NFL linebacker Mychal Kendricks will be sentenced soon in the Third Circuit for his 2014 insider trading.

Back on Aug. 28, 2018, both the Securities and Exchange Commission and the Department of Justice announced insider trading charges against a former Goldman Sachs analyst and his tippee, the 27-year old Kendricks, a Super Bowl-winning player. It was alleged that Kendricks traded on advance news of the acquisitions of four publicly traded companies. The tips were allegedly imparted to the NFL star via coded text messages in exchange for a variety of unconventional kickbacks, earning Kendricks approximately $1.2 million.

Also in August 2018, Kendricks settled with the SEC and reached a criminal plea, agreeing to one count of securities fraud and one count of conspiracy to commit the same. He issued a social media apology taking responsibility for his actions, and promised to disgorge all profits from his illegal activities. He faces treble damages from the SEC and may be fined millions more when he is sentenced. As collateral consequences of the accusations and admissions, Kendricks was cut by the Cleveland Browns. After being signed by the Seattle Seahawks, he played three games before being suspended by the NFL for eight games based upon his guilty plea. He finished the 2018 season on injured reserve for the Seattle squad.

Separately, professional golfer Phil Mickelson allegedly received a tip in 2012 earning him approximately $1 million. Four years later he was named in a joint complaint with his tipper; however, being classified a “relief defendant,” Mickelson paid the SEC and faced no further discipline (either by the SEC or DOJ), save for interest on the $931,000 profit. The golfer made no statement on the SEC accusations.

Thus, the potential sentence of 25 years against Kendricks, in conjunction with the SEC and DOJ monetary penalties, appear at best disproportionate to Mickelson's treatment.

The Mickelson Case

In a May 2016 civil complaint, the SEC alleged that Mickelson on two occasions in July 2012 established a position worth $2.4 million in a company called Dean Foods. That position was created based upon a tip from professional sports bettor (and co-SEC defendant) Billy Walters, whom Mickelson owed an undisclosed amount of money. When the relevant news went public, the stock price rose 40 percent, and Mickelson earned approximately $931,000. The SEC also alleged that Walters gained from Mickelson's trading, as Mickelson repaid him in part from his earnings. Contemporaneous with the SEC Complaint, Mickelson settled with the SEC as relief defendant by agreeing to approximately $1 million in disgorgement and interest.

The Kendricks Scheme

According to the SEC Complaint, Kendricks and Damilare Sonoiki first met and began discussing investment ideas in late 2013, and continued this relationship until July 2014. At that time, Kendricks allegedly began trading on the insider information knowingly provided to him by Sonoiki. Due to his position within Goldman Sachs, Sonoiki was privy to information regarding possible acquisitions of public companies months before disclosure. Sonoiki and Kendricks opened a trading account under Kendricks' name, where both the linebacker himself and Sonoiki—through an unnamed middleman—executed a number of trades over a four-and-a-half month period.

In exchange for the nonpublic material information, Kendricks allegedly gave Sonoiki about $10 thousand in cash, as well as tickets to Eagles games, a night out in Philadelphia, and access to the closed set of a music video in which Kendricks appeared.

As civil penalty, the SEC sought disgorgement, a pre-judgment interest, injunctive relief, and treble damages. In addition to the SEC demands, Kendricks could face up to 25 years in prison and a $5.25 million fine. In a prior period, Kendricks—like Mickelson—might have satisfied authorities by writing one rather large check.

Double Jeopardy and Parallel Actions

Between 1989 and 1997, the federal government recognized the application of the Fifth Amendment's Double Jeopardy Clause in criminal and civil proceedings centered around the same set of facts. In the seminal Halper case, the Supreme Court found that civil sanctions following a criminal trial must not be punitive in nature, later adding that civil forfeiture, too, is a penalty under the Excessive Fines Clause of the Eighth Amendment. If this were still the controlling precedent, Kendricks would not face the additional DOJ demands, as jail time and forfeiture are considered penalties.

However, eight years later in Hudson, the court narrowed its prior departure, applying Double Jeopardy to cases where the offense is considered legislatively “criminal.” Under this test, insider trading fines do not rise to the level of criminality as to trigger Double Jeopardy protection. And, in the field of insider trading, parallel proceedings are becoming the inscrutable norm.

The SEC Referral Process

Specifically, the Securities Act and Securities Exchange Act both contain terse language creating discretionary SEC referral of evidence to the DOJ (specifically, §§20(b) of the '33 Act and 21(d)(1) of the '34 Act). The most recent SEC Enforcement Manual urges the Commission's investigators before engaging in informal referral to criminal authorities to consider “the egregiousness of the conduct, whether recidivism is a factor, and whether the involvement of criminal authorities will provide additional meaningful protection to investors.” Section 5.6.1. Meanwhile, a 2010 NYSBA report focused on case outcomes identified the major factors affecting the referral process as (1) professional status of the SEC defendant, (2) tipper status (as opposed to a “tippee or sole actor”, and (3) size of gain (e.g., over $100,000).

On its end, the DOJ Manual encourages its attorneys to “decline” prosecution when such “would serve no substantial federal interest; (2) the person is subject to effective prosecution in another jurisdiction; or (3) there exists an adequate non-criminal alternative to prosecution.”

