S. HRG. 109–898

EXAMINING ENFORCEMENT OF CRIMINAL INSIDER

TRADING AND HEDGE FUND ACTIVITY

HEARING

BEFORE THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

TUESDAY, DECEMBER 5, 2006

Serial No. J–109–121

Printed for the use of the Committee on the Judiciary

(

EXAMINING ENFORCEMENT OF CRIMINAL INSIDER TRADING AND 

HEDGE FUND ACTIVITY 

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35–458 PDF 2007

S. HRG. 109–898

EXAMINING ENFORCEMENT OF CRIMINAL INSIDER

TRADING AND HEDGE FUND ACTIVITY

HEARING

BEFORE THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

TUESDAY, DECEMBER 5, 2006

Serial No. J–109–121

Printed for the use of the Committee on the Judiciary

(

(II)

COMMITTEE ON THE JUDICIARY 

ARLEN SPECTER, Pennsylvania, Chairman 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

MIKE DEWINE, Ohio 

JEFF SESSIONS, Alabama 

LINDSEY O. GRAHAM, South Carolina 

JOHN CORNYN, Texas 

SAM BROWNBACK, Kansas 

TOM COBURN, Oklahoma 

PATRICK J. LEAHY, Vermont 

EDWARD M. KENNEDY, Massachusetts 

JOSEPH R. BIDEN, JR., Delaware 

HERBERT KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

MICHAEL O’NEILL, Chief Counsel and Staff Director 

BRUCE A. COHEN, Democratic Chief Counsel and Staff Director 

(III)

C O N T E N T S 

STATEMENTS OF COMMITTEE MEMBERS 

Page

Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa ..................... 5

prepared statement .......................................................................................... 1248

Specter, Hon. Arlen, a U.S. Senator from the State of Pennsylvania ................. 1

WITNESSES 

Aguirre, Gary J., former Investigator, Securities and Exchange Commission, 

Washington, D.C. ................................................................................................. 13

Berger, Paul R., former Associate Director, Division of Enforcement, Securities and Exchange Commission, Washington, D.C. ........................................... 22

Blumenthal, Richard, Attorney General, State of Connecticut, Hartford, Connecticut .................................................................................................................. 3

Hanson, Robert B., Branch Chief, Division of Enforcement, Securities and 

Exchange Commission, Washington, D.C. ......................................................... 15

Kreitman, Mark, Assistant Director, Division of Enforcement, Securities and 

Exchange Commission, Washington, D.C. ......................................................... 19

Ribelin, Eric, Branch Chief, Office of Market Surveillance, Securities and 

Exchange Commission, Washington, D.C. ......................................................... 25

Stachnik, Walter J., Inspector General, Securities and Exchange Commission, 

Washington, D.C. ................................................................................................. 38

Tenpas, Ronald J., Associate Deputy Attorney General, Department of Justice, Washington, D.C. ......................................................................................... 6

Thomsen, Linda C., Director of Enforcement, Securities and Exchange Commission, Washington, D.C. .................................................................................. 17

QUESTIONS AND ANSWERS 

Responses of Gary J. Aguirre to questions submitted by Senators Grassley 

and Specter (Note: This material has been redacted by the staffs of Senators Specter and Grassley.) ............................................................................... 44

Responses of Paul R. Berger to questions submitted by Senators Specter 

and Grassley ......................................................................................................... 440

Responses of Robert B. Hanson to questions submitted by Senators Specter 

and Grassley ......................................................................................................... 447

Responses of Mark Kreitman to questions submitted by Senators Grassley 

and Specter ........................................................................................................... 453

Responses of Eric Ribelin to questions submitted by Senator Specter ............... 457

Responses of Walter J. Stachnik to questions submitted by Senators Specter 

and Grassley ......................................................................................................... 459

Responses of Ronald J. Tenpas to questions submitted by Senator Specter ...... 479

Responses of Linda C. Thomsen to questions submitted by Senators Grassley 

and Specter ........................................................................................................... 499

SUBMISSIONS FOR THE RECORD 

Aguirre, Gary J., former Investigator, Securities and Exchange Commission, 

Washington, D.C., statements and attachments (Note: This material has 

been redacted by the staffs of Senators Specter and Grassley.) ...................... 509

Berger, Paul R., former Associate Director, Division of Enforcement, Securities and Exchange Commission, Washington, D.C., statement and attachment ...................................................................................................................... 1221

Blumenthal, Richard, Attorney General, State of Connecticut, Hartford, Connecticut, statement ............................................................................................... 1244

Page

IV

Hanson, Robert B., Branch Chief, Division of Enforcement, Securities and 

Exchange Commission, Washington, D.C., statement ...................................... 1250

Kasowitz, Marc E., Counsel, Alliance for Investment Transparency, Washington, D.C., statement ........................................................................................ 1256

Kreitman, Mark, Assistant Director, Division of Enforcement, Securities and 

Exchange Commission, Washington, D.C., statement and attachment .......... 1262

Tenpas, Ronald J., Associate Deputy Attorney General, Department of Justice, Washington, D.C., statement ...................................................................... 1268

Thomsen, Linda C., Director of Enforcement, Securities and Exchange Commission, Washington, D.C., statement and attachments .................................. 1276

Wood, John P., CEO & Chairman of the Board, Telos Corporation, Ashburn, 

Virginia, statement .............................................................................................. 1315

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EXAMINING ENFORCEMENT OF CRIMINAL INSIDER TRADING AND HEDGE FUND ACTIVITY 

TUESDAY, DECEMBER 5, 2006

U.S. SENATE, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Committee met, pursuant to notice, at 9:32 a.m., in room 

SD–226, Dirksen Senate Office Building, Hon. Arlen Specter, 

Chairman of the Committee, presiding. 

Present: Senators Specter and Grassley. 

OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. 

SENATOR FROM THE STATE OF PENNSYLVANIA 

Chairman SPECTER. Good morning, ladies and gentlemen. The 

Judiciary Committee will now proceed with this hearing on enforcement of insider trading and the issue of hedge funds, where we 

now find enormous growth, to more than $1 trillion a year, some 

30 percent of the U.S. stock transactions. 

Sarbanes-Oxley had included in it provisions for criminal law enforcement which came out of hearings from the Judiciary Committee, and this is the third in a series of hearings by the Judiciary 

Committee into this very important subject. 

We have circulated draft legislation which will be the subject of 

comment here today. A concern about Federal court decisions prohibiting coordination between the Securities and Exchange Commission and the Department of Justice invalidating two criminal 

prosecutions. A question arises as to why that should be. What is 

the problem with having the SEC and the Department of Justice 

coordinate? 

We find that the whistleblower provisions of existing law have 

not been utilized by the Securities and Exchange Commission, and 

the draft legislation has a proposal to make awards at the discretion of the Attorney General in substantial amounts to whistleblowers who have proceeds going to the Federal Government by 

way of fine or settlement or other enforcement mechanisms. 

And with the development of the hedge funds so that there are 

many who are now investing, the so-called smaller investors, the 

issue arises as to whether there ought to be regulation. That is 

really essentially a matter for the Banking Committee, and I have 

talked to Senator Shelby, the Chairman, about that. 

The Judiciary Committee is making an inquiry, as is the Finance 

Committee, led by Chairman Senator Grassley, who is also a memVerDate 0ct 09 2002 13:07 Jun 01, 2007 Jkt 035458 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\35458.TXT SJUD1 PsN: CMORC
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ber of this Committee. And the draft legislation has a provision 

which would call for regulation where there are pension funds involved. Those are subjects which we are going to be considering in 

the course of today’s hearing. 

The issue of the investigation into charges brought by Mr. Gary 

Aguirre has attracted the attention of the Committee. There are a 

number of factors which raise issues. We have had the unusual result of Mr. Aguirre being involved in a very important SEC investigation and having favorable evaluations of his job and two pay 

raises, and then when he presses an investigation to have suddenly 

a re-evaluation as to what he has been doing and to have him terminated. 

We have another investigator in the SEC expressing concerns 

about the nature of the investigation, what has been happened, 

and submits an e-mail after being asked to be relieved of his responsibilities that there is something smelly going on. 

Then you have no action taken by the SEC until the Senate investigation is initiated. You have the deposition taken of Mr. Mack 

long after it might have been taken in the ordinary course of business, and, curiously, 5 days after the statute of limitations has run. 

You have the Inspector General of the SEC closing out an investigation without interviewing Mr. Aguirre. A little hard to understand that kind of investigative technique. 

What is the explanation? Well, that is something that this Committee is going to try to find out. At best, it looks like extraordinarily lax enforcement by the Securities and Exchange Commission. That is at best. And at worst, it has the overtone of a possible 

coverup. And those are difficult matters to ascertain, but we are 

dealing here with a very, very important subject. 

We are dealing with communications between individuals where 

there appears to be inside information on a pending merger and 

some $11 million is gained by transactions related to that. And the 

matter is referred to the SEC, and nothing is done for 2 years. 

Then finally, when the investigation by Mr. Aguirre is picked up, 

those events occur. 

Well, maybe it is just smoke and maybe there is no fire, but 

where you have hedge funds with as dominant a role as they are 

playing in the economy, more than $1 trillion, and their expansive 

nature in picking up smaller investors, pension funds, and this 

Committee is charged with oversight on enforcement, these are 

very, very important matters. 

In reviewing the orderly sequence for today’s hearing, I had 

wanted the witnesses who were at the table now as to panel one, 

but I believe it would be more efficient to alter the presentation. 

So we are going to hear first from Associate Deputy Attorney 

General Ronald Tenpas and Connecticut Attorney General Richard 

Blumenthal. So if you gentlemen would step back, and Mr. Tenpas 

and General Blumenthal will step forward, and Ms. Linda 

Thomsen will be in the second panel. 

Our first witness this morning will be Connecticut Attorney General Richard Blumenthal, an outstanding record in public service, 

having served in the Connecticut State Senate, State House of Representatives, and as a U.S. Attorney for the District of Connecticut, 

was law clerk to Justice Harry Blackmun, formerly assistant to 

3

Senator Abraham Ribicoff, and Presidential assistant to Daniel 

Patrick Moynihan before he became a Senator; Phi Beta Kappa 

graduate of Harvard and law school from Yale and editor of the 

Yale Law Journal. Pretty good pedigree, Mr. Blumenthal. We welcome you here and look forward to your testimony. 

STATEMENT OF RICHARD BLUMENTHAL, ATTORNEY GENERAL, STATE OF CONNECTICUT, HARTFORD, CONNECTICUT 

Mr. BLUMENTHAL. Thank you very much, Mr. Chairman. I appreciate this opportunity to be with you again, and I want to thank 

you, as Chairman of this Committee, as well as the Committee 

itself for its leadership in this absolutely critical area, focusing not 

only on the specific instance—that you have just outlined so well—

of potential problematic laxity in investigation, but also on the 

more general problems that arise with respect to hedge funds. And 

with your permission, I would like to present a much abbreviated 

version of my testimony and then have the full text entered in the 

record. 

Chairman SPECTER. Attorney General Blumenthal, your full 

statement will be made a part of the record, as will all other statements, and we appreciate your summarizing. 

Mr. BLUMENTHAL. Thank you. 

As you very correctly observed, hedge funds have become more 

and more retailed in the financial markets to investors who are no 

longer the wealthy and sophisticated individuals who once were 

viewed as the sole kind of investors in hedge funds, and now the 

$1 trillion and 9,000 hedge funds that are involved in this industry 

span a much broader section of the American public. 

But, equally important, they involved investment vehicles and instruments such as credit default swaps and increasing use of public 

offerings, bonds and so forth, that can impact the markets. 

The investments in commodities, as we saw with Amaranth, can 

have a huge, sweeping effect on those markets and potentially for 

good, but also for ill. And so I think that the emphasis in the draft 

discussion bill on greater disclosure of risk strategy and of other 

very relevant factors in operation of hedge funds is absolutely going 

in the right direction. 

I want to emphasize also the importance of protecting whistleblowers, and I think that point is directly relevant to the specific 

subject relating to Pequot Capital that brings us here today or has 

elicited the Committee’s attention. 

The kinds of rewards for whistleblowers we have found in our investigation, protection for people who are willing to risk their lives 

and livelihoods, their careers and reputations, is critical, and the 

idea of providing, for example, 30 percent of any sort of civil fines 

and penalties, as a maximum 30 percent, as much as 30 percent, 

is a very, very promising concept, and I think in my view, based 

on my experience in our investigation, is a very worthwhile avenue 

to pursue. 

I want to also emphasize the importance of concurrent jurisdiction—it is mentioned in my testimony, but I think, again, it is an 

area that acquires even greater importance in light of the potential 

problems in the Pequot Capital investigation by the SEC—concurrent jurisdiction that enables States to be active participants and 

4

partners, but also empowered to conduct their own investigations 

in this area if necessary has been one of the lessons, I think, in 

recent history, whether in securities, insurance, environment, the 

role of States in active, aggressive law enforcement where the Federal Government, either purposely or inadvertently, abandons the 

field or fails to be sufficiently aggressive is a lesson that I think 

is applicable here as well. 

The kinds of experiences we have had in Connecticut with hedge 

funds, whether Amaranth or Bayou, others obviously across the 

country where there have been failures, I think emphasize the importance of that concurrent jurisdiction where States like Connecticut which have a very heavy representation of hedge funds 

can be an active participant is very important, in my view. 

And, finally, I want to just emphasize one very important feature 

of changing the law that I think should be examined by the Committee. Raising the net worth or income levels that are required for 

participation in hedge funds is one of the most important steps 

that this Committee could take or that the SEC could take, because 

it will raise the bar, so to speak, and enable investors themselves 

to be of the type that can do their due diligence, that will have the 

assets and the sophistication that hedge funds initially were supposed to provide, and that hedge fund investors were supposed to 

have. 

And so I would suggest, for example, that the net worth require- ments be raised to $2 million—presently they are $1 million—or 

higher, and that the minimum income requirements for investors 

be raised far higher than the $200,000 now, as an alternative to 

that $2 million, perhaps on the order of $500,000. 

These numbers are illustrative, as I indicate in my testimony, 

but, again, such requirements would help ensure that hedge fund 

investors are capable of doing the due diligence and assessing the 

risk that informed hedge fund participation requires. 

I want to again thank the Committee for giving me this opportunity and look forward to continuing my contribution as someone 

who comes from a State where hedge funds are a big part of our 

economy. We want there to be Federal action rather than a patchwork of different State rules or guidelines. 

We want the Federal Government to take the lead because we 

want to avoid disadvantaging hedge funds in any single State, and 

instead we should have uniform national rules, stronger protections 

for investors in disclosure and accountability than we do now. 

Thank you. 

