Saturday, 26 July 2014
Last updated 20 hours ago
Jan 8 2009 | 2:23am ET
The Securities and Exchange Commission has reopened its insider trading investigation of Pequot Capital Management more than two years after saying it had “insufficient evidence to bring a case” over the hedge fund’s trading of Microsoft Inc. securities.
The resurrected probe comes following the revelation that Pequot or founder Arthur Samberg paid a former Microsoft employee who briefly worked for the hedge fund $1.4 million. The payments—two each of $700,000, with another due in April—came to light in financial statements filed by former analyst David Zilkha in divorce proceedings.
Despite finding e-mails between Samberg and Zilkha in which the former asked his new hire for information prior to Zilkha’s departure from Microsoft, neither the SEC nor the Justice Dept. brought charges against Pequot, Samberg or Zilkha. Last month, Pequot said the payments stemmed from “a civil claim related to his employment and termination.” Zilkha worked for Pequot for just a few months in 2001 before he was fired.
Intriguing as the mysterious payments are, Zilkha’s divorce from his wife may have produced some altogether more damning evidence. As part of their divorce, which was finalized in 2005, Karen Zilkha copied the hard drive of their shared computer. According to media reports, the hard drive contained e-mails between David Zilkha, then a product manager at Microsoft, and a more senior employee at the software giants.
At around the same time he got his job offer—and e-mails seeking information—from Samberg, Zilkha e-mailed Mark Spain asking, “Have you heard whether we will miss estimates? Any other info?” Spain responded that “march was the best march on record,” that it “made up the shortfall” and left the company “on trace for revised forecast.” Pequot made a profit of some $2.1 million betting on Microsoft in April, the month Zilkha and Spain exchanged e-mails, and May of 2001.
The hard drive does not contain any evidence that Zilkha passed the information on to Samberg, according to Conde Nast Portfolio, and Pequot has denied any wrongdoing. But the SEC has decided to reopen the case, and has subpoenaed the hard drive from David Zilkha. The documents are already in the hands of a pair of senators who were highly critical of the SEC’s inquiry into possible insider trading at Pequot.
“Re-opening this case is overdue,” Sen. Charles Grassley (R-Iowa) said in a statement yesterday. “There are questions about why the SEC’s investigation was shut down in the first place. I hope this isn’t too little, too late.”
A Senate investigation, led by Grassley and Sen. Arlen Specter (R-Pa.) of the SEC probe into Pequot 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.
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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…