- In 2008, the Securities and Exchange Commission (SEC) filed charges against Mark Cuban for violating insider trading laws
- In May 2010, the case is far from over
- Illegal insider trading is when an investor buys or sells a company's securities, usually shares of stock, based on non-public information he has about the company
- Not all insider trading is illegal
- If you’re in the stock market, know which "hot tips" to avoid
A lot of us have money in the stock markets. The goal, of course, is to make money through the investments we make. Sometimes, the urge to make a profit gets an investor in legal trouble.
You may or may not know who Mark Cuban is. He's the billionaire owner of the NBA's Dallas Mavericks. He's a successful and experienced businessman and investor, as shown by his 2009 ranking of 138th on the Forbes 400 Richest Americans list.
In 2008, the Securities and Exchange Commission (SEC) filed insider trading charges against him. The charges stemmed from Cuban's 2004 sale of 600,000 shares of the stock of Momma.com. It was every share Cuban owned in the company.
According to the SEC, Cuban sold the stock because had "material, non-public information" about the company. It also claimed Cuban was able to avoid losing over $750,000 by using that information to sell the stock before the price of the stock dropped.
Cuban defended the lawsuit, and eventually it was dismissed because the SEC's complaint didn't claim that Cuban agreed not to use the "inside" information. The SEC is appealing the decision.
Cuban is playing hardball, too. He filed a lawsuit over the SEC's refusal to comply with his Freedom of Information Act (FOIA) request for documents related to the case. He claims the SEC went after him simply because it had grudge against him and without any real evidence of wrongdoing.
Illegal insider trading is when an investor buys or sells a company's securities, usually shares of stock, based on material non-public information he has about the company. "Material" means the information is important and plays a big part in the investor's decision to buy or sell. "Insider" goes with "non-public." It's information that comes from someone with intimate knowledge of the company - someone on the inside.
Illegal insider trading can take many shapes, such as when:
- An officer or employee of a corporation buys or sells shares of the corporation after learning about important and confidential business dealings, such as a plan to buy another company
- Friends and family members who get a "tip" from the officer or employee about the business dealings and then buy or sell shares
- Third parties - like lawyers, accountants, or printing companies - who get the information in ordinary business dealings and use the information to buy or sell stock in the company
The SEC's charge against Cuban is another classic example. It claimed an officer of Momma.com invited Cuban to buy more stock through a "stock offering" and he got the invitation before the offer was made available to the general public. Because he knew the offering would lower the value of his stock, the SEC claimed, Cuban immediately sold his shares.