Meh. Photographer: Scott Eells/Bloomberg Photographer: Scott Eells/Bloomberg
Meh. Photographer: Scott Eells/Bloomberg Photographer: Scott Eells/Bloomberg

One question about the big Carl Icahn golf insider-trading investigation is, who leaked it to the press, and why? My initial assumption was that the government leaked it, to try to shake loose some information after coming to a series of dead ends in the investigation. Maybe if it was in the papers, someone in the vast network of golfing insider traders1 would read about it and contact the FBI to confess.

But then there was this morning's Wall Street Journal story about how the leak will prevent the FBI from getting wiretaps, which makes me think that the government can't possibly have leaked it. You don't pass up wiretaps on Carl Icahn.2 Leaving aside the insider trading or whatever, the man is consistently entertaining in public, and from what we know of his telephone conversations they're even funnier. Imagine being the FBI agent listening in when Bill Ackman called to forgive Icahn.

The combined impression left by these articles is that the government didn't have much evidence of insider trading before the story got out, and now doesn't have much hope of gathering more. All there is are a few well-timed trades, particularly trading in Clorox options a few days before Icahn announced a bid to buy the company. And the people making those trades include "high-rolling gambler and golf course owner William T. Walters," a buddy of Icahn's from his (Icahn's) casino-owning and poker-playing days, as well as Phil Mickelson, the golfer.

So there is the question of the basic facts: When Icahn was planning to buy Clorox, did he tell Billy Walters, and did Walters then tell Phil Mickelson, and did they all buy a bunch of Clorox options? Icahn emphatically denies this -- "inflammatory and speculative" -- and Mickelson seems befuddled by it.3 Walters, on the other hand, "reached on Friday evening, said, 'While I don’t have any comment, pal, I’ll talk to you later,'" which is pretty much the worst denial I've ever heard, so maybe there's something there.

But even if there was, that wouldn't be enough. Insider trading, remember, is not just trading on inside information. In particular, the allegation is that Walters and Mickelson traded in Clorox stock, and Icahn was not a Clorox insider. Any case would, as Stephen Bainbridge explains, have to be under the "misappopriation theory" of insider trading.

The first question there would be: Did Carl Icahn4 have a duty to keep his takeover plans secret? Icahn's intentions, you might think, belong to him. If I plan to buy Clorox stock, I can tell you my plans, and you can trade on them, and it's not insider trading. Even if I plan to buy a lot of stock; even if my buying is material; even if I plan to take over Clorox.5 This is straightforwardly the law in the U.S., and it drives people nuts, because if you think insider trading is about fairness and level playing fields this makes no sense. But it's not; it's about breaching duties to other people to keep information private, and you don't have a duty to yourself to keep your own intentions private.

But this case is not as simple as Carl Icahn planning to buy Clorox stock for himself. While Icahn wound down his hedge fund into a family office earlier in 2011, he bought his Clorox stake, and submitted his acquisition proposal, through Icahn Enterprises L.P., a publicly traded partnership of which Icahn owned only 92.3 percent.6

Did he have a duty of confidentiality to his public shareholders? I don't know. Here is Icahn Enterprises' Code of Ethics and Business Conduct, which says all the expected things about how "Employees shall not use confidential information for personal advantage" and "Confidential information may be disclosed to others only when disclosure is authorized by the Company or legally mandated." But it is a bit thin on how you know what information is confidential (though surely a planned acquisition proposal is?), and on how disclosure gets "authorized by the Company." It's possible that Carl Icahn, as chairman of the board and principal shareholder, gets to do that authorizing.7

One thing you might ask is, if Icahn did tip Walters and Mickelson, and they traded on those tips, how would that have hurt Icahn Enterprises' minority shareholders? Certainly the people who sold Walters and Mickelson Clorox options might feel aggrieved at being picked off, but that's not an Icahn Enterprises issue. The only loss for Icahn Enterprises would be if the pre-announcement trading pushed up the price that it had to pay for Clorox. But Icahn Enterprises never actually ended up buying Clorox, and if you followed the story you'd have a hard time concluding that the sticking point was price. So it doesn't look like these disclosures, even if they happened, betrayed Icahn's public shareholders.

