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" ! COMMITTEE PRINT 110TH CONGRESS

1st Session

S. PRT.

2007

110–28

THE FIRING OF AN SEC ATTORNEY

AND THE INVESTIGATION OF PEQUOT

CAPITAL MANAGEMENT

PREPARED BY THE MINORITY STAFF OF THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

MAX BAUCUS, Chairman

CHARLES E. GRASSLEY, Ranking Member

AND THE

COMMITTEE ON THE JUDICIARY

UNITED STATES SENATE

ARLEN SPECTER, Ranking Member

AUGUST 2007

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHARLES E. GRASSLEY, Iowa

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

(III)

C O N T E N T S

Page

I. INTRODUCTION ...................................................................................... 1

II. EXECUTIVE SUMMARY ........................................................................ 5

III. RECOMMENDATIONS ........................................................................... 7

IV. TABLE OF NAMES .................................................................................. 9

V. KEY EVENTS ............................................................................................ 11

VI. THE PEQUOT INVESTIGATION ......................................................... 15

A. Pequot’s Suspicious Trading Surrounding the GE-Heller

Acquisition .............................................................................................. 15

B. The Early Stages of the Investigation ................................................. 16

1. The SEC’s Delayed and Truncated Investigation .......................... 16

a. Time Elapsed between Trades and Serious Investigation ..... 16

b. Supervisors Order a Limited Inquiry ...................................... 16

2. Other Suspicious Pequot Trading .................................................... 18

a. Wash Sales and Potential Stock Manipulation ...................... 18

b. The AstraZeneca and Par Pharmaceutical Trades ................. 19

c. The Microsoft Trades ................................................................ 20

3. Pequot and the SEC Fight over Document Production ................. 21

4. The Arthur Samberg Testimonies ................................................... 23

5. The SEC Briefs Criminal Prosecutors on its Investigation ........... 24

C. SEC Investigators Identify a Potential Tipper ................................... 24

1. Investigators Suspect John Mack .................................................... 24

2. Others Concur in Aguirre’s Request to Take John Mack’s

Testimony ......................................................................................... 27

3. Morgan Stanley’s Investigation and Contacts with the SEC ........ 28

a. Planning a Response to Outside Inquiries .............................. 28

b. Debevoise & Plimpton Contacts ............................................... 29

c. Thomsen and Berger Respond to Inquiries ............................. 30

4. Supervisors Deny Requests to Question John Mack ..................... 32

a. ‘‘Not Premature, but Prerequisite’’ .......................................... 32

b. Mack’s Testimony Should Have Been Taken Earlier ............ 34

c. Political Clout or Prominence? ................................................. 36

5. The SEC Fires its Lead Investigator .............................................. 37

D. The Investigation Shifts Focus ............................................................ 38

1. Attempts to Identify other Potential Tippers/Tippees ................... 38

2. Dropping the Microsoft Trades ........................................................ 39

E. The Universe Shifted: Returning to the GE-Heller Trades ............... 39

1. The Decision to Finally Question John Mack ................................ 39

2. Unasked Questions: The Mack Transcript ..................................... 41

F. The SEC’s Case Closing Report ............................................................ 42

1. GE-Heller .......................................................................................... 42

2. Microsoft ............................................................................................ 44

3. AstraZeneca and Par Pharmaceutical ............................................. 45

G. Conclusion .............................................................................................. 46

VII. GARY AGUIRRE’S EMPLOYMENT AT THE SEC ............................ 55

A. Background ............................................................................................ 55

1. Applications for Employment and EEO Claim ............................... 55

2. Transfer to another Branch Chief ................................................... 56

3. Positive Performance Evaluations ................................................... 57

4. Merit Pay Increase ........................................................................... 57

B. Objections to Blocking Mack Testimony .............................................. 58

1. Supervisor’s Reference to Mack’s ‘‘Powerful Political

Connections’’ ..................................................................................... 58

2. Notice and Withdrawal of Resignation ........................................... 62

Page

IV

C. Terminating Gary Aguirre .................................................................... 67

1. Accusations of a ‘‘Coup,’’ August 1, 2005 ........................................ 67

2. The Negative Re-Evaluations .......................................................... 70

a. Timing ........................................................................................ 70

b. Content of Supplemental Evaluation ...................................... 71

3. The Merit Pay Calendar and Aguirre’s Raise ................................ 74

4. The Director of Enforcement and the Termination Notice ............ 76

5. The Connections between the Mack Dispute and the Decision

to Fire Aguirre .................................................................................. 78

a. The Termination Proposal ........................................................ 78

b. The Termination Decision Meeting ......................................... 79

6. Paul Berger Leaves the SEC ........................................................... 82

a. The Initial Story ....................................................................... 82

b. The Full Story ........................................................................... 83

c. Berger’s Failure to Mention Pre-Recusal Contacts ................ 84

d. Berger’s Failure to Recuse Himself Immediately from the

Pequot Case ............................................................................. 85

VIII. THE INSPECTOR GENERAL’S INVESTIGATION ........................... 93

A. Background ............................................................................................ 93

B. SEC/OIG Investigation of Aguirre’s Claims—A One-Sided

Approach ................................................................................................. 93

1. Investigative Plan: Don’t talk to the Complainant ........................ 94

a. The Privacy Act ......................................................................... 94

b. The Necessity of an Aguirre Interview ................................... 95

2. Witness Interviews ........................................................................... 96

a. Hanson Denies Referring to Mack’s ‘‘Political Connections’’ . 96

b. Other Interviews ....................................................................... 96

c. Deference and Informality ........................................................ 97

3. The Failure to Obtain Key Documents ........................................... 97

4. Failures of the Office of Information Technology ........................... 98

5. Closing Memorandum ...................................................................... 99

6. ‘‘Irregularities’’ Deemed Merely an Audit Issue ............................. 100

C. Other OIG Investigations ..................................................................... 101

1. A More Vigorous OIG Investigation ................................................ 101

2. Geek Securities and Commissioner Cynthia Glassman ................ 102

D. The Reopening of the Aguirre Investigation ....................................... 102

1. Relationship to Congressional Investigations ................................ 102

2. Attempt to Compel Disclosure of Confidential Communications

with Congress ................................................................................... 103

E. Conclusion—Independence of the OIG ................................................ 104

Appendix I: Exhibits ............................................................................................ 109

Appendix II: Correspondence ........................................................................... 657

(1)

I. INTRODUCTION

Last year, under the leadership of then-Chairmen Charles Grassley and Arlen Specter, the staff of the Senate Committees on Finance and Judiciary (‘‘the Committees’’) conducted an extensive

joint investigation into allegations of lax enforcement, improper political influence, whistleblower retaliation, and related matters involving the Securities and Exchange Commission (SEC). In this report, we detail our findings and recommendations. Our recommendations follow the review of about 10,000 pages of documents, over 30 witness interviews, three Judiciary Committee

hearings, and a previously released set of interim findings.

On June 28, 2006, the Judiciary Committee held a hearing examining short selling activities of hedge funds and independent analysts. On September 26, 2006, the Committee’s second hearing examined enforcement of insider trading prohibitions and insider

trading by hedge funds, especially trading ahead of mergers. On

December 5, 2006, the Committee’s third hearing focused on allegations that (1) the SEC mishandled its investigation of a major

hedge fund, Pequot Capital Management, (2) the SEC fired its lead

investigator in retaliation for reporting evidence of improper political influence on the investigation, and (3) the SEC’s Office of Inspector General failed to conduct a serious, credible inquiry into

the fired attorney’s allegations. Senators Specter and Grassley presented interim findings on the Senate floor on January 31, 2007.

This report concludes the investigation.

We commend SEC Chairman Christopher Cox for his full and

complete cooperation. Although the SEC initially ‘‘circled the wagons,’’ its eventual cooperation allowed us to conduct a thorough,

independent review of allegations by the fired SEC attorney, Gary

Aguirre. According to Aguirre, his efforts to investigate insider

trading violations by Pequot were thwarted by his superiors after

he focused on the current Morgan Stanley Chief Executive Officer

John Mack. Aguirre alleged that requests to take Mack’s testimony

met resistance within the SEC and that his supervisor told him it

was because of Mack’s ‘‘powerful political connections.’’ Aguirre

claimed this dispute ultimately led to his firing. These allegations

were given short shrift by the SEC Office of Inspector General in

its initial report. However, under Chairman Cox’s leadership, when

Senate investigators raised questions, the SEC eventually opened

its investigative files. By making documents and witnesses available, Chairman Cox demonstrated a commitment to accountability

and transparency. That is the first crucial step to the SEC restoring confidence in the integrity of its enforcement operations.

We also commend the SEC for increased enforcement efforts regarding insider trading, and specifically insider trading by hedge

funds, following our investigation. On March 1, 2007, in announcing charges against 14 individuals in a brazen insider trading

2

scheme, Chairman Cox stated: ‘‘Our action today is one of several

that will make it very clear the SEC is targeting hedge fund insider trading as a top priority.’’ Linda Thomsen, Director of the

SEC’s Division of Enforcement, recently stated that the SEC has

made investigating insider trading ahead of mergers and acquisition one of its top priorities. Peter Bresnan, Deputy Director of the

SEC’s Division of Enforcement, stated in a CNBC interview on May

11, 2007: ‘‘Hedge fund managers are under enormous pressure to

show profits for their clients. . . . Not every hedge fund manager

can get those kinds of return through legitimate trading.’’ Bruce

Karpati, an Assistant Regional Director in the SEC’s New York office stated in May 2007 that the SEC is ‘‘actively studying the relationships that hedge funds have both inside the hedge funds and

outside’’ to see how information flows around financial markets,

and that the SEC is also looking at ‘‘more complex trading strategies’’ at hedge funds. Also in May 2007, when the SEC filed

charges against a Hong Kong couple alleging they illegally traded

ahead of News Corp.’s offer to buy Dow Jones, Cheryl Scarboro,

SEC Associate Enforcement Director, stated: ‘‘Cases like this, insider trading ahead of mergers, are a top priority and we will continue our pursuit of it, no matter where it occurs.’’ Finally, in early

2007 it was widely reported that the SEC began a fact-finding

study of the relationships hedge fund advisers have with

brokerages to determine if those contacts could lead to insider trading, and specifically has requested information about stock and options trading by major firms, including Merrill Lynch, Morgan

Stanley, UBS, and Deutsch Bank.

Linda Thomsen testified at the hearing on September 26, 2006

that ‘‘[r]igorous enforcement of our current statutory and regulatory prohibition on insider trading is an important part of the

Commission’s mission.’’ The SEC, a civil enforcement agency that

uses civil sanctions to address insider trading, works with the Department of Justice to enforce federal criminal law prohibiting insider trading. In addition, the New York Stock Exchange’s 160

member Market Surveillance branch utilizes real time trading data

and specialized algorithms that generate alerts when stocks exceed

preset trading limits, which may be flagged for the SEC. Since

2001, the SEC has brought more than 300 insider trading cases

against several hundred individuals and entities.

Since our joint investigation commenced, the SEC and the Department of Justice have brought several high profile insider trading cases.

