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The law doth punish man or woman
That steals the goose from off the common
But lets the greater felon loose
That steals the common from the goose.

-- anonymous 18th-century English epigram

These pithy words should be the motto of the Securities and Exchange Commission, the federal agency that is supposed to police capital markets but actually protects corporate bigwigs and Wall Street moguls who fleece the lambs and pluck the geese.

Early this month, Linda Thomsen, who heads the agency's enforcement, proclaimed, "Insider trading ahead of mergers and acquisitions is one of the SEC's top priorities." That may be true -- for small-time rustlers. It is definitely not true for the rich and powerful.

There are several repugnant reasons for this. One of them is what San Diegan Gary Aguirre calls "the rotating door." Attorneys work for the SEC for a few years, learn how the law can be evaded, then join a large law firm that is representing the big-time sharks. "Too many senior officials at the SEC think more about the $2 million-a-year law-firm job they are going to step into and too little about how the major Wall Street players compromise the capital markets," says Aguirre, brother of City Attorney Mike Aguirre. After several years in Washington, Gary Aguirre has returned to San Diego, possibly to write a book.

This month, the Senate's Committee on Finance and Committee on the Judiciary issued a combined final report concluding that Aguirre was fired unjustly from the securities commission because he wanted to pursue an investigation of a Wall Street nabob who was in a very suspicious position to pass insider information about a pending merger. The agency did everything it could to thwart Aguirre's investigation of this kingpin who had "clout" and "juice," according to the report.

One of the former SEC officials mentioned prominently in the report was earlier handling the Peregrine Systems fraud. Some lower-level Peregrine officials have confessed their crimes in a criminal case in San Diego. But the boardmembers who massively dumped stock while possessing inside information about pending acquisitions have not been touched by the SEC or the Department of Justice. The insiders were warned by Peregrine's own lawyer not to sell stock because they had material, nonpublic information, but they sold anyway, and the government has looked the other way.

I asked Gary Weiss, author of Wall Street Versus America and columnist for Forbes.com, about the securities commission's double standards. "There is no question that the SEC is delighted to get an insider-trading case, because it allows the agency to look tough without stepping on the toes of anyone of consequence," says Weiss. He calls the Peregrine matter "one of the many SEC horror stories that I have encountered over the years. Time and again, the SEC ignores corporate malfeasance that for any number of reasons it decides to give a pass to -- kind of the SEC equivalent of the 'get out of jail free' card."

The 108-page report by the two Senate committees is a horrific account of high-level influence peddling. Here's the story in a nutshell, as gleaned from the report: a hedge fund named Pequot Capital Management amassed $18 million in a few short weeks by betting that a subsidiary of General Electric would make a particular acquisition. Pequot bought a bundle of stock in the company that GE was secretly negotiating to acquire and shorted (or bet on a decline) of GE stock. (Shares of a company being acquired usually go up substantially, while shares of a company making an acquisition often go down.) Wall Street powerhouse John Mack, a Pequot investor and former chairman, and a close friend of the Pequot chief executive, had talked with a Swiss firm handling the acquisition and shortly talked to his friend at Pequot. "Pequot's trades in advance of the GE acquisition...were highly suspicious and deserved a thorough investigation," said the Senate investigating committees. "Seeking John Mack's testimony was a reasonable next step in the investigation."

Aguirre tried to do that. His supervisor warned that Mack had "political connections." (Among other things, he was a big fund-raiser for George W. Bush.) Mack and his colleagues also had "juice," or the ability to sway the top people at the agency. Pequot's lead lawyer met with the agency's head of enforcement, who would later be hired by a private law firm, opening the way for Thomsen to take over. The big Wall Street investment firm of Morgan Stanley was thinking of bringing Mack aboard as its chief executive. It hired a former prominent U.S. attorney, Mary Jo White of the establishment law firm of Debevoise & Plimpton, to see if Mack might be fingered in the Pequot investigation. She contacted Thomsen, who said there was "smoke" but "surely not fire." (That's not what Senate investigators concluded.) Various Morgan Stanley officials contacted Paul Berger, an associate director of enforcement for whom Aguirre worked. These "juice" discussions took place behind Aguirre's back.

Outcome: agency officials delayed the investigation, narrowed its scope, barred Aguirre from interviewing Mack, stalled Mack's testimony until after the statute of limitations had expired, and shut the probe down. Then they downgraded their evaluations of Aguirre's work and fired him, claiming he didn't respect protocol, among other things. Berger was instrumental in Aguirre's firing. Then, through a fellow official at the agency, Berger passed word to Debevoise & Plimpton that he would be interested in a job there. He got one. The agency official who told Mary Jo White that Berger was available for hire was one Lawrence West, another associate director of enforcement.

For several years, West was the agency's overseer in the investigation of Peregrine Systems. If the SEC is serious about cracking down on insider trading in advance of acquisitions, it should state why it has ignored Peregrine's board.

In an effort to comply with state and federal law, Peregrine policy specifically banned purchases or sales of its stock by any boardmember or officer possessing material nonpublic information. This was particularly true when the company was considering an acquisition. The board began looking into purchase of Harbinger Corporation in late 1999. Directors worried that the acquisition announcement would depress Peregrine stock, because Harbinger appeared to be growing much more slowly than Peregrine. (As it turned out, 40 percent of Peregrine's sales were phony.) The secret discussions between the two companies were hot and heavy in January and February 2000.

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