How To Avoid Being Wiretapped: The Carl Icahn Case Study

One thing is certain about the much discussed investigation into possible insider trading involving Carl Icahn and Phil Mickelson - it is guaranteed to go exactly nowhere and fast. Not just because it would not help the already crumbling image of "fair and efficient" markets that one of the most prominent investors of the past several decades had to resort to such illegal gimmicks, but because by the time Carl Icahn's army of lawyers is done with the SEC (assuming there even is a formal probe to begin with), the corrupt regulator (has Mary White recused herself yet?) will be left in a heap of smouldering rubble.

Reuters explained why the SEC's case is so very weak:

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.

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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.

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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.

Naturally, should the SEC determine it has a case against Icahn, it would then have to prosecute all powerful, market-moving entities that can move a market with an announcement or research report, and which either sell or give out for free advance notice that such an event is coming in the near future.

Furthermore, one must also remember that when it comes to US justice, just like the HFT-dominated markets, there are two tiers - one for everyone, and one for the uber rich. This is doubly true when one considers that Icahn is not only uber-rich but also angry, and the last thing anyone wants to see (ask Ackman) is an angry Icahn. This is what he told Bloomberg in regard to the investigation:

“We do not know of any investigation. Further, we are always very careful to observe all legal requirements in all of our activities. We believe that making inflammatory and speculative statements, especially when we’ve had an unblemished record for 50 years, is completely irresponsible on the part of the Wall Street Journal.”

Count IEP as one party that will not be renewing its WSJ subscription. Which is ironic: as the WSJ - which broke the news of the inquiry in the first place - reported, "a snag has hit the insider-trading investigation of investor Carl Icahn, golfer Phil Mickelson and sports bettor William "Billy" Walters: News of the probe derailed government efforts to secretly deploy wiretaps, which have been key components of many successful insider-trading cases."

Uhm, doesn't this mean that Icahn should be grateul to the WSJ, not accusing it of "irresponsible inflammatory statements" - without the WSJ's report, the SEC could have proceeded to tap all three implicated parties.

However, there was one specific aspect of the Icahn investigation pertaining to the possibility of wiretaps, that will likely soon become a staple when it comes to SEC inquiries into hedge fund malfeasance. From Reuters:

The investigators believed it was hard to wiretap Icahn without him finding out because he owned a stake in a telecommunications company through which surveillance might have to be conducted, the Wall Street Journal reported, citing one of its sources.

So the take home lesson is simple: want to avoid being wiretapped in some SEC probe? Just buy a telecom company.