The SEC apparently sandbagged an investigation into insider trading and fired one of its attorneys for aggressively pursuing testimony from the politically connected head of Morgan Stanley, and then tried to cover it up; so says a report created by the Senate Finance and Judiciary Committee.
According to the report, in July 2001 Arthur J. Samberg, president of hedge fund Pequot Capital Management, bought more than one million shares of Heller Financial Inc. stock after speaking with John J. Mack, former CEO of Morgan Stanley, about the firm. Mack had invested $5 million in a closed Pequot fund that did not previously accept individual investors; Mack was then interviewing with senior officers at Credit Suisse to become CEO of Credit Suisse First Boston, which was working on a merger deal between Heller and General Electric Capital Corporation (GE).
Further, the report says Samberg shorted GE stock, and one day after GE acquired Heller, Samberg started dumping the Heller stock for an $18 million profit. The GE-Heller transactions were just one of 17 sets of suspicious Pequot transactions that the New York Stock Exchange and National Association of Securities Dealers brought to the SEC’s attention.
According to the report, Gary J. Aguirre, an SEC staff attorney investigating Pequot, was prohibited to subpoena Mack, and was told by supervisors that would be unlikely because of Mack’s political connections. (According to the Center for Media and Democracy, Mack raised no less than $200,000 in 2004 for George W. Bush’s re-election campaign.)
In addition, the report says, SEC lawyers limited the scope of the investigation, and SEC enforcement directors had conversations with lawyers for Mack and Pequot from which Aguirre was excluded.
In addition, one of Aguirre’s supervisors went to work for one of those firms soon after. When Aguirre objected to SEC foot-dragging, he was fired despite positive performance reviews and a recent merit-based pay raise. Further, the report says, “SEC management then delayed Mack’s testimony for more than a year, until days after the statute of limitations expired.”
In a press statement, SEC Chairman Christopher Cox said, “We will follow up on the report and recommendations from Sen. Grassley and Sen. Specter with energy and urgency…The agency’s commitment to prosecuting insider trading has never been stronger, and initiatives such as our hedge fund insider trading task force in the Enforcement Division will insure that remains true in the future.”
No charges have been filed against Mack or Samberg, and the report recommended that the case be reopened.
“The SEC has not been protecting the capital markets from insider trading from the big hedge funds and that has created an un-level playing field,” Aguirre says. “The primary action to look for is: what is [Cox] going to do about the staff that compromised itself on the Pequot investigation?”
