In 2004-2005 Gary Aguirre led a Securities and Exchange Commission (SEC) investigation into insider trading involving hedge funds and investment banks. Basically, the investment banks made large profits from commissions from hedge funds and in return tipped off these funds ahead of ordinary investors on lucrative deals about to be announced to the markets. Specifically, Aguirre was looking into Pequot Capital Management run by Arthur Samberg which made $18 million in one such deal in 2001 when it received information that General Electric Capital Corporation intended to buy Heller Financial. In mid-June 2005, Aguirre sought to subpoena John Mack, chief investment executive at Morgan Stanley, an investor in Pequot, and friend of Samberg, together with emails exchanged between the two. In this he was initially backed by his boss Robert Hanson but Hanson soon backtracked warning that Mack had powerful political connections. He wasn’t kidding. Mack was a 2004 Bush Ranger, an elite group of political fundraisers who collected $200,000 or more in bundled donations. Enter at this point Mary Jo White a corporate fixer at the law firm of Debevoise & Plimpton (see item 229) representing Morgan Stanley. She went over Aguirre’s head directly to the Enforcement Director at the SEC Linda Thomsen and the subpoenas that Aguirre had sought were blocked. Aguirre protested, announced his intention to resign, but then withdrew it. Meanwhile his supervisors had decided to fire him and orchestrated a special negative evaluation to justify their action. On September 1, 2005, Aguirre was fired at the end of his one year probationary period. On his last day, he wrote a letter to SEC Chairman Christopher Cox outlining the preferential treatment John Mack had been given.
On June 28, 2006, Aguirre testified to Congress about these events and in August 2007 the Senate Finance and Judiciary Committees issued a 711 page report on it. The report noted that shortly after Aguirre was hired (September 2004) by the SEC and the Pequot investigation began (October/November 2004) in January/February 2005, an attorney for Pequot Audrey Strauss met the then Enforcement Director Stephen Cutler. As a result of that meeting, the investigation into Pequot was narrowed making it more difficult to establish a pattern of illegality. The report also found that the associate director of enforcement Paul Berger who was a supervisor of Aguirre and in his reporting chain of command had not recused himself from the Pequot investigation until early 2006 although an email from a colleague of Berger just days after Aguirre’s firing showed that Berger had already expressed an interest in working at Debevoise at that point. And, in fact, Berger did end up accepting a partnership there in June 2006.
An investigation by the SEC’s lackadaisical Inspector General Walter Stachnik initiated by a complaint from Aguirre was also criticized. According to the Senate report, Stachnik “failed to conduct a serious, credible investigation of Aguirre’s claims. The OIG did not attempt to contact Aguirre. It merely interviewed his supervisors informally on the telephone, accepted their statements at face-value, and closed the case without obtaining key evidence.”
As for John Mack, it came out that Samberg gave him preferential investment opportunities in April and May 2001. Mack at the time of the GE-Heller deal had just left Morgan Stanley and was about to take up the position of CEO of Credit Suisse First Boston. Both companies were involved in setting up the Heller deal. Mack contacted Samberg on June 29, 2001, and on July 2, 2001 Pequot began buying large amounts of Heller stock and shorting GE. On July 30, the GE-Heller deal was announced and Pequot and Samberg made a killing. Mack was eventually called in to testify before the SEC in June 2006, a year after Aguirre’s attempt and just days after the statute of limitations had run out on him. Mark Kreitman, an assistant director of enforcement and Hanson’s immediate superior, assigned a staff attorney with 2 days notice to take Mack’s testimony. Kreitman told the attorney, “You don’t need to prepare that much for it.” On November 30, 2006, the SEC closed the joke that was its investigation into Pequot.
In all this, the SEC proved itself to be not the watchdog of Big Money but its lapdog. Taking this into account, is it really any surprise that they “overlooked” the subprime debacle until it hit?
An October 6, 2008 New York Times story reports that the current SEC Inspector General David Kotz issued a follow up report which substantiated Gary Aguirre’s account of events and recommended disciplinary action against his superiors Linda Thomsen, Robert Hanson and Mark Kreitman. The Pequot investigation remains closed.