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Posted: Monday November 17, 2008 7:14PM; Updated: Monday November 17, 2008 7:27PM
Michael McCann Michael McCann >
SPORTS LAW

What's next for Mavs owner after accusations of insider trading

Story Highlights

Mavericks owner Mark Cuban has been accused of illegal insider trading

Cuban isn't facing criminal charges, but he does face a fine of up to $2.25 million

The NBA is unlikely to discipline Cuban until the legal process progresses

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Mark Cuban has vowed to contest claims that he used insider information on a stock sale.
Ronald Martinez/Getty Images

SI.com legal analyst Michael McCann answers the key questions after Dallas Mavericks owner Mark Cuban on Monday was accused of insider trading.

1) What has Cuban been charged with?

The Securities and Exchange Commission filed a complaint in the U.S. District Court for the Northern District of Texas alleging that Cuban committed securities fraud by engaging in illegal insider trading. According to the SEC, Cuban received insider information about Mamma.com, a company in which he owned 6 percent. Cuban was allegedly told that the company's shares were due to drop in value. The SEC insists that upon learning that information, Cuban instructed his stock broker to dump his shares, a transaction that led him to avoid losses in excess of $750,000. The Commission seeks to recover those avoided losses, with interest, and for Cuban to be fined up to $2.25 million.

2) Why would the SEC seek civil enforcement rather than refer the matter to the Justice Department for criminal proceedings?

There are several possible reasons (assuming such referral has neither occurred nor will occur). Foremost, the SEC probably believes that Cuban's alleged mistakes warrant only civil sanction, as is usually the result for insider trading cases. Federal securities laws provide for civil and criminal remedies in part to reflect the varying degrees of culpability among those who are alleged to have committed insider trading and other financial offenses.

The SEC may also have strategic motivations. The Commission may believe that it lacks the requisite evidence to secure a criminal conviction, which would require that charges be proved "beyond a reasonable doubt" (as opposed to the lower "preponderance of evidence" burden in a civil case). Preliminary indications of the evidence may corroborate that explanation: The SEC's complaint appears to be based largely on the testimony and documentation of Mamma.com's chief executive, Guy Faure, whose veracity remains to be determined. And keep in mind, the Commission must prove intent or knowledge on the part of Cuban to engage in insider trading; mere negligence will not do.

3) But could Cuban eventually face criminal charges?

Yes. The Justice Department, through the U.S. Attorney for the North District of Texas, could seek a criminal indictment for insider trading. An indictment would require a grand jury to conclude that there is probable cause (or "more likely than not") that Cuban committed insider trading. A criminal conviction of Cuban would require the government to meet the high burden of "beyond a reasonable doubt."

At this point, however, there is no indication that Cuban will face criminal charges. And none seem likely to occur, as criminal charges for insider trading are typically reserved for egregious cases. Even if Cuban behaved as the SEC claims, his actions would probably not trigger a criminal case.

4) Can the NBA discipline Cuban?

Yes. The NBA enjoys the right to discipline any owner or employee of any of the 30 franchises for conduct detrimental to the league. Discipline could entail a suspension, fine or both.

5) Will the NBA discipline Cuban?

At this point, probably not. Keep in mind, the legal process has only begun. Although Cuban has been charged, he has not yet been found liable of breaking any laws. He is presumed innocent and the NBA likely values that presumption.

The SEC's decision to seek civil enforcement also works in Cuban's favor. The Commission's decision may suggest that it views Cuban's alleged misdoings as less egregious than those of a defendant pursued by the Justice Department.

On the other hand, securities fraud is extremely serious, and the NBA need not embrace the law's presumption of innocence. Both the circumstances and timing of this case also appear relevant: Securities fraud seems even more reprehensible when the alleged culprit is a billionaire and when the nation's current financial crisis is thought to at least in part reflect the greed of Wall Street. Although it is unlikely, the NBA may thus view mere allegations of such misconduct as worthy of punishment -- especially since, as a member of an association of owners, Cuban and his actions reflect upon other owners and the league itself.

Commissioner David Stern's relationship with Cuban may also influence whether the NBA takes action. To put it mildly, the two have not always hit it off.

6) What is the likely outcome?

It is too early to make such a prediction. Cuban -- who, with his counsel, may have had settlement negotiations with the SEC before today's court filing -- could view the charges as preposterous, even slanderous, and vow to fight them. In fact, Cuban has already released a statement expressing that "the government's claims are false and they will be proven to be so."

Over time, however, Cuban may view the charges as sufficiently worrisome to seek a settlement with the SEC. He may pursue a settlement even if he believes that he is innocent. Plus, the SEC has a very good track record in bringing claims, a point that may influence Cuban and the advice he receives from his legal counsel.

Cuban's interest in purchasing a Major League Baseball team -- he has made a bid to buy the Cubs -- may also factor into his thinking. If he wants to preserve his chances for securing approval by MLB owners, any settlement with the SEC would need to be carefully structured so as to mitigate his admission of wrongdoing.

Although not a party to this dispute, the NBA probably wants the matter to disappear as quickly as possible. A trial pitting Cuban against the country's protector of fair and orderly financial transactions would not seem to be in the NBA's best interests.

But the dispute is fundamentally between the federal government and Cuban, and he retains the right to contest the charges.

Michael McCann is a visiting law professor at Boston College Law School, a law professor at Vermont Law School and the distinguished visiting Hall of Fame Professor of Law at Mississippi College School of Law.

 
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