Pequot, Samberg Facing Insider-Trading Charges

Aug 13 2009 | 1:36pm ET

The renewed insider-trading probe into Pequot Capital Management apparently turned up the goods, because the Securities and Exchange Commission is preparing to level charges at the hedge fund and its founder, Arthur Samberg.

The regulator sent a Wells notice—indicating it plans to bring an enforcement action—to Samberg and his firm, once the largest hedge fund in the world, Samberg wrote in a letter to investors. The SEC believes that Pequot traded on non-public information about software giant Microsoft Corp. eight years ago; Pequot and Samberg argued in their response to the Wells notice that the trades weren’t based on any material, non-public information, The Wall Street Journal reports.

Pequot received the Wells notice about six weeks ago, shortly after Samberg decided to close the firm in the wake of the SEC’s renewed investigation. The firm sent its response to the regulator about a month ago.

A Wells notice does not guarantee civil fraud charges will be brought; the five SEC commissioners must still approve any further proceedings. But if the regulator does move forward with the charges, it could mean the end of Samberg’s career in money management. The Wells notice indicates that the SEC would seek to bar the 68-year-old from serving as an investment adviser.

In the letter, dated Monday, Pequot called the potential enforcement action “without merit,” and said it would “defend the matter vigorously.” The firm said the regulatory action would not impact “the process of liquidating the remaining securities in the Pequot funds.”

Samberg announced in May that he would shutter Pequot, although several of its funds are being spun off.

“Public disclosures about the continuing investigation have cast a cloud over the firm and have become a source of personal distraction,” he wrote at the time. “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.”

The SEC reopened its investigation into the Microsoft trading in January, two years after determining that it had “insufficient evidence to bring a case.” Shortly before the SEC probe reconvened, the late Conde Nast Portfolio reported that Pequot or Samberg had paid a former Microsoft employee that briefly worked for the hedge fund more than $2 million.

Certainly, several e-mails uncovered by the SEC in their original investigation look damning. Samberg in February 2001 hired David Zilkha from Microsoft, and sought information about that company from him before he left to join the hedge fund, which fired him just months later. In the same e-mail offering Zilkha a job, Samberg wrote that he “might as well pick your brain before you go on the payroll,” and later asked Zilkha for “tidbits” about Microsoft. Three days after that April e-mail, Pequot began buying Microsoft options.

After that bet paid off, Samberg wrote to Zilkha, “I shouldn’t say this, but you probably have paid for yourself already.”

Pequot was also at the center of a controversial insider-trading probe that never was involving Morgan Stanley CEO John Mack. A Senate committee and the SEC’s own inspector general pilloried the agency for its handling of the case, which dealt with Pequot’s trading prior to General Electric’s acquisition of Heller Financial. A former CEO lawyer, Gary Aguirre, claimed he was fired for pushing too hard to interview Mack, a former chairman of Pequot, about that case.

What’s more, earlier this week, it emerged that Pequot had been flagged by several exchanges and the National Association of Securities Dealers no fewer than 44 times over a four year period for potential misconduct; most of those referrals were due to suspected insider trading.

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