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Phil's Insider-Trading Escape

By Jeffrey Toobin Illustrations by Eddie Guy
June 27, 2017

Phil Mickelson has long been known as golf's consummate escape artist. His signature flop shot has turned innumerable misdirected approaches into tap-in pars. When his drive on the 13th hole at Augusta National in the final round of the 2010 Masters settled on pine straw, Mickelson fired a 6-iron between two trees and onto the green, setting up a birdie that would lead to his third green jacket. Yet all of those salvaged pars and dazzling birdies might pale next to the way Mickelson extricated himself from legal trouble earlier this year. In a trial that unfolded in a Manhattan courthouse, Mickelson was implicated in a three-way insider-trading scandal that ended with the two other principals facing many years in prison. Mickelson's fate? He just walked away—and he didn't even have to testify.

The story centered on one of the more extraordinary figures in American sports: Billy Walters. Just as Warren Buffett made billions from doing what untold Americans do every day—picking stocks—Walters made millions from a similarly common activity: betting on games. Walters' life story reads like a tabloid twist on the Horatio Alger myth. He was born 71 years ago in the impoverished hamlet of Munfordville, Ky. His father died when Billy was a year old, and his mother soon took off for parts unknown. Billy was left to be raised by his grandmother, who instilled in the boy a ferocious work ethic. At 7, Billy was cutting lawns; at 9, he had a paper route. The patterns—and passions—that would recur in his life were established early. When he was just 11, as Billy often told the tale, he saved up his earnings—sometimes said to be $75, sometimes $120—and placed his first bet with a local grocer for his favorite team, the New York Yankees, to win the 1955 World Series. They didn't. It remained "one of the most hurtful, memorable losses I've ever had," Walters told the Las Vegas Review-Journal.

After high school, Walters cultivated embryonic versions of the skills that would prove critical later in life—for selling cars, for gambling on sports, and for testing the limits of the law. In Kentucky, he ran through money (thousands), marriages (two) and misdemeanor plea bargains (one, for illegal gambling, later expunged from his record). But by the time he was in his mid-30s, the truth was that Walters was no better at wagering than he was at matrimony. He was broke more often than not, frequently drunk, and his life was heading (at best) sideways. So in 1982, Walters made the best bet of his life by moving to Las Vegas.

There Walters quit drinking and connected with two certified geniuses in the infant field of computer-aided gambling. Ivan Mindlin was a surgeon, and Michael Kent was a mathematician who once designed nuclear submarines, and together they started what they called the Computer Group, which was a kind of Moneyball with real money. Using the primitive computers of that era, they analyzed college and pro football statistics to discover flaws in the point spreads established by the Las Vegas casinos. As a result, the Computer Group figured out how to place bets that would produce, on average, better results than virtually any individual could come up with. The geniuses couldn't guarantee wins, like a single sure thing a week. Rather, they identified slight statistical anomalies in point spreads—which meant that they had to bet a great deal of money to profit from the insights gleaned from their computers.

That's where Billy Walters came in. He was fearless about laying down hundreds of thousands of dollars a week, and he had the charm, contacts and know-how to spread the bets among the dozens of bookies and casino sports books that could handle that kind of action. This partnership of the nerds and the hillbilly gladhander made gambling history. It's difficult to confirm exact figures, but it seems clear that the Computer Group made tens of millions of dollars in the '80s. Before too long, the big casinos tired of losing money to the digital savants, so they began, at first, limiting the amounts that could be bet on each game and then barring the Computer Group gamblers from their premises. This led Walters to create a network of assistants who would lay down the bets for the group. As Walters later described those days, he said he would bet about $2 million a week during the football season—and he said he once won $3.5 million on the Super Bowl.

This kind of success drew attention from law enforcement. In 1985, the FBI raided the headquarters of the Computer Group, and Walters and more than a dozen others were indicted on charges relating to illegal interstate gambling. Walters was acquitted. Later, the state of Nevada indicted Walters three separate times on similar charges. He was never convicted of anything. The prosecutions succeeded only in creating an aura of invincibility around Billy Walters. He became a major figure around town in Las Vegas, opening car dealerships, subsidizing local charities and playing a lot of golf.