• In November 2006, the SEC charged the head of several San

Francisco-based hedge funds with defrauding investors in the

Compass West Fund, Viper Founders Fund, and Viper Investments. • In February 2007, the SEC charged seven individuals and two

hedge funds with insider trading ahead of announcements by

Taro Pharmaceuticals Industries regarding earnings and FDA

drug approvals. • In March 2007, the SEC and federal prosecutors filed charges

against a dozen defendants, including a Morgan Stanley compliance officer who pled guilty in May 2007 to charges that she

and her husband sold information about four deals—including

3

Adobe Systems Inc.’s $3.4 billion purchase of Macromedia and

the $2.1 billion acquisition of Argosy Gaming by Penn National

Gaming, Inc.—to individuals who used the information in trading for hedge fund Q Capital Investment Partners and other

accounts. • In March 2007, the SEC charged a UBS research executive

with selling information about upcoming UBS upgrades and

downgrades of the stock of Caterpillar, Goldman Sachs, and

other companies. The information was then used in trading on

behalf of hedge funds Lyford Cay, Chelsea Capital and Q Capital Investment Partners. • In May 2007, a Credit Suisse investment banker was charged

with insider trading for leaking details of acquisitions involving nine publicly traded U.S. companies, including the $45 billion takeover of TXU Corp by a private equity firm. • In May 2007, the SEC accused a former analyst at Morgan

Stanley and her husband, a former analyst in the hedge fund

group at ING, of making more that $600,000 by trading on

companies advised by Morgan Stanley’s real estate subsidiary. • On May 30, 2007, the Barclays Bank and its former head trader consented to entry of a court order requiring Barclays to pay

$10.94 million to settle charges of insider trading based on

Barclays’ authorization of trading in securities of companies

while the trader had material nonpublic information about

those companies because he served on bankruptcy creditor

committees of those companies. • On June 13, 2007, the SEC filed and settled a civil injunctive

action against the former managing partner of a large law firm

who traded in securities of a company after he learned from a

job applicant that the company was about to be acquired. • On June 13, 2007, the SEC filed an unlawful insider trading

complaint against a former bank vice president who had information concerning an imminent sale of the bank.

The notion advanced by some that insider trading—unlawful

trading based on material, non-public information—is a victimless

crime, or that it benefits investors by more quickly introducing new

information into the market, is not accepted by Congress. Three

primary objectives of good securities market regulation are (1) investor protection, (2) ensuring that markets are fair, efficient and

transparent, and (3) reducing systemic risk. Moreover, Congress

has passed legislation intended to protect investors from misleading, manipulative, or fraudulent practices, including insider

trading, front-running or trading ahead of customers, and misuse

of client assets.

Maintaining transparency, public confidence in the integrity of

our securities market, and a level playing field for the average investor are important goals of the SEC’s enforcement practices. The

booming merger and acquisitions market, lightly regulated hedge

funds under pressure to deliver extraordinary returns, and increased use of complex trading strategies all present new opportunities to profit from, and hide, unlawful insider trading. The junk

bond and insider trading scandals tied to the heavy corporate

merger and acquisition activity in the 1980s may have contributed

to the 1990 recession, and led to many successful criminal prosecuVerDate 11-MAY-2000 14:44 Aug 07, 2007 Jkt 095484 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 36960.000 SFIN1 PsN: SFIN1
4

tions. Because those events may be forgotten by a new generation

working on Wall Street, it is important for Congress to continue to

ensure that regulators have an appropriate focus on preventing a

recurrence of such activity and to effectively utilize the authority

and tools given to them under statutes and in the funding process.

Robust, but balanced, regulation is the foundation of our prosperity

and growth and the reason U.S. capital markets succeed. Deterring, detecting, and eliminating fraud in an environment free of political influence is good for business.

(5)

II. EXECUTIVE SUMMARY

Pequot’s trades in advance of the GE acquisition of Heller

Financial were highly suspicious and deserved a thorough

investigation. In the weeks after a conversation with John Mack

and prior to the public announcement of GE’s acquisition of Heller,

Pequot CEO Arthur Samberg purchased over one million shares of

Heller Financial stock, and also shorted GE shares. On the day the

deal was announced, Samberg sold all of the Heller stock. He also

covered the short positions in GE shortly thereafter, for a total

profit of about $18 million for Pequot in a matter of weeks.

The SEC examined only a fraction of the other suspicious

Pequot trading highlighted by Self-Regulatory Organizations (SROs). GE-Heller represented just one of at least 17 sets

of suspicious transactions involving Pequot brought to the SEC’s

attention by organizations like the NYSE and NASD. However,

SEC managers ordered the staff to focus on only a few transactions. In addition to GE-Heller, the SEC investigated trades involving (1) Microsoft, (2) Astra Zeneca and Par Pharmaceutical,

and (3) various ‘‘wash sales.’’

Staff Attorney Gary Aguirre said that his supervisor

warned him that it would be difficult to obtain approval for

a subpoena of John Mack due to his ‘‘very powerful political

connections.’’ Aguirre’s claim is corroborated by internal SEC emails, including one from his supervisor, Robert Hanson. Hanson

also told Aguirre that Mack’s counsel would have ‘‘juice,’’ meaning

they could directly contact the Director or an Associate Director of

Enforcement.

Attorneys for Pequot and Morgan Stanley had direct access to the Director and an Associate Director of the SEC’s

Enforcement Division. In January 2005, Pequot’s lead counsel

met with the SEC Director of Enforcement Stephen Cutler. Shortly

thereafter, SEC managers ordered the case to be narrowed considerably. In June 2005, Morgan Stanley’s Board of Directors hired

former U.S. Attorney Mary Jo White to determine whether prospective CEO John Mack had any exposure in the Pequot investigation.

White contacted Director of Enforcement Linda Thomsen directly,

and other Morgan Stanley officials contacted Associate Director

Paul Berger. Soon afterward, SEC managers prohibited the staff

from asking John Mack about his communications with Arthur

Samberg at Pequot.

Seeking John Mack’s testimony was a reasonable next

step in the investigation. Several SEC staff wished to take

Mack’s testimony because they believed he: (1) had close ties to

Samberg, (2) had potential access to advanced knowledge of the

deal, (3) had spoken to Samberg just before Pequot started buying

Heller and shorting GE, and (4) was an investor in Pequot funds

and was allowed to share in a lucrative direct investment in a

6

start-up company along side Pequot, possibly as a reward for providing inside information.

SEC management delayed Mack’s testimony for over a

year, until days after the statute of limitations expired. After

Aguirre complained about his supervisor’s reference to Mack’s ‘‘political clout,’’ SEC management offered conflicting and shifting explanations for blocking Mack’s testimony. Although Paul Berger

claimed that the SEC had always intended to take Mack’s testimony, Assistant Director Mark Kreitman said that definitive proof

that Mack knew about the GE-Heller deal was the ‘‘necessary prerequisite’’ for taking his testimony. The SEC eventually took

Mack’s testimony only after the Senate Committees began investigating and after Aguirre’s allegations became public, even though

it had not met Kreitman’s prerequisite.

The SEC fired Gary Aguirre after he reported his supervisor’s comments about Mack’s ‘‘political connections,’’ despite positive performance reviews and a merit pay raise.

Just days after Aguirre sent an e-mail to Associate Director Paul

Berger detailing his allegations, his supervisors prepared a negative re-evaluation outside the SEC’s ordinary performance appraisal process. They prepared a negative re-evaluation of only one

other employee. Like Aguirre, that employee had recently sent an

e-mail complaining about a similar situation where he believed

SEC managers limited an investigation following contact between

outside counsel and the Director of Enforcement.

After being contacted by a friend in early September 2005,

Associate Director Paul Berger authorized the friend to

mention his interest in a job with Debevoise & Plimpton. Although that was the same firm that contacted the SEC for information about John Mack’s exposure in the Pequot investigation,

Berger did not immediately recuse himself from the Pequot probe.

Berger ultimately left the SEC to join Debevoise & Plimpton. When

initially questioned, Berger’s answers concerning his employment

search were less than forthcoming.

The SEC’s Office of Inspector General failed to conduct a

serious, credible investigation of Aguirre’s claims. The OIG

did not attempt to contact Aguirre. It merely interviewed his supervisors informally on the telephone, accepted their statements at

face-value, and closed the case without obtaining key evidence. The

OIG made no written document requests of Aguirre’s supervisors

and failed to interview SEC witnesses whom Aguirre had identified

in his complaint as likely to corroborate his allegations.

(7)

* As a starting point for drafting such a policy, the SEC should review and consider adapting

an approach similar to that of the Food and Drug Administration in 21 C.F.R. §10.65(e). HowContinued

III. RECOMMENDATIONS

The controversy over allegations of improper political influence

and the firing of SEC attorney Gary Aguirre garnered considerable

media attention. The public airing of evidence in support of those

allegations undoubtedly had an adverse impact on public confidence in the SEC. The damage to public confidence in the SEC

as a fair and impartial regulator must be repaired if the agency is

to be effective and able to fulfill its mission.

However, the controversy is more than merely an issue of perception. Our investigation uncovered real failures that need real solutions. Our recommendations focus on improving the Commission’s

approach to the management of complex securities investigations,

personnel problems, the handling of ethics issues, and the role of

the Inspector General. A more standardized, professional system

for dealing with these issues could have averted much of the controversy. It could also improve employee morale and confidence in

management by ensuring more consistent, documented, transparent, and careful internal deliberations.

For these reasons, we offer the following recommendations for

consideration:

1. Standardized Investigative Procedures: The SEC should

draft and maintain a uniform, comprehensive manual of procedures for conducting enforcement investigations, along the

lines of the United States Attorney’s Manual. The manual

should attempt to address situations or issues likely to recur.

It should set a consistent SEC policy where possible and provide general guidance for complex issues that require individual assessment on a case-by-case basis, so that inquiries

are handled as uniformly as possible throughout the Enforcement Division.

2. Directing Resources to Significant and Complex

Cases: The SEC currently lacks a set of objective criteria for

setting staffing levels and has no mechanism for designating

a case as critically important. The SEC should set standards

for assessing the size, complexity, and importance of cases to

ensure that significant cases receive more resources. The Enforcement Division should develop and apply objective criteria for determining how many attorneys, paralegals, and

support personnel should be assigned to a particular case.

3. Transparent and Uniform External Communications:

The SEC should issue written guidance requiring supervisors to keep complete and reliable records of all outside

communications regarding any investigation.* The need for a

8

ever, the current FDA regulation has its own flaw in that it only requires documentation of outside meetings when the agency ‘‘determines that such documentation is useful.’’ That exception

is too broad. All material communications about an investigation between senior SEC managers

and third parties should be included in the policy.

clear record and transparency is especially acute regarding

any communications by supervisors that exclude the staff attorney assigned to the case. The SEC’s guidance should generally discourage supervisors from engaging in such communications without the knowledge or participation of the lead

staff attorney. The SEC needs to present one, consistent position to parties involved in its investigations.

4. Greater Office of Inspector General (OIG) Independence and More Thorough Investigative Procedures:

The hallmarks of any good Inspector General are independence and integrity. However, the reputation of the Inspector

General within the SEC appears to be that of an office closely aligned with management, lacking independence. In addition to the facts of the Aguirre case, we received numerous

complaints about the OIG from both current and former SEC

employees. The OIG should develop a plan to ensure independence from SEC management and the General Counsel’s

Office, and to ensure that its future investigations of allegations against management are thorough, fair, and credible.

The SEC needs to implement a directive requiring its Office

of Information Technology to provide thorough and timely responses to SEC/OIG document requests. Since the purpose of

the OIG is to ensure integrity and efficiency, a document request in connection with an SEC/OIG investigation should be

among the highest priorities.

5. Timely and Transparent Recusals: The SEC should review its guidance to employees regarding their obligations to

recuse themselves immediately from any matter involving a

potential employer with whom the employee has had contact,

either directly or indirectly through an agent. Recusals

should be communicated in writing to all SEC staff who have

official contact with the recused individual, and a record of

the recusals should be centrally maintained by a designated

ethics officer. The appearance created by having undisclosed

contacts with potential employers while still participating in

an enforcement matter involving that potential employer undermines public confidence in the fairness and impartiality

of the SEC.

6. Standardized Evaluation Procedures: Employee evaluations should be submitted in a timely manner, according to

an established schedule. Evaluations should not be prepared

outside or apart from the established procedure. Although it

is appropriate to document performance issues and to discuss them with the employee as the issues arise, submitting

a re-evaluation with substantive changes after the regularly

scheduled evaluation is submitted can raise questions.

