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Bont: Pinstriped pants and handcuffs: Inside a high-profile case

March 6, 2019

criminal-justice-bontIt is almost time to dust off my clubs and set them in front of the TV while I watch scattered segments of the final round of every televised golf tournament and dream about the day when I might be able to play again. (Likely 2029.) During much of the early 2000s, Phil Mickelson, a.k.a. Lefty, was widely beloved as professional golf’s “nice guy.” (He also wore notoriously hideous pinstriped golf pants.) If you are unfamiliar with professional golf and wonder why it needed a “nice guy,” cf. Tiger Woods. In an ironic example of the blue-collar/white-collar dichotomy, right around the time that Tiger was running his Escalade into a fire hydrant after failing to keep Vegas in Vegas, Phil found himself subjected to an insider trading investigation.

Unsavory company is never in short supply for nice guys with money. Phil was bros with Billy Walters, a sports gambling guru with a reputation for extending large amounts of credit to his high-end friends. Before long, Phil was in debt to Walters. So, too, was Tom Davis, who sat on the board of Dean Foods and who was, much like Mickelson, a lousy gambler. You can see where this is going, right? Davis leaked material nonpublic information to Walters, who allegedly shared it with Phil. Phil’s and Davis’ debts to Walters magically disappeared.

Walters was indicted on insider trading charges after Davis gave him up to the FBI. It probably would have been an open and shut case, but for a series of pre-indictment missteps. See U.S. v. Walters, 910 F.3d 11 (2d Cir. 2018) for the judicial recitation of the story. The FBI special agent who was supervising the grand jury investigation into Walters’ trading patterns met with reporters from the Wall Street Journal on numerous occasions before Davis and Walters were indicted. The Journal published articles about the investigation from May 2014 through August 2015, the last of which specifically identified Davis as a target. Six months later, Davis informed the government he wanted to cooperate and implicated Walters. Davis pleaded guilty pursuant to a cooperation agreement on May 19, 2016, and the very next day, two years after the Journal first published the story, the United States attorney indicted Walters.

Walters promptly moved to dismiss the indictment due to the government’s grand jury leaks. In case you are wondering why all the secrecy, the grand jury is about as close at it comes to a prosecutor’s temple. The 16 to 23 grand jurors (six if in state court proceedings) are the priest, and every last unfortunate soul who testifies is the penitent. The Supreme Court recognizes that indictments can be dismissed for Rule 6(e) violations, but only if the defendant demonstrates that he was prejudiced by the leaks. Bank of Nova Scotia v. U.S., 487 U.S. 250 (1988). In order to demonstrate prejudice, the defendant must establish that the violation “substantially influenced the grand jury’s decision to indict” or at least that there are “grave doubts” about whether the grand jury’s decision was affected. Id. at 256. In Walters’ case, the Second Circuit Court of Appeals held that he failed to satisfy this high standard. (How is someone really supposed to prove what a couple dozen jurors found persuasive in a secret proceeding?)

First, the court found that the investigation did not receive an unfair boost from the publicity associated with the Journal articles. Notably, the evidence presented to the grand jury included numerous Dean Foods’ board meeting minutes and the contemporaneous stock trades by Walters. It was not as though witnesses suddenly materialized after reading the newspaper. Likewise, there was no evidence that Davis cooperated with the government because of the media attention. To the contrary, Davis testified at trial that “it was pretty clear, based on advice from counsel, that [he] was likely to get indicted in the next couple of months.” Also, the government had only just gotten authorization to tap Walters’ phone when the Journal published the first of the articles. So, one could argue the leaks actually impeded the investigation into Walters’ Dean Foods trading. Finally, the evidence against Walters was overwhelming. A dismissal of the indictment would have been an undeserved windfall for Walters.

Of course, if you want the rebuttal to the reasoning adopted by the court, you need only scour the internet for conspiracy theorists who point out: 1) that the initial (2011) investigation of Walters was due to suspicious trading of Clorox stock, not Dean Foods; 2) that Special Agent David Chaves actually told the Journal reporters the investigation (of Clorox trading) was dormant when he first approached them, and; 3) that the FBI was anticipating an uptick in “guilty chatter” on the wiretaps after the first Journal article was published about Dean Foods. Also, in case you are wondering what happened to Phil, it is rumored he never even sat through an FBI interview; he was not called to testify; and, in perhaps the biggest bunker save of his life, paid a fine to the SEC and avoided charges.

Sometimes it really does pay to be a nice guy.•

Jonathan Bont practices in the areas of criminal defense, business litigation and government compliance at Paganelli Law Group. Opinions expressed are those of the author.

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