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. They also had a secret.
Both men owed money to William T. Walters, a high-rolling Las Vegas kingmaker, often considered the most successful sports bettor in the country. Now, federal authorities say those debts were at the center of a long-running insider trading scheme. 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. 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.” 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.
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. 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. 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.” “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.” 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.
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 could allow “a potential bonanza for friends and family of rich people.” 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. “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.” 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.
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.