[The prepared statement of Mr. Blumenthal appears as a submission for the record.] 

Chairman SPECTER. Well, thank you, Attorney General 

Blumenthal. We appreciate your coming back to testify, and we appreciate what you are doing on the State level, and we thank you 

for being with us. 

We have been joined now by Senator Grassley, who, as I had 

mentioned earlier, has taken the lead with the Finance Committee 

on inquiries into what is happening with hedge funds. He is 

chairing another hearing, so since he is a distinguished member of 

the class of 1980, one of the two remaining members of that class, 

I am going to yield to him at this time. 

5

STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR 

FROM THE STATE OF IOWA 

Senator GRASSLEY. Thank you. I appreciate your courtesies. I 

also appreciate your continued cooperation that you have given 

with my Committee in working on this issue. 

I also ought to appreciate the cooperation of the Securities and 

Exchange Commission, and particularly Chairman Cox, in providing documents, information, and witnesses to both the Finance 

and Judiciary Committees during this investigation. 

The SEC is recognizing the constitutional responsibility of Congress to conduct oversight of Federal agencies. A lot of other Federal agencies, especially Health and Human Services and the Justice Department, could learn a lot from this good example set by 

the SEC. 

Now, today’s hearing is the second by this Committee relating to 

penalties for criminal enforcement of illegal insider trading, and 

the third that has discussed the evolving role involving hedge 

funds. 

And so I want everybody to know that I share Chairman Specter’s concerns about the extent of insider trading and its impact on 

public confidence in the fairness and integrity of the stock market. 

This Committee has jurisdiction over criminal laws, and with today’s hearing we need to see if the laws on the books are strong 

enough to see that they are enforced in a way that Congress intended. 

We are also here today to discuss allegations brought by the 

former SEC Attorney Gary Aguirre. His allegations led to a joint 

Finance/Judiciary Committee investigation on whether there was 

retaliation against this SEC lawyer for his role in the investigation 

of a large hedge fund. The Senate investigation also focused on the 

original investigation of these allegations by the Inspector General 

of the SEC. 

Today we will hear about findings from the Senate Committees’ 

investigation along with information learned through witness interviews and an extensive review of SEC documents. We will dig into 

why the Inspector General failed to uncover important evidence 

corroborating many of these allegations. 

We will also question Mr. Aguirre’s supervisors about the debate 

that went on inside the SEC about whether and when to ask a 

high-profile Wall Street executive some key questions during its insider trading investigation. 

The resistance of the SEC to taking Mr. Mack’s testimony until 

after the press and Congress put a spotlight on issues raised serious questions for me about whether captains of industry get the 

same treatment as regular investors or whether they get treated 

with kid gloves. 

Finally, we will question Mr. Aguirre’s supervisors about the 

SEC’s personnel process and why they created an alternative negative evaluation of Mr. Aguirre that was not submitted into his personnel file until after they fired him. 

I would like to hear how they can square that with his original 

positive evaluation and the pay increases that he got. It looks like 

that negative evaluation was only created after Mr. Aguirre started 

complaining to his supervisors that it was unfair to treat John 

6

Mack differently than the SEC would treat an average investigation in the same situation. That is not a legitimate reason to go 

back and change an employee’s performance evaluation. 

These issues point to problems within the agency that distract 

from the core mission of protecting investors. This hearing can 

kick-start some necessary changes at the SEC. This hearing is 

about finding solutions as well as exposing problems. 

I thank you, Mr. Chairman. I will be back to ask questions. 

[The prepared statement of Senator Grassley appear as a submission for the record.] 

Chairman SPECTER. Thank you very much, Senator Grassley. 

Thank you for your leadership and extensive work this on this important subject. 

Senator GRASSLEY. Thank you. 

Chairman SPECTER. We now turn to Associate Deputy Attorney 

General Ronald Tenpas, who has responsibilities including coordinating work by the President’s Corporate Fraud Task Force and reviewing policy proposals related to preventing and punishing 

crimes in the corporate world. 

Previously, Mr. Tenpas was U.S. Attorney for the Southern District of Illinois and an Assistant U.S. Attorney in both the Middle 

District of Florida and the District of Maryland. He clerked for 

Chief Justice Rehnquist and Judge Pollak of the Eastern District 

of Pennsylvania; bachelor’s degree from Michigan, law degree from 

the University of Virginia, and a Rhodes scholar. 

Thank you for being with us today, Mr. Tenpas, and the floor is 

yours. 

STATEMENT OF RONALD J. TENPAS, ASSOCIATE DEPUTY ATTORNEY GENERAL, DEPARTMENT OF JUSTICE, WASHINGTON, D.C. 

Mr. TENPAS. Thank you, Senator Specter. Thank you for the opportunity to be back and talk again about this issue. 

I thought in my opening I would focus my remarks on the bill’s 

criminal provisions, the draft bill that you have shared with us, 

and try to highlight the effect some of those provisions would have 

on our criminal enforcement efforts. 

As we discussed in my prior appearance here, there is a division 

of labor in this arena between the civil and criminal enforcement 

effort, with DOJ having the lead in the criminal enforcement 

arena. 

Let me start my discussion with Section 4 of the bill. This section 

would amend Title 18, Section 1348, by adding a new subsection 

(b) that would expressly prohibit insider trading. 

We believe it could be helpful to put insider trading offenses on 

a firmer statutory footing than they now stand, which is really as 

a species of judicially recognized Title 15 offenses where Title 15 

prohibits schemes to deceive associated with the offering and sale 

of securities. So creating some statutory clarity here in that courtcreated arena could be helpful to us. 

We do have a number of concerns about the specifics reflected in 

the bill. For example, the section is entitled ‘‘Willful misuse of material nonpublic information.’’ Yet the new paragraph (b)(2)(1)(A) 

7

incorporates a ‘‘knowingly’’ standard, while paragraph (b)(2)(1)(B) 

provides no explicit scienter requirement. 

The new subsection (b) as currently worded introduces at least 

two substantial changes from current law. It eliminates the element that a person who is charged with insider trading be shown 

to have a ‘‘duty’’ with respect to that information. 

We have concerns that eliminating this requirement potentially 

subjects to criminal sanctions those who might innocently come by 

valuable information and trade on it. Conversely, the draft bill essentially adds a new affirmative defense that trading on inside information is acceptable if that information was ‘‘gained 

by...research and skill.’’ 

Such a formulation will make it more difficult to prove insider 

trading than is the case under current law where no such defense 

exists. Similarly, some of the phrases, such as ‘‘of a specific nature’’ 

and the phrase ‘‘significant factor,’’ which are included in the legislation, would impose burdens that we do not currently face, and so 

give us concern. 

We think perhaps a better model may be to look to the definition 

of ‘‘insider trading’’ that the SEC has already promulgated through 

its regulatory process and then build from that if any adjustments 

are necessary. Obviously, we would be happy to work with you and 

other members of the Committee on such an effort going forward. 

Similarly, in Section 4, paragraph (c), we welcome the effort to 

make clear the Department’s authority to investigate insider trading offenses and to do so in a manner that involves express coordination with our partners at the SEC. 

As you noted, there have been a couple of court decisions in this 

arena recently, and the United States has appealed one of those decisions that has, unfortunately, created potential barriers to the 

conduct of parallel investigations. 

Thus, while we welcome the thrust of the effort to cure some of 

this, we would urge that any final decisions on how to respond be 

made after the appellate court releases its decision so that we can 

ensure that any legislation provides as comprehensive a fix as possible in light of where the law will stand at the time of that decision. 

Even as that section is framed right now, there are things that 

we would hope to have a chance to work with you and the Committee on to perhaps tweak a bit. Proposed paragraph (c)(2) of Section 1348 would provide that neither the Attorney General nor any 

other Federal agency would have a duty to disclose any investigation or to disclose any contacts made with a companion agency to 

‘‘request or receive evidence,’’ is the language in the bill. 

But we have traditionally coordinated our efforts with the SEC 

through more than just requesting or receiving evidence. Thus, this 

language might be argued to cut back on rather than to confirm 

the proprietary of some of these traditional coordination efforts. 

And, similarly, the language in the proposed bill applies only to 

investigations of violations of ‘‘this section,’’ i.e., Section 1348 of 

Title 18. Yet we continue to have parallel proceedings that involved 

other criminal provisions of Title 18 and Title 15, which could be 

equally frustrated or affected by these court decisions. And so, 

8

again, we would be concerned about some of the particular language contained in the bill. 

Let me also briefly turn to Section 5, the section to create incentives for private citizens to report and assist in the investigation 

of insider trading. We always welcome the assistance of private 

citizens who report criminal acts. 

However, giving such substantial financial incentives to individuals to make criminal allegations would be a fairly dramatic departure from past practice in the criminal arena and will introduce 

new complexity for us and, thus, raise concerns. 

Such financial incentives may produce not only meritorious allegations that are helpful, but also false allegations that can result 

in individuals being false accused. 

It will be important grist for impeachment of key government 

witnesses, and we are concerned about whether the factors the 

statute indicates should be considered in fashioning a reward 

amount are meant to be exhaustive or only illustrative. 

For example, we think it would be significant to consider whether the person who provides the information was himself complicit 

in the crime, and that is not a factor that is identified as a factor 

for consideration. 

Let me conclude there. I have laid out in more detail in the written testimony other examples of specifics that we observe we would 

like the opportunity to work with the Committee on further. 

Thank you. 

[The prepared statement of Mr. Tenpas appears as a submission 

for the record.] 

Chairman SPECTER. Thank you very much, Mr. Tenpas. 

I will include in the record at this point a statement from Mr. 

John P. Wood, Chief Executive Officer and Chairman of the Board 

of the Telus Corporation, a four-page analysis favoring the draft 

legislation. 

[The prepared statement of Mr. Wood appears as a submission 

for the record.] 

Chairman SPECTER. Mr. Tenpas, the jurisdiction of the Judiciary 

Committee led to the enactment of 18 United States Code 1348 

Criminal Code in 2002, and the question I have for you at the outset is: How many indictments have been brought under that statute? 

Mr. TENPAS. We have brought just over 50. I think the number 

is around 53, 54, something in that neighborhood. 

Chairman SPECTER. And how many of those involved insider 

trading? 

Mr. TENPAS. We do not have a good way to measure that, Senator. 

Chairman SPECTER. Why not? 

Mr. TENPAS. Because as I alluded to earlier, insider trading is a 

species of schemes to defraud, and so we simply—in our statistical 

programs that track this, we track the statute that has been 

charged. We do not necessarily track sort of the underlying theory 

that has been used. Is it insider trading? Was it accounting fraud 

or any of the other kinds of things that might be a violation of the 

statute? 

9

Chairman SPECTER. Mr. Tenpas, insider trading is sufficiently 

important so that I think it would be very useful to this Committee 

if you would make that identification, because that is a little different species. So would you endeavor to do so? 

Mr. TENPAS. We will do so. 

Chairman SPECTER. Mr. Tenpas, just last Thursday, on November 30th, Mr. Michael Tom of Global Time Capital Growth Hedge 

Fund was given 3 years’ probation in Boston involving a trading tip 

that Citizens Bank would be acquiring Charter One Financial. He 

made a $750,000 profit on that transaction and got 3 months’ probation. Is that sentence adequate? 

Mr. TENPAS. I am not— 

Chairman SPECTER. You have been an Assistant U.S. Attorney in 

two districts, a U.S. Attorney in one district. The assistant prosecutors have a pretty good feel for that, and I recall my days as an 

Assistant D.A. Three months’ probation for $750,000? That is more 

than you get paid, $250,000 a month. What do you think? 

Mr. TENPAS. I am simply not familiar with the specifics. We 

would be happy to go back and look at it and advise the Committee 

of what went into fashioning that sentence. Obviously, as you are 

aware, the sentence ultimately is determined by the court, and I 

am not— 

Chairman SPECTER. Oh, is that so? 

Mr. TENPAS. I am not certain whether the United States made 

a particular recommendation in that case or not. 

Chairman SPECTER. Well, is there any coordination on DOJ recommendations? The Department of Justice does make recommendations. We do know that it is up to the judge. 

Mr. TENPAS. Certainly the United States Attorney’s Office will—

the prosecutor assigned to the case will typically make some—give 

some indication at the sentencing of the appropriate sentence. 

Chairman SPECTER. Well, that is a pretty big case. I would have 

thought that you would have had some familiarity with that. You 

are in a key position. Aren’t those matters brought to your attention for your input? 

Mr. TENPAS. A case of that magnitude would not necessarily or 

routinely— 

Chairman SPECTER. What magnitude would it take? 

Mr. TENPAS. It is usually going to be bigger than that, in the several millions of dollars. Our U.S. Attorney’s Offices routinely handle matters in which the loss or the fraud is in the hundreds of 

thousands of dollars, and so a case of that magnitude, given what 

you have described, is not something that I would routinely expect 

to come to officials in Washington. 

Chairman SPECTER. Mr. Tenpas, let me suggest to you that 

$750,000 is significant and that it is a very bad sign to get 3 

months’ probation on that kind of a case. 

Attorney General Blumenthal, there has been the overall approach that voluntary procedures within the industry would be sufficient, and after the Long Term Capital Management collapse 8 

years ago, voluntary industry changes were implemented to control 

potential abuses in hedge funds. 

And then as you noted in your testimony, Amaranth came along recently, some $9 billion in losses. How do you evaluate the overall 

10

approach that the industry can regulate itself, that the bank’s involvement puts them sufficiently at risk so that they will make 

independent inquiries and that it is not necessary to have governmental regulation? 

Mr. BLUMENTHAL. I think that there is a growing consensus 

within the hedge fund industry that measures to require greater 

transparency are inevitable and necessary. The voluntary self-policing I think continues to put at risk lenders to the hedge funds, 

commodity markets, as well as individual investors that now include pension funds, university endowments, a much broader crosssection of the investing public. 

Chairman SPECTER. When you mention voluntary procedures, 

just what does that involve? 

Mr. BLUMENTHAL. Essentially it involves primarily the investor 

doing the due diligence and getting from the hedge fund information that is thought necessary about investment strategies, types of 

investments, degrees of return, past performance, baseline performance, compensation for hedge funds managers—all of the key areas 

that are identified in your proposed draft bill. 

And I think that is one of the very central points about this draft 

bill, that it identifies that information, through Subdivisions A, B, 

C, D, E, the investment objectives and strategies, the risks, the 

side agreements, the extent of audits. 

I think those are the key pieces of information that right now, 

to answer your question directly, are voluntarily provided, supposedly, by the hedge funds. The problem is that a lot of the investors, even some of the largest pension funds and endowments and 

others that should have that analytical ability, simply either lack 

it or are not provided with complete information. And right now 

there really is not the kind of oversight and scrutiny that this bill 

envisions for that truth-telling process, that disclosure. 

