Double takes from L’Affaire Aguirre

The 700-plus page report on The Firing of an SEC Attorney and the Investigation of Pequot Management, released last Friday by the minority staff of the Senate Finance and Judiciary committees, is notable not just for its analysis of the scandal’s critical issues. Sprinkled in the narrative, tasty anecdotal morsels about how the world works.

1. Everybody should have a Goldman Sachs

2. How to get hired by the SEC

3. Oh no, it’s Mario Gabelli!

Everybody should have a Goldman Sachs

As part of its investigation into alleged insider trading by Pequot Capital Management and its founder Art Samberg, the US Securities and Exchange Commission’s division of enforcement examined Microsoft trades that Pequot made in Apr. 2001. While most of the focus was on information Samberg allegedly received from David Zilkha, a Microsoft employee who later became a Pequot analyst, a familiar name came into the mix [Emphasis added].

The SEC also cited the fact that other Microsoft-related information was in the marketplace and could theoretically have spurred Samberg’s trades and the fact that Goldman Sachs provided Pequot early access to information on Microsoft that it later published in an analyst’s report...

According to SEC attorney James Eichner, who took over the Pequot investigation after Gary Aguirre was fired [Emphasis added]:

[M]y opinion was certainly that Samberg thought he was getting inside information and trading on it. That was my opinion and continues to be my opinion...I think Samberg thought he was committing insider trading, but it’s not clear that he was, in fact, committing insider trading...

...So then we did the Goldman piece, and then that turns out not to be—you know, it turns out to be Goldman policy [to provide certain clients advanced access information in unpublished analyst reports] and not illegal.

[I]t seems terribly unfair to me[.]...[W]hat I learned from this whole thing is that, you know, people at Pequot, they get a lot of good information from a lot of sources that allows them to make money. And, you know, it’s no wonder a lot of these hedge funds do really well. I mean, they give Goldman tons of money in brokerage commissions, and Goldman gives them the best information, and the poor schmoes out there, that is a tough hurdle, but, you know, it’s not against the law, and that’s the limit of our authority...

I don’t speak for the SEC on this, but, I mean, I think Samberg committed insider trading on Microsoft[.]

That would make it unanimous. But not anywhere that matters. Despite his personal views, Eichner concluded by saying that he did not think that the SEC could win the case at trial. The Senate report concluded:

...given the apparently inculpatory emails from Samberg telling Zilkha, (e.g. I shouldn’t say this, but you have probably paid for yourself already!) it is difficult to understand why the SEC would not, at bare minimum, invite Pequot, Samberg and Zilkha to respond to a Wells notice.

The Firing of an SEC Attorney
and the Investigation of Pequot Capital Management
Minority staff report (Pp 44-45)
US Senate Finance & Judiciary Committees
Aug. 3 2007

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How to get hired by the SEC

Read too many SEC press releases, or watch too many meeting webcasts that begin with the chairman waxing lyrical about the vengeance about to be unleashed on wrong-doers, and it’s easy to fall into trap of believing the agency’s self-bestowed image of a brave knight in shining armor, mounted on a rearing white stallion, a sharpened sword glinting in the sun.

So much for that idea. And it’s not just the senior officials rolling over after so much as a phone call from attorneys with Hindenberg-scale egos representing similarly-equipped clients. Or the minions scuttling about in the shadows, one eye on their post-government career prospects while ensuring nobody gets to ruffle the big feathers. It extends to hiring process. In summary [Emphasis added]:

The SEC rejected Aguirre’s first 23 applications for employment...

Aguirre then filed a complaint with the [Equal Employment Opportunity] office of the SEC charging [age] discrimination...

Immediately following Aguirre’s EEO complaint, the SEC contacted him to set up an interview and offered to hire him as a “superior qualifications appointment.”

An administrative law judge eventually rejected Aguirre’s age discrimination claim, which he pursued even after his hiring.

The Firing of an SEC Attorney
and the Investigation of Pequot Capital Management
Minority staff report (Pp 55-79)
US Senate Finance & Judiciary Committees
Aug. 3 2007

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Oh no, its Super Mario!

Attorneys for Morgan Stanley and Pequot Capital Management founder Art Samberg weren’t the only ones throwing their weight around the upper echelons of the division of enforcement during 2005. Enter, stage left, Gandolfo V. (Vince) DiBlasi, of Sullivan and Cromwell:

John Smith* had complained on July 21 about another case in an email to his supervisor, Dave Fielder (who, like [enforcement division branch chief Robert] Hanson, reported to Mark Kreitman). Smith wrote to Fielder regarding a matter apparently related to a mutual fund market timing investigation involving Mario Gabelli. Smith indicated that he believed a contact may have occurred between Gabelli’s counsel, Vince DiBlasi, and director of enforcement Linda Thomsen:

My sense is Vince DiBlasi (left)—because Mario Gabelli is mad he has to answer questions—called...Linda [Thomsen] with some misrepresentations, which went to [associate director, and now Debevoise & Plimpton partner (but that’s another story)] Paul [Berger.]...You should know that Mario Gabelli is mad because...he doesn’t think he should have to answer our questions— even though we have e-mails showing he approved timing arrangements, involving quid pro quo exchange for timing capacity, with...two of the leading groups caught by Spitzer...and the staff isn’t getting adequate support. We should be unified here, not questioning one another from within...

Smith’s complaints in this e-mail seem remarkably similar to Aguirre’s. Just as in the Pequot case, it appears as if someone outside the commission went over the staff attorney’s head and contacted the director of enforcement. Just as in the Pequot case, the outside contact to senior SEC officials was followed by a disagreement between Kreitman and a staff attorney. And just as in the Pequot investigation, the staff attorney who objected received a negative re-evaluation shortly thereafter.

*John Smith is not the employee’s true name. We are using this pseudonym given the sensitive nature of the personnel information discussed and because the employee continues to be employed by the SEC.

Two things:

• Gabelli was also feeling heat from the Federal Communications Commission by Jul. 2005; a year later, he agreed to pay $130 million to settle allegations that he used sham companies to buy cellphone licenses under a federal program for small and minority-owned businesses.
• Gabelli has yet to be sanctioned in the market timing case, despite the existence of emails showing he approved timing arrangements. Not that he would be involved in any conduct that might disadvantage investors in his mutal funds:
  Back in September, Gabelli publicly released a memo describing how its funds steer clear of late traders and market-timers.
  Hurdles Loom for Gabelli Asset Management
  by Gregg Greenberg
  TheStreet.com Dec. 24 2003

The Firing of an SEC Attorney
and the Investigation of Pequot Capital Management
Minority staff report (Page 67)
US Senate Finance & Judiciary Committees
Aug. 3 2007