I’ve been getting a steady stream of traffic over the past couple of days to a post I wrote in May 2007 titled Ha ha ha Mark Cuban ha ha ha. It was about the Warriors’ glorious upset of Cuban’s Mavs in the NBA playoffs that year. The people landing there now all presumably want to read about Cuban’s insider trading mess, and I feel bad about disappointing them. So, first of all, here’s a link to an excellent little story that Barbara wrote on the subject for TIME.com that she hasn’t gotten around to linking to here. An excerpt:
While the popular perception of illegal insider trading may be clear-cut — say, a pharmaceutical executive selling stock right before the FDA fails to approve a new drug — the law is substantially less black and white. In 1934 Congress passed the Securities Exchange Act but didn’t specifically address the topic of insider trading; it was only in the 1960s that the SEC began to bring cases under the law’s antifraud statutes. Toward the end of that decade, courts codified the SEC’s actions in case law, locking down the idea that everyone in the marketplace should get roughly equal access to information.
But the initial legal theory didn’t last forever. By the 1980s, the Supreme Court had ruled that equal access was too broad a policy, and that for insider trading to be illegal a person had to breach a fiduciary duty — a trust that had been established between that person and the company.
Now the fact that I don’t think (at least beyond reasonable doubt) that Mark Cuban is guilty of insider trading doesn’t mean I condone what he did. It was unethical – in that with information given to Mark at least because of his position (as a rich guy) he acted in a way that increased his returns vis other shareholders. It is not nice behaviour and it would be illegal in Australia.
And finally, from one of the early posts on this blog, back in 2006:
There is a school of thought, most vigorously represented through the years by Henry Manne, which holds that insider trading is a good thing, because it facilitates the rapid transfer of information–through the mechanism of stock prices–from insiders to the market at large. But Manne has never been able to convince Congress or the SEC or most of the securities bar of the rightness of his views.
The problem with the Manne argument, Joe Grundfest explained to me sometime after I wrote that post, is that corporate insiders are in the employ of the shareholders. Any inside information they possess legally belongs to the all the shareholders. But Cuban wasn’t an insider at Mamma.com. He was just a big shareholder who got tipped off to some bad news by the CEO. Same thing with Martha Stewart and ImClone, except she wasn’t that big a shareholder. I still really don’t get why Stewart had to go to jail, other than that she was rich and kind of a jerk. Which means Cuban could be in big trouble.
Update: Okay, so I’m kind of slow. The reason there’s been so much traffic to my Ha ha ha Mark Cuban ha ha ha post is because of one of the comments, a nice little bit of Cuban-mockery (and 9/11-conspiracy-theorist-mockery) that just so happens to have been written by an SEC lawyer from Fort Worth.