Chairman SPECTER. Did Amaranth involve pension funds? 

Mr. BLUMENTHAL. There were pension funds that lost money in Amaranth. Indeed, I believe one in California lost about $87 million, the pension funds of one of the cities in California. 

And as you know also, Amaranth involved use of the electronic 

trading issues through the intercontinental exchange that right 

now is not subject to the kind of disclosure requirements that 

NYMEX is. So that is another area where hedge funds are involved 

in practices where more disclosure should be required by— 

Chairman SPECTER. Were small investors involved in Amaranth 

as well? 

Mr. BLUMENTHAL. I know some of them personally. Amaranth 

was and continues to be a Connecticut hedge fund. I think it is now 

non-operational, but many smaller investors in my own community, 

in Greenwich-Stamford, Connecticut, generally, were involved in 

Amaranth, as they were involved in Bayou. 

Chairman SPECTER. Do you have any idea of how much they 

lost? 

Mr. BLUMENTHAL. Well, the total losses probably were in the range of $6 billion out of the $9 billion that Amaranth had because 

$6 billion was approximately the amount that was invested in natural gas futures. But some of these were losses of life savings and 

some on the part of people who couldn’t afford to lose them. 

11

Chairman SPECTER. And when you talk about small investors, 

how do you define ‘‘small’’? 

Mr. BLUMENTHAL. Well, a small investor would, in my view, be 

anyone who cannot afford to lose the amount invested, and in different communities it may be different amounts. 

Right now the million-dollar net worth threshold for an accredited investor in parts of Connecticut, New York, New Jersey, Pennsylvania, many areas of our country, is still a small investor, but 

many of the investors that I have in mind have net worths well 

below that $1 million. 

Chairman SPECTER. Mr. Tenpas, what is your evaluation of the 

adequacy of these so-called voluntary industry practices to safeguard against inappropriate practices by hedge funds? 

Mr. TENPAS. I think that is a little beyond the Department’s ken. 

The President’s Working Group on Financial Markets that is 

chaired by the Treasury Department includes the SEC, the Federal 

Reserve, and the CFTC is really the group that is looking at that, 

understands those markets and the way they work better than we 

do. And so I think I would have to defer to that group of folks to 

give you a sensible evaluation. 

Chairman SPECTER. Well, OK. Let’s come back squarely within 

your so-called ken. On the parallel investigations by the SEC and 

the Department of Justice, you do favor a change in the law or a 

specification in the law to deal with the Federal court decisions 

which have stricken prosecutions on the ground that it was inappropriate to have parallel or coordination between the SEC and the 

Department of Justice? 

Mr. TENPAS. We would welcome, I think, some clarification. We 

think those cases were wrongly decided, so I would be reluctant to 

say that we think a change in the law is needed. There have been 

a couple of cases decided since the Stringer case that have rejected 

some of the language in Stringer and the Scrushy case. So I am not 

sure we need a change, but we need some clarification that the 

view we have taken is, in fact, the correct view of— 

Chairman SPECTER. Clarification that you can have parallel investigations appropriately. 

Mr. TENPAS. Yes. I think clarification that the Department and 

the SEC or other similar regulatory agencies can communicate 

with each other about and coordinate their investigations for appropriate purposes. 

Chairman SPECTER. When you mention that we ought to await 

the decision by an appellate court, what is the status there? How 

long do we have to wait? 

Mr. TENPAS. It is still being briefed. Oral argument has not been 

held, so it would probably be, at best, sometime this spring, early 

summer. It is in the Ninth Circuit so it is a little hard for us to 

predict how long they would have it under advisement. 

Chairman SPECTER. So you think it might happen sometime next 

year. 

Mr. TENPAS. I think so. 

Chairman SPECTER. Congress has a pretty good record at waiting, even without a specific reason, but I think this is something 

we really ought to be acting on. 

12

Attorney General Blumenthal, you talk about protecting whistleblowers. I agree with you. It is not easy to come forward and to 

make an identification, but it is indispensable to have real law enforcement. You are a prosecutor. Mr. Tenpas was. We know from 

our common experience how hard it is to gather this information 

which is done behind closed doors and in secrecy. 

Do you think the current protections for whistleblowers are adequate? 

Mr. BLUMENTHAL. Overall, I think not, Mr. Chairman. I think 

there needs to be a stronger shield, protection against retaliation, 

indirect as well as overt, and direct forms of revenge or retaliation. 

Often, as you know, they can be subtle, pernicious, but long-lasting on a person’s career. We see it at the State level, obviously, 

which is the arena where I practice now. Just yesterday, as a matter of fact, my office produced a report that culminated a 13-month 

investigation of the Internal Affairs unit of our State Police that resulted from State Troopers themselves having the courage and conviction to come forward with complaints about a system that was 

in disarray. 

And we have protected those whistleblowers. We are able to do 

so as best we can at the State level. But we need the kind of rewards, I think, and incentives that your draft bill proposes. 

As well as the shield, we need the kind of incentives that will 

provide a financial security—maybe the best way to characterize 

it—for people who come forward and take the risk that government 

may not be able to protect them. 

We saw it in the tobacco cases where we were guided initially by 

whistleblowers, now well known, but, arguably, the States would 

not have had the evidence and the guidance that we needed there 

without whistleblowers from the tobacco industry. Again and again 

what we see is not just disclosure of information, but also providing 

a road map. 

As you know from your prosecutorial days, and I am sure Mr. 

Tenpas does as well, one of the classic tactics of potential defendants is to deluge prosecutors with documents. Having a road map, 

having someone to guide that effort, to pinpoint the documents that 

are critical, often is invaluable. And, again, whistleblowers provide 

that service. 

So I apologize for the long-winded answer, but I believe that a 

greater measure of protection, as you have sought, as the Committee is seeking to do in this bill, is absolutely vital. 

Chairman SPECTER. That is not long-winded at all, Mr. 

Blumenthal, by Senate standards. 

[Laughter.] 

Chairman SPECTER. Well, thank you very much, Mr. Tenpas and 

Attorney General Blumenthal. We very much appreciate your testimony. 

Mr. Tenpas, if you would followup on those outstanding issues, 

and, Attorney General Blumenthal, keep going. 

Mr. BLUMENTHAL. Thank you very much, Mr. Chairman. 

Mr. TENPAS. Thank you. 

Chairman SPECTER. Thank you very much. 

We will now turn to Mr. Aguirre, Mr. Stachnik, Mr. Hanson, Mr. 

Kreitman, Mr. Berger, Mr. Ribelin, and Ms. Thomsen. 

13

At this point I will put into the record a lengthy analysis of six 

pages by Mr. Mark Kasowitz of the Alliance for Investment Transparency, dated September 4, 2006, in support of the draft legislation. 

[The prepared analysis of Mr. Kasowitz appears as a submission 

for the record.] 

Will all of you please stand for the administration of the Oath? 

Raise your right hands. Do each of you solemnly swear that the 

testimony you will give before this Committee will be the truth, the 

whole truth, and nothing but the truth, subject to the laws on perjury? 

Mr. AGUIRRE. I do. 

Mr. STACHNIK. I do. 

Mr. HANSON. I do. 

Mr. KREITMAN. I do. 

Mr. BERGER. I do. 

Mr. RIBELIN. I do. 

Ms. THOMSEN. I do. 

Chairman SPECTER. May the record show that each of the witnesses has said ‘‘I do.’’ 

Mr. Aguirre, thank you for returning to testify before this Committee. Mr. Aguirre is a former senior counsel with the Division of 

Enforcement in the Securities and Exchange Commission, has 

nearly 40 years of litigation experience, including the areas of construction disputes, environmental regulations, securities litigation, 

and criminal defense; published many scholarly legal articles, including one arising from litigation from the Enron debacle and the 

application of Section 10(b) of the Securities Act for fraud; bachelor’s degree in politics and a law degree from the University of 

California at Berkeley; a master of fine arts from UCLA and a 

master of law from Georgetown University Law Center. 

Thank you for being with us, Mr. Aguirre, and we look forward 

to your testimony again. 

STATEMENT OF GARY J. AGUIRRE, FORMER INVESTIGATOR, 

SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C. 

Mr. AGUIRRE. Thank you, Senator Specter. I would like to express my gratitude for the time that your staff has taken to look 

into this matter and your leadership in looking into this matter. 

Before I touch on the Pequot case, I would like to speak briefly 

about the SEC’s track record on the subject you are looking at. The 

SEC has brought—and I am talking, of course, about insider trading investigations of hedge funds, and specifically those that result— 

Chairman SPECTER. Mr. Aguirre, is your microphone on? 

Mr. AGUIRRE. I will move a little closer. Specifically about SEC 

cases that have been filed against hedge funds for insider trading. 

It is a short record. There are six cases. Three of those cases are 

PIPEs cases. PIPE transactions are a filament, a tiny, tiny, thin aspect of our capital markets. Last year they were $20 billion. Compare that, for example, with our merger and acquisitions market, 

which is $1.46 trillion. Half the focus was on this. 

On all the other types of insider trading, whatever it is—mergers, acquisitions, tips before earnings, tips before drugs—everyVerDate 0ct 09 2002 13:07 Jun 01, 2007 Jkt 035458 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\35458.TXT SJUD1 PsN: CMORC
14

thing else, there are three cases. The total recovery in those three 

cases is $110,000. That is the track record of the SEC in pursuing 

insider trading with the exception of the PIPEs cases, and in the 

PIPEs cases they recovered $25 million. 

Now, those three cases deserve a little more comment. Two of 

them involved tiny, tiny hedge funds, and the third, it took them 

5 years to file a case. 

Now, I would like to talk for a moment about the Pequot case, 

and in particular on the date of June 14th. On that date, I was 

meeting with Mr. Hanson and Mr. Kreitman. I was reviewing for 

them the status of the case at that moment. I had reviewed the 

status of the evidence involving Pequot itself, Mr. Samberg, and as 

well as Mr. Mack. That day, they authorized me to meet the next 

day with the FBI and the U.S. Attorney and present the same facts 

to initiate a criminal investigation. 

Now, that is a serious matter. That is why I was so shocked 

when, 9 days later, they would not permit the issuance of an administrative subpoena for Mr. Mack’s testimony. Of course, something had changed during those 9 days. 

On June 23rd, the Wall Street Journal announced that Mr. Mack 

would be a candidate as the CEO for Morgan Stanley. On June 

22nd or 23rd, Mr. Hanson explained to me that I could not issue 

that subpoena for Mr. Mack for one reason, and he gave me only 

one reason, and that reason was his powerful political contacts. 

Chairman SPECTER. Mr. Hanson told you that? 

Mr. AGUIRRE. Face to face, twice that week. 

Now, that event was followed very quickly by a phone call from 

Morgan Stanley in which I was told by Morgan Stanley’s compliance officer, ‘‘We’ve got a problem with Mr. Mack if you guys are 

going to go after him.’’ 

That investigation vanished in a week, and in that same 7 days, 

Mr. Mack went from a candidate for CEO to CEO. The rest of my 

time I continued minding the evidence against Mr. Mack. I continued presenting that evidence. And every time I presented it, the 

bar went up another notch and the bar went up another notch. 

And, finally, it was a 9-foot bar. 

I would like to say just a few words about my evaluations. They 

were touched on by Senator Grassley, the remarkable way I had 

a re-evaluation out of nowhere. I read this morning the testimony 

that has come in from the SEC and the attacks. I have not seen 

a single piece of paper backing anything that they have said 

through my history with the SEC, and I have been trying to get 

them through FOIA and Privacy Acts. 

Thank you. I think my time has run out. 

[The prepared statement of Mr. Aguirre appears as a submission 

for the record.] 

Chairman SPECTER. Thank you, Mr. Aguirre. 

Mr. Hanson, I am going to go to you out of order so that you will 

have a prompt opportunity to respond to Mr. Aguirre’s statement 

that he and you face to face had an exchange where, according to 

Mr. Aguirre’s testimony, you told him not to proceed with an administrative subpoena as to Mr. Mack because, as Mr. Aguirre puts 

it, of his powerful political contacts. The floor is yours, Mr. Hanson. 

15

STATEMENT OF ROBERT B. HANSON, BRANCH CHIEF, DIVISION OF ENFORCEMENT, SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C. 

Mr. HANSON. Thank you, Senator Specter. I did not say that to 

Mr. Aguirre, as he states. I have no recollection of making that 

statement. In fact, I had no knowledge at all about Mr. Mack’s political connections at that point. 

I certainly knew that Mr. Mack was a very high profile individual, but I had no idea until I read in the New York Times recently about Mr. Mack’s political connections. I didn’t even know 

what a Ranger was until I read that in the New York Times and 

looked it up. So I had no idea what that was at the time Mr. 

Aguirre alleges that I told him that. 

Chairman SPECTER. You may proceed with your testimony generally, Mr. Hanson, as you choose. 

Mr. HANSON. Thank you, Senator Specter. Thank you for the opportunity to testify today and to respond to false allegations of 

abuse of authority that have been advanced by a former staff attorney of the United States Securities and Exchange Commission. I 

appreciate the opportunity to set the record straight on the matter 

about which Mr. Aguirre testified to this Committee last summer. 

I have spent my entire legal career in Federal Government service, currently a branch chief at the SEC, where I have worked for 

approximately 81⁄2 years. Every day I get the chance to work with 

motivated professionals dedicated to the agency’s mission. It is a 

great honor and privilege to do so. 

Let me state that in my experience the Division of Enforcement 

of the SEC has never considered an individual’s political connections in deciding whether to take his or her testimony. No one has 

ever asked or suggested that I refrain from taking a person’s testimony because of his or her political connections. In conducting and 

supervising investigations, I have followed the evidence wherever 

it leads, even if the trail points to a prominent executive or a public 

figure. 

In the investigation concerning the hedge fund Pequot Capital, 

I have no reason whatsoever to believe any outside source ever attempted to influence a decision on taking the testimony of anyone. 

I supervised Mr. Aguirre before he was terminated. I found him 

to be highly energetic, but his conduct was erratic and unprofessional. It was extremely difficult to communicate with Mr. 

Aguirre, and miscommunications were common. 

Information that Mr. Aguirre presented as fact often turned out 

to be mere speculation, and he omitted information that did not 

support his hypothesis. He did the same thing in his written testimony he provided today. 

Failing to bring to the Committee’s attention the inconvenient 

fact that CS First Boston counsel had told Mr. Aguirre that the individual who Mr. Mack met with before Mr. Mack joined CS First 

Boston did not even have the information that Mr. Aguirre had relied on to support his theory that Mr. Mack had received the information from CS First Boston before joining the firm. 

