Metropolitan News-Enterprise


Tuesday, January 2, 2024


Page 1


Court of Appeal:

Wife Not Liable for Debts Linked to Husband’s Crimes


By a MetNews Staff Writer


Div. Two of the First District Court of Appeal on Friday affirmed the decision of a trial court that the former manager of a hedge fund who in 2012 was convicted on two counts of conspiracy to commit securities fraud and two counts of securities fraud is solely responsible for the $9.4 million he spent on defense fees and the $250,000 criminal fine that was imposed, rejecting his contention that these were community obligations.

However, the appeals court reversed the decision by San Mateo Superior Court Judge Elizabeth M. Hill to the extent she ruled, in a divorce proceeding, that the $935,306 that was forfeited under a settlement that inside trader Douglas F. Whitman reached with the Securities and Exchange Commission was to be paid out of community funds.

The only sum in connection with the criminal and civil proceedings against Whitman properly allocated to the community, Presiding Justice Therese M. Stewart said, was $290,000 of the sum expended on attorney fees in the SEC action.

‘Benefit of Community’

That post-separation debts “are Doug’s separate debts is not even debatable,” Stewart said. However, the obligation to pay attorney fees, she noted, was incurred when a contract was entered into with Sidley Austin before separation and, under Family Code §2625 “are community debts or separate debts depending on whether they were ‘incurred for the benefit of the community.’ ”

The presiding justice wrote:

“Doug argues his operation of the hedge fund in general benefited the community, and there is no question that it did. But section 2625 presents a narrower question. The debts at issue were incurred not by Doug’s overall operation of the hedge fund throughout the course of the parties’ marriage. Rather, they were incurred because Doug violated the securities law by conspiring to commit and committing multiple acts of insider trading. The question is whether the amounts Doug expended on attorney fees to defend himself in the criminal and SEC cases were incurred for the benefit of the community.”

She pointed out:

“[T]he attorney fees Doug expended to defend against the criminal and SEC actions totaled $9.7 million, which of course dwarfed any potential community benefit.”

Of that amount, Stewart said, the $290,000 spent on the defense in the SEC proceeding “was proportionate to the limited community benefit at stake in that litigation.”

Disgorged Funds

In explaining why Whitman’s wife—who was unaware of her husband’s criminality—should not bear any part of the burden as to payment of the $935,306 that was disgorged, Stewart said:

“Even assuming the community benefited in the amount of $935,000 from Doug’s insider trading…, the combined total of the civil penalty, criminal fine and attorney fees Doug incurred ($11,885,000) is almost 13 times that amount.

“And it is impossible to quantify the ongoing loss of income available to support the community that resulted after Doug’s criminal conduct was discovered and the limited partners withdrew from the fund and it was effectively shut down.”

The case is Whitman v. Whitman, A157055.

In the criminal proceeding, in the U.S. District Court for the Southern District of New York, Whitman was sentenced to two years in prison.


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