The Congressional Record is a unique source of public documentation. It started in 1873, documenting nearly all the major and minor policies being discussed and debated.
“SEC INVESTIGATION FINDINGS” mentioning the U.S. Dept. of Justice was published in the Senate section on pages S1381-S1391 on Jan. 31, 2007.
The publication is reproduced in full below:
SEC INVESTIGATION FINDINGS
Mr. GRASSLEY. Mr. President, I am very happy to be on the floor with my colleague Senator Specter on something we have worked on together over a long period of time, and it falls very much into the category of congressional oversight. I am not going to go into the details now because I have a statement I want to use as a basis for our cooperation, and then you will hear from Senator Specter. I want to say how great it was to work with Senator Specter.
We are here to update the Senate on the interim Finance Committee findings of the joint investigation into the Securities and Exchange Commission that was conducted by the Finance Committee on the one hand, and the Judiciary Committee on the other, during the 109th Congress.
Before I go into details, there is another person I would thank for his cooperation. I want to take this opportunity to thank Securities and Exchange Commission Chairman Christopher Cox for his cooperation in providing access to thousands of pages of documents, as well as interviews with the staff at the Securities and Exchange Commission. Chairman Cox's cooperation was very essential to our ability to conduct our constitutionally mandated oversight of Federal agencies.
That said, I hope Chairman Cox takes today's findings to heart and will work to implement recommendations Senator Specter and I plan to put forth into the forthcoming final report.
Today, we want to update the Senate on some of the details of our investigation, which began early last year when allegations were presented to our staffs by former Securities and Exchange Commission attorney Gary Aguirre. Mr. Aguirre described the roadblocks he faced in pursuing an insider trading investigation while he was employed as a senior enforcement attorney at the Securities and Exchange Commission. Specifically, he alleged his supervisor prevented him from taking the testimony of a prominent Wall Street figure because of his ``political clout,'' which obviously should not be ignored if an agency is doing the job they should be doing.
Well, after Mr. Aguirre complained about that sort of preferential treatment given to somebody with ``political clout,'' his supervisors terminated him from the SEC while he was on vacation.
The interim findings we released today outlined the three primary concerns shared by Senator Specter and me. First, the SEC's investigation into Pequot Capital Management was plagued with problems from its beginning to its abrupt conclusion. Second, the termination of Mr. Aguirre by the SEC was highly suspect given the timing and the circumstances. Thirdly, the original investigation conducted by the SEC Office of Inspector General was both seriously and fatally flawed. The inspector general's failure required our committees to take a more thorough look at Mr. Aguirre's allegations and examine this matter closely. Taken together, these findings paint a picture of a troubled agency that faces serious questions about public confidence, the integrity of its investigations, and its ability to protect all investors, large and small, with an even hand.
The SEC should have taken Mr. Aguirre's allegations more seriously and very seriously. Instead, it does like too many agencies do when under fire: it circled the wagons and it shot a whistleblower--an all too familiar practice in Washington, DC. As we know, whistleblowers are about as welcome as a skunk at a picnic.
There is more information to follow and more details that need to come to light. Senator Specter and I together plan on releasing a comprehensive report in the near future. For now, I hope these interim findings will spur the SEC to consider meaningful reforms. I urge all my colleagues to read these important interim findings and to read the final report when it is made available.
I yield the floor.
The PRESIDING OFFICER. The Senator from Pennsylvania.
Mr. SPECTER. Mr. President, I would like to begin by thanking my distinguished colleague, Senator Grassley, for his outstanding work on the issues which he has just addressed. Senator Grassley and I have a long record of working together. We were elected together in November 1980 with the election of Ronald Reagan. There were 16 members of the incoming class of Republican Senators at that time. Two Democrats were elected.
In the intervening years, Senator Grassley and I have become the sole survivors, and we have done a great deal of work together.
We sit together on the Judiciary Committee, and Senator Grassley has had a very distinguished record as chairman of the Senate Finance Committee during the 109th Congress, and I chaired the Judiciary Committee during the 109th Congress. We are making a presentation today of interim findings on the investigation into potential abuse of authority at the Securities and Exchange Commission.
I join Senator Grassley in commending the Chairman of the SEC, Christopher Cox, for his cooperation, and I also join Senator Grassley in urging Chairman Cox and the SEC to do more. The oversight which our two committees undertook constituted a review of over 9,000 pages of documents and the interviewing of 19 witnesses over the course of 24 interviews.
