Here's a fun piece of trivia. Way back, before myStockOptions.com, our publishing team first became involved with stock plan education while producing our Think Twice video series for employee education to prevent insider trading. Since its launch, myStockOptions.com has always had a special section of content on insider trading and other topics in SEC law, including Rule 144, Section 16, and Rule 10b5-1 trading plans. To this day, whenever we hear about new insider-trading cases that provide excellent cautionary tales for employees, executives, and directors, we like to bring them to your attention.
Highly educational insider-trading cases often involve famous people and intriguing circumstances. These qualities are notably present in a recent high-profile SEC action involving three people: professional golfer Phil Mickelson; William "Billy" Walters, a prominent sports gambler in Las Vegas; and Thomas Davis, a director on the board of Dean Foods. In addition to the SEC press release on the case, the related public statement from Andrew Ceresney, the director of the SEC's Division of Enforcement, is worth distributing in its entirety to your board members. Mr. Ceresney's message is clear:
"Board members owe their shareholders a fiduciary duty and we will pursue vigorously those who breach that trust and seek to profit from those breaches. The management and shareholders of Dean Foods placed their trust and confidence in Davis, and he repeatedly breached that trust and confidence, year after year, providing Walters with the company's most closely held information."
The SEC brought criminal charges against Mr. Davis, who has already pleaded guilty.
Some commentators think that the outcome with Mr. Mickelson, who was not charged with securities fraud, indicates that challenges may be growing for the SEC in bringing cases against tippees after United States v. Newman (see a blog commentary from the law firm Brooks, Pierce, McLendon, Humphrey & Leonard). Clarification on what is needed to show tippee liability is expected when the Supreme Court issues its opinion in Salman v. United States.
However, the case involving Phil Mickelson also shows that when the SEC finds insider trading somewhere in a chain of events, all who profited will be forced to pay back their gains, even if they did not know that the information in question was tainted. In the SEC's action, Mr. Mickelson was named as a "relief defendant," i.e an individual who must turn over ill-gotten gains arising from schemes perpetrated by others. Without admitting or denying the allegations in the SEC's complaint, Mr. Mickelson agreed to pay the full disgorgement of his trading profits, which totaled $931,738.12 plus interest of $105,291.69.