Updated from 1:37 p.m. EDTJohn Mack will find himself on the hot seat after all, answering allegations that he fed inside trading tips to a giant hedge fund. Morgan Stanley ( MS) said Friday that the Securities and Exchange Commission wants to interview Mack, the Wall Street firm's CEO, over the allegations that he passed on an improper tip about a possible corporate merger to Pequot Capital, a $7 billion hedge fund. "Yesterday, the SEC contacted John Mack and asked that he be interviewed regarding the hedge fund matter that has been widely covered by the media recently," Morgan Stanley's statement said. "John immediately responded that he is happy to meet with the commission staff, and he welcomes the opportunity to put to rest any issues surrounding this matter." The SEC's request to interview Mack comes just weeks after the allegations became the subject of a high-profile hearing on Capitol Hill. The Senate Judiciary Committee called the hearing after The New York Times ran a front-page story about a former SEC staff attorney, who claims his superiors put the kibosh on his investigation of Pequot and Mack. Attorney Gary Aguirre claims his superiors at the SEC stymied his investigation when he sought to take testimony from Mack. He also claims the SEC let him go because he was too aggressive in pursuing the allegations against Mack and Pequot. Up until now, SEC officials have denied squelching the investigation. Regulators said Aguirre didn't present enough evidence to justify calling Mack as a witness. The SEC's about-face on taking testimony from Mack could be a response to pressure from Capitol Hill or could reflect newly discovered information. A spokesman for the SEC was unavailable for comment. A spokesman for Pequot reiterated the hedge fund's claim that it has done nothing wrong. A spokeswoman for Morgan Stanley declined to comment beyond the statement. The law firm representing Aguirre, the Government Accountability Project, released a statement late Friday regarding the Pequot probe. Aguirre's attorney, Joanne Royce, was informed that the SEC was reopening the investigation into Aguirre's claims. "The SEC Inspector General informed Ms. Royce that it has reopened the investigation into Aguirre's charges of favoritism and retaliation and is seeking to interview Aguirre," the statement said.
Aguirre, before he was let go by the SEC, was investigating trading by Pequot, which is led by Art Samberg, for about a year. 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 particularly stood out. That was Pequot's purchase of shares of Chicago-based commercial lender Heller Financial prior to its acquisition by General Electric ( GE) in July 2001. The trade, paired with a GE short, netted $18 million for the hedge fund. In Aguirre's testimony, he spoke generally about the insider trading tips, pointing a finger at Mack without actually mentioning him by name. Pequot previously has denied any wrongdoing, saying the trades were "ordinary course" and were not born of any inside information. "In the period under review, Pequot conducted more than 136,000 trades and it is natural that some limited number would be kicked out by SRO market surveillance efforts. At all times, Pequot's securities trading has been entirely proper and not based on insider information. The trades at issue were made in the ordinary course of the firm's business and were entirely normal within the context of its daily investing activities," the fund said in a statement last month. Mack became the head of Morgan Stanley late last summer after a high-profile management shake-up at the firm. He briefly served as Pequot's chairman, but longer after the alleged insider trading incident occurred. Mack also is an investor and longtime friend of Samberg.