By Justin Hibbard A week after the Securities & Exchange Commission charged John H. Whittier with defrauding investors in the Wood River Partners hedge fund (see BW Online, 10/13/05, "Another Fishy Hedge Fund"), a picture of Whittier is emerging that seems to portray him as an inexperienced money manager who entered the profession by way of his family's wealth and got in over his head. His story demonstrates how easily an unseasoned manager can raise millions of dollars for a hedge fund -- a lightly regulated investment pool for wealthy individuals and institutions -- and keep managing the money long after he has incurred serious losses.
In response to the SEC suit, Whittier's attorney, Elliot Peters, issued a statement saying Whittier has cooperated with the SEC's investigation and, through counsel, has been in contact with lawyers for investors "to apprise them of the situation and work to protect their interests." The statement continues: "While the decision to invest heavily in Endwave [a key Wood River holding] may prove in hindsight to have been unwise, the SEC's claims of fraud are unfounded. There was no self-dealing. There was no personal enrichment. There was no fraud."
EARLY AT INTEL. Whittier, 38, is the son of Ronald J. Whittier, chairman of search software company Convera (CNVR) and a former senior vice-president at chipmaker Intel (INTC). The elder Whittier is a self-made millionaire who was born in San Francisco and left the city's hardscrabble Mission High School after one year to join the Army. He eventually graduated from the University of California, Berkeley, and earned a doctorate in chemical engineering from Stanford University. He joined Intel in 1970, two years after it was founded, and owned grants of Intel stock and stock options worth approximately $78 million by August 1996, when his divorce was final.
"Ron Whittier is a first-class fellow and an excellent human being," says Herbert Allen, chairman of media-focused investment bank Allen & Co. and a director at Convera.
With his first wife, Lucy, Ronald Whittier had two daughters and John, his youngest child. The children grew up in the upscale Silicon Valley community of Los Altos, Calif., 13 miles from Intel's headquarters. The oldest daughter, Jacqueline, took after her father, attending U.C. Berkeley and later working at Intel as a merchandising manager.
In 1997, she married an Intel manager 13 years her senior. After her husband was treated for cancer, Jacqueline started FamiliesCAN, a charitable organization for families of cancer victims, with funding from the Ronald Whittier Family Foundation. John Whittier serves on the $5 million foundation's board with his sisters and father.
OFF TO WALL STREET. John Whittier enrolled at U.C. Berkeley in 1984. There he joined the Kappa Sigma fraternity and the Young Republicans club. In 1987, he got his first taste of the securities business as an intern at the San Francisco office of investment bank Bear Stearns (BSC). The following year, he interned at the San Francisco office of U.S. Senator Pete Wilson (R-Calif.).
After graduating with a degree in political economies of industrial societies in 1989, Whittier signed on with Wilson's California gubernatorial campaign in San Diego. "He was real energetic and affable, and everybody liked him," says political consultant Marty Wilson, who hired Whittier. In 1991, after Pete Wilson had been elected, Whittier headed to New York to pursue a Wall Street career, realizing he would make more money in finance than in politics, Marty Wilson says.
Whittier joined investment bank Donaldson, Lufkin & Jenrette that year. As a junior research analyst in the communications and media group, he worked under respected analyst Dennis Liebowitz and learned the ins and outs of cable, cellular, and eventually the Internet. "His main claim to fame was that he was the son of an Intel executive," says a former DLJ analyst who worked with Whittier and spoke under condition of anonymity. (Whittier didn't respond to repeated requests for comment. His lawyer declined to speak on the record.)
FAMILY SPLIT. Like many analysts in the 1990s, Whittier issued mostly positive recommendations -- often for companies with which DLJ had banking relationships. His tips usually worked out well for investors since a bull market was driving stock prices ever higher. Several companies on his watch -- including Evergreen Media, Renaissance Communications, and Pricellular -- were acquired at share prices higher than the price at which he had recommended buying their stock.
Three years into Whittier's tenure at DLJ, his mother sued his father for divorce after 34 years of marriage, citing irreconcilable differences. Lucy Whittier got half of the couple's Intel stock and stock options, valued at $58 million, and all of a Northern California ranch where she had a business breeding Arabian horses.
John Whittier married about two years later. He and his wife, Collette DeCicco, settled in Sun Valley, Idaho, where Whittier already had his eye on a plot of land where he intended to build a house.
GOOD TIMES. In 1997, Whittier quit DLJ to start his own investment business in New York, Wood River Capital Management LLC, which was named for a river that runs through the Sun Valley region. First Advantage CoreFacts, a New York research firm that vetted Wood River for potential investors last year, concluded that Whittier left DLJ on good terms. "We talked to someone who was effectively his boss at DLJ who liked him," says Randy Shain, executive vice-president at First Advantage. "And we talked to another colleague at DLJ who liked him and said they would work with him again."
Whittier launched Wood River with about $30 million from his father and friends. Originally, he managed family money and some public and private-equity portfolios. In 1997, he helped establish the Lucy G. Whittier Foundation, his mother's charitable organization that gives grants for equine research and medicine. He serves as the foundation's chief financial officer.
In 1999, a year in which the Nasdaq rose 87%, the Wood River family office's tech-heavy stock portfolio more than doubled in value, according to a Wood River offering memorandum. Whittier "made a lot of money in the new issues boom" that year, says Joel Price, a former DLJ analyst.
