Whitman Capital LLC founder Doug Whitman is going on trial for using illicit tips from technology company insiders including one who was a neighbor, a woman at the center of the biggest stock-tipping probe in U.S. history.
Roomy Khan, a former Intel Corp. (INTC:US) executive, is scheduled to be one of the government’s key witnesses at Whitman’s trial that starts July 30 in federal court in Manhattan. Khan twice pleaded guilty to passing inside information to Galleon Group LLC fund manager Raj Rajaratnam -- once in 2001 and again in 2009.
Khan cooperated with prosecutors after she was arrested with Rajaratnam in October 2009 and played a crucial role in the biggest prosecution of insider trading at hedge funds by providing investigators with evidence used to obtain court- authorized wiretaps against Rajaratnam.
Whitman allegedly earned $900,000 for his hedge fund in two separate insider-trading schemes, one involving Khan and her tippers and another with Karl Motey, an independent consultant. Prosecutors in the office of Manhattan U.S. Attorney Preet Bharara say Motey obtained illegal tips about Marvell Technology Group Ltd. (MRVL:US), from two insiders, including one man who allegedly tipped former Galleon fund manager Ali Far, the U.S. said.
Karl Motey, an independent consultant who pleaded guilty to insider-trading and is cooperating with the U.S., will be the government’s first substantive witness against Whitman, prosecutors said. Motey testified as a key government witness last year against a former Primary Global Research LLC executive accused of passing inside information to fund manager clients.
Whitman’s lawyers say their client had traded in Marvell and other stocks cited by prosecutors for years. He can’t be convicted of securities fraud for trading on information he got from a middleman without knowing it was obtained illegally from insiders, they have said.
“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.”
U.S. District Judge Jed Rakoff, who is presiding over the trial, has said prosecutors will have the burden 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.
In detailing their case against Whitman for his lawyers, prosecutors cited technology company insiders they say are co- conspirators in the scheme. Motey funneled inside information to Whitman from two employees at chipmaker Marvell -- Sam Miri, a former Marvell employee and Bill Brennan, a former Marvell vice president of sales. Miri and Brennan haven’t been charged with criminal wrongdoing, according to court records.
“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.
Prosecutors identified Whitman’s intermediary as Motey, who testified against former Primary Global executive James Fleishman. Fleishman was convicted last year on insider-trading charges involving the Mountain View, California-based expert networking firm.
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 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:US), prosecutors said in the indictment. Khan was Whitman’s neighbor in Atherton, California, according to a related civil complaint filed by the SEC.
Two other alleged Rajaratnam tippers who prosecutors say passed nonpublic information to Whitman are Shammara Hussain and Sunil Bhalla. Hussain couldn’t be reached by telephone for comment on Whitman’s case.
Timothy P. Crudo, a lawyer for Bhalla, and Shawn Daina, a Polycom spokesman, didn’t return voice-mail messages seeking comment Bhalla’s role.
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 that Motey and Wang will testify at the trial. They said their evidence against Whitman includes consensual recordings and court-ordered wiretaps of phone conversations between Whitman, Motey and others.
“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).
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