The Judiciary Committee, on which we both serve, held a series of three public hearings regarding this matter, most recently on December 5, 2006, when the committee heard detailed sworn testimony from current and former SEC employees involved in the so-called Pequot investigation.
Based upon our review of the evidence, we have serious concerns, which are documented in a lengthy report, which we will make a part of the record, plus supplemental documents. Our investigation has raised concerns about, first, the SEC's mishandling of the Pequot investigation before, during, and after the firing of Mr. Gary Aguirre; secondly, the circumstances under which Mr. Aguirre was terminated; and third, the manner in which the SEC's Inspector General's Office handled Mr. Aguirre's allegations after he was fired.
Viewing these concerns as a whole, we believe a very troubling picture evolves. At best, the picture shows extraordinarily lax enforcement by the SEC, and it may even indicate a coverup by the SEC. We are concerned, first of all, as detailed in this report, that the SEC failed to act on the GE/Heller trades for years. We are concerned about the suggestions of political power which was present in the investigation, which has all of the earmarks of a possible obstruction of justice.
There is sworn testimony by Mr. Gary Aguirre that he was told in a face-to-face meeting with his immediate supervisor, Branch Chief Robert Hanson, that he could not take the testimony of Mr. John Mack, who was thought to have leaked confidential information. Mr. Aguirre testified that Mr. Hanson refused to allow the taking of testimony, as Mr. Aguirre pointed out, because of Mr. Mack's ``powerful political contacts.''
Now, Mr. Hanson denied to the SEC inspector general and to the committee that he ever said that, but we have contemporaneous e-mails, for example, where Mr. Hanson admitted to a very similar statement when he wrote to Mr. Aguirre on August 24, 2005, ``Most importantly, the political clout I mentioned to you was a reason to keep Paul,'' referring to a man named Paul Berger, ``and possibly Linda,'' referring to a woman named Linda Thomsen, ``in the loop on the testimony.'' Now, that is conclusive proof of the political clout or at least what Mr. Hanson thought was political clout when the SEC made a decision not to permit the taking of key testimony, the testimony of Mr. Mack.
Mr. Hanson submitted a written statement to the committee concluding that it was ``highly suspect and illogical'' to link Mr. Mack as the tipper, but in his prior writings he said, in written form, ``Mack is another bad guy.''
The rationale used by the SEC officials who denied Mr. Aguirre's request to take the testimony of Mr. Mack was that they wanted to get
``their ducks in a row.'' But the overwhelming evidence in the matter showed that the testimony should have been taken at a much earlier stage. There is no problem with taking testimony again if necessary at a later stage.
A key SEC investigator, Mr. Hilton Foster, with knowledge of the Pequot matter, said, ``As the SEC expert on insider trading, if people had asked me, `When do you take his testimony,' I would have said take it yesterday.''
Mr. Joseph Cella, Chief of the SEC's Market Surveillance Commission, told committee investigators, ``it seemed to me that it was a reasonable thing to do to bring Mack in and have him testify,'' and
``in my mind there was no down side.''
Mr. Mack's testimony was taken 5 days after the statute of limitations expired. But let me point out at this juncture that even though the statute of limitations has expired, there is injunctive relief and other action that can yet be taken by the SEC.
The problems with the Pequot investigation are amplified by the suspect termination of Mr. Aguirre. On June 1, 2005, in a performance plan and evaluation, Mr. Aguirre was given an acceptable rating, and Mr. Hanson, on June 29, 2005, noted Mr. Aguirre's ``unmatched dedication'' to the Pequot investigation and ``contributions of high quality.'' These evaluations were submitted to the SEC's Compensation Committee, which later approved Mr. Hanson's recommendation on July 18. Despite these favorable reviews, Aguirre's supervisors wrote a so-
called supplemental evaluation on August 1, and this reevaluation on August 1 occurred 5 days after Mr. Aguirre sent supervisor Berger an e-
mail saying that he believed the Pequot investigation was being halted because of Mr. Mack's political power.
There was an investigation by the inspector general of the SEC, and in my years in the Senate and hearing many inspectors general testify, I can't recall hearing an inspector general who said less, did less, and was more thoroughly inadequate in the investigation. For example, the inspector general's staff said, ``we don't second guess management's decisions. We don't second guess why employees are terminated.'' Well, that is precisely the purpose of having an inspector general. The purpose of having an inspector general is to review those kinds of decisions.
The inspector general testified that he was given advice by the Department of Justice, which made absolutely no sense. This appears in some detail in the record.
