Golfer Phil Mickelson Avoids Insider Trading Charges Thanks to Newman Decision
Phil Mickelson owes his freedom to the landmark insider trading case, U.S. v. Newman, 773 F.3d 438 (2d Cir. 2014). In late-July 2012, Mickelson traded on inside information about Dean Foods Company ("Dean Foods") on a tip from a sports gambler, William Walters, and reaped a $931,000 profit. But under Newman, Mickelson was not liable for insider trading unless he knew that the original source of the information, Dean Foods Director Thomas Davis, tipped in exchange for a "pecuniary or similarly valuable" benefit. 773 F.3d at 452. Because the U.S. Attorney's Office and the SEC did not show that Mickelson knew Davis tipped for such a benefit, Mickelson was not charged with insider trading. This is a very favorable outcome for Mickelson, because prior to Newman this type of conduct was routinely charged by the U.S. Attorney's Office and the SEC as insider trading. Before Newman, the U.S. Attorney's Office and the SEC routinely brought insider trading charges (and won) against people who traded based on a tip of inside information received from a "friend." Mickelson did just that, because he traded based on a tip from Walters, a friend who Mickelson owed money from sports betting at the time. (SEC Compl. ¶ 8.) In fact, Mickelson used some of the $932,000 profit from his trading to repay his debt to Walters.
But after Newman, the critical inquiry for liability is whether Mickelson knew that the original source of the tip, Thomas Davis, a director of Dean Foods, tipped the inside information in exchange for a pecuniary or similarly valuable benefit. Neither the SEC nor the U.S. Attorney's Office alleged that Mickelson had such knowledge. In fact, Mr. Davis did tip for monetary benefit - in exchange for $1,000,000 in funds from Walters. But there is no allegation that Mickelson knew about this monetary exchange. Thus, Mickelson avoided charges.
Mickelson did not escape scot-free, however. He settled with the SEC as a Relief Defendant in a larger case against Davis and Walters, and is paying back the $932,000, plus prejudgment interest. A Relief Defendant is not alleged to have engaged in wrongdoing, but is alleged to have received the proceeds of someone else's wrongdoing without a legitimate claim.
The Mickelson case underscores the importance of Newman in providing new defenses and protections against insider trading charges. Potential defendants now have much greater ability to avoid insider trading charges, even in compromising circumstances. This makes it more important than ever to retain counsel immediately upon learning of an investigation. Counsel can help exploit the defenses available under Newman, and help avoid any charges.
Click on the link below to review the complaint: https://www.sec.gov/litigation/complaints/2016/comp-pr2016-92.pdf
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