Where the re-evaluation occurs just after an employee reports alleged wrongdoing by a supervisor, it tends to suggest

that retaliation is driving the process rather than an honest

attempt to evaluate employee performance.

(9)

IV. TABLE OF NAMES

U.S. Securities and Exchange

Commission:

Christopher Cox ................................. Chairman

Enforcement Division:

Linda Thomsen ................................... Director

Paul Berger ......................................... Associate Director (now partner at

Debevoise & Plimpton)

Mark Kreitman .................................. Assistant Director

Robert Hanson .................................... Branch Chief

Gary Aguirre ...................................... Former Attorney

James Eichner .................................... Attorney

Hilton Foster ...................................... Attorney (Ret.)

Office of General Counsel:

William Lenox .................................... Ethics Counsel

Office of Inspector General:

Kelly Andrews .................................... Associate Counsel

Walter Stachnik ................................. Inspector General (Ret.)

Mary-Beth Sullivan ........................... Assistant Inspector General for Investigations

Office of Market Surveillance:

Joseph Cella ....................................... Chief (Ret.)

Thomas Conroy .................................. Market Surveillance Specialist

Eric Ribelin ......................................... Branch Chief

Pequot Capital Management:

Gerald Poch ............................................ Managing Director, Applied Technology

Arthur Samberg ..................................... Chief Executive Officer

David Zilkha .......................................... Former Pequot and Microsoft employee

Morgan Stanley:

Eric Dinallo ............................................ Former Head of Regulatory Group

Gary Lynch ............................................. Chief Legal Officer

John Mack .............................................. Chief Executive Officer

Other Counsel

Attorney Firm Representing

Irving Pollack .................... Fulbright & Jaworski ....... Pequot

Larry Storch ...................... Fulbright & Jaworski ....... Pequot

Audrey Strauss ................. Fried Frank ....................... Pequot

Mary Jo White .................. Debevoise & Plimpton ...... Morgan Stanley Board

10

Gary Aguirre’s Chain of Command

—————————

LINDA THOMSEN, DIRECTOR, DIVISION OF ENFORCEMENT

↓

PAUL BERGER, ASSOCIATE DIRECTOR OF ENFORCEMENT DIVISION

↓

MARK KREITMAN, ASSISTANT DIRECTOR, DIVISION OF ENFORCEMENT

↓

ROBERT HANSON, BRANCH CHIEF, DIVISION OF ENFORCEMENT

↓

GARY AGUIRRE, SENIOR COUNSEL

11

V. KEY EVENTS

Pequot’s Suspicious Trading

March 2001 .................. John Mack leaves as CEO of Morgan Stanley.

April 2001 ..................... First known contact between with between Morgan Stanley and GE regarding the Heller acquisition.

May 11, 2001 ................ Arthur Samberg tells a Pequot employee that John Mack

would like to invest $5 million in Partners, a closed

Pequot fund.

June 20, 2001 ............... Samberg tells another Pequot employee that Mack wants

to invest in a private equity deal known as Fresh Start

alongside Pequot funds. Mack is the only individual investor allowed to participate.

June 26–28, 2001 ......... Mack travels to Switzerland to meet with Senior officials

from Credit Suisse, the parent company of Credit Suisse

First Boston (CSFB) about becoming CSFB CEO.

June 29, 2001 ............... Immediately upon his return from Switzerland Mack contacts Samberg.

June 30, 2001 ............... Poch writes to Samberg ‘‘Great call with John Mack last

night.’’ Samberg replies, ‘‘He called here looking for you

last night.’’

July 2, 2001 .................. Upon Samberg’s direction, Pequot begins purchasing large

amounts of Heller stock. Also in July, Samberg directs

large amounts of GE stock to be shorted.

July 12, 2001 ................ Credit Suisse First Boston (CSFB), a firm working on the

GE-Heller deal, hire’s John Mack as its CEO.

July 30, 2001 ................ GE-Heller acquisition is announced. Pequot begins selling

its Heller shares and covering shorts on GE, earning

$18 million in profit in a matter of weeks.

January 30, 2002 ......... The NYSE highlights Heller trades as a matter warranting further scrutiny and surveillance.

Aguirre Hired at SEC

May, 2003 ..................... Gary Aguirre begins applying for positions at the Securities Exchange Commission.

June, 2004 .................... Prior to being hired at the SEC, Aguirre files an EEO

complaint alleging that the SEC is discriminating

against him on the basis of age.

September 7, 2004 ....... Aguirre is hired by the SEC Enforcement Division.

The Pequot Investigation Builds

Oct/Nov, 2004 ............... Pequot Capital Management investigation is opened.

January 10, 2005 ......... Aguirre requests transfer via letter to Paul Berger.

January/February,

2005

Lead lawyer representing Pequot meets with Director of

Enforcement Stephen Cutler. Aguirre is not invited, and

following the meeting is told to narrow the scope of the

investigation to only the most promising referrals.

May-June, 2005 ........... Aguirre develops theory that John Mack tipped Arthur

Samberg regarding General Electric acquisition of Heller Financial.

June 1, 2005 ................. Aguirre receives ‘‘acceptable’’ performance evaluation, and

Hanson notes his ‘‘unmatched dedication to [the] case.’’

June 1, 2005 ................. Hanson writes to Aguirre, remarking ‘‘Mack is another

bad guy [in my view].’’

June 14, 2005 ............... Kreitman asks Aguirre to brief him on the evidence concerning PCM’s suspicious activity.

12

V. KEY EVENTS—Continued

June 15, 2005 ............... Aguirre and Ribelin meet with two FBI agents and an

AUSA for the Southern District of New York to discuss

the evidence.

June 20, 2005 ............... Hanson e-mails Aguirre, telling him, ‘‘Okay Gary you’ve

given me the bug. I’m starting to think about the case

during my non work hours.’’

The Turnaround: Aguirre Attempts to Sustain Pequot Investigation

June 23, 2005 ............... Morgan Stanley’s Eric Dinallo contacts Aguirre to ask if

he is ‘‘going to proceed against Mack,’’ due to concerns

that an SEC investigation of Mack would affect Morgan

Stanley’s decision to hire him as CEO.

June 23, 2005 ............... Hanson allegedly tells Aguirre it will be difficult to subpoena Mack because of his ‘‘very powerful political connections.’’

June 23, 2005 ............... Berger states that no case will likely be filed against

Mack, despite never having been briefed on the investigation, according to Aguirre.

June 26, 2005 ............... Mary Jo White, an attorney at Debevoise & Plimpton

hired by Morgan Stanley to vet John Mack, contacts

Thomsen. According to Thomsen, she told White that

she couldn’t ‘‘tell [her] anything.’’ However, a set of

White’s talking points indicate that Thomsen said there

was ‘‘smoke’’ regarding Mack, but ‘‘surely not fire.’’

June 27, 2005 ............... Aguirre e-mails his supervisors an analysis of the evidence against PCM, alleging Samberg engaged in insider trading based on a tip from John Mack.

June 28, 2005 ............... Aguirre proposes the interview of John Mack. He and

Kreitman have a ‘‘heated discussion’’ over the SEC’s refusal.

June 29, 2005 ............... Hanson gives Aguirre a positive evaluation, commenting

‘‘he has consistently gone the extra mile, and then

some.’’

June 29–30, 2005 ......... Aguirre verbally informs Berger that he is resigning from

the SEC effective July 30, 2005.

June 30, 2005 ............... Morgan Stanley hires John Mack as CEO.

July 19, 2005 ................ Compensation Committee meets and approves Aguirre’s

pay increase.

July 25, 2005 ................ Kreitman calls evidence of Samberg’s motive ‘‘too vague,

as articulated to be meaningful.’’

Allegations of Political Considerations/Aguirre Termination

July 27, 2005 ................ Aguirre rescinds his ‘‘resignation of June 30, 2005’’ by

sending an electronic message to Berger. He reports

Hanson’s comment about Mack’s ‘‘political connections.’’

August 1, 2005 ............. Days after Aguirre alleges to Berger that Hanson blocked

Mack subpoena due to political considerations, Berger

instructs Hanson to do a supplemental evaluation of

Aguirre and another staff attorney in the group after

Hanson told him they were ‘‘looking to raise trouble.’’

August 3, 2005 ............. Hanson and Aguirre discuss the Mack issue. Hanson

again refers to Mack’s ‘‘political connections,’’ according

to Aguirre.

August 4, 2005 ............. Aguirre writes to Hanson about his ‘‘political connections’’

comment. Hanson replies, suggesting that ‘‘Mack’s counsel will have ‘juice’ as I described last night—meaning

that they may reach out to Paul and Linda (and possibly others).’’

13

V. KEY EVENTS—Continued

August 18, 2005 ........... Aguirre receives a merit increase based upon his performance.

August 24, 2005 ........... Kreitman proposes that Aguirre be fired. Hanson writes

in an e-mail to Aguirre that ‘‘the political clout I mentioned to you was a reason to keep Paul and possibly

Linda in the loop on the testimony. As far as I know,

politics are never involved in determining whether to

take someone’s testimony.’’

September 1, 2005 ....... Aguirre is terminated from the SEC during his one-year

probationary period.

September 2, 2005 ....... On his last day of employment at the SEC, Aguirre wrote

to SEC Chairman Cox alleging that Mack was receiving

preferential treatment because of his political connections.

After Aguirre: Investigation Moves Away from John Mack and the GEHeller Trades

Fall 2005–Spring 2006 SEC abandons Mack-related aspects of the investigation.

September 8, 2005 ....... In an e-mail with the subject heading ‘‘Debevoise,’’ Lawrence West (same staff level as Berger, and not a supervisor of Aguirre’s) e-mails Berger, letting him know that

he mentioned Berger’s ‘‘interest’’ to Mary Jo White during a call.

October 20, 2005 .......... Rumors begin to circulate that Berger is leaving the SEC

to accept a partnership position at Debevoise &

Plimpton.

November 29, 2005 ...... The SEC Office of Inspector General completes its investigation and concludes Aguirre’s allegations lack sufficient corroborating evidence.

January 20, 2006 ......... Aguirre files a lengthy 56-page confidential Office of Special Counsel Complaint against the SEC, several of its

Commissioners and his superiors. He later withdraws

the complaint and seeks review by the Merit Systems

Protection Board (MSPB), which remains pending.

February 10, 2006 ....... Berger recuses himself from any matter involving

Debevoise & Plimpton and Goodwin Proctor.

April 17, 2006 .............. Finance Committee sends its first letter to the SEC requesting a briefing on the Pequot investigation, cosigned by the Banking Committee Chair.

April 28, 2006 .............. The SEC’s Office of Inspector General issues its semi-annual report for the period October 1, 2005 to March 31,

2006. The OIG Report recounts an allegation of abuse of

discretionary authority and the resulting investigation.

May 15, 2006 ................ Aguirre’s third-level manager, Paul Berger, submits his

resignation to SEC Human Resources. He becomes a

partner at Debevoise & Plimpton in its D.C. office beginning June 1, 2006.

June 23, 2006 ............... The New York Times runs a story by Walt Bogdanich and

Gretchen Morgenson titled ‘‘S.E.C. is Reported to be Examining a Big Hedge Fund.’’

June–July, 2006 ........... SEC prepares to take Mack testimony, subpoenas two

CSFB executives. Kreitman assigns a staff attorney to

take the testimonies with only two days advanced notice. Kreitman tells attorney, ‘‘you don’t need to prepare

that much for it.’’

July 6, 2006 .................. At Chairman Cox’s request, OIG reopens its investigation

into Aguirre’s allegations.

August 1, 2006 ............. The SEC questions John Mack.

14

V. KEY EVENTS—Continued

November 30, 2006 ...... The SEC closes the Pequot investigation.

December 5, 2006 ........ Judiciary Committee holds hearing, ‘‘Examining Enforcement of Criminal Insider Trading and Hedge Fund Activity.’’

January 31, 2007 ......... Committees release interim findings.

