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Investing 101 - Jun 24, 2006 - Printable Version
- The Keystone Cops meet the Gang that Couldn’t Shoot Straight
by Mark Faulk
In the most stunning development yet in the scandal that is threatening to rock the very foundation of the US stock market, a former SEC attorney who was fired on September 1, 2005, has released two scathing letters accusing SEC officials of apparent wrongdoing in dealing with an investigation into one of the nations most prominent hedge funds, Pequot Capital Management. First, on the same day that a federal court struck down a rule requiring hedge funds to register with the SEC, the New York Times reported today that Gary J. Aguirre had been fired by the SEC last August eleven days after he was praised for his work on the Pequot investigation and awarded a merit pay increase. His supervisor, Robert Hanson, wrote in Aguirre’s performance evaluation just before the firing, that “His efforts have uncovered evidence of potential insider trading and possible manipulative trading by the fund. He has consistently gone the extra mile, and then some."
Apparently, going the “extra mile” wasn’t what his superiors at the SEC had in mind, because Aguirre was fired without notice just eleven days later while he was on vacation. The next day, on September 2, 2005, he wrote a letter to SEC Chairman Chris Cox detailing his allegations of wrongdoing within the SEC in connection with the Pequot investigation…three weeks before the Faulking Truth reported that Senate Banking Committee Chairman Richard Shelby (R-ALA) had killed a scheduled Banking Committee hearing into stock market fraud and naked short selling.
According to the New York Times article Aguirre “has told Congress that the fund's trading had repeatedly aroused suspicion among stock exchange officials, prompting them on 18 occasions to refer cases to the SEC for further investigation.” Although both letters have the names deleted, the Times reported that Aguirre was fired when he tried to take testimony from Morgan Stanley CEO John J. Mack, who at the time was the former head of Credit Suisse First Boston, and was under consideration for the Morgan Stanley position. Aguirre had begun to suspect that Mack was the person who provided inside information to Pequot CEO Arthur J. Samberg, that enabled Pequot to realize an $18 million profit involving General Electric’s buyout of Heller Financial, when Heller’s stock rose 50% in one day.
In the September, 2005 letter to Chairman Cox, Aguirre said, in part: “I am compelled to write to you today, my last day with the Commission, out of a sense of duty to the Commission’s mission—to maintain the integrity of the financial markets and to protect the investor. Unfortunately, my supervisors--as far up the chain as I can see—have lost sight of the mission in the above matter.”
When he suggested that they solicit testimony from Mack, Aguirre's Branch Chief, Robert Hanson, said “it would be very difficult to obtain approval to take [suspect’s] testimony because of his powerful political connections." Aguirre said that "Hanson later repeated the same statements to me on several other occasions. Some are confirmed by emails. Assistant Director (Mark) Kreitman participated in one of these discussions.”
He went on to say in the letter to Cox that after issuing approximately 100 subpoenas in the investigation where all documents came directly to him, that when he subpoenaed documents from both Samberg and Mack, they suddenly went over his head and began to deal directly with Linda Thomson, and that Pequot’s counsel also bypassed Aguirre and began to deal directly with Thomson. According to Aguirre, “of hundreds of contacts with defense counsel, this is the first time any defense counsel began discussions at the top of the chain of command. Further, at the same time, my supervisors excluded me from the discussions involving [suspected tippee].”
From late June through late August, Aguirre continued to send “multiple e-mails to my Branch Chief Robert Hanson, Assistant Director Mark Kreitman, and Associate Director Paul Berger, as well as a brief e-mail to Linda Thomson, expressing my concerns.” Instead, immediately following praise from both Hanson and Keitman for “the excellent job” he was doing on the investigation, Aguirre was fired.
