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High-Rolling Sports Gambler and a Former Dean Foods Chairman Charged With Insider Trading
High-Rolling Sports Gambler and a Former Dean Foods Chairman Charged With Insider Trading
(about 3 hours later)
Federal authorities announced criminal charges on Thursday against the former chairman of Dean Foods and a high-rolling sports gambler with ties to prominent athletes and corporate executives, a surprising escalation of a long-running insider-trading investigation.
Phil Mickelson has five major golf championships and countless endorsement deals. Thomas C. Davis, a former investment banker, has a Harvard pedigree and a country club lifestyle.
William T. Walters, a businessman better known as “Billy” who is often considered the most successful sports bettor in the country, was arrested by the F.B.I. at a Las Vegas resort late Wednesday.
They also had a secret.
Thomas C. Davis, the former chairman of Dean Foods who stepped down last year after being suspected of leaking insider tips to Mr. Walters, also faces charges but is cooperating with the government, his lawyer said.
Both men owed money to William T. Walters, a high-rolling Las Vegas kingmaker, often considered the most successful sports bettor in the country.
In addition to criminal charges from federal prosecutors in Manhattan, the men face a civil case from the Securities and Exchange Commission.
Now, federal authorities say those debts were at the center of a long-running insider trading scheme.
Mr. Walters’s case bridges the world of sports, gambling and finance, providing an unusual backdrop to an insider trading investigation. In the course of the investigation, federal authorities examined trades not just by Mr. Walters but by some of his friends, including the golfer Phil Mickelson.
Federal prosecutors in Manhattan on Thursday unveiled criminal charges against Mr. Walters, saying that illegal stock tips from Mr. Davis helped him generate some $40 million in profits and avoided losses. They also charged Mr. Davis, who has agreed to plead guilty and who is cooperating against Mr. Walters.
The criminal charges against Mr. Walters and Mr. Davis carry a heightened significance for prosecutors, representing one of the most notable insider trading cases since an appellate court overturned two prominent convictions.
Mr. Mickelson was not accused of wrongdoing. But the Securities and Exchange Commission listed him in a civil complaint as a relief defendant, arguing that he was “unjustly enriched” and must disgorge “ill-gotten gains” he made from trades Mr. Walters recommended. Mr. Mickelson, known as “Lefty,” agreed to repay nearly $1 million, and his lawyer said he “takes full responsibility for the decisions and associations that led him to becoming part of this investigation.”
After the United States Court of Appeals for the Second Circuit overturned the convictions of two hedge fund managers in December 2014 — and in the process imposed the greatest limits on prosecutors in a generation — the government predicted a chilling effect on future insider trading investigations.
The investigation hinged on Mr. Davis’s mounting debts, which were far larger than Mr. Mickelson’s and which may have provided a motive to share inside information.
Preet Bharara, the United States attorney in Manhattan, who led a sweeping crackdown on insider trading, warned last year of “a potential bonanza for friends and family of rich people.”
Mr. Davis retired from investment banking at Credit Suisse First Boston in 2001, the government said, but not from the free-spending lifestyle it enabled. His finances were so troubled, the authorities said, that he even misused money from a charity.
But in charging Mr. Walters and Mr. Davis with securities fraud, his office is sending a message to Wall Street and beyond that these cases can still be made. The charges could also become a test case in just how far prosecutors can go after the appellate court ruling.
Mr. Walters also lent him money. Mr. Davis, then the chairman of Dean Foods, returned the favor by feeding Mr. Walters boardroom secrets as far back as 2008, the authorities say.
On at least two occasions, the F.B.I. contacted Mr. Mickelson to seek his cooperation in the case against Mr. Walters, people briefed on the investigation have previously said. Once, agents approached him on a golf course.
To disguise the scheme, they said, the two men used disposable cellphones and created “a secret code” for discussing Dean Foods, a Dallas company, referring to it as “the Dallas Cowboys.”
Mr. Mickelson, a three-time winner of the Masters golf tournament and one of the country’s highest-paid athletes, has not been accused of wrongdoing. Nor is there any indication that he will be charged, prompting his lawyer to say, “On that point, Phil feels vindicated.”
