Always the Maverick
mav·er·ick n. One that refuses to abide by the dictates of or resists adherence to a group; a dissenter. adj. Being independent in thought and action or exhibiting such independence....
How appropriate that the NBA team owner Mark Cuban purchased years ago was called the "Mavericks." Whether it is his unique style in owning the team, the ideas that he posts on his usually provocative Blog Maverick weblog, or the businesses that he pursues (which range from High Definition TV to the Swash), Cuban is himself a true Maverick (for the record, I'm a Wizards fan rooting for the Mavs for no particular reason, and I don't see how the refs could call that ticky-tack "foul" on Dirk at the end of OT to basically hand the game to the Heat last night).
So why is Cuban appearing on the pages of SLW today? Let's back up a bit first to put this in context. There have been many, high-profile insider trading cases brought through the years against people who traded based on non-public information concerning what would be imminently published in influential (and market-moving) newspapers or magazines. The case against R. Foster Winans, the Wall Street Journal reporter who was sentenced to prison for his part in a scheme to trade stocks based on advance information about WSJ's "Heard on the Street" column, is a prime example. And please don't even get me started on the Business Week cases.
These "trading in advance" cases, however, have always depended on a curious fact that allowed the SEC or prosecutor to allege that the "breach of duty" required to prove insider trading existed: that the publication whose information was stolen or misappropriated considered the information to be confidential and had a policy in place to protect that information pre-publication. Indeed, I recall reading a court opinion in one of the Business Week criminal cases years ago and wondering to myself: "So if there was no confidentiality policy then this would be legal trading?"
Enter Mark Cuban. As discussed in this article, Cuban is an investor in a new website called Sharesleuth.com that will employ investigative journalists to ferret out and blow the whistle on corporate fraud. Certainly a worthy endeavor, but the story does not end there. Cuban is quoted in the article as stating, “there are a million ugly stories in the financial underground.... We plan on finding and sharing and profiting from them.”
Did you catch that last "profiting" part? According to the article and Cuban's own blog, Cuban plans to buy and sell the stocks of the companies the Sharesleuth site writes about in advance of the publication of these Sharesleuth stories. As Cuban writes in this post on his blog,
I just hired a young, award winning journalist to partner with me on a blog that will do nothing but try to uncover corporate fraud. Young, energetic, fired up and damn the stuff i have seen so far is good. Will the payoff be about accounting gone bad ? Will it be a Skilling and Lay standing in front of the mike picture with accompanying text ? No chance.
If we found the enron scam, I would push to tell the story with a flash animation parody of Skilling and Lay to Shaggies “It wasnt me” along side a Bethany McLean/Peter Elkind quality story. Just as the movie “Enron The Smartest Guys in the Room ” told the story in a detailed and entertaining way, our goal will be to do the same.
Business is an easy place for me to start because the fraud and sithlord wannabes uncovered can not only create great stories of interest for the webite and HDNet World Report, but also allow me to buy and the sell the stocks of the company. A journalistic conflict you say ? Not any more. Not in this world. It will be fully disclosed and explained. This site is for the profit of its owners and we will buy and sell stocks that are discussed, before they are made available on the site. So make any decisions based on this information accordingly.
Facts are facts. Right is its own defense. If we can uncover companies whose stock is public and that can be bought or sold and that allows us to pay for more in depth research and effort. Im good with that.
So there you have it, SEC. Sharesleuth will have no "confidentiality" policy about its information. To the contrary, it will apparently have the opposite policy--the owners not only may but will trade on the publication's information in advance. And they are telling you this up front.
I confess that I do not know whether this maverick "business plan" is legal or not. If it is, I'm sure that Plotkin and Pajcin are kicking themselves right now for not including it in the Insider Trading, Inc. business plan. I am very curious what insider trading experts such as Profs. Bainbridge, Ribstein or Henning would have to say about it. Perhaps they will weigh in?
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Comments
Bruce,
I certainly rank a very distant third on your list, so it is flattering to be in the same sentence as Professors Ribstein and Bainbridge.
An interesting situation which, in Mark Cuban's oddly endearing way, brings up an interesting parallel to the Dirks case (another "personality" who enjoyed the limelight). The Dirks decision seems to give a free pass to analysts who dig out information on a company and then use it for their own purposes. Indeed, that's why we want analysts to be "independent" and the Wall Street firms paid so much in penalties for having biased research. So, to the extent Cuban is putting his website in the position of being an "analyst" by digging out fraud and then taking advantage of that knowledge, at least as long as it's not information from an insider who meets the Dirks tippee test, he should be in the clear.
The Winans case, and the various Business Week cases you have discussed so well (and enjoyably, too), all hinge on the breach of a fiduciary duty owed to the publisher. If your publisher says to the reporters to feel free to buy and sell on information that will be published later, then so long as there is not market manipulation (i.e. publishing news to drive down the price while trading on the opposite side), I can't see a basis for a Rule 10b-5 action based on that breach. If you recall in the O'Hagan case, which establishes the misappropriation theory for these types of situations, the Supreme Court said that there would not be a problem if the holder of the information informed the principal that he/she intended to trade on it because that would obviate the breach of fiduciary duty necessary for the Rule 10b-5 action. As long as everyone knows you are going to trade on the information, then there is no violation of the federal securities laws (assuming the information is not obtained improperly). This whole thing sounds consonant with the recent editorials in the Wall Street Journal (where else) by former Dean Manne resurrecting his 1960s position that insider trading is proper and good for the market.
I guess as a final note, if Mark Cuban really thinks there's that much fraud out there and his journalist will discover it, then got get 'em. I suspect that there is not as much as he might believe, or at least it is not as easily discovered as he might think. The Wall Street Journal (among others) devotes substantial editorial resources to just this area, such as the options-timing issues now cropping up. I think these are fairly uncommon, and while it is fun to refer to widespread conspiracies to hide financial chicanery, there really are not all that many going on. Indeed, if you find it, you might become the defense at trial for the former CEO who will blame you for the demise of an otherwise good company (see Lay and Skilling). If Cuban can find such information and profit from it, I will be happy to join him at the Dairy Queen for a couple blizzards on me.
As always, I very much enjoy the SLW blog.
Peter Henning
Posted by: Peter Henning | June 19, 2006 1:50 PM