Proving that Phil Mickelson engaged in insider trading would require more than suspicion and two degrees of separation

Phil Mickelson
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Phil Mickelson teed it up at the FedEx St. Jude Classic in Memphis in a final tuneup before next week's U.S. Open.

Federal authorities seem to believe that Phil Mickelson knows something about an unusual sequence of winning stock trades in 2011. They also appear intent on making the public aware of these suspicions, choosing to interact with Mickelson at the recent Memorial Tournament in Dublin, Ohio.

Mickelson, who categorically denies any wrongdoing, is linked to a fortuitously timed sale of Clorox stock and another stock in 2011. The sale led to Mickelson, golf course owner Billy Walters and other investors making a subbstantial profit. Officials from the Securities and Exchange Commission are reportedly troubled by possibility of insider trading, which refers to using confidential information for profit. The government can criminally charge or civilly sue a person with insider trading. Criminal charges tend arise in instances when the person engaged in significant and repeat insider trading, when the available evidence supports a criminal conviction and when a person has a criminal history. A criminal charge for insider trading normally carries a maximum of 20 years in prison and a fine of as much as $5 million. A civil lawsuit for insider trading, in contrast, is more likely to arise in instances where there is weaker evidence against the defendant and where the alleged insider trading happened only once and led to only modest earnings.

To be clear, Mickelson has not been charged or sued with insider trading, and it has been nearly three years since the activity in question occurred. The statute of limitations on insider trading is five years, which means the government only has until 2016 to act against Mickelson. Still, the facts concerning Mickelson and the 2011 Clorox stock sale invite curiosity. Mickelson reportedly knows Walters, who knows billionaire investor Carl Icahn, who days after Mickelson and Walters purchased option contracts in Clorox announced that he was buying Clorox. Icahn’s announcement triggered a jump in the price of Clorox stock, and substantial profits for both Walters and Mickelson. A suspicious mind might reason that Icahn somehow tipped off Walters about his pending purchase and Walters in turn tipped off Mickelson, and Walters and Mickelson profited from the tip. Icahn later withdrew his bid.

Proving that Mickelson engaged in insider trading would require more than mere suspicion and two degrees of separation. Sufficient proof normally demands a paper trail or electronic recordings. Emails, audio conversations, transcripts, notes and other correspondences have been used to prove that a defendant received and acted on a confidential tip. Testimony from cooperating witnesses, such as those who are willing to implicate others in order to save themselves, can also prove instrumental. A secret shared on a golf course, without any documentation of the conversation or willingness of the conversation’s participants to speak about what was said, would not be sufficient evidence.

There are numerous defenses to insider trading, and some might be available to Mickelson should he be charged or sued. Defendants, for instance, often insist that they conducted their own independent stock research, which led them to a financial decision to buy or sell. Sometimes defendants also allege they simply had the right intuition at the right time to buy or sell. Mickelson, for this part, could stress that he is a seasoned investor who enjoys taking chances on the stock market, much like he enjoys taking chances on the golf course.

Defendants also regularly frame confidential information as unimportant and not influencing their decision-making. Other times they acknowledge they received a stock tip, but portray the tip as public information rather than confidential material. Dallas Mavericks owner Mark Cuban recently defeated the Securities and Exchange Commission in an insider-trading trial. Federal authorities had sued Cuban, claiming that he sold stock in a Canadian internet-search firm after receiving confidential information that the stock price was about fall. Cuban’s attorneys persuaded jurors that, among other points, the information Cuban received wasn’t confidential. If Mickelson received information about the Clorox stock, it might be shown that the information was not confidential, perhaps because the person who shared it did not breach a duty of confidentiality to Clorox stockholders.

Federal authorities’ interest in Mickelson may not be to charge or sue him with insider trading, but rather to convince him to implicate others -- most likely Walters and Icahn. Given the essential role of Mickelson’s reputation in his earnings, authorities might regard Mickelson as particularly vulnerable to their pressure. After all, consider how Mickelson earns 90 percent of his annual income: endorsement deals. According to SI’s The Fortunate 50, Mickelson earned $36 million in endorsements between July 2012 to April 2013, compared to $3.5 million in tournament prize money during that same period. Mickelson, in other words, earns almost 10 times in endorsement money as he earns golfing. Protecting his reputation is therefore crucial to Mickelson and his livelihood.

Even more worrisome for Mickelson is that his endorsement deals with Barclays, KPMG and other companies likely contain “morals clauses.” These clauses empower a company to suspend or terminate an endorsement deal when an endorser commits an act that “offends the community” (as defined and interpreted by the endorsed company) or brings the endorser into public ridicule. Morals clauses are broadly construed and do not require the endorser to have committed a crime or even face criminal charges. As federal authorities undoubtedly know, Mickelson merely being investigated for insider trading might be enough.

The Mickelson insider-trading probe will surely be one to follow. It presents an intriguing interplay of securities law, endorsement contracts and golf.

Michael McCann is a legal analyst and writer for Sports Illustrated and SI.com. He is also the founding director of the Sports and Entertainment Law Institute at the University of New Hampshire School of Law and the distinguished visiting Hall of Fame Professor of Law at Mississippi College School of Law.

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