The real story behind Phil Mickelson's insider trading case

Pro golfer Phil Mickelson is back in headlines about insider trading today—but this time he's actually a defendant. And behind the insider trading story, there’s a detail that might be more important to Mickelson’s reputation in golf: a gambling story.

Mickelson has been in the news repeatedly since 2014, tied to federal investigations of potential insider trading by well-known sports gambler Billy Walters and the former chairman of Dean Foods (DF), Thomas Davis. In May 2014, the SEC investigated Mickelson, Walters and Carl Icahn, but charges were not filed. One year later, in August 2015, the SEC investigated Davis, Walters and Mickelson, and again, charges did not immediately come. Now they have.

Davis and Walters are named as defendants in the SEC's civil complaint, which demands a jury trial; Mickelson is named only as a “relief defendant," along with The Walters Group in Nevada, and Nature Development, a Netherlands company owned by Walters. What is a relief defendant? The SEC defines the them, in its press release, as people, "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."

Mickelson's ill-gotten gains amount to $931,000, all from a single trade, when Mickelson unloaded all his shares of Dean Foods on Aug. 8, 2012—shares he had purchased less than a month before, on July 30 and 31, 2012. Mickelson will be returning the $931,000, plus another $105,000 in interest, to the SEC.

A statement released by Mickelson’s attorney says, “Phil has no desire to benefit from any transaction that the SEC sees as question. Accordingly, he has entered into an agreement with the SEC under which he will return all the money he made on that 2012 investment.” The statement adds that Mickelson “feels vindicated” because he is not a criminal defendant.

There’s a lot to unpack in this web. According to the SEC, in broad strokes, Billy Walters engaged in “repeated and very profitable insider trading” from 2008 through 2012, “based on tips received from his longtime friend, Thomas C. Davis, a director of Dean Foods Company.” (Davis gave Walters “sneak previews of at least six of the company’s quarterly earnings announcements.”) Here’s where Mickelson came in: In July 2012, Walters called Mickelson, at a time when Mickelson owed him money, and Walters “urged Mickelson to trade in Dean Foods stock.” Mickelson acted on the tip. The next day, Dean announced the spinoff of WhiteWave, the maker of Silk soy milk, and Dean’s stock popped 40%.

The standard of proof for insider trading cases got a lot tougher in 2014 with the case of United States vs. Newman. The case established that when someone gives out inside information (let’s call them a “tipper”) to a recipient (the “tippee”), the government needs to prove not only that the tipper gave the information in a breach of fiduciary duty, but gave it for personal benefit—and that the tippee knew both of those things.

In other words, if the SEC’s version of events is true, then Davis certainly broke his fiduciary duty by giving Walters information about Dean Foods, and he did it for his own benefit, because it eased his own debt to Walters. But did Mickelson, in receiving the tip from Walters, know that it came from Davis, and know how Davis was benefitting?

That’s hard to prove, explains Jeffrey Cohen, a former prosecutor at the U.S. Attorney’s Office in Boston and an assistant professor at NYU’s law school. “The bottom line is it’s become increasingly difficult to prove tippee liability,” Cohen says. “When it’s one person giving a tip to one person, it’s simple enough, but as you get farther down a chain, it’s less likely that the tippee can be found guilty.” This is why the SEC complaint specifically includes the sentences, “Davis benefited from sharing the information Walters,” and, “Walters benefited by tipping Mickelson.” Yes, Mickelson benefited from Walters’ information, but it’s unclear if he knew exactly how Davis, the initial tipper, benefited from telling Walters. “Or the government doesn’t want to go down that road,” Cohen says.

It is not likely Mickelson will be criminally charged now, according to Cohen, but he could be. (Mickelson is not even named in the criminal complaint from the Department of Justice.) “I suspect that they’re happy just to get the money back because they feel that it’s unlikely they can prove tippee liability. It’s not out of the question that he could be charged, but it’s unlikely,” Cohen says.

And yet, Mickelson, 45, may not be out of the woods in his sport—and certainly not in the court of public opinion. The most salient detail in the SEC report, to golf’s governing bodies, will likely be the fact that Mickelson owed Walters gambling money.

The PGA Tour has special language related to gambling in its Player Handbook, mostly about betting on golf. Separately, under the heading “Conduct unbecoming a professional,” the handbook states that a PGA Tour member deemed guilty of such conduct can be fined or suspended from competition. There is no specific language relating to a federal investigation or indictment, but it is up to the discretion of the PGA Tour what constitutes such conduct. Think of it as equivalent to the “morals clause” in athlete endorsement deal contracts these days, which gives brands an out in the event that a sponsored star becomes a P.R. liability.

You can bet that gambling might be something the PGA Tour deems “unbecoming.” (The PGA Tour declined comment for this story.) The stink of gambling tends to raise instant alarm bells to sports governing bodies. Just last week, the NBA began allowing its teams to sell sponsorship patches on player jerseys, but with a select few restrictions, including: no gambling companies.

Known to golf fans as “Lefty,” Mickelson is one of the most famous golfers alive and one of the winningest golfers currently active on the PGA Tour, with 42 wins including five Majors. He makes an estimated $33 million a year in endorsement money off the green, from sponsors like Callaway, Barclays, KPMG, Rolex, ExxonMobil and Enbrel.

How will those sponsors react to salacious headlines about Mickelson trading on inside stock information to repay a gambling debt? And how will golf react?