U.S. regulators are investigating Pequot Capital Management, a $7 billion hedge fund, for possible insider trading, The New York Times said Friday, citing government officials briefed on the case.
Pequot responded to the newspaper’s story with a sharply worded statement in which the Westport, Connecticut-based investment firm denied all wrongdoing and said the story was based on “unfounded allegations of a terminated SEC employee.”
According to the New York Times’ story, the hedge fund earned $18 million after investing in companies involved in one of the biggest mergers of 2001 -- when General Electric Capital Corp. bought Heller Financial.
“Nobody at Pequot was tipped by anyone regarding the Heller acquisition or any other corporate event,” a spokesman for the fund said in a statement. “At all times, Pequot securities trading has been entirely proper, and not based on insider information,” the fund said.
The allegations came to light in an 18-page letter sent to two U.S. senators and obtained by the New York Times.
The Securities and Exchange Commission has filed no charges against Pequot. In keeping with its practice of not discussing any possible probes, the SEC neither confirmed nor denied an investigation into the hedge fund, one of America’s oldest and best known. The fund is run by Arthur Samberg, a 65-year-old investor, who has had a long Wall Street career.
A lawyer who once led the SEC’s probe told Congress that trading at Pequot repeatedly aroused suspicion among stock exchange officials, the newspaper said.
Records show exchange officials on 18 occasions referred cases to the SEC for further investigation, the paper wrote.
Trades by large investors including mutual funds and hedge funds are often monitored and it is not unusual for investors to be contacted by the government to clarify some matters, industry analysts said.
In this instance, the hedge fund said: “In the period under review, Pequot conducted over 136,000 trades, and it is natural that some limited number would be kicked out by SRO market surveillance efforts.”
The matter appears to have a special twist because Gary Aguirre, the SEC lawyer who had been in charge of the Pequot probe, said he was fired in September after trying to obtain testimony from a top Wall Street executive.
The New York Times said its sources identified that executive as John Mack, who now heads Morgan Stanley and briefly was Pequot’s chairman.
Morgan Stanley said: “We have no reason to believe that the SEC has any interest in Mr. Mack in connection with this matter,” and added that the firm’s chief executive, “has never been contacted on this matter by the SEC.”