Mark Cuban: Insider Trading Project
By:
Deborah Lomas
Kyle Hoffmann
L203
IPFW
Professor: Kent Kaufmann
Introduction
Mark Cuban the owner of the Dallas Mavericks was born and raised in Pittsburgh, PA. From his early age you could tell Mark was a determined well rounded individual and when there was an opportunity he would not hesitate to act upon it. After he graduated with a business degree from Indiana University in 1981 he started a computer company which he then sold making him a millionaire. He was the co-founder of another major business and played a role in a few other major corporations. In 2008, the SEC accused him of insider trading. In general, insider trading laws forbid the trading of securities by individuals in the possession of material, nonpublic information who have a duty to an issuer, the issuer’s shareholders, or the source of the information. There are various theories of insider trading; the most common being the classical theory, the tipper/tippee theory, and the misappropriation theory. Mark Cuban was accused of misappropriation insider trading. The SEC purported that Cuban sold his 6.3% stake in the online company Mamma.com after learning from the Chief Executive Officer (CEO) that the company was going dilute the worth of its shares by offering stock. By trading his stock on this material information Mr. Cuban averted $750,000 in losses. After a five year battle between the SEC and Mr. Cuban and an initial reversal in the SEC’s favor the case went to trial and the verdict came out in favor of Mark Cuban. This paper will analyze and answer specific questions regarding this case.
Why didn’t the SEC accuse Mark Cuban of traditional insider trading considering he was the largest individual share...
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...mmitted illegal insider trading of Mamma.com stock, based on misappropriation theory?
One scenario where Mr. Cuban could have committed illegal insider trading could include if he had agreed not to trade before the Mr. Faure had given him the information. Mr. Cuban also could have committed illegal misappropriate illegal insider trading if it could have been established that he and Mr. Faure had a previous history of sharing confidential information. Another scenario could be if Mr. Faure’s lawyer overheard sensitive information that the company would be facing a lawsuit and due to this information he sells his stock in the company. In this scenario the lawyer has misappropriated the information for his personal benefit. The lawyer has a relationship of confidence with Mr. Faure and would reasonably be expected to be trusted with confidential information.
In a year were so many great athletes are no longer with us, Payne Stewart, Wilt Chamberlain, Joe DiMaggio, Walter Payton, the man we thought would have passed away first is still among us, Magic Johnson. Rick Reilly does a remarkable job on this praising article on Magic. Reilly talks about how fit magic is. "He can bench 325 pounds. Weighing 245, he's about 20 pounds heavier than he was in his prime, but now he's ripped." He is still playing basketball in different celebrity appearances, and plays quite well in them although he is way older than everyone there. What really impressed me the most about Magic is influence as a black businessman. Reilly showed me, as well as America, a different side of Magic that is not seen on Sports Center. "He owns five Starbucks and has plans to open 10 more, nearly all of them in black neighborhoods, including one in Crenshaw and one in Harlem." Magic is willing to put money into the ghettos when other white investors are not. He owns many different businesses, from a TV company to a bank. What is truly amazing is he hires all black people to build and work his businesses. "Magic feels like many black athletes forget where they came from, I try not to." When I read this I was really stunned. He made a fortune taking risks that many other people won't try. He is living his life to the fullest and using his HIV experience to educate great number of people.
On February 12, 2008, 15 year old Larry King was shot in the back of the head by 14 year old Brandon McInerney in a middle school classroom in Oxnard, California. King was sitting in his seat, completing his work, and McInerney shot him. Prior to the incident, McInerney expressed on many occasions to his peers that he disliked the compliments that King relayed to him on his physical appearance and also had a profound hatred for King’s feminine gender expression. King was kept on life support for two days and died of brain damage. The facts presented to me made it clear that McInerney should grow old in prison for such a violent and intentional crime, but sadly that is not the case. McInerney was sentenced to 21 years in prison and will be released in in his mid thirties. Larry King, however, is deceased and the school will not allow for a plaque to be put in front of a tree that was planted in his honor.
