[Congressional Record Volume 153, Number 19 (Wednesday, January 31, 2007)]
[Senate]
[Pages S1381-S1391]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
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.
[[Page S1382]]
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.
[[Page S1383]]
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.
[[Page S1384]]
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
[[Page S1385]]
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 Handheld
From: 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 2005
Subject: 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.
[From the Wall Street Journal, June 3, 2005]
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.
[[Page S1386]]
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.
____
To: 'Joe@' [Joe@
From: Samberg, Art
Re: 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.