Pro golfer Phil Mickelson was let off the hook for his involvement in an insider trading scheme, not because of his celebrity status, but because of a prior Securities and Exchange Commission case that makes it harder to prosecute people who use second- or thirdhand inside information to make a profit, says David R. Chase, an SEC defense attorney and securities lawyer.
In a blog posting Monday, Chase calls Mickelson’s settlement with the SEC better than a hole in one for the golfer, who is second in career high earnings next to Tiger Woods, but adds that the outcome was the best either side could get. Chase is the head of a firm that represents individuals nationwide in SEC insider trading investigations.
“Looking beyond the sordid tabloid appeal of a high-profile athlete becoming entangled with individuals who are alleged to have been waist-deep in a long-running insider trading scheme, there is a much more significant, arguably groundbreaking, aspect of the case [in the settlement],” Chase says.
Mickelson agreed as a relief defendant to repay $931,000 he had obtained through the insider-trading scheme of others. He was not charged with any crime nor ordered to pay any fines. This was the best result the SEC could have reasonably hoped for after the United States v. Newman, a recent appellate court decision on the SEC’s insider trading cases involving information received second- or thirdhand from the original source, Chase says.
“The Newman case imposed new, substantial hurdles for the government to overcome in proving an insider trading charge,” Chase writes. “It has caused reversals of prior insider trading criminal convictions and has sent a cold chill through the halls of the SEC Enforcement Division, likely shutting down many ongoing, non-public insider trading inquiries.”
Under the ruling in the Newman case, the SEC has to prove that the person receiving the secondhand information knew the tip constituted a breach of duty for the person providing the tip and that the person was receiving some benefit for it, Chase explained in a telephone interview.
In the Mickelson case, instead of charging him and risking losing a high profile case or dropping all charges, “the SEC apparently chose a unique, albeit creative middle ground, effectively giving Mickelson a relatively painless way out of his mess, but ensuring that the government still salvaged at least part of its case. This settlement may be indicative of the SEC’s new approach to dealing with the inconvenient realities of, and high hurdles imposed by, the Newman decision,” Chase speculates in the blog.
However, “I have my doubts as to whether the SEC’s novel ‘relief defendant’ approach would survive legal scrutiny if pursued in a contested enforcement action in federal court,” he concludes in the blog.
Until some challenge is raised, if it ever is, the SEC may use this middle ground technique in future cases, Chase said in the phone interview.