On Friday, February 10, 2012, the U.S. Attorney for the Southern District of New York and the SEC announced charges against Douglas F. Whitman, the head portfolio manager at Whitman Capital, LLC, related to alleged insider trading. It is claimed that Mr. Whitman’s friend and neighbor, Roomy Khan, provided Mr. Whitman with the same information that she provided Raj Rajaratnam of Galleon Management, who was convicted of insider trading in May 2011, sentenced to twelve years in prison and had a $92 million civil judgment imposed upon him.
According to the announcement of the criminal charges, Mr. Whitman was involved with two insider trading schemes. In the first scheme, between 2006 and 2007, Ms. Khan provided material, nonpublic inside information (including earnings information and financial information) relating to Polycom, Inc. and Google, Inc. Mr. Whitman used that information to execute trades that earned Whitman Capital LLC more than $900,000 in illegal profits. Mr. Whitman in turn, provided Ms. Khan with information about other publicly traded technology companies.
In the second scheme, Mr. Whitman obtained and traded on material non-public information (including earnings, revenue, and other financial information) regarding Marvell Technology Group, Ltd. which he received from Karl Motey, an independent research consultant who had obtained it from Marvell employees. Mr. Whitman paid Mr. Motey for the information through a soft dollar payment arrangement between their firms.
The Government charged Mr. Whitman with two counts of conspiracy to commit securities fraud and two counts of securities fraud. The tippers in both schemes (Ms. Khan and Mr. Motey) have previously pled guilty to insider trading charges.
The SEC announced charges against both Mr. Whitman and his firm, focusing on his dealings with Ms. Khan (and not charging him with the Marvell Technology trades). The Commission stated that "the inside information about Polycom and Google used by [Mr.] Whitman is the same information that the SEC has previously alleged [Ms.] Khan provided to many of her hedge fund contacts, including [Raj] Rajaratnam … ." George S. Canellos, Director of the SEC’s New York Regional Office, accused Mr. Whitman of engaging in what Mr. Whitman himself termed "’slimeball’ activity" with Ms. Khan. Specifically, the SEC charged Mr. Whitman and his firm with violations of Section 10(b) of the 1934 Exchange Act (and Rule 10b-5 thereunder) and Section 17(a) of the 1933 Securities Act, seeking a permanent injunction from future violations, disgorgement, prejudgment interest, and financial penalties.