Walters' love of golf fit nicely with his passion for gambling. He was never a terrific player—he was about a 10-handicap—but he could handle pressure as well as any PGA pro. In a laudatory profile of Walters on "60 Minutes," broadcast in 2011, he said he had won as much as $400,000 on a hole of golf. He also said that he once won $1 million on a single round—which he then lost at the blackjack tables that night. In the 1990s, Walters became friends with someone who was, in one respect, his mirror opposite: a great golfer and a mediocre gambler named Phil Mickelson.


Mark Kauzlarich/Bloomberg/Getty Images

During his long tenure in the public eye, Mickelson has never been coy about his love of gambling, especially on sports. His love of the long shot somehow seemed fitting for a player who also relished risk on the golf course. Over the years, Mickelson has been happy to let the word out that he made some major scores. Mickelson and a group of partners are said to have put $20,000 down on a preseason bet on the 2001 Super Bowl winner and won a reported $560,000. He also supposedly won big by betting on the Arizona Diamondbacks to beat the New York Yankees in the 2001 World Series. But these successes, clearly, were only part of the story. According to people familiar with Walters' practices, he allowed Mickelson to keep an account for sports bets with him; Walters operated, in effect, as a big-time bookie for Mickelson. For example, according to a sworn statement by Mickelson's business manager, on Sept. 19, 2012, Mickelson paid Walters $1,950,000 to cover a debt "related to sports gambling."

Furthermore, his manager acknowledged, Mickelson "owed similar debts to Mr. Walters in the past, and had repaid them." Against those kinds of losses, Mickelson's fortunate bet on one Super Bowl looks less impressive. Still, considering that in 2012 alone Mickelson made a reported $48 million from golf winnings and endorsements, his wagering looks like a pricey but affordable hobby.

Walters, on the other hand, had no such cushion. His downfall began when he tried to turn his passion for golf into a business, shortly before the post-2008 recession hit Las Vegas harder than anywhere. According to an investigation by Bloomberg, Walters and his companies bought four courses in Las Vegas during the boom years, but the recession pummeled the golf business, especially in Nevada. Walters had sold a course called Stallion Mountain, and to close the deal, he personally guaranteed the loan for the buyer. When the buyer defaulted, the Federal Deposit Insurance Corporation pursued Walters to repay $15.25 million, Bloomberg found. Later, he sold another course, called Desert Pines. He later said that a third course, Bali Hai Golf Club, left him with $49 million in "un-recouped costs."

The recession apparently convinced Walters to forgo the risks of gambling and look for a sure thing: insider trading. And he had just the man to help him.

Mickelson sold his shares for more than $931,000 in profits. At the same time, he repaid his gambling debt to Walters in September 2012.

Walters met Tom Davis in the mid-'90s, when both men were flying high. Walters was still king of Las Vegas in those days, and Davis was a board member of Dallas-based Dean Foods, which was one of the largest dairy processors in the country. The two men shared a love of golf and gambling, though Davis was not nearly as successful as Walters was in the casinos. Indeed, where Walters was strategic in his gambling, Davis was merely compulsive—and his life turned into a cautionary tale. Davis made millions in his business career, but it was never enough to make up for what he kept losing at the tables. After Davis lost $200,000 playing blackjack at the Cosmopolitan Hotel in Las Vegas, he stole $100,000 from a shelter for battered women, in Dallas, for which he had raised funds in the past. Davis used the money to pay for a surprise party for his wife. Later, Davis took another $50,000 from the shelter.

