March 25, 2015 / 8:46 PM / 5 years ago

Imprisoned hedge fund founder seeks to void insider trading conviction

NEW YORK (Reuters) - Former hedge fund manager Doug Whitman, the first defendant in a broad U.S. insider trading crackdown to testify in his own defense, is seeking to void his conviction.

Whitman, 57, who has been imprisoned since early September, on Wednesday joined a swelling list of defendants trying to have their insider trading convictions or guilty pleas thrown out, after a recent federal appeals court decision narrowed the scope of that offense.

Lawyers for Whitman sought his freedom on the same day that four U.S. House of Representatives members introduced a bill to explicitly ban insider trading, rather than leave it for courts to decide when questionable trading constitutes securities fraud.

Whitman, the founder of Whitman Capital LLC in Menlo Park, California, is serving a two-year prison term for his August 2012 conviction on securities fraud and conspiracy charges.

Prosecutors said he profited in trading in shares of Google Inc and video-conferencing company Polycom Inc based on illegal tips from people like former Intel Corp employee Roomy Khan, and paid consultant Karl Motey for tips from insiders at chipmaker Marvell Technology Group Ltd.

Lawyers for Whitman said the case was flawed in light of a Dec. 10 ruling by the 2nd U.S. Circuit Court of Appeals in New York.

In voiding the convictions of hedge fund managers Todd Newman and Anthony Chiasson, that court said insider trading required knowledge that insiders who passed confidential tips did so in exchange for personal benefits of some consequence.

Whitman’s lawyers said the decision undermined the government’s “core theory of guilt” in their client’s case - that he traded on inside tips to maintain personal and professional relationships with friends.

“The invalid theory was so pervasive in this case that it fatally infects Mr. Whitman’s conviction,” they wrote, asking U.S. District Judge Jed Rakoff to order a new trial.

A spokeswoman for U.S. Attorney Preet Bharara in Manhattan declined to comment.

The House insider trading bill was proposed by Democrats Jim Himes of Connecticut, Carolyn Maloney of New York and Emanuel Cleaver of Missouri, and Republican Steve Womack of Arkansas. Himes’ district is home to many hedge funds, in locations including Greenwich, Stamford and Westport.

Whitman is housed at a federal prison complex in Lompoc, California. He is not eligible for release until May 29, 2016.

The case is U.S. v. Whitman, U.S. District Court, Southern District of New York, No. 12-cr-00125.

Reporting by Jonathan Stempel in New York; Editing by Leslie Adler

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