Thursday, 24 July 2014
Last updated 6 hours ago
May 27 2010 | 1:25pm ET
Pequot Capital Management and founder Arthur Samberg have settled insider-trading charges almost exactly one year after the renewed investigation convinced Samberg to close the one-time hedge fund giant.
The Securities and Exchange Commission today announced that it had simultaneously charged Pequot and Samberg with insider trading, and that they had agreed to pay almost $28 million to settle the charges. Neither Pequot nor Samberg acknowledged any wrongdoing.
The SEC also announced charges against David Zilkha, the former Microsoft Corp. employee who allegedly passed the confidential tips on to Pequot. Zilkha was briefly employed by Pequot, and the SEC’s renewed probe—launched last January, more than two years after it had first closed the case due to “insufficient evidence”—followed the revelation that Pequot or Samberg had paid Zilkha $1.4 million as part of a civil claim. Zilkha was fired just a few months after joining Pequot in 2001.
The payments came to light as part of Zilkha’s Connecticut divorce proceedings. Zilkha has not settled the SEC charges; the regulator said administrative proceedings against him continue.
“The cases have two particularly troubling aspects—a hedge fund manager trading on illegal insider information, and his tipper source who withheld crucial information about the scheme during an SEC investigation,” Robert Khuzami, head of enforcement at the SEC, said.
Indeed, if not for the divorce case, none of the alleged misdeeds may have ever come to light. The SEC found several e-mails indicating that Samberg sought information about Microsoft from Zilkha while the latter was still at the software giant on a copy of his hard drive made by his now-ex-wife, Karen.
In one e-mail, from Samberg to Zilkha in February 2001, the Pequot chief wrote that he “might as well pick your brain before you go on the payroll.”
According to the SEC, Pequot used information from Zilkha indicating that Microsoft would beat its earnings estimates for the first quarter of 2001, despite market rumors that the company would fall short. The complaint alleges that Pequot turned a $14 million profit on the insider-trade.
Pequot and Samberg will pay almost $18 million in disgorgement and prejudgment interest, as well as $10 million in fines. Samberg has also agreed to barred from association with an investment adviser, effectively kicking him out of the money management business, except to continue to wind-down of Pequot.
Samberg announced that he would shutter the hedge fund, which once managed $15 billion, last May. He said the SEC investigation and a parallel criminal probe “have cast a cloud over the firm and have become a source of personal distraction,” and indicated that he planned to retire. Pequot managed about $3.5 billion at the time.
Jul 8 2014 | 10:48am ET
The surge in derivatives regulation is among the most complex challenges facing the financial services industry today. Northern Trust’s Joshua Satten recently spoke with FINalternatives to share insights into the challenges presented by new regulation and explore how the industry is responding. Read more…