(15)

VI. The Pequot Investigation

A. Pequot’s Suspicious Trading Surrounding the

GE-Heller Acquisition

Pequot Capital Management (PCM or Pequot) is ‘‘an investment

advisory firm.’’1 Led by Chairman and CEO Arthur Samberg,

Pequot employs numerous analysts who are charged with following

various companies’ stock and making investment recommendations.2 The firm employs ‘‘a research driven approach’’ to guide its

investments in publicly traded companies.’’3 The fund managers

whom Samberg supervises interact with Pequot’s analysts daily

and make ‘‘sure they are doing diligent work in understanding balance sheets, income statements’’ and ‘‘meeting with companies

[and] assessing industry trends.’’4 At all times relevant to this report, Pequot ‘‘was managing over $15 billion’’ in stocks and other

investments.5

In the summer of 2001, General Electric (GE) acquired Heller Financial. The deal was in progress for months, but was not announced until July 30th.6 Before that announcement, knowledge

that the deal was in progress constituted material non-public information and was therefore subject to prohibitions on insider trading.

In other words, a reasonable investor contemplating a purchase or

sale of either GE or Heller stock would want to know about the acquisition in assessing the companies’ stock prices. When an acquisition is announced, the price of the purchasing company typically

falls, and the price of the purchased company typically rises. In

this case anyone with knowledge of the deal before it was announced could purchase Heller and short GE for virtually guaranteed profits.7

Samberg directed the purchase of ‘‘a little over a million shares’’

of Heller Financial stock in July 2001, before GE’s acquisition was

announced8 at an estimated cost between $34 and $38 million.9 He

directed Pequot to short shares of GE during the same time period.10 Just after the acquisition was announced, Samberg sold the

Heller stock and covered the GE short position, resulting in approximately $18 million in profits over a period of a few weeks.

Pequot’s trading in Heller and GE is summarized in Figure 1

and Figure 2 (see pps. 47-48). As illustrated in the figures,

Samberg attempted to purchase many more shares of Heller than

his traders could safely execute without driving up the price. On

some days, he authorized purchases of well over 200% of the total

daily volume of trading in Heller.

The Heller transactions were initially highlighted in an advisory

from the New York Stock Exchange (NYSE) to the SEC Enforcement Division as suspicious.11 Nearly three years later, the matter

was investigated by SEC Enforcement Staff Attorney Gary Aguirre

who also discovered that Pequot had shorted GE.

16

During the SEC investigation, Arthur Samberg testified that he

decided to purchase Heller stock without any assistance, advice, or

consultation with the fund managers he had hired to analyze possible investments for Pequot.12 Though he testified generally about

outside analyst reports,13 Samberg did not ‘‘have a clear recollection of reading any analyst’s report in that time period.’’14 He could

not identify even a single analyst’s report upon which he relied in

making the decision to purchase Heller Financial shares in July

2001.15

When asked how long he had been following Heller Financial

stock prior to buying over one million shares, Samberg testified, ‘‘I

really had not [followed] Heller Financial closely in the way people

follow stocks before it was purchased.’’16 Samberg’s account described the trades in Heller and GE as being executed contrary to

the regular process for investments at Pequot.17

Taken together, the timing of the trades, the lack of consultation

or advice, the unsuccessful attempts to purchase even larger

amounts of Heller stock prior to the acquisition, Samberg’s evolving

rationalizations for the trades, and the NYSE advisory all add up

to circumstances that are, at the very least, suspicious. These

transactions suggest that a thorough and wide-ranging investigation was needed.

B. The Early Stages of the Investigation

1. The SEC’s Delayed and Truncated Investigation

a. Time Elapsed between Trades and Serious Investigation

The trading occurred in July 2001 when Pequot CEO Arthur

Samberg began purchasing Heller and shorting GE a few weeks before the announcement that GE would purchase Heller. The NYSE

highlighted some of these trades for the SEC on January 30,

2002.18 It appears that the SEC did little to investigate these

trades until after Gary Aguirre joined the Commission over two

years later on September 7, 2004. In fact, it is clear that Aguirre

was the driving force behind the investigation of the GE-Heller

trades that had otherwise remained dormant at the SEC. The original investigation of Pequot was opened on other suspect trades that

were investigated prior to Aguirre’s employment. It was not until

Aguirre took over the case that the investigation made real

progress in examining suspect trades in GE and Heller.

b. Supervisors Order a Limited Inquiry

The staff initially believed that the key to bringing an insider

trading case against a large hedge fund would be to demonstrate

a pattern of suspicious behavior in a series of transactions. As retired SEC Senior Counsel Hilton Foster explained, proving a case

against a hedge fund would be difficult because of the sheer volume

of hedge fund transactions:

A hedge fund is an entity that has a whole bunch of other people’s money and invests in all kinds of different securities. So

if you go in and say, I think, Hedge Fund A, you engaged in

insider trading in IBM, they will open their files and say, we

make two million trades a year, and so what if we got lucky

17

on IBM? It’s very difficult to prove a case where they’ve got

that kind of trading history all over the board. So what you do,

from an investigative standpoint, is you see whether there’s a

pattern there. . . . So hedge funds are different than the ordinary investigation.

***

So that’s why you have to go back and say, if we’re going to

do this investigation we can’t just be looking at Heller, because

no matter what we find there will be an explanation. But if

you’ve got Heller and 12 others . . . then you’ve got something

you can work with[.]19

Ultimately, however, the SEC did not pursue this strategy. Instead, following a meeting between Pequot’s lead counsel, Audrey

Strauss, and the SEC Enforcement Director Stephen Cutler, the

staff was ordered to investigate only a few of the suspicious transactions identified by the self-regulatory organizations (SROs). According to Aguirre:

[I]n early February 2005, less than a month after staff had obtained subpoena power and before any subpoenas had been

issued. [Assistant Director Mark] Kreitman directed that the

PCM investigation be narrowed to two or three matters.

Kreitman had expressed his approval a few days before when

the investigation was increased to include seventeen referrals.

. . . It came approximately two weeks after an influential attorney representing PCM met with Enforcement Director Stephen

Cutler.20

This account was corroborated by Eric Ribelin, who added that the

team members working on the case were left out of the meeting between Strauss and the Director of Enforcement.21

SROs identified between 17 and 25 sets of suspicious trading involving Pequot. The GE-Heller trades represent only one such set

of transactions. Others investigated by the SEC will be discussed

briefly below. However, the SEC did not examine most of the suspicious activity in any depth. Given the SEC’s limited resources, it

may have been reasonable to focus on the most suspicious transactions. SEC Enforcement Division Associate Director Paul Berger

and Assistant Director Mark Kreitman described the need to triage

especially large cases due to limited resources.22 However, an arbitrary restriction on investigating other transactions that could help

demonstrate a pattern, as in the strategy described by Hilton Foster, simply makes an already difficult task even more so.

Even after narrowing the scope of the case, there were complex

transactions to analyze and millions of documents to review. Despite the number and complexity of the remaining suspicious

Pequot transactions, the SEC assigned only one staff attorney to

the investigation full-time: Gary Aguirre. He had part-time assistance from just a few other staff, including some attorneys and some

personnel from the Office of Market Surveillance. Aguirre shared

one paralegal with several other staff attorneys working other

cases. By contrast, one law firm representing Pequot said it had 59

attorneys and paralegals working on the case and reviewing docuVerDate 11-MAY-2000 14:44 Aug 07, 2007 Jkt 095484 PO 00000 Frm 00025 Fmt 6601 Sfmt 6601 36960.000 SFIN1 PsN: SFIN1
18

ments 6 days and 60 hours per week.23 Given the importance and

size of the case, the SEC should have devoted more resources to it.

In cases of large, document intensive investigations, it appears

that the core mission of the SEC could be better served by the dedication of more support staff and attorneys. Such inquiries require

considerable support from administrative professionals, paralegals,

and law clerks.24 Aguirre shared one administrative assistant with

many other attorneys working on dozens of other investigations.

His pleas for additional assistance went largely unanswered. Without full-time assistants to focus on tasks such as document management and correspondence tracking, it is difficult to imagine how

one full-time attorney could conduct a complex securities investigation effectively.

2. Other Suspicious Pequot Trading

a. Wash Sales and Potential Stock Manipulation

Wash sales occur when someone both buys and sells the same security at the same price in a short period of time. Such trades are

not illegal per se, but are suspicious because they incur commission

costs yet offer no potential profit or loss.25 Sometimes such trades

are conducted for illegitimate accounting, tax, or market manipulation purposes. Pequot engaged in a large number of wash sales

that the SEC began to investigate. Pequot provided the SEC with

‘‘an extensive written response explaining that its trading occurred

to transfer beneficial ownership’’ of the stocks acquired in initial

public offerings (IPOs) from one class of fund investors to another—from those eligible to participate in the offering to those ineligible to participate.26 Pequot argued that the practice was specifically sanctioned by the National Association of Securities Dealers (NASD), one of the securities industry’s self-regulatory organizations (SROs).27 However, the SEC did not independently determine whether Pequot’s investors met the criteria for participation

or exclusion of the IPOs at issue.28 It is therefore unclear whether

the SEC, the government body responsible for overseeing SROs,

sufficiently reviewed the NASD’s decision in order to make an independent judgment that such wash sales should be allowed.

On August 3, 2005, Market Surveillance analyst Tom Conroy

generated a memorandum to the Pequot File in which he discusses

three scenarios in which Pequot engaged in ‘‘apparent’’ wash

sales.29 The three scenarios were as follows: (1) wash sales reported as an agency cross30 in the immediate aftermarket of an

IPO, (2) wash sales reported as an agency cross in the aftermarket

of a secondary offering, and (3) wash sales in which buy and short

sale orders are executed against each other.31 According to Conroy:

We believe that in the first two scenarios above, the trades are

designed to benefit Pequot by artificially inflating the volume

and/or price and thus inflating the value of shares received by

Pequot in the offerings. In the third, scenario, staff has noted

several instances of trading following the wash sale trade in

which Pequot does substantial selling, short selling and then

buying and/or covering at substantially lower prices.32

19

Conroy suggested five lines of inquiry for the ongoing investigation

and noted, ‘‘[w]e are concerned that insufficient brokerage surveillance systems may be in place that allow for the execution of manipulative orders that artificially elevate or reduce the price of securities for the benefit of Pequot and to the detriment of market integrity.’’33

The market surveillance team working the Pequot investigation

wrote another memorandum regarding the wash sales on November 14, 2005.34 This memorandum was prepared by Craig Miller,

Tom Conroy, and Eric Ribelin. It explores theories surrounding the

intent and purpose of Pequot’s trading.35 Specifically, the memorandum highlights a specific type of trade called a ‘‘short to buy’’36

that was ‘‘repeated hundreds of times over a four-year period.’’37

The ‘‘short to buy’’ transaction takes place when,

Pequot instructs its executing broker to effect an agency cross

transaction in which one side of the trade is a short sale and

the other side is a buy. Both the short sale and the buy are

for the same number of shares at the same price and are executed simultaneously against each other. The trade is reported

to NASDAQ as an agency cross, but the Pequot trade report

reflects the same Pequot funds on both sides of the trade, thus

causing no change in beneficial ownership.38

According to the memorandum, Pequot was able to use this opportunity to make a profit on the short side should an opportunity

present itself. Otherwise, Pequot could ‘‘simply close out the net

flat position with a journal entry in the back office.’’39

The memorandum goes on to provide a case study with particular trades made by Pequot in the stock of Atheros Communications.40 It also notes that there are questions surrounding the nature of borrowed stock leveraged by Pequot to short.41 The memorandum concludes that the shorting of the borrowed shares would

‘‘appear to decrease the amount of stock available for others to borrow for shorting purposes.’’42

