U.S. federal investigators are looking into whether Mickelson and
Walters may have traded illegally on private information provided by
hedge fund manager Icahn, a source familiar with the matter said on
Friday. None of the three men has been accused of any wrongdoing,
the source said.
Icahn's style of investing is to aggressively buy stock with the aim
of changing the direction of corporate boards, which makes him an
outsider when federal insider trading laws have traditionally
focused on corporate insiders, according to legal experts.
The federal probe centers on trades in Clorox Co by Walters and
Mickelson as Icahn was making moves to access the company's board in
2011, the New York Times reported.
After accumulating a 9.1 percent stake in Clorox, Icahn made a bid
valued at more than $10 billion to buy the consumer products
company, which sent stock soaring.
Even if Icahn did leak information about his plans regarding Clorox,
he may not necessarily have violated the law. Prosecutors would have
to show he had breached a fiduciary or confidentiality duty by
disclosing material, nonpublic information that was later traded on.
"A true quirk of insider trading rules is that the person who
creates the information that's material and confidential has the
freedom to use that for themselves and to authorize others to use
it," said James Cox, a professor of securities law at Duke
"That’s part of our capitalistic spirit, that people who create the
ideas should be able to exploit them,” he said, noting that this
could complicate a potential government case.
The regulations also raise the issue of who Icahn would have a duty
to in his investing role, said Reed Brodsky, an expert in
white-collar crime at Gibson Dunn.
Since Clorox rejected the hostile bid, Icahn would not likely be
breaching a duty to the public company's shareholders unless he had
entered into some kind of non-disclosure agreement, Brodsky said.
Roland Riopelle, a former government prosecutor, said Icahn may have
had a duty to his own investors to keep certain information
confidential. If that duty was breached, the government could argue
he violated insider trading laws, he said.
"It could come down to whether (Icahn's fund) had written rules that
would prohibit this kind of disclosure or conduct," Riopelle said.
"If they didn't have any rules, then (they) are not going to have a
"Every case of this kind really comes down to the granular facts,"
Icahn sent a letter in July 2011 to Clorox's chairman offering to
purchase the company for $76.50 a share and saying he could arrange
debt financing for the deal. He later raised the bid to $80.
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If Icahn had launched a formal tender offer, it would have triggered
a different standard of disclosure rules under the SEC's 1968
Williams Act, said John Coffee, an expert in corporate governance at
Columbia Law School.
Prosecuting Mickelson and Walters would present a different set of
challenges, the experts said.
A case against them could hinge on a pending decision expected from
the 2nd U.S. Circuit Court of Appeals that could make it harder for
the government to prosecute insider trading cases.
Two hedge fund managers brought the appeal in an effort to overturn
their insider trading convictions.
The U.S. Supreme Court in 1983 held that the recipient of nonpublic
information - a "tippee" - can only be found to have engaged in
insider trading if the tipper benefited from the disclosure. The
appeals court is being asked to address whether prosecutors must
show the tippee knew of the tipper's benefit, which can be financial
Mickelson and Walters, if they were alleged recipients of inside
tips, could be helped by a ruling that toughens the standards for
government prosecutors, the experts said.
In response to Friday's news of a federal probe into possible
insider trading Icahn told Reuters he was unaware of any
investigation and said his firm always followed the law. Mickelson,
a Masters champion, said he has done nothing wrong and is
cooperating with the investigation. Walters did not respond to
requests for comment.
Officials with the FBI and the SEC declined to comment.
(Additional reporting by Nate Raymond and Jennifer Ablan; Editing by
Ted Botha and Frances Kerry)
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