After Chairman Cox took no action on the letter from nine months ago, Aguirre wrote another letter to Senators Chuck Hagel and Christopher Dodd of the Senate banking Committee, and sent copies to Senator Shelby and Senator Paul Sarbanes. The second letter, dated May 30, 2006, is 18 pages in length, and is stunning as an indictment of the SEC, the hedge funds, and the entire investment industry. Here are a few excerpts from that letter:
Dear Chairman Hagel and Ranking Member Dodd:
One stubborn question kept popping up when SEC officials recently testified before the full Committee and your Subcommittee: is the SEC adequately protecting the nation’s capital markets and their participants from the risk of manipulation and fraud by the nation’s 11,500 hedge funds? The answer is no.
And the answer is no whatever facts you consider. It is no when the SEC fails to consider any hedge fund fraud or manipulation against other market participants for a quarter century: from 1979 to 2004. It is no when the SEC fails to protect mutual fund investors when billions of dollars are siphoned from their accounts by hedge funds. It is no when you compare what the SEC is doing with what its counterparts in Europe are doing and saying…It is a deafening no when the SEC halts an insider trading investigation of one of the nation’s largest hedge funds because the suspected tipper has powerful political connections, as they did with the investigation assigned to me. (page 1)
…Fixing the SEC so it can protect investors and capital markets from hedge fund abuse will not be an easy task. Those interests are not just the hedge funds. They include the financial industries that are receiving tens of billions of dollars in revenues for helping hedge funds cheat other market participants or close their eyes to the carnage. At the top of the list are the big investment banks, e.g., Goldman Sachs, Morgan Stanley, Merrill Lynch, and Bear Stearns. Those interests know how to reward friends and punish perceived enemies. Their tentacles reach far. They stopped the hedge fund investigation I was assigned to conduct. They cost me my job. (pages 2 and 3)
…Likewise, the value investor has no clue that an attractively priced small cap is on its way to bankruptcy via the naked shorting of an $8 billion hedge fund. (pages 4 and 5)
…An investment bank can help a hedge fund make and retain illegal profits in multiple ways. For example, its computers can be programmed to miss illegal hedge fund trading, e.g., naked shorts or wash trades. That appeared to be the case with the prime broker in the investigation I headed. (page 7)
In another section of the letter, he goes on to describe in detail how the SEC mishandled one case after another, saying about one investigation “If this case were a movie, it would be titled, The Keystone Cops meet the Gang that Couldn’t Shoot Straight.”
Aguirre presents damning evidence in page after page of his letter to Congressional leaders, detailing how SEC regulators either covered up or turned a blind eye time and time again to massive fraud in the stock market, fraud that has cost investors billions upon billions of dollars over the course of decades of stock market abuse. Next Wednesday, on June 28, the Senate Judiciary Committee will investigate the relationship between hedge funds and independent analysts. If they have any sense of honor and integrity whatsoever, they will broaden the scope of their hearing and call for a full Congressional investigation into the SEC and the entire securities industry. And their first and star witness should be none other than former SEC attorney Gary J. Aguirre.
To read Gary J. Aguirre’s Sept. 2, 2005 letter to Chairman Cox, go to:
http://www.faulkingtruth.com/Files/aguirre_cox0623.pdf
To read Aguirre’s May 30, 2006 letter to members of Congress, go to:
http://www.faulkingtruth.com/Files/aguirre_congress0623.pdf
This article is also posted at The Sanity Check, along with an excellent comment forum, at:
http://www.thesanitycheck.com/Blogs/MarkFaulksBlog/tabid/86/EntryID/351/Default.aspx
For information on how to contact the members of the Judiciary Committee, go to:
http://www.faulkingtruth.com/Articles/-EditorsCorner/1048.html
To read more about recent events in the stock market, read
“The world was too ridiculous to bother to live in.”:
http://www.faulkingtruth.com/Articles/CommentaryToo/1061.html
Mark Faulk is the Editor of The Faulking Truth, and the author of the upcoming book entitled "The Naked Truth: Counterfeiting the American Dream," due out in August, 2006. For more information on the book and on the stock market scandal, go to http://www.faulkingtruth.com , and to pre-order your copy, go to http://www.theownersgroupinc.com/cart/
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