SPOTTED IN PJs. Also that year, Whittier and his wife moved to Ketchum, Idaho, a town near Sun Valley that's home to many former Wall Street money managers. Whittier leased a downtown office with an upstairs apartment, where he and his wife lived while their luxurious flagstone house in nearby Hailey, Idaho, was being built. Locals say Whittier sometimes appeared in the Tully's café near the apartment in pajamas to buy morning coffee. He owned a pair of matching Lincoln Navigators.
Jon Gove, project coordinator at Sun Valley real estate developer Valley Club Homes LLC, got to know Whittier. "John is an extremely hard-working, caring individual who loves his family, loves the valley he lives in, enjoys what this area has to offer in the way of recreation, and is an avid skier and runner," Gove says. Some local money managers say Whittier kept a low profile among his fellow financial mavens and wasn't involved in community organizations.
In 2000, as the Nasdaq shed nearly 40% of its value, the Wood River family office's stock portfolio rose 2%, beating the index but falling far short of its 1999 performance. Nevertheless, Whittier expanded, signing a five-year lease in May, 2000, on a 4,442-square feet office in San Francisco's financial district at a monthly base rent of $31,464. The following year, things got worse. The value of the family office's stock portfolio declined from 2001 through 2002, according to a Wood River offering memorandum.
UNDETERRED. In April, 2002, bad things started happening to Whittier. The state of California issued a tax lien against him for $45,760, according to public records, which don't show the current status of the lien. Credit Suisse First Boston sued him and Wood River, claiming they has stiffed the brokerage on several stock trades. According to the suit, Whittier acknowledged ordering the trades but said CSFB would not receive payment for them "anytime in the near future." (The case was settled with neither side acknowledging liability after being dismissed with prejudice by the judge overseeing it).
These problems don't appear to have deterred Whittier. Three weeks after CSFB sued, he formed Wood River Partners LP, the Delaware limited partnership that would become his first hedge fund. But financial problems continued to arise. In July, 2002, the state of Idaho issued a tax lien against him for $80,781. (The state released Whittier from the lien after it was paid in February, 2004.)
In August, 2002, though, the owner of his San Francisco office sued him and Wood River for allegedly failing to pay rent for three months. That case was settled after being dismissed without prejudice with neither side admitting liability. By the end of 2002, Whittier had stopped returning phone calls and e-mails from his friend and former DLJ colleague Joel Price, Price says.
OPTIMISTIC FACE. Despite these warning signs, Whittier was able to raise enough money to launch the Wood River Partners hedge fund in February, 2003. Money flowed into the fund from supposedly sophisticated investors and intermediaries such as energy utility PNM Resources and brokerage BNP Paribas. In marketing materials, Wood River Partners claimed 34% net returns in 2003.
But Whittier's personal financial problems persisted. In December, 2003, the state of California issued a tax lien against him for $54,088. Public records don't show the status of this lien.
Yet Wood River continued to show an optimistic face to the world in 2004. Marketing materials trumpeted 22.8% net returns for the year. In a yearend letter to shareholders, Whittier waxed proudly about expansion plans for 2005. The firm had just hired a risk manager, planned to add up to four more employees in the first quarter, and aimed to add research staff at its New York office later in the year.
GARGANTUAN STAKE. But the worst was yet to come. Whittier's yearend letter in 2004 contained a prophetic passage: "Of all of the different areas of our portfolio where we have opportunities to make money, our smaller investment companies are the ones with disproportionately favorable risk/reward characteristics." In the ensuing months of 2005, Wood River built up a massive stake in a small-cap stock called Endwave (ENWV), according to a lawsuit filed against Wood River by the SEC. The suit says that by July, 2005, Wood River owned nearly half of Endwave's outstanding shares, a position that accounted for more than 65% of the fund's $265 million in assets.
If that's true, Wood River may have violated terms of its offering memorandum, which says no long position will account for more than 10% of the fund. Furthermore, the firm may have violated SEC rules that require funds to file ownership reports when they buy more than 10% of a company's outstanding shares (see BW Online, 10/19/05, "A Guide to the Hedge-Fund Maze"). Exactly how Wood River acquired the gargantuan stake is still a mystery. Wood River filed a 13D form with the SEC on Oct. 7, saying it owns 40%, or 4.3 million, of Endwave's outstanding shares. The filing doesn't specify when the shares were acquired or at what price.
From July 14 to Sept. 15, Endwave's stock price fell from $53 to $31. By mid-September, some Wood River investors were trying unsuccessfully to get their money back. When pressed by BNP Paribas, Whittier said if he had to liquidate the fund, "nobody would get anything," and he "would go to jail," according to the SEC's suit.
NO COMPENSATION. By Sept. 28, Wood River had shut down its San Francisco office and stopped responding to most phone calls. On Oct. 3, Lehman Brothers (LEH) sued Whittier and Wood River, claiming they had failed to pay the brokerage for transferring 800,000 shares of Endwave. The stock price is currently hovering at $13 (see BW Online, 10/10/05, "Lehman:
Burned by a Hedge Fund?").
Whittier and Wood River haven't yet answered the suits filed by Lehman and the SEC. For the past week, Whittier has been in San Francisco meeting with his attorney at the law firm Keker & Van Nest. According to a statement prepared by Peters, Whittier has agreed to place Wood River's funds into receivership and partially freeze his personal assets. The statement says Whittier paid $3 million of his own money to cover Wood River's margin debts in August and that Whittier has taken no compensation from the Wood River hedge funds this year.
That's cold comfort to investors who are still wondering whether they'll ever see their money again.
Editor's note: An earlier version of this story incorrectly stated that John Whittier had been married twice. We regret the error.
With Adrienne Carter in Chicago and Lauren Young in New York
Hibbard is a correspondent in BusinessWeek's Silicon Valley bureau