Mark Cuban Charged by the SEC. Whoa, Mamma.com!

By Michael Santo
Editor-in-Chief, RealTechNews

Mark Cuban has been called abrasive, brash, egotistical and more. Not only is he the owner of the NBA franchise the Dallas Mavericks, he’s a billionaire and Chairman of HDNet, an HDTV cable network. He’s also poked his nose into things some think he should stay out of, such as commenting — and blogging — on politics and tech.

Well, on Monday, he was charged with insider trading in the shares of Mamma.com by the Securities and Exchange Commission (SEC), avoiding losses of some $750,000 by doing so.

Insider trading is the “trading of a corporation’s stock or other securities (e.g. bonds or stock options) by individuals with potential access to non-public information about the company.” The SEC’s press release says:

The Commission’s complaint, filed in the U.S. District Court for the Northern District of Texas, alleges that in June 2004, Mamma.com Inc. invited Cuban to participate in the stock offering after he agreed to keep the information confidential. The complaint further alleges that Cuban knew that the offering would be conducted at a discount to the prevailing market price and that it would be dilutive to existing shareholders.

Within hours of receiving this information, according to the complaint, Cuban called his broker and instructed him to sell Cuban’s entire position in the company. When the offering was publicly announced, Mamma.com’s stock price opened at $11.89, down $1.215 or 9.3 percent from the prior day’s closing price of $13.105. According to the complaint, Cuban avoided losses in excess of $750,000 by selling his stock prior to the public announcement of the offering.

You might ask, what the heck is Mamma.com? After all, Mamma.com is no Apple or Google, right? Well, it’s a search engine, and I’ve used Mamma.com before (I’ll be honest; I tried it and discarded it).

Mamma.com calls itself “The Mother of All Search Engines.” It lets you search the Web, Videos, Jobs, Shop, Yellow Pages, White Pages. Problem is, if your name isn’t Google, Yahoo, or Microsoft you’re pretty much out in the cold nowadays.

While Mamma.com’s interface is pretty uncluttered, that doesn’t apparently grab enough users to prevent losses.

In December 2005, Mamma.com merged with Copernic Technologies, which also offers search software and online advertising services. It not trades under the ticker symbol CNIC.

According to comScore, in one year it dropped from 2 million unique visits (Sept. 07) to 669,000 unique visits (Sep. 08). That’s a 66% drop, pretty huge.

In March of 2004 Cuban blogged (and bragged) about his Mamma.com investment.

Everyone wanted to know why. Why this stock. Particularly when I usually am opposed to investing in any non dividend paying stocks at all. At some point I will write a book, ok maybe not a book, but definitely a couple blogagraphs on why I think the stock market is closer to a Ponzi Scheme or chain letter than it is an efficient market. But not today.

I invested in mamma.com for the same reason I invested in Netidentity.com back when it was known as mailbank.com. I love businesses with low overhead, that don’t need to be technology leaders to succeed, that generate cash that they can put in the bank, and at some point, hopefully payout to shareholders. I think mamma.com has that potential.

Well, apparently not. In March of 2005 he blogged that he had sold it, and pretty much dissed the stock.

I had purchased stock in Mamma.com in hope that it could be an up and coming search engine. I thought I had done some level of due diligence. Talked to the company management. Talked to some employees who worked in sales. Read the SEC Filings. I knew that they had a checkered past and had been linked to stock promoter Irving Kott, and that their law firm still handled some of Kotts business, but the CEO, Chairman, lawyers all said that things were reformed and the company was focused on its business.

Then the company did a PIPE financing. Im not going to discuss the good or bad of PIPE financing other than to say that to me its a huge red flag and I dont want to own stock in companies that use this method of financing .

Why? Because I dont like the idea of selling in a private placement, stock for less than the market price, and then to make matters worse, pushing the price lower with the issuance of warrants.So I sold the stock.

As I said above, Cuban had been told the information about the PIPE (”private investment in public equity”) financing was confidential. And, according to the SEC complaint (.PDF), at the end of the call, Cuban even said: “Well, now I’m screwed. I can’t sell.”

He knew he couldn’t sell, and yet he did. You would think a billionaire would laugh at a $750K loss, but apparently not.

Whoa, mamma(.com)!