“Davis breached his duty and broke the law as the result of being in dire financial straits,” Andrew J. Ceresney, the head of the S.E.C.’s enforcement division, said at a news conference on Thursday. And Mr. Walters, who was arrested at a resort in Las Vegas late Wednesday, was “gambling on a sure thing.”
Still, he is listed in the S.E.C. complaint as a relief defendant, an acknowledgment that he was “unjustly enriched” through his trading and must disgorge his “ill-gotten gains”
The case, however, is much broader than a story about gambling debts. The charges represent one of the most notable insider trading prosecutions since a federal appellate court overturned two prominent convictions — a ruling that led to the dismissal of about a dozen other convictions.
Mr. Mickelson agreed to return all of the nearly $1 million in trading profit he reaped, according to his lawyer, Gregory Craig, who described Mr. Mickelson as “an innocent bystander.”
After the United States Court of Appeals for the Second Circuit overturned the convictions of two hedge fund managers, Todd Newman and Anthony Chiasson, in December 2014 — and in the process imposed the greatest limits on prosecutors in a generation — the government predicted a chilling effect on future insider trading investigations. Preet Bharara, the United States attorney in Manhattan, who led a sweeping crackdown on insider trading, warned that the ruling would allow “a potential bonanza for friends and family of rich people.”
“Phil understands and deeply respects the high professional and ethical standards that the companies he represents expect of their employees, associates and of Phil himself,” Mr. Craig said in a statement. “He subscribes to the same values and regrets any appearance that, on this occasion, he fell short. He takes full responsibility for the decisions and associations that led him to becoming part of this investigation.”
But in charging both Mr. Walters and Mr. Davis with securities fraud and wire fraud, his office and the S.E.C. are sending a message that these cases can still be made.
At the time of the trades, the S.E.C. said, Mr. Mickelson owed Mr. Walters money from gambling bets. Some of the trading profit Mr. Mickelson made went to reimburse Mr. Walters, who made more than $17 million from the trades.
“Brazen insider trading continues to be a blot in our securities markets, and so the integrity of our markets continues to be a priority for this office,” Mr. Bharara said at the news conference. Still, he added that “there is conduct that we think is nefarious and undermines faith in the market and undermines the strength of the market that will not be able to be prosecuted because of the Newman decision.”
Mr. Walters’s lawyer said his client had done nothing wrong. “Bill Walters is a true American success story, whose extraordinary accomplishments as a lawful sports gambler have been widely recognized and lauded,” the lawyer, Barry Berke, said in a statement. “Mr. Walters and his counsel look forward to his day in court, where it will be shown that the prosecutors’ accusations are based on erroneous assumptions, speculative theories and false finger-pointing. The investigation centered on trading in shares of Dean Foods, the nation’s largest milk processor. The trading occurred around the time Dean Foods was planning to spin off a subsidiary, in 2012.
Mr. Walters’s lawyer said his client had done nothing wrong. “Bill Walters is a true American success story, whose extraordinary accomplishments as a lawful sports gambler have been widely recognized and lauded,” the lawyer, Barry Berke, said in a statement. “Mr. Walters and his counsel look forward to his day in court.”
The authorities examined whether the tip about the spinoff came from a board member at the company who knew Mr. Walters, who then shared the information with Mr. Mickelson, the people briefed on the investigations previously said. Mr. Mickelson may not have known the origins of the tip.
This is not the first time Mr. Walters, who is 69, has been the subject of a criminal investigation. He has faced charges four times, none of which resulted in a conviction.
Mr. Walters and Mr. Davis, longtime friends who first met 20 years ago on a golf course, went to great lengths to conceal their arrangement, the government said.
The latest investigation of Mr. Walters centered largely on trading in shares of Dean Foods, the nation’s largest milk processor, and its decision to spin off a subsidiary.
They used disposable prepaid cellphones that Mr. Walters provided. They also created “a secret code” for Dean Foods, a Dallas company, referring to it as “the Dallas Cowboys.”
The court filings detail the following:
Last August, Dean Foods announced the immediate resignation of Mr. Davis, its chairman, in a regulatory filing. Jamaison Schuler, a company spokesman, declined at the time to comment on the resignation of Mr. Davis, 67, an investment banker who had been on the Dean Foods board since 2001.