Dennis Kozlowski was living his dream as a multimillionaire and if anyone got in the way of his dream to create his empire then they would be stepped on like a bug. This is what happened to Jeanne Terrile at Merrill Lynch. Terrile smelled something funny coming from Tyco and when she acknowledged that something was wrong, she was shut down quickly. Nobody knows for sure if Kozlowski paid off the CEO of Merrill Lynch, David Komansky, or not and nobody knows what they talked about. The fact is that Jeanne Terrile was replaced and the stock recommendation for Tyco soon changed after their talk. Terrile decided to do what she thought was right and make sure to notify people of what she thought of the company. Because of Terrile’s ethical decision
In other words, its buying and selling of securities that has obtained non-public material information, and in Martha’s case she was guilty of it. “However in an interesting legal technicality, Martha Stewart did not necessarily breach a fiduciary duty to the other investors, since she had no real obligations to inform other investors, which would be the case if she were an officer with company (US SEC, 2009). This being said, if she confessed her actions were wrong, she would not have been convicted of insider trading. Insider trading can be either legal or illegal due to the nature and the timeframe. This was not the road that Martha Stewart decided to take. ‘She instead chose to collide with her broker in an attempt to barricade a story about how there was a standing order for Ms. Stewart to sell her shares” (US SEC, 2009). Martha Stewart had knowledge on the ethics surrounding trading of stock having already been a CEO, she should have known what she was doing, but one can argue that due to her crazy work life, she simply did no think about it. It shows that she is not engaging in illegal behavior. “Martha Stewart displayed her morality lies when lying to the US authorities even thought this was obviously illegal and unethical; her action can also be analyzed through egoism philosophy where right or acceptable behavior defined in terms of consequences to the individual, regarding maximizing self0interest” (Carr, 2002). Martha Stewart thought she did everything right, but still did not bother to warn the shareholders. If insider trading had not taken place, it would be less of a crime, but her actions indicated unethical behavior and define lack of integrity, and lying to Federal investigators only made it
The CFO, Andrew Fastow, systematically falsified there earnings by moving company losses off book and only reporting earnings, which led to Enron’s bankruptcy. Any safeguards or mechanisms that were in place to catch unethical behavior were thrown out the window when the corporate culture became a situation where every person was looking out for their own best interests. There were a select few employees that tried to get in front of the unethical accounting practices, but they were pushed aside and silenced. The corporate culture at Enron became a place where if an employee would not make unethical decisions then they would be terminated and the next person that would make those unethical decisions would replace them. Enron executives had no conscience or they would have cared for the people they ended up hurting. At one time, Enron probably was a growing company that had potential to make a difference, but because their lack of social responsibility and their excessive greed the company became known for the negative affects it had on society rather than the potential positive ones it could have had. Enron’s coercive power created fear amongst the employees, which created a corporate culture that drove everyone to make unethical decisions and eventually led to the downfall and bankruptcy of
Svoboda and Robles both broke the misappropriation and tripper (tippee) theory. In Bailey article, he mentions that the misappropriation theory requires courts to focus on whether a fiduciary relationship, or similar relationship with a "duty of trust or confidence," exists (2010, p.541), and tripper theory obtains an individual who received confidential information from the insider individual. Svoboda and Robles violated the fiduciary duties which are the duty of loyalty and care. When Svoboda brought in an outsider, Alena, to complete the task, he broke the duty of loyalty and care toward his company, but then was disloyal to Robles when Svoboda prepared his own trade security. Under Section 10b and rule 10b-5, if an individual using confidential information and then assist another individual, the individual is liable for the trading of the confidential information if they are aware of the fiduciary duties. As a tippee, Robles was liable for trade securities because he was aware of the policy of the Rogue Bank. Bailey (2010) provides an example regard to the SEC v. Texas Gulph Sulfur, when the Second Circuit held that an investor is prohibited from using non-public information to his advantage, regardless of how the investor received the information and the explanation for this situation was to ensure all investors were provided with equal
There are many instances of insider trading that have taken place in the U.S. stock exchange. The Federal Reserve and The Federal Government have clearly stated that insider trading undermines the law and is illegal, but individuals insider trade anyway.
