Can Cuban Do That?
Can Mark Cuban really trade stocks based on advanced knowledge of stories that will be published on Sharesleuth.com, the blog he is funding that will focus on exposing corporate fraud?
Cuban says that he will use the information gathered by investigators for Sharesleuth to buy and sell stocks before the stories are published. Presumably he would seek to profit by short-selling stocks of companies where his investigators have uncovered wrong-doing, expecting the stock price to fall after the wrong-doing is exposed to the public.
But wait a minute! Isn’t that insider-trading or something? Can journalists trade on their stories in advance of publication?
DealBreaker’s exclusive analysis after the jump.
Some of the most famous cases of insider trading have involved trading on pre-publication information from the business press. In 1985 a young Wall Street Journal writer named Foster Winans was convicted of leaking advance information the would appear in his ''Heard on the Street'' column to a stockbroker at Kidder, Peabody & Company. The recent arrests of Eugene Plotkin, David David Pajcin, Stanislav Shpigelman stemmed in part from an alleged scheme to get advanced knowledge of Business Week’s reporting.
So won’t Cuban run into trouble if he trades on his insider knowledge of what will appear on Sharesleuth? Maybe not. The case against Winans rested on a somewhat complex theory of insider trading that may not apply to Cuban.
The most basic type of insider trading involves someone inside a public company trading stocks based on information that is has not been made public. The head of a pharmaceuticals R&D division selling stock in his company stock after he discovers that the company’s latest super-drug also makes patients grow rabbit ears, for example.
Now Winans didn’t work for the companies whose shares the brokers he leaked to traded. He worked for the Wall Street Journal. He wasn’t a classic “insider” at all. So how can you be an insider-trader when you are not really an insider?
To get Winans the prosecution relied on a theory called “misappropriation”—they said his broker friends were trading on information Winans had a duty to keep confidential. Who did he have the duty to? It turns out he had a duty to his employer, the Wall Street Journal, to keep information in his column confidential until publication. Trading on that information was misappropriation.
But Cuban will own Sharesleuth, and he can set the rules up anyway he wants them. He cannot violate a duty of confidentiality to his own enterprise if he never makes a rule requiring such confidentiality. And since he’s already said he plans to trade on the information, we can be pretty confident there is no such rule. With out a duty of confidentiality, there can’t be a Winans style case against Cuban.
So Cuban’s in the clear, right? Not so fast. There’s more than one way to fillet a fish. Next week we’ll continue our examination of Cuban’s controversial plan.
Comments
If it's his site, who's he defrauding or misappropriating if he trades on the info.
he paid to dig it up. how's hiring a journalist to sleuth around any different from hiring a forensic accountant to blowtorch a company's possibly-dubious financials?
let's say he pays to get the info -- but trades on it without publishing it.
is that somehow better?
either what he does is legal or it's not. let's not waste time pondering journalistic ethics. there's not such thing, anyway. when journalists talk ehtics, they're really just talking industry norms.
Posted by: auto | June 16, 2006 04:24 PM
i don't see anything illegal about what he's planning on doing. it's not inside information if his "sharesleuths" are digging through public information. chances are, they will make some good calls and some bad calls, just like any other stock analyst. whether or not people (i.e., the market) will react to his calls is another unknown -- maybe he'll be the next jim cramer, pushing small cap stocks up and down with his amazing insight. if he trashes a company that hasn't done anything wrong, he could find himself in trouble with the law, but i'm sure he's smart enough to couch everything in terms of opinion and put forth all of the usual disclaimers about not providing investment advice.
Posted by: amigo | June 16, 2006 06:21 PM
Isn't it Frontrunning then?
Posted by: Angus Green | June 16, 2006 06:46 PM
Frontrunning involves trading on nonpublic information about an impending event, right? Cuban's strategy will be trading based on public information, so no foul, unless there is such a thing as making public information "more public," which is the same thing that a stock analyst does when they highlight what they believe to be the relevant portions of a company's public filings.
Posted by: amigo | June 16, 2006 06:58 PM
It's not the journalism angle that could trip up Cuban, since, as noted, he is sole owner of the site and can't misappropriate from himself. Rather, the problem for him is whether the investigative work that site itself does uncovers material non-public information that somebody had a duty to keep confidential. Now, if he is uncovering *only* true fraud, it might be argued that an employee can't be bound by his employer to keep criminal activity confidential -- you can't bindingly contract over criminal activity, explicitly or implicitly. But my guess is much of the "fraud" uncovered will be ambiguous enough that one could make the case that certain pieces of information are material, non-public and properly subject to explicit or implied duty of confidentiality. Cuban should tread more carefully with the Feds than he does with the NBA.
Posted by: Ben_H | June 16, 2006 07:22 PM
I thought (from my time as a sell side analyst) frontrunning was where an analyst traded a stock and then published a report on it which moved the stock in his/her favor.
'Where an analyst or advisor executes certain trades for himself and then advises his clients to undertake similar transactions.'
Posted by: Angus Green | June 17, 2006 06:15 AM
In the world of stock market regulators, frontrunning means you get a big buy order from a customer, then buy ahead of the customer to get the shares at a lower price. It's not insider trading, as it really has nothing to do with the company itself, only the fact that the large customer buy order will bump the price up and you'll be profitable on your purchase. This is illegal.
As for Cuban, I guess there is nothing inherently illegal about it. But rest assured, the SEC places low priority on looking out for the rich investor. They aren't going to let him get away with it for too long, but who cares because he's still got plenty of time to exploit it and get rich and more power to him.
Posted by: Market Regulator | June 17, 2006 10:19 AM
This is not so uncommon - check out stocklemon.com - they research lemons and trade short on these stocks then publish their articles afterwards - they have been very effective. Check out the recent demise of HOM after their articels were published and the reaction it led. All quite legal but the way, I think.
Posted by: defenderyou | June 18, 2006 02:36 PM