Phil Mickelson, whom the SEC describes as a “successful professional golfer,” was not charged with insider trading earlier today. I wasn’t either, and I’m glad about that. And you probably weren’t either! High fives all around. But mostly, Phil wasn’t charged, and he’s really glad, because that guy was %$&*@! close to being charged with insider trading. Instead, he was merely named as a relief defendant in an SEC complaint filed today, and completely avoided criminal charges in a parallel case brought in the Southern District of New York.

There is so much here, it’s hard to know where to begin. But let’s start with the allegations, the description of which here is derived from the summary in the SEC’s complaint. These are not proven, and I don’t know if they’re true. The defendants’ lawyers say they’re not!

Allegations

Anyway, from 2008 through 2012, Thomas Davis, a director of Dean Foods Company, tipped his long-time friend and “professional sports bettor” Billy Walters, to confidential information about the company. This information included “sneak previews of at least six of the company’s quarterly earnings announcements and advance notice of the spin-off of Dean Foods’s profitable subsidiary, The WhiteWave Foods Company.” In exchange for these insider trading tips, Walters gave Davis almost $1 million. In July 2012, Walters called Mickelson, who had placed bets with Walters and owed Walters money at the time of the call. “At a time when Walters was in possession of material nonpublic information regarding Dean Foods, Walters . . . urged Mickelson to trade in Dean Foods stock, which Mickelson did the next trading day in three brokerage accounts he controlled.” A week later, Dean Foods’s stock price jumped 40% on the announcements of the WhiteWave spin-off and strong second quarter 2012 earnings, allowing Mickelson to profit by approximately $931,000.

Again, maybe not true.

Phil Mickelson

But I’m mostly interested in Mickelson here. What they’re saying he did sounds a lot like insider trading, but he wasn’t named as a defendant. Instead, the SEC named him as a relief defendant. Here’s how the Second Circuit described relief defendants in SEC v. Contorinis, 743 F.3d 296, 305 n.11 (2014):

When certain conditions are met, innocent third parties (“relief defendants”) may be ordered to disgorge the proceeds generated by the illegal conduct of a fraudulent investor. However, imposing such liability upon innocent third parties is elective rather than mandatory. See, e.g., SEC v. Cavanagh, 155 F.3d 129, 136 (2d Cir. 1998) (“Federal courts may order equitable relief against a person who is not accused of wrongdoing in a securities enforcement action where that person: (1) has received ill-gotten funds; and (2) does not have a legitimate claim to those funds.”) (emphasis added). Here the SEC could have sought to recover illegal gains from the Paragon Fund as a relief defendant, but chose, as our case law has indicated is an established and legitimate alternative, to seek damages from the wrongdoer Contorinis directly.

So maybe the SEC could have gone after Walters only for Mickelson’s profits, if Mickelson really was an “innocent third party,” as described in Contorinis. But the SEC named Mickelson as a relief defendant, and have required him to disgorge the $931,000 and to pay prejudgment interest of $105,000. I have never seen prejudgment interest as part of a settlement involving a relief defendant, though it may have happened before.

Why no charges?

Why didn’t the SEC and the Justice Department go ahead and charge Mickelson, instead of doing this weird relief defendant thing? I think there are a couple of reasons that may be rooted in the evidence the government was able to gather. First, the SEC doesn’t allege that Walters actually told Mickelson any material, nonpublic information about Dean Foods. Sure, Walters “was in possession of” that information and urged Mickelson to buy Dean Foods shares, but the SEC doesn’t say Walters told Mickelson what that information was. So maybe Mickelson didn’t have it, and without it, he wouldn’t be liable.

Second, the government alleges that Walters gave Davis a lot of money for the Dean Foods information, almost $1 million. But it doesn’t say that Mickelson knew about those payments back to Davis. And under United States v. Newman, which is the law of the Second Circuit at least until United States v. Salman is decided by the Supreme Court later this year, Mickelson needs to have been aware of that personal benefit being kicked back to the original tipper, Davis. Without that knowledge, Mickelson wouldn’t be liable.

Mickelson’s knowledge may have been too hard to prove given the fighting posture Walters and Davis are now in. Those evidentiary problems may explain the weird relief-defendant-plus-prejudgment-interest result for Mickelson.