One by one, Mr. Aguirre alienated the other staff attorneys and 

the assigned trial attorney on the case, treating them with open 

hostility for no valid reason. At least twice, Mr. Aguirre angrily 

16

stormed out of the office during the workday after disagreements 

with other attorneys in the spring of 2005. 

Both times he said he was going to think about what he was 

going to do, which I understood him to mean that he was planning 

to leave the Commission. He formally tendered his resignation in 

June 2005, but later withdrew that resignation. I learned that he 

had withdrawn his resignation through the grapevine rather than 

from him directly, even though I was responsible for staffing the 

case. 

Mr. Aguirre then said he would be willing to work to complete 

the investigation but would not document his findings, which was 

essential to completing the investigation. It became apparent that 

Mr. Aguirre was a significant risk to leave at a moment’s notice, 

regardless of the impact such action would have on the investigation. His erratic behavior and the negative impact it had on the 

other attorneys on the case, on the investigation compelled me to 

strongly urge that Mr. Aguirre be terminated before his probationary period ended. 

I was not the first supervisor to recommend that Mr. Aguirre be 

terminated. Mr. Aguirre’s public assertion that the Pequot investigation was halted is utterly false. After he was terminated, the 

Division of Enforcement continued the investigation unabated, devoting hundreds of hours to the matter. 

After Mr. Aguirre’s termination, investigative staff took testimony from or interviewed more than a dozen individuals, made numerous formal and informal document requests, reviewed and analyzed thousands of documents, and participated in two proffer sessions with the FBI and the Office of the U.S. Attorney for the 

Southern District of New York. No shrinking violets. 

Ultimately, after a thorough investigation, we closed the matter 

after finding insufficient evidence to warrant bringing an enforcement action. 

While at the SEC, every investigation I have worked on has been 

conducted with fairness, diligence, and integrity. We did so in the 

Pequot investigation. 

Thank you. I would be glad to answer any questions you may 

have. 

[The prepared statement of Mr. Hanson appears as a submission 

for the record.] 

Chairman SPECTER. Thank you, Mr. Hanson. I want to make it 

a part of the record as to your background. You are Branch Director in the SEC’s Division of Enforcement, and you were Mr. 

Aguirre’s immediate supervisor at the time of his termination. 

Prior to joining Enforcement, you were a staff attorney with the 

SEC’s Office of Compliance and previously had served with IRS in 

the Office of Chief Counsel; a graduate of the University of Delaware and the University of Maryland School of Law. 

Mr. Hanson, let me bring up at this point as a matter of sequence a couple of memoranda, one from you to Mr. Aguirre dated 

August 4th, or an e-mail, which you have involved with other comments this statement, ‘‘Mack’s counsel will have ‘juice’ as I described it last night, meaning that they may reach out to Paul and 

Linda and possibly others.’’ 

Do you recollect writing that statement? 

17

Mr. HANSON. I do. 

Chairman SPECTER. What did you mean by ‘‘juice’’? 

Mr. HANSON. Well, as I explained in my written testimony, although I had no reason to know who would represent Mr. Mack if 

he was called to testify, I knew he would retain experienced SEC 

counsel, who would likely, as is not uncommon, directly contact my 

superiors about the testimony. 

Chairman SPECTER. A second written communications was from 

you to Mr. Kreitman dated August 24th, and the second paragraph 

says, ‘‘Most importantly, the political clout I mentioned to you was 

a reason to keep Paul, and possibly Linda, in the loop of the testimony. 

As far as I know, politics are never involved in determining 

whether to take someone’s testimony. I’ve not seen it done at the 

agency. It does make sense, though, to have all your ducks in a row 

before approaching a significant witness like Mack; hence, the reason to try to figure out a number of things about him before scheduling him up, not the least of which is whether he knew about the 

deal.’’ 

Was there some special precaution or preparation you took as to 

Mr. Mack within the context that, as I have quoted here your 

statement, politics are never involved in determining whether to 

take someone’s testimony? Was there any special precaution taken 

as to Mr. Mack? 

Mr. HANSON. The precaution I did want to take was I wanted to 

see what information we could learn about Mr. Mack before trying 

to take his testimony. And as I do mention in that e-mail, politics 

have never been involved in deciding whether to take someone’s 

testimony. 

Chairman SPECTER. We are going to go now to Ms. Linda 

Thomsen, who is the Director of the Securities and Exchange Commission’s Division of Enforcement, joined the Securities and Exchange Commission in 1995; prior to that served as Assistant U.S. 

Attorney for the District of Maryland; bachelor’s degree from Smith 

and a law degree from Harvard University. 

I am going to have to take you out of sequence, Ms. Thomsen, 

at this time because I think that there ought to be as early an opportunity as possible to respond to Mr. Aguirre, and then we will 

have further questioning. But you may proceed at this time. 

STATEMENT OF LINDA C. THOMSEN, DIRECTOR OF ENFORCEMENT, SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C. 

Ms. THOMSEN. Chairman Specter, thank you for inviting me to 

testify today. I have submitted written testimony and ask that it 

be made part of the record. 

Chairman SPECTER. Your statement will be made a part of the 

record. 

Ms. THOMSEN. Thank you, Mr. Chairman. 

I would like to start briefly on some of the broader issues that 

you raised in the first panel, and as that earlier panel discussed 

and, indeed, as Mr. Tenpas and I discussed with the Committee 

earlier this fall, the pursuit of illegal insider trading is an important and challenging part of the overall enforcement of the Federal 

18

securities laws. The same is true for illegal activity by hedge funds, 

important and challenging. 

We at the SEC are committed to pursuing enforcement actions 

related to insider trading and to hedge funds. Indeed, insider trading cases typically constitute 8 to 12 percent of our filed cases in 

any given fiscal year. As to hedge funds, and purported hedge 

funds, they are a growing focus of our efforts. 

Just to illustrate, in fiscal year 1999 we had one case involving 

a hedge fund. During the last three fiscal years, in each year we 

have brought in excess of 20 cases, and since that time, since 1999, 

over 100. 

The cases against hedge funds fall into two general categories: 

abuses that are directed at the investors in the funds, and abuses 

that are directed more at the market, such as insider trading or 

market manipulation. To date this fiscal year, which has just started, we have already brought two cases involved hedge funds. We 

very much appreciate your support of this important work. 

My written testimonies both for today and from September go 

into greater detail on some of the programmatic issues, but I think 

it is important, in light of your expressed concern about the investigation of Pequot, to address it here very briefly. 

As you indicated, a former SEC attorney has alleged that the investigation was impeded and he was terminated because he sought 

to take the testimony of a prominent individual. Speaking for the 

Division of Enforcement, these allegations are simply not true. 

After an unhappy probationary period of employment, the former 

employee was terminated on September 1, 2005, because of his inability to work effectively with other staff and his unwillingness to 

operate within the Securities and Exchange Commission process. 

As discussed in the SEC’s termination letter, which is attached 

to my testimony, he had continued personality conflicts with other 

staff, he resisted standard supervision, and he ignored the SEC’s 

chain of command. 

Despite these problems, the SEC attempted to accommodate him. 

He was, at his request, transferred from his original supervisor to 

a supervisor he selected and about whom he now bitterly complains. 

He also requested and received official time to pursue an unsuccessful age discrimination claim against the SEC for failing to hire 

him on 22 prior occasions. The EEOC denied those claims in a 

thorough written opinion, which is also attached to my testimony. 

Regarding the substance of his work, among other things he 

issued, without his supervisor’s review or approval, subpoenas that 

violated Federal privacy law, which were withdrawn after his supervisor’s learned of them. 

But for the supervisor’s corrective actions, the former employee’s 

work product could have been extremely damaging to the SEC, and 

his continued resistance to supervision created a substantial risk of 

future error. After the SEC had expended considerable effort to 

make the employment relationship work, we decided not to extend 

his employment beyond the 1-year probationary period. 

Moving to the investigation of Pequot, the potential insider trading by Pequot, as well as other potential securities law violations, 

were thoroughly investigated. The investigation was conducted in 

19

large part by staff other than the former employee and was continued long after he left. 

Ultimately, we did not find sufficient evidence to support an enforcement action. Accordingly, our investigation was closed for lack 

of evidence. The closing memorandum summarizes the many hours 

of hard work by the SEC staff that did this investigation, and it 

too is attached to my testimony. 

Finally, and perhaps most importantly, Mr. Chairman, the three 

supervisors working on the Pequot investigation collectively have 

decades of experience and have brought some of our toughest cases. 

They are also, each of them, smart, dedicated, and honorable. 

Their decisions in Pequot were not influenced by who any potential witnesses were but, rather, by the facts and the evidence. This 

is consistent with the finest traditions of our agency. 

We follow the facts, and if those facts take us to John or Jane 

Doe, or some more famous John or Jane, so be it. We have gathered evidence from and about, and in some instances we have sued, 

captains of industry, Presidential Cabinet members, Members of 

Congress, and celebrities, as well as thousands of people who are 

less well known. Indeed, a long list of prominent and not-so-prominent individuals would undoubtedly testify that the Enforcement 

Division does not pull its punches. 

I want to assure you and the Committee that we are passionate 

about our work and we will pursue it with vigor, skill, and fairness. 

And I, too, would be happy to take any questions. 

[The prepared statement of Ms. Thomsen appears as a submission for the record.] 

Chairman SPECTER. Thank you very much, Ms. Thomsen. 

We turn now to Mr. Mark Kreitman, Assistant Director, Division 

of Enforcement, of the SEC, supervises a 15-lawyer investigative 

group and was one of Mr. Aguirre’s superiors during his time at 

the SEC. Previously, Mr. Kreitman served as Assistant Chief Litigation Counsel for the Division of Enforcement, and prior to joining 

the SEC was a partner at Shea & Gould; holds an undergraduate 

degree from Yale and a law degree from Harvard. 

We appreciate your being with us, Mr. Kreitman, and look forward to your testimony. 

STATEMENT OF MARK KREITMAN, ASSISTANT DIRECTOR, DIVISION OF ENFORCEMENT, SECURITIES AND EXCHANGE 

COMMISSION, WASHINGTON, D.C. 

Mr. KREITMAN. Thank you very much, Chairman Specter. I have 

also prepared written testimony, which I request be made a part 

of the record. 

Chairman SPECTER. It will be made a part of the record. 

Mr. KREITMAN. Thank you for the opportunity to testify. The concern raised in this inquiry was the possibility that political influence may have distorted the Commission process. 

I can say categorically that no such thing affected the conduct of 

the Pequot investigation, Mr. Aguirre’s termination, or the decision 

not to take testimony from John Mack while Mr. Aguirre worked 

at the Commission. 

The Pequot investigation was pursued with vigor and professionalism after Mr. Aguirre departed. When all reasonable leads 

20

were exhausted, the relevant individuals questioned and documents examined, it was recently closed with no action taken. 

As you have indicated, I have been an Assistant Director and before that an Assistant Chief Litigation Counsel—trial lawyer—with 

the Division of Enforcement for 19 years and have received a variety of awards and commendations. 

I have investigated or tried cases against a department head at 

a major New York law firm, a president of a Beverly Hills bank, 

the son of a prominent local banker, First Jersey principal Robert 

Brennan, and numerous Wall Street luminaries. 

I brought one of the cases, insider trading cases, against a major 

hedge fund within the past year and a half, and I recommended 

successfully the largest whistleblower award that the Commission 

has offered. In 26 years of public service, I have played a role in 

recovering nearly $1 billion for investors and for the government. 

Mr. Aguirre was a student of mine at Georgetown, where I teach 

as an adjunct and have since 1999. I advised him and supervised 

his master’s thesis, which, as you indicated, was published in a 

number of journals. We became friends and socialized together, and 

that, Senator, has made this entire episode particularly painful for 

me and for my wife. 

When Mr. Aguirre graduated from Georgetown, he had not practiced law for a number of years. He had no experience in enforcement investigation. He was unfamiliar with a closely supervised 

working environment like the Commission, where investigative 

zeal must be tempered by a respect for the rights and legitimate 

interests of citizens and where collegiality and mutual respect is 

the hallmark. 

Mr. Aguirre was a hard worker but, unfortunately, treated his 

colleagues who questioned him or his methods with disrespect, bordering on contempt. He was unable to fairly and impartially balance evidence against his preconceived conclusions or articulate his 

thinking in a linear fashion. He viewed all supervision, direction, 

even inquiry concerning his work as unwarranted intrusion. 

Beginning in June 2005, he came to believe that John Mack 

tipped Pequot about the GE/Heller acquisition. He heatedly insisted that we subpoena Mr. Mack before he had evidence that Mr. 

Mack had access to inside information or indeed, any potentially 

inculpatory evidence with which to confront Mr. Mack. 

His supervisors, with, as Ms. Thomsen has indicated, more than 

40 years combined Commission experience, instructed him of the 

need for proper foundation to invoke compulsory process and that 

premature testimony would likely be fruitless because Mr. Mack 

could simply deny any illegal activity or any connection to the suspicious trading. 

Mr. Aguirre concluded that this proved a widespread conspiracy 

to thwart him and protect an individual no more significant or 

powerful than people from whom we take testimony every day—including during this same time period a former U.S. Senator and a 

former high-ranking White House official. 

Toward the end, Mr. Aguirre’s behavior became increasingly unprofessional, irresponsible, and erratic. He threw what can only be 

fairly described as ‘‘tantrums,’’ storming down the halls in a furious 

crouch, abruptly leaving the office without leave, resigning at least 

21

twice, necessitating that, despite severely limited resources, we 

were required to double staff his investigation. Finally, as Mr. Hanson mentioned, he announced that he refused to write up his investigation in the required formal memorandum. 

Mr. Aguirre did receive a two-step increase effective shortly before his termination. That was for the rating period that ended 4 

months earlier on April 30. He was a new employee. He worked a 

great many hours. I wanted to encourage and help him readjust 

after a troubled beginning in another group. 

His subsequent behavior, however, so far exceeded the bounds of 

acceptable professional conduct that it was incumbent upon me and 

his other supervisors to supplement and correct that overly generous evaluation, which we did on August 1, a month before Mr. 

Aguirre’s termination. 

I would be happy to answer any questions, Senator. 

[The prepared statement of Mr. Kreitman appears as a submission for the record.] 

Chairman SPECTER. Thank you, Mr. Kreitman. 

Mr. Kreitman, in your written testimony you state that Mr. 

Aguirre’s theory regarding John Mack as a potential tipper was a 

‘‘highly suspect and illogical conclusion.’’ And yet I note on a written communication, a June 3, 2005, e-mail to Aguirre that, ‘‘Mack 

is another bad guy (in my view.)’’ Was that your memorandum or 

was that a memorandum from Mr. Hanson? 

Mr. KREITMAN. I do not believe those were my words, Senator. 