Then the inspector general initiated an attempt to take what was really punitive action against Mr. Aguirre by seeking enforcement of a subpoena for documents which were involving Mr. Aguirre's communications with Congress. Now, how can an individual communicate, talk to an oversight committee, such as the Judiciary Committee or the Finance Committee, if those communications are going to be subject to a subpoena by the SEC, by the inspector general? It is just preposterous. We have constitutional oversight responsibilities, and we obviously cannot conduct those responsibilities if the information we glean is going to be subject to somebody else's review.
The subpoena wasn't pursued, but the lack of judgment--and it is hard to find a strong enough word which is not insensitive to describe the inspector general's conduct in trying to subpoena the records of the Senate Judiciary Committee and the Senate Finance Committee. It just made absolutely no sense.
We hope that the SEC will reopen its investigation even though the statute of limitations has run on criminal penalties. It has run because of the inaction of the SEC waiting so long to start the investigation, then not taking Mr. Mack's testimony until 5 days after the statute of limitations had expired. Notwithstanding that, there are other remedies, such as disgorgement, which still may be pursued.
The oversight function of Congress, as we all know, is very important. Pursuing an investigation of this sort is highly technical, but we have done so, so far, in a preliminary manner. We believe this matter is of sufficient importance so that Senator Grassley and I have come to the floor jointly today to make a statement.
On behalf of Senator Grassley and myself, I ask unanimous consent that the full text of the interim findings on the investigation of potential abuse of authority of the Securities and Exchange Commission be printed in the Record, together with extensive documentation which supports the findings.
Again, we acknowledge the cooperation of Chairman Cox and the SEC, and we ask that further investigation be undertaken there. It is a matter of continuing oversight concern to Senator Grassley and myself and the respective committees where we now serve as ranking members.
Mr. President, I ask Senator Grassley, what did I leave out?
Mr. GRASSLEY. You didn't leave anything out, but we did ask unanimous consent that this be put in.
There being no objection, the material was ordered to be printed in the Record, as follows:
THE SPECTER-GRASSLEY INTERIM FINDINGS ON THE INVESTIGATION INTO
POTENTIAL ABUSE OF AUTHORITY AT THE SECURITIES AND EXCHANGE COMMISSION
Overview
These findings follow the Judiciary Committee's December 5, 2006, hearing that examined allegations that the Securities and Exchange Commission (SEC) abused its authority in handling its now-closed investigation of suspicious trading by the hedge fund Pequot Capital Management (``Pequot'' or
``PCM''). We submit these preliminary findings based upon the evidence received by both Committees to date because we believe it is important to share with the full Senate.
Between July 2006 and the end of the 109th Congress, the Senate Judiciary and Finance Committees conducted a joint investigation into allegations raised by former SEC employee Gary Aguirre. Mr. Aguirre contends that his efforts to investigate potentially massive insider trading violations by Pequot were thwarted by his superiors when his investigation increasingly focused on current Morgan Stanley Chief Executive Officer John Mack. Mr. Aguirre also alleges that his insistence on taking Mr. Mack's testimony met resistance within the SEC and ultimately led to his firing. In addressing these allegations, we have focused on the internal processes of the SEC. We have not attempted to decide the merits of the underlying Pequot insider trading investigation and, at this juncture, take no position on whether Pequot or Mack violated any securities laws.
To date, Committee investigators have received and reviewed over 9,000 pages of documents and interviewed nineteen (19) key witnesses over the course of twenty-four (24) interviews. The Judiciary Committee also held a series of three (3) public hearings regarding this matter--most recently on December 5--when the Committee heard detailed sworn testimony from current and former SEC employees involved in the Pequot investigation.
Based on our review of this evidence we have serious concerns. As discussed further below, our primary concerns involve: (1) the SEC's mishandling of the Pequot investigation before, during, and after Aguirre's firing; (2) the circumstances under which Aguirre was terminated; and (3) the manner in which the SEC's Inspector General's office handled Aguirre's allegations after he was fired. Viewing these concerns as a whole, we believe a troubling picture emerges. At best the picture shows extraordinarily lax enforcement by the SEC. At worse, the picture is colored with overtones of a possible cover-up. Either way, we believe the SEC must take corrective and preventative action to ensure that future investigations, internal and external, do not follow the same path as the Pequot matter.
