At last, securities regulators seem to be realizing that illegal insider trading is a way of life among operators of hedge funds. And so is lying to government investigators, concealing documents and emails, obstructing justice, and engaging in bribery and blackmail to cover up that insider trading.
There’s an important reason for this: if your dishonesty can stall the government’s investigation long enough, the statute of limitations may run out and you won’t be held criminally accountable for your insider trading. You might get nailed civilly for your sins, but all that means is that you may pay a multimillion-dollar fine, go out of business, get banned from the industry — and then retire to your mansion in the Hamptons with your billion-dollar treasure trove largely intact.
San Diego attorney Gary Aguirre is now tackling this very problem in a case he has been involved in for years. In fact, the Securities and Exchange Commission, which never wanted to pursue the plutocrats involved in the case, was forced to reopen the matter after Aguirre provided damning evidence last year.
On November 12, Preet Bharara, United States attorney for the Southern District of New York, Wall Street’s top cop, stated that “there is no greater way to send a message” to Wall Street miscreants than for the government to bring perjury cases against those who lie to the Securities and Exchange Commission, the agency that is supposed to ride herd on the securities industry but usually drops the ball — deliberately.
Aguirre, brother of former city attorney Mike Aguirre, took a job with the Securities and Exchange Commission early in the century. He had reason to believe that Pequot Capital Management, one of the largest hedge funds, had received inside information about a pending corporate acquisition. Pequot made a bundle when the purchase went through. Aguirre wanted to interview one of Wall Street’s muckiest mucky-mucks, who was close to the head of Pequot, and also close to then-president George W. Bush. Although the agency had just given Aguirre a high personnel rating, it suddenly switched course and fired him.
The agency didn’t realize it was up against a tiger. Two Senate committees studied Aguirre’s ordeal and cleared him, blasting the agency for sheltering Wall Street fat cats. The securities agency’s own inspector general studied the matter and came to the same conclusion, even recommending that Aguirre’s supervisors be disciplined. (They still haven’t been.)
But as all this happened, the statute of limitations ran out, and the insider traders got away with it — or thought they had. Aguirre kept working on the case on his own time and nickel.
Last year, he presented irrefutable evidence to the agency of another instance of Pequot’s egregious insider trading, this time involving Microsoft. After studying the information, the red-faced agency officially shut down Pequot this year, fined it and its chief $28 million, and agreed to pay Aguirre $755,000 for four years and ten months of salary and legal fees. By this time, Pequot had already closed down; $28 million was chump change to Pequot’s head, Arthur Samberg.
The agency also brought charges against David Zilkha, a former employee of Microsoft who had allegedly given Pequot lots of inside information about Microsoft — information that Pequot used to rake in millions.
In the spring of 2005, according to a Securities and Exchange Commission statement made at an administrative proceeding this year, the commission had begun looking into whether Pequot was getting and using inside information from someone at Microsoft. Commission staffers interviewed Zilkha. He concealed the fact that in the spring of 2001, he had received inside information on Microsoft’s upcoming earnings and passed it to Pequot, testified the agency. Zilkha had been obligated to produce documents related to this caper but had not done so. He had also concealed certain emails that contained material, nonpublic information that he had passed along to Pequot.
Later, Zilkha went to work directly for Pequot. According to emails unearthed by Aguirre, Samberg told Zilkha upon his arrival that he had already earned his keep.
The agency closed the investigation in 2006. But Zilkha got divorced, and his ex-wife disclosed the information. Then, the divorce papers reveal, five months after the agency closed the investigation, Samberg or Pequot paid Zilkha $1.4 million in two installments with a promise of another $700,000. Aguirre calls it “hush money.” The press (tipped off by Aguirre) picked up the news in 2008.
Then Aguirre wrote the agency in 2009. He said that the statute of limitations may have run its course for the criminal insider trading but not for the “active concealment” of the fraud. Aguirre presented evidence calling for criminal investigation of Samberg and Zilkha for witness tampering, bribery, and obstruction of justice during the government’s investigative process. This letter led to the fine and shutdown of Samberg’s operation (civil actions) and a civil suit against Zilkha.
But the Department of Justice has not moved criminally against Samberg and Zilkha, says Aguirre. “I am convinced that the failure of the Department of Justice to prosecute Zilkha and Samberg is an Achilles’ heel in the Department of Justice’s handling of the financial crisis,” says Aguirre.
He points out that media star Martha Stewart was convicted and served time for lying to government investigators, but Stewart was never charged with criminal insider trading. (She was charged with civil insider trading.) He points out that when the securities agency filed charges against Zilkha last May, the agency’s enforcement director said he was quite disturbed by Zilkha’s decision to withhold “crucial information about the scheme during an SEC investigation.”
“We are not able to comment whether these cases [Samberg and Zilkha] will be prosecuted criminally,” says Luke Cadigan, assistant regional director of the securities agency in Boston. He has been in charge of the matter all along. He would not answer other questions about the case.
Aguirre points out that Wall Street bigwigs are yawning at the news that insider trading is commonplace at hedge funds. Indeed, some Wall Street insiders are openly laughing at the government’s claim that it will pursue such hedge-fund thievery. “Why would you expect any other reaction from Wall Street?” says Aguirre. Until criminal prosecutors “put a few Wall Street elite in the slammer, Wall Street’s boys and girls will continue to thumb their noses at the securities laws, while angling the playing field more and more their way.”
If it’s too late under the statute of limitations to charge the crooks with criminal insider trading, it is not too late to charge them criminally with lying to cover up that illegal trading. But the statute of limitations on the lying by Samberg and Zilkha runs out in February, Aguirre warns.