On Friday the New York Times broke a front-page story about possible insider trading at one of the country’s largest hedge funds, Pequot Capital Management.
“The SEC declined to confirm or deny that it was investigating Pequot, a $7 billion fund overseen by Arthur J. Samberg, 65, a leading money manager and philanthropist,” reported the Times. “But a lawyer who once led the agency’s investigation has told Congress that the fund’s trading had repeatedly aroused suspicion among stock exchange officials, prompting them on 18 occasions to refer cases to the SEC for further investigation, records show.”
At the center of the Times‘ story was the aforementioned lawyer, Gary Aguirre, who had led the SEC’s investigation into the hedge fund until last September, when he was fired for dubious reasons. According to the Times, at the time of his dismissal Aguirre was on the verge of deposing John Mack, currently chief executive of Morgan Stanley, who is also a former chairman of Pequot and a big-time fund-raiser for President Bush.
If true, that is a scandal of gargantuan proportions. Equally noteworthy are the various other allegations that Aguirre eloquently presented in a letter to the Senate Subcommittee on Securities and Investment. The 18-page document, which was leaked to the Times and prompted Friday’s story, is a shocking compendium of hedge fund malfeasance, negligent enforcement and system rot.
Wednesday Aguirre will give what should be explosive testimony at a U.S. Senate Judiciary Committee hearing on hedge fund tactics. Yet some of the reporters assigned to cover this issue have questioned the necessity of the hearings, and most have ignored Aguirre’s broader allegations, focusing their stories on the spot-news of the Pequot investigation.
“Prominent hedge fund faces insider trading probe,” read a headline from the Boston Globe.
“Further probe into Pequot Capital,” announced the Financial Times.
“Hedge fund under investigation,” proclaimed Saturday’s St. Petersburg Times.
Perhaps the best follow-up article we’ve read so far appeared in Sunday’s New York Post, which noted that the former SEC investigator’s concerns about hedge funds extend well beyond Pequot to the entire industry and the system it supports.
“Ex-SEC lawyer Gary Aguirre’s 18-page stinging letter details numerous examples of what he alleged is the SEC’s inability — or unwillingness — to investigate alleged fraud perpetrated by hedge funds,” reported Roddy Boyd.
“Aguirre, in the letter, levels broadside after broadside against the SEC, arguing that it has consistently failed to detect or even act as hedge funds engage in a variety of unfair or illegal trading practices,” added Boyd “His charges that certain stocks were being ‘naked-shorted to zero’ are certain to find a supportive audience among Overstock.com chief executive Patrick Byrne and his supporters, who have launched a bitter crusade centered on eliminating naked short-selling.”
On Saturday, the Financial Times also filed a story taking a look at some of the broader issues raised in Aguirre’s letter.
“To politicians looking for evidence to justify further scrutiny of hedge funds, Gary Aguirre’s letter to Senators Chuck Hagel and Christopher Dodd appears to provide welcome ammunition,” reported the paper. “In the letter sent three weeks ago, the former SEC lawyer accused the agency of failing to protect US capital markets from ‘the risk of manipulation and fraud by hedge funds.'”
But for anyone interested in ongoing debate over the need for hedge fund regulation, we suggest visiting TheSanityCheck.com, a blog that contains a link to Aguirre’s letter in its glorious entirety.
“I believe our capital markets face growing risk from lightly or unregulated hedge funds just as our markets did in the 1920s from unregulated pools of money-then called syndicates, trusts or pools,” writes Aguirre. “Those unregulated pools were instrumental in delivering the 1929 Crash….There is growing evidence that today’s pools — hedge funds — have advanced and refined the practice of manipulating and cheating other market participants.”
“Fixing the SEC so it can protect investors and capital markets from hedge fund abuse will not be an easy task,” writes Aguirre. “Powerful interests want the SEC to stay just the way it is or, better yet, to become even weaker. Those interests are not just the hedge funds. They include the financial industries that are receiving tens of billions of dollars in revenues from helping hedge funds cheat other market participants or close their eyes to the carnage.”
Let’s hope that members of the nation’s financial press are among those keeping their eyes wide open.
Felix Gillette writes about the media for The New York Observer.