Findings
The SEC's Investigation of Pequot was Plagued with Problems
The SEC Failed To Act on the GE/Heller Trades for Years
The alleged insider trading occurred in July 2001 when Pequot CEO Arthur Samberg began purchasing large quantities of Heller Financial stock while also shorting General Electric (``GE'') stock a few weeks before the public announcement that GE would purchase Heller. On January 30, 2002, the NYSE ``highlighted'' some of these trades for the SEC as a matter that warranted further scrutiny and surveillance. But it appears that the SEC did next to nothing to investigate these trades until after Aguirre joined the Commission over 2 years later on September 7, 2004. In fact, it is clear to us that Aguirre was the driving force behind the investigation of the GE-Heller trades that had otherwise remained dormant at SEC since 2002.The Circumstances Surrounding the Investigation of John Mack as the Potential Tipper Are Highly Suspect
The evidence shows that Aguirre's immediate supervisors, Branch Chief Robert Hanson and Assistant Director Mark Kreitman, initially were enthusiastic about investigating Pequot and Mr. Mack as the possible supplier of inside information to Pequot. Indeed, after Aguirre developed a plausible theory connecting Mack to the trades, Hanson wrote on June 3, 2005, in an email that ``Mack is another bad guy
(in my view)'' (Attachment 1). And on June 14, 2005 Aguirre's supervisors Hanson and Kreitman authorized him to speak with federal prosecutors concerning the trades. Six days later on June 20, 2005, in response to a more comprehensive analysis of his theory regarding Mack, Hanson wrote: ``Okay Gary you've given me the bug. I'm starting to think about the case during my non work hours'' (Attachment 2).
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 CEO. Specifically, we are concerned about the circumstances leading to the decision by Aguirre's supervisors to delay taking Mack's testimony. The Judiciary Committee received sworn testimony from Aguirre that he was told in a face-to-face meeting with his immediate supervisor, Hanson, that he could not take Mack's testimony because of his ``powerful political contacts.'' While Hanson denied to the SEC/IG and to the Committees that he ever said that, we question his denial because of conflicting contemporaneous emails. For example, Hanson admitted to a very similar statement when he wrote to Aguirre on August 24, 2005, ``Most importantly the political clout I mentioned to you was a reason to keep Paul [Berger] and possibly Linda [Thomsen] in the loop on the testimony'' (Attachment 3, emphasis added). He also used the term ``juice'' when referring to Mack's attorneys (Attachment 4). Another witness testified before the Judiciary Committee that Hanson referred to Mack's
``prominence'' as a reason for not taking his testimony
(Attachment 5).
To be sure, Hanson's supervisor, Mark Kreitman, also referred to John Mack's ``prominence.'' Speaking about former U.S. Attorney Mary Jo White's contact with SEC Enforcement Director Linda Thomsen regarding the Pequot investigation, Kreitman told the Inspector General's Office, ``White is very prestigious and it isn't uncommon for someone prominent to have someone intervene on their behalf'' (Attachment 6). Kreitman's supervisor, Associate Director Paul Berger, also brought up the issue of prominence, when asked whether he could remember examples of witnesses other than John Mack for whom he required a staff attorney to prepare a memorandum to justify the taking of investigative testimony (Attachment 7).
We also have reason to question Hanson's credibility given certain inconsistent statements that he gave to the Judiciary Committee during its December hearing. Specifically, we find it difficult to reconcile Hanson's submitted written statement to the Committee concluding that it was ``highly suspect and illogical'' to link Mack as the tipper with his prior writings that ``Mack is another bad guy (in my view)''
(Attachment 8). Moreover, it bears noting that despite Hanson's statement that Aguirre's theory was ``highly suspect and illogical'' the SEC ultimately took Mack's testimony on August 1, 2006. Furthermore, we are troubled by Hanson's failure to recall a key investment that Mack entered into with the help of Pequot prior to his alleged passing of inside information to Pequot CEO Samberg regarding the GE-Heller transaction. Hanson's failure to recall this transaction at the hearing raises doubt as to whether Aguirre's theory regarding Mack was ever taken seriously by his supervisors at the SEC.
Moreover, we question the rationale advanced by Aguirre's supervisors in not taking Mack's testimony: to get ``their ducks in a row.'' While reasonable minds may disagree on an appropriate investigative strategy, the SEC's rationale for delaying the taking of Mack's testimony runs contrary to what insider trading experts have told us and contrary to what others within the SEC believed at the time. According to Mr. Hilton Foster, an experienced former SEC investigator with knowledge of the Pequot matter: ``as the SEC expert on insider trading, if people had asked me, `when do you take his testimony,' I would have said take it yesterday.'' In addition, Joseph Cella, Chief of the SEC's Market Surveillance Division, told Committee investigators, ``it seemed to me that it was a reasonable thing to do to bring Mack in and have him testify,'' and ``in my mind there was no down side[.]''