Chairman SPECTER. Not your words. 

Mr. KREITMAN. I do not believe so. 

Chairman SPECTER. Were those your words, Mr. Hanson? 

Mr. HANSON. I believe they were. 

Chairman SPECTER. Why did you say that Mr. Mack was another 

bad guy? 

Mr. HANSON. I can’t remember why I said that at that time. In 

hindsight, I was trying to encourage probably the investigation to 

wherever it led, and looking back in hindsight, those words are 

probably inappropriate. I have subsequently met Mr. Mack, and— 

Chairman SPECTER. You don’t remember? 

Mr. HANSON. I am sorry? 

Chairman SPECTER. You do not remember? 

Mr. HANSON. I do not remember. 

Chairman SPECTER. Well, it was your written testimony that Mr. 

Aguirre’s theory regarding John Mack as a potential tipper was a 

‘‘highly suspect and illogical conclusion.’’ Do you still stand by that? 

Mr. HANSON. I do. 

Chairman SPECTER. But you can’t explain why in a memo contemporaneously with these events back on June 3rd that you said 

Mack is ‘‘another bad guy (in my view)’’? 

Mr. HANSON. I can’t remember why I sent the first e-mail. That 

is correct. 

Chairman SPECTER. Well, was Mack another bad guy, in your 

view? 

Mr. HANSON. At the time that I wrote that, I can’t remember the 

basis for which I wrote it. But I certainly do not believe Mr. Mack 

is a bad guy. 

22

Chairman SPECTER. It did not come out of thin air, did it, Mr. 

Hanson? Is this your statement at that time? 

Mr. HANSON. It was. 

Chairman SPECTER. Your statement at that time. 

Mr. HANSON. That is correct. 

Chairman SPECTER. ‘‘Bad guy.’’ 

Mr. HANSON. Correct. 

Chairman SPECTER. But you don’t know any reason you had to 

say that. 

Mr. HANSON. Excuse me? 

Chairman SPECTER. You don’t know any reason that you had to 

say that at that time? 

Mr. HANSON. The only thing I can think of, sitting here today, 

is that he had the reputation as Mack the Knife. 

Chairman SPECTER. Well, tell me a little bit more about the reputation. What was his reputation as Mack the Knife? 

Mr. HANSON. I think he had the reputation of—again, his name 

was—or his nickname was Mack the Knife because he had terminated a number of employees when he went to work at a couple 

of brokerage firms. 

Chairman SPECTER. Because Mr. Mack had terminated employees? 

Mr. HANSON. I believe that is correct. 

Chairman SPECTER. Anything else? 

Mr. HANSON. No. 

Chairman SPECTER. Well, terminating other employees, why 

would that lead you to call him a bad guy? 

Mr. HANSON. Again, Senator, I cannot remember why I wrote 

that e-mail, and thinking back today, I just can’t come up with 

anything other than that. 

Chairman SPECTER. OK. We now turn to Mr. Paul Berger, partner at Debevoise & Plimpton; joined the Securities and Exchange 

Commission in 1992 and served as senior counsel, branch chief, Assistant Director, and Associate Director; and in his latter capacity, 

he oversaw Mr. Kreitman’s unit. 

Prior to joining the SEC, he practiced law with Jenner & Block 

and was a staff attorney to the D.C. Circuit Court of Appeals; undergraduate degree with honors from American University, and a 

law degree from the Antioch School of Law. 

We appreciate your being with us, Mr. Berger, and the floor is 

yours. 

STATEMENT OF PAUL R. BERGER, FORMER ASSOCIATE DIRECTOR, DIVISION OF ENFORCEMENT, SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C. 

Mr. BERGER. Thank you, Chairman Specter. Good morning. 

Thank you for the invitation to appear before this Committee today 

and to respond to allegations of abuse of authority that have been 

made by a former staff lawyer with the United States Securities 

and Exchange Commission. 

I believe that accountability and oversight are healthy, and I 

commend you, Mr. Chairman, for taking these matters seriously. 

Indeed, I welcome the opportunity to respond to these allegations. 

23

For months now, allegations have circulated around town about 

this matter that the SEC and I have been unable to respond to because of our obligation to refrain from discussing confidential SEC 

investigations. Finally, we have a chance to put these allegations 

to rest, for they are completely false. 

As background, let me give you a sense of who I am. I spent 14 

years as a career law enforcement officer for the United States Securities and Exchange Commission, the last 6 of which as an Associate Director of Enforcement. 

As an Associate Director, I had anywhere from 150 to 200 open 

investigations under my indirect supervision, as well as supervising current litigation. I authorized the opening of the Pequot investigation before Gary Aguirre joined the Commission because I 

believed then, as I do now, that hedge funds play an important role 

in our capital markets. 

And I, along with my colleagues, wanted to ensure that hedge 

funds conduct their affairs consistent with the laws prohibiting insider trading. When issues arose as to possible insider trading, I 

decided that, despite the considerable age of this particular matter, 

we should take a hard look. 

As I am sure you are aware, insider trading investigations are 

some of the most difficult cases to make. Establishing that someone 

had material nonpublic information and used that information to 

violate the anti-fraud provisions of the Federal securities laws is 

exceedingly difficult. In fact, it is more difficult than making a financial fraud case. Nevertheless, we opened the Pequot matter to 

look into concerns about possible insider trading. 

Now, there have been various allegations about that investigation that need to be addressed. 

First, I have heard that the SEC’s investigation was stopped. 

Nothing could be further from the truth. Not only did the investigation continue for a year after Gary left, but we added two terrific staff lawyers to the case because, in part, we had become concerned with Gary’s reliability since he had resigned on a number 

of occasions. 

Next—and this is particularly key—the major issue that we confronted in the investigation was not if we would take Mr. Mack’s 

testimony but when we would take it. As I told Gary at least twice, 

the SEC is not and never has been afraid to take anyone’s testimony. What we needed to do in the Pequot investigation was to get 

our ducks in a row. We needed to do our homework before we took 

Mr. Mack’s testimony. 

The SEC supervisors made a judgment based on years of experience conducting SEC investigations, and particularly insider trading investigations, that the best time to take the testimony was at 

the conclusion of the investigation when all of the evidence had 

been assembled, all of the leads had been run down, and when the 

U.S. Attorney, who I had contacted in the first instance about this 

matter, had reviewed the evidence and completed their investigation. It was our professional judgment that the best and most efficient use of our resources was to conduct the investigation in this 

manner. 

Now, there are those who might say, well, what is the harm in 

taking the testimony when Gary wanted? Well, that would be an 

24

interesting standard for determining when to take testimony: as 

long as we do no harm. But that is not the standard. 

Now, experience shows that the most efficient and productive 

way to conduct an investigation is to take testimony when you 

have marshalled all of the facts necessary to take the witness. As 

I am sure you are aware as a former prosecutor, taking the testimony of witnesses multiple times creates a murky and sometimes 

unusable record. 

There has also been the suggestion that Mr. Mack was given special treatment when in 2005 lawyers not for Mr. Mack, but for 

Morgan Stanley’s Board of Directors called to see if Mr. Mack had 

regulatory exposure. 

Both my Assistant Director and I told counsel that it was premature to draw any conclusions about the investigation. That was 

the right call. Why? Because it was consistent with SEC policy not 

to disclose confidential information about the investigation. 

I told counsel that we could not say whether Mr. Mack had any 

exposure or not, that we could not help Morgan Stanley with its 

decision; it would have been inappropriate for SEC staff to insert 

itself in a regulated entity’s business decision. That was true since, 

at the time, as Gary admits, we didn’t know whether Mr. Mack had 

violated the law. 

This investigation was conducted like every other investigation. 

Experienced supervisors made sure that we were balancing all of 

the facts and the evidentiary record and making the correct professional judgments. One can disagree with those professional judgments. That is fine. But it is beyond the pale when one turns those 

judgments into a conspiracy that ropes in SEC supervisors and the 

Commissioners themselves. 

I was a public servant who worked for 14 years on behalf of our 

Nation’s investors and our capital markets. I tried to bring a passion for my work each and every day. Not a day passed that I did 

not ask whether a judgment that we made was the right thing to 

do. I believed then and I believe now that our judgments were 

sound and our investigations were exemplary. 

Thank you. I would be happy to answer any questions and ask 

that my testimony that was submitted be made part of the record. 

[The prepared statement of Mr. Berger appears as a submission 

for the record.] 

Chairman SPECTER. Thank you very much, Mr. Berger. 

We now turn to Mr. Eric Ribelin. He joined the SEC in 1988, currently Branch Chief in the Division of Enforcement’s Office of Market Surveillance; previously served as a market surveillance specialist and senior market surveillance specialist; numerous honors 

at the SEC, including Chairman’s Award for Supervisory Excellence in 2002 and Enforcement Division Director’s Award in 2000; 

bachelor’s and master’s degree in economics from Eastern Illinois 

University. 

Thank you very much for your contribution here, Mr. Ribelin, 

and we look forward to your testimony. 

25

STATEMENT OF ERIC RIBELIN, BRANCH CHIEF, OFFICE OF 

MARKET SURVEILLANCE, SECURITIES AND EXCHANGE COMMISSION, WASHINGTON D.C. 

Mr. RIBELIN. Thank you, Mr. Chairman. I do not have any opening statements. 

Chairman SPECTER. Mr. Ribelin, there is a document which you 

sent to Mr. Hanson, a memorandum or communication from you to 

Mr. Hanson, dated September 9, 2005, re: Pequot saying this, ‘‘Bob, 

I have serious misgivings about many decisions made in this investigation. I don’t know what all has driven the decisions. Something 

smells rotten, though. I am accusing you of nothing. You seem like 

a good guy, and you are certainly a good soldier. But I am nonplussed by issued big and small about the course of events going 

back to January. I really do need to contemplate my involvement 

going forward.’’ 

Mr. Ribelin, what did you mean by ‘‘something smells rotten’’? 

Mr. RIBELIN. Mr. Chairman, we had an aggressive investigation 

into possible insider trading by Pequot and possible stock manipulation. Gary Aguirre is a tenacious investigator. He had an aggressive investigation. In my judgment, he was professional. 

We had a very worthy adversary, the best lawyers, the smartest 

lawyers who could be hired to defend, and they were extremely aggressive, and let me give a couple of examples. In a subpoena requesting the production of e-mail, we frequently didn’t get production of those e-mails in a timely fashion. 

We took testimony of witnesses and had documents that had 

been subpoenaed to be associated with testimony of those witnesses, and documents would show up in the 11th hour prior to 

testimony or on the day of testimony. And it is extraordinarily difficult to conduct a testimonial session when we do not have documents. 

Repeatedly, Mr. Aguirre attempted to hold the feet to the fire of 

the attorneys on the other side to get e-mail production pursuant 

to subpoena, to get documents produced on time so that we could 

take testimony and do it appropriately. 

He continued to aggressively try to enforce the subpoena, if you 

will, and continued to go to his supervisors to get assistance from 

them that these subpoenas get enforced internally. And there was 

certainly a period of time when Mr. Kreitman and Mr. Hanson 

seemed to agree with Gary. 

But I can tell you that I was surprised from January of 2005 that 

Paul Berger, who had a reputation for being an aggressive and 

smart attorney, did not seem as though he was aggressive in supporting the attempts of Mr. Aguirre to get subpoenaed documents 

on time and to get e-mail production so that we can conduct an investigation. That is one example of what I was referring to when 

I said ‘‘something smells rotten.’’ 

That went through a very long period of time of the investigation 

where it was my sense that there was not the support for the aggressiveness and the tenacity of the investigator. 

There are other examples I can give you. 

Chairman SPECTER. Would you please do that? 

Mr. RIBELIN. I can do that. As I said, for a very long period of 

time, we had a hard time getting e-mail production, and I can tell 

26

you that if you subpoena a document or subpoena e-mails and you 

don’t get them, you are not going to be able to do the investigation. 

And so we continued to push. 

There was a period of time when a very significant, large portion 

of e-mails were put out of our ability to get a hold of and to examine. Part of the reason given was because these e-mails may be 

privileged e-mails, communications between attorney and client. 

We thought certainly there was a possibility that some of those 

e-mails fell into that category, but there was a very large number 

of e-mails that we suspected fell outside of that category. And there 

was one point that an attorney was hired who had custody of some 

of those e-mails—I can’t remember how many thousands they were. 

Mr. Aguirre was not allowed by Mr. Kreitman to speak to that attorney about trying to get production of e-mails. To this day I don’t 

know why that is. 

And I can tell you that Mr. Mack had been the CEO of Morgan 

Stanley. He was being courted to become the CEO of CS First Boston. We did not have information that he had material nonpublic 

information as it related to the GE/Heller merger. That is for sure. 

It was Gary’s theory—I agreed; I think other people supported 

the idea—that it wasn’t unlikely, it was certainly possible that he 

could have gotten access to the information based on the fact he 

had been the former CEO of Morgan Stanley and he was being 

courted at the time by CS First Boston of the trades engaged in 

by Pequot. 

After the word came down that the testimony of John Mack was 

not going to be taken, I had a conversation within a week or so of 

that with Bob Hanson, and Bob Hanson said to me that because 

Mr. Mack was a prominent person or because he had connections—

I don’t remember exactly how he put it—that we would have to be 

careful about taking his testimony, we would have to, my impression is, move maybe more carefully than we would if it was somebody other than somebody of prominence. And I said, ‘‘Well, Bob, 

if that is the case or not, just call him up on the phone instead of 

bringing him in for testimony and ask a couple of basic questions.’’ 

And this is something, by the way, that Gary proposed, Gary 

Aguirre proposed a couple of times. Mr. Hanson didn’t respond to 

me. 

And then finally, of course, Gary Aguirre was fired when he was 

on vacation. I was stunned. I was outraged. And the e-mail that 

you just referred to was soon after these events. 

Chairman SPECTER. Mr. Hanson, do you recall the comment that 

Mr. Ribelin has testified to, that you called Mr. Mack a ‘‘prominent 

person’’ and then suggested that there would have to be treatment 

of him a little different? 

Mr. HANSON. I certainly felt he was a prominent person and I 

wanted to, as I have said to Mr. Aguirre and Mr. Ribelin, make 

sure we had our ducks in a row before taking Mr. Mack’s testimony. And what I meant by that was, let us figure out what we 

can about whether he had the information before taking his testimony. 

Chairman SPECTER. Well, what would you be looking for as to 

what information that he would have had? 

27

Mr. HANSON. Whether he had the information regarding the 

deal, whether he had the inside information. I mean, there are 

hundreds of suspects or possible witnesses we could take the testimony from, almost an endless number of them. 

One of the things you want to try to look at as a criterion is 

whether or not they have access to the information. These merger 

and acquisition deals are highly sensitive matters within investment banking firms and they do not give that information out willy 

nilly. 

