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In the Clear, Phil Mickelson Can Thank an Insider Trading Ruling
Sports Business
By JOE NOCERA MAY 20, 2016

Phil Mickelson, meet Todd Newman.

It’s unlikely that the famous golfer knows the former portfolio manager for Diamondback Capital Management, a hedge fund based in Stamford, Conn., that went out of business in 2013. But Mickelson ought to consider reaching out to thank him. Newman is quite likely a key reason Mickelson was not charged Thursday with insider trading by the Securities and Exchange Commission.

Newman and another hedge fund manager, Anthony Chiasson, were indicted in 2012 on insider trading charges by Preet Bharara, the United States attorney for the Southern District of New York. (The S.E.C. also brought civil charges.) Newman was accused of regularly receiving information about two stocks — Dell, the computer company, and Nvidia, a chip maker — from company insiders, allowing him to make what amounted to illegal trades.

When Newman was convicted of the charges in December 2012, he appeared to be just another Wall Street scalp for federal prosecutors, part of their aggressive, continuing effort to crack down on insider trading. In all, some 71 people had either pleaded guilty or been convicted of insider trading by Bharara’s office by the time Newman was found guilty. (Chiasson was also convicted.)

But then something strange happened — or at least it seemed strange to those who had assumed that Bharara and the S.E.C. would continue to rack up insider trading convictions. In 2014, the United States Court of Appeals for the Second Circuit overturned Newman’s conviction (and Chiasson’s too), and tossed the original indictments. In effect, the appeals court ruled that Newman had not been guilty of insider trading.

Why? Because, the court said, for a crime to have been committed, the company insider — the so-called tipper — had to have received a personal benefit in return for offering up inside information. In addition, the person who received the tip — the “tippee” — had to know that the tipper was receiving that personal benefit. By all appearances, Newman didn’t even know who the tippers were; the information got to him through a series of intermediaries, the last of whom was an analyst at Diamondback. Without that knowledge of a personal benefit, Newman had not committed a crime.

Critics of the appeals court’s Newman decision, including Bharara, say that the judges essentially redefined what constituted insider trading, making it much more difficult to bring cases even when it is obvious that wrongful behavior has taken place. Defenders, including many lawyers in the white-collar defense bar, say the court was simply reiterating the law as the Supreme Court had always intended it to be, and was finally reining in overly aggressive prosecutions by Bharara.

Whichever the case, the Newman decision sent an unmistakable message: “It told prosecutors they had to be cautious,” said Peter J. Henning, a law professor at Wayne State University who writes the White Collar Watch column for DealBook in The New York Times. “It has had a chilling effect.”

With that context, let’s take a closer look at what the government said about Phil Mickelson’s behavior when it announced its indictment of his friend William T. Walters, a Las Vegas businessman and successful sports gambler. The facts, as laid out by the S.E.C., are not pretty. (Mickelson is not mentioned in the indictment, only in the S.E.C.’s civil charges against Walters.)

Walters, the government said, had been trading for years on insider information provided by Thomas C. Davis, a retired investment banker who was the chairman of Dean Foods. For a number of months in the spring and summer of 2012, Davis had been engaged in confidential Dean Foods board discussions about spinning off its organic food subsidiary, WhiteWave, a move Wall Street was encouraging. Davis — who has pleaded guilty and is cooperating with the government — had kept Walters informed about the discussions, and Walters had loaded up on the stock in anticipation of the spinoff.

At the time, Mickelson owed Walters gambling debts. Although he was a serious gambler, Mickelson was not a big stock trader, with only about $250,000 in the market, according to the S.E.C. Yet on July 30 and 31, 2012, after a series of phone calls and texts with Walters, Mickelson bought $2.4 million worth of Dean Foods stock — some of it with money he borrowed. “These were his first ever Dean Foods purchases,” the S.E.C. noted.

You know, of course, what happened next: A week later, Dean Foods announced the WhiteWave spinoff. The stock jumped 40 percent. The very next day, Mickelson sold his Dean Foods stock, reaping a profit of $931,000.

The case against Walters, as outlined by the S.E.C. and the United States attorney’s office, appears to be strong. In all, the government says, the inside information Walters got from Davis was worth $40 million. The government goes out of its way to play up the personal benefit Davis received in return. An inveterate gambler trying to keep up an unsustainable lifestyle, he owed money to the I.R.S. and others, including Walters. More than once, Walters bailed him out by either lending him money or arranging for a loan. The loans totaled nearly $2 million.

It is also clear that Walters, who is alleged to have tipped off Mickelson in turn, got a benefit from his tippee. According to the S.E.C., Mickelson used some of his Dean Foods profits to pay back his gambling debt to Walters. But did Mickelson know about the personal benefit the original tipper, Davis, was receiving? I know it sounds a little strange, but that really is the key legal question in the wake of the Newman decision. If he didn’t know that Davis was receiving a personal benefit in return for giving inside information to Walters, he’s off the hook.

(A quick aside: According to Forbes, Mickelson has reaped around $500 million in career earnings, and gets some $50 million a year in endorsement income. The fact that he was trading in Dean Foods to repay a debt to Walters surely raises questions about Mickelson’s financial decision-making, well apart from whether he traded on inside information.)

In its complaint against Walters, the S.E.C. seems to have highlighted Mickelson’s involvement in the case. But ultimately, it merely named him a “relief defendant,” meaning that all he had to do was return the money he had made from the Dean Foods trade, plus interest. He readily agreed. (The total is about $1.03 million.)

A spokesman for Mickelson issued a statement Thursday in which he said that Mickelson didn’t want to “benefit from any transaction that the S.E.C. sees as questionable.” He added that Mickelson regretted any “appearance” that he had fallen short of “the high professional and ethical standards that the companies he represents expect of their employees, associates and Phil himself.”

That should do the trick: Several of the companies Mickelson endorses have already said they’ll stick with him. For Mickelson, this too shall pass — and probably pretty quickly. Still, given the set of facts laid out by the government, it’s a little hard to believe that he didn’t know what he was doing.

The government won’t explicitly say the Newman case caused the government to back away from bringing charges against Mickelson. But at his news conference on Thursday, after declining to comment on that very question, Bharara did say this: “Conduct we think is nefarious, and undermines faith in the market and the fairness of the markets, will not be able to be prosecuted because of the Newman decision.”

On Thursday, Phil Mickelson became Exhibit A.
http://www.nytimes.com/2016/05/21/sports/golf/in-the-clear-phil-mickelson-can-thank-an-insider-trading-ruling.html?partner=rss&emc=rss