Davis ultimately paid back the charity, with money that he borrowed from Billy Walters. In time, Davis borrowed nearly a million dollars from Walters, and in 2011, as both men were facing financial trouble, prosecutors say they concocted a scheme that was both simple and audacious. Walters gave Davis a cellphone that would be used exclusively for discussions about stock in Dean Foods. Walters would call Davis' usual cellphone and leave a message that said, "Let's go have a cup of coffee." That was the signal for Davis to call Walters back on what they called the "Bat Phone," and give Walters inside information about issues affecting the stock price of Dean Foods—which they would refer to as the "Dallas Cowboys." Of course, as a board member of Dean Foods, Davis was the classic insider and thus obligated to keep this kind of information secret. By sharing the information with Walters, Davis was breaking the law—and he knew it.

Insider traders can make money in two ways: They can buy stock when they know it's going to increase in value, or they can sell when they know the value of the shares will soon fall. Thanks to Davis, Walters made money both ways. Walters first bought nearly four million shares of Dean Foods on Davis' advice in 2008, and he sold it, again with Davis' guidance, for $6 million in realized and unrealized profits shortly thereafter. But the trading really took off in 2010, after Walters started loaning Davis money. (During this period, too, Walters introduced his friend Phil Mickelson to Davis, as Mickelson was on the practice range of the Rancho Santa Fe Golf Club, to which Mickelson and Walters belonged.) Walters' most profitable trades came after Davis tipped him that Dean Foods would be spinning off a subsidiary called WhiteWave. By the end of 2012, Walters' trading in Dean Foods stock netted him realized and unrealized profits and avoided losses of more than $43 million.

At roughly the same time, Mickelson was making similarly profitable, if less-extensive, trading in Dean Foods stock. It began in July 2012, according to the Securities and Exchange Commission, when Walters called Mickelson, who had placed bets with Walters and owed him money at the time. (Phone records showed frequent calls and texts between Mickelson and Walters during this period.) Mickelson had never before invested in Dean Foods stock, but Walters urged Mickelson to start trading in it. Mickelson bought Dean Foods the next trading day in three brokerage accounts he controlled. About a week later, Dean Foods' stock price jumped 40 percent following public announcements about the WhiteWave spinoff. Mickelson then sold his shares for more than $931,000 in profits. At the same time, he repaid his gambling debt to Walters in September 2012, apparently in part with the trading proceeds. (Mickelson and his attorneys in the matter declined to comment.)

Soon, though, federal investigators noticed the suspicious trading in Dean Foods stock. One morning in May 2014, a pair of FBI agents appeared at Davis' home in Dallas to ask him about his financial relationship with Billy Walters. Davis acknowledged knowing Walters but lied about nearly everything else, especially about whether he had ever supplied Walters with inside information regarding Dean Foods. Later, Davis lied about the same subjects in a sworn deposition before the SEC. Finally, though, at the end of 2015, facing a mountain of evidence and declining health, Davis decided to come clean. He pleaded guilty to 12 counts, including insider trading and lying to the SEC and FBI, and agreed to cooperate with the continuing investigation of Walters. In light of his multiple guilty pleas, Davis faced a maximum of 190 years in prison. By cooperating, Davis greatly reduced his chances for a long sentence.

Once prosecutors had Davis' testimony in hand, they faced their next decision. It appeared that Walters and Mickelson were in very similar situations: Both had profited from inside information supplied by Tom Davis. But were they both guilty of insider trading?

Insider trading is an anomaly among federal crimes. Congress never passed a specific law outlawing the practice, so prosecutors have improvised, generally bringing insider-trading cases under statutes that were originally designed to forbid ordinary business frauds. The Supreme Court and other federal appeals courts have approved most of these prosecutions, but not all of them, giving the law of insider trading an unusual degree of uncertainty. In short, it's not always clear what constitutes unlawful insider trading.

Most insider-trading prosecutions begin with two people—known as a tipper and a tippee. The first is an individual with a duty to keep corporate information secret (also known as an insider), and the second is someone who sells stock based on the tip from the insider. When it came to Dean Foods, Tom Davis, as a board member of the company, was a classic insider, and tipper, and Billy Walters was a prototypical tippee. The complexity arises when the tippee passes inside information to a third party—in this case, from Walters to Phil Mickelson. If Mickelson traded on this information (as he apparently did) but had no contact with the original insider (as he apparently did not), was Mickelson guilty of a crime?

