The Honourable Jed S Rakoff of the US District Court for the Southern District of New York has entered a final judgment approving a USD1.8m settlement between the SEC and hedge fund manager Douglas F Whitman and his firm Whitman Capital in a case that arose from the SEC's investigation of widespread insider trading perpetrated by Raj Rajaratnam of Gallon Management and other hedge fund managers.
In its February 2012 action, SEC v Douglas F Whitman et al, the SEC alleged that Whitman and Whitman Capital illegally traded based on material non-public information obtained from Rajaratnam associate Roomy Khan, who was Whitman's friend and neighbour.
Khan tipped Whitman with confidential details about Polycom's fourth quarter 2005 earnings and Google’s second quarter 2007 earnings prior to the public announcements of those financial results by the companies.
Khan had received the material non-public information that she conveyed to Whitman from a high-ranking executive at Polycom and from an employee of an investor relations firm retained by Google.
According to the SEC complaint, hedge funds managed by Whitman Capital reaped over USD900,000 in ill-gotten gains by trading on Khan's illegal tips.
On 21 August 2012, in the parallel criminal case arising out of the same facts, Whitman was convicted of two counts of conspiracy to commit securities fraud and two counts of securities fraud. On 29 January 2012, Whitman was sentenced to two years in prison, followed by one year of supervised release, and ordered to pay forfeiture of USD935,306, and a USD250,000 criminal fine.
The final judgment in the SEC action permanently enjoins Whitman and Whitman Capital from violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. It also requires Whitman and Whitman Capital to jointly and severally disgorge USD935,306, and orders Whitman to pay a civil penalty in the amount of USD935,306. Pursuant to the final judgment, Whitman's civil disgorgement liability will be offset by his obligation to make criminal forfeiture of the same amount. The imposition of the civil penalty is in addition to the criminal fine that has been assessed. Separately, Whitman has also agreed to be barred from the securities industry.