Senators Voice Concern on SEC Hedge Fund Case
    By Walt Bogtdanich
    The New York Times

    Tuesday 15 August 2006

    The chairmen of two Senate committees have written to the head of the Securities and Exchange Commission saying they are troubled by the agency's handling of accusations that political considerations impeded the investigation of a prominent hedge fund, Pequot Capital Management.

    In a letter dated Aug. 2, the senators - Arlen Specter, chairman of the Judiciary Committee and a Republican from Pennsylvania, and Charles E. Grassley, a Republican from Iowa who leads the Finance Committee - said that the S.E.C. and its inspector general had given Senate investigators information on the Pequot case that was "inconsistent, incomplete and contradicted by documentary evidence."

    They also told the S.E.C. chairman, Christopher Cox, that agency officials "were seemingly unaware" of important documents and meetings involving its investigation of Pequot.

    As a result, they wrote, "many questions regarding the handling of the PCM matter remain unanswered." They asked Mr. Cox for all documents created by the S.E.C. in connection with its Pequot investigation.

    A spokesman for the S.E.C., John Nester, declined to comment on the specifics of the letter but said, "We appreciate the opportunity to assure lawmakers and the public of the fairness and integrity of our investigatory process."

    The S.E.C.'s handling of the Pequot investigation first came under Congressional scrutiny last spring after a former investigator for the agency, Gary J. Aguirre, accused senior agency officials of giving in to political pressure when they blocked him from taking the testimony of John J. Mack, a Wall Street executive and a major fund-raiser for President Bush.

    At the time, people who have been briefed on the agency's position say, S.E.C. officials argued that Mr. Aguirre had not made a strong enough case for taking testimony from Mr. Mack. Mr. Mack, who was about to be named Morgan Stanley's chief executive, is close to Arthur J. Samberg, who oversees Pequot, and he briefly worked for the fund before joining Morgan Stanley.

    But after several Congressional committees began looking into Mr. Aguirre's charges, the S.E.C. reversed course and recently interviewed Mr. Mack, more than a year after Mr. Aguirre first tried to do so.

    The S.E.C.'s investigation, first reported by The New York Times, has not resulted in any charges against Pequot or Mr. Mack. Both deny any wrongdoing and Morgan Stanley has previously stated that no one, including Mr. Aguirre, has produced any evidence that Mr. Mack engaged in insider trading.

    Mr. Aguirre, who ran the commission's Pequot investigation, was fired by the S.E.C. only days after the he received a two-step merit pay increase. Mr. Aguirre's firing is also being investigated by the Office of Special Counsel, a federal agency that examines whistle-blower complaints.

    In their letter to Mr. Cox, Senator Specter and Senator Grassley asked specifically for records of any communications involving Linda Thomsen, the S.E.C.'s enforcement chief, and Mary Jo White, the former federal prosecutor who now works at the law firm of Debevoise & Plimpton.

    Mr. Aguirre told Congressional investigators that the Pequot investigation ground to a halt after Ms. White went over his head and contacted Ms. Thomsen.

    Ms. White said Morgan Stanley's board hired her to help vet Mr. Mack before he was named to head the company a year ago on June 30. Ms. White said she gave Mr. Mack a clean bill of health. She denies ever suggesting that the S.E.C. close its investigation.

    Mr. Specter and Mr. Grassley have also asked that the S.E.C. allow Congressional investigators to interview six S.E.C. staff members, including Ms. Thomsen and two of Mr. Aguirre's supervisors, Mark Kreitman and Robert Hanson.

    The letter states that Ms. Thomsen briefed the Finance Committee staff about Mr. Aguirre's allegations on May 3 and that the S.E.C. staff told Congressional investigators that the matter had been referred to the agency's inspector general, Walter J. Stachnik, who "conducted a complete and thorough review and had subsequently closed the case."

    The Times subsequently reported that the inspector general, as part of his review, had not interviewed Mr. Aguirre. The inspector general late last month reopened its inquiry into Mr. Aguirre's firing.

    But that decision did not appear to satisfy Mr. Specter and Mr. Grassley, who questioned whether the inspector general was "capable of conducting a reinvestigation worthy of any public confidence," according to their letter to Mr. Cox. Mr. Aguirre has told Senate investigators that before his firing, he was looking into profits Pequot made on positions it took, beginning in early July 2001, in shares of Heller Financial, a Chicago-based business lending concern.

    On July 30 that year, a unit of General Electric announced that it was acquiring Heller for $5 billion in cash. Heller's stock rose 50 percent on the news of the deal, indicating investors were surprised by the transaction, even though it had been the subject of rumors several months earlier.

    Mr. Aguirre said he suspected Mr. Mack might have leaked nonpublic information about the impending deal, though the former S.E.C. investigator has not publicly discussed why he suspected him. Morgan Stanley has denied that Mr. Mack did anything wrong.

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