Tuesday, December 05, 2006

Specter, Grassley eye SEC probe of hedge fund and Morgan Stanley CEO

December 5 2006: 4:21 PM EST

WASHINGTON (Reuters) -- Two senior lawmakers Tuesday questioned how market regulators handled an insider trading probe involving hedge fund Pequot Capital and John Mack, CEO of Wall Street investment house Morgan Stanley.

Pennsylvania Republican Sen. Arlen Specter, chairman of the Senate Judiciary Committee, said he was disturbed by the Securities and Exchange Commission's management of the matter.
"At best it looks like extraordinarily lax enforcement by the Securities and Exchange Commission ... At worst, it has the overtone of a possible cover-up," Specter said at a hearing by his committee that looked into the Pequot investigation.

At the close of the hearing, where officials involved in the probe testified, Specter said, "We are not finished with this. There are people under oath with directly contradictory testimony. It's very, very troubling."

The Pequot affair emerged earlier this year when former SEC attorney Gary Aguirre alleged he was fired and the probe, which he had led, was halted after it got too close to Mack.

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Aguirre said he suspected that Mack tipped Pequot to a 2001 merger deal that allowed the hedge fund to make an illegal $18 million insider-trading profit. At the time, Mack worked at a different investment bank. He earlier had led Pequot, as well.

Aguirre claimed he wanted to subpoena Mack, but was stopped by SEC supervisors because of Mack's political clout. When he pressed the issue, Aguirre said, he was fired, despite being praised earlier by superiors and getting a pay raise.

Iowa Republican Sen. Charles Grassley said at the hearing that the case "raises serious questions for me about whether 'captains of industry' get the same treatment as regular investors or whether they get treated with kid gloves."

SEC officials told the Senate panel that Aguirre was fired because of a series of problems at work and that the Pequot probe was not influenced by political sensitivities.

SEC Enforcement Director Linda Thomsen said Aguirre's allegations "are simply not true."
Aguirre was dismissed from the SEC on Sept. 1, 2005, after a year on the job, due to his "inability to work effectively with other staff and his unwillingness to operate within the Securities and Exchange Commission process," Thomsen said.

SEC Enforcement Division Branch Chief Robert Hanson told the committee that he has no reason to believe political considerations came into play in the Pequot probe. SEC Enforcement Division Assistant Director Mark Kreitman, a former Aguirre supervisor, said at the hearing that Aguirre threw "tantrums" at the office, "storming down the halls in a furious crouch and abruptly left the office without leave on a number of occasions." He said no politics affected the probe.

Responding to SEC officials, Aguirre told the committee: "I have not seen a single piece of paper backing anything that they have said and I've been trying to get it."

A second individual raised questions about the handling of the investigation at the hearing. Eric Ribelin, branch chief in the SEC's Office of Market Surveillance, told the committee he was "stunned" and "outraged" when Aguirre was dismissed.

"Gary Aguirre was a tenacious investigator in an aggressive investigation. In my judgment, he's a professional," said Ribelin, who worked with Aguirre on the Pequot inquiry.

He said something "smelled rotten" about the probe. He questioned the commitment to it of
other SEC officials.

Morgan Stanley (Charts), which competes with investment banking giants Bear Stearns (Charts) and Goldman Sachs (Charts) among others, said last week that the SEC had formally cleared Mack in the probe of Pequot. The hedge fund said in October it had been cleared.
No SEC charges have been filed against anyone in the Pequot matter. Thomsen said Pequot was thoroughly investigated. She added: "We did not find sufficient evidence to support an enforcement action. Accordingly our investigation was closed."

Hedge funds have gained prominence among investment banks in recent years. Lehman Brothers Holdings Inc. (Charts) last year bought a 20 percent stake in Ospraie Management LP, a $2 billion hedge fund firm that invests in commodities and raw materials. Merrill Lynch (Charts) in October bought a minority stake in DiMaio Ahmad Capital, which manages $2 billion in assets.


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