Internal Report Blasts SEC’s Handing Of Hedge Fund Probe

Oct 7 2008 | 10:13am ET

An internal inquiry has found that the Securities and Exchange Commission erred in its investigation of alleged insider trading at hedge fund Pequot Capital Management, with disciplinary action recommended for three high-ranking officials at the SEC.

The agency’s inspector general, H. David Kotz, more or less sided with Gary Aguirre, the former SEC lawyer who claimed he was fired for seeking to question John Mack, the one-time Pequot chairman who now serves as CEO of Morgan Stanley, The New York Times reports. In a 191-page report, Kotz said h found evidence that “raised serious questions about the impartiality and fairness” of the SEC probe into Pequot, which ended without any enforcement action. Kotz’s report also blasted the “common practice” of giving lawyers for prominent outside clients access to high-level SEC officials when they had complaints about an investigation.

Aguirre said he was fired in September 2005 when he asked to take testimony from Mack. He also claimed that his superiors sought to impede his investigation when it got close to Mack. Kotz’s report did not attempt to discover whether insider trading had occurred at Pequot, focusing instead on Aguirre’s accusations about the SEC, finding that it allowed “inappropriate reasons to factor into its decision to terminate him.”

“There was a connection between the decision to terminate Aguirre and his seeking to take Mack’s testimony,” Kotz wrote.

The report echoes, in somewhat less bombastic tones, a Senate report issued last year that found the SEC had botched the Pequot case. One of the Senators who held hearings on the Pequot probe, Sen. Charles Grassley (R-Iowa), said Kotz’s report showed how the SEC’s failures have helped fuel the current market crisis.

“Gary Aguirre told it like it was and lost his job,” Grassley said. “Today, we’re all paying the price for an SEC culture of deference to Wall Street.”

Kotz recommended that the SEC take disciplinary action against Linda Thomsen, the agency’s director of enforcement, Mark Kreitman, the assistant director of enforcement, and Robert Hanson, Aguirre’s former supervisor. A spokesman for the SEC said its review process would determine whether any punishment was meted out.


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