Chief of Market Surveillance Joe Cella forwarded the memo to

the Division of Market Regulation.43 In response, an Associate Director in Market Regulation indicated, ‘‘This memo describes some

wild and troubling trading. The wash sales may be manipulative

or fraudulent . . . Either case involves potential SEC or [NASD]

rule violations.’’44

Although employees within SEC’s Market Surveillance branch

saw potential violations, the Enforcement Division ultimately

closed the case without action on the wash sales. The concerns

raised by Market Surveillance warrant further attention. They

raise serious questions about how prevalent these practices are

among hedge funds and whether they ought to be considered legitimate. These issues go far beyond the simple question of whether

the wash sales were designed to artificially inflate the volume or

price of a security.

b. The AstraZeneca and Par Pharmaceutical Trades

In October 2002, a federal district court held that Par Pharmaceutical had infringed on drug patents held by another drug company, AstraZeneca.45 The decision caused AstraZeneca’s stock price

20

to rise and Par’s price to fall significantly on the day the decision

was announced.46 The NYSE alerted the SEC to suspicious trading

by Pequot in both AstraZeneca and Par leading up to the date of

the court decision, as well as Pequot trading in Par in advance of

positive earnings estimates announced about a month earlier, in

September 2002. Pequot was ‘‘the largest institutional buyer’’ of

Par in the week before the earnings announcement.47 Pequot also

reversed its trading positions in both AstraZeneca and Par just before the announcement of the court decision.48

In other words, the trading activity made it appear that Pequot

may have profited or avoided losses on advance knowledge of both

events—the earnings announcement (which caused Par’s price to

rise) and the court decision (which caused Par’s price to fall and

AstraZeneca’s price to rise). Gary Aguirre outlined the trading

early on in the investigation to his supervisors:

On 9/12/02, one month before the court announced its decision,

[Par] announced its earnings. From 8/12/02 through 9/11/02,

Pequot bought 605,000 shares of [Par] for a total position of

776,600 shares on 9/12/02, the date of the earnings announcement. Sixteen days later, [Pequot] began to sell [Par] and, by

10/4/02, a week before the court decision was announced, it

had a short position of 34,000 shares.49

Following this e-mail, Aguirre’s supervisor directed him to include

the AstraZeneca and Par transactions into the formal order of investigation memorandum, which was later adopted by the SEC to

authorize the Pequot probe.50 Authorities in the Southern District

of New York (SDNY) also conducted a criminal investigation of

whether a judicial law clerk had leaked the outcome of the patent

case.51 As of the date of this report, no charges have been filed in

connection with the alleged leak.

c. The Microsoft Trades

Until the summer of 2006, the SEC took significant interest in

Pequot’s April 2001 trades in Microsoft stock. Initially, many of the

SEC Enforcement Division attorneys were optimistic about the

prospect of proving Pequot illegally traded on material, non-public

information concerning Microsoft stock.52 Aguirre’s successor as

lead counsel in the Pequot probe, James Eichner, eventually drafted an outline in preparation for a Wells notice, the formal procedure by which the SEC informs a potential defendant that it intends to file an enforcement action.53 SEC Enforcement personnel

agreed Aguirre had unearthed ‘‘direct evidence’’ of insider trading.54 Both Eichner and Kreitman described the Microsoft aspect of

the investigation as ‘‘promising.’’55 Eichner went as far as to suggest that when Samberg traded Microsoft stock in April 2001, he

did so thinking he was engaged in ‘‘insider trading.’’56

In its Wells notice, the SEC quotes several e-mail exchanges between Samberg and a Microsoft employee named David Zilkha.

Zilkha eventually left Microsoft for employment at Pequot.

• In the same e-mail in which Samberg offered Zilkha a job, he

asked whether Zilkha had any current views on Microsoft that

21

might be helpful. He wrote ‘might as well pick your brain before you go on the [Pequot] payroll!!’

• On April 6, 2001, Samberg asked Zilkha if he had any ‘tidbits’

about Microsoft. . . . . Zilkha responded that he would get back

to Samberg about Microsoft ‘ASAP’

• On April 16, 2001, Samberg asked Zilkha if he had ‘any further [c]olor’ on Microsoft.

• On April 17, 2001, at 8:01 p.m., after the close of the market,

Zilkha informed Samberg ‘I heard this afternoon from the

MSN finance controller that our CFO has been more relaxed

before this next earnings release than he has been in the last

year. Augurs well.’ . . . .57

• On April 19, 2001, at or right before the close of the market,

Microsoft announced its quarterly earnings. (Microsoft press

release). Microsoft’s results beat estimates for revenues and

earnings. (4/20/01 e-mail from Samberg to Zilkha). Microsoft’s

stock price rose 2.5 points (about 3.6%) on April 19 and another point on April 20.

• On April 20, 2001, Samberg closed out his April 19, 2001 position, realizing a profit of approximately $1.6 million. That

same day Samberg wrote Zilkha, in an e-mail exchange containing the news about Microsoft’s earnings, ‘I shouldn’t say

this, but you have probably paid for yourself already!’58

This sort of evidence clearly warranted a serious and thorough investigation by the SEC.

3. Pequot and the SEC Fight over Document Production

Pequot retained Fried, Frank, Harris, Shriver, & Jacobson (Fried

Frank) to represent its interests in the SEC’s investigation. Individual Pequot employees were represented by six different law

firms.59 Audrey Strauss of Fried Frank was the lead counsel and

handled the document production for Pequot. On February 7, 2005,

Aguirre sent the first SEC subpoena to Pequot seeking e-mails and

other documents.60 In response to a February 23 e-mail from

Aguirre complaining about Fried Frank’s lack of cooperation on

previous requests for information, Kreitman wrote, ‘‘Agreed. We

need to continue to document this pattern of behavior with a view

to possible §17(b) charge and perhaps some disciplinary action

against the law firm.’’61 However, others in the SEC doubted the

resolve of Aguirre’s supervisors to support pressing for complete

compliance with document subpoenas. In an e-mail exchange with

Eric Ribelin, one wrote:

I have seen these [SEC Enforcement] Lawyers get all huffy before. They are empty suits. When push comes to shove, no one

in the SEC is going to take on [Fried Frank] or any other

major player. Not going to happen. . . . When Fried Frank gets

a handle on the email, they will produce them, and not

before[.]62

A second subpoena for documents was sent on March 22, 2005.63

These subpoenas were among over 90 that the SEC issued in the

Pequot investigation.64 Pequot began producing ‘‘significant volumes of its records’’ in response to these subpoenas in April and

22

May of 2005.65 This included nearly 80,000 electronic records and

300,000 pages per week.66 However, by the middle of May 2005,

production began to slow as Pequot raised claims of attorney-client

privilege.67

In fact, Pequot withheld over 200,000 pages of documents sought

by the March 22, 2005 subpoena based on claims of privilege.68 The

privilege claims continued through spring 2005 and ultimately led

to a dispute between SEC employees and Pequot attorneys.69 Mark

Kreitman minimized the dispute, calling it ‘‘the kind of ordinary resistance that we [SEC] encounter in seeking full, accurate, and

complete compliance with subpoenas.’’70

The dispute eventually focused on back-up tapes that contained

e-mails from the 2001 timeframe when Pequot was making the suspect trades. Given the time elapsed between the trades and the

SEC’s investigation, obtaining e-mails from these tapes would seem

to be a critical step. Pequot retained two outside attorneys, Irving

Pollack and Larry Storch of Fulbright & Jaworski L.L.P., to review

the documents that were being withheld.71 They were friends of

Mark Kreitman, who testified that Storch was ‘‘a classmate from

law school and a friend’’ and that Pollack was ‘‘a mentor.’’72

Kreitman instructed Aguirre not to contact Pollack or Storch. Although Strauss had delegated the backup-tape issue to them, she

did not officially acknowledge that Pollack and Storch represented

Pequot for some time.73 Kreitman’s instruction that Aguirre not

contact them because it was not clear whose interests they represented had the effect of delaying the investigation. Aguirre repeatedly attempted to deal with Straus on document production

issues, only have Strauss refer him to Pollack and Storch. Yet, because Aguirre was instructed not to talk to Pollack and Storch, the

document production dispute continued to linger into June 2005

with little or no clarification. As late as June 28, 2005, Aguirre described the situation this way:

I think Audrey [Strauss] has the best of all worlds right now

regarding these three categories of tapes: the Pollack-Storch

wall of integrity and my inability to press them for answers to

pertinent questions. . . . Mark’s call last week to Fried Frank

may get Pollack-Storch to concede they simply represent

Pequot.74

This situation was eventually rectified as Strauss conceded in writing that Pollack and Storch were counsel representing Pequot

sometime after July 13.75 However, this concession came too late

to have much practical effect as many of the documents sought

were never produced, even after Aguirre was fired.76 When documents were produced, they were delivered, ‘‘on the day of, days

after, and weeks after testimony’’ was taken.77

Aguirre explained the significance of obtaining the e-mails to his

supervisors: ‘‘the second best source of proving the Samberg GE tip

is from the backup tapes.’’78 Thus, the failure to produce all of the

backed-up e-mails in a timely fashion represented another barrier

to success in the investigation.

23

4. The Arthur Samberg Testimonies

The SEC took Arthur Samberg’s testimony twice before Gary

Aguirre was fired, and once afterward. In his first session of testimony on May 3, 2005, Arthur Samberg listed a number of specific

reasons that he claimed motivated him to purchase Heller stock in

July 2001.79 In his second session on June 7, 2005, it became clear

that each of the reasons he had previously indicated was highlighted in a Legg Mason analyst report that Samberg had reviewed

in preparation for his May 3 testimony. During cross-examination

by Gary Aguirre, Samberg conceded that he did not recall reviewing the report before ordering the trades and probably would not

have done so because it was ‘‘sell-side research,’’ which Samberg

had said publicly was not ‘‘worth a damn.’’80 SEC investigators believed that given these circumstances, Samberg’s initial story appeared to be an after-the-fact rationalization using the Legg Mason

report as source material.

During our review of the SEC inquiry, we interviewed James

Eichner, the SEC Staff Attorney who took over the Pequot investigation after Gary Aguirre was fired. Although Eichner criticized

Aguirre’s examination of Samberg in other respects, he agreed that

Samberg’s rationales for the trades were unpersuasive:

Mr. Eichner: [T]here was a sense that [Samberg] had . . . a chance

to prepare and it seemed reasonable to think that he had sort

of—I mean, spoon-fed is not . . . an inaccurate characterization.

***

I mean, if you ask me what I thought, I would say that

Samberg was spoon-fed this information after the fact by his

attorneys. I think Gary [Aguirre] was right on that, but I’m

just——

Question: And in fact . . . Mr. Samberg admits that he had not seen

the documents which cited those six reasons by the time he

made the trades?

Mr. Eichner: Right.

***

I think that’s entirely correct, that Mr. Samberg had a suspiciously clearer recollection in the second examination than he

did in the first about Heller.

Question: And is it accurate to say that Mr. Aguirre was able to

establish in that deposition that [Samberg’s] lawyers had provided him with those exact rationalizations after-the-fact, after

the trade—years after the trades?

Mr. Eichner: Yeah, I think . . . that was established in the second

testimony[.]81

Samberg had not reviewed analyst reports on Heller or consulted

with others at Pequot before purchasing over one million shares.

Even though Eichner and Aguirre disagreed on many aspects of the

24

Pequot investigation, it appears that Eichner agreed that

Samberg’s testimony added to the suspicion about Pequot’s trades.

5. The SEC Briefs Criminal Prosecutors on its Investigation

In mid-June, Kreitman told Berger it was time to consider briefing criminal prosecutors about the case. Berger then called the

chief of the Securities and Commodities Fraud Section at the U.S.

