Whitman v. Whitman

316 Cal.Rptr.3d 812

IN RE the MARRIAGE OF Quin WHITMAN and Douglas F. Whitman.

Quin Whitman, Appellant,

v.Douglas F. Whitman, Appellant.

A157055

Court of Appeal, First District, Division 2.

Filed December 29, 2023

As Modified on Denial of Rehearing

January 26, 2024

Certified for Partial Publication^*

(San Mateo County Super. Ct. No. FAM0117304) Hon. Elizabeth M. Hill

McManis Faulkner, James McManis, William Faulkner, Brandon Rose, and Beverly Bergstrom, for Appellant Quin Whitman.

California Appellate Law Group, Complex Appellate Litigation Group, Charles Kagay, Robert A. Roth, and Kelly A. Woodruff, for Appellant Douglas F. Whitman.

STEWART, P.J.

Douglas F. Whitman (Doug), the founder of a once highly successful hedge fund, and Quin Whitman (Quin) each appeal from a judgment entered after a lengthy court trial in their contested divorce.

We affirm the judgment in all respects but one. We conclude:

(1) The trial court did not err in ruling that Doug failed to prove he retained any separate property interest in the hedge fund at the time of dissolution, despite an initial $300,000 capital investment of his own separate funds.

(2) The community is not financially responsible for any of the legal fees Doug incurred to defend against criminal charges brought against him for insider trading or the $250,000 fine imposed on him in that case. The trial court thus did not err in characterizing those as Doug’s separate debts. It erred in holding the community responsible for the $935,000 penalty the Securities and Exchange Commission (SEC) imposed on Doug in the parallel enforcement action for engaging in illegal insider trading while running the hedge fund during the marriage. It did not err in holding the community responsible for $290,000 in legal fees Doug incurred in that parallel SEC enforcement case.

(3) Quin has not demonstrated the court erred in holding the community responsible for legal fees expended by the hedge fund when it intervened as a third party into these proceedings.

(4) The court did not err in concluding Quin failed to prove her claim that Doug breached his fiduciary duty in connection with the sale of the couple’s luxury home.

BACKGROUND

Quin and Doug married in 1992. By then, Doug had spent nearly a decade working as a highly compensated financial analyst at several investment firms and had amassed substantial separate property savings. During the first two years of their marriage, the couple lived frugally, while Doug continued to work in the financial sector and earn a high income. In 1994, Doug was terminated from his position at the investment bank where he had been working and decided to form his own investment fund (or "hedge fund").

To launch the hedge fund and attract outside investors, Doug invested $900,000 of capital in three rounds of funding during 1994. A major contested issue at trial was whether any portion of that capital infusion was Doug’s separate property and, if so, whether it could be adequately traced decades later at the time of dissolution. We will discuss that subject in great- er detail below in the unpublished portion of this decision.

By the end of 2011, the hedge fund had proved a tremendous success, having grown cumulatively 2118.7 percent from its inception. At its peak, it had more than 60 outside investors and nearly $300 million in assets.

But in February 2012, the U.S. Attorney in the Southern District of New York charged Doug with crimes and the SEC filed an enforcement action against him and Whitman Capital for insider trading.¹ Within months, by the end of March 2012, all the outside investors had withdrawn from the hedge fund, leaving only about $29 million in equity belonging to Doug (effectively). The following year, in January 2013, Doug was convicted of four counts of insider trading, sentenced to 24 months in prison, assessed a $250,000 criminal fine and ordered to forfeit $935,306. Then in March 2013 Doug settled the SEC action and paid a $935,306 civil penalty.

Over time, the hedge fund had earned handsome profits and Doug was extremely well compensated. During their marriage, Doug reinvested all of his annual compensation back into the fund, and the parties withdrew more than $88 million from the fund.

On April 11, 2012, two months after the civil and criminal charges were filed, Quin filed a petition for legal separation that was later amended to a petition for dissolution. The following year, in June 2013, the hedge fund was granted leave to intervene in the case after Quin sought the appointment of a receiver to wind it down. Her efforts in that regard were ultimately not successful, and we discuss in greater detail below (in the unpublished portion of this opinion) the trial court’s ruling concerning the legal fees the hedge fund incurred to appear in the case.

