Senate Report Says S.E.C. Botched Hedge Fund Inquiry

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February 2, 2007
Senate Report Says S.E.C. Botched Hedge Fund Inquiry
By WALT BOGDANICH
The Securities and Exchange Commission mishandled its inquiry into suspect trades by a prominent hedge fund, then may have tried to cover up those mistakes after its chief investigator on the case complained, according to an interim Senate report released yesterday.

The report, released by the former chairmen of the Senate Judiciary and Finance Committees, Arlen Specter of Pennsylvania and Charles E. Grassley of Iowa, also asked the S.E.C. or the Justice Department to consider investigating whether false testimony was given to S.E.C. officials who examined the hedge fund, Pequot Capital Management.

The report did not cite examples of what testimony might have been false.

The two Senate committees began looking into the case in July after the investigator, a commission lawyer named Gary J. Aguirre, said he was fired for complaining that the Pequot investigation had been derailed because of political considerations.

Though the S.E.C.’s handling of the Pequot matter came under fire at Senate hearings last year, yesterday’s report provides the strongest condemnation yet of how that investigation was run.

“At best, the picture shows extraordinarily lax enforcement by the S.E.C.,” Senate investigators concluded. “At worse, the picture is colored with overtones of a possible cover-up.”

The report strongly suggests that Mr. Aguirre was fired in retaliation for his criticism. At the same time, Senate investigators said they were “deeply troubled” by the failure of the S.E.C.’s inspector general, Walter J. Stachnik, to investigate Mr. Aguirre’s accusations properly.

“The I.G. spoke only to Aguirre’s supervisors, accepted everything they said at face value and reviewed only documents identified by those supervisors,” the report concluded. “We believe the S.E.C. must take corrective and preventative action to ensure that future investigations, internal and external, do not follow the same path as the Pequot matter.”

The S.E.C. should also consider reopening its Pequot investigation, the report states, though it takes no position on whether the fund or anyone connected to it engaged in any wrongdoing.

The S.E.C. closed its inquiry without charging anyone in connection with the Pequot inquiry.

John J. Nester, a spokesman for the S.E.C., said in a statement that because the matter was under review by other federal entities, which he did not name, the commission would have no comment.

The report, which is based largely on Senate interviews with 19 crucial witnesses and thousands of pages of internal S.E.C. records, is a victory for Mr. Aguirre, who was fired in September 2005, just days after receiving a merit pay increase.

At a Senate hearing in December, senior S.E.C. officials sought to justify his firing, arguing that he had done a poor job running the Pequot investigation and that he had been difficult to get along with. The officials asserted that Mr. Aguirre had once issued flawed subpoenas and that he had been unprofessional in the way he conducted an interview with Pequot’s founder, Arthur J. Samberg.

There was scant documentary evidence to back up those charges, the report concluded. “We have noted the considerable lack of contemporaneous documents corroborating the concerns they raised,” it said.

S.E.C. officials said the flawed subpoenas had seriously undermined their confidence in Mr. Aguirre. But, the report noted, those officials “produced no documents to the committees suggesting that they viewed it that way at the time.”

The same held true for the examination of Mr. Samberg. In fact, the report states, one longtime S.E.C. investigator told the committee that he planned to use Mr. Aguirre’s examination “as a model for how to take testimony in his training of new S.E.C. attorneys.”

The report called Mr. Aguirre “a smart, hardworking, aggressive attorney who was passionately dedicated to the Pequot investigation.”

Mr. Aguirre testified that his troubles at the S.E.C. began when he asked for permission to examine John J. Mack, an influential Wall Street executive who was a close friend of Mr. Samberg. After initially supporting Mr. Aguirre’s decision, senior S.E.C. officials abruptly changed course, the report notes.

“What is troubling is how this enthusiasm waned after public reports on June 23, 2005, that Morgan Stanley was considering hiring Mack as its new C.E.O.,” the report concludes.

Mr. Aguirre was told that since he had no evidence linking Mr. Mack to suspected insider trading by Pequot, calling in Mr. Mack for an interview would not be justified.

“The purpose of taking investigative testimony is not to confront a witness with accusations of wrongdoing, as Aguirre’s supervisors seem to believe,” the report states. “Rather it is to gather information that helps confirm‎ or rule out working theories.”

Mr. Mack and Mr. Samberg have repeatedly denied any improper conduct.

Mr. Mack’s testimony was eventually taken in August 2006, more than a year after Mr. Aguirre proposed doing so.

“We are concerned about the circumstances under which it was done,” investigators said. “Mack’s testimony was taken five days after the statute of limitations expired, and only a few months after we initiated our inquiry into this matter.”

The report concludes that the S.E.C. finally interviewed Mr. Mack to deflect public criticism for not having done it earlier.