Local developer and gambler Billy Walters said in a Monday statement that he’s blameless in a burgeoning insider-trading investigation, and an analysis of federal law shows it could be difficult to prove a case against him.
Walters, owner of the Bali Hai Golf Club on Las Vegas Boulevard South and a creator of computerized betting systems that became the bane of sports books everywhere, is under federal investigation for potentially trading illegally in stocks based on private information from billionaire Carl Icahn, who owns the shuttered Fontainebleau on the Strip.
But Walters said the allegations are false.
“I am innocent of doing anything wrong. It’s that simple,” he said in a statement. “Those who know me best know it is preposterous to think that I would involve myself in insider trading. Yes, I have studied and invested in the stock market for many years and no one says anything when I lose money or when I am not successful. And certainly, that’s happened, like it has to many of us.
“But the bottom line here is, as I stated before, I’m not involved in any insider trading. I’ve never been involved in any insider trading.”
A Monday report from Reuters showed that questions about how to apply securities law to activist investors could complicate any potential insider trading case against Walters, Icahn and pro golfer Phil Mickelson, a golf partner of Walters’ and another target in the investigation.
And a Bloomberg report said publicity in the case will hinder the ability of investigators to use wiretaps, cooperating witnesses or consensual recordings.
Such tactics depend on secrecy and have been crucial for the Justice Department in obtaining 85 insider trading-related convictions over the past seven years, including those of Galleon Group co-founder Raj Rajaratnam and former Goldman Sachs Director Rajat Gupta.
“The publicity is going to make this a lot more difficult, if there ever was a case,” said Harvey Pitt, a former chairman of the Securities and Exchange Commission, in an interview.
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.
AGGRESSIVE STYLE OF INVESTING
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. 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.
DIFFERENT SET OF CHALLENGES
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.
Reuters and Bloomberg News contributed to this report.