Why the Case Against Cuban Smells Fishy

Updated: It’s a classic PR play: When you start to look like the bad guy, call out a bigger bad guy. And it seems to be the strategy that the Securities and Exchange Commission — besieged by accusations of lax enforcement before and during the credit crisis — is using in going after Mark Cuban for insider trading. It’s too early to say definitively whether Cuban is guilty of insider trading in Mamma.com (now called Copernic), a search also-ran whose management has, in Cuban’s own judgment, “a checkered past.” On his blog, the normally voluble Cuban simply accused the SEC of acting on “win-at-any-cost ambitions” and a process that “was result-oriented, fact be damned.” Still, it’s not looking good for him at all.

The SEC’s complaint against Cuban outlines some pretty compelling evidence: Cuban bought 6.3 percent of Mamma.com in March 2004. Three months later, the company CEO told him it was issuing a controversial, and heavily dilutive, private placement. “Well, now I’m screwed,” Cuban told Mamma’s CEO. “I can’t sell.” But he did, before the offering’s official announcement, sparing himself $750,000 in losses. Whatever the outcome of the case — Silicon Alley Insider discusses some possible wriggle room — the timing of this news is fishy. Cuban’s attorney said the investigation has been pending for nearly two years, yet it’s only being announced now, less than a month after SEC chair Christopher Cox was raked over the coals at a House committee hearing. Cox has hardly been a champion of investors. Back in April, some Senators asked the General Accounting Office to investigate the SEC’s enforcement division. Years of budget cuts had left a lean crew, prompting many talented staffers to leave. Disgorgements — repayments of ill-gotten profits — fell 50 percent last year. With a credit crisis looming, Cox’s 2009 budget called for a 1 percent increase in funds — not enough to account for cost of living increases, so another 32 jobs were cut from the enforcement division. There’s no quicker way to show your watchdog has teeth than to bite a big name. The Cuban story is dominating business news today, just as the Martha Stewart insider trading case did in the wake of the last round of financial scandals — Enron, WorldCom, Tyco, etc. Martha Stewart did regulators a big favor: She kept the story alive by making statements that prosecutors deemed false. The SEC had been facing charges of lax enforcement back then, too. Stewart’s stock sales saved her only$46,000, but her trial and jail time not only eclipsed other financial fraud cases, it left many people thinking the SEC had learned its lesson and was getting tough.

To be clear, I’m not defending insider selling. Cuban may or may not be guilty, and as I said it’s not looking good. My point is that it’s very suspicious that the SEC tends to wheel out a big, headline-grabbing case whenever it’s chairman is on the ropes.

Whatever happens to Cuban, this case will do absolutely nothing to prevent the SEC from falling asleep at the wheel again.

Update: Cuban is fighting back, as VentureBeat sums up. Cuban’s blog has a memo attempting to refute evidence in the SEC ‘s complaint; and the NY Times has a purported email from an SEC staffer accusing Cuban of being unpatriotic because of his involvement in a documentary critical of President Bush. Very odd, but it suggests Cuban may run a media-savvy counter-campaign.