Whitman Trial to Turn on Whether He Knew of Illicit Tips
By Patricia Hurtado and Bob Van Voris – Jul 27, 2012 12:00 AM ET.
Whitman Capital LLC founder Doug Whitman, facing an insider-trading trial next week in New York, is accused of using illicit information from a network of sources to make $900,000 for his hedge fund.
The insiders included two employees of chipmaker Marvell Technology Group Ltd. (MRVL) who supplied tips to a consultant whose firm Whitman paid, according to prosecutors in the office of Manhattan U.S. Attorney Preet Bharara. Whitman is also accused of getting inside tips from a former Intel Corp. (INTC) executive who twice pleaded guilty to insider-trading charges, including passing tips to Galleon Group LLC co-founder Raj Rajaratnam.
The case features other players tied to Galleon as well as expert-networking firms that connect industry experts with fund managers looking for insight on a sector. Some of those expert networkers pass nonpublic information to fund managers for money, prosecutors have said. Whitman’s trial will pivot on when and how a fund manager can be held criminally liable for trading on inside tips passed through a middleman.
“There is no allegation that Mr. Whitman provided payoffs or any other benefits to any insiders for inside information,” his lawyer David Anderson said in an interview. “He’s been following these companies for as long as they have existed as a well-regarded research analyst in Silicon Valley.”
Whitman’s lawyers said there’s no proof he knew he was getting illicit information from his sources, and U.S. District Judge Jed Rakoff, who is presiding over the trial, has said the burden is on the prosecution to prove Whitman traded on information he knew wasn’t public.
Whitman is charged with two counts of conspiracy and two counts of securities fraud. The most serious charge carries a maximum 20-year prison sentence.
The U.S. alleges that Whitman obtained tips through an intermediary about Santa Clara, California-based Marvell from Sam Miri, a former employee at the chipmaker, and Bill Brennan, who was a Marvell vice president of sales.
“Miri and Brennan were sources of material, nonpublic information at Marvell Technology Group from approximately late 2007 through early 2009,” assistant U.S. attorneys Chris LaVigne and Jillian Berman said in a letter to Whitman’s lawyers made public this month. Neither Miri nor Brennan has been charged with criminal wrongdoing, according to court records.
Prosecutors identified Whitman’s intermediary as Karl Motey, an independent consultant who pleaded guilty to insider- trading charges and is cooperating with the U.S. Motey was a key witness against James Fleishman, a former executive at Mountain View, California-based Primary Global Research LLC. Fleishman was convicted on insider-trading charges involving the expert networking firm last year.
Miri’s name first emerged during the November 2009 guilty plea of Ali Far, a former fund manager at Galleon and co-founder of Spherix Capital LLC, who admitted to paying a Marvell employee in return for inside information. Three more alleged Whitman sources have been accused by the U.S. Securities and Exchange Commission of passing information to Rajaratnam, who is serving an 11-year prison sentence for insider trading.
Brennan provided nonpublic information to Motey “in exchange for Motey’s views and analysis on the semiconductor industry; for professional and networking opportunities and because Brennan was dissatisfied with aspects of Marvell management,” LaVigne and Berman wrote in the letter.
“Miri provided information to Motey because of their friendship and because Miri had a pre-existing debt to Motey,” the prosecutors said. “At times, Motey also paid for meals when he dined with Miri.”
Prosecutors said Motey passed the information to Whitman on several occasions from 2007 to 2009, both by phone and in person, sometimes over meals at a restaurant in Sunnyvale, California. In exchange, Whitman paid Motey’s consulting firm at least $12,500 a quarter, LaVigne and Berman said.
Daniel Yoo, a spokesman for Marvell, didn’t respond to voice-mail or e-mail messages seeking comment about Brennan and Miri. Marvell is located in Santa Clara, California, and registered in Hamilton, Bermuda.
Voice-mail messages left at Brennan’s office and Miri’s home seeking comment on the allegations weren’t returned.
Bradford Berenson, another lawyer for Whitman, said during a court hearing that his client hired Motey to do legitimate research and didn’t know whether Motey’s sources breached their fiduciary duty by supplying the information Whitman traded on.
“Mr. Whitman employs people like Karl Motey to help him do research,” Berenson said. “In those kinds of situations, if he does not know where or how or who Mr. Motey gets his information from, how is he ever to know that he can’t trade on the information that he’s hearing?”
Prosecutors also allege that Whitman got illegal tips from Roomy Khan, the former Intel executive who was also a source for Rajaratnam, and Wesley Wang, a hedge-fund consultant who formerly worked for Trellus Management and Sigma Capital, a division of SAC Capital Advisors LP. Both have pleaded guilty and are cooperating with the government.
Whitman got inside information from Khan about Google Inc. and Polycom Inc. (PLCM), prosecutors said in the indictment. Khan was Whitman’s neighbor in Atherton, California, according to a related civil complaint filed by the SEC. She has pleaded guilty to insider-trading charges twice as well as helped prosecutors investigate insider trading at Rajaratnam’s hedge fund.
Two more alleged Rajaratnam tippers who prosecutors say passed nonpublic information to Whitman are Shammara Hussain and Sunil Bhalla. Hussain and Bhalla couldn’t be reached by telephone late yesterday for comment on Whitman’s case.
Whitman obtained nonpublic information about Polycom, a Pleasanton, California-based maker of videoconferencing equipment, from Bhalla, a senior vice president and general manager of the company’s voice division, the government said. Bhalla hasn’t been criminally charged.
Hussain, of Fremont, California, worked in 2007 at Market Street Partners, an investor-relations consulting firm. The SEC said that Hussain’s firm did work for Google and that Hussain tipped Khan about the search-engine company’s earnings. Hussain hasn’t been criminally charged.
Prosecutors have told Rakoff they plan to call Motey, Khan and Wang to testify at Whitman’s trial. They said their evidence against Whitman includes consensual recordings and court-ordered wiretaps of phone conversations.
“The evidence will show that Mr. Whitman knew this information was provided by Khan and Motey by insiders corruptly,” LaVigne said in court hearing.
The criminal case is U.S. v. Whitman, 12-cr-00125, and the SEC case is SEC v. Whitman, 12-cv-01055, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporters on this story: Patricia Hurtado in New York at firstname.lastname@example.org; Bob Van Voris in New York at email@example.com
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