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Lawyer says Feds failing on hedge fund fraud

A former government attorney told Congress on Wednesday that he was fired for investigating a hedge fund too aggressively and said law enforcement is failing in its duty to protect investors in the growing hedge fund industry.
/ Source: The Associated Press

A former government attorney told Congress on Wednesday that he was fired last summer after he tried to subpoena a prominent Wall Street executive to testify in an insider-trading investigation of a major hedge fund.

Attorney Gary Aguirre, who led the Securities and Exchange Commission’s investigation into Pequot Capital Management Inc., said he was told by his supervisors that it would be difficult to obtain the subpoenas because the executive had “very powerful political connections.”

The SEC was investigating in the spring of 2005 whether the hedge fund had received a tip in 2001 from an individual about an upcoming merger.

“By mid-June, growing evidence pointed to one person: the former CEO of a large investment bank,” Aguirre said in written testimony to the Senate Judiciary Committee.

Under questioning by committee members, he identified the executive as John Mack, who is the chairman and chief executive of investment house Morgan Stanley Inc.

Morgan Stanley, one of the largest U.S. securities firms, said Aguirre had provided no evidence to support his allegation against Mack. “No one has provided any evidence that Mr. Mack has engaged in any wrongdoing and Mr. Aguirre provided none today,” firm spokeswoman Jeanmarie McFadden said from New York.

Mack is an influential Wall Street figure and a major fundraiser for President Bush’s campaigns. At the time in question, he was the former chief executive of Credit Suisse First Boston.

The committee is looking into problems involving the growing hedge fund industry, which commands trillions of dollars in assets and is believed to account for as much as 20 percent of all U.S. stock trading.

In his written testimony, Aguirre said the person he called “the suspected tipper” likely knew in advance about a merger offer, likely spoke with Pequot’s CEO just before he began to trade, “and had other personal and financial motives for tipping the hedge fund’s CEO.”

The attorney’s allegation “raises questions about the propriety of what the SEC has done,” said Sen. Arlen Specter, R-Pa., chairman of the judiciary panel.

Aguirre also said the SEC had told him he would risk violating the law by testifying on the matter because details of a pending investigation could be made public.

More broadly, he said, the SEC and the Justice Department are failing in their duty to protect investors in the growing hedge fund industry and haven’t adequately prosecuted fraud and manipulation.

“Fixing the SEC so it can protect investors and capital markets from hedge fund abuse will not be an easy task,” Aguirre said in his written testimony. “Powerful interests want the SEC to stay just the way it is or, better yet, to become even weaker.”

SEC officials deny Aguirre’s allegation of political influence, and they say it is against their policy to discuss personnel matters. Without confirming or denying that an investigation of Pequot exists, SEC spokesman John Nester said Wednesday: “Protecting investors is our top priority. Any suggestion that preferential treatment was sought or given during the course of an investigation is completely without merit.”

Attorney General Richard Blumenthal of Connecticut urged the senators to regulate hedge funds, the high-risk investment pools that traditionally served the very wealthy but are increasingly luring ordinary investors.

A federal appeals court decision Friday overturning the SEC’s new regulation of hedge funds has left them in “a regulatory black hole,” Blumenthal testified at Wednesday’s hearing.

“Federal action is profoundly preferable ... but the states must fill the void if Congress fails to act,” he said.

At the same time, SEC regulators have seen an upswing in fraud among hedge funds, and the agency has been bringing more enforcement cases against them — charging fund managers with defrauding investors of a total exceeding $1 billion in the last five years.

In addition to Aguirre’s allegations, the Judiciary Committee also is examining the case of Demetrios Anifantis, a former employee of a research firm, who has accused the firm of colluding with its hedge fund clients to issue biased research reports on companies. Anifantis was fired from his job at Camelback Research Alliance, which now is called Gradient Analytics Inc.

Mack, the Morgan Stanley chief, is a longtime investor in Pequot and a friend of its founder. He served briefly last year as the hedge fund’s chairman.

No charges have been brought against Pequot, a hedge fund with some $6.5 billion in assets that is overseen by Arthur Samberg, a well-known money manager and philanthropist. Pequot has denied that there was any improper activity by the fund. The SEC investigation of the fund and Aguirre’s accusations were first reported Friday by The New York Times.