The NYT reports that:
Phil Mickelson has five major golf championships and countless endorsement deals. Thomas C. Davis, a former investment banker, has a Harvard pedigree and a country club lifestyle. They also had a secret.
Both men owed money to William T. Walters, a high-rolling Las Vegas kingmaker, often considered the most successful sports bettor in the country. Now, federal authorities say those debts were at the center of a long-running insider trading scheme.
The SEC alleges that:
The SEC alleges that the sports gambler, William “Billy” Walters of Las Vegas, was owed money by then-Dean Foods Company board member Thomas C. Davis. According to the SEC complaint, Davis regularly shared inside information about Dean Foods with Walters in advance of market-moving events, using prepaid cell phones and other methods in an effort to avoid detection. The SEC further alleges that while Walters made millions of dollars insider trading using the confidential information, he provided Davis with almost $1 million and other benefits to help Davis address his financial debts.
The SEC complaint also alleges that professional golfer Phil Mickelson traded Dean Foods’s securities at Walters’s urging and then used his almost $1 million of trading profits to help repay his own gambling debt to Walters. Walters and Davis are charged with insider trading, and Mickelson is named as a relief defendant. Relief defendants are not accused of wrongdoing but are named in SEC complaints for the purposes of recovering alleged ill-gotten gains in their possession from schemes perpetrated by others. ...
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Walters and Davis. ...
In July 2012, Walters called Mickelson, who had placed bets with Walters and owed him money at the time. While Walters was in possession of material nonpublic information about Dean Foods, he urged Mickelson to trade in Dean Foods stock. ...
Mickelson neither admitted nor denied the allegations in the SEC’s complaint and agreed to pay full disgorgement of his trading profits totaling $931,738.12 plus interest of $105,291.69.
Both Walters and Mickelson are what we in the insider trading biz call tippee. n my book, Insider Trading Law and Policy, I explain that:
Dirks held that tippees could be held liable, provided two conditions are met: (1) the tipper breached a fiduciary duty to the corporation by making the tip and (2) the tippee knew or had reason to know of the breach.
The requirement that the tip constitute a breach of duty on the tipper’s part eliminates many cases in which an insider discloses information to an outsider. It would be perfectly proper for Acme’s CEO to tell its outside legal counsel about [an] ore discovery, so long as he does so for the purpose of enabling her to perform legal work on the company’s behalf. After all, making disclosures for a legitimate corporate purpose violates no fiduciary obligation.
In addition, not every disclosure made in violation of a fiduciary duty constitutes an illegal tip. ... What Dirks proscribes is not a breach of any duty, however, but solely a breach of the duty of loyalty forbidding fiduciaries to personally benefit from the disclosure.
I also discuss a scenario much like what happened here:
Suppose, for example, that Tipper tells Tippee #1 who tells Tippee #2 who trades. Can Tippee #2 be held liable? If the preconditions of tipping liability are satisfied, there is nothing in Dirks to foreclose such liability.
But now we come to United States v. Newman, 773 F.3d 438 (2d Cir. 2014), cert. denied, 136 S. Ct. 242 (2015), which held that:
... to sustain an insider trading conviction against a tippee, the Government must prove each of the following elements beyond a reasonable doubt: that (1) the corporate insider was entrusted with a fiduciary duty; (2) the corporate insider breached his fiduciary duty by (a) disclosing confidential information to a tippee (b) in exchange for a personal benefit; (3) the tippee knew of the tipper's breach, that is, he knew the information was confidential and divulged for personal benefit; and (4) the tippee still used that information to trade in a security or tip another individual for personal benefit.
The dispositive legal question key question thus would be: Did Mickelson know that the information was confidential and that Davis got a personal benefit from disclosing it to Walters?
We now come to the puzzle: Why did the government not charge Mickelson with insider trading? Presumably, the government didn't have enough evidence to satisfy Newman.
But then the next question is why did Mickelson settle? Here we come to the huge advantage the government has in settlement negotiations: In civil cases, the government can ask the court to force the defendant to disgorge his ill-gotten gains and, under the Insider Trading Sanctions Act, impose an additional civil fine of up to 3 times the amount of the illegal profit.
So if Mickelson made a profit of about $1 million (the amount he disgorged), went to trial, lost, and got hit with the maximum civil sanction, he'd face a total liability of $4 million. Assume Mickelson's lawyers told him that he had a two in three chance of winning at trial. That mean he still faced an expected sanction of $1.33 million. Settling for $1 million thus made economic sense. (Setting aside the cost of legal fees, the opportunity costs associated with opting for trial, etc..., which make settlement even more attractive.)
In sum, ITSA gives the government a huge club to coerce settlements out of even innocent defendants.
Now, we come to the gambling question. Other sports make a huge deal out go preventing gambling. In contrast, the PGA apparently is thinking about getting into bed with the gaming industry:
Golf betting generates an estimated $2.8 billion every year, and the PGA Tour wants a piece.
The Tour has asked a handful of data companies to submit bids for the right to package real-time tournament data into feeds for gambling houses, according to a “request for proposal” reviewed by Bloomberg News. The governing body of American men’s golf “continues to explore the risk/return trade-off associated with potential entry into the online sports gaming category,” the documents said.
Apparently, the PGA rules have a limited prohibition of gambling:
According to Section VI-B in the PGA Tour Player Handbook, "A player shall not have any financial interest, either direct or indirect, in the performance or the winnings of another player ... whether through purse-splitting, prize money 'insurance,' financial assistance, bets or otherwise."
The handbook says players are not to gamble or play cards on the premises where a PGA Tour event is being played.
But gambling apparently is pervasive in golf, including among PGA players, and Mickelson bets on a wide range of sporting events, including the outcome of Tuesday practice matches before PGA events.
So why is golf seemingly so much more relaxed about gambling than other sports? Maybe for historical reasons:
From the 1920s through the 1950s, pro golfers were often glorified clubhouse hustlers, eclipsing their purses and funding their travel with the money they pocketed on their days off. Gambling, in a way, bankrolled the nascent tour. Gene Sarazen, Ben Hogan, Byron Nelson, Sam Snead -- each lived and died by the bet. Lee Trevino built his game hustling on the hardpan courses of Texas. And the lineage continued through the likes of such famed money-match players as Arnold Palmer, Lanny Wadkins, Tom Weiskopf, Ben Crenshaw, Mark Calcavecchia and Paul Azinger. Even the young Tiger Woods, according to his father, hustled older boys at the local course, returning home with fistfuls of bills.
But other sports have gambling histories, which have made them more paranoid about gambling rather than less. So I confess to being puzzled. Should golf tighten the rules or should everybody else loosen them up?
My guess is that eventually everybody else will lighten up. The NFL may move a team to Vegas even though pro teams traditionally avoided Nevada due to gambling concerns. The NFL has embraced DFS (which is NOT gambling, of course, wink wink). If I remember correctly, some NBA official predicted sports betting would eventually be legal.