SEC accuses Mark Cuban of inside trading of Mamma.com

— -- Flashy billionaire Mark Cuban found himself in a different kind of spotlight Monday when the Securities and Exchange Commission charged him with illegal inside trading for his sale of a dot-com stock.

Cuban, probably best known as the owner of the NBA's Dallas Mavericks, sold his 6.3% stake in Mamma.com and avoided a $750,000 loss in June 2004 after the search engine's CEO told him it planned to sell additional stock, the SEC said in its complaint. The CEO wanted to gauge Cuban's interest in the stock sale, a private investment in public equity, or PIPE, the SEC said.

The PIPE valued Mamma.com's stock below its market value and threatened to water down the holdings of current investors. Mamma.com's stock fell 9.3% the day after the deal was announced. (Mamma.com has since renamed itself Copernic.)

Inside-trading rules forbid profiting from material information not disclosed to the public that violates a fiduciary obligation to shareholders, says Gregory Lawrence at law firm Conti Fenn & Lawrence.

Cuban could not be reached Monday, but he wrote on his blog, "The government's claims are false and they will be proven to be so." NBA spokesman Mark Broussard said, "We don't comment on matters such as these."

Civil penalties for inside trading can total three times the amount of losses avoided, says Scott Friestad of the SEC's Division of Enforcement. The SEC can bar individuals from being officers or directors in public companies, but not private companies like Cuban's, says Jill Fisch, professor of law at the University of Pennsylvania Law School. No criminal charges have been filed.

The case may hinge on the SEC's allegation that Mamma.com's CEO asked Cuban to keep the information private before telling him about the PIPE, Lawrence says. Such an agreement could raise legal questions.

Mamma.com's CEO contacted Cuban on June 28, 2004, and after hearing of the offering, the complaint said, Cuban "became very upset and angry" because his stake would be diluted and at the end of the call said, "Well, now I'm screwed. I can't sell."