Attorney’s Office for the Southern District of New York.82 On June

14, 2005, Kreitman asked Aguirre to walk him through the evidence of Pequot’s suspicious trades. Aguirre prepared a tabbed

binder with hundreds of pages of documents including both blue

sheet data reflecting Pequot’s trades and Samberg’s e-mail exchanges. The following day, Aguirre, Eric Ribelin, and an SEC intern traveled to New York to meet with two FBI agents and an Assistant U.S. Attorney. Among other things, Aguirre briefed them on

Pequot’s suspicious trading (1) in advance of the GE acquisition of

Heller, (2) in Microsoft stock, and (3) in AstraZeneca and Par Pharmaceuticals. On June 15, 2005, the SEC attempted to interest the

Department of Justice in opening up a parallel proceeding to investigate Pequot. Section 21(d) of the Securities and Exchange Act83

authorizes the SEC to furnish the DOJ with evidence of misconduct

it has uncovered in its civil proceedings.84 Congress has approved

of this procedure for the past three decades.85

Aguirre’s supervisors considered the presentation a success. After

Aguirre previewed the presentation for Kreitman, he gave Aguirre

a motivational award in recognition of developing the case into a

potentially criminal matter. The award was a photocopied picture

of Raymond Burr, which Kreitman described as ‘‘the Big Perry’’ in

reference to Burr’s portrayal of the fictional, legendary attorney

Perry Mason.86

C. SEC Investigators Identify a Potential Tipper

1. Investigators Suspect John Mack

In a June 27, 2005 e-mail to his supervisors, Aguirre analyzed

the evidence gathered in the case so far. According to Aguirre’s theory of the evidence, Samberg may have engaged in insider trading

based on a tip about the upcoming acquisition from John Mack.87

At the time of the trades, John Mack was being considered for the

position of Chief Executive Officer of Credit Suisse First Boston

(CSFB) and had recently left Morgan Stanley. Both CSFB and Morgan Stanley were firms working on the GE acquisition of Heller,

and thus possessed material, non-public information about the

deal. Aguirre’s e-mail summarized the trading (for a more detailed

description, see Figure 1 and Figure 2 on pps. 47-48).

Given the appearance that the trades were made based on material, non-public information, Aguirre began to search for potential

tippers. He eventually identified John Mack as a likely candidate.

Mack was a close associate of Samberg and an investor in Pequot

funds. Mack was thus in a position to share in any profits the

funds might make by trading on inside information. Mack also had

been in employment negotiations with a firm working on the deal

at the time of the trades, which meant he might have had an opportunity to learn of the GE-Heller acquisition before the public anVerDate 11-MAY-2000 14:44 Aug 07, 2007 Jkt 095484 PO 00000 Frm 00032 Fmt 6601 Sfmt 6601 36960.000 SFIN1 PsN: SFIN1
25

nouncement. Moreover, an e-mail from Samberg indicated that he

had spoken to Mack on June 29, 2001.88 Samberg began directing

large purchases of Heller stock on the next trading day.

Aguirre theorized that Mack may have tipped Samberg about the

acquisition in exchange for Samberg allowing Mack to invest in a

‘‘closed’’ Pequot fund or directly alongside Pequot in a private equity deal. To bolster the point, Aguirre pointed out that on May 11,

2001, Samberg wrote another Pequot employee that ‘‘John Mack

would like to put $5mm into Partners at the 1st available opening.

He’d also like to put more $ into Scout, if that’s possible, and would

like a recap of what he has where.’’89 On June 20, 2001, Samberg

wrote to a different Pequot employee, Jerry Poch, to report, ‘‘I’m

sitting here with John Mack and . . . John is busting my chops cuz

he hasn’t gotten the Freshstart material yet.’’90 ‘‘Partners’’ and

‘‘Scout’’ were two of the funds managed by Pequot. Fresh Start was

not a Pequot fund, but rather a start-up company in which Mack

was allowed to invest directly, alongside Pequot. On June 30, 2001,

Poch wrote to Samberg, ‘‘I had a great call with John Mack last

night. He wants to go forward with Freshstart and put 5mm in.’’91

Mack was the only individual investor allowed to participate in the

deal.

Samberg responded, ‘‘As he might have mentioned, [Mack] called

here looking for you. Cuz of our breakfast I remembered you were

in Vail and gave him your number. Glad this is moving along, and

thrilled at the $5m number.’’ On the next trading day, July 2,

2001, Samberg began aggressively acquiring as much Heller stock

as possible without driving up the price. Aguirre theorized that

John Mack might have first tipped Arthur Samberg about the GE

acquisition of Heller during that June 29, 2001 telephone call.

Aguirre explained the significance of Mack’s interest in Fresh

Start in his December 5, 2006, written testimony before the Judiciary Committee:

Mack was admitted directly into special PCM deals. One key

deal went by the code name ‘‘Fresh Start,’’ a Lucent spin-off

which PCM got into extremely cheap. Mack was promised a $5

million piece of Fresh Start the same night in which he was

suspected of giving Samberg the Heller tip. Just nine days earlier, according to a Samberg email, Mack was ‘‘beating

[Samberg’s] chops’’ to get into Fresh Start. Neither the PCM

principals nor Samberg’s son seemed happy about Mack getting into Fresh Start. SEC filings indicate Mack did extremely

well on his $5 million investment.92

Although Hanson testified that the SEC did not independently

verify how well Mack’s money performed in this private Pequot

deal, Aguirre provided more information in his written testimony:

Fresh Start became Celiant Corporation. It was initially coowned by PCM and Lucent. Mack bought 3,333,333 shares of

preferred stock directly from Celiant for $5 million (See page

21, Andrew Corp Form 8-K/A for the period ending June 4,

2002), the same terms and conditions under which PCM acquired its 33,333,333 shares. On February 19, 2002, Andrews

Corp filed an 8-K with the SEC stating that it would buy all

26

outstanding Celient stock for $469.8 million: $203.1 million in

cash and $266.6 million in stock. The merger agreement provided that Celient preferred shareholders, such as Mack and

PCM, would split $119.6 million in cash and the 16.28 million

shares of Andrew Corp. common stock. Mack owned 4.26% of

the outstanding preferred stock. Hence, under the terms announced in the February 19, 2002, and the June 4, 2002, Form

8-K/A, the value of Mack’s interest would have been approximately $16.43 million [or, over three times his $5 million investment]. However, the stock would not be issued until June

2002 and would not be registered until September 2002. (See

Andrew[s] Corp Form 424B3).93

That Samberg allowed Mack to invest right around the time that

Samberg began trading in Heller creates an appearance of a potential quid pro quo worthy of thorough investigation. Mack and

Samberg were decidedly close to one another. Mack was also an investor in various Pequot funds. Mack had significant informational

sources both from his former and prospective employers: Morgan

Stanley and Credit Suisse First Boston. Both investment banks

were advising GE and Heller in the deal. For these reasons,

Aguirre and the investigators working with him believed that Mack

fit the profile of a potential tipper.

Aguirre continued to explain this theory in a series of e-mails he

sent to his supervisors. On June 27, 2005, in an e-mail to Hanson

that copied Kreitman and Ribelin, Aguirre suggested Mack was a

potential tipper because Mack ‘‘likely had the GE-HF info sources,

he had contacts with Samberg during the period, there was quid

pro quo, mutual trust existed, and Samberg needed a huge

favor.’’94 On June 28, 2005, in his ‘‘proposed next steps’’ e-mail

memorandum to his superiors, Aguirre suggested that the SEC

pursue the Pequot insider trading investigation by (1) pursuing

‘‘Documents-Testimony from the five investment [banks] (CSFB,

Morgan Stanley, JP Morgan, Lehman and Merrill Lynch) or the

two principals (GE and HF)’’95 and (2) taking ‘‘Mack’s testimony

[to] simply nail down whether he will admit that he knew about

the GE/HF acquisition from any source.’’96

The memorandum reminded Aguirre’s superiors that Mack

‘‘could have learned this at either CSFB or MS’’ presumably because he had just left Morgan Stanley in March 2001 and was

being wooed by Credit Suisse First Boston at the time Samberg

began trading in GE/HF.97 Aguirre received substantial push-back

from Hanson, Kreitman and Berger. They delayed Mack’s testimony indefinitely, eventually taking it under public pressure almost a year after they fired Aguirre. Paul Berger left the SEC before Mack’s testimony was eventually taken. Both Hanson and

Kreitman continued to oppose the idea even in the summer of

2006. However, they were overruled by more senior SEC Enforcement Division officials who understood the lack of a downside to

taking Mack’s testimony and the high cost in public confidence by

failing to take it.

27

2. Others Concur in Aguirre’s Request to Take John Mack’s Testimony

Aguirre was not alone in thinking the SEC should take John

Mack’s testimony in the summer of 2005. He was joined in this belief by at least three other senior SEC officials, including Hilton

Foster, Joseph Cella, and Eric Ribelin. Hilton Foster retired shortly

before Aguirre was fired. Foster’s 30 years of experience in insider

trading investigations were apparently valued by the SEC since

Foster conducted training on a contract basis for new SEC attorneys even after retirement As a strategic matter, Foster believed

it was imperative to take John Mack’s testimony ‘‘sooner rather

than later.’’98 He said, ‘‘As the SEC expert on insider trading, if

people had asked me, ‘When do you take [John Mack’s] testimony,’

I would have said take it yesterday.’’99 Foster explained that, ‘‘As

an investigator, you want to lock people in as soon as possible[.] .

. . I always said you want to take testimony from these people

sooner rather than later because you lock them in.’’100

Eric Ribelin is a Branch Chief in the Office of Market Surveillance within the SEC’s Division of Enforcement. He has worked

there for at least 18 years.101 Ribelin was one of the few staff members involved in the Pequot investigation from the beginning. He

spent about 20 percent of his time on the investigation and was in

daily contact with Aguirre. Ribelin’s Market Surveillance branch

assists the Enforcement Division by providing technical advice in

the areas of stock manipulation and insider trading, helping analyze trading patterns, deciphering activities of stock brokers and

traders, and analyzing trading positions or derivative securities.102

When asked about SEC Enforcement Division managers’ refusal

to take Mack’s testimony, Ribelin said, ‘‘the impression that I had

from Berger, especially—he seemed dismissive of investigative

ideas. [He] seemed disinterested in the idea of moving aggressively

and assertively.’’103 With respect to taking Mack’s testimony,

Ribelin recalled Hanson saying that, ‘‘Mack has connections, or he

has stature, or something to that effect, and that because of that,

we—that, you know, we have to be careful about taking his testimony.’’104 After Aguirre’s termination, Ribelin sent Hanson an email concerning his frustrations, indicating that in his view, ‘‘something smells rotten’’ about the course of the investigation.105

Ribelin then attempted to withdraw from the case.106 He said that

Paul Berger made the decision not to interview John Mack and

that it came down as a ‘‘fait accompli.’’107 Ribelin agreed with

Aguirre that the SEC should have taken Mack’s testimony sooner

rather than later but conceded that ‘‘maybe reasonable minds could

have disagreed’’ about the precise timing.108

Joseph J. Cella, III, the Chief of the SEC Enforcement Division’s

Market Surveillance branch, supervised Branch Chief Eric

Ribelin.109 Cella has worked with Ribelin since 1992 and described

him as conscientious and honest.110 After Aguirre was fired,

Ribelin requested that he be removed from the investigation and

assigned to another case. According to Cella, this was the first time

that Ribelin ever asked to be removed from an investigation.111

When asked about his own opinion of the propriety of taking

Mack’s testimony, Cella said, ‘‘I didn’t think that there was anything wrong with bringing Mack in.’’112 When pressed further,

28

Cella said, ‘‘It seemed to me that it was a reasonable thing to do

to bring Mack in and have him testify.’’113 According to Cella, Bob

Hanson and Mark Kreitman objected to questioning Mack.114 As to

whether he thought there was any downside to taking Mack’s testimony, Cella said, ‘‘In my mind there was no downside, correct.’’115

Cella said he had a ‘‘strictly professional’’ relationship with Aguirre

and that he could not recall them ever having any disputes.116

Cella had never heard ‘‘anyone with the SEC’’ describe Aguirre as

a ‘‘substandard employee’’ prior to Aguirre’s termination.117 He

was, nonetheless, ‘‘skeptical’’ that the SEC would give Mack a pass

based upon his or Samberg’s ‘‘political connections.’’118

3. Morgan Stanley’s Investigation and Contacts with the SEC

a. Planning a Response to Outside Inquiries

Given that Aguirre and the others working on the case day-today wanted to question John Mack, why did Aguirre’s supervisors

resist? This question is especially perplexing in light of their initial

support for Aguirre’s theory. Aguirre points to a particular day on

which he claims their attitudes abruptly changed, June 23, 2005.

