Pequot Cleared on Trades

The SEC clears the hedge fund of insider-trading charges
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Pequot Capital

says securities regulators have cleared the big hedge fund of any wrongdoing in a high-profile insider-trading investigation.

The $7 billion hedge fund sent a letter Thursday to investors telling them that the

Securities and Exchange Commission

"is not going to recommend any enforcement action'' against the fund or any Pequot employees.

An SEC spokesman declined to comment on Pequot's claim.

The SEC had been looking into allegations that Morgan Stanley CEO John Mack had passed on an improper tip about a possible corporate merger to Pequot Capital's founder Art Samberg. The investigation became headline news when

The New York Times

ran a front-page story about Gary Aguirre, a former SEC staff attorney, who claims his superiors put the kibosh on his investigation of Pequot and Mack.

Gary Aguirre's allegations were the subject of a widely publicized Capitol Hill hearing, at which Aguirre repeated his claims before the Senate Judiciary Committee. In response to the hearing, the SEC subsequently interviewed Mack about the insider-trading allegation.

A Morgan Stanley spokeswoman declined to comment. But a person close to the Wall Street firm says regulators have told Mack that he too has been cleared of any wrongdoing.

SEC sources say Aguirre was let go by the agency after his one-year probationary period was up. Aguirre portrayed himself before Congress as a whistleblower, suggesting the SEC didn't retain him because he was too aggressive in pushing to take Mack's testimony.

Regulators had contended there wasn't sufficient evidence to warrant taking testimony from Mack. But the SEC did an about face after the Congressional hearing.

The investigation was prompted by a number of referrals from market regulators about well-timed trades made by the hedge fund. Regulators say they found at least 18 such trades.

One trade in particular stood out. That was Pequot's purchase of shares of Chicago-based commercial lender Heller Financial prior to its acquisition by

General Electric

(GE) - Get Report

in July 2001. The trade, paired with a GE short, netted $18 million for the hedge fund.