Phil Fallout

It's quite shocking how little discussion of Phil's stock market prowess is to be found in the golfing press....  It's being treated just like cattle futures trading by the Dowager Empress of Chappaqua..... I get that political reporters are merely Democratic operatives with bylines, but this?

Is it their lack of familiarity with the stock market and the ramifications of the Supreme Court's 2014 decision in U.S. v. Newman?  Or, as per Occam's Razor, are they just in the bag for Phil?  Because this is really deplorable behavior from Phil, and we shouldn't be fooled by the fact that the SEC has found it not specifically indictable.

So props to Shane Ryan for digging in and providing some useful background.  let's piggy-back on his efforts, though we'll come at it from reverse order, starting with the above-referenced legal precedent:

• 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.

Of course the SEC hates it, because it dilutes their leverage over those that get in their scope sights.  Not just those that they indict, but those they leverage into cooperating against other defendants.

But conceptually the decision rings true.... to indict and convict for insider trading the government should have to prove that the trader (or "tippee", though I'd think it should be spelled with a single "P", though that's not important now.  

Now let's circle back to the relevant facts of this case:

• 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.

We'll assess a mandatory deduction to Shane for that pay it forward bit, as this was no random act of kindness...  And it's at best a tad early to conclude that it was a good investment by Walters, as the end result might prove to be a cot and three hots at a correctional facility....

I'll draw your attention back to the second bullet in the first excerpt, in which Shane discusses the legal requirements, which reasonable assumptions would lead us to conclude fits our fact profile.  

• Did the tipper receive a benefit?  Shane kind of glosses over the fact that there was a sizable gambling debt due, I've seen a million dollar number bandied about;
• Did the tippee know that the tipper would receive a benefit?   Well, duh!

Without full knowledge of the nature of those phone conversations, the SEC might have logically concluded that they couldn't meet the burden of proof to convict Phil.  But, dear reader, we are not similarly constrained....

It's blindingly obvious that Phil knew he was receiving material, non-public information, and that the information was being provided to ensure the collection of a gambling debt.  Shane reacted as I did to his claims of vindication:

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.

Now, let's fill the popcorn bowl and find a comfortable seat and see what, if anything, Commissioner Ratched will do.  Having a big-time star like Phil owe a sleazebag like Billy Walters a million large has to violate every ethics clause of the players agreement with the Tour.  And such a violation can only be appropriately dealt with through a long suspension....

Of course, the astute reader quickly sees through that clever sleight of hand.... that only applies to the extent that the Tour's objective are to keep the game clean.  As distinct from what seems to be the Tour's policy to be to keep the appearance of being clean.  Two very different things...

My guess is that Phil will at some point suffer a back injury while jet-skiing....