The Senate Finance and Judiciary committees have released the results of their investigation into the SEC’s firing of a former staff lawyer, Gary Aguirre, in September 2005.
Mr. Aguirre had been leading the SEC investigation into possible illegal insider trading by large hedge fund Pequot Capital that is run by Arthur J. Samberg.
Aguirre was fired after complaining that his superiors were interfering by improperly narrowing the scope of the investigation and preventing him from interviewing Morgan Stanley’s CEO John Mack (who allegedly could have been the source for some of the “inside information”).
Now, two years later, the congressional report agrees that the SEC bungled the investigation in a major way and that this resulted in a lost opportunity to broadly crack down on hedge fund insider trading. Here is an excerpt of the report:
“The investigation of Pequot Capital Management could have been an ideal opportunity for the S.E.C. to develop expertise and visibility into the operations of a major hedge fund while deterring institutional insider trading and market manipulation through vigorous enforcement…”
Pequot Capital originally came under SEC scrutiny in 2004 after stock exchange officials found up to 25 sets of highly suspicious trades made by the hedge fund prior to major announcements. The SEC closed the Pequot inquiry last fall without taking action against the fund or its management.
Commentary: To us, it has seemed that there has been something fishy in this case since the get-go. That being said, Morgan Stanley CEO John Mack is surely far too smart to be passing along privileged information to a hedge for insider trading purposes. Yet, it’s rare that an experienced and fairly senior government official risk everything like this in “whistleblowing” unless there is real merit to the case. The Congressional investigation report appears to agree.
Records show that Pequot MUST have been improperly trading on inside information and that the SEC lost a tremendous opportunity to prove and prosecute. Unfortunately, nothing will likely come out it at this point in time – which makes our regulatory system (in this case) look about as fair and just as something designed by Putin.
On a lighter note, wondering what the picture is? That’s an illustration of a Pequot village from the mid-1600s (remember: Pequot is an Native American tribe). Know what the Pequot tribe does today? They are the wealthiest tribe in the nation and their holdings include the popular Foxwoods Hotel and Casino in Mystic CT. Perhaps Samberg had ‘gambling’ on his mind when decide what to name his hedge fund. So far his gaming seems to be working.