Despite these guidelines, commentators have long noted the murkiness surrounding the elevation of the common law insider trading offense from civil transgression to crime. Involvement of multiple parties seems to be a factor: Former MLB third baseman Doug DeCinces, who was found guilty of criminal charges in May 2017 after having settled with the SEC for $2.5 million, could link his challenging doubleheader to the allegations that he served as both tipper (to 14 individuals collectively garnering $1.3 million) and tippee (earning $1.3 million himself).

However, Kendricks was not a tipper. And he will pay back his profits exponentially. When asked by a federal judge why he was pleading guilty, he stated simply that it was the right thing to do; he hardly appears the recidivist.

Further, there were a range of options open to the government, and the young NFL star is being hit by all of them. Overall, Kendricks could potentially owe close to $9 million—almost three times the statutory maximum penalty the legislature provided to the SEC in the '34 Act.

Checking the Tape

An even more pointed review of the rival cases reveals that Kendricks and Mickelson truly differ marginally under existing law. Both made approximately $1 million acting at the encouragement of (and in monetary benefit to) a tipper close to an unknown source. Both cooperated by settling SEC charges. While Kendricks was tied to four transactions and Mickelson but one, such tallying proves distinction without difference since the Kendricks plea was based upon one substantive and one conspiracy count. Concurrently, the assertion that Kendrick's activities indicate a prolonged “scheme” (i.e., a staple of criminal cases) is dubious: The respective SEC allegations commence the linebacker's timeline with his meeting his tipper about eight months prior to trading, while blandly labeling Walters and Mickelson “friends” at the time the bettor “urged” the golfer to trade.

Overall, observers could assume that the elevation to criminal charges was due to either a dearth of evidence in one case or unique nefariousness in the other. These conclusions, while certainly traditional, are equally flawed. Both cases were founded on circumstantial evidence (i.e., text messages/phone call data, and timing of trades). While Kendricks indisputably left a colorful text trail (e.g., disguising prices as football jersey numbers), the requisite degree of scienter for criminal insider trading is broadly met by any realization (or conscious avoidance) of a wrongful act. That realization is traditionally exemplified by the defendant's opportunistic trading practices, and both athletes easily cleared that hurdle—Kendricks depended upon his tipper and then an unnamed middleman to trade call options, while the infrequent trader Mickelson created a position that “dwarfed” all of his other holdings in one stock, via three different accounts.

Concomitantly, the differences between the two cases, if anything, support harsher treatment of Mickelson. Notably, Mickelson took a tip from a sports gambler who had been indicted multiple times by a state (the golfer was not called to testify at the gambler's recent loss at criminal trial). Further, the gambler had purchased and sold stock on information imparted by his board member source as far back as 2008. Kendricks took tips from an investment bank analyst with no alleged history of longtime misdeeds.

Another glaring difference between the two cases concerns Kendricks' being contacted by his brokerage about third-party (i.e., Sonoiki) use of Kendricks' account, a warning that allegedly spurred Kendricks to issue entreaties to the brokerage to remove its operational hold. However, Mickelson was seemingly never forced into such quandary, for the allegations did not discuss whether his two-week, $2.4 million position in a sole stock (valued at almost 10 times the worth of all of his accounts) prompted action by his brokerage. Yet the SEC press release congratulated its staff on revealing the gambler's financial dealings with both the board member and Mickelson “[i]n spite of the concerted effort at concealment.”

All of which thwarts an understanding of the SEC's unnecessary roughness. Kendricks is not an investment professional. Among his woes, he played this past season per a one-year contract with the Seahawks making about $790,000—which is significantly less than his average NFL salary over the past five years of $3.4 million. Sentencing experts predict a prison term of up to 37 months. It is incontrovertible that the SEC and DOJ are determined to punish Kendricks to exemplary extent of the law, whereas Mickelson, again, simply paid back profits and escaped prosecution. And the notorious Newman case, which for less than two years absolved “remote tippees” in the Second Circuit (1) had no effect outside that Circuit (Mickelson lives in California), and (2) focused on fourth generation recipients of information who routinely learned of and evaluated analyst estimates.

End Game

A return to the Halper Era would certainly soften the blow to defendants facing parallel actions—a topic that the European Union has taken up with interest in the past five years. Failing such a second judicial turn domestically, uniformity in discretionary prosecution may make the SEC enforcement program at once more cohesive and comprehensible.

Insider trading has proven to be shockingly resilient. Yet, its deterrence is undermined when one athlete faces repeat hits (ultimately culminating in years in jail), while another simply returns his ill-gotten gains and continues in his roles as endorser for major corporations. Both athletes received million dollar bonuses prohibited by the securities laws; both victimized “the market” per a violation that does not exist in statute. One has played his last NFL game and prepares for prison, while the other, all things considered, shot for par and readies to play the next round.

Scott Colesanti, a former regulator, is a professor at the Hofstra University Maurice A. Deane School of Law. He has taught Securities Regulation for 19 years. Emily Knight, Hofstra Law Class of 2020, serves as Professor Colesanti's Teaching Assistant and is a member of the Hofstra Law Review.