updated 1/31/2007 9:55:29 PM ET 2007-02-01T02:55:29

Two senior senators said Wednesday that an official review raises serious questions about the Securities and Exchange Commission’s handling of an insider-trading investigation and the possibility of a cover-up amid allegations of political interference by SEC officials.

Sen. Arlen Specter, R-Pa., the Senate Judiciary Committee chairman in the last Congress, and Sen. Charles Grassley, R-Iowa, a member of the panel, made the statements on the Senate floor in the matter of a fired former SEC attorney who has alleged political meddling in the agency’s investigation touching on Wall Street executive John Mack and a major hedge fund.

After taking testimony and reviewing thousands of documents, many of them provided by the SEC, the judiciary panel’s preliminary findings show “extraordinarily lax enforcement by the SEC and ... may even indicate a cover-up by the SEC,” Specter said. The SEC’s handling of the matter, including a review of the attorney’s allegations by the agency’s inspector general, “has all of the earmarks of the obstruction of justice,” he said.

The matter first came to light last spring when the former attorney, Gary Aguirre, told Congress he was blocked by superiors at the SEC when he tried to question Mack, now chairman of investment house Morgan Stanley, in the insider-trading investigation of hedge fund Pequot Capital Management Inc. It has focused congressional scrutiny on the normally low-profile regulatory agency.

SEC spokesman John Nester said Wednesday: “We have not yet had the opportunity to read the interim final report, but we respect and appreciate the oversight role of the Congress and we have fully cooperated at every stage of the review. We will carefully consider the report’s findings and recommendations.”

Grassley, in his remarks in the Senate chamber, thanked SEC Chairman Christopher Cox for his cooperation in providing the documents requested by the Judiciary panel, adding, “I hope that Chairman Cox takes today’s findings to heart.”

“These findings paint a picture of a troubled agency that faces serious questions about public confidence, the integrity of its investigations” and its ability to protect investors large and small evenhandedly, Grassley said. The SEC “circled the wagons and it shot a whistle-blower,” he said.

At a Judiciary hearing in December, four SEC enforcement officials rejected Aguirre’s allegations. But another agency official, also in sworn testimony, bolstered the attorney’s claims.

The four officials — Aguirre’s supervisors at the agency and Enforcement Director Linda Thomsen — portrayed him as a hard-charging and aggressive attorney who also was volatile and given to fits of temper, and had trouble accepting the authority of supervisors and working in a structured organization.

The investigation was begun in 2005 to determine whether Pequot had received a tip in 2001 from an individual about an upcoming $5.3 billion merger between General Electric Capital Corp. and Heller Financial Inc. Aguirre has pointed to Mack as the likely person who had tipped Pequot to the merger, potentially enabling the hedge fund to buy and sell shares ahead of the announcement and make millions.

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