If You Can’t Trust Phil, Who Can You Trust?


Two events occurred lately that should make gaming executives nervous.  The first event has only an indirect connection to gaming, although I suspect underneath the story is more about gambling than anything else; the Department of Justice and the SEC are investigating a case of insider trading that involves the CEO of a publicly traded company, a well-know Las Vegas sports bettor and professional golfer Phil Mickelson.  The government claims that Mickelson received a stock market tip from the gambler Billy Walters.  Walters was a friend of Tom Davis, CEO of Dean Foods.  According the documents filed in the case, Walter told Mickelson that “now would be a good time to buy Dean Foods.”  Mickelson not known for his stock market ventures, followed the advice and bought 200,000 shares of Dean Foods for $2.4 million.  The company released a better than expected earnings report and announced the spin-off of its subsidiary White Wave; the stock price spiked.  Mickelson sold his shares for $931,738.12 more than he paid for them originally.   Allegedly, Mickelson used the proceeds to pay Walter back on a debt, presumably a gambling debt.  The government also alleges that Davis owed Walter money and was trading information in lieu of payment.  The government’s claims beg the question, just how did Mickelson and Davis incur those debts to Walter?  Did they bet on sports with him, or did he simply beat them at golf?

The tips came to Billy Walters, the Las Vegas high-roller, by prepaid burner phones and during lunch meetings…What began with a friendship forged over gambling, golf and business turned into an insider-trading plot involving two men who owed money to Walters — former Dean Foods Co. chairman Tom C. Davis and Mickelson. David Voreacos, Bloomberg, 5-20-16

The professional golfer Phil Mickelson has agreed to forfeit nearly $1 million that the Securities and Exchange Commission said was unfairly earned on a tip from an insider trading scheme. Marcy Gordon/ Tom Hays, Associated Press, 5-20-16

Michelson denies any wrong doing, but he is giving the money back, plus $100, 000 in interest.  He does not face prosecution because the United States Court of Appeals for the Second Circuit in Manhattan ruled in December 2014 that if the tipster does not receive benefit for the tip, it is not insider trading.  Walter only received the money due to him.  Phil may not have committed a crime. But the actions of Davis, Walter and Michelson violate another kind of unwritten law; it holds the public can trust the processes of the stock market.  Clearly, other investors did not have the same information that Mickelson had and therefore were at a disadvantage in trading shares of Dean Foods.

In the other case, the Nevada regulators are charging CG Technologies with underpaying winners, accepting bets after a match and knowingly withholding information.  The company runs the books at the Cosmopolitan, Venetian, Tropicana, M, Hard Rock, Palms and Silverton casinos.

Nevada gambling regulators have accused one of the state’s largest sports book operators of a series of egregious violations, including underpaying winners, accepting bets after a match and knowingly withholding information…CG Technology was hit with the six-count complaint filed by the Nevada Gaming Control Board. Sally Ho, Associated Press, 5-19-16

Both cases involve the public trust, a critical element that underlies both legalized gambling and stock trading; it is fundamental to both Wall Street and Las Vegas.  Whenever I make a bet or buy stock, I assume that the transaction will be honest and free of deceit; in casino terms that means no one gets to see the hole card.  Nevada believes the casino industry depends on customer’s confidence in each transaction.  The state punishes anyone that undermines that principle and all licensees are held to that standard: “Failure to exercise discretion and sound judgment to prevent incidents which might reflect on the repute of the State of Nevada and act as a detriment to the development of the industry.”  By statue, the reputation of Nevada is synonymous with the integrity of gaming.

5.010: It is the policy of the commission and the board to require that all establishments wherein gaming is conducted in this state be operated in a manner suitable to protect the public health, safety, morals, good order and general welfare of the inhabitants of the State of Nevada. Nevada Gaming Regulations

5.011: The board and the commission deem any activity on the part of any licensee, his agents or employees, that is inimical to the public health, safety, morals, good order and general welfare of the people of the State of Nevada, or that would reflect or tend to reflect discredit upon the State of Nevada or the gaming industry, to be an unsuitable method of operation and shall be grounds for disciplinary action. Nevada Gaming Regulations

Since the 1930s, Nevada has recognized that casino customers had to trust the integrity of the games.  Without honest games, casino gaming would have failed in Nevada.  In the 1980s, I got a person glimpse of how seriously Nevada takes that game integrity.  I was working at the Comstock Hotel when a customer claimed the casino had cheated him out of a slot machine jackpot.  The customer said jackpot symbols had been displayed on the payline, but when a casino employee came to verify the jackpot and pay him, the employee moved the reels and voided the jackpot.  As soon as the complaint was registered we were required by regulation to call gaming regulators.  We shut down the slot machine and waited for an agent, in the meantime we conducted an investigation.  When the agent arrived, he looked at video, interviewed other customers, all the employees involved and the gambler.

We concluded that there had been no jackpot.  However, the state determined there had been and we were required to pay the customer according to his claim.  Before making the ruling, the regulators moved slowly and cautiously gathering and assessing all the available information. The agent did not make a decision on the spot; instead he took all of the data to his office.  It was subsequently reviewed by a series of agents and supervisors.  No one in the process took it lightly, we all understood that the reputation of the state, the industry and the Comstock were at stake.  We did not like paying the money, but we did like the seriousness of the investigation.

Nevada and Wall Street are in the same boat on this one; regardless of how different the details may be.  And while faith in Mickelson is not critical to anyone but golfers, the casino industry and the entire public market need the public trust and anything that violates it is a threat to all of us.

 

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