Mickelson Seeks Relief from Insider Trading Hazard

Almost two years ago, the Wall Street Journal and New York Times first reported an insider trading investigation involving sports gambler William “Billy” Walters and pro golfer Phil Mickelson.  At the time, the investigation appeared to focus on trading activity surrounding a potential take-over bid of Clorox.  We didn’t think much of potential claims against Mickelson arising out of the Clorox investigation.  Yet, buried in both articles was a reference to a second investigation involving trading in Dean Foods.  Today, the Dean Foods investigation shot up the leaderboard with the announcement of criminal insider trading charges against Walters and former Dean Foods Chairman Thomas Davis.  The SEC also brought civil charges against the pair and has named Mickelson as a “relief defendant,” asserting that Mickelson profited from trading in Dean Foods stock based upon non-public information received from Walters.

As a relief defendant, Mickelson is not accused of any wrongdoing. Rather, a relief defendant may be ordered to repay funds when that person has received ill-gotten gains and does not have a legitimate claim to those funds.  SEC v. Cavanagh, 155 F.3d 129, 136 (2d Cir. 1988).  In this case, the SEC alleges that Walters gave Mickelson, who at the time owed Walters for a gambling debt, inside information regarding Dean Foods (which Walters had received from Davis).  Mickelson then used that information to earn a $931,000 profit in just over a week from his $2.4 million position in the company.  That sure beats the $500 he made off of Mike Weir for betting that Jim Furyk would sink a bunker shot, a bet that put him in hot water for violating PGA Tour policy that provides that “player shall not have any financial interest, either direct or indirect, in the performance or the winnings of another player.”  In any event, the “ill-gotten” nature of Mickelson’s Dean Foods’ profit was not alleged to be the result of Mickelson’s conduct, but rather, Walters’.

It is not uncommon for the SEC to pursue disgorgement from individuals who are downstream tippees – traders who are a step or two distant from the insider who breached his or her fiduciary duty in disclosing material, non-public information.  See, e.g., SEC v. McGee, 895 F.Supp.2d 669, 686-689 (E.D. Pa. 2012).  By naming Mickelson as a relief defendant, not charging him civilly or criminally, the government need not prove that Mickelson knew that the insider – here, Davis – received a benefit from the immediate tippee – Walters – in exchange for the inside information. As tipees get further down the chain from the insider, the government faces an increasingly difficult task in proving the requisite knowledge of this benefit, particularly in light of the Second Circuit’s decision clarifying this requirement in United States v. Newman.  See our discussion of Newman here, here, and here.

As for Walters, he is a gambling man, and he’s now facing the gamble of his life.  He faces a federal indictment that alleges gains (and avoided losses) of more than $40 million.  Further, the government has announced that the corporate insider, Davis, has already pleaded guilty to conspiracy, securities fraud, wire fraud, obstruction of justice, and perjury, and is cooperating with the government.

For Mickelson, as the SEC announced today, he has agreed to repay the full disgorgement of his trading profits of $931,738.12 plus interest of $105,291.69.  He has neither admitted nor denied the allegations.  In a statement, Mickelson noted the return of the funds and said that he had “no desire to benefit from any transaction that the SEC sees as questionable.”  Mickelson appears to be identified in Walters’ indictment as “Individual-2” and may well play an ongoing role as a witness in any civil or criminal trial arising out of the SEC’s complaint or the criminal case against Walters.

Insider Trading Probe a Bogey for Mickelson?

On Friday, the Wall Street Journal and New York Times reported that federal authorities are investigating investor Carl Icahn, gambler William Walters and golf champion Phil Mickelson for insider trading. Investigators are examining a series of successful trades by Walters and Mickelson of shares of Clorox in 2011 shortly before Icahn announced an unsolicited (and ultimately unpursued) take-over bid for the company. FBI agents first questioned Mickelson about the trades a year ago, pulling him off a plane in New Jersey, then again last Thursday following his first round at the Memorial Tournament. Mickelson and Icahn both have denied even knowing each other. However, both know Walters and he may have been the link between the two.

Full disclosure: I’m a Phil Mickelson fan. Whether it’s his swashbuckling, go-for-broke style or the fact that we’ve eagled the same par four (mine was a fluke; his was Phil being Phil). He’s a risk-taker and with his aggressive game on the course comes both the good (think pine straw in 2010) and the bad (think Winged Foot in 2006). Perhaps that risk-taking has now gotten him into the deep rough with the SEC and DOJ.

Maybe, but maybe not. Even if Icahn passed information to Walters, who then passed it along to Mickelson, who then made a series of successful trades, liability is far from clear, particularly for a “downstream tippee” like Mickelson.

For there to be any insider trading liability, the tipper – Icahn – must have breached a fiduciary duty. Although Rule 14e-3 prohibits certain persons from disclosing or trading on information in connection with a tender offer, the rule applies only where the person making the offer has taken “substantial step” in making it. Icahn, who has no affiliation with Clorox, never made the offer. Icahn may have had a duty to his own investors to keep the proposed offer confidential, but the basis of such a duty is unclear and would likely turn on any non-disclosure requirements Icahn had with his investors.

But there are additional challenges in attaching liability to Mickelson. Even assuming that Icahn had a duty to his own investors, the government would need to demonstrate that “Phil the Thrill” knew or should have known that Icahn was breaching a fiduciary duty by making the a disclosure of non-public, material information. In addition, as we have blogged about previously, the government may also be required to demonstrate that Mickelson also knew or should have known that Icahn received a personal benefit from making the tip (also assuming that Icahn, in fact, received a personal benefit, an assumption that is far from clear).

That’s a lot of assumptions. So, ultimately, while Phil didn’t have the greatest week (or season) on the course, the government has an uphill fight in reaching him as a downstream tippee. In the meantime, Mickelson will chase that elusive U.S. Open victory at Pinehurst while the SEC and the DOJ continue to shoot for the pin as they aggressively pursue insider trading.