SEC settles charges with Pequot firm over insider trading
Friday, May 28, 2010
The Securities and Exchange Commission settled insider-trading charges Thursday with a prominent hedge fund and its chief executive after facing withering criticism from lawmakers that the agency had mishandled an earlier investigation of the matter.
Pequot Capital Management and its chief executive, Arthur Samberg, agreed to pay $28 million to settle the SEC's charges that the firm traded shares of Microsoft based on insider information.
SEC Enforcement Director Robert Khuzami said the case was a high priority for the agency, but several years ago lawmakers accused the agency of not conducting a thorough inquiry.
The agency concluded in 2006 that there was not enough evidence that Pequot traded Microsoft shares based on information about an upcoming earnings report.
Soon after, the case attracted congressional scrutiny from key senators when Gary Aguirre, an SEC lawyer who worked on the probe, said his superiors had botched it.
In January 2007, Sens. Charles E. Grassley (R-Iowa) and Arlen Specter (Pa.), who was then a Republican, called on the SEC to reopen the case and issued a 700-plus-page report on the matter that accused the agency of turning a blind eye to one of Wall Street's most prominent investors.
It wasn't until new evidence came to light in a divorce proceeding a year and a half ago that investigators reopened the case.
"There was clearly a case to be made against Pequot, and the SEC has finally admitted it," Grassley said Thursday. "Federal regulators have finally followed the evidence to its logical conclusions after years of unnecessary delays and timidity."
Jonathan Gasthalter, a spokesman for Pequot and Samberg, declined to comment. After the scrutiny generated by the investigation, Pequot announced last year that it would wind down its business. The SEC says it obtained, in the years since it closed the case, clear evidence that Samberg made trades based on insider information.
In its civil complaint filed Thursday, the SEC said Samberg obtained the confidential information from David Zilkha, a former Microsoft employee who asked a colleague for details about an upcoming earnings report. Shortly after providing the material to Samberg, Zilkha joined Pequot as an employee. Pequot made $14 million from the trade, according to the complaint.
An attorney for Zilkha did not return a call seeking comment.
In January 2009, the SEC obtained "direct evidence that Zilkha had material, nonpublic information about Microsoft," according to a statement accompanying the complaint. The evidence was e-mails that were found on a computer hard drive in the possession of Zilkha's ex-wife, according to the SEC.
The SEC says that, in its earlier investigation, Zilkha hid the fact that he had obtained information about Microsoft's earnings and that he had conveyed what he learned to Samberg.
"The cases have two particularly troubling aspects -- a hedge fund manager trading on illegal insider information, and his tipper source who withheld crucial information about the scheme during an SEC investigation," Khuzami said.