Days after learning of the planned spinoff in 2010, Mr. Davis flew to Las Vegas to meet with Mr. Walters. On the next business day, Mr. Walters purchased a million shares of Dean Foods.
Thomas M. Melsheimer, a Dallas lawyer representing Mr. Davis, previously stated that his client “voluntarily decided to step down from the board.” On Thursday, he said Mr. Davis, who is 67, “is pleased to be assisting the government in its investigation.”
The deal was delayed. But two years later, while at his country club, Mr. Davis dialed into a Dean Foods conference call to discuss a renewed spinoff effort.
Through all the illicit trades that underpin Mr. Walters’s indictment, Mr. Davis is the common thread.
Three minutes after the call ended, Mr. Davis rang Mr. Walters. Nine minutes after that, Mr. Walters called his stockbroker to buy more shares.
In addition to the 2012 spinoff, Mr. Davis provided Mr. Walters with “sneak previews” of at least six quarterly earnings statements for Dean Foods, the S.E.C. said. It started in 2008 and continued through 2012.
Mr. Walters also called Mr. Mickelson and recommended that he buy shares in Dean Foods. At the time, Mr. Mickelson owed money to Mr. Walters on a gambling debt. The S.E.C. said some of the nearly $1 million in trading profit Mr. Mickelson made on shares of Dean Foods went to reimburse Mr. Walters.
Mr. Davis also tipped Mr. Walters off to a not-yet-public activist campaign by a group of hedge fund investors who were looking to shake things up at Darden, the restaurant group that owns chains including Olive Garden, LongHorn Steakhouse and Capital Grille chains.
Mr. Mickelson, who has a reputation for betting on sports, may not have known the origins of the tip. But on at least two occasions, the F.B.I. contacted Mr. Mickelson to seek his cooperation in the case against Mr. Walters, people briefed on the investigation have previously said. Once, agents approached him on a golf course, another time at an airport hangar.
In the summer of 2013, Mr. Davis was approached by a representative of the group, which included Barington Capital, about its intention to acquire shares in the company and then push for structural changes. At the time, Mr. Davis had signed an agreement that he would keep the activist investors’ plans confidential and not tip anyone else off to buy shares in Darden. Barington is not named in the S.E.C. complaint and has not been accused of any wrongdoing.
At Thursday’s news conference in Lower Manhattan, the S.E.C. displayed a chart with the heading: “Mickelson’s Trades in Dean Foods.”
But soon after, Mr. Davis sent a confidential presentation of the hedge fund’s plans code-named “Project Dee” to Mr. Walters, who authorities said then bought more than $30 million worth of Darden stock. When the news of the activist group’s plans became public, Darden’s stock price soared, allowing Mr. Walters to generate what the authorities said was $1 million in unrealized trading profits.
Gregory Craig, a lawyer for Mr. Mickelson, described the three-time winner of the Masters golf tournament as “an innocent bystander.”
All told, Mr. Walters generated more than $40 million in trading profits and avoided losses, the government said.
“Phil understands and deeply respects the high professional and ethical standards that the companies he represents expect of their employees, associates and of Phil himself,” Mr. Craig said in a statement. “He subscribes to the same values and regrets any appearance that, on this occasion, he fell short.”
Early in the investigation, federal authorities also looked at what role, if any, the billionaire investor Carl C. Icahn may have had in sharing information with Mr. Walters about the consumer products company Clorox. Mr. Icahn was mounting a takeover bid for Clorox.
Through all the illicit trades that underpin the case against Mr. Walters, Mr. Davis was the common thread.
That aspect of the investigation did not bear fruit, and Mr. Icahn is not suspected of wrongdoing.
In addition to the 2012 spinoff, Mr. Davis provided Mr. Walters with “sneak previews” of at least six quarterly earnings statements for Dean Foods, the S.E.C. said.
The case against Mr. Walters comes as prosecutors reassess their ability to pursue insider trading cases after the appeals court ruling, which overturned the case against two former hedge fund managers, Todd Newman and Anthony Chiasson.
