| NEW YORK, June 2
NEW YORK, June 2 Questions about how to apply
securities law to activist investors could complicate any
potential insider trading case against billionaire Carl Icahn,
pro-golfer Phil Mickelson and Las Vegas gambler William Walters,
legal experts said.
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
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 University.
"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
"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 case."
"Every case of this kind really comes down to the granular
facts," he said.
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.
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
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 or non-monetary.
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)