying that Cuban was trying to make money. He was trying not to lose it.
If the charges are true, Cuban was put in an untenable position. It’s like being told that a hunk of concrete is about to break off the building above you and will fall on the exact spot where you’ve parked your brand-new car. But this is inside information, and you’re not allowed to move your car. Oh, and you don’t have insurance on the car. It’s going to be a near total loss.
Do you move the car? I like to think of myself as an ethical person, but I’m probably moving the car. It seems stupid not to.
In Cuban’s case, if the allegations are true, shouldn’t the guy answering the charges be the man who told him about the impending dilution of his stock? Why would he tell Cuban if there was nothing Cuban could do to save $700,000? Why is the person who gets the information more guilty than the person who gave it out?
Just asking.
