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 on 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 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.
"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 did not respond to requests for comment.
Officials with the FBI and the SEC declined to comment.