Hedge Fund Escapes Charges
Friday, October 6, 2006
Securities and Exchange Commission staff will recommend that the agency not pursue insider trading charges against $7 billion hedge fund Pequot Capital Management Inc., its management team, and former chairman John J. Mack, according to a letter sent to the fund's investors yesterday and three sources familiar with the investigation.
Regulators had been investigating whether Mack, who now serves as chief executive of investment bank Morgan Stanley, improperly tipped Pequot officials five years ago to a looming merger between General Electric Capital Corp. and Heller Financial Inc.
The investigation became public this summer after former SEC enforcement lawyer Gary J. Aguirre told a congressional committee that he was dismissed last year for pressing to interview Mack under oath. A different agency lawyer ultimately deposed Mack a few weeks after the hearing.
Arthur J. Samberg, founder and chairman of Pequot, said in his letter addressed "to clients and friends" that regulators had not formally closed the two-year-old investigation but that all signs pointed to its quick end. Jonathan Gasthalter, a spokesman for the fund, declined to comment further, as did SEC spokesman John Nester.
The investigation of Pequot, whose headquarters are in Westport, Conn., was one of several the agency is conducting into the trading practices of hedge funds, lightly regulated investment pools designed for wealthy and sophisticated investors. Earlier this year, a federal appeals court invalidated a rule that would have required hedge funds to open their books for inspection and to provide basic information to the SEC. Administration officials are studying hedge funds, which have multiplied rapidly and which now appeal to public pension funds and retail investors, not only the financial elite.
SEC enforcement chief Linda Chatman Thomsen told the Senate Judiciary Committee last week that insider trading by hedge funds is "an area of significant concern to the commission." Thomsen testified that the agency had brought five such cases against hedge funds or their advisers in the fiscal year that ended last week.
But without e-mails, documents or an outright admission by someone involved in a case, insider trading charges can be difficult for regulators to prove.
Mack, a longtime friend of Pequot's founder who for a time served as chairman of the fund, had for months denied through a Morgan Stanley spokeswoman that he engaged in wrongdoing. A Morgan Stanley representative declined to comment on the apparent resolution of the probe. The sources who spoke about the status of the investigation spoke on condition of anonymity because it has not been completed.