The explanation offered by Aguirre's supervisors that without direct evidence that Mack had knowledge of the GE transaction--what Aguirre's supervisors referred to as proving Mack went ``over the wall'' (Attachment 3)--the deposition would consist simply of a denial by Mack is not at all convincing. Indeed, although the SEC apparently never found such direct evidence, the SEC did manage to question Mack for over 4 hours when it finally took his testimony on August 1, 2006, after the statute of limitations had expired. And although Aguirre's supervisors advance the rationale that taking Mack's testimony in the summer of 2005 would have been merely premature, this notion is contradicted by the staff attorney who took the lead in the investigation after Aguirre was fired. In particular, shortly before taking Mack's deposition in August 2006, that attorney wrote explicitly in a July 19, 2006, email that the rationale for taking Mack's testimony was not a matter of being
``premature'' but rather an issue of establishing the necessary ``prerequisite'' of when Mack had obtained inside information (Attachment 8).
The purpose of taking investigative testimony is not to confront a witness with accusations of wrongdoing, as Aguirre's supervisors seem to believe. Rather it is to gather information that helps to either confirm or rule-out working theories, which by their nature must be speculative at the beginning of the investigation. One SEC witness who wishes to remain anonymous told the Committees' investigators that SEC training personnel teach new attorneys that:
it was important to immediately ``nail down'' the stories of any individuals who possibly had been involved in the suspicious trades so that the person could not adjust their story to account for any information we later uncovered. This also served to assist the direction of the investigation because it allowed us to immediately identify whether or not any subsequent evidence supported the individual's initial statement thereby giving us a strong indication of whether the initial statement appeared to be true and what, if any, additional investigation needed to be conducted (such as the need for more in-depth testimony if we found contradictions).
Although the SEC finally took Mack's testimony in August 2006, we are concerned about the circumstances under which it was done. 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. We question why the SEC failed to take this obvious step earlier. The evidence suggests that his testimony was taken primarily to deflect public criticism for not having taken it much earlier. It took the SEC over a year to ask John Mack about his communications with Arthur Samberg and Pequot's trading in Heller and GE. By contrast, it took Mary Jo White only two days to do so. On the Sunday after Morgan Stanley's Board of Directors hired her and her firm, Debevoise & Plimpton, to look into Mack's potential exposure in the Pequot investigation, she quickly obtained documents and questioned Mack about specific emails with Arthur Samberg. The SEC should have been at least as curious about Mack's answers as Mary Jo White was.The Problems With the Pequot Case Are Amplified by the
Testimony of Other SEC Employees
Our concerns are further heightened by the testimony of one key SEC employee who raised issues with the manner in which the Pequot investigation was handled. Specifically, the Judiciary Committee received compelling sworn testimony from SEC Market Surveillance Branch Chief Eric Ribelin who sought recusal from the Pequot investigation shortly after Aguirre's termination because, as he alleged at the time, ``something smells rotten.'' Ribelin also explained to the Judiciary Committee that he believed Aguirre's supervisors, especially Associate Director Paul Berger, failed to ``support the aggressiveness and tenacity of [Aguirre]'' (Attachment 5). This is significant testimony from a witness who felt it was his duty to come forward and testify. As such, we trust that Commissioners at the SEC will take every step to ensure that no retaliation against Ribelin will occur.
The SEC's Termination of Aguirre is Highly Suspect
The documents and testimony adduced by the Committees show that Aguirre, a probationary employee while at the SEC, was a smart, hardworking, aggressive attorney who was passionately dedicated to the Pequot investigation. These positive attributes were noted in a June 1, 2005 ``Performance Plan and Evaluation'' prepared by Kreitman which give Aguirre an
``acceptable'' rating for numerous work criteria, and then followed by a more detailed ``Merit Pay'' evaluation written by Hanson on June 29, 2005, which noted Aguirre's ``unmatched dedication'' to the Pequot investigation and ``contributions of high quality.'' These evaluations were submitted to the SEC's Compensation Committee which later approved Hanson's recommendation (among others) on July 18, 2005.