Jordan Belfort is the notorious 1990’s stockbroker who saw himself earning fifty million dollars a year operating a penny stock boiler room from his Stratton Oakmont, Inc. brokerage firm. Corrupted by drugs, money, and sex he went from being an innocent twenty – two year old on the fringe of a new life to manipulating the system in his infamous “pump and dump” scheme. As a stock swindler, he would motivate his young brokers through insane presentations to rile them up as they defrauded investors with duplicitous stock sales. Toward the end of this debauchery tale he was convicted for securities fraud and money laundering for which he was sentenced to twenty – two months in prison as well as recompensing two – hundred million in restitution to any swindled stock buyers of his brokerage firm (A&E Networks Television). Though his lavish spending and berserk party lifestyle was consumed by excessive greed, he displayed both positive and negative aspects of business communications.
This case study is not about Ms. Stewart direct participation with illegal insider trading as the media had steered the public to believe. To begin, Ms. Stewart received a phone call from Ann Armstrong, her assistant, stating that Peter Bacanovic, her stockbroker, “thinks ImClone is going to start trading down.” (Arnold, Beauchamp, Bowie, 2013, p. 390) Although Ms. Stewart was not able to get a hold of Peter, she talked to his assistance, Douglas Faneuil,
The stock market is an enigma to the average individual, as they cannot fathom or predict what the stock market will do. Due to this lack of knowledge, investors typically rely on a knowledgeable individual who inspires the confidence that they can turn their investments into a profit. This trust allowed Jordan Belfort to convince individuals to buy inferior stocks with the belief that they were going to make a fortune, all while he became wealthy instead. Jordan Belfort, the self-titled “Wolf of Wall Street”, at the helm of Stratton Oakmont was investigated and subsequently indicted with twenty-two counts of securities fraud, stock manipulation, money laundering and obstruction of justice. He went to prison at the age of 36 for defrauding an estimated 100 million dollars from investors through his company (Belfort, 2009). Analyzing his history of offences, how individual and environmental factors influenced his decision-making, and why he desisted from crime following his prison sentence can be explained through rational choice theory.
Insider trading has been a commonly discussed topic since Martha Stewart was accused, tried, convicted, and served a prison term for her involvement with the Inclon trading scandal. However, the definition of the term “insider trading” is not necessarily always connected with illegal activity. As a matter of fact, in some jurisdictions, “insider trading is no crime. Traditionally, it has been an expected, and perfectly acceptable prerequisite of certain sorts of employment.”(Insider Trading). But since the latter part of the 1960’s, stricter enforcement of insider trading practices have been put into place because of financial scandals.
Jordan Belfort is the notorious 1990’s stockbroker who saw himself earning fifty million dollars a year operating a penny stock boiler room from his Stratton Oakmont, Inc. brokerage firm. Corrupted by drugs, money, and sex, he went from being an innocent twenty – two year old on the fringe of a new life to manipulating the system in his infamous “pump and dump” scheme. As a stock swindler, he would motivate his young brokers through insane presentations to rile them up as they defrauded investors with duplicitous stock sales. Toward the end of this debauchery tale he was convicted for securities fraud and money laundering for which he was sentenced to twenty – two months in prison as well as recompensing two – hundred million in restitution to any swindled stock buyers of his brokerage firm. Though his lavish spending and berserk party lifestyle was consumed by excessive greed, he displayed both positive and negative aspects of business communications.
They were committing fraud by creative accounting, acting illegally when using insider trading and shredding their documents relevant to the investigation. Next, consider the stakeholders. Anyone who owns stock in the company would suffer, along with every employee. Under the values bullet we can assume that they have none. Greed and power got the better of every one of them.
The Tyco accounting scandal is an ideal illustration of how individuals who hold key positions in an organization are able to manipulate accounting practices and financial reports for personal gain. The few key individuals involved in the Tyco Scandal (CEO Kozlowski and CFO Swartz), used a number of clever and unique tactics in order to accomplish what they did; including spring loading, manipulating their ‘key-employee loan’ program, and multiple ‘hush money’ payouts.
There are many lessons a business owner can learn from the Andersen/Enron scandal, the only lesson would not be that honesty is the best policy, but also that a dishonest action made by a few people can affect many. Enron’s insider trading and failure to report accurate earnings and losses paired with Andersen’s failure to properly audit and report the company’s debts and earnings made for one of the biggest scandals that the business world has ever seen. Enron used SPE’s or Special Purpose Entities to mask the large amounts of debt that they had acquired overtime