Authorities say that Mr. Davis also tipped Mr. Walters to a not-yet-public activist campaign by a group of hedge fund investors who were looking to shake things up at Darden, which owns restaurant chains including Olive Garden and LongHorn Steakhouse.
The Supreme Court denied an appeal from the government. Afterward, prosecutors in Manhattan voluntarily dismissed several other convictions, including the case against Michael Steinberg, a hedge fund manager represented by Mr. Berke, who also represents Mr. Walters. In effect, the appellate court ruling chipped away at Mr. Bharara’s insider trading track record, which was once contained no losses.
In the summer of 2013, Mr. Davis was approached by a representative of the group about its intention to acquire shares in Darden. Mr. Davis signed an agreement that he would keep the plans confidential but he told Mr. Walters nonetheless, authorities said.
At its core, the appellate court ruling constrained prosecutors from filing insider trading charges against a group of friends, which is the case for Mr. Walters. Specifically, the court required “proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential and represents at least a potential gain of a pecuniary or similarly valuable nature.”
Mr. Davis also “misappropriated” $100,000 from a charity he ran that raised money for a battered-women’s shelter in Dallas, according to the court filings. He took the money to pay down a gambling debt at a Las Vegas casino.
The case against Mr. Walters addressed the issue head-on instead of skirting it. The 40-page indictment of Mr. Walters details how his longtime friendship with Mr. Walters overlapped with numerous business deals and personal loans.
The charges against Mr. Davis include perjury — authorities said he lied to the S.E.C. during a deposition last year — and obstruction of justice because he “corruptly altered” and destroyed evidence in May 2014 when news of the investigation first emerged. Mr. Davis resigned as chairman of Dean Foods last August.
They formed a limited liability corporation to invest in a software company. Mr. Walters arranged for another friend to provide Mr. Davis with a $625,000 personal loan in 2010. A year later, as Mr. Davis fell deeper into financial trouble, Mr. Walters helped bail him out with a $350,000 loan that was never repaid.
Thomas M. Melsheimer, a Dallas lawyer representing Mr. Davis, said his client was “pleased to be assisting the government in its investigation.”
Mr. Davis’s debts were increasing at the time. He owed money to a charity that raised money for a shelter for battered women and children. Mr. Davis, the government said, “misappropriated” $100,000 from the charity to help pay off a gambling debt to a Las Vegas casino.
The case against Mr. Walters comes as prosecutors reassess their ability to bring insider trading cases. The appeals court ruling constrained the pursuit of cases involving the sharing of inside information between friends. Specifically, the appeals court required “proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential and represents at least a potential gain of a pecuniary or similarly valuable nature.”
Unlike many of Mr. Bharara’s past targets, Mr. Walters is not a Wall Street trader. Instead, Mr. Walters has been a philanthropist and well-known businessman in Las Vegas. He bought golf courses and auto dealerships. He also donated to political campaigns.
The case against Mr. Walters addressed the issue of “pecuniary” gain head-on. The 40-page indictment not only details Mr. Walter’s longtime friendship with Mr. Davis — they first met 20 years ago on a golf course — but that he had entered into numerous business deals and personal loans with him.
This is not the first time Mr. Walters, who is 69, has been the subject of a criminal investigation. In 1992, he was acquitted of illegal gambling charges. The Nevada attorney general later charged Mr. Walters with money laundering. The case resulted in three indictments, none of which resulted in a conviction.
They invested in a software company together. Mr. Walters arranged for a friend to provide Mr. Davis with a $625,000 personal loan. And as Mr. Davis fell deeper into financial trouble, Mr. Walters helped bail him out with a $350,000 loan that was never repaid.
And Mr. Walters he invoked his Fifth Amendment right during the S.E.C. investigation, he may still beat the latest charges.
“It’s a straightforward announcement that the Southern District is still in the insider trading prosecution business,” said Daniel Richman, a former federal prosecutor, who is now a professor at Columbia Law School. “It’s also a reminder that however important Newman is, if the facts are there, you can take on the burden of proving precisely the kind of exchange that Newman demanded.”
In a 2011 “60 Minutes” segment, the anchor, Lara Logan, remarked that “it’s hard to find anyone better at winning than Billy Walters.”