Senate probes SEC for stonewalling

IRVINE, Calif. — After examining an aborted insider-trading investigation involving Pequot Capital Management Inc. and Morgan Stanley chief executive John Mack, Senate investigators have concluded that SEC enforcers are concerned about being undermined by their supervisors. Top officials at the Securities and Exchange Commission may be swayed by influential defense lawyers, according to a Senate committee report released this month. The joint investigation by the Senate Judiciary and Finance committees was sparked by Gary Aguirre, an SEC investigator turned whistle-blower. The former enforcer claimed that an insider-trading investigation of New York-based Pequot and Mr. Mack was scuttled in 2005 after enforcement officials learned that Mr. Mack was being considered for the top spot at Morgan Stanley. Mr. Mack was hired by the New York-based wirehouse in June 2005. The report affirmed Mr. Aguirre’s claims that high-powered lawyers hired by Pequot and Morgan Stanley had access to top SEC enforcement officials, who then decided not to subpoena Mr. Mack. That decision was made without consulting Mr. Aguirre and other investigators, according to the report. Senate investigators found no evidence that Mr. Mack himself prevented or delayed his testimony.
Mr. Aguirre theorized that Mr. Mack may have tipped his friend, Pequot founder Arthur Samberg, about Stamford, Conn.-based General Electric Capital Corp.’s pending acquisition of Heller Financial Inc. of Chicago in 2001. Mr. Aguirre thought Mr. Mack may have heard something from officials of Zurich-based Credit Suisse Group during a trip to Switzerland in late June 2001. New York-based Credit Suisse First Boston was working on the deal. Within a month, Mr. Mack was hired as chief executive of CSFB. After returning, Mr. Mack spoke with Mr. Samberg, and within days — and at Mr. Samberg’s direction — Pequot began purchasing Heller stock and shorting that of Fairfield, Conn.-based General Electric Co., the report said. The Heller deal was announced a month later. Pequot closed out its $80 million investment with an $18 million profit. The Pequot case was once seen as so promising within the SEC that Mr. Aguirre and other staff members in June 2005 briefed the FBI and the U.S. attorney for the Southern District of New York about the matter. SEC enforcement officials fired Mr. Aguirre in September 2005 after he complained about not being able to depose Mr. Mack. The SEC dropped the case in November 2006 after questioning Mr. Mack that summer. Mr. Mack told the SEC he never got a tip about Heller. In a statement, SEC Chairman Christopher Cox said the SEC would follow up on the report’s recommendations. One recommendation was to protect more effectively the integrity of investigations and protect employees. Mr. Aguirre said SEC employees are still at risk for retaliation. Mr. Cox “cannot leave their careers in the hands of the current [enforcement] director,” Linda Thomsen, he said. Spokesmen for Pequot and Morgan Stanley declined to comment. Senate investigators said there is “a perception within the SEC ... that investigations involving prominent individuals can be slowed or halted by contacts from outsiders with direct access to the most senior SEC officials.” Being undermined by superiors “is a recurring problem here,” an SEC investigator wrote in an e-mail uncovered by Senate investigators. Like Mr. Aguirre, this investigator suffered retaliation after complaining about suspected interference in another investigation, the report said. “The report confirms the existence of an elite cadre of securities lawyers able to stop an SEC investigation in its tracks,” Mr. Aguirre said. “When [officials leave] the SEC for their $2-million-a-year job in private practice ... it’s their turn to harvest favors.”
Mr. Aguirre added that many of his colleagues at the SEC are “very committed and talented ... But those who understand the favors game are more likely to reach the highest levels” of the agency. The Senate report also showed that SEC enforcers are outgunned. When a lawyer at Fried Frank Harris Shriver & Jacobson LLP of New York who was defending Pequot refused to produce requested e-mails, SEC lawyers gave serious thought to building a disciplinary case against the law firm. But an unidentified SEC staff member quoted in the report doubts the agency’s resolve, saying: “I have seen these [SEC enforcement] lawyers get all huffy before. They are empty suits. When push comes to shove, no one in the SEC is going to take on [Fried Frank] or any other major player — not going to happen.” At one point, Fried Frank had 55 lawyers on the case, according to an SEC e-mail uncovered by Senate investigators. Little help In contrast, records show that Mr. Aguirre was struggling to handle the case with minimal administrative help. Jonathan Gasthalter, a spokesman for Fried Frank, declined to comment. Mr. Aguirre told Senators that the SEC had no problem going after small targets. He contrasted the failure to pursue the Pequot investigation with a similar case involving a former vice president of finance at GE Capital, Anthony Chrysikos, and Mr. Chrysikos’ accomplice, Michael Martello. The men made $157,000 buying Heller call options before the GE buyout. The SEC brought insider- trading charges against them in March 2002, and both men were sentenced to prison that year. Pequot’s trades had been referred to the SEC by the New York Stock Exchange in January 2002, but nothing happened with the case until Mr. Aguirre began pursuing it in September 2004, the Senate report said.