Monday, June 2, 2014
The news over the weekend that Phil Mickelson is subject of an insider trading investigation is surprising and not surprising at the same time. Celebrities and high profile athletes will naturally attract a lot of investigator attention when their names show up on lists of suspect trades. Imagine you are a FINRA staffer and your job involves scanning lists of hundreds of names of people involved in suspect trades. Frankly, it can be a boring job. Not all that different from doc review or a never ending diligence exercise. Of course, if a name that looks familiar pops up on a list, you are definitely going to stop and take a look. Who wouldn't?
Add to that the pedagogic effect of possibly catching a high profile athelete/celebrity with their hand in the cookie jar. Prosecution of such cases doesn't only make a career, but it's also going to send a much bigger message to the trading public about insider trading than prosecuting an anonymous hedge fund trader. So, there are real incentives for prosecutors to run down every lead when the name of a high profile individual pops up on a suspect trade list.
Of course, having one's name on a suspect trade list is not the same as actually engaging in insider trading. Don't get me wrong. If you are a deal lawyer, you never want to see you father's name turn up on a suspect trade list of a deal that you've been working on. That will take you down a long, dark road to be sure.
No, what I mean is that since the news of the Phil Mickelson investigation has leaked, precious little evidence beyond the fact that Mickelson may have traded in Clorox stock options in the week before Carl Icahn announced his intent to acquire Clorox in 2011. Given how thin the market for single stock options are, it's not good - really not good - that Mickelson happened to buy call options just before announcement of a potential acquisition. That's going to mean a huge legal bill for Mickelson as he explains himself to the SEC, but that, in and of itself, is not going to be enough to tag Mickelson with any liability.
To get to liability - exam review for students who just took my exam - the SEC will first have to find someone with a fiduciary duty to the source of the information. Second, the SEC will have to prove that the person with the information about Icahn's bid actually tipped Mickelson (let's make this sumple and not daisy-chain the information, yet). Third, that the when tipping Mickelson the source of the information received a "personal benefit" and therefore breached his or her fiduciuary duty to the source. And then finally, that when Mickelson traded on the information, he knew or should have known that the information he received was tainted because it was inside information received via a breach. That's a lot of dots to connect. And so far, there's not a lot of ink to connect them.