Gary Aguirre's Sacking Should Spur Probe

San Diego — The federal Securities and Exchange Commission was established in 1934 with the mission to protect the public from Wall Street.

Today, it's the other way around, say critics. Now there may be a national debate on the subject, thanks to the agency's ham-handed attempt to squelch Gary J. Aguirre, longtime San Diegan who, like his brother Mike Aguirre, made a bundle practicing law here before going into government.

Late last month, Gary Aguirre told the Senate Judiciary Committee how, as an investigator for the Securities and Exchange Commission, he had spent months probing a hedge fund. Among many questionable things, it had made money by investing in a company shortly before it was taken over at a fat premium. Aguirre came to suspect that the fund had been tipped off to the pending deal by John Mack, now head of one of Wall Street's biggest firms, Morgan Stanley. Mack, whose name has been bandied about as a possible political appointee, is a major fund-raiser for President George W. Bush.

Gary Aguirre's supervisor initially backed him enthusiastically; he had just gotten excellent performance reviews. But senior officials of the agency nixed the investigation "because the suspected tipper had powerful political connections," Aguirre says he was told.

Shortly, Gary Aguirre was fired. Strike one. Then when he wanted to tell his story to Congress, the agency warned him that he would risk breaking the law because details of the investigation could not be made public. Strike two. "There is a federal statute in effect for more than 90 years that authorizes federal employees to provide information to the Congress," says Aguirre in an interview. Some politicians and other bureaucrats are upset with the treatment Gary Aguirre is getting.

"These ninnies at the SEC [Securities and Exchange Commission] -- it's typical stupidity," says Gary Weiss, author of the hot-selling new book, Wall Street Versus America. "The SEC is set up to protect Wall Street. But you rarely see an instance when the SEC goes this far out of its way to stick its head in a guillotine to protect Wall Street. How blatant can you get?"

Others took up the cudgels for Gary Aguirre. The New York Times broke the story on its front page and has kept up the coverage. Gary Aguirre's ordeal could be "a scandal of gargantuan proportions," opined CJR Daily, a media watchdog connected with the Columbia Journalism Review.

Other media were not so kind. Gary Aguirre's allegations "seem flimsy, even if political factors did indeed spur his firing," commented Barron's, the investment weekly.

Its sister publication, the Wall Street Journal, in a piece signed by no fewer than six reporters, went out of its way to note that Gary Aguirre is the brother of San Diego City Attorney Mike Aguirre, who has had a long-running battle with Christopher Cox, former Orange County congress member who is now head of the Securities and Exchange Commission. "As city attorney, Michael Aguirre has also been critical of the SEC in its continuing probe of accounting improprieties of the San Diego pension fund," said the Journal.

"Mike had nothing to do with this. I never discussed this with him," says Gary Aguirre, who intends to return to San Diego before long. "The Wall Street Journal's suggestion is ridiculous. Mike and I do not share an anti-SEC gene."

"I haven't even spoken to Gary about this," says Mike Aguirre. The Journal's story represented "guilt by association. They never contacted me to see if we had ever spoken. I didn't know about it until I read it in the newspaper. It is highly improper for them to do that without speaking to me; obviously it was some kind of a plant, some kind of spin to discredit what he was saying."

A spokesperson for the Journal says, "We weren't trying to draw any implications or inferences from the connection. It is simply a fact, and Michael Aguirre's spokeswoman confirmed it to our reporter."

Like his brother, Gary Aguirre has a law degree from the University of California, Berkeley's Boalt Hall. He came to San Diego in 1968 to work as a public defender. In 1971, while with a law firm, he handled a contentious trade-secret case. He opposed attorney Jim Eckmann. "He can be upsetting and aggressive, but he never lied to me, never lied in court," says Eckmann. In 1984, the onetime opponents formed a law firm to tackle construction defect legislation.

Initially, the firm was located in a run-down building at Eighth and C, one story below the firm run by Mike Aguirre. "They moved out many years before I moved out," says Mike Aguirre. "For a while I was the only tenant there -- me and the rats."

The firm founded by Gary Aguirre and Jim Eckmann closed in 1995. Eckmann has been teaching in several universities since then. Gary Aguirre says he "went to film school, spent some time in Europe, sort of took the weekends I had never taken in 28 years of practicing law and took the next 5 years to do the things I had always hoped to do. Around 2001, I decided that I would like to do something in public service." He went to Georgetown Law Center for his LLM (master of laws) degree, specializing in securities. Then he joined the Securities and Exchange Commission, although he was in his 60s.

He was investigating Pequot Capital Management, a hedge fund. When he sought permission to take the deposition of Mack, he was rebuffed and then fired. When he wanted to tell his story to Congress, he was warned that he could be in trouble. (Pequot and Morgan Stanley deny any wrongdoing.)

The Judiciary Committee is looking into hedge funds, which now have more than $2 trillion in assets. These are sometimes called mutual funds for the superrich, although there are differences: a high percentage are based in offshore tax and secrecy havens, and they take huge risks with borrowed money, such as speculating in currencies, complex derivatives, and corporate takeovers. Initially, the idea was that they would hedge -- that is, bet that some stocks will go up and others go down. Now, many don't hedge at all. They just gamble, and they charge their clients 20 percent or more of their profits, plus 2 percent of their assets under management.

Weiss devotes five chapters of his book to tearing up hedge funds, saying such things as "Hedge funds are glorified mutual funds with fees that are high enough to choke a Clydesdale, Belgian, Percheron or other draft horse." Also, he quotes figures from a prominent economist showing that hedge funds actually underperformed the overall market from 1995 to 2003. So why does so-called "smart money" invest in these things? I suspect there are hidden tax advantages from the offshore locations, and there's a whole lotta stashin' goin' on, but others say that's only a small factor.

In his testimony, Aguirre warned that hedge funds could become as dangerous as the unregulated pools of money (called syndicates, trusts, and pools) that manipulated stocks in the ultimately disastrous markets of the 1920s. He is concerned that big concentrations of loot parked in hedge funds will lead to another takeover wave like the one of the 1980s when good companies were raided and seized by crooks with shady sources of money. He would like to see hedge funds regulated, even though an appellate court late last month knocked down the securities commission's attempt to make hedge funds register with the agency.

Harrumphs Weiss, "The regulation of hedge funds is ridiculous. The SEC is not going to do anything. Hedge-fund regulation has such gigantic loopholes you could drive the Northeast Corridor Amtrak trains through it."

As Gary Aguirre points out, influential forces make sure the agency has neither the funds nor the legal clout to do its job against the rich and powerful. There is another problem: for lawyers, a gig at the Securities and Exchange Commission is a stepping-stone to high-paying Wall Street jobs. The staff attitude, says Weiss, is "You can't do that to John Mack. We might want to work for Morgan Stanley one of these days."

It's time for a national discussion on these topics.