Aguirre testified:

I received a phone call from Morgan Stanley on June 23rd,

from the head of their compliance [Eric Dinallo]. He had this

question: ‘Are you going to proceed against Mack? Because if

you proceed against Mack, we are going to have a problem in

having him step in as CEO. We do not want him to step in as

CEO if there is going to be a securities case brought against

him by the SEC.’ Until that point, this case was, as I said, supported by everyone.119

Aguirre alleges that on June 23, ‘‘in a face-to-face meeting, Hanson

told me that it would be very difficult to obtain authorization for

issuance of these subpoenas because Mack had very powerful political connections and Assistant Director Kreitman ‘would have to

make the call.’ ’’120 After this encounter with Hanson, Aguirre went

to Kreitman. Aguirre reported Dinallo’s call to Kreitman who, in

turn, called Dinallo on the speakerphone with Aguirre in the

room.121 Kreitman confirmed Dinallo’s question to Aguirre and terminated the call before responding. After hanging up, Kreitman

told Aguirre, ‘‘I think we have got to let them know we probably

will [proceed against Mack].’’ According to Aguirre, Kreitman followed up with, ‘‘But, first, I am going to call Associate Director

Paul Berger and let him know.’’122

Thereafter, according to Aguirre’s account, Kreitman called

Berger and said, ‘‘Paul, this case is coming along pretty well now.

We got this phone call from Morgan Stanley, and I think they want

to know whether we are serious about it. I think we are going to

go on this, and I think we ought to say something now.’’ Aguirre

testified that Berger responded, ‘‘I don’t think we are, and we

shouldn’t say anything.’’123 Kreitman and Berger disputed some aspects of Aguirre’s account of these conversations but, in essence,

agreed on two key points, that: (1) Kreitman suggested warning

Morgan Stanley about the SEC’s interest in Mack and (2) Berger

29

insisted on saying nothing to Morgan Stanley while the investigation remained pending.124

b. Debevoise & Plimpton Contacts

Around the same time that Dinallo called Aguirre, a former

United States Attorney for the SDNY called and e-mailed Linda

Thomsen. The Morgan Stanley Board of Directors hired Debevoise

& Plimpton to conduct a due diligence investigation to vet John

Mack before extending an offer for him to rejoin Morgan Stanley.

Mary Jo White, co-chair of the litigation section at Debevoise, was

responsible for conducted the inquiry as quickly as possible. She

spoke to lawyers for Morgan Stanley, Pequot, and CSFB.125 The

SEC had recently subpoenaed both Morgan Stanley and CSFB for

e-mails between Mack and Samberg.126 White indicated she was

trying ‘‘to learn whatever I could within a rather short time

frame.’’127

Only two days after being retained, White did what the SEC did

not do until more than a year later. She questioned John Mack:

The other thing that I did for the board to gather what information I could on that time frame was to interview John Mack

himself.

***

[C]learly everybody went into full gear on this. You know, we

worked over the weekend . . . [W]e interviewed him. I basically

caused John Mack to be summoned back from wherever he was

in London so we could interview him. And, you know, we accelerated getting e-mails, reviewed them, [and] looked at the

other e-mails at Pequot. . . .128

That evening, Sunday, June 26, 2005, White sent Thomsen an email message marked ‘‘URGENT’’ and asked that Thomsen return

the call ‘‘this evening.’’129 Aguirre complained that the next day

White delivered the e-mails that he had subpoenaed from Morgan

Stanley directly to Linda Thomsen:

On June 27, l learned that Mack-Samberg emails, which I had

subpoenaed from Morgan Stanley, had been delivered directly

to the Director of Enforcement, Linda Thomsen (Thomsen).

Neither I nor other staff had heard of this happening before.

Indeed, the subpoena explicitly stated that the documents were

to be delivered to me.130

White indicated that she had the e-mails delivered to Thomsen for

the purpose of determining whether the SEC could comment on

whether the e-mails changed their view of Mack’s role:

So I asked whether Ms. Thomsen would be willing to have her

staff, you know, look at those [e-mails used in White’s questioning of Mack] and, frankly, any of the others that had been

subpoenaed and give us, you know, some kind of statement, if

they could, about what they considered his status to be in the

investigation.

30

***

Her response to that was, you know, send them down, you

know, we’ll see what we can do, taking a look at them, and

then we’ll see what, if anything, you know, we can say. I think

I asked in that—it would have been in that call that I said,

‘‘Where should I send them?’’ And she said send them to

her.131

For Thomsen to comment on the significance of the e-mails without

first learning what the lead staff attorney’s opinion of their significance would be rather unusual. However, it appears that is what

she did.

c. Thomsen and Berger Respond to Inquiries

Thomsen said that after checking with Paul Berger (who had

also not discussed the significance of the e-mails with Aguirre)132

to see what, if anything she could say, that she told White she

could not comment:

I told her that I didn’t know whether I could tell her anything,

that, as I sat there, I didn’t know enough one way or another

to even know whether there was anything I could tell her if I

could tell her and that I’ll get back to her.

***

After I got off the phone I talked to Mr. Berger and learned

that we just didn’t have enough information one way or the

other with respect to Mr. Mack . . . . [W]e didn’t have anything

to indicate that he had engaged in any illegal or improper behavior, . . . [but] we weren’t at a stage to be confident that he

hadn’t . . . . [W]e weren’t likely to be at that stage any time

soon . . . . I then got back to Ms. White and said I can’t tell

you anything.133

Likewise, Berger described his conversation with Dinallo as consistent with his position that the SEC could not comment on the

investigation.

Berger had opposed Kreitman’s proposal to signal Morgan Stanley that the SEC was serious about investigating Mack. In his

interviews with Committee staff, Berger left the impression that he

provided Dinallo with no substantive information:

Question: After the conversation with Mr. Kreitman in which you

said, ‘‘No. I’ll call Mr. Dinallo,’’ or words to that effect, you

called Mr. Dinallo back. What precisely did he ask you?

Mr. Berger: . . . [He] identified the fact that the Board of Directors

of Morgan Stanley was considering hiring John Mack, and they

were concerned about whether or not he had any issues with

the SEC and its investigation.

***

I don’t recall saying anything with respect to Mr. Mack, other

than . . . I told him that it was premature for us to evaluate.

We were roughly in the middle of our investigation. I didn’t

31

know where it was going to go. I think I said something to the

effect, ‘‘Like any other insider trading investigation, we don’t

know where it’s going to go until we’ve finished it.’’

***

[T]he point of my phone call was to adhere to the Commission

policy by not disclosing any information about an investigation[.]134

However, in the course of our investigation, we obtained documentary evidence inconsistent with Thomsen’s and Berger’s accounts.

Debevoise & Plimpton provided a set of talking points used to

brief Morgan Stanley’s Board of Directors on its efforts. Those talking points provide a record of what Dinallo reported to White about

his conversation with Berger. The pertinent paragraph reads:

You will recall that last Friday, after Morgan Stanley had been

subpoenaed for Mr. Mack’s e-mails with Samberg, Eric Dinallo

spoke to Paul Berger, a senior supervisor in the SEC’s Enforcement Division, and asked him whether the SEC had any evidence of issues for Mr. Mack in their insider trading investigation of Pequot. The response was that the SEC was looking at

Mr. Mack, among others, as part of their investigation, primarily based on what they had seen in e-mail traffic, but implied that they did not presently have evidence of any wrongdoing by Mr. Mack.135

This description of the conversation differs from Berger’s. Rather

than ‘‘not disclosing any information,’’ this document suggests that,

in fact, Berger disclosed the specific type of evidence (i.e., e-mail

traffic) on which the SEC’s interest in Mack was ‘‘primarily based.’’

Moreover, it suggests that Berger signaled that the SEC ‘‘did not

presently have evidence’’ of wrongdoing. It is particularly troubling

that Berger would provide that sort of detail about what the SEC

knew to someone so closely aligned with the interests of a potential

defendant.

The talking points also provide a more detailed account of Linda

Thomsen’s conversation with Mary Jo White:

Thomsen called me late on Tuesday after she and her staff had

reviewed those emails and confirmed that the emails did not

change their view of Mr. Mack. It was still ‘‘too early’’ in the

investigation to tell whether Mr. Mack had any issues. She

added that there is ‘‘smoke there’’—but that there was ‘‘surely

not fire.’’ She said they are weeks away from knowing more

and could give us no more comfort. She commented that the

‘‘Board will have to trust him.’’136

According to this account, Thomsen provided White with more detail than simply, ‘‘I can’t tell you anything.’’ She told White what

SEC staff thought about the e-mails that Morgan Stanley had just

produced, indicating that the documents ‘‘didn’t change their view.’’

She also indicated that, though there was smoke, there was ‘‘surely

not fire.’’ Whether referencing the particular set of e-mails or the

investigation as a whole, these statements go beyond a simple ‘‘no

comment.’’

32

After Aguirre’s termination, Kreitman told the Office of Inspector

General that direct contacts like these with senior SEC officials

were a bit unusual but not unprecedented: ‘‘Kreitman also said

that it is a little out of the ordinary for Mary Jo White to contact

Linda Thomsen directly, but that White is very prestigious and it

is not uncommon for someone prominent to have someone intervene on their behalf.’’137 That is precisely the problem. By providing prominent individuals selective access to senior SEC officials, the SEC allowed bits of information about its non-public investigation of Pequot to leak to a potential defendant’s prospective

employer.

4. Supervisors Deny Requests to Question John Mack

On June 23, Kreitman’s initial reaction to inquiries from Morgan

Stanley about John Mack’s exposure was to tell Berger, ‘‘Paul, this

case is coming along pretty well now.’’138 However after contact between Morgan Stanley’s representatives and the Director and Associate Director of Enforcement, Kretiman’s attitude changed markedly. He denied Aguirre’s request to authorize a subpoena for

Mack’s testimony and failed to respond to e-mails from Aguirre on

the subject.139

a. ‘‘Not Premature, but Prerequisite’’

Aguirre’s supervisors gave conflicting explanations for why they

would not approve of questioning Mack. Mark Kreitman’s initial

explanation was that it wasn’t necessary to ‘‘lock-in’’ Mack. When

asked whether SEC investigators normally bring in potential tippers early on in an investigation to nail down their testimony, as

Hilton Foster had described, Kreitman disagreed:

In some cases, there is an advantage to nailing somebody’s testimony down. . . . [I]t is different in this case when we were

investigating in 2005 conduct that occurred in 2001. The

chance that we benefited nailing down some of these stories

when it is so remote from the events is very limited.140

While the trades occurred years earlier, they had only come under

scrutiny by the SEC in the proceeding months. Interest in Mack’s

role was only a few weeks old, and document production was just

under way. Accordingly, Kreitman’s distinction misses the mark by

failing to recognize that some benefits of ‘‘locking-in’’ a witness

come at the beginning of the investigation, not just at the beginning of the events being examined. Moreover, pointing to the time

that had passed since the trades can hardly be an argument for

waiting even longer before questioning witnesses. That strategy

merely ensures that fading memories continue to fade even further.

