LAWFUEL – The Law News Wire – MICHAEL J. GARCIA, the United States Attorney for the Southern District of New York, announced today that former hedge fund manager JOHN H. WHITTIER, 40, of Hailey, Idaho, pleaded
guilty this afternoon in Manhattan federal court to charges of
carrying out a securities fraud scheme that resulted in losses of
approximately $88 million. According to the Indictment filed in
the case and WHITTIER’s guilty plea proceeding:
WHITTIER founded, operated, and managed the Wood River
Partners, L.P. (“Wood River U.S.”) and Wood River Partners
Offshore, Ltd. (“Wood River Cayman”) hedge funds. In addition,
WHITTIER owned and controlled Wood River Capital Management,
L.L.C., the investment adviser to these hedge funds.
WHITTIER schemed to defraud hedge fund investors and
the general investing public by, among other things, falsely
representing to investors that he would pursue a broad investment
strategy — that no investment would ever constitute more than
approximately 10 percent of the hedge funds’ holdings — while
knowingly failing to make required public filings that would
have disclosed his concentrated holdings in one stock.
Beginning in the fall of 2004 through September 2005,
WHITTIER accumulated beneficial ownership — through Wood River
U.S., Wood River Cayman, and other accounts he controlled — of
approximately 80 percent of the common stock of Endwave
Corporation(“Endwave”). WHITTIER then purposefully failed to
make required filings with the United States Securities and
Exchange Commission (“SEC”) disclosing that ownership interest to
his hedge fund investors and the public. The SEC requires
filings disclosing beneficial ownership of 5 percent or more of a
publicly traded stock, and further disclosure if ownership
exceeds 10 percent.
WHITTIER also breached his promises to investors by
investing approximately 85 percent of Wood River U.S.’s $127
million portfolio solely in Endwave stock, rather than
diversifying the portfolio with a variety of investments. In
acquiring such a concentrated position in Endwave stock, WHITTIER
far exceeded the maximum 10 percent of the hedge fund’s holdings
that he had assured would be invested in any one stock.
In mid-September 2005, a company for which WHITTIER had
been managing investments (“Company-1”), terminated its
relationship with WHITTIER because of concerns raised by
problematic trades and WHITTIER’s suspicious trading activity in
Endwave stock. Company-1 then liquidated its Endwave holdings.
A dramatic drop in Endwave’s stock price caused the
value of the Wood River U.S. hedge fund portfolio to drop and
triggered margin calls by certain of the hedge funds’ brokers.
Similar margin calls were triggered at Wood River Cayman, which
had also accumulated significant holdings in Endwave. Because
such a large portion of the Wood River U.S. and Wood River Cayman
funds’ assets were invested in Endwave stock, WHITTIER was unable
to meet certain of these margin calls, and various brokers began
liquidating the hedge funds’ Endwave stock positions. Around the
same time, WHITTIER informed investors that he could not pay
redemption requests because of liquidity problems. By
approximately October 2005, WHITTIER and the Wood River funds
were no longer doing business. As a result, investors in the Wood
River U.S. and Wood River Cayman hedge funds lost approximately
In another facet of the fraud scheme, WHITTIER acquired
a significant ownership interest in a second publicly traded
company, called MediaBay, Inc. (“MediaBay”). In July 2005,
WHITTIER caused funds he controlled to purchase approximately 23
percent of MediaBay’s outstanding shares. Having been advised by
a securities lawyer of the legal ramifications of owning more
than 10 percent of the outstanding common stock of a publiclytraded
company, WHITTIER then intentionally failed to file
required documents with the SEC disclosing his beneficial
ownership of MediaBay securities in excess of 10 percent.
WHITTIER instead falsely informed his securities lawyers that he
had only purchased approximately 9.6 percent of MediaBay’s stock.
As a result, WHITTIER’s securities attorneys filed a form with
the SEC disclosing that WHITTIER controlled only approximately
9.5 percent of MediaBay’s common stock when, in fact, WHITTIER
was the beneficial owner of approximately 23 percent of MediaBay
WHITTIER pleaded guilty to one count of securities
fraud, and one count of failing to make a filing with the SEC
disclosing his beneficial interest of five percent or more in a
publicly-traded security, Endwave. WHITTIER also pleaded guilty
to one count of failing to make a filing with the SEC disclosing
his beneficial interest of ten percent or more in a publiclytraded
security, MediaBay. WHITTIER faces on each of the three
counts to which he pleaded guilty a maximum sentence of twenty
years’ imprisonment and a maximum fine of the greater of $5
million or twice the gross gain or loss resulting from the crime.
As part of his guilty plea, WHITTIER agreed to forfeit to the
United States the sum of $5,535,571.
WHITTIER is scheduled to be sentenced by United States
District Judge JED S. RAKOFF on October 15, 2007.
Assistant United States Attorney STEVEN D. FELDMAN is
in charge of the prosecution.