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Tuesday, December 05, 2006

SEC Officials to Defend Decisions In Insider-Trading Probe of Pequot

Securities and Exchange Commission officials will take the offensive on Capitol Hill today, countering allegations that they stopped an insider-trading probe into hedge fund Pequot Capital Management Inc. after the investigation got too close to a prominent Wall Street executive.

The testimony, to be delivered to the Senate Judiciary Committee, also includes documents that offer an inside look at how Pequot amassed and used information. The material gathered by the SEC alludes to Pequot's use of research from Goldman Sachs Group Inc. before the brokerage firm published the material and to information that Pequot received in conversation with a Microsoft Corp. employee it later hired. The SEC didn't find that any of the evidence it gathered amounted to illegal behavior.

The testimony from SEC Enforcement Director Linda Thomsen and top enforcement officials offers a different picture than the one painted by Gary Aguirre, a former SEC enforcement attorney. Mr. Aguirre has alleged that he was fired in September 2005 after his supervisors blocked him from issuing subpoenas to John Mack, former chief executive of Credit Suisse First Boston, now head of Morgan Stanley. Mr. Aguirre had suspected Mr. Mack of tipping off Pequot to a pending merger, but said he wasn't permitted to pursue the investigation because of Mr. Mack's "powerful political connections."

Ms. Thomsen is expected to say, according to a copy of testimony: "These allegations are simply not true." She will note that Mr. Aguirre "had continued personality conflicts with other staff attorneys, resisted standard supervision, and ignored the SEC's chain of command." She also will say that the SEC tried to accommodate Mr. Aguirre, including giving him time to "pursue an unsuccessful age-discrimination claim against the SEC for failing to hire him on 22 prior applications." Mr. Aguirre is 66 years old.

Senate Finance Committee Chairman Charles Grassley has said that the evidence he has gathered so far is on balance "supportive" of Mr. Aguirre's claims. However, Ms. Thomsen's explanation is supported by testimony from three other current and former SEC enforcement officials. Paul Berger, a former associate SEC enforcement director, is expected to say that "no one refused his request to take testimony of John Mack. In fact, Mr. Aguirre was told that his request to take testimony might make sense, but that he hadn't yet done enough investigating to obtain testimony that would be useful."

Mr. Aguirre brought his concerns to Congress earlier this year and laid out his allegations before the Senate Judiciary Committee. The SEC subsequently took Mr. Mack's testimony this summer. Mr. Mack cooperated with the investigation, Morgan Stanley has said.

The SEC staff formally closed its investigation of Pequot last week without recommending any enforcement action. By May 2005, the investigation began focusing on Pequot's July 2001 short sales of General Electric Co. stock and purchase of Heller Financial Inc. shares. GE's acquisition of Heller was publicly announced on July 30, prompting a rise in Heller's stock price and a small decline in GE's stock price. Pequot made $17 million on the Heller trade and about $1.9 million on GE.

The question of whether Mr. Aguirre had enough information to issue a subpoena to Mr. Mack, who is close friends with Pequot Chief Executive Arthur Samberg, is at the heart of the dispute between Mr. Aguirre and his former bosses. Mr. Aguirre has said that "growing evidence" pointed to Mr. Mack. His bosses say that Mr. Aguirre didn't have enough facts.

"He was extremely anxious to take Mr. Mack's testimony, so much so that I grew increasingly concerned that his desire to take Mr. Mack's testimony stemmed from Mr. Mack's high-profile status, not an objective assessment of the facts," Robert Hanson, the SEC branch chief who supervised Mr. Aguirre, plans to say according to a copy of his testimony. "My concern was heightened because Mr. Aguirre wanted to take Mr. Mack's testimony immediately, before gathering documents from CSFB that could shed light on whether Mack had received information about the merger before he joined CSFB."

Mark Kreitman, an SEC assistant director who was Mr. Aguirre's professor at Georgetown University's law school, said that Mr. Aguirre's behavior became "increasingly unprofessional, irresponsible, and erratic" as time went on. He said that Mr. Aguirre, who had received a positive evaluation for his performance through April 30, 2005, "threw what can only be reasonably described as tantrums, storming up and down the halls in a furious crouch." Mr. Kreitman says he and Mr. Aguirre's other supervisors had to amend Mr. Aguirre's evaluation because his behavior "exceeded the bounds of acceptable professional conduct."

In a brief phone interview, Mr. Aguirre called their testimony "fiction." He says there is no evidence that SEC supervisors were unhappy with his performance until after he complained about what he said was Mr. Mack's special treatment.


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