NEW YORK -- Questions about how to apply securities law to activist investors could complicate any potential insider trading case against billionaire Carl Icahn, pro-golfer Phil Mickelson and Las Vegas gambler William Walters, legal experts said.
U.S. federal investigators are looking into whether Mickelson and Walters may have traded illegally on private information provided by hedge fund manager Icahn, a source familiar with the matter said Friday. None of the three men has been accused of any wrongdoing, the source said.
Icahn's style of investing is to aggressively buy stock with the aim of changing the direction of corporate boards, which makes him an outsider when federal insider trading laws have traditionally focused on corporate insiders, according to legal experts.
The federal probe centers on trades in Clorox Co. (CLX) by Walters and Mickelson as Icahn was making moves to access the company's board in 2011, the New York Times reported.
After accumulating a 9.1 percent stake in Clorox, Icahn made a bid valued at more than $10 billion to buy the consumer products company, which sent stock soaring.
Even if Icahn did leak information about his plans regarding Clorox, he may not necessarily have violated the law. Prosecutors would have to show he had breached a fiduciary or confidentiality duty by disclosing material, nonpublic information that was later traded on.
%VIRTUAL-article-sponsoredlinks%"A true quirk of insider trading rules is that the person who creates the information that's material and confidential has the freedom to use that for themselves and to authorize others to use it," said James Cox, a professor of securities law at Duke University.
"That's part of our capitalistic spirit, that people who create the ideas should be able to exploit them," he said, noting that this could complicate a potential government case.
The regulations also raise the issue of who Icahn would have a duty to in his investing role, said Reed Brodsky, an expert in white-collar crime at Gibson Dunn.
Since Clorox rejected the hostile bid, Icahn would not likely be breaching a duty to the public company's shareholders unless he had entered into some kind of non-disclosure agreement, Brodsky said.
Roland Riopelle, a former government prosecutor, said Icahn may have had a duty to his own investors to keep certain information confidential. If that duty was breached, the government could argue he violated insider trading laws, he said.
"It could come down to whether [Icahn's fund] had written rules that would prohibit this kind of disclosure or conduct," Riopelle said. "If they didn't have any rules, then [they] are not going to have a case."
"Every case of this kind really comes down to the granular facts," he said.
Icahn sent a letter in July 2011 to Clorox's chairman offering to purchase the company for $76.50 a share and saying he could arrange debt financing for the deal. He later raised the bid to $80.
If Icahn had launched a formal tender offer, it would have triggered a different standard of disclosure rules under the SEC's 1968 Williams Act, said John Coffee, an expert in corporate governance at Columbia Law School.
Prosecuting Mickelson and Walters would present a different set of challenges, the experts said.
A case against them could hinge on a pending decision expected from the 2nd U.S. Circuit Court of Appeals that could make it harder for the government to prosecute insider trading cases.
Two hedge fund managers brought the appeal in an effort to overturn their insider trading convictions.
The U.S. Supreme Court in 1983 held that the recipient of nonpublic information -- a "tippee" -- can only be found to have engaged in insider trading if the tipper benefited from the disclosure. The appeals court is being asked to address whether prosecutors must show the tippee knew of the tipper's benefit, which can be financial or non-monetary.
Mickelson and Walters, if they were alleged recipients of inside tips, could be helped by a ruling that toughens the standards for government prosecutors, the experts said.
In response to Friday's news of a federal probe into possible insider trading Icahn told Reuters he was unaware of any investigation and said his firm always followed the law. Mickelson, a Masters champion, said he has done nothing wrong and is cooperating with the investigation. Walters didn't respond to requests for comment.
Officials with the FBI and the SEC declined to comment.
-Additional reporting by Nate Raymond and Jennifer Ablan.
12 Purchases You Should Always Negotiate On
U.S. Faces Hurdles Bringing Case Against Icahn, Mickelson
Car dealerships, unlike many other retailers, expect you to haggle. It's built into their price tags. So if you pay the sticker price for any new or used vehicle, basically ever, you're getting hoodwinked. When you walk into a dealership, prepare to haggle over just about everything -- the trade-in value of your car, the price of the car and extras like warranties. You'll have more leverage if you have more cash, but even cash-strapped buyers can and should negotiate.
Real estate agents expect some negotiation. But when buying a home, negotiation doesn't have to be all about price. If the seller isn't willing to come down on the price, ask for extras. For instance, ask that the seller pay more closing costs (which basically amounts to a cheaper deal for you). Or ask that the seller take care of some maintenance issues you found when you had the home inspected.
Mortgage companies will quote you a rate when you ask, but that doesn't mean you need to stick to that rate. If your credit is good (find out if it is, first) or you have a big down payment, you have plenty of leverage to negotiate a lower rate. And if you can't straight-up negotiate for a lower rate, you may be able to save by paying for points. This basically means you put more cash down for a lower rate, and, in some cases, it can save you a lot of money.
If you're renting from a landlord for the first time, rent may not be as negotiable. But if you're getting ready to renew your lease, don't just accept the now-higher rental price you're quoted. Keep in mind that it's a pain for rental companies and landlords to get you moved out, prep the property and move someone new in. Unless you're living in the hottest area in town, they'll likely lose money looking for a new renter. This means they may be more willing than you'd think to negotiate pricing.
Insurance companies usually get special rates from doctors' offices and hospitals. But those rates don't automatically apply to uninsured individuals -- or those who haven't yet hit their deductibles. If a medical bill isn't going through your insurance company, negotiate it. Often times, the doctor's office or hospital will come down on the price, so that it's closer to (or if you're lucky, even less than) what your insurer might pay.
If you're in good standing on your credit card account, you have plenty of negotiating power. You can negotiate lower rates, annual fees and higher credit limits. Even if you aren't in good standing, credit card companies can help you come up with a payment plan if you can't afford the minimum payments. You just need to ask.
When hiring someone to maintain your lawn, re-roof your home or pop out a dormer window on your second story, always get at least three quotes. And once you have those quotes, negotiate for a better price or a better deal. As with buying a home, you don't just have to negotiate for a lower price. Some service providers and contractors won't bring down the price, but they will often add in extra services for the same price -- or at least for a discount.
If you've recently gotten away from your cable or Internet company's promotional pricing, you may be in for a shock. Most of us fail to read the fine print that says just how much the service will cost after the promotional period. Before you call the company, look at the promotional offers other services in town are offering. Then, tell them you're considering switching so you can get a better deal. You may not talk them all the way back down to the promo price, but you can get pretty close.
Any time you buy big-ticket items like furniture or appliances, you should negotiate the price. This is especially true if you're buying in quantity -- for example, if you're purchasing both a washer and a dryer or an entire living room set. If the salesperson won't negotiate with you, ask to talk to the manager.
As with credit card companies, if you're in good standing with your insurance company, you may be able to negotiate for better rates. At minimum, you should ask about bundling your insurance policies to see how much that could save you. And if you notice your insurance company is running a new promotional deal that you're not in on, ask about it. The company may sign you up just for asking.
Collections calls are never fun, but they can be productive if you look at them the right way. Once an account of yours has gone to collections, that means the company has paid pennies on the dollar for the account. In other words, your $5,000 debt may have cost them $200 to take over from the original company. So a collections company may accept $1,000 for a $5,000 debt -- or possibly even less.
Whether you're shopping at a thrift store or a garage sale, you should always negotiate the price of used stuff. You can usually buy two or three things at once to get a better deal, or just negotiate for a better price on a single, bigger-ticket item.