The Dean Foods investigation took place as federal prosecutors in Manhattan were undertaking a major crackdown on insider trading. But just as the Dean Foods case was coming to a head, in December 2014, the prosecutors suffered a stinging setback in court. The United States Court of Appeals for the Second Circuit, which includes New York, threw out one of the prosecutors' most important convictions. In that case, Todd Newman traded stock based on inside information that he had received second-hand—that is, from an individual who had received it from a corporate insider. In other words, Newman was in a comparable position to Mickelson—who was separated from Davis, the source of the inside information, by Walters. According to the Second Circuit decision in the Newman case, a tippee (like Mickelson) could only be found guilty of insider trading if he knew that the tipper (Davis) benefited in some way from giving the information to Walters. Because there was no evidence of what Mickelson knew about Davis' motivations, Mickelson could not be charged, under the law of the Newman case. "There is no question that the Newman case hurt the chances of a case being brought against Mickelson," said a government investigator involved in the Walters prosecution.

According to his lawyer, Walters was too smart to involve a celebrity like Mickelson in an insider-trading scheme.

In light of the Newman case, the U.S. Attorney in Manhattan charged only Billy Walters with insider trading. Still, even though Mickelson was not at the defense table, he figured prominently in Walters' trial. Indeed, Barry Berke, Walters' lawyer, built his defense in part around Mickelson. In Berke's opening statement to the jury, he said that Walters, as a sophisticated investor, would have known that the SEC would examine unusual trades in Dean Foods stock that were made before and after major corporate announcements. "When there is a big event for a company, whether it's a merger, acquisition or a spinoff, the Securities and Exchange Commission looks to see who are the buyers leading up to that, and they investigate; that's what they do. So if you're Bill Walters, I would submit, and you believe that someone has given you illegal inside information, the last thing you would do is give it to Phil Mickelson, one of the most famous athletes in the world, that is immediately going to attract regulatory scrutiny and lead back to Bill Walters." In other words, according to his lawyer, Walters was too smart to involve a celebrity like Mickelson in an insider-trading scheme.

The dramatic high point of the trial came on the morning of March 21, 2017, when Tom Davis took the witness stand against his one-time close friend Billy Walters. The government's theory of the case was straightforward. Davis gave Walters inside information as a way of repaying Walters for the money Davis had borrowed from him. Asked why he gave inside information about Dean Foods stock to Walters, Davis testified, "I borrowed money from him. I became indebted to him." Berke savaged Davis on cross-examination, dwelling at length on his theft from the women's shelter and his repeated lies to the authorities. Davis acknowledged his misdeeds but insisted that he was now telling the truth. And Davis' story was buttressed by cellphone records and Walters' trading patterns, which matched with Davis' description of their relationship.

Prosecutors had another way of backing up Davis' credibility—by showing how Mickelson also traded in Dean Foods stock in a similar pattern as Walters. In the view of prosecutors, Walters gave Mickelson inside information so he could generate the cash to repay the golfer's debt to him. According to financial records introduced at the trial, accounts controlled by Phil Mickelson and his wife, Amy, made 23 purchases of Dean Foods stock, at a total cost of about $2.46 million, in a single month, between July and August 2012. Then, on Aug. 8, after the WhiteWave spinoff was announced, the Mickelsons sold all their holdings, for a profit of nearly $1 million.

One witness at Walters' trial could have clarified Phil Mickelson's role: Phil Mickelson. But the golfer's lawyers informed the prosecution and defense that if called by either side, Mickelson would decline to testify, based on his Fifth Amendment right against self-incrimination. (Pursuant to the practice in Manhattan's federal court, Mickelson could make that representation through his lawyers and avoid the humiliating spectacle of taking the Fifth in public.) In lieu of Mickelson's testimony, the two sides agreed on a substitute of sorts—a stipulation, or agreement, about Mickelson's financial dealings, based on records provided by Boulevard Management, which conducts his financial affairs. The statement acknowledged that Mickelson paid Walters $1,950,000 in 2012, to settle a gambling debt, and that Mickelson had owed and paid similar debts to Walters in the past. The stipulation went on to say that Mickelson's reported income in 2012 was about $48 million.

