New Evidence Emerges in Closed Insider-Trading Case

Arthur J. Samberg of Pequot Capital.
Arthur J. Samberg of Pequot Capital. (Brian Dorsey - Via Bloomberg News)
By Amit R. Paley
Washington Post Staff Writer
Friday, December 12, 2008

New evidence has emerged in an insider-trading investigation that the Securities and Exchange Commission closed two years ago without filing charges, raising questions on Capitol Hill about the government's oversight of what was once one of the nation's most prominent hedge funds.

According to documents, the hedge fund -- Pequot Capital Management -- secretly began to pay $2.1 million to a key witness in the case last spring, just three months after several senators called on the SEC to reopen its investigation.

Top Republicans on the Senate Finance and Judiciary committees asked Pequot's chairman this week to provide records related to the payments. The FBI is also looking into the matter, according to people familiar with the case.

"The timing is suspicious and the explanation looks thin, so the payments should be investigated to determine if they were legitimate," said Sen. Charles E. Grassley (R-Iowa), the ranking member of the Senate Finance Committee, who led the congressional probe into the matter.

A spokesman for Pequot said that the payments were related to an employment issue and that the firm "will cooperate fully with the senators' request."

Allegations about insider trading at Pequot -- which had $15 billion under management in 2001 -- date to January 2002, when the New York Stock Exchange flagged several trades as questionable. The SEC intensified an investigation into the hedge fund in 2004, but the agency and federal prosecutors declined to bring any charges and closed the case in late 2006.

The case began to attract congressional scrutiny after SEC lawyer Gary Aguirre was fired from the agency in late 2005 and filed a complaint alleging that the Pequot investigation had been botched.

In late January 2007, prominent senators called on the SEC to reopen the case and issued an interim version of a 707-page report on the matter.

Three months later, Pequot paid $700,000 to a key witness in the case, according to documents that emerged last month in divorce proceedings between the witness and his ex-wife in a Connecticut court. The witness, David Zilkha, was then paid the same amount exactly one year later and is scheduled to receive a final installment of $700,000 in 2009, the court documents show.

"The payments made to David Zilkha are pursuant to the settlement of a civil claim related to his employment and termination by Pequot that was first presented to the firm in January 2007 after all investigations had been closed," Pequot spokesman Jonathan Gasthalter said in an e-mail.

Personal e-mails between Zilkha and his attorneys show that Zilkha, who was let go in 2001, was advised in 2004 that he had a "marginal" claim against Pequot. "You were an acknowledged at-will employee, meaning you could quit or be fired at will. This makes any recovery difficult," one attorney wrote.

An attorney for Zilkha did not return phone and e-mail messages this week, and Zilkha could not be reached. Spokesmen for both the SEC and the FBI also declined to comment for this story.

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