Senators Issue Damning Report On SEC Pequot Probe

Feb 2 2007 | 11:24am ET

In an interim report that does not mince words, a pair of Republican senators blasted the Securities and Exchange Commission for botching an inquiry into Pequot Capital Management.

The report, released by Sens. Arlen Specter (R-Pa.) and Charles Grassley (R-Iowa), prior to Republican losses in last year’s midterm elections the chairmen of the Senate Judiciary and Finance committees, respectively, is based on investigations by the two committees, which began in July. In addition to its mishandling of the Pequot probe, the report says the SEC may have attempted to cover up its mistakes and questioned why the agency fired the lawyer leading the investigation into the prominent hedge fund, where Morgan Stanley CEO John Mack once served as chairman.

“At best, the picture shows extraordinarily lax enforcement by the SEC,” the report concluded. “At worst, the picture is colored with overtones of a possible cover-up.”

The report stems from an insider-trading investigation of Pequot, headed by Mack’s friend Arthur Samberg. An enforcement lawyer working on the case, Gary Aguirre, alleges he was fired for getting too close to Mack, who he suspected of passing on insider information to Samberg. The SEC denies those charges, and dropped the case against Pequot last year.

Senate investigators said they were “deeply troubled” by SEC Inspector General Walter Stachnik’s failure to investigate Aguirre’s claims.

“The I.G. spoke only to Aguirre’s supervisors, accepted everything they said at face value and reviewed only documents identified by those superiors,” the report said. Further, it rejected the SEC’s claim that Aguirre was let go for poor performance in September 2005—just days after he received a merit-based pay raise—noting the SEC “produced no documents to the committees suggesting that they viewed it that way at the time.” The report calls Aguirre “a smart, hardworking, aggressive attorney who was passionately dedicated to the Pequot investigation.”

The damning report also suggests that the SEC shied away from extending the probe to Mack. After initially supporting Aguirre’s request to investigate Mack, the report said, “What is troubling is how this enthusiasm waned after public reports on July 23, 2005, that Morgan Stanley was considering hiring Mack as its new CEO.”

The report takes the SEC to task for interviewing Mack—in August 2006—simply to deflect criticism. “The purpose of taking investigative testimony is not to confront a witness with accusations of wrongdoing, as Aguirre’s supervisors seem to believe,” it states. “Rather, it is to gather information that helps confirm or rule out working theories. Mack’s testimony was taken five days after the statute of limitations expired, and only a few months after we initiated our inquiry into the matter.”

It’s incendiary findings notwithstanding, the fate of the report is uncertain. Upon taking power, the new Democratic leaders of the House of Representatives and Senate indicated that they would not pursue hedge funds with the same zeal as their Republican predecessors.


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