Your SEC: Still Enabling Corruption

By Lee Russ

Tuesday, August 28, 2007 at 08:47 PM

Your SEC, working for.....ummm, it seems to depend on how much juice you have. Just ask former SEC staffer Gary Aquirre, who went from good performance reviews to good-by shortly after ignoring his SEC superiors' desires to protect their friend, Wall Street hotshot John Mack.

A congressional report was issued earlier this month about the SEC's odd handling of its investigation into possible insider trading by executives at the hedge fund Pequot Capital Management. The report is pretty grim about the SEC's investigative arm, and has some interesting tidbits tucked way down deep.

For the basic story to make any sense, you need to know that former SEC staffer Gary Aguirre was fired by the SEC in 2005, at a time that he was leading an insider trading probe of Pequot and, potentially, of John Mack, currently CEO of Morgan Stanley, who worked with Pequot at the time of the alleged insider trades. Aguirre was warned by his superiors that it was going to be difficult to get the SEC to approve a subpoena for Mack, and hinted that investigating Mack was generally going to be a problem, because he had "juice" with the SEC.

In the words of the congressional report (emphasis added):

Staff Attorney Gary Aguirre said that his supervisor warned him that it would be difficult to obtain approval for a subpoena of John Mack due to his ‘‘very powerful political connections.’’ Aguirre’s claim is corroborated by internal SEC emails, including one from his supervisor, Robert Hanson. Hanson also told Aguirre that Mack’s counsel would have ‘‘juice,’’ meaning they could directly contact the Director or an Associate Director of Enforcement. Attorneys for Pequot and Morgan Stanley had direct access to the Director and an Associate Director of the SEC’s Enforcement Division. In January 2005, Pequot’s lead counsel met with the SEC Director of Enforcement Stephen Cutler. Shortly thereafter, SEC managers ordered the case to be narrowed considerably.

In June 2005, Morgan Stanley’s Board of Directors hired former U.S. Attorney Mary Jo White to determine whether prospective CEO John Mack had any exposure in the Pequot investigation. White contacted Director of Enforcement Linda Thomsen directly, and other Morgan Stanley officials contacted Associate Director Paul Berger. Soon afterward, SEC managers prohibited the staff from asking John Mack about his communications with Arthur Samberg at Pequot. ...

SEC management delayed Mack’s testimony for over a year, until days after the statute of limitations expired. After Aguirre complained about his supervisor’s reference to Mack’s ‘‘political clout,’’ SEC management offered conflicting and shifting explanations for blocking Mack’s testimony. Although Paul Berger claimed that the SEC had always intended to take Mack’s testimony, Assistant Director Mark Kreitman said that definitive proof that Mack knew about the GE-Heller deal was the ‘‘necessary prerequisite’’ for taking his testimony. The SEC eventually took Mack’s testimony only after the Senate Committees began investigating and after Aguirre’s allegations became public, even though it had not met Kreitman’s prerequisite. The SEC fired Gary Aguirre after he reported his supervisor’s comments about Mack’s ‘‘political connections,’’ despite positive performance reviews and a merit pay raise. Just days after Aguirre sent an e-mail to Associate Director Paul Berger detailing his allegations, his supervisors prepared a negative re-evaluation outside the SEC’s ordinary performance appraisal process. They prepared a negative re-evaluation of only one other employee. Like Aguirre, that employee had recently sent an e-mail complaining about a similar situation where he believed SEC managers limited an investigation following contact between outside counsel and the Director of Enforcement.

Two investigators canned for honesty. Ain't life in the SEC grand--don't call your SEC superiors on it when they meddle in your investigation in order to protect their buddies. After all, it isn't like the SEC is charged with protecting the public, right? Right?

Any way, the SEC has a mechanism for reviewing claims bit its staff that they have been dismissed for improper reasons, so Aguirre presumably had some reason to hope that the SEC's Inspector General would set things right. Sure. The congressional report states:

Aguirre claimed this dispute ultimately led to his firing. These allegations were given short shrift by the SEC Office of Inspector General in its initial report. However, under Chairman Cox’s leadership, when Senate investigators raised questions, the SEC eventually opened its investigative files. By making documents and witnesses available, Chairman Cox demonstrated a commitment to accountability and transparency. That is the first crucial step to the SEC restoring confidence in the integrity of its enforcement operations. We also commend the SEC for increased enforcement efforts regarding insider trading, and specifically insider trading by hedge funds, following our investigation.

I love the "eventually" opened its files. All it took was a congressional investigation.

But the good news, dutifully detailed at length in the report, is that the SEC is now being more vigorous in investigating insider trading generally, and hedge funds particularly. And I think I know about how long this new found diligence will last. It's called "are they still watching us?"

Could there be a better argument for having a significant portion of SEC officers from outside the Wall Street world?

It all makes me wonder exactly how long the SEC was protecting these moneymen before they got caught. And why exactly the corporate world is so convinced that they are just being regulated to death, yes, absolutely to the death, they really need some relief from all these intrusive regulations.