Lefty’s Lucky Break
Prior to last month, the most fortuitous moment of Phil Mickelson’s career came on the last hole of the 2004 Masters. While he had long been regarded as one of the game’s top players, a major championship had continued to elude him. As Mickelson approached the 18th green on Sunday, a putt away from victory, he had his best chance yet to avoid being placed alongside Charles Barkley and Dan Marino on the list of all-time greats who could never win the ultimate prize. The tension in Augusta was palpable as Mickelson lined up to putt. After he struck the ball, it looked like it might miss just to the left. However, as Mickelson noted after the tournament, “it was hanging on that left lip. Instead of falling off, it caught that lip and circled around and went in.” Realizing what had just occurred, Mickelson crouched and then leaped in the air as he removed a rather large metaphorical monkey from his back.
While many had long regarded that moment as Phil’s big break, he caught a much larger one on May 19. That was when the Securities and Exchange Commission announced that it had reached a settlement with Mickelson regarding stock trades he made four year earlier. In July 2012, Mickelson received a tip from a friend, Happy Walters, that Dean Foods was about to be spun off. Mickelson proceeded to acquire $2.4 million in Dean Foods stock and sell it for a $931,000 profit days later after Deans Food was spun off.
This was a almost certainly a case of insider trading according to caselaw at the time of the trade. In Dirks v SEC, the Supreme Court held that an individual who receives material, nonpublic information regarding a security (the tippee) can’t trade on that information if the tipster breached his fiduciary duty by divulging the information and the tippee was aware of that breach. However, in 2014, United States Court of Appeals for the 2nd Circuit ruled in U.S. v Newman that the tipster must have received a personal benefit from the trade and the tippee must be aware that the tipster received the benefit. Because authorities could not definitively prove that Mickelson knew of a personal benefit that inured to Walters as a result of Mickelson’s trade, Mickelson was not charged with insider trading.
The Supreme Court recently granted certiorari in another case, U.S. v Salman, after the 9th Circuit ruled that when the tippee is a close friend or relative of the tipster, he is prohibited from trading even if the tipster provided the information solely as a gift i.e. with no personal benefit to himself. Regardless of how Salman is ultimately decided by the Supreme Court, Mickelson can rest easy that the 2nd Circuit’s ruling in Newman got him out of the rough.