In the wake of a number of corporate accounting scandals that rocked investor confidence in 2002, President Bush inaugurated the federal government-wide Corporate Fraud Task Force.
In 2009, President Barack Obama replaced the Corporate Fraud Task Force and set up the Financial Fraud Enforcement Task Force. This interagency Task Force aims to “wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes.” (1)
In coordination with the Financial Fraud Investment Task Force, Doug Whitman, a portfolio manager at Whitman Capital LLC, was found guilty on four counts of conspiracy and securities fraud crimes. According to a press statement released by the U.S. Attorney’s Office in the Southern District of New York, the charges stemmed from Whitman’s involvement in two ‘insider trading schemes’, which netted his company more than $900,000 in illegal profits. (1)
The press release continues that Whitman’s fraud included executing based on “material, non-public information, related to three publicly traded companies – Marvell Technology Group, Polycom and Google.” (1)
Evidence of Corruption
The trial, which had lasted for three weeks, included evidence that from 2007 until 2009, Whitman had used Inside Information that he had bought from Karl Motey, an independent research consultant. Karl had obtained the information from Marvell employees.
Whitman had then used the insider information in his investment decisions. That information included revenue, earnings, and other business-related material. Whitman used that infromation to buy and sell Marvell stock and options. (1)
In a similar fraud scheme, the portfolio manager had also obtained financial Inside Information related to Google and Polycom. According to the FBI press statement, Whitman had obtained the top secret financial information via Roomy Khan, a hedge fund industry worker, in exchange for insider information about other publicly traded technology companies.
Sounds complicated, but this exchange of insider information netted Whitman’s company more than $900,000 in illegal profits. (1)
With illegal profit margins this huge, it is not surprising that both President George W. Bush and President Barack Obama were keen to implement Task Forces that wage a proactive and aggressive effort to investigate and prosecute crimes related by business and finance.
The penalties for such crimes are justifiably unforgiving. According to the Stop Fraud Government website, Whitman, 54, who will be sentenced on December 20 2012, could face a maximum prison sentence of 20 years and a maximum fine of $5 million. (2)
Greed and Corruption Caused His Undoing
Whitman’s co-conspirators had previously pleaded guilty to crimes related to insider trading, and are also pending sentencing.
Referring to the case, Manhattan Attorney Preet Bharara said:
“Douglas Whitman now joins the grim procession of convicted Wall Street professionals who decided that the rules don’t apply to them…. He [Whitman] flouted these rules, tarnished his name, and now is a convicted felon facing imprisonment.” (1)
The conviction of a Wall Street professional never fails to whip up media interest. A similar case to this one was the conviction of Raj Rajaratnam in 2011.
In May last year, Raj Rajaratnam, the billionaire investor who was once the director of one of the world’s largest hedge funds, was charged with fraud and conspiracy. According to the New York Times, the conviction gave the U.S. government its ‘biggest victory yet in widening investigation of insider trading’.
The verdict, the New York Times wrote, is, “…expected to embolden prosecutors in their campaign to ferret out criminal activity on Wall Street trading floors.” (3)
Similar to Whitman, Rajaratnam seemed to have everything, as Preet Bhara commented, “…he was one of the most educated, successful and privileged professionals in the country.” (3)
Though, also similar to Douglas Whitman, Rajaratnam continued to work the system until his activities were uncovered. As the Manhattan Attorney put it, “greed and corruption caused his undoing.” (3)
The Mosaic Theory Defense
Mr. Rojaratnam based his defence on the ‘mosaic theory’ of investing. Mosaic investing essentially involves collecting both public and non-public information about a company in order to “determine the underlying value of the company’s securities and to enable the analysts to make recommendations to clients based on that information.” (4)
Although, as we saw with the verdict at Raj Rajaratnam’s trial and the successive conviction of Wall Street investor Douglas Whitman, the argument that one’s financial crimes was little more than ‘mosaic investing’ didn’t stand up in court.
The latest addition to the grim line of convicted Wall Street professionals is evidence that although President Barack Obama’s Corporate Fraud Task Force may not be entirely deterring all hedge fund managers from abusing their positions, it is certainly succeeding at proactively investigating and prosecuting financial crimes.
Meanwhile, the media continues to have a field day when stories of Wall Street’s “fat cats” finally meet their demise.