On Thursday, May 19, 2016, the U.S. Attorney’s Office for the Southern District of New York announced the arrest of renowned sports bettor William “Billy” T. Walters on an alleged years-long insider trading scheme conducted with his friend and business partner, Thomas C. Davis. According to the indictment, from 2008 to 2014, Mr. Walters executed a series of profitable stock trades in Dean Foods and Darden Restaurants based on inside information repeatedly and systematically provided to him by Mr. Davis. The U.S. Attorney’s Office alleges that these trades netted Mr. Walters over $40 million and charged him with conspiracy, securities fraud, and wire fraud.

Mr. Davis, who sat on Dean Food’s board of directors during the relevant time period and was purportedly being considered to join Darden’s board, pled guilty to the scheme whereby he provided Mr. Walters with information about the two companies in exchange for Mr. Walters providing capital for joint business ventures and loaning Mr. Davis roughly $1 million, which was never repaid.

Notably absent from the criminal indictment was any reference to pro-golfer Phil Mickelson. Instead, Mr. Mickelson was named as a defendant in an SEC civil action arising from the same conduct. See Sec. & Exchange Comm. v. Walters, 1:16-cv-03722, (S.D.N.Y. May 19, 2016). Specifically, the SEC civil action alleged that Mr. Walters encouraged Mr. Mickelson to buy Dean Foods stock on the basis of inside information that Mr. Walters had acquired from Mr. Davis. Mr. Mickelson, who allegedly owed Mr. Walters money at the time, complied with Mr. Walters’ request and allegedly earned $931,000 as a result. Without admitting any wrongdoing, Mr. Mickelson agreed to disgorge the full amount, as well as to pay $105,000 in prejudgment interest.

So how did Mr. Mickelson manage to avoid criminal charges when the other defendants didn’t? The reason is likely a recent Second Circuit decision that heightened the evidentiary hurdles for prosecutors to bring insider trading charges against downstream tippees. See United States v. Newman, No. 13-1837, 773 F.3d 438 (2d Cir. 2014). Under Newman, the government must prove that a defendant knew that the original tippers in the tipper-tippee chain disclosed confidential information in exchange for a personal benefit. Thus, “to sustain an insider trading conviction against a tippee, the Government must prove each of the following elements beyond a reasonable doubt: (1) the corporate insider was entrusted with a fiduciary duty; (2) the corporate insider breached his fiduciary duty by (a) disclosing confidential information to a tippee (b) in exchange for a personal benefit; (3) the tippee knew of the tipper’s breach, that is, he knew the information was confidential and divulged for personal benefit; and (4) the tippee still used that information to trade in a security or tip another individual for personal benefit.” Id. at 450.

Although federal prosecutors have declined to comment on whether Newman impacted the government’s decision not to charge Mr. Mickelson, the general consensus among those following the litigation is that it is the reason. Under Newman, the government would have been required to prove that Mr. Mickelson (1) knew the tip originated with Mr. Davis, and (2) knew that Mr. Davis received a benefit in exchange for passing the information to Mr. Walters – a hefty undertaking. In fact, federal prosecutors have been outspoken regarding the impact of Newman, warning that it would “create[] an obvious road map for unscrupulous behavior,” and be “a potential bonanza for friends and family of rich people.” At the press conference regarding the above charges, the U.S. Attorney stated: “Conduct we think is nefarious, and undermines faith in the market and the fairness of the markets, will not be able to be prosecuted because of the Newman decision.”