It's probably fair to say, at this point, that the Phil Mickelson insider-trading saga has drawn its last gasping breath. Mickelson paid back his Dean Foods profits, he's not being charged by the SEC, and there's really no meat left on this story's bones beyond a lot of speculation. But I couldn't help raise an eyebrow when I read this postmortem:
Thursday’s filing was vindication of sorts for Mickelson, who agreed to pay back the money he earned ($931,000 plus interest) from his purchase of Dean Foods stock prior to an upcoming spin-off announcement.
"The complaint does not assert that Phil Mickelson violated the securities laws in any way. On that point, Phil feels vindicated,” Mickelson’s lawyer said in a statement. “At the same time, however, Phil has no desire to benefit from any transaction that the SEC sees as questionable.”
Few things can tarnish a reputation, particularly a reputation that has been as carefully crafted as Mickelson’s, like a white-collar crime allegation, but give Lefty credit for mitigating the damage.
Two key concepts here: “vindication" and "mitigating the damage."
These are very interesting word choices, but before we delve too deeply into the idea of whether Mickelson has actually cleared his name, let's revisit the facts of the case. I'll try to do this as briefly as possible, and my summary will owe everything to wonderfully comprehensive recaps by the National Law Review and The New York Times. I encourage you to read those pieces, but failing that, here's the bite-size, blog-friendly, 13-point recap:
The Securities and Exchange Commission (SEC) alleged that a man named Thomas Davis—one of the directors of the Dean Foods Company—gave his pal Billy Walters insider information about the company, including the hot tip that one of the company's subsidiaries (WhiteWave Foods, which traffics in organic products) was about to go through a "spin-off," which essentially means that it would become a separate business. These spin-offs frequently result in huge leaps in stock price for the parent company.
Walters is an infamous professional gambler, and Davis owed him money. Davis also owed money to the IRS and other parties, and in exchange for all the Dean Foods information, Walters kept him afloat with loans that totaled almost $2 million.
It was a good investment by Walters, who in turn received information worth $40 million from Davis.
Paying it forward, Walters tipped off Phil Mickelson to the WhiteWave spin-off. In July 2012, Mickelson very suddenly dumped $2.4 million into Dean Foods stock (records showed extensive phone contact with Walters beforehand). The spin-off happened within a week, Dean Foods stock went up 40 percent, and Mickelson pocketed $931,000 when he immediately sold out. Some of those profits went to paying off Walters for gambling debts.
Seems like a pretty clear-cut case of insider trading, right?
Not so fast! This is where it gets a little tricky—the SEC complaint against Davis fell within the Second Circuit, which is the U.S. Court of Appeals with jurisdiction over New York, and hence Wall Street. In 2014, that same court overturned the conviction of a man named Thomas Newman on insider trading charges. More importantly, the case—U.S. v. Newman—gave new protection to traders who were separated, by at least one degree, from the original source of inside information.
Here's what the pertinent part of the ruling said, in basic, over-simplified terms: If someone (the "tippee," a term I am so happy I get to use) profits from insider trading after receiving a tip, that person ("tippee") can't be convicted unless A) the tipper received a personal benefit in exchange for offering the inside information, and B) the tippee also knew about the actual benefit the tipper received. That last part is really significant here.
As a brief aside, this ruling seems really strange—and the SEC hates it—but it sort of makes sense. Imagine some CEO releases inside information about his company in order to collect $3 million from some Saudi Arabian billionaire because he wants to buy a new yacht. Now imagine that billionaire called a few friends, tipped them off, and somehow you're a golf buddy with one of those friends, and after a dozen intermediaries, the information gets to you. You have no clue about the Saudi billionaire, or the CEO, or where any of this information came from. All you know is that you've got a hot stock tip from someone you trust, so you invest and make ten grand. When the proverbial shit hits the fan, do you deserve to go down for insider trading? The U.S. v. Newman ruling was intended to protect people like you. (Incidentally, there's a case set to go through the Supreme Court this year that could totally overrule Newman.)
Of course, Billy Walters seems like he's screwed. He knew Davis shouldn't have been giving away that information, and he knew Davis was receiving a benefit for it—from Walters himself. Good luck to Walters.
But what about Phil? While the Newman decision doesn't seem like it was meant to protect someone like Mickelson—who was pretty high up the food chain—that's the practical effect. Can the SEC prove that he knew Davis had spread the information illegally? Or that he even knew it came from Davis? Probably not, even though, as the Times points out, "it's a little hard to believe that [Mickelson] didn't know what he was doing." Would it be possible to show that Mickelson knew about Walters' payments to Davis? Barring transcripts of possible phone conversations and texts between the two men, or Walters perhaps rolling over on Mickelson, that's doubtful.
So, via what can only be called a strange case that might not even apply in the Second Circuit this time next year, Phil wasn't charged. You can debate the justice of that among yourselves.
Instead, he was named as a "relief defendant," and the SEC chose to make him pay back his $931,000 in Dean Foods profits, plus about $105,00 in interest. Again, I want to emphasize that he had to pay this back. For Phil, this is where the story ends.
But is the SEC pretty annoyed they can't charge him? Oh yeah. They won't say it outright, but the Times highlights this telling quote from U.S. attorney Preet Bharara, at Thursday's press conference: "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."
In other words: Count your lucky stars, Phil.
So let's get back to the idea of "vindication" and "mitigating the damage," because you can bet that Mickelson's lawyers and agents will be pushing that specific narrative over the coming months.
First, "vindication." Unless that word means "hooray, the SEC can't produce any evidence link that proves what many suspect!", then it doesn't apply. In order to be vindicated, there would have to be more proof that Phil is innocent. And if this case were pursued before the Newman ruling, the circumstances for Mickelson might be different.
As for "mitigating the damage" by paying back his profits and interest, the idea doesn't hold up to scrutiny. Phil had to pay the SEC. He doesn't deserve any kind of credit for that.
So let's drop the pretense. As a collective entity, golf journalists should have the guts to say what Joe Nocera of the Times said: Looking at the facts, Mickelson clearly benefited from the recent change in insider-trading laws. For a golfer who seems to believe that he's the smartest guy in the room wherever he goes, he made a really dumb move, and I'm going to take a wild guess that he didn't know U.S. v. Newman was waiting as a safety net. Furthermore, for a guy who Golf Digest estimates makes more than $50 million a year in winnings and endorsements, why would he risk his neck for a profit that falls short of what he'd make for filming a single commercial? What kind of decisions has he been making?
These are the questions we should be asking. So when the "vindicated Phil" narrative starts gathering momentum, as it inevitably will, please don't believe it. Lefty got lucky, and that's about it.