Chairman SPECTER. Well, it is not a matter of who else has access. It is a question of whether Mr. Mack would have access. And 

is it not true that, in his position with Credit Suisse, that he did 

have information about the prospective merger between GE and 

Heller in the July of 2001 timeframe? 

Mr. HANSON. After he joined Credit Suisse First Boston, it is certainly entirely likely that he would have had that information, but 

prior to that time, no. That is the trading period we were looking 

at, prior to that time. 

Chairman SPECTER. How about that, Mr. Aguirre? What time period was in question? 

Mr. AGUIRRE. The timeframe in question was from July 2 

through July 25. There were three dramatic trade moves by Mr. 

Samberg during that time. July 2, he opened the trading. July 9 

to 10, he went from 15,000 shares to 450,000 shares, in terms of 

what he was trying to buy. Then on September 25, he shorted. 

Now, that fit perfectly with the timing of Mr. Mack. Mr. Mack, 

according to Mr. Padalino, who was CSFB’s attorney, told me that 

Mr. Mack had met with the CSFB people on approximately June 

28 or June 29. 

Chairman SPECTER. So Mr. Mack had met with people who had 

the insider information prior to the July timeframe you testified 

about? 

Mr. AGUIRRE. Well, he met with CSFB. I was told he met with 

CSFB people at that time on June 28. Now, that is coming from 

the lawyer on the other side. Of course, I would want to verify that 

and talk to Mr. Mack: who exactly did you meet with? 

Chairman SPECTER. But that would have required questioning 

Mr. Mack. 

Mr. AGUIRRE. That would require it. 

Chairman SPECTER. But there was that contact in late June, 

June 28, as you testify. 

Mr. AGUIRRE. That was the first one. 

Chairman SPECTER. Let me finish the question. 

Mr. AGUIRRE. Sorry, sir. 

Chairman SPECTER. Where Mr. Mack would have had access to 

the inside information. 

Mr. AGUIRRE. Potential access to that information. 

Chairman SPECTER. Well, how about it, Mr. Hanson? 

Would that not establish the necessary predicate for questioning 

Mr. Mack? 

Mr. HANSON. Mr. Aguirre believed that Mr. Mack may have gotten the information from—I think one of his hypotheses was that 

he may have gotten it as part of a courting process with CS First 

Boston. It seemed highly unlikely that CS First Boston, in courting 

28

Mr. Mack, would tell him confidential, nonpublic information about 

a deal in their courting process. 

Not only that, but Mr. Aguirre was told by CS First Boston counsel—and this is the part that he excludes from his testimony to the 

Senate—that the person that Mr. Mack met with did not have the 

information. 

Chairman SPECTER. Well, what other information did you have 

about Mr. Mack’s potential involvement when you finally did take 

his deposition, 5 days after the statute of limitations expired? 

Mr. HANSON. When we finally took Mr. Mack’s testimony, subsequent to Mr. Aguirre’s termination, we had actually gone to CS 

First Boston, subpoenaed their records to see whether or not the 

people that Mr. Mack had met with actually had the information. 

We first did that. 

Chairman SPECTER. And did you find they did have the information? 

Mr. HANSON. We did not. 

Chairman SPECTER. Why did you wait so long to subpoena those 

records? 

Mr. HANSON. We subpoenaed them September 1, the day that 

Mr. Aguirre was terminated, so there was no time delay at all. 

Chairman SPECTER. Why was Mr. Mack’s deposition taken so 

long after that? 

Mr. HANSON. I am getting there. We subpoenaed CS First Boston 

records. We did an extensive e-mail review of Mr. Mack’s records. 

We found additional exculpatory evidence that sort of suggested 

that the likelihood of Mr. Mack being the tipper was minuscule. 

We turned our attention and our focus to another transaction 

that Pequot was engaged in in approximately November of 2005. 

We followed that through until approximately June of 2005. 

At that point, we decided whether or not we were going to take 

additional individuals in connection—— 

Chairman SPECTER. When was that? 

Mr. HANSON. I am sorry. 2006. Additional individuals in connection with the GE Heller transaction. At that point in time we took 

the testimony, before the statute of limitation expired, of the individuals at CS First Boston who potentially could have passed the 

information on to Mr. Mack. 

Chairman SPECTER. Why not take Mr. Mack’s deposition before 

the statute of limitations expired? 

Mr. HANSON. We took the testimony of the two individuals who 

could have given Mr. Mack the tip or the information before the 

statute of limitations expired. If we found out from them that Mr. 

Mack had gotten the information or they had the potential of giving the information to Mack, we probably would have sought a tolling agreement. We sought tolling agreements from Pequot in 

March of 2006. 

Chairman SPECTER. Well, that is all very interesting about tolling agreements for somebody else. But you did not seek a tolling 

agreement for Mr. Mack. 

Mr. HANSON. I do not think we could have. We did not have the 

evidence that he had the information. 

Chairman SPECTER. All right. If the tolling agreement is out, I 

wonder why you mentioned it. If it was not relevant to Mr. Mack, 

29

why did you wait until after the statute of limitations had expired 

to take Mr. Mack’s testimony? 

Mr. HANSON. We took Mr. Mack’s testimony, as I described in my 

written statement, which I will ask to be made part of the record. 

Chairman SPECTER. But that does not tell us why you waited 

until after the statute of limitations had expired. 

Mr. HANSON. We got to it as soon as we could. The predicate to 

trying to figure out whether to take Mr. Mack’s testimony or not 

was whether he had the information. 

We did not think, at the time that we took Mr. Mack’s testimony, 

that there was any—there was virtually no likelihood, by the time 

we took Mr. Mack’s testimony, that he had any information regarding the transaction that he could have passed on. 

Chairman SPECTER. So why did you take his testimony? 

Mr. HANSON. As I explained in my written statement, one consideration was the harm Mr. Aguirre had caused by taking this confidential, nonpublic investigation public for his own purposes, and 

the need to maintain public investor confidence in the work of the 

Division of Enforcement. 

Mr. KREITMAN. Senator, I wonder whether I could clarify. 

Chairman SPECTER. You may, Mr. Kreitman, but in just a 

minute. 

Mr. Hanson, did the fact that this Committee held a hearing on 

June 28 have any effect on your moving ahead with Mr. Mack’s 

deposition, or was that just entirely coincidental? 

Mr. HANSON. No. I think that, as I said, one consideration in taking Mr. Mack’s testimony was the harm Mr. Aguirre had caused by 

taking the confidential, nonpublic investigation public. 

Chairman SPECTER. Mr. Kreitman, if you wanted to add something there, you are welcome to do so. 

Mr. KREITMAN. Yes. Thank you, Senator. I would just like to 

clarify that the statute of limitations you referred to bars only penalty. It does not bar injunction. It does not bar other equitable remedies. It does not bar disgorgement of illegal profits or pre-judgment interest. 

Chairman SPECTER. But there is a significant limitation on what 

can be done after a statute of limitations expires. Is that not correct, Mr. Kreitman? 

Mr. KREITMAN. That is correct, Senator. It does preclude imposition of penalties, financial penalties. That is the only impact. 

Chairman SPECTER. Mr. Kreitman, you heard what Mr. Ribelin 

said about the effort by Mr. Aguirre to acquire e-mails and your refusal to back him up on that. Do you want to comment on that? 

Mr. KREITMAN. I do not think it is accurate. It is not uncommon 

for us to encounter push-back when we send out broad subpoenas. 

In this case, the subpoenas—and I believe there were more than 

100 of them that Mr. Aguirre sent out—resulted in the production 

of, I believe, more than 19 million e-mails. 

I considered it so important to try to enforce these subpoenas—

and it is unusual—I became personally involved in negotiation with 

Pequot’s counsel. We do have available to us the remedy of subpoena enforcement in the District Courts, however, our experience 

is that that is neither a speedy, nor efficacious, remedy. 

30

But, short of bringing a subpoena enforcement action, I believe 

that we did everything that we could to facilitate and expedite production of documents in response to our subpoenas. 

Mr. AGUIRRE. Senator, may I just dip in my oar on that comment 

for just a moment? 

Chairman SPECTER. Yes, you may, Mr. Aguirre. Anybody who 

wants to comment as we proceed here, if you feel that something 

has been said which bears on your own participation in the matter, 

feel free to ask for recognition because the Committee wants to give 

you, as we always do, every opportunity to explain or comment as 

to anything which is said, because this hearing is filled with accusations, counter accusations, and denials. So if you have any denials to make, do not wait for me to ask. 

Go ahead, Mr. Aguirre. 

Mr. AGUIRRE. I think that Mr. Ribelin was referring to the prohibition of my speaking to attorneys who had control of the documents. Those two attorneys were a former Commissioner of the 

SEC, Irving Pollack, and another attorney by the name of Larry 

Storch. They were some of Mr. Kreitman’s closest friends. Mr. 

Storch was a next-door-neighbor. 

Mr. Hanson pointed out to me, it was very troubling that they 

had been brought in exclusively to deal with documents which I 

thought were a critical aspect of that case, and Mr. Kreitman had 

given me an injunction not to talk to them about those critical documents. I think that was what Mr. Ribelin was speaking about. 

Let me just add a couple of points of why I suspected Mr. Mack. 

It was not just one contact on June 28 or June 29 that I had been 

told about by Mr. Padalino that came just before Mr. Mack talked 

with Mr. Samberg, which had come just before Mr. Samberg suddenly started trading ferociously the next trading day. 

But again, there was another contact by Mr. Mack on July 9 with 

CSFB. The following day, Mr. Samberg’s trades jumped from 

15,000 to 450,000 in terms of his order. Then once again on July 

25, when Mr. Mack was already there and obviously had access to 

that information, it fit with the fact that Mr. Mack began shorting. 

So, there were those three connections. 

Then during the phone call on June 29 between Mr. Mack and Mr. Samberg, Mr. Mack got into a deal for $5 million. He got a 

piece of a deal that nearly tripled in 8 months. Nobody else got into 

that deal. 

Chairman SPECTER. What was that deal related to? 

Mr. AGUIRRE. It was called Fresh Start. There was an e-mail saying that he had been ‘‘beating on Mr. Samberg’s chops’’ on June 20 

to get into this deal. Then he talks with the CSFB people. He calls 

them on June 29. That night, he gets into this deal. 

If you look at the SEC filings, you will see that he put in his $5 

million on October 15, and in late February of 2006 it was announced that that was paying about 3:1 on what he had put in. Nobody else got into those kinds of deals except Mr. Mack. Pequot got 

nothing out of that. So the question is, how come he got that favor 

at the same time that we think he gave the tip back going the 

other way? 

Chairman SPECTER. Mr. Hanson, any idea as to why Mr. Mack 

would be benefited, as Mr. Aguirre just described? 

31

Mr. HANSON. I am sorry. I did not follow your question. 

Chairman SPECTER. Mr. Aguirre has set forth a sequence of 

events. First of all, he mentioned three contacts—not one contact, 

three contacts—between Mr. Mack and people who had the inside 

information, and the contacts that Mr. Mack then had with Mr. 

Samberg. 

Were you aware of all of those matters? Mr. Hanson. Mr. Mack 

did not have contact with those three people during the timeframe 

that Mr. Aguirre alleges. 

Chairman SPECTER. Mr. Aguirre—— 

Mr. AGUIRRE. Let me—— 

Chairman SPECTER. Let me finish my question. 

Mr. AGUIRRE. I am sorry. 

Chairman SPECTER. Be specific about them so Mr. Hanson can 

comment on them, please. 

Mr. AGUIRRE. It is in my written testimony. 

Chairman SPECTER. Mr. Hanson, have you seen Mr. Aguirre’s 

written testimony? 

Mr. HANSON. I looked at it last night for a brief period of time. 

Chairman SPECTER. Go ahead, Mr. Aguirre. 

Mr. AGUIRRE. The cases talk about looking at the trades and 

looking at the contacts. In this case, we saw three dramatic moves 

by Mr. Samberg: July 2, July 10, and July 25. We know that Mack 

met with CSFB just before the July 2 trade, and we know that he 

talked to Mr. Samberg just before that trade. 

Mr. HANSON. The first of those is inaccurate. 

Chairman SPECTER. Were you aware of that, Mr. Hanson? 

Mr. HANSON. Of the fact that he did not meet with the individual 

from CS First Boston, as Mr. Aguirre alleges. 

Chairman SPECTER. He did not? 

Mr. HANSON. He did not. 

Chairman SPECTER. Mr. Aguirre, how do you know that he did? 

Mr. AGUIRRE. Well, I was told by Patrick Padalino, who was the 

CSFB attorney, that that contact had occurred around the 28th or 

the 29th. Now, I was relying on what the attorneys from CSFB 

were telling me, because I could not ask Mr. Mack. 

I, to this day, think that there were likely more contacts in exactly that timeframe involving Mr. Mack or CSFB. Perhaps Mr. 

Hanson can enlighten us whether Mr. Mack was in fact meeting 

with people from Credit Suisse or CSFB during this timeframe 

around June 27 or June 28. I was told of one version by Mr. 

Padalino, the attorney. I relied on that. 

Chairman SPECTER. Had you informed Mr. Hanson about what 

you had learned from Mr. Padalino? 

Mr. AGUIRRE. Absolutely. They were all in my e-mails. 

Chairman SPECTER. Is that true, Mr. Hanson? 

Mr. HANSON. He had informed me that Mr. Padalino had told 

him that Mr. Mack may have met with CS First Boston’s CFO approximately 2 weeks before he joined Credit Suisse First Boston. 

That was not correct. 

Chairman SPECTER. What was not correct? 

Mr. HANSON. He did not meet with Mr. Mack during that timeframe. 

Chairman SPECTER. How do you know that? 

32

Mr. HANSON. I took the testimony of the CS First Boston CFO. 

Chairman SPECTER. You had contrary information at that time, 

Mr. Aguirre? 

Mr. AGUIRRE. Yes, I did, at that time. And I think, more importantly, the question is, what did Mr. Mack say about his meetings 

with Credit Suisse during the 27th, 28th, and 29th of June? He 

took his testimony. They should know. 

Chairman SPECTER. Was Mr. Mack questioned about that, Mr. 

Hanson? 

Mr. HANSON. Of course. 

Chairman SPECTER. And what did he say? 

Mr. HANSON. That the information that Mr. Aguirre alleged or 

speculated that Mr. Mack may have had was so far down in the 

weeds for Mr. Mack. 

Chairman SPECTER. So far down in the weeds? 

Mr. HANSON. It was so far removed from what he was doing with 

respect to negotiating with CS First Boston that it had no relevance to him. Not only that, but the people from CS First Boston 

that we talked to and received the e-mails from said that there is 

no possible way that they had the information, let alone passed it 

on to Mr. Mack. 

