Pequot To Close In Face Of Insider-Trading Probe

May 27 2009 | 8:54pm ET

Facing a renewed insider-trading investigation, Pequot Capital Management and founder Arthur Samberg are throwing in the towel.

Samberg told investors today that he was closing the firm and three of its hedge funds. The remaining two funds, Special Opportunities and Matawin, will be spun off into separate entities. Samberg, who said he plans to retire, will have no role with the new firms.

The letter indicated that the Securities and Exchange Commission’s decision in January to reopen an insider-trading probe two years after closing it was the impetus for the decision to close Pequot, once among the largest and most prominent hedge funds in the world.

“Public disclosures about the continuing investigation have cast a cloud over the firm and have become a source of personal distraction,” Samberg wrote. “With the situation increasingly untenable for the firm and for me, I have concluded that Pequot can no longer stay in business as an investment adviser.”

Pequot’s assets under management have steadily declined from a peak of $15 billion in 2001. The Wilton, Conn.-based firm now manages $3.47 billion, down from $4.3 billion as recently as six months ago.

But while Pequot was at its largest in 2001, the seeds of its decline were sown in the same year. The hedge fund that year hired David Zilkha from Microsoft Corp. According to e-mails uncovered by the Securities and Exchange Commission, Samberg asked Zilkha for information about Microsoft before he left the software giant.

In a February 2001 e-mail, Samberg wrote to Zilkha that he “might as well pick your brain before you go on the payroll.”

While its first investigation of insider trading at Pequot ended when the SEC said it had “insufficient evidence to bring a case,” the agency restarted its probe in January. A month later, it emerged that federal prosecutors in New York had launched a criminal investigation of Pequot. Neither civil nor criminal charges against Pequot or Samberg are thought to be imminent.

The Microsoft allegations are not the only insider-trading accusations Pequot has faced. A former SEC lawyer said he was fired for trying to look into whether Morgan Stanley CEO John Mack, while at Credit Suisse, passed confidential information about a pending merger to Samberg. Recently, Pequot has also become engulfed in a kickback scandal at a New York public pension fund, although the firm has not been charged with any wrongdoing.

Samberg said that Pequot would liquidate its Pequot Partners, Pequot International and Pequot Endowment funds, which have a combined $2 billion in assets. Investors can expect a “significant amount” of their money back by next month, with the rest paid out over the next few months as Pequot sells off its more illiquid assets.

The remaining two funds will remain in the hands of their current managers. The $600 million Special Opportunities fund will be run by Rob Webster and Paul Mellinger. The $450 million Matawin fund will be headed by Mike Corasaniti.

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