Senate critizes SEC shyness in hedge fund fraud

Discussion in 'Wall St. News' started by crgarcia, Aug 6, 2007.

  1. SEC 'squandered' Pequot-Mack probe William Hutchings
    06 Aug 2007

    A US Senate report has criticized the Securities and Exchange Commission's insider trading investigation of Pequot Capital Management, a US hedge fund manager, finding evidence the SEC had shied away from thoroughly grilling John Mack for fear of his political clout.

    The report, prepared by the minority staff of the US Senate Committee on Finance, said: "The investigation of Pequot Capital Management could have been an ideal opportunity for the SEC to develop expertise in the operations of a major hedge fund while deterring institutional insider trading. The SEC squandered this opportunity."

    It found evidence supporting the claims of former SEC staff attorney Gary Aguirre, who had been leading the investigation into Pequot and whom the SEC had fired in 2005.

    Aguirre claimed he had been sacked for criticizing his supervisor's decision to stop him interviewing Mack, former chief executive of Credit Suisse. The report said Aguirre's request to interview Mack was reasonable, and that internal SEC e-mails corroborated his view that the SEC initially avoided interviewing Mack because of his political connections.

    The Senate report queried the SEC's subsequent decision to close the Pequot case without complaint, published in 2006 after it reversed its decision and interviewed Mack. It criticized the SEC's interview of Mack, saying it had left pertinent questions unasked.

    The Senate report details Pequot's trades in General Electric and Heller Financial before and after July 30 2001, when GE announced its acquisition of Heller. Before that announcement, knowledge of the deal was subject to prohibitions on insider trading.

    The report said Arthur Samberg, chief executive of Pequot, had held a conversation about a month before the announcement with Mack, his friend and investor, while Mack was between jobs as chief executive of Morgan Stanley and chief executive of Credit Suisse, both of which were working on the GE-Heller deal.

    The report said Pequot’s trades in advance of the GE acquisition of Heller Financial were "highly suspicious". Shortly after the conversation with Mack, the report said, Samberg bought Heller shares and shorted GE. He reversed these after the deal was announced, making a total profit of about $18m (€13m) in a matter of weeks.

    The report listed five reasons for thinking Pequot's trades were executed contrary to the firm's regular process for investments, and labeled the trades "highly suspicious". Moreover, the report said: "The SEC examined only a fraction of the other suspicious Pequot trading. GE-Heller represented just one of at least 17 sets of suspicious transactions involving Pequot brought to the SEC’s attention."

    To read the Senate committee's report in full, click here: 2007/36960.pdf