[Congressional Record (Bound Edition), Volume 153 (2007), Part 2]
[Senate]
[Pages 2830-2840]
[From the U.S. 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.
  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

[[Page 2831]]

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:

[[Page 2832]]



    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

[[Page 2833]]

     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,

[[Page 2834]]

     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. 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.