Despite these favorable reviews, Aguirre's supervisors
(Kreitman, Hanson and Berger) wrote a so-called
``supplemental evaluation'' on August 1 that spoke negatively of Aguirre. Aguirre's supervisors never shared this evaluation with Aguirre and indeed admitted that they are
``fairly rare''. In fact, during the December 5, 2006 hearing, current SEC supervisors could not recall other instances where a supplemental evaluation was prepared for an employee. We are skeptical of the supervisors' explanations regarding the creation of this document. According to Hanson and Kreitman, their initial positive evaluations covered only the period ending April 30, 2005, thus suggesting that the evaluation was accurate with respect to performance up to that date. But these same supervisors also testified that the initial evaluations were perhaps too generous, thus suggesting that there were performance issues that should have been addressed in the initial evaluation and Merit Pay recommendation.
Rather than taking them at face value, we have attempted to assess the credibility of the negative statements Aguirre's supervisors made about him in his re-evaluation, in his notice of termination, in interviews with the SEC/IG, in interviews with Committee staff, and in their hearing testimony. In doing so, we have noted the considerable lack of contemporaneous documents corroborating the concerns they raised.
For example, the IG's closing memo cites his supervisors' concerns about subpoenas that Aguirre issued allegedly in violation of law. While his supervisors now claim that this was a significant error, which seriously undermined their confidence in Aguirre, they have produced no documents to the Committees suggesting that they viewed it that way at the time. Another example is Hanson's allegation that Aguirre behaved ``unprofessionally'' while taking the testimony of Arthur Samberg. This allegation is based on second-hand knowledge, as Hanson did not actually attend the testimony. Moreover, the SEC has not produced records to the Committees suggesting that Hanson or any of his other supervisors were concerned at the time about the way Aguirre took the Samberg testimony. In fact, Hilton Foster told the Committees that he planned to use a portion of the transcript as a model for how to take testimony in his training of new SEC attorneys. A third former SEC employee told staff that the testimony of current SEC supervisors at the December 5, 2006 hearing concerning the reasons for terminating Aguirre were not consistent with that employee's experience with Aguirre.
Aside from these inconsistencies, the greater concern is with the timing of Aguirre's re-evaluation. Aguirre's supervisors prepared the re-evaluation on August 1 after the Compensation Committee (on which Berger sat) had already approved the merit pay increase for Aguirre and most significantly, 5 days after Aguirre sent Berger an email saying that he believed the Pequot investigation of Mack was being halted because of Mack's political power.
Finally, there are questions about Paul Berger's outside employment with the law firm of Debevoise & Plimpton--the private firm that represented John Mack's prospective employer during the time that Berger allegedly vetoed efforts to take Mack's testimony. Although Berger testified recently before the Judiciary Committee that he ``first approached Debevoise in January of 2006'' (at which time he recused himself from the Pequot investigation and all other matters in which Debevoise had entered an appearance), Committee investigators identified a September 8, 2005, email suggesting that a contact was made on behalf of Berger through an intermediary who was also seeking employment with the same firm at the time. While we have found no proof of actual quid pro quo for Berger's employment in exchange for the favorable treatment of Mack, the SEC should take steps to avoid the appearance of impropriety of the sort that this email seems to suggest. This is especially true given that this contact on Berger's behalf occurred just days after Aguirre was fired and months before Berger recused himself from the Pequot matter.
The Follow-Up SEC Inspector General's Investigation Was Seriously
Flawed
We are deeply troubled by what appears to us to be a cursory investigation of Aguirre's allegations by the SEC's Office of Inspector General, headed by Walter Stachnik. Subsequent to SEC Chairman Cox's September 7, 2005, referral of Aguirre's allegations to the IG, Stachnik failed to interview Aguirre or any of the other SEC employees mentioned in Aguirre's letter to Chairman Cox. The testimony of one such witness, Eric Ribelin, saw the light of day only through our investigation. Moreover, our concerns were further enhanced when the IG's investigators repeatedly told our staff that in investigating Aguirre's allegations of improper motivation for his termination, ``we don't second guess management decisions . . . we don't second guess why employees are terminated.'' (Attachment 9). Such statements are fundamentally incompatible with the mission and purpose of the Office of Inspector General. This may explain why the IG spoke only to Aguirre's supervisors, accepted everything they said at face value, and reviewed only documents identified by those supervisors. However, it is certainly not a recipe for an independent and thorough investigation.
