Thomas C. Davis: Insider Trading, Guilty Plea, and Sentencing

Thomas C. Davis, the former chairman of Dean Foods Company, pleaded guilty in May 2016 to a dozen federal felonies for feeding confidential boardroom information to professional sports gambler William “Billy” Walters over roughly six years, in one of the largest insider trading cases prosecuted in the Southern District of New York. Walters used the tips to generate at least $40 million in trading profits and avoided losses. Davis became the government’s star cooperating witness against Walters and was sentenced in October 2017 to two years in federal prison, along with nearly $9 million in restitution and close to $1 million in forfeiture.

Who Thomas C. Davis Was

Davis served in the U.S. Navy and attended Harvard Business School before spending most of his career in investment banking at Credit Suisse First Boston, formerly DLJ, where he ran banking and corporate finance for the Southwest division from 1984 to 2001. He earned more than $1 million a year there and received $10 million when the firm was acquired.¹

He left in 2001 to become CEO of The Concorde Group, a private investment firm, and by 2004 was sitting on the boards of Dean Foods and Westwood Holdings Group.² He eventually rose to chairman of the board at Dean Foods, the Dallas-based dairy company. That seat gave him the access he later sold.

What He Leaked, and to Whom

Davis and Walters had been friends since the mid-1990s, bonding over sports, golf, gambling, and business. Between 2008 and 2014, Davis funneled a steady stream of confidential Dean Foods information to Walters. U.S. Attorney Preet Bharara said the arrangement gave Walters “a direct channel into Dean Foods’ boardroom.”³

The tips covered the most market-moving categories a public company generates. Davis passed advance notice of quarterly earnings on multiple occasions between 2008 and 2012, and he tipped Walters about the planned spin-off of The WhiteWave Foods Company and the pricing of WhiteWave’s initial public offering. In 2013 he widened the scheme beyond Dean Foods, leaking confidential strategic plans and details about activist shareholder involvement at Darden Restaurants.⁴

The individual trades were enormous. A single round of Dean Foods trading around the second quarter 2012 earnings and spin-off announcement produced more than $17.1 million in unrealized profits for Walters. An earlier 2008 tip generated over $6 million, and a 2010 tip helped him avoid $7.3 million in losses.⁴

The “Bat Phone” and the Cover-Up

To keep the tips off ordinary phone records, Walters gave Davis a prepaid cellphone they called the “bat phone,” used only for Dean Foods business.⁵ On Walters’ instructions, Davis used code during calls, referring to Dean Foods as the “Dallas Cowboys.”⁶

Once the FBI began asking questions and the SEC opened its own inquiry, Davis threw the bat phone into a Dallas creek. He later testified he had been “scared to death” and was trying to “cover it up.”⁶ The phone was never recovered.

What Davis Got in Return

Walters gave Davis close to $1 million to help cover personal debts. In April 2010, Walters arranged for a friend to hand Davis $625,000. In November 2011, Walters extended another $350,000, structured as a line of credit. Walters later personally paid off the original loan, covering roughly $647,000 in principal and interest.⁴ The money functioned as forgiven loans that Davis never fully repaid.¹

Davis used some of the cash to repay $100,000 he had taken from a Dallas-based charity he managed to cover gambling debts at a Las Vegas casino.⁴

Where Phil Mickelson Fits In

The case drew wide attention because of professional golfer Phil Mickelson. The SEC said Walters urged Mickelson to buy Dean Foods stock in 2012 while Walters possessed material nonpublic information about the coming WhiteWave spin-off. Mickelson bought 240,000 shares across three brokerage accounts and made roughly $931,000, which he used in part to repay a gambling debt he owed Walters.⁷

Mickelson was never criminally charged. The SEC named him only as a “relief defendant,” a designation for people who profited from a scheme without evidence they knew the tip’s origin.⁸ He neither admitted nor denied the allegations and paid full disgorgement of $931,738.12 plus $105,291.69 in interest.⁷ Mickelson was not Davis’s tippee; the SEC’s theory ran through Walters.

The Guilty Plea and Sentence

Davis told the government in February 2016 that he wanted to cooperate. On May 16, 2016, he pleaded guilty to a 12-count criminal information in the U.S. District Court for the Southern District of New York, case number 16-cr-338, the same case in which Walters was charged.⁹ The counts included securities fraud, wire fraud, conspiracy, perjury, and obstruction of justice.³ Davis admitted passing material nonpublic information to Walters, making false statements to prosecutors, and intentionally destroying the bat phone.

On October 19, 2017, U.S. District Judge P. Kevin Castel sentenced Davis, then 68, to two years in prison, nearly $9 million in restitution, and forfeiture of close to $1 million.¹

Cooperation Against Walters

Davis was the prosecution’s most important witness against Walters. At trial in March 2017, prosecutors called him the “key and star witness” and described his testimony as “incredibly devastating.”¹ Davis told the jury he had given Walters “an enormous amount of inside information” over “a rather long period of time.”¹⁰

Walters was convicted in April 2017 on all counts, including conspiracy, securities fraud, and wire fraud. Judge Castel sentenced him to five years in prison and a $10 million fine.¹¹⁹¹²

The SEC Civil Case

Alongside the criminal prosecution, the SEC filed a civil action on May 19, 2016, in the Southern District of New York, case number 16-cv-3722, charging Davis and Walters with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.⁴ The court approved settlements with both men on April 17, 2018. Davis was permanently barred from serving as an officer or director of any public company and was permanently enjoined from further securities fraud violations. Walters was ordered to pay more than $19 million in disgorgement plus over $3.5 million in prejudgment interest.⁵

1
ESPN. Ex-Dean Foods Co. Executive Thomas Davis Sentenced
2
Westwood Holdings Group, Inc. Westwood Holdings Group Names Tom Davis and Leonard Riggs
3
CNBC. Former Dean Foods Chair Thomas Davis Charged With Insider Trading
4
U.S. Securities and Exchange Commission. SEC Complaint, Securities and Exchange Commission v. William T. Walters, et al.
5
U.S. Securities and Exchange Commission. SEC Litigation Release No. 24125
6
Yahoo Finance. Ex-Dean Foods Chair Describes Insider Trading Scheme
7
U.S. Securities and Exchange Commission. SEC Charges Two With Insider Trading
8
ESPN. Phil Mickelson Not Charged by SEC
9
FindLaw. United States v. Walters
10
The New York Times. Dean Foods Insider Trading Trial
11
USA Today. Billy Walters, Phil Mickelson Insider Trading Conviction
12
The Nevada Independent. Walters Not the Big Winner in Trump’s Pardon Party