The Securities and Exchange Commission today announced insider trading charges against a professional sports gambler who allegedly made $40 million based on illegal stock tips from a corporate insider who owed him money.
The SEC alleges that the sports gambler, William “Billy” Walters of Las Vegas, was owed money by then-Dean Foods Company board member Thomas C. Davis. According to the SEC complaint, Davis regularly shared inside information about Dean Foods with Walters in advance of market-moving events, using prepaid cell phones and other methods in an effort to avoid detection. The SEC further alleges that while Walters made millions of dollars insider trading using the confidential information, he provided Davis with almost $1 million and other benefits to help Davis address his financial debts.
The SEC complaint also alleges that professional golfer Phil Mickelson traded Dean Foods’s securities at Walters’s urging and then used his almost $1 million of trading profits to help repay his own gambling debt to Walters. Walters and Davis are charged with insider trading, and Mickelson is named as a relief defendant. Relief defendants are not accused of wrongdoing but are named in SEC complaints for the purposes of recovering alleged ill-gotten gains in their possession from schemes perpetrated by others.
“As we charge in our complaint, Walters illegally reaped tens of millions of dollars with the benefit of the ultimate ace in the hole – confidential information leaked by a sitting board member of a public company,” said Andrew Ceresney, Director of the SEC’s Enforcement Division. “Additionally, Mickelson will repay the money he made from his trading in Dean Foods because he should not be allowed to profit from Walters’s illegal conduct.”
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Walters and Davis.
After certain suspicious trades had been identified, the SEC’s investigation analyzed years of trading data and other information and followed the leads back to Walters and Davis, including their use of a variety of prepaid cell phone numbers.
According to the SEC’s complaint, Walters provided Davis with a prepaid cellular phone to use when he shared inside information about Dean Foods. Walters further instructed Davis to refer to Dean Foods as the “Dallas Cowboys” during conversations.
According to the SEC’s complaint filed in federal court in Manhattan:
- The unlawful trading occurred during a five-year period. Among the inside information passed from Davis to Walters in advance of Dean Foods public announcements was earnings information for the second and fourth quarters in 2008, the first and third quarters in 2010, and the first and second quarters of 2012.
- Davis also tipped Walters as Dean Foods prepared to convert its profitable subsidiary WhiteWave Foods Company into a separate business with its own stock. Walters traded in Dean Foods stock in advance of public announcements about the spin-off and initial public offering (IPO) of WhiteWave shares.
- The SEC also identified suspicious trades in the stock of Darden Restaurants and linked them to Davis, who was recruited in 2013 by a group of shareholders buying up Darden stock with the goal of influencing management to make corporate changes.
- Davis was lacking market-moving information about Dean Foods to share with Walters at that time, so he began sharing nonpublic information about strategic plans for Darden despite signing a non-disclosure agreement to keep the group’s details secret.
- Walters in turn bought almost $30 million worth of Darden stock based on illegal tips from Davis and profited when the stock price increased 7 percent in October 2013 upon reported news about the investor group’s plans.
- In July 2012, Walters called Mickelson, who had placed bets with Walters and owed him money at the time. While Walters was in possession of material nonpublic information about Dean Foods, he urged Mickelson to trade in Dean Foods stock.
- Mickelson bought Dean Foods stock the next trading day in three brokerage accounts he controlled. About one week later, Dean Foods’s stock price jumped 40 percent following public announcements about the WhiteWave spin-off and strong second-quarter earnings.
- Mickelson then sold his shares for more than $931,000 in profits. He repaid his debt to Walters in September 2012 in part with the trading proceeds.
The SEC’s complaint charges Walters and Davis with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC seeks a final judgment ordering the return of ill-gotten gains plus interest and penalties as well as permanent injunctions from future violations of Section 10(b) and Rule 10b-5 and an officer-and-director bar against Davis.
Mickelson neither admitted nor denied the allegations in the SEC’s complaint and agreed to pay full disgorgement of his trading profits totaling $931,738.12 plus interest of $105,291.69.
The SEC’s investigation was conducted in its San Francisco Regional Office by Karen Kreuzkamp, Market Abuse Unit members Victor W. Hong, William J. Martin, and Steven D. Buchholz, and Alexander M. Vasilescu of the New York office, who will also lead the SEC’s litigation. The case was supervised by San Francisco office director Jina L. Choi and Market Abuse Unit co-chief Joseph Sansone.
The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, Federal Bureau of Investigation, U.S. Postal Inspection Service, and Financial Industry Regulatory Authority.