Phil Mickelson Investigation: What Is Insider Trading? - Tarnished Twenty
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Phil Mickelson Investigation: What Is Insider Trading?

Golfer Phil Mickelson has announced that he is cooperating with a federal probe regarding allegations of possible insider trading.

Mickelson and Las Vegas gambler William Walters are being questioned in connection with trading activity that federal authorities believe may be linked to billionaire hedge-fund manager Carl Icahn's 2011 bid to purchase consumer products-maker Clorox.

But as Mickelson prepares to play in this month's U.S. Open, what will authorities be looking for and why might it be hard to make any possible insider trading charge against Mickelson stick?

What Is Insider Trading?

Inside trading generally refers to violations of a number of federal Securities and Exchange Commission (SEC) rules regarding the buying and selling of stock in publicly traded companies. These rules prohibit those with inside information -- typically people who work for or with companies and may have access to information not known to the general public -- from using that information to profit by buying or selling that company's stock.

Insider trading also forbids those who have inside information from acting as a "tipper" and passing the information to others, known as "tippees." It is this tipper-tippee scenario that is reportedly involved in the investigation into Mickelson's trading activity. Investigators may be looking into whether Walters received information from Icahn related to Icahn's plan to make an offer to Clorox and subsequently passed that information to Mickelson.

SEC May Have a Hard Time Prosecuting Mickelson

Mickelson's potential insider trading liability depends in large part on whether or not Icahn can be considered an "insider" by way of his aggressive investing strategy in Clorox. Insiders are typically employees, board members or other fiduciaries of a company such as lawyers or accountants. But in this case, reports suggest Icahn was just an outside investor who made an unsolicited offer to buy the company.

Even if the SEC succeeds in pinning Icahn with insider trading charges, Mickelson's status as an alleged tippee may hinge on the outcome of a case set to be heard by the U.S. Second Circuit Court of Appeals. That case will determine whether a tippee must know that the source of the tip benefited from his or her disclosure of the information.

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