Even without Mickelson's testimony, the prosecution believed that his trading in Dean Foods stock represented powerful incriminating evidence against Walters. Brooke Cucinella, one of the prosecutors, said in her closing argument, "When [Walters] knew he had a sure winner, he let his friends in on the action. In the days leading up to the spinoff, the defendant told Mike Luce [president of The Walters Group and a friend] and Phil Mickelson to get in on Dean Foods' stock. Now, we don't know if he told them the source of the information. But you know that Mickelson, at least, thought that the information he was getting from Walters was good enough to invest over $2 million in Dean Foods stock, some of it in his children's accounts. Mickelson had never purchased Dean Foods stock before—not once. The phone records show you that Walters and Mickelson were texting repeatedly on the days leading up to Davis' visit to the Walters' home, before he even got there. The defendant knew by then that the spinoff was looking good and that things were on track for Aug. 7. And he told Mickelson that the trade was a winner. Now, you know that on Aug. 8, Luce and Mickelson sold their shares. Mickelson made just under $1 million—money that ultimately he transferred right back to the defendant because of a gambling debt."

In his closing argument for Walters, Barry Berke mocked the idea that someone as wealthy as Mickelson needed a stock tip from Billy Walters to pay off a gambling debt. Berke said that Walters and Mickelson often shared stock tips, and they shared a connection at Barclays, which was one of Mickelson's sponsors. "What you have is that in July of 2012, Mr. Walters had a high, high conviction that it was a good time to invest in Dean Foods. It was a free roll, it was beaten down, and WhiteWave may happen. ... Some notion that it was because of a gambling debt," Berke told the jury. "You see from the stipulation Mr. Mickelson always paid off, he didn't need any tips, given he made $48 million in one year alone. ... The prosecution's theory is based on lies, speculation and innuendo." The jury disagreed and found Walters guilty of all 10 counts against him. Speaking to reporters after the verdict, Walters said, "I just did lose the biggest bet of my life." Like Davis, Walters faces the possibility of more than 100 years in prison.

In the view of prosecutors, Walters gave Mickelson inside information so he could generate cash to repay the golfer's debt to him.

Mickelson did not escape totally free from his dealings with the insider-trading ring. Walters never cooperated with the authorities, so investigators never learned what, if anything, he told Mickelson about his sources of information about Dean Foods. The government had no proof that Mickelson intended to violate the laws against insider trading. But the SEC named Mickelson as a "relief defendant" in a civil case, meaning that the agency believed that he profited from insider trading in Dean Foods, even if he didn't engage in it himself. Mickelson settled this civil case by agreeing to surrender his trading profits of $931,738 plus interest of $105,291. In doing so, Mickelson neither admitted nor denied the allegations in the SEC's complaint.

But Mickelson's legal odyssey had a final twist. The Newman case, decided by the Second Circuit in December 2014, effectively prevented a criminal prosecution against Mickelson. But while the criminal prosecution of Walters was pending, the United States Supreme Court took up another case from California, which had limited insider-trading law in a nearly identical way that Newman had done in New York. In a unanimous decision in December 2016, the Supreme Court rejected the Newman rule and held that recipients of inside information could be prosecuted even if they didn't know what the original tipper received. In other words, Mickelson might have been prosecuted if his case had arisen before December 2014 or after December 2016. But because the Newman case was the law in New York when his case came up, Mickelson dodged trouble on either side—just as he did between those two trees at Augusta.

Jeffrey Toobin is a staff writer at The New Yorker, the senior legal analyst for CNN, and the author, most recently, of American Heiress: The Wild Saga of the Kidnapping, Crimes, and Trial Patty Hearst.