Furthermore, the IG initially attempted to take punitive action against Aguirre by seeking enforcement of a subpoena for documents in his possession--including confidential communications with Congress. We are pleased that the scope of the subpoena was subsequently narrowed to exclude communications with Congress. Nevertheless, Stachnik's continued insistence that his first investigation was
``professional,'' and his refusal to answer the Committee's questions about the subpoena at the instruction of the Justice Department are similarly troubling. The SEC's IG is supposed to provide employees an alternate, objective, open-minded avenue for reporting abuse of authority or other misconduct. At no time, before or after his termination, was Aguirre able to obtain at the SEC an objective and thorough consideration of his concerns. It is unfortunate that he had to reach out to our Committees to obtain such a review.
Conclusion
The handling of the Pequot investigation, the basis for and the timing of Aguirre's termination, and the woefully inadequate IG investigation of serious allegations of abuse of authority, present a very troubling picture. Based upon the evidence we have reviewed to date, the SEC's handling of the Pequot investigation shows either inexplicably lax enforcement or possibly a willful cover-up. Either way, the SEC must review this matter and take appropriate corrective measures. Anything less will undermine public confidence in our capital markets. We owe it to the public to ensure that securities enforcement is rigorous and unbiased.
As such, we hope the SEC will consider re-opening its investigation into the Pequot matter given our findings. While the statute of limitations has run on criminal penalties and civil penalties related to the underlying trades, we understand that other remedies, such as disgorgement, may still be pursued. There also may be reasonable cause for the SEC or the Department of Justice to investigate whether any testimony given in the underlying Pequot investigation was false. We urge the SEC to take Aguirre's allegations seriously and seek to improve the management and operations of the Commission based on lessons learned from this controversy. We anticipate transmitting more detailed findings, conclusions and recommendations to the Senate during the 110th Congress after we conclude our assessment of the evidence adduced to date.
Attachment 1
From: Hanson, Robert.Sent: Friday, June 03, 2005 10:00 a.m.To: Aguirre, Gary J.Subject: Re: Possible tipper new Pequot Chairman?
Mack is another bad guy (in my view).
Sent from my BlackBerry Wireless HandheldFrom: Aguirre, Gary J.To: Ribelin, Eric; Foster, Hilton; Eichner, Jim; Conroy,
Thomas; Glascoe, Stephen; Miller, Nancy B.CC: Hanson, Robert; Kreitman, Mark J.Sent: Fri Jun 03 08:36:07 2005Subject: Possible tipper new Pequot Chairman?
John Mack, who came up on radar screen as possible GE-Heller tipper, has just become chairman of Pequot Capital, according to WSJ article below. Mack moved from Morgan Stanley, adviser in Heller acquisition, to CSFB, also adviser in Heller, in late July 2001, the month of acquisition. The are hundreds of Pequot e-mails referring to Mack, including a dozen in July 2001. See e-mail below between Samberg and his son referring to Mack (``It's nice to have friends in high places . . .:)'' Is there something to this perverse logic: Mack is the only person in the world who would have as much to loose as Samberg if we could prove that he provided material-nonpublic info to Samberg. Who safer for Samberg to head Pequot and keep its secrets? Please note the happy face which has already come up twice in relating to possible flow of insider info. Ironically, Mack's article quoted below is C-1 of WSJ, just as was when Samberg's exchanged e-mails below.
John Mack To Join Pequot Hedge Fund in Chairman's Role
(By Gregory Zuckerman and Ann Davis)
In the latest example of a prominent financial figure entering the hedge-fund world, former Wall Street heavy-hitter John Mack is joining Pequot Capital Management Inc. as chairman.
Mr. Mack, 60 years old, was co-chief executive of Credit Suisse Group and CEO of that bank's Credit Suisse First Boston until last year, and previously was president of Wall Street firm Morgan Stanley. He will work with Pequot's founder, Art Samberg, to help lead the firm into new markets, recruit money managers and help guide the Westport, Conn., firm. Hedge funds are lightly regulated investing pools, traditionally for the wealthy and institutions.
[John Mack] Mr. Samberg, 64, an investor with a well-regarded record, will remain chief executive of Pequot, which manages about $6.5 billion, effectively running the firm day-to-day. (Meanwhile, a British financial regulator, Gay Huey Evans is joining a hedge fund run by Citigroup.)
Speculation about where Mr. Mack would land after he was replaced last year at CSFB has been something of a parlor game on Wall Street. Various companies put out feelers,including Goldman Sachs Group Inc., and he was approached as a possible candidate to run mortgage giant Fannie Mae, among other positions, according to people close to the matter. Some expected Mr. Mack, who is active in politics, to seek an office or ambassadorship.
