Phil Mickelson's Reputation Just Got Cloroxed
What happens when federal authorities investigate suspicion of insider trading by a high-profile individual for over two years without finding a enough to file charges? If you are Phil Mickelson, your reputation gets tarnished by a deluge of leaks from the investigators. Apparently frustrrated that Mickelson provided no information to aid in the investigation, someone with intimate knowledge of the investigation disclosed it to the press.
THE MAY 30 CLOROX LEAKS
In the last 48 hours, the world learned that Phil Mickelson is under investigaton by the SEC, FBI and DOJ for insider trading in Clorox stock. On May 30, the New York Times reported that Mickelson, billionaire investor Carl Icahn and Las Vegas high-roller Billy Walters had been under investigation for over two years for trading in Clorox stock in 2011 just ahead of a hostile takeover offer from Icahn to Clorox. The information in the article reportedly came from unnamed "people briefed on the matter" - meaning a leak from the federal authorities. Five separate New York Times reporters were credited with either writing or contributing to the article.
The article set forth the circumstances that led to the investigation. In February 2011, Icahn filed a Schedule 13-D with the SEC stating that he had accumulated over 9% of Clorox. In July 2011, Icahn sent a "bear hug" letter to Clorox offering to take-over the company for $76.25 per share. Apparently Mickelson and Walters engaged in large-scale options trading in Clorox immediately before Icahn's bid was conveyed. According to the NY Times, the feds suspect that Icahn (or someone close to Icahn) tipped Walters that he was about to make a bid for Clorox, and that Walters, in turn, tipped Mickelson.
THE MAY 31 ADDITIONAL SPILLS
On May 31, the New York Times filed a follow-up that made it clear that after the initial investigation of Icahn came up empty, "The focus then turned to Mr. Mickelson, whom authorities hoped to scare into cooperating." According to the NY Times, the federal authorities believed that Mickelson would provide information "because Mr. Mickelson had much to lose under the glare of the government’s spotlight." When Mickelson was approached by investigators on May 28, he apparently told them to speak to his attorney. Two days later, on May 30 the story was all over the press.
THE INDELIBLE CLOROX STAIN
Phil Mickelson is particularly vulnerable to this attack on his reputation. He literally serves a human billboard for KPMG, one of the Big 4 accounting firms, and Barclays Bank. Because KPMG's entire business depends upon its ability to serve as the accountants for public companies in their filings before the SEC, it cannot afford to be affiliated with an individual publicly suspected of insider trading. As a leading investment bank, Barclays similarly cannot afford to be tied to insider trading.
The assault on Mickelson's reputation is particuarly troubling because the facts disclosed by the NY Times fall far short of a case for insider trading. It is not illegal for an individual to trade on an tip from a friend, unless that individual knew (or displayed "willful blindness" to the fact) that the tip originated with a breach of a duty of non-disclosure. Even if the tip originated with Icahn (which is far from clear) and even if Mickelson acted knowing that the tip came from Icahn (also far from clear), it is hard to identify any duty that Icahn had to keep confidential his plan to bid for Clorox.
THE BOTTOM LINE
With great power comes great responsibility. The law enforcement officers and civil authorities entrusted to investigate insider trading have the power to destroy a man's reputation by simply leaking that he is under investigation. The public should not know that Phil Mickelson is under investigation for insider trading. I do not know if he acted wrongfully, and (after years of investigation) apparently neither do the federal investigators. Mickelson has not been accused in an indictment or even a civil complaint. Those who leaked the Mickelson investigation failed to live up to their responsibility.