Hedge fund founder wins early release in U.S. insider trading case

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[February 03, 2016]  By Nate Raymond

NEW YORK (Reuters) - Former hedge fund manager Doug Whitman on Tuesday won a reprieve from serving the remainder of his two-year sentence for insider trading after several judges expressed skepticism that his 2012 conviction should be upheld.

The 2nd U.S. Circuit Court of Appeals in New York in a brief order granted the Whitman Capital LLC founder bail, allowing him to be released from the Sacramento, California, halfway house where he was serving the remaining four months of his sentence.

The three-judge panel's decision gave no explanation. But it followed a hearing earlier Tuesday in which some judges suggested Whitman's conviction could no longer stand following a major appellate ruling that limited the scope of insider trading laws.

Whitman lost a prior appeal in February 2014. But Circuit Judge Barrington Parker said if that case had been heard after the December 2014 ruling, "this court would have tossed the conviction."

Parker questioned why U.S. Attorney Preet Bharara's office opposed allowing Whitman's release amid an appeal that would otherwise not be heard until after his sentence finishes.

"It sounds sadistic to me," Parker said.

A spokesman for Bharara declined to comment. Whitman's lawyers did not immediately respond to requests for comment.

The decision came amid continuing litigation over what constitutes insider trading, an issue the U.S. Supreme Court last month agreed to review.

Whitman brought his latest challenge after the 2nd Circuit ruled that prosecutors must prove that a trader knew a tip's source received a benefit in exchange.

The court, in reversing the convictions of hedge fund managers Todd Newman and Anthony Chiasson, also narrowly defined what constituted a benefit by saying it could not be just a friendship but had to be of "some consequence."

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Of the 96 people charged under Bharara's watch for insider trading since 2009, 14 have escaped charges thanks to that decision, which held that prosecutors must prove that a trader knew a tip's source received something in exchange.

Prosecutors accused Whitman of making nearly $1 million trading on inside information about Google Inc, Polycom Inc and Marvell Technology Group Ltd.

Those tips came from former Intel Corp employee Roomy Khan, Whitman's neighbor and friend, and from a consultant, Karl Motey, prosecutors said.

Whitman argued that under the December 2014 ruling, jurors were improperly instructed that "just maintaining or furthering a friendship" constitutes a benefit. But U.S. District Judge Jed Rakoff in July called Whitman's interpretation "overbroad."

The case is Whitman v. United States, 2nd U.S. Circuit Court of Appeals, No. 15-2686.

(Reporting by Nate Raymond in New York; Editing by Jonathan Oatis)

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