Tuesday, November 18, 2008

Mark Cuban

If you don't know whats going on with the SEC and the allegations of Mark Cuban with mamma.com check it out here:
This is what I think about it though:

This is the most erroneous thing I have ever heard of. Why would a
billionaire engage in this kind of activity? Short answer, he wouldn’t.
Mark Cuban may be called a lot of things by people who don’t understand
him, but truth be told he is a genius and a self made man. He is not
only a successful entrepreneur, he also turned the mavericks around.
I admire this man for what he has accomplished. Insider trading is
flawed from the core anyway. I mean in some regards it makes sense, but
if one really thinks about it the only thing people who violate “insider
trading” are guilty of is having friends in the right places. I mean, if
I had stock in an airline and saw on the news that one of their planes
crashed and I sold the stock I would in essence be doing the same thing
that Mark Cuban allegedly did. Additionally, making guinea pigs out of
people like Martha Stewart or Mark Cuban accomplishes nothing. The
people who have the connections to conduct insider trading is not the
same audience the SEC is trying to scare. They are trying to scare the
average investor who has someone else handling their finances. I think
that these allegations are ridiculous and I hope that they are dropped.


Jonah said...

I have many thoughts on this situation. While I agree that this, and the Martha Stewart scandals may seem like frivolous cases, with regard to the larger economic issues the SEC is facing today, I think they are important towards maintaining the clarity in the financial markets that FDR sought to create, through his implementation of the SEC.

Why would a billionaire engage in this kind of activity? Short answer: greed. Keep in mind we are talking about the same flamboyant investor who disclosed on his own blog (which he establish to expose wrongdoing in securities markets) that he may short-sell the shares of companies that he knows the site is about to discuss, seeking to profit from the expected decline in their shares. I think there is a lot to be said about an investor who creates a website to expose corporate wrongdoing, then uses the fruits of his creation to engage in speculative short-selling.

While I agree that Mark Cuban is an accomplished investor and a highly successful entrepreneur, I don't think his success lends anything to his integrity.

As far as insider trading goes: I refute it on the simple grounds that it is counterintuitive to economic efficiency in financial markets, where securities should be bought and sold competitively, and with little to no transaction costs. While I see your point about insider trading simply being having friends in the right places, it is obviously large institutional investors and people of considerable influence who could ever have those friends in the first place. I like to think that those people got to their places of power through hard work and determination.

The fact of the matter is that insider trading is illegal. Securities markets are public, and insider traders make use of information that is not available to the public for their own advantage in public markets. Taking advantage of information of this manner clouds information and inhibits efficiency in financial markets. It is the SEC's job to enforce these laws and to maintain clarity.

Mark Cuban's learning of a proposed private offering (by the CEO) that he feared would trigger a decline in the stock price is clearly very private information, not available to anybody outside the organization. Why the CEO even told Cuban is beyond me, and the SEC too, apparently.

Jonah said...

The CEO told Cuban to keep the information confidential. Cuban had to have been very naive to think that executing the sale of his full stake the next morning would not raise any red flags.

So do i think that the SEC should make a guinea pig out of Mark Cuban. Yes, why would they not. Regardless of your feelings on insider trading, it seems very apparent that he violated the law, just as Enron pretended to sell their debt to "3rd party organizations" that they ended up owning.

It is obvious that the financial markets are extremely complex, and that they require significant regulation and monitoring. The role of the SEC is to regulate the stock market and prevent corporate abuses relating to the offering and sale of securities and corporate reporting. I hope the evidence speaks for itself and they are able to do that job.

Young Baron said...

You make the obvious points. Points that anyone could make. However, when one tells you information, information that benefits you, can you honestly tell me that you do not take action on that information? For instance, if you were a college student at a football game where drinking is prohibited and I saw a police officer and informed you, wouldn't you ditch the beer? I would argue that you would. Now, what is different here? You are both breaking the law to better yourself. So how can one choose which laws are okay to break and which aren't? The only think that Cuban didn't do that he should have is disclose the information.

Now, for his website. If one is able to capitalize off of a website they create, how is there harm done? Google does the same thing. Although they are not selling stocks, they are selling information and advertising. Some if which tricks people (i.e. the sponsored links on the right side of the page). I argue that if one comes up with a solid business model they should use it!

One more example, if one of your best friends was on a plane, from an airline that you owned stock in, and called you when it was crashing due to a mechanical malfunction. Would you sell the stock? I believe that you would. So how is this any different. You are on the inside of information that the rest of the public has not idea about. Additionally, if you really think that the market is truly competitive and driven by supply and demand, I challenge you. Everyone knows that stocks are manipulated day by day. Wether it be from hostile take overs, or short sellers, or any number of things.

I also think that the Enron scandal cannot even be brought into this debate. That is a whole different subject. It is a business, not an individual, that benefited from information. This information left many jobless, and many more out of the money that was rightfully theirs. Now if a stock is going to plummet, for what ever reason (other than a company cooking the books), that is a risk an investor knows when ever they make any stock transaction.

Jonah said...

I can easily pick and choose which laws I will break and which I will follow. I would not experience any moral conflict by ditching a beer at a football game, however, the case would obviously be very different with insider trading.

