Novel Defense for Insider Trading


Raj Rajaratnam tried using the mosaic theory and lost.  Now, another hedge fund manager will try a different defense: seeking out non-public information is beneficial and should be encouraged, not prosecuted.  Doug Whitman, who ran a $120 million hedge fund, has pleaded not guilty to charges that he used confidential information to trade in the shares of Google, Marvell Technology and Polycom, netting $900,000 in illegal profit.

“Mr. Whitman traded on the basis of lawful research and analysis, not unlawfully obtained inside information,” his lawyer, David L. Anderson of Sidley Austin, said in a statement at the time Whitman was arrested.  The defense argument is that obtaining non-public information is what “every diligent, competent fund manager and analyst should do, checking up on companies’ management to make sure they are being forthright with their investors.”

The issue, however, is whether Whitman traded on the non-public information.  The defense claims he did not trade on it.  The prosecution in its complaint alleges Whitman made more than $600,000 placing a negative bet on Google after learning from Roomy Khan, a former Intel employee who pleaded guilty in the Rajaratnam case,  that the company was going to announce a poor quarter. Afterward, as a thank-you, Whitman supposedly sent Khan a large floral arrangement.

Whitman’s lawyers will argue that Khan has an incentive to drum up charges to avoid a lengthy prison sentence. Her claims “are false and will be proved false.”

Another key witness for the prosecution will be Karl Motey, a former sell side technology analyst who ran his own independent research boutique, Coda Group Inc.  Unlike John Kinnucan, Motey was eager to cooperate with investigators.  He signed up as a client of expert network Primary Global Research (PGR) at the request of the Government, and made over 60 calls seeking incriminating evidence.  He provided evidence against two employees of PGR and three experts offered through PGR’s network.

The complaint against Whitman mentions a third unnamed cooperating witness who allegedly received inside information from Khan about Google about the same time she allegedly shared Google information with Whitman.

Whitman worked as a technology analyst for several Wall Street firms including Alex. Brown & Sons, Hambrecht & Quist and Montgomery Securities, before setting up Whitman Capital in 1994.

Whitman’s lawyers had tried to get the trial moved to California, which was denied by Jed Rakoff, a sometimes controversial Federal judge based in the Southern District of New York.  Rakoff tried James Fleishman, a PGR salesperson who was found guilty.  During the Fleishman trial, Rakoff instructed the jury that ANY non-public information is off limits:  “As I told you earlier in the trial, every employee of a company has a legal duty not to disclose to anyone outside the company ‘non-public information,’ such as financial or other confidential information about the company that the company has not yet made public or authorized to be made public and that has not otherwise been disclosed to the public.”  It is unlikely he will be sympathetic to Whitman’s defense.

For a complete list of individuals affiliated with research firms charged with insider trading, go to


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