Whitman Capital LLC’s Doug Whitman told jurors that he refrained from trading the stock of Polycom Inc. (PLCM) when he first suspected that Roomy Khan, a key government witness in his prosecution, was getting illegal inside information.
Whitman, 54, testified yesterday for a second day at his insider-trading trial in Manhattan federal court. He told the jury that he became suspicious during a telephone conversation with Khan in April 2006 that she was getting confidential revenue figures from inside the company.
“I wasn’t sure, but I was suspicious that she might have gotten improper information,” Whitman said. “So I was trained to refrain from trading.”
Whitman is charged with trading on illegal inside information about Polycom, Google Inc. (GOOG) and Marvell Technology Group Ltd. (MRVL) He disputed Khan’s testimony that she passed him Polycom tips she received from Sunil Bhalla, a senior vice president at the Pleasanton, California-based company. Khan, who testified earlier in the trial, said that Whitman often “hounded” her to get information from Bhalla.
Whitman is the first defendant to testify at a trial in the government’s nationwide crackdown on insider trading at hedge funds. Prosecutors said they expect to spend about three hours cross examining him after he finishes his direct testimony today.
During his testimony yesterday, the hedge fund manager said he never thought Khan had inside Polycom information before the April 2006 conversation. He said that conversation made him think Khan had tricked Bhalla into disclosing Polycom’s revenue figures.
“She told me she knew what the numbers were going to be,” Whitman said. “I don’t remember the numbers she told me, but she had very specific numbers.”
Khan pleaded guilty in 2009 and is cooperating with the government’s insider trading investigation. Steven Mark Bauer, an attorney with Latham & Watkins LLP in San Francisco who represented Bhalla in a civil suit brought by the U.S. Securities and Exchange Commission, didn’t immediately return a call seeking comment on the testimony.
Bhalla in September agreed to pay $85,000 and was barred from serving as an officer or a director of a public company for five years to settle the SEC suit. U.S. District Judge Jed Rakoff, who is presiding over the trial, denied a defense request to admit Bhalla’s deposition testimony from the SEC case in the Whitman trial. Whitman’s lawyers claim Bhalla repeatedly testified that he never shared confidential information with Khan.
Whitman’s lawyer, David Anderson, yesterday showed jurors trading information that indicated Whitman Capital bought Polycom shares earlier in April 2006, before the call with Khan. The firm didn’t make any Polycom trades in the days after the conversation with her, Whitman said.
Whitman claimed he traded on legitimate research on Polycom, including “color,” or non-confidential anecdotal information received from company employees.
Anderson also showed Whitman transcripts of phone conversations he had with Khan, which were recorded without his knowledge.
Anderson asked about a call on Aug. 22, 2008, in which Whitman said he was joking with Khan about Marvell.
“Oh, you wanna use my inside information?” Whitman asks Khan in the call.
“Just fooling around with her,” Whitman testified yesterday.
Whitman also denied trading in Google put options based on information from Khan in July 2007. Prosecutors claim Khan provided him tips about Google revenue, which she received from Shammara Hussain, a former employee of Market Street Partners, an investor-relations consulting firm that worked for the search-engine company.
Whitman testified that Khan told him she had an unidentified “contact” with Google’s outside firm. She didn’t provide him with specific revenue figures and only agreed with the conclusion he’d already reached that “the quarter was going to be slightly light,” he testified.
At the time, Whitman testified, he believed Khan was mirroring what he was telling her and thought she was lying about her source.
“I thought she was making the story up,” Whitman told jurors.
Later, when Khan told Whitman her source wanted to be paid for the information, Whitman said, he suspected Khan was getting improper information.
“I told her she’d be crazy to do it and that she shouldn’t do it,” Whitman said.
Hussain agreed in June 2011 to settle SEC claims against her for $48,000. She hasn’t been charged criminally. Robert Knuts, who represented Hussain in the SEC case, didn’t immediately return a voicemail seeking comment on the testimony.
In addition to Khan, jurors have heard testimony from two other witnesses who pleaded guilty and are cooperating with the government: Karl Motey, a consultant hired by Whitman, and Wesley Wang, a consultant and former Whitman Capital intern.
Whitman’s testimony covered recorded conversations he had with both men. He provided innocent explanations for discussions in which Motey and Wang testified Whitman knew he was getting inside information.
If convicted, Whitman faces as long as five years in prison on each conspiracy charge and 20 years on each securities fraud charge.
The government rested its case against the fund manager yesterday after presenting almost two weeks of testimony.
The judge told lawyers he expects the jury will begin deliberations by the end of this week.
The case is U.S. v. Whitman, 12-cr-00125, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporter on this story: Bob Van Voris in Manhattan federal court at email@example.com.