At a press conference Thursday in which Manhattan U.S. Attorney Preet Bharara unveiled details of an insider trading case against sports gambler William "Billy" Walters, a reporter wanted to know why exactly the most famous person connected to case had been left out of the prosecution. "Doesn't it undermine confidence in the markets," the reporter asked, "to not charge the celebrity defendant and not explain why you are not charging the celebrity?"
A flash of irritation could be detected on Bharara's face.
Back in June 2014, a number of press leaks suggested that the pro golfer Phil Mickelson was under investigation for possible insider trading, along with Walters and the investor Carl Icahn. (Mickelson, Icahn and Walters denied any wrongdoing, and Icahn also wasn't charged on Thursday.) It was to be expected that journalists would now focus on the most obvious question—some might say "omission"—to arise from the Walters indictment.
Nearly two years later, federal prosecutors and the Securities and Exchange Commission have filed formal charges. Walters was arrested on Wednesday night in Nevada and charged with trading on inside information he obtained from Thomas Davis, a former member of the board of dairy company Dean Foods who is cooperating with the investigation.
Mickelson, meanwhile, was named only as a "relief defendant" in the SEC's civil complaint. According to Andrew Ceresney, the SEC's director of enforcement, a relief defendant is someone who was a "recipient of ill-gotten gains for which he has no legitimate claim"—essentially that he made money based on the illegal conduct of other people. The SEC made no assertion that Mickelson did anything wrong and is asking that he simply return the inadvertently obtained illegal profit of $931,000 he made trading shares of Dean Foods.
“Phil was an innocent bystander to alleged wrongdoing by others that he was unaware of,” Mickelson's lawyer said in a statement. Walters' lawyer, Barry Berke, said: “Prosecutors’ accusations [agains his client] are based on erroneous assumptions, speculative theories and false finger-pointing."
The legal landscape around insider trading law has been shifting under prosecutors' and regulators' feet, and this case may be a reflection of that. A series of appeals court decisions, referred to as the Newman case after a fund manager whose conviction was overturned, made it harder to bring insider trading charges in two ways. First, they increased the level of knowledge a trader must be proved to have had about the source of his or her tip; and second, they tightened the definition of the gain or benefit a tipper must be shown to have received in exchange for leaking the information. In the Walters case, prosecutors and the SEC are alleging that Walters made six-figure loans and gifts to help Davis pay off gambling debts, along with other financial enticements, in exchange for confidential information about Dean Foods.
During the question-and-answer portion of the press conference, a reporter asked Bharara whether the Newman decision was the reason why Mickelson hadn't been charged.
"I will repeat what I’ve said many times: If the Newman decision stands, it has an impact on our investigations," Bharara said, somewhat grumpily. "Conduct we think is nefarious, and that undermines faith in the markets and the fairness of the markets, will not be able to be prosecuted because of the Newman decision."
Until the Supreme Court clarifies insider trading law, the public will be left to ponder why some skate free and others don't.