You are arguing that insider trading is okay, and that we can relate everyday questions of right and wrong to
much larger questions of morality. If you truly believe that using private information to compete in public markets is okay, then obviously I could never appeal to your reasoning since what I see as black, you see as white.

As far as the website goes, there is a serious difference between his website and google. I don't really what you are trying to argue about how his site and google are similar. Google sells ad space to businesses and then displays the relevant results when people search. Cuban makes a website about exposing immortality in the financial markets, then capitalizes upon it to engage in an activity that already pushes the boundaries of morality in financial markets: producing speculation, then using it as a means of short selling. I am not saying he should be in trouble for this, it isn't illegal. You have to see the irony in what he is doing.

Economics and financial theory gives us an idea of the underlying forces that cause markets to behave in the ways they do. Obviously everything is not as our textbooks explain them. The financial market are still however competitive in nature. Think about you and I, and every other individual investor for that matter, who has no means of inside information and whose every transaction means gain for one party, while the other one loses. This is competition. If we suspend that belief that markets are and should be competitive, then what do you think the market is, a free for all? Clearly not. Short -selling is still competitive and there is nothing wrong with it. Insider trading however is clearly a different story. Think about the S&P 500, or the DJIA, how often do you think those people have opportunities to engage in insider trading: all the time...how often to you think they do it: some of them, some of the time.....how often do you think they get caught: rarely. Just because we know it is happening, does not mean it is okay. If people were permitted to use private information to compete in public markets, there would be no efficiency and people like you and I would simply not compete, resulting in a crazy fucked up equilibrium, one that would be meaningless.

Stock prices reflect how the market perceives the value of a firm. Obviously this valuation is based on many assumptions and ambiguities. If insider information was divested freely, you and I would have no place participating in the markets.

More simply though. Insider trading is highly illegal. It is against the law. It has been since 1966. It is one of the most highly illegal forms of corporate crime. Everyone knows that, and I have no sympathy for anyone who engages in it and gets caught.

Using inside information to ditch my beer is so fundamentally different I cannot even equate the two. Perhaps more appropriate would be something like me stealing a copy of a final and studying it before hand. Would I ever do this: no.

The American Legal system is based on a system of precedent and justice. There is little room for interpretation. Insider trading is very clear, and it differs from simply using insider information to avoid a situation you described with the beer. I hope that that the dire importance of this difference is apparent in Cuban's legal proceedings.

Jonah said...

by those people, i mean the CEO's of the companies included in those indices

and by free for all, i mean unregulated free for all

Young Baron said...

But how can one decide what rules are okay to break and what aren't? That is fundamentally flawed at the core. Are you god? Do you have the authority to make moral decisions based off of what the overall impact is going to be. If you are looking at it as black and white, with no room for gray, then what you are arguing is that every crime, no matter how big or small, should be punished. It shouldn't matter what the crime was. The first law against smoking pot was initiated in 1905, and I would argue that you have no problem with people smoking the stuff. So what gives you the authority to say which laws are okay to break and which aren't?

Also, it has long been established in business that it is no longer what you know (unless you are a genius) it is who you know. Wether or not I agree with this is a different topic. So I argue that this happens all the time. In many ways, shapes, or forms. Now when a billionaire takes advantage of information that gives hime under a million dollars, I think it is his instinct. What else should he do. Yeah he should have disclosed the information and then sold. But he still should have sold!

Jonah said...

No, I'm not god. Furthermore, I don't believe in god, so I don't consider the notion of "him" to have an more authority that you or I.

Do I have the authority to decide what is right and wrong? No.

Do I have the authority to use my own reasoning and judgement to decide within the bounds of my life what is moral: what is good and what is bad? Yes. I do it on a daily basis, so do you.

I don't understand your point of what you know versus who you know. Obviously people get to positions of power where it pays to know certain people as a result of what they know/ what they accomplished. Using this as a grounds to accept insider trading is okay because it draws off elements of a "long established" business practice is fine so long as once again you are willing to consciously break a law that is as well established as your notion of who you know.

Young Baron said...

All I am trying to say, is that maybe the $750,000 to him is like you ditching a beer. To you or I this may seem like a lot of money, but to him it is pocket change. So if I look at the same way that you do, that we all have the choice of what is morally right or wrong, this may not have been a big deal to him. I am not saying that he should be above the law just because he is so rich, I am just saying it is pointless to make a Guinea pig out of someone like him. I mean he should be fined financially but he should not receive jail time. It just doesn't make sense to me. If the damages are paid back, then the harm is undone. Plus I am sure that he would gladly just pay the money back and be done with it all.

Jonah said...

I can't argue with that bra.

Young Baron said...

Dan, to use an analogy similar to yours:

It was OK for Cuban to sell, but he just should have waited until it was
legal to do so.

If your car is capable of doing 70 mph, it's OK to drive that fast. You
just can't do it in a 35 mph zone. Cuban can read the signs as well as the
rest of us. He knew the stakes and simply chose to bet that he would not be
caught. I guess there are people smarter than him enforcing the laws. He
lost this one and now has to pay off the bet. It's not complicated at all.

You can post this on my behalf. Sign it "Always Right".


Marcy-Marc said...

Jabroni, Mark Cuban sucks