Chairman SPECTER. Mr. Hanson, back to the question which was 

pending a few minutes ago. Were you aware, as Mr. Aguirre has 

just testified, that Mr. Mack was afforded an investment opportunity by Mr. Samberg which enabled him to triple his investment? 

Mr. HANSON. I am aware that Mr. Mack was often an investor 

alongside Pequot in private investments. 

Chairman SPECTER. Now answer my question. 

Mr. HANSON. I guess I do not follow your question. 

Chairman SPECTER. My question, again, is were you aware, as 

Mr. Aguirre has testified, that Mr. Mack was offered an investment 

by Mr. Samberg which enabled him to triple his investment. 

Mr. HANSON. I do not know the specific facts for the investment 

that Mr. Aguirre is referring to. I know that one of the investments 

that Mr. Mack put money into with Pequot around that time, he 

lost all the money on. In another one, he doubled the money on. 

Chairman SPECTER. I am interested in what he lost money on. 

I am interested in a lot of things. But not today. What I want today 

is an answer, if you learned from Mr. Aguirre—and this is the last 

time I am going to ask it—that Mr. Samberg gave Mr. Mack an opportunity for an investment that he tripled. 

Mr. HANSON. I do not believe so. I think there was an investment. I am not sure, again, on the facts, which one doubled and 

which one he lost money on, which one he is referring to. 

Chairman SPECTER. Was there one that doubled? 

Mr. HANSON. I think so. 

Chairman SPECTER. Was that different from the one that tripled? 

Mr. HANSON. I am not aware of one that tripled. 

Chairman SPECTER. Did Mr. Aguirre tell you about one that tripled? 

Mr. HANSON. Not to my recollection. 

Chairman SPECTER. Mr. Hanson, let us come to the— 

Mr. KREITMAN. Senator, I wonder whether I could respond to 

something both Mr. Ribelin and Mr. Aguirre have said. 

33

Chairman SPECTER. If you would like to respond, Mr. Kreitman, 

you have the floor. 

Mr. KREITMAN. Thank you. Thank you, Senator. Just to correct 

the record, Mr. Storch is not, and has never been, a next-doorneighbor of mine. He is, however, a classmate from law school and 

a friend. 

Mr. Pollack is not only a former Commissioner, but the first Director of Enforcement of the Commission and an icon in this field, 

someone whom I regard as a mentor and a giant in the field. 

Nonetheless, as both Mr. Ribelin and Mr. Aguirre have testified 

here, I directed them not to speak to Mr. Pollack or Mr. Storch for 

a very simple reason, and that was that they did not represent any 

party in the investigation. 

As I advised Pequot’s lawyers, I would be pleased to deal with 

them myself, and have my staff deal with them, if we were advised 

that they represented, and could therefore bind, Pequot. 

But if they were to occupy, as was proposed, an undefined, inchoate role in discovery production but could neither speak for nor 

bind any party to the investigation, then I was unprepared to have 

my staff deal with them. 

Chairman SPECTER. Mr. Aguirre, on page 21 of your testimony 

you have stated that ‘‘SEC filings indicate Mack did extremely well 

on his $5 million investment’’ and in Footnote 116, you say that 

‘‘the value of Mack’s interest would have been approximately 

$16.43 million.’’ 

Would you amplify what went on here which is the basis for your 

saying that Mr. Mack had an investment that tripled in value? 

Mr. AGUIRRE. Yes. During the conversation on June 29, the night 

that we thought that Mack gave Samberg the tip, that night Mack 

got promised to get into Fresh Start. He had been trying to get in 

it for some time. There is an e-mail the next day of June 30 confirming the fact that he got into Fresh Start that night. 

Fresh Start is actually Salient Corporation. If you go to the SEC 

filings of Salient Corporation for the beginning of February, 2002—

there is a series of SEC filings—you can track the history. He put 

the $5 million into Salient on October 15, 2001. He got 3,333,000 

shares. He got in on the same exact terms and conditions that 

Pequot got into in the same company. 

In February, the company was bought out by the Andrews Corporation for $467 million, but $82 million of that had to go to somebody else. The bottom line, after you sort that out, there was approximately $300 and some million. If you took the amount of the 

shares, the percentage of the shares that Mr. Mack got and simply 

did the mathematics, it came out to around $16 million. 

Chairman SPECTER. Mr. Hanson, before yielding to Senator 

Grassley, I want to take up the subject of the pay increases and 

the ratings of Mr. Aguirre. 

Is it not true that Mr. Aguirre received two favorable reviews in 

September of 2004 and then April of 2005? 

Mr. HANSON. Mr. Aguirre, I think, received sort of a ‘‘pass/fail’’ 

rating in, probably, April or March, thereabouts, of 2005. 

Chairman SPECTER. Would you tell the Committee why there 

was a supplemental evaluation which led to Mr. Aguirre’s termination? 

34

Mr. HANSON. Well, I would not say it led to Mr. Aguirre’s termination. But we did draft a supplemental evaluation for Mr. Aguirre 

on August 1, 2005. 

Chairman SPECTER. Was it not highly unusual to have that kind 

of a supplemental evaluation? 

Mr. HANSON. I had never drafted one before, but I felt it was appropriate in Mr. Aguirre’s case. 

Chairman SPECTER. I take that as a ‘‘yes’’ answer. 

Mr. Kreitman, is it not highly unusual to have that kind of a 

supplemental evaluation? 

Mr. KREITMAN. Well, at that time, Senator, I had only participated in the evaluation process once before, and I had not done it 

in that case. So, I do not know, really, more generally than that. 

Chairman SPECTER. Well, have you ever seen a supplemental 

evaluation under analogous circumstances? 

Mr. KREITMAN. Prior to becoming an assistant director, I had 

never seen any evaluations. 

Chairman SPECTER. Well, you were on the pay raise committee, 

were you not? 

Mr. KREITMAN. No, I was not. 

Chairman SPECTER. Mr. Berger, was this not a highly unusual 

thing to have a supplemental evaluation? 

Mr. BERGER. I think it was fairly rare, Mr. Chairman, to do a 

supplemental evaluation. 

Chairman SPECTER. Fairly rare? Happened one time in the past 

only? 

Mr. BERGER. Oh, I could not say how many times it happened 

in the past. 

Chairman SPECTER. Do you know if it is happening at all? 

Mr. BERGER. I think it has happened, yes. 

Chairman SPECTER. Do you know when it happened in the past? 

Mr. BERGER. No, I do not. I am saying that I think it is rare. 

What I was going to say is that—— 

Chairman SPECTER. Well, this is a pretty important point here. 

With the overtone that suddenly there is a change in evaluation, 

a supplemental evaluation, something the Committee is very concerned about, if this had been something that had been done in the 

past, would you not have checked that out before coming in to testify today? 

Mr. BERGER. I am sorry. I am not at the SEC and I do not have 

access to that information. 

Chairman SPECTER. You are what? 

Mr. BERGER. I am not at the SEC so I do not have access to the 

information. 

Chairman SPECTER. I know. But you are a witness in a matter 

which involved you on the evaluation of Mr. Aguirre and a supplemental evaluation. 

Mr. Aguirre, what happened in this situation? 

Mr. AGUIRRE. Well, of course, I did not know anything about any 

reevaluation until they fired me, but I have been able to track 

what has happened. 

Chairman SPECTER. You were never told you were being reevaluated? 

35

Mr. AGUIRRE. No. I had to dig that out. I had to press these guys 

to get the records, and they finally gave it to me in October. 

On June 1, I got the first evaluation ‘‘acceptable on all grounds’’, 

which qualified me for a merit pay increase. On June 17, I submitted my evaluation. On June 29, Mr. Hanson forwarded the evaluation, saying my work was of high value, and made some very 

positive comments. For example, that I ‘‘went the extra mile, and 

then some’’. 

Now, I understand between June 29 and July 18, everyone, with 

the exception of Linda Thomsen, approved that merit pay increase. 

On July 18, the Compensation Committee met and approved it. 

Now, between July 18 and July 27, Linda Thomsen approved it. 

But on the evening of July 27 at 5:30, I sent Mr. Berger an e-mail 

for the first time saying to him, this investigation has been stopped 

because of Mack’s political power. 

He did nothing in response to that e-mail. That is, he did not 

say, come on in, let us talk about it, let us get to the bottom of this. 

Two days later, he reevaluated me. That is the sequence. 

Chairman SPECTER. Mr. Hanson, there is a form here which is 

designated ‘‘Merit Pay Supervisor Transmittal Form—Employee’s 

Name: Gary Aguirre. Supervisor’s Name: Robert Hanson’’. Are you 

familiar with this document, or would you like to see it up close? 

Mr. HANSON. I am familiar with it. 

Chairman SPECTER. You are familiar with it. On June 29, 2005, 

you checked off the category here, ‘‘Made Contributions of High 

Quality’’. 

Mr. HANSON. That is correct. 

Chairman SPECTER. Well, what was it that changed your view as 

to his qualifications? 

Mr. HANSON. As I indicated in my written statement, the evaluation prepared for Mr. Aguirre was based on his work for the 3-

month period, from the date Mr. Aguirre joined my group through 

April 30, 2005. 

Chairman SPECTER. And Mr. Kreitman, are you familiar with a 

document dated June 1, 2005 concerning ‘‘Performance Plan and 

Evaluation’’ as to Mr. Aguirre? 

Mr. KREITMAN. Yes, I am, Senator. 

Chairman SPECTER. You are familiar. Where you checked off 

‘‘Knowledge of Field or Occupation: acceptable. Planning and organizing work: acceptable. Execution of Duties: acceptable. Communications: acceptable.’’ 

Mr. KREITMAN. Yes, Senator. 

Chairman SPECTER. That was your evaluation of Mr. Aguirre on 

June 1 of 2005. 

Mr. KREITMAN. Yes, it is. 

Chairman SPECTER. Why the change? 

Mr. KREITMAN. Well, Senator, Mr. Aguirre was a probationary 

employee. If I had rated him ‘‘unacceptable’’ in any of those four 

critical performance evaluation standards, it would effectively have 

terminated his employment at that time. 

Chairman SPECTER. He ultimately was terminated. 

Mr. KREITMAN. That is correct. 

Chairman SPECTER. If he is unacceptable, why should he not be 

terminated? 

36

Mr. KREITMAN. He should be. 

Chairman SPECTER. If he is acceptable, why was he terminated? 

Mr. KREITMAN. He was not acceptable at the time that he was 

terminated, Senator, at the end of his probationary period. 

Chairman SPECTER. Well, what was the change that moved from 

‘‘Acceptable’’ in all those categories to ‘‘Unacceptable’’? Is it not a 

curious coincidence, Mr. Kreitman, that at the time he is pursuing 

these matters which are not meeting with favor by Mr. Hanson, 

Mr. Kreitman, and Mr. Berger, that suddenly there is a reevaluation, highly unusual, and all of these qualifications where he is 

‘‘Acceptable’’, and where Mr. Hanson says, his immediate supervisor, ‘‘Made Contributions of High Quality’’. Suddenly there is a 

change and he is fired? 

Mr. KREITMAN. Senator, the only respect in which Mr. Aguirre’s 

professional judgment received disfavor by any of his supervisors 

was, as Mr. Berger indicated, with respect to the timing of the testimony of Mr. Mack. 

However, it was Mr. Aguirre’s behavior and conduct, the contemptuous way in which he treated his colleagues, the unprofessional way in which he dealt with opposing counsel, his refusal 

to accept any kind of directional supervision, that led to his termination. 

Chairman SPECTER. Well, he worked there for a long time. He 

got these very favorable ratings on June 29, and a favorable rating 

from you, ‘‘Acceptable’’, on June 1. Then on September 1, 2 months 

later from the Hanson evaluation and 3 months later from your 

evaluation, suddenly he is fired. 

Mr. KREITMAN. Well, Senator, he did not work there for a long 

time. He was a probationary employee. He worked in our group 

from February until September and, perhaps erroneously in retrospect, we were very generous with him. We wanted to encourage 

him. I had promised him that when he came to my group after having very serious difficulties in another assistant director group, 

that I would give him a fresh start. 

He worked an enormous number of hours with very great energy 

and diligence, therefore, in my judgment and in the judgment of 

his other supervisors, I believe, he made a highly valuable contribution. 

That is very different from the basis upon which he was terminated, which was his inability to work within a closely supervised, 

structured, and collegial environment. 

Chairman SPECTER. Senator Grassley? 

Senator GRASSLEY. Before I ask questions, I would like to ask 

that a list of documents that I will hand to you now would be included in the record of today’s hearing. Also then, before they are 

included, it would be necessary for your Committee and my Committee staffs to make appropriate redactions. 

Chairman SPECTER. Without objection they will be made a part 

of the record, as will all of the documents which have been referenced during the course of the testimony be made a part of the 

formal record. 

[The documents appear as submissions for the record.] 

Senator GRASSLEY. Yesterday’s written testimony was submitted 

by the witnesses for today’s hearing. Mr. Hanson, in your testiVerDate 0ct 09 2002 13:07 Jun 01, 2007 Jkt 035458 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\35458.TXT SJUD1 PsN: CMORC
37

mony you discuss Mr. Aguirre’s performance when he took the testimony of Arthur Samberg. You stated, ‘‘It was reported to me that 

Mr. Aguirre behaved unprofessionally and was extremely disorganized during the testimony.’’ 

Mr. Hanson, were you present at any of the testimonies that Mr. 

Samberg gave? 

Mr. HANSON. I was. 

Senator GRASSLEY. You were there? 

Mr. HANSON. Your question was, was I present at any of the testimonies that Mr. Samberg gave. 

Senator GRASSLEY. Yes. 

Mr. HANSON. I was. 

Senator GRASSLEY. You were there. 

Mr. HANSON. I think, just to clarify the record, I was not at the 

testimonies that Mr. Aguirre took of Mr. Samberg. 

Senator GRASSLEY. All right. 

So you would have no direct knowledge of what took place at Mr. 

Aguirre’s testimony of Mr. Samberg. 

Mr. HANSON. Other than reading the transcript, I would not 

have direct knowledge. 

Senator GRASSLEY. All right. 

Hilton Foster, who I understand is an ex-Securities and Exchange Commission expert on insider trading cases, was there. He 

has over 30 years’ of experience at the SEC and he trained new attorneys at the SEC. 

He testified in an interview with Committee investigators that 

‘‘did I think anything happened in there that was unusual or unprofessional? No.’’ Foster continued, ‘‘There was a portion there 

where I said, ‘this is dynamite stuff here.’ Further, I remember 

being impressed with the way that Gary did the testimony.’’ 