Even beyond that, there would be other questions. Like, did Icahn get any personal benefit from tipping Walters? If not, then there's no breach of duty, and it's not illegal insider trading. The personal benefit requirement is really lax -- "ooh I got to meet a famous golfer" would be enough of a benefit -- but it sounds like Icahn never actually got to meet Mickelson. And he could probably already play poker any time he wanted. And, at least for Walters and Mickelson, there is the question of, did they know that Icahn had breached a duty of confidentiality? (Even if he had?) It sounds like Mickelson didn't even know that the tips came from Icahn, never mind all the breach of duty stuff.

This seems like it would be a very hard case even if the government had evidence; it also seems like it doesn't. So why pursue the case? Obviously the fame of the participants, in their respective fields, makes this a sexy case, and fact that Mickelson, "whom authorities hoped to scare into cooperating," is a golfer rather than a heavily lawyered hedge fund manager might have made it seem easier to investigate.

But the other thing is that this pattern -- big activist investor sharing information about his intentions before announcing a big move in a public company -- has come under a lot of scrutiny recently. But it's a hard one for the government to go after: If a hedge fund manager tips other activists about a position, what duty is he violating? Perhaps he has some duty to his investors to keep his position secret, but I'm not sure you'd get the investors to say that. And there might be good business reasons -- building a constituency, getting reciprocal tips in other activist situations -- for activists to tip each other about their campaigns.

So a good test case would be one where the tipper is not an activist hedge fund manager, but rather an activist chairman of a public company, however vestigial. And where the tips are not for an arguable business purpose, but just friendly chat at the golf course and the poker table. "CEO sells out public shareholders to poker buddies" is a better story to start with than "hedge fund manager sells out investors to other hedge funds," and if you win with that you can build from there.

Of course, if you very publicly strike out with that there's not much to build on. And at least so far, that seems to be the situation that the government is in.

1 I don't play a lot of golf, but if you told me that the point of the sport is to walk around and exchange stock tips in the open air I would not be the least bit surprised.

2 Though but also can you wiretap a golf course? FBI snorkelers hiding in the water hazards with microphones?

3 From the New York Times:

But when the F.B.I. approached Mr. Mickelson — first pulling him off a plane at Teterboro Airport in New Jersey last year, the people said, and then confronting him on Thursday at a golf tournament in Ohio — Mr. Mickelson had little to offer. In the airport discussion last year, which lasted no more than an hour, the people said, Mr. Mickelson pledged to cooperate but explained that he did not know Mr. Icahn and had no clue that the stock tips might have been improper. On Thursday, Mr. Mickelson said, he instructed F.B.I. agents to “speak to my lawyers.”

4 Or, alternatively, someone who works for him. This would be an easier case for prosecutors if it were an Icahn lieutenant leaking information behind his boss's back, but that's not what it sounds like.

5 There is an important exception, Rule 14e-3, which prohibits trading on inside information that "any person has taken a substantial step or steps to commence, or has commenced, a tender offer." So if Icahn were about to launch a tender offer for Clorox, it would be illegal for him or his tippees to trade on that information. But that's not what happened in Clorox: Icahn proposed a merger to Clorox's board, didn't mention a tender offer in that proposal, and never actually launched a tender offer.

6 That's per the 2011 Schedule 13D that Icahn filed for Clorox. The latest Icahn Enterprises 10-K shows him owning 88 percent.

7 Of course if it was an authorized disclosure to a couple of favored traders then that raises some Regulation FD problems. But this doesn't sound like a Regulation FD investigation? Who knows.

To contact the writer of this article: Matt Levine at mlevine51@bloomberg.net.

To contact the editor responsible for this article: Zara Kessler at zkessler@bloomberg.net.