But like many Wall Street traders and analysts lately, Mr. Mack is heading for the hedge-fund world, where assets are growing and the rewards can be lucrative. Hedge funds generally charge a management fee and a percentage of the firm's investment gains, meaning that stellar results bring big paydays. In addition to a salary, Mr. Mack will receive equity in Pequot, according to the firm.
Mr. Mack wouldn't address details of other possible job offers but said in an interview that he was attracted to Pequot because he and Mr. Samberg have been friends for more than a decade, starting when Mr. Mack gave some money to Mr. Samberg to invest. Mr. Mack also said he was eager to help the firm push into new investment areas.
[Arthur Samberg] ``Many people who have called me for a job want me to fix something, but I'd like to focus my job on building,'' Mr. Mack said.
For Pequot, the hiring of Mr. Mack is part of a change in recent years from traditional hedge-fund strategies, such as buying and selling U.S. and European shares. Returns for some hedge-funds have fallen, amid concern by some that too many savvy ``hedge funds were seeking the same opportunities in the market.
Hedge funds lost less than 1 percent this year through April--results that topped the returns of the market though they pale in comparison to the double-digit gains hedge funds scored in recent years. Pequot's various hedge funds are up about 3 percent in 2005, according to investors. But Mr. Samberg predicts that the growth of the hedge-fund business will lead to a shakeout that forces as many as 30 percent of existing hedge funds to throw in the towel, even as institutions continue to up their investments in so-called alternative investments. At the same time, the market is neither cheap nor especially expensive, presenting few obvious opportunities. That is why Pequot has been looking elsewhere lately, starting hedge funds focused on emerging markets, parts of the debt world and other strategies.
As reported in The Wall Street Journal, Pequot recently formed a joint venture with Singapore-based Pangaea Capital Management to invest in distressed assets in Asia, including real estate.
Mr. Mack's move effectively blunts speculation that he might join a new investment-banking boutique with some recently departed top Morgan Stanley executives. A group of former Morgan alumni waged a loud campaign for the ouster of Morgan CEO Philip Purcell this spring, after a management shakeup and several executive departures. Mr. Mack, who clashed with Mr. Purcell before he left the firm in 2001, has kept a studied distance from the dissidents.
Mr. Mack's move effectively blunts speculation that he might join a new investment-banking boutique with some recently departed top Morgan Stanley executives. A group of former Morgan alumni waged a loud campaign for the ouster of Morgan CEO Philip Purcell this spring, after a management shakeup and several executive departures. Mr. Mack, who clashed with Mr. Purcell before he left the firm in 2001, has kept a studied distance from the dissidents.
Mr. Mack will be asked to tap into his wide-ranging contacts to find new investment ideas around the globe, as well as coach Pequot's investment team. Mr. Mack is expected to help smooth the way for Pequot fund managers by introducing them to company executives.
``I see an opportunity to build something really great here and John will be a big part of that,'' Mr. Samberg said.
Mr. Samberg's previous alliance with a high-powered partner ended when Pequot co-founder Dan Benton quit the firm in 2001, taking about $7 billion of investor money with him to his new firm, Andor Capital Management LLC. Mr. Samberg says he is confident his new partnership with Mr. Mack will work, in part because of his close relationship with Mr. Mack. In recent months, Mr. Mack has been using spare space in Pequot's New York office, weighing his options.
The move to bring in an established Wall Street executive like Mr. Mack could signal that Pequot, like some other hedge-fund firms lately, might be interested at some point in selling itself, or part of the firm, to a mainstream Wall Street firm or even going public through. a stock offering, although Mr. Samberg says he has no plans to do so. J.P. Morgan Chase & Co. recently purchased a majority stake in big hedge-fund firm New York-based Highbridge Capital Management., and Lehman Brothers Holdings Inc. has purchased 20 percent of Ospraie Management LP, a New York hedge fund.
Merrill Lynch & Co. agreed to provide $300 million in capital for a venture with Pequot to place money with 15 to 30 new fund managers. Pequot is expected to offer the managers research and administrative support--part of a trend of hedge funds providing services also offered by investment banks., blurring the lines between the two.
____ From: Samberg, ArtRe: John Mack.Date: 07/12/2001.
Spoke to him last night and commented on how up he sounded. He said he was close to something, but I didn't know it would be today. Sounds like the perfect opportunity for him.
From: Joe Samberg.