Mr. Foster later stated that he was going to use that transcript 

in his training of other attorneys. 

Mr. Hanson, who was your source that said Mr. Aguirre behaved 

unprofessionally? 

Mr. HANSON. This was a senior counsel in my group. 

Senator GRASSLEY. And he was an attorney with the SEC. 

Mr. HANSON. That is correct. 

Senator GRASSLEY. Or was he an attorney for the defense bar? 

Mr. HANSON. He was an attorney with the SEC. 

Senator GRASSLEY. All right. 

Did you ever check what you had heard about the testimony with 

Mr. Foster? 

Mr. HANSON. I did not. 

Senator GRASSLEY. Why not? 

Mr. HANSON. The attorney that gave me that information is an 

individual I think highly of. I respect his judgment. He has been 

doing litigation for a number of years, so whatever he says to me 

I generally take as a given. 

Senator GRASSLEY. How about Mr. Ribelin? Did you ask him 

about Gary’s conduct during the testimony? 

Mr. HANSON. I did not. 

Senator GRASSLEY. Well, let us ask Mr. Ribelin. 

You were there. Do you think that Gary did a good job questioning Arthur Samberg? 

38

Mr. RIBELIN. Absolutely. 

Senator GRASSLEY. Mr. Stachnik, as you know, I was troubled 

about your inquiry into Mr. Aguirre’s allegation from the beginning. I have to tell you, the more I learn, the more troubled I get. 

Your office did little more than look at his letter to Chairman 

Cox, call his supervisors, accept what they told you at face value. 

Just calling up people accused of wrongdoing and asking them if 

they did it is not my idea of an investigation that you should have 

performed. 

You did not talk to any of the people at the SEC who identified 

in his letter as agreeing with him. You did not contact Mr. Aguirre 

to get more detailed information or learn whether he had evidence 

to support his claims, which it turns out he did. 

Since you did not talk to Mr. Aguirre, you closed the investigation without even looking at an e-mail from Mr. Hanson where he 

admits to talking about John Mack’s ‘‘political clout’’. In short, you 

only got one side of the story and you did not seem very interested 

in getting the other side. 

In my opinion, an Inspector General is supposed to be independent-minded. When a whistleblower comes forward, you should 

take these allegations seriously, not help play defense for the SEC. 

So my first question is, can you explain why your office was not 

more aggressive in looking at these allegations when they were 

first brought to your attention last year? 

Mr. STACHNIK. Senator, we did do a professional and thorough 

investigation, in my judgment, at the time. We did assign the most 

senior staff in my office to this matter. They did review documents, 

e-mails. They analyzed metadata, as well as interviewing the personnel within the SEC. 

My judgment in this matter was that the allegations in the two 

letters that came from Mr. Aguirre to Chairman Cox, the allegations were not validated by the investigation. These included 

Mack’s testimony not being taken. That was a matter of timing 

rather than whether or not it would or would not be taken. 

It included the phone call between Linda Thomsen and, I believe 

it was Mary Jo White, although I may be mistaken about that, 

which we determined was normal communications between the Director of Enforcement. 

We looked at documents which indicated that Mr. Aguirre did 

have access and did participate in lots of meetings concerning all 

of the matters he claimed he was not invited, and did not participate in the meetings. 

We looked at the allegation about his personnel file and found 

out, through analysis of metadata, that the supplemental evaluation, unlike the allegation, was prepared back in an appropriate 

time and it was not post-dated. 

We also determined that his termination was based on a dysfunctional relationship between himself and his supervisors. It was 

pretty obvious that it had been going on. Based on contemporaneous memos, e-mails, and so forth, it was pretty obvious that it 

was going on for a long period of time. This was not something that 

came up suddenly. 

Senator GRASSLEY. Well, does it not bother you, if your office is 

independent of the SEC and you can do your work as an Inspector 

39

General ought to do the work, and does it not raise a red flag when 

somebody says that you ought to be careful because somebody has 

got a lot of political clout? 

I mean, after all, you are talking about an independent agency. 

But any place in the government. When you start worrying about 

somebody that has political clout, you are not doing your job. 

Mr. STACHNIK. I agree, Senator. That is the reason that we did 

open the investigation. I was very disturbed by the allegations that 

were made by Mr. Aguirre. The investigation was designed to validate those allegations. 

Senator GRASSLEY. Well, let me ask you, do you still stand by the 

closing memorandum that you did? If so, why did you reopen the 

investigation? 

Mr. STACHNIK. The reason that I decided to reopen the investigation was a combination of factors. The serious concerns expressed 

by the Senate, your Committee and Senator Specter’s committee, 

were clearly part of that decision. The concerns expressed to me by 

Chairman Cox of the SEC was also part of that decision. 

In my estimation, we did a professional and rigorous investigation. However, we are not infallible. We are taking another look at 

the matter. That is the reason we reopened it. I reopened it. 

Senator GRASSLEY. All right. 

Well, my last question is going to followup on that. Your office 

made no written document request to the SEC before closing this 

initial investigation. Yet, after Congress started raising questions, 

you did reopen it, as we just discussed, and have since issued a 

broad subpoena to Mr. Aguirre calling for records of his communication with this Committee and with my own Finance Committee. 

You are now attempting to have the Justice Department enforce 

that subpoena in court, even though you are aware that we have 

raised constitutional objections to your office seeking confidential 

communications between a whistleblower and a Congress about an 

ongoing Congressional inquiry, which includes questions about the 

effectiveness of your office, which, if you are successful, you might 

as well close down the whole business of whistleblowing and close 

down a major source of information for Congress doing its constitutional job of oversight. 

Could you explain to me why it is necessary for you to have access to communications between Mr. Aguirre and the committees 

investigating his allegations? 

Mr. STACHNIK. First off, I do have a parochial interest in whistleblowers, as part of the IGs’ community that depends on whistleblowers, as well as other individuals within the government, to provide information and leads for investigation, so it is not the case 

that we find them un-valuable. 

I can tell you, in terms of this subpoena enforcement matter that 

you were discussing—— 

Senator GRASSLEY. Yes. Why do you need access to communications? I mean, you should have all this information. If you are 

doing your job and you are talking to whistleblowers, why do you 

need what they give us? 

Anyway, we have made an entreaty to you to agree to avoid 

interfering in our investigation. If you would narrow the scope of 

40

your subpoena to exclude his communications with our committee, 

it might get you the information you need and you are not interfering with any constitutional checks and balances and things of 

that nature. Also, you just said that you respect whistleblowers. 

Mr. STACHNIK. Yes, sir. 

Senator GRASSLEY. Well, then you do not seem to be respecting 

Mr. Aguirre very well in this whole process. 

Mr. STACHNIK. I am unaware I did anything disrespectful to Mr. 

Aguirre. 

Senator GRASSLEY. Well, I am using that as an example. Do you 

really have respect for whistleblowers in that respect? In other 

words, if you consider them of value, why do you not take the word 

of the whistleblower sitting beside you? 

Mr. STACHNIK. Well, I am not an advocate for whistleblowers. 

That is not the function of the Inspector General. 

Senator GRASSLEY. But you ought to be an advocate for their information that they give you. 

Mr. STACHNIK. We did. That is the purpose of the investigation, 

was to validate the information and the allegations made by Mr. 

Aguirre. 

Senator GRASSLEY. What are the chances of narrowing your request to Congress? 

Mr. STACHNIK. I have been advised by the Department of Justice 

not to comment on that. I can tell you that, personally, I am not 

looking to make a fuss about this matter. It is up to lawyers. 

Senator GRASSLEY. You may be playing footsie with an executive 

branch of government that wants to curb Congressional inquiries 

even beyond this one. That is a precedent that could be set. 

Chairman Specter, I think we need to consider legislation that 

ensures that agencies cannot intimidate whistleblowers by issuing 

subpoenas to them for all of their communications with Congress. 

We need to ensure that people feel free to come to us with information about waste, fraud and abuse without worrying that they are 

going to get slapped with a subpoena. 

Chairman SPECTER. Senator Grassley, there is no doubt about 

that. We have some of that included in the draft legislation which 

has been circulated, but we need to be sure that Mr. Ribelin, for 

example, who stepped forward and has given candid testimony, 

backed up by documents, will be protected. There is no doubt about 

that. 

And the point that you are making with Mr. Stachnik is very 

well founded. We had not come to the point of questioning him, but 

he closed his investigation without questioning Mr. Aguirre, which 

is sort of incomprehensible. 

For the Inspector General to seek the testimony, what Mr. 

Aguirre told the Finance Committee, what he told the Judiciary 

Committee, is just really extraordinary. It is just really extraordinary that our oversight and our inquiries would be subject to intimidation. I mean, that is what it is. You are getting even with 

Mr. Aguirre for talking to the Finance Committee and the Judiciary Committee. Is that not about the size of it, Mr. Stachnik? 

Mr. STACHNIK. Not from my perspective, no. I am trying to get 

the information necessary to complete the reopened investigation. 

41

Chairman SPECTER. Well, why do you not ask Mr. Aguirre? Why 

not ask Mr. Aguirre for what he has told the committees? 

Mr. STACHNIK. We have talked to Mr. Aguirre’s attorneys. My attorneys have talked to his attorneys. We will take his statement 

from this Committee and look at that carefully. 

Chairman SPECTER. Well, any information you want from Mr. 

Aguirre, you can get from him. Why do you have to—— 

Mr. STACHNIK. We have asked Mr.—— 

Chairman SPECTER. Let me finish the question. Why do you have 

to implicate what the Judiciary Committee has heard from Mr. 

Aguirre? 

Mr. STACHNIK. We have asked Mr. Aguirre directly for information and he has declined to give us that information. 

Mr. AGUIRRE. I have to speak on that. May I? 

Chairman SPECTER. Go ahead, Mr. Aguirre. 

Mr. AGUIRRE. I provided them 250 pages of details, a 45-page 

statement backed up by 200 pages of exhibits, laying out everything. This statement that I gave them, I have given to your staff. 

I have never had anyone come back and say, it is not enough information for us to understand. 

I do not know why they are doing this. I am not sure it is a 

search for information any more. I think it is something else. The 

information that they have got now is voluminous. Yet, we continue 

on. 

Chairman SPECTER. Mr. Berger, do you care to make a comment? 

There has been some media speculation as to your joining the 

Debevoise firm after there was some involvement by the Debevoise 

firm with Morgan Stanley and Mr. Mack. I want to give you an opportunity to comment about that. 

Mr. BERGER. Thank you, Senator. I appreciate the opportunity to 

comment on that. The first statement, is there is absolutely no correlation whatsoever between my decision to seek employment outside of the Commission and the Pequot investigation, or any investigation. 

Chairman SPECTER. How long a period of time was there between your involvement in the Pequot investigation and the involvement of Mr. Mack and the representation by Debevoise and 

the time you sought employment with Debevoise? 

Mr. BERGER. My understanding is that Debevoise represented 

not Mr. Mack, but the board of directors of Morgan Stanley, for 6 

days in June of 2005. I first approached Debevoise in January of 

2006. 

Chairman SPECTER. Anything further you want to say about 

that? 

Mr. BERGER. I think I have said everything. 

Chairman SPECTER. All right. 

Mr. Stachnik, are you saying, in effect, that as far as you are 

concerned, you do not want the communications with the committees? 

Mr. STACHNIK. I have been advised by the Department of Justice 

not to discuss this matter. I apologize. 

Chairman SPECTER. Well, they are representing you. But you are 

the investigator. You are the Inspector General. You are the party 

42

in these proceedings. Do you want the information which was given 

to the Judiciary Committee? 

Mr. STACHNIK. We need the information that would allow us to 

conduct the investigation. 

Chairman SPECTER. Now answer my question. 

Mr. STACHNIK. I am sorry. I have to go with the advice given to 

me by the Department of Justice and I cannot discuss the matter. 

Chairman SPECTER. Well, has the Department of Justice told you 

that you should get the information from the Judiciary Committee? 

Mr. STACHNIK. We did request the information from the Judiciary Committee. We requested it in writing, as well as orally. My 

understanding is, you have a Senate rule—— 

Chairman SPECTER. Now see if you can focus on my question. 

Mr. STACHNIK. All right. I am sorry. 

Chairman SPECTER. Did the Department of Justice urge you to 

get the information from the Judiciary Committee or is the Department of Justice not really your lawyer in the matter to proceed it 

in court to see if they can compel it? 

The Department of Justice does not make the decision as to 

whether the information is necessary for your investigation, Mr. 

Stachnik. You make that decision. 

Mr. STACHNIK. That is correct. 

Chairman SPECTER. Well, so are you saying that you want that 

information from the Judiciary Committee? 

Mr. STACHNIK. Again, Senator, the Department of Justice has advised me not to discuss the matter. I do not know anything 

more—— 

Chairman SPECTER. Oh. Now the Department of Justice has advised you not to discuss the matter with the Judiciary Committee? 

Mr. STACHNIK. That is correct. 

Chairman SPECTER. The plot grows thicker all the time. 

Well, I think we have gone about as far as we can go here. The 

draft legislation which would permit the parallel activities by the 

Department of Justice and the SEC, and would provide greater inducements to whistleblowers and would provide for some regulation where you have small investors and you have pension funds, 

we are going to put that into the legislative process and introduce 

that legislation. Obviously nothing is going to happen in the 109th 

Congress, but this is going to be a matter for analysis and pursuit 

later. 

At a minimum, it is very, very troubling what the SEC has done 

here, Ms. Thomsen, Mr. Berger, Mr. Kreitman, Mr. Hanson. At the 

very minimum, it is very, very troubling. When you have a matter 

referred to you and it sits dormant for 2 years, and you have a very 

vigorous investigator like Mr. Aguirre coming forward and you 

have him working from September of 2004 and getting very good 

reports as late as June 29, 2005, and then because he is pressing 

on what is admitted by your own memoranda, Mr. Hanson, to have 

political overtones, to have ‘‘juice’’, and you have one of your professionals of long standing, Mr. Ribelin, coming in and saying something is smelly, and then your agency takes no action until there 

is a Judiciary Committee hearing in June and you finally get 

around to taking Mr. Mack’s deposition 5 days after the statute of 

limitations has run, and you have the Inspector General of the SEC 

43

taking punitive action against Mr. Aguirre—that is what it is, Mr. 

Stachnik. 

Senator Grassley expressed it very, very well on the kind of an 

investigation you have run here, which is not professional. You are 

not the only one who knows something about running investigations. 

But we are not finished with this yet, ladies and gentlemen. We 

are not finished with this. We have people under oath with directly 

contradictory testimony. It is very, very troubling, at a minimum. 

That concludes the hearing. 

[Whereupon, at 12:03 p.m. the hearing was concluded.] 

[Questions and answers and submissions for the record follow.]

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