No one was happier about the 2014 United States Court of Appeals for the Second Circuit overturning the convictions of insider traders Todd Newman and Anthony Chiasson than golf professional and Tea Party statement maker Phil Mickelson. The reasoning for the court’s decision was strange and a huge blow to prosecutors trying to try insider trading, since the decision basically redefined what insider trading was.
Why? Because, the court said, for a crime to have been committed, the company insider — the so-called tipper — had to have received a personal benefit in return for offering up inside information. In addition, the person who received the tip — the “tippee” — had to know that the tipper was receiving that personal benefit. By all appearances, Newman didn’t even know who the tippers were; the information got to him through a series of intermediaries, the last of whom was an analyst at Diamondback. Without that knowledge of a personal benefit, Newman had not committed a crime.
Sure people might have clearly participated in criminal behavior but … plausible deniability is not just a river in Egypt, according to the court. The main U.S. prosector this affected was U.S. Attorney Preet Bharara, who had to drop charges against 12 others he had in the works when the Second Circuit Court’s decision came down. However, that doesn’t mean that Bharara is staying in retreat. According to Reuters, he is back to fill tilt with a new way of getting convictions on insider traders.
Federal prosecutors in Manhattan are pursuing insider trading cases on a pace not seen since 2012 - before a major appellate ruling limited their ability to bring charges against hedge fund managers and other traders.
So far this year, U.S. Attorney Preet Bharara, known for high-profile prosecutions of wrongdoing on Wall Street, has announced charges against 11 people for insider trading, up from four in all of 2015.
In all, Bharara’s office has announced charges against 107 individuals over the last seven years. The secret is getting rats to turn on rats.
All of the cases involving a tipper and tippee brought this year came after prosecutors secured guilty pleas from cooperators, suggesting authorities are using such witnesses to help them overcome the new legal hurdles.
The use of cooperators previously was featured in investigations that led to the 2011 conviction of Galleon Group founder Raj Rajaratnam and a $1.8 billion settlement and plea deal in 2013 with Steven A. Cohen's SAC Capital Advisors LP.
The reason this is important to note is that one of the problems with the 2014 reversal was that being able to prove that someone knew something about how someone else was benefiting from insider trading when you yourself were benefiting in a different way, is very difficult. Which brings us back to golfing choke artist, Phil Mickelson. Mickelson was implicated, but never charged, in an alleged insider trading scheme that involved gambler William Walters, billionaire Carl Icahn and retired investment banker and former chairman of Dean Foods, Thomas C. Davis.
At the time, Mickelson owed Walters gambling debts. Although he was a serious gambler, Mickelson was not a big stock trader, with only about $250,000 in the market, according to the S.E.C. Yet on July 30 and 31, 2012, after a series of phone calls and texts with Walters, Mickelson bought $2.4 million worth of Dean Foods stock — some of it with money he borrowed. “These were his first ever Dean Foods purchases,” the S.E.C. noted.
You know, of course, what happened next: A week later, Dean Foods announced the WhiteWave spinoff. The stock jumped 40 percent. The very next day, Mickelson sold his Dean Foods stock, reaping a profit of $931,000.
Preet Bharara’s office is using Davis in this case.
Walters, who has pleaded not guilty, was charged on May 19 after prosecutors secretly secured the guilty plea of Thomas Davis, the former chairman of Dean Foods Co(DF.N).
According to a transcript of his plea, Davis said he leaked inside information to Walters about Dean Foods in exchange for, among other things, thousands of dollars in loans that Davis did not fully repay.
That’s the good news. The bad news is that Mickelson will get away with it. The U.S. Supreme Court is set to review both the Second Circuit Court decision and a conflicting opinion out of California. Hopefully a clearer definition of “insider trading” will come out of that.