The case proceeded to 30-day bench trial between March 2017 and January 2018 on the characterization and division of numerous marital assets. The court issued a 133-page statement of decision, entered judgment and denied the parties’ new trial motions. Both parties then timely appealed.

DISCUSSION

I.^**

II. Legal Fees and Fines Arising from Doug’s Insider Trading

Between 2007 and 2009, while the parties were married, Doug engaged in insider trading, purchasing interests in Google and two other companies based on tips he received from company insiders. The question of who should be responsible for the financial repercussions of Doug’s criminal conduct divided the parties below and remains an issue in this appeal.

Both parties challenge the trial court’s ruling on Quin’s request that it treat as Doug’s separate obligation, and reimburse the community for, the debts incurred as a result of his criminal conduct, including the debts for the civil penalty, the criminal fine and the attorney fees incurred for his defense in the parallel criminal and SEC cases. The trial court ruled the community was responsible for the $935,000 civil penalty and $290,000 in attorney fees and costs associated with the SEC action. It held that the $9.4 million in attorney fees spent defending him against the criminal action and the $250,000 criminal fine were Doug’s separate debts for which he, not the community, was responsible.

Doug claims the trial court erred in failing to allocate the entire cost of his criminal conduct to the community. Quin, who knew nothing about Doug’s criminal wrongdoing until after the fact, and therefore had no opportunity to avoid it, argues the trial court should not have allocated any of these losses to the community.

In the alternative, Doug also challenges the amount of legal fees and costs the trial court attributed to the SEC action, contending the trial court erroneously excluded evidence that resulted in the court vastly underestimating those expenses.

We affirm the trial court’s decision in all but one respect. It erred only to the extent it characterized the SEC penalty Doug was ordered to pay in the SEC case as a community obligation. The penalty he paid to settle the SEC case, the criminal fine imposed against him, and all but $290,000 of the attorney fees Doug incurred to defend himself are Doug’s separate responsibility. And our reasoning for affirming the allocation of the $290,000 to Doug is distinct from that of the trial court and renders it unnecessary to address Doug’s challenge to the amount of legal fees the court allocated to his defense of the SEC case.⁹

A. Background

In January 2011, Doug retained the law firm Sidley Austin to assist him in connection with investigations into his trading activities launched by federal prosecutors in New York and the SEC. His legal team spent the next year negotiating with both sets of New York investigators in an attempt to convince them not to charge Doug, while simultaneously investigating the case and preparing a defense.

Their negotiating efforts failed, and in February 2012, a grand jury returned an indictment. Doug was charged in the federal district court for the Southern District of New York with four federal criminal securities law violations, including two charges for conspiracy to commit securities fraud and two charges of securities fraud. The charges alleged Doug engaged in two insider trading schemes that involved purchasing securities in three publicly traded companies based on inside information obtained from two different sources.

Contemporaneously, the SEC filed a complaint against Doug and Whitman Capital arising out of some of the same insider trading as was alleged in the criminal indictment. The complaint alleged that based on the insider information, "Whitman Capital hedge funds reaped approximately $980,000 in ill-gotten profits." It sought injunctive relief, disgorgement and civil penalties.

Two months later, in April 2012, Doug and Quin separated.

After pleading not guilty in the criminal action, Doug was tried by a jury, which in August 2012 found him guilty on all four counts. In January 2013, the court sentenced him to two years’ imprisonment, a year of probation, a fine of $250,000 and forfeiture of $935,306. The forfeiture amount represented "the amount of proceeds obtained as a result of the offenses" charged in the indictment.

About two months later, on March 19, 2013, Doug and Whitman Capital consented to entry of judgment against them in the SEC action. The judgment permanently enjoined them from violating the anti-fraud provisions of the Securities Exchange Act of 1934 and the Securities Act of 1933; imposed joint and several liability on them for "disgorgement in the amount of $935,306, representing profits gained as a result of the conduct alleged in the Complaint" (plus prejudgment interest), which was to be "credited" by the amount paid for the criminal forfeiture; and also required Doug to pay a "civil penalty in the amount of $935,306" to the SEC. Doug also agreed he would "not seek or accept, directly or indirectly, reimbursement or indemnification from any source" or claim any tax...