Thursday, 24 July 2014
Last updated 8 min ago
Dec 11 2008 | 4:45am ET
A former employee’s divorce proceedings are calling attention to a previously ignored aspect of the insider trading investigation of hedge fund Pequot Capital Management, as well as begging some uncomfortable questions for founder Arthur Samberg.
Financial statements filed by former Pequot employee David Zilkha show that Pequot or Samberg have paid him $1.4 million since April 2007, with another $700,000 due this coming April. Conde Nast Portfolio reports that neither Zilkha nor Samberg have explained the payments in court, and both declined to answer questions about them when contacted.
The Senate Judiciary Committee is monitoring the case, Portfolio says, and has obtained the financial records from the Stamford, Conn., court.
Zilkha joined Pequot in 2001 from Microsoft Corp. But the SEC believed that Zilkha may have passed insider information about the software giant to Pequot before he left the company, and Zilkha was interviewed—and given immunity from prosecution—by the Federal Bureau of Investigation and Justice Department on the SEC’s suggestion. An SEC memo noted, “Zilkha proffered that he had obtained information from Microsoft employees and provided it to Samberg, but did not believe the information was either material or confidential.”
No charges were ever filed.
Much ink has been spilled about the SEC’s Pequot investigation, which ended without charges against the hedge fund or Samberg but which raised serious questions about how the SEC handles such investigations. A Senate investigation of the investigation found credence in a former SEC lawyer’s claim that he had been fired for seeking to subpoena John Mack, the former Pequot chairman who now heads Morgan Stanley. An internal SEC investigation also faulted the agency, although no disciplinary action was taken.
But until now, little has been written about alleged insider trading of Microsoft shares by Pequot. In April 2001, after long shorting Microsoft shares, Samberg quickly bought up some 30,000 options, which turned him a quick $12 million profit when Microsoft announced higher-than-expected earnings. According to documents related to the investigation released by the SEC, Samberg pressed Zilkha for information about Microsoft prior to the latter’s departure.
In February, Samberg offered Zilkha, who was a product manager at Microsoft, a job as a technology analyst. In the same e-mail, Samberg said he “might as well pick your brain before you go on the payroll,” and sought information about Microsoft. Two months later, he asked Zilkha for “tidbits” about his employer. About three days later, Samberg began buying the Microsoft options, and 10 days later, Zilkha noted that Microsoft’s CFO has been unusually upbeat in advance of its quarterly earnings announcement.
After the Microsoft bet paid off, Samberg e-mailed Zilkha, “I shouldn’t say this, but you probably have paid for yourself already.”
As for the mysterious payments, Zilkha’s ex-wife—the divorce was finalized in 2005—wants to know more about them. Her lawyers are seeking to question both Zilkha and Samberg under oath to find out when exactly the payment agreement was struck. For their parts, both Zilkha and Samberg has sought to seal any testimony they might give about the payments. According to Samberg’s lawyers, such a step is “necessary to protect Pequot’s private financial information and business affairs.”
Zilkha was fired just months after joining Pequot, after his Microsoft contacts stopped communicating with him, according to the SEC probe. It isn’t known whether Zilkha sought any compensation for unfair termination from Pequot, or whether the payments are related to his few months at the firm.
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…