Fault Lines
22 June 2017

Professional Bettor Charged With Insider Trading, But The Charges May Be Hard to Prove

June 9, 2016 (Mimesis Law) — No, this case does not involve that famous “Gambler.” The cast set for this federal indictment involves professional golfer Phil Mickelson, a wealthy corporate director named Thomas Davis, and a high-rolling sports bettor named William T. Walters.  Walters has been charged with insider trading in the Southern District of New York, while Walters and Mickelson may play the roles of snitches cooperating witnesses.

But the case against Walters — who has been cleared of felony charges in previous cases — will be tougher to prove in light of the Second Circuit’s 2014 decision in United States v. Newman, according to Peter Henning from the New York Times’ DealB%k:

The Newman decision put a damper on insider trading cases by making it more difficult to prove a violation when tipping confidential information is involved. The United States Court of Appeals for the Second Circuit held that the government must show that each recipient who trades on the information, called a tippee, knew the tipper received a benefit from providing the information to prove there was a breach of duty need for securities fraud.

Just being buddies would no longer be enough for an insider trading violation, an approach that had been a staple of cases brought by the Justice Department and the Securities and Exchange Commission in the past.

In a nutshell, the government is alleging that Davis leaked inside information to Walters that generated $40 million (!) for Walters in gains and avoided losses.  Mickelson’s alleged role in the affair is that he received information from Davis about an upcoming corporate spinoff, and that Mickelson then bought millions of stock in a subdivision of Dean Foods (of which Davis was the chairman).  After the spinoff materialized a week later, Mickelson made close to a million dollars in profits, but Mickelson has (so far) been spared an indictment and he will likely be sitting in a witness box instead of defense counsel’s table.

Mickelson has already agreed to pay back the profits from the deal which was purportedly based on information Walters gave him.  Obviously, Mickelson would want to keep the government happy tell the truth should they subpoena him to testify in Walters’ case.

Henning points out that Walters has a good shot at creating reasonable doubt as to whether there was a beneficial exchange that would trigger a conviction for insider trading:

But neither the Justice Department nor the S.E.C. link a particular loan to dispensing confidential information, focusing generally on a type of mutually beneficial arrangement without any specific quid pro quo exchange. For example, the indictment traces a pattern of illicit disclosures by Mr. Davis going back to 2008, but the first loan from Mr. Walters was not made until 2010.

That raises the issue whether a bookie-gambler relationship is enough to show the type of beneficial exchange needed to establish insider trading. The bookie wants the gambler to keep betting, and so may extend credit to keep the player in the game.

The stakes are high for the government in this one, as it is the first high-profile insider trading prosecution since the Newman decision, which raised the bar for these types of cases when it reversed several convictions.  But another problem for the government is the type of witness Davis will be.

As the government’s star witness, Davis has already pled guilty to insider trading, perjury, and obstruction of justice.  The latter two will definitely provide plenty of ammunition for Walters’ defense attorneys during cross examination.  Davis has admitted to lying to the Securities and Exchange Commission during its investigation of this case, and to hurling a prepaid cellphone into a creek after being contacted by the FBI about Walters’ case (If Tom Brady is watching this case, he’s probably thanking the gods that his cellphone “scandal” was only an NFL investigation).

Should Davis prove to be unlikeable and ineffective, the government can use golden boy Mickelson to rehabilitate its case against Walters, whereby Mickelson would testify as to what Walters told him about Dean Foods.  Mickelson has no real baggage and is a very likeable (and thus marketable) celebrity athlete, who has appeared in California’s tourism ads and has made a cameo in the popular (or to those with a modicum of taste, insufferable) HBO series  Entourage.

There are two more important factors in this case.  One, Walters has also been charged with wire fraud as well, and the elements of wire fraud do not require a breach of fiduciary duty “by the tipper from receiving a benefit from the tipee” like the insider trading count.  Rather, the government only has to prove that Walters obtained some money through a scheme to defraud.  This means that if the government gets only one count of wire fraud through the jury, Walters will most likely be collecting his social security checks at the Bureau of Prisons until he dies, because of relevant conduct.

Second, if Walters decides to testify in his own defense, it may be difficult for him to remain composed and likeable to the jury.  This is a man who for over 40 years has not only made a very good living in the shady world of betting, but has repeatedly beat the odds in the criminal justice system as well.  So there’s always the possibility of him becoming combative with the prosecutor during questioning, or worse, his testimony coming off as braggadocio to the jury.

One golfing idol, a lying and thieving banker, and a gambler will walk into a federal courthouse.  It would be deliciously ironic if it’s the gambler who walks away unscathed.

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