Insider Trading and Taxes: The State Wants to Read Your Mind
Professional golfer Phil Mickelson was back in the news this summer thanks to a 2014 federal investigation into an insider trading case. It is alleged that Mickelson owed high stakes sports gambler Billy Walters a considerable amount of money in July of 2012. As a result, Walters advised Mickelson to buy stock in Dean Foods Company as a result of an inside tip received by Walters’ longtime friend and top Dean Foods director Thomas C. Davis. The purchase netted Mickelson $931,000 after he sold the stock less than one month after purchase. The Securities and Exchange Commission (SEC) has now ruled that he must return the entire $931,000 plus another $105,000 in interest. Davis and Walters are named as co-defendants in the SEC’s civil suit while Mickelson is named only as a relief defendant. No further legal action will be taken against the golfer commonly referred to as “Lefty.”
Insider trading laws are typically difficult to assess. In this particular case, Davis appears to be the individual who provided the non-public information and Walters appears to be the one who received it. Mickelson is involved as a result of being a third party to the initial infraction having been told information illegally obtained but not actually receiving it from the original source (Davis). This is the reason for the more lenient status in the case for Mickelson and the harsher status for the other two men.
Can the State Prove Motive?
Many have wondered why Mickelson hasn’t been considered for a harsher sentence in this case. His being a sports celebrity, along with having considerable wealth, paints a perception of someone able to beat the system as a result of these advantages. But if Mickelson had already owned stock in Dean Foods and had been told not to sell by the same inside source, would the SEC still be able to file charges against him? Could they really prove that the golfer’s inaction in deciding to keep ahold of the stock he had was the result of this illegal tip? Of course not, because only positive actions can be ascribed to information no matter if it is legally obtained or not. This is one of the major problems in attempting to crack down on insider trading.
Another problem with insider trading enforcement is that it only seems to penalize those who succeed in the aftermath of their transactions. Had Walters been wrong about the Dean Foods stock and the value of it plummeted rather than increased, how would the SEC be able to levy any kind of penalty against Mickelson? After all, there would be no “ill-gotten gains” to return as a result of the purchase and selling of this stock. But if the activity of obtaining inside information is cause for legal action, then penalties for this activity should apply equally regardless of the result.
This isn’t the first time Mickelson’s finances have made headlines. In January of 2013 he alluded to the possibility of moving out of California due to the increase in state income tax for high income earners that accompanied a federal tax hike which targeted the same group. Mickelson then walked back these comments by saying: “My apology is for talking about it publicly, because I shouldn’t take advantage of the forum that I have as a professional golfer to try to ignite change over these issues.”
However, his concern over the high tax rate appears to be real considering he sold his Rancho Santa Fe, CA home in early 2015.
Mickelson’s apology for discussing his personal financial matters publicly highlights the fact that when higher taxes (or other unpopular government policy) cause individuals to move from a state, those motivations are typically not discussed in a public forum. For every public figure or celebrity whose state of residence may cause some degree of popular interest, many more individuals who possess varying amounts of wealth are certainly making decisions on where to live for many of the same reasons. While many factors play into the decision to move to or from certain states, tax rates are undeniably a major factor in weighing the costs and benefits of where to reside. Mickelson’s longtime rival and California native Tiger Woods admitted that he moved to Florida at the start of his professional golf career due (at least in part) to the Golden State’s high tax rate.
Mickelson’s insider trading case and his desire to move out of a high tax state show the inability of government to regulate self-interested financial decisions. Just as the government cannot punish stock market inactivity or insider trading that nets financial losses, they also aren’t able to know how many people are choosing to not live in their state as a result of harmful tax policy. Mickelson happened to have acted on his inside information in a way that caused suspicion and benefited financially from his transaction. He also disclosed his motivations to move from a state in a way which criticized tax policy. It stands to reason that many times both insider trading and state migration due to taxes happen with relatively no knowledge being given to either the government or the public. The state at all levels is unable to legislate against intent despite its best efforts.