Phil Mickelson’s inside information may have been perfectly legal


Phil Mickelson reacts after making double bogey on the 17th hole during the first round of the Memorial Tournament on Thursday in Dublin, Ohio. (Jay LaPrete/AP)

Phil Mickelson might be an even better investor than he is a golfer, and that's gotten the Securities and Exchange Commission's (SEC) attention.

Here's what we know. In 2011, Mickelson bought some cheap options on Clorox stock that gave him the right to buy it at what would have been a cheap price if the stock went up a lot. So did William Walters, an acquaintance of Mickelson's who made his fortune in sports betting and now owns a few golf courses. Well, whaddya know, a few days later an acquaintance of Walters's, activist investor Carl Icahn, made a buyout offer for Clorox — sending the stock up a cool 7 percent. You can see this suspicious timeline in the chart from the Wall Street Journal.

The SEC thinks this might be insider trading, because this is what insider trading looks like. Or at least what bad insider trading that gets caught looks like.

See, buying options instead of buying stock lets you make a much bigger bet for the same amount of money, but it's also a much riskier one. If the underlying stock doesn't soar by the time your options expire, you'll be left with nothing — which is why sane people don't load up on options unless they know something everyone else doesn't. Of course, watching the options market makes it easy enough to catch insider trading. As Bloomberg's Matt Levine put it, the SEC just has to "round up the usual out-of-the-money call buyers" after every merger or buyout.

Now, even though this looks like insider trading, it might not be illegal.

For one, Icahn might not technically be an "insider." He isn't a chief executive, and despite his stature, he may not have any non-public information.

But what about the not-exactly-public information that he was about to make a bid for Clorox? Well, activist investors are allowed to tell whoever they want about their plans as long as they:

  1. Don't submit a tender offer for the particular company they want to buy.
  2. Don't have public investors.

Icahn never made a formal offer, but he did use a publicly traded partnership that, Levine notes, he "only" controls 92.3 percent of to make the initial offer that he did. So if he did tip off Walters, which Icahn denies, he might be in trouble, simply because he used that publicly traded partnership.

But Icahn might not be in trouble: It's hard to say how he would have benefited from any of this. Now, it could be something as simple as getting to play a round with world-famous golfer Phil Mickelson. But Icahn is the rare rich guy who doesn't like golf, and he claims, at least, to have never heard of Mickelson. The government probably won't be able to prove otherwise, because they can't get wiretaps they need now that the case has been leaked.

So, how did Mickelson and Walters end up getting their timing so right on Clorox's stock? It could be chance, though that seems unlikely. Or either Mickelson and Walters are clairvoyant. Or it's possible Icahn told somebody who told somebody who told them about his impending bid for Clorox.

The scandal, of course, is that it's mostly legal if they did hear about Icahn's plans through the corporate golf grapevine. See, the super-rich are different from you and me, and even the merely rich. As the WSJ has noted, they can, and do, tell each other about their buyout plans that will send stocks shooting up. It looks, walks and quacks like insider trading, but it isn't, because they're not actually corporate insiders. They just have enough money to move the stock all by themselves — and give their friends a heads up.

A fore, if you will.

Matt O'Brien is a reporter for Wonkblog covering economic affairs. He was previously a senior associate editor at The Atlantic.
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