Kreitman eventually made it clear that he would not authorize

taking Mack’s testimony without definitive proof that Mack had

foreknowledge of the GE acquisition of Heller in time to tip Pequot,

which he referred to as being ‘‘over the wall.’’141 Kreitman said

that establishing the date that Mack learned of the acquisition

was, ‘‘the necessary pre-requisite to [issue] a subpoena to Mack.’’142

Of course, Kreitman’s view ignored the possibility that interviewing Mack might itself be an appropriate method of determining

whether he had foreknowledge of the acquisition. Moreover, SEC

33

management did not generally impose any such hurdle to taking

investigative testimony in other insider trading cases. Hilton Foster, a 30-year SEC veteran, was unaware of any such pre-requisite:

Question: [I]n your experience at the Commission, in all the insider

trading cases that you have worked on before, has it ever been

described to you that there should be a necessary prerequisite

that you establish that a potential tipper had access to material non-public information before you take that potential tipper’s testimony?

Mr. H. Foster: Well, no. But in this case that misses the point, because I think it was clear that Mack was in a position to know.

Whether he did know or did not know, I don’t know. But he

was a player.

***

[Y]ou’re not going to prove your case and then go talk to these

people. I don’t understand the justification for waiting.143

Indeed, waiting until staff has established the date on which a potential tipper learned the non-public information before questioning

that person might mean waiting forever, if the date is never established. Kreitman simply imposed an arbitrary requirement, which

(1) was not required by any SEC policy; (2) was not endorsed by

the Senior Attorney who conducted training on insider trading investigations; (3) created an artificially high bar for obtaining

Mack’s testimony; and (4) delayed that testimony indefinitely.

After Aguirre’s allegations were under investigation, however,

SEC managers (including Kreitman) claimed that the issue was not

about whether to take Mack’s testimony, but when to take it.144 In

other words, it was merely a question of timing, and the decision

to take Mack’s testimony had already been made. For example, Associate Director Paul Berger said the issue ‘‘wasn’t . . . whether we

were going to take Mack’s testimony or not, because we had pretty

much decided we were going to take the testimony.’’145 The ‘‘necessary pre-requisite’’ and ‘‘not whether, but when’’ rationales are

mutually exclusive. In the months after Aguirre was fired, when

virtually no Mack-related investigative activity occurred, the ‘‘necessary pre-requisite’’ position appeared to have triumphed.

Nearly a year later, when the SEC revived the Mack inquiry following the public airing of Aguirre’s allegations, the conflict re-surfaced. In July 2006, when SEC management was re-considering

whether to take Mack’s testimony, Aguirre’s replacement as lead

staff attorney, James Eichner, forwarded Kreitman’s ‘‘necessary

pre-requisite’’ e-mail to Robert Hanson with the comment, ‘‘I assume Walter has this—not premature, but prerequisite.’’146 When

asked about the e-mail, Eichner explained that he was referring to

Deputy Director of Enforcement Walter Ricciardi and that this email was in response to Ricciardi’s view that Mack’s testimony

should be taken:

Walter had written a memo . . . about this issue, and he had

said that it had been decided during Gary [Aguirre]’s tenure

that taking Mack’s testimony was premature. . . . [T]o him,

34

premature meant we were going to do it eventually and we just

hadn’t done it yet.

***

And so he felt like one reason to take Mack’s testimony was

that . . . he had written this memo . . . [that said] it was premature and . . . suggested we were going to take it. And so

that . . . was an argument in favor of actually going ahead and

taking testimony.

***

The others of us, myself, Bob Hanson, and Mark Kreitman,

said, no, it wasn’t. . . . [O]ur recollection was that it wasn’t

definitely decided it was premature, but that we decided we

weren’t going to do it unless and until we had evidence that

Mack knew about the deal.147

This directly contradicts what the OIG reported. According to the

OIG’s closing memo, ‘‘Hanson, Kreitman, Berger and Thomsen all

said that the issue was not whether to take Mack’s testimony, but

when to take it, because they believed that it was premature to

take Mack’s testimony at the time Aguirre wanted to take it.’’148

b. Mack’s Testimony Should Have Been Taken Earlier

Two days after Morgan Stanley’s Board of Directors hired

Debevoise & Plimpton to vet John Mack, Debevoise partner Mary

Jo White ‘‘summoned’’ John Mack from London on June 26, 2005,

to answer questions on a Sunday. Gary Aguirre’s supervisors at the

SEC failed to ask Mack any questions until more than a year later.

When asked by then-Chairman Specter why it took so long, Hanson

asserted that Mack was questioned as soon as possible:

Sen. Specter: [W]hy 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.

Sen. 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.149

It simply isn’t believable that the SEC questioned Mack, ‘‘as soon

as [it] could.’’ Were it not for the Kreitman-imposed pre-requisite

of proving that the he knew about the GE-Heller deal before

Pequot began buying Heller on July 2, 2001, Mack’s testimony

could have been taken much earlier. Indeed, Kreitman was eventually overruled by more senior SEC officials. Given that his pre-requisite has no objective basis in law or practice, what then is the

actual reason the SEC waited so long?

When Aguirre suggested questioning John Mack in the summer

of 2005, Kreitman said that he and Aguirre’s other supervisors ‘‘inVerDate 11-MAY-2000 14:44 Aug 07, 2007 Jkt 095484 PO 00000 Frm 00042 Fmt 6601 Sfmt 6601 36960.000 SFIN1 PsN: SFIN1
35

structed 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.’’150

Kreitman’s statement begs the question. What is the proper foundation for the SEC to require a witness to answer questions under

oath? The purpose of investigative testimony is to gather information—not, as Kreitman claimed, to confront witnesses with evidence of wrongdoing. Therefore, the necessary pre-requisite for taking testimony is a reasonable basis to believe the witness has relevant information—not whether the SEC can prove that the witness violated the law. Seeking testimony is not an accusation.

Hanson and Kreitman implicitly admitted this basic truth by

their practice in approving subpoenas issued for other witness testimony in the Pequot investigation. For example, on one occasion,

Aguirre provided a list of proposed subpoenas for 27 witnesses. According to Aguirre, his supervisors did not ask for evidence that the

27 individuals had access to material, non-public information.151

However, when it came to Mack, Aguirre’s supervisors required

a much higher hurdle. There were extensive questions and deliberations. Aguirre was required to write memo after memo laying

out the reasons that Mack should be questioned. This requirement

appears to be extremely rare. For example, Hilton Foster couldn’t

recall it ever occurring:

Question: In your time with the SEC, how many subpoenas have

you been involved in issuing? Thousands?

Mr. H. Foster: Hundreds. Thousands. A whole bunch.

Question: And of all those subpoenas, how frequently—what percentage of those do you think you required that there be a

memo drafted to justify—and I’m talking about document subpoenas and subpoenas for testimony. That you required there

be a memo drafted by the staff to justify the reason for issuing

the subpoena that would go up the chain of command to managers at the SEC?

Mr. H. Foster: I can’t remember any.

Question: Never?

Mr. H. Foster: That’s make-work. I mean, if you have—if somebody

wants to know why you need the subpoena, you go and you sit

down and you talk to them. I need it because of this, this, and

this.152

When Paul Berger was asked if he had ever required a memorandum to justify a subpoena for witness testimony, he could recall

an example from another case, but it had something in common

with the Mack request, which Berger noted in his answer:

Question: So you don’t recall whether [a memo was required] in

order to get permission to issue a testimonial subpoena?

Mr. Berger: Well, we were talking about taking some testimony

from individuals fairly prominent, a Senator or a former Senator, and some other individuals, and we wanted to see what

we had. So I think that—I remember reading something in adVerDate 11-MAY-2000 14:44 Aug 07, 2007 Jkt 095484 PO 00000 Frm 00043 Fmt 6601 Sfmt 6601 36960.000 SFIN1 PsN: SFIN1
36

vance of the testimony that would support—that supported

taking their testimony.

Question: You mentioned prominence just now.

Mr. Berger: Uh-huh.

Question: Is it the case that you’re more likely to require a memo

such as this in a case where the proposed testimony is of someone prominent?

Mr. Berger: No, I don’t think so. We’ve done this, we’ve done

memos in advance of people that no one would know.

Question: Can you give us an example?

Mr. Berger: Not off the top of my head.

Question: Can you get back to us on that?

Mr. Berger: I can think about it. I mean, I was there for 14 years.

I was probably involved in maybe a thousand investigations,

brought 400 or so investigations. I mean, that’s a lot of people.

Question: Why did you mention prominence just now, though?

Mr. Berger: I don’t know why I mentioned prominence.153

Subsequent to his interview, Berger failed to provide any examples

where he required staff to draft a memo to justify taking the testimony of a non-prominent witness.

c. Political Clout or Prominence?

On several occasions, Gary Aguirre cited Mack’s campaign contributions when discussing how he interpreted Hanson’s statement

about Mack’s ‘‘powerful political connections.’’ For example, in his

written submission to the Judiciary Committee, Aguirre included a

footnote extensively documenting Mack’s fundraising for President

Bush.154 Aguirre pointed to Mack’s status as a ‘‘‘Bush’ Ranger,

meaning he raised at least $200,000 for the President during the

2004 presidential campaign.’’155 The implication that Mack’s fundraising for Republicans was somehow related to the decision to

block the SEC from taking Mack’s testimony permeated the press

coverage of Aguirre’s allegations.

However, in our investigation, we found no evidence that such an

explicitly partisan consideration played any role in the resistance

to questioning Mack. Aguirre’s supervisors testified that they were

unaware of Mack’s political contributions until the press published

stories about Aguirre’s allegations, and none of the documents we

examined contradicted that testimony. While Mack has primarily

donated to Republicans, he has contributed to Democrats as well.

For example, over the last five yeas, he reportedly gave ‘‘$10,000

to four Democratic congressional hopefuls, including [Hillary] Clinton.’’156 Mack is now raising money for Senator Clinton’s presidential campaign. Just recently, Mack invited senior staff to a Clinton fundraiser ‘‘on the 41st floor of Morgan Stanley’s headquarters

in Times Square’’ and urged them to give $4,600 each, ‘‘the maximum for the 2008 presidential campaign.’’157

37

Evidence we reviewed suggests that the reluctance to question

Mack represents a much more subtle and pervasive problem than

an individual partisan political favor. SEC officials were overly deferential to Mack—not because of his politics—but because he was

an ‘‘industry captain’’ who could hire influential counsel to represent him. Aguirre wrote to Hanson in August 2005, ‘‘You told me

that Mack was ‘an industry captain,’ that he had powerful contacts,

that [Former U.S. Attorney] Mary Jo White, [Former Enforcement

Director] Gary Lynch, and others would be representing him, that

Mary Jo White could contact a number of powerful individuals, any

of whom could call [Enforcement Director] Linda [Thomsen] about

the examination.’’158 Hanson’s e-mails confirm that he was concerned about direct contacts between senior SEC officials and influential outside counsel. He wrote to Aguirre, ‘‘Mack’s counsel will

have ‘juice’ as I described last night—meaning that they will reach

out to Paul [Berger] and Linda [Thomsen] (and possibly others).’’159

Mack’s Wall Street prominence and ability to hire prestigious

counsel appears to have been the driving force behind treating him

with undue deference. However, we found no evidence that Mack

himself had a hand in preventing or delaying his testimony. The

SEC has a duty to conduct a vigorous investigation and to treat

prospective witnesses equally under the law. The evidence suggests

that the bar for taking other testimony in the Pequot investigation

was considerably lower than it was for Mack. If he were a mid-level

trader instead of the head of Morgan Stanley, it seems likely that

a subpoena would have issued in short order with little or no interference from Aguirre’s supervisors. Unfortunately, we have received anecdotal reports that the sort of deference Mack received

is not uncommon. It is reportedly driven by a perception within the

SEC, which Hanson alluded to in his e-mail, that investigations involving prominent individuals can be slowed or halted by contacts

from outsiders with direct access to the most senior SEC officials.

By allowing the perception that ‘‘going over the head’’ of SEC staff

attorneys yields results, the SEC undermines public confidence the

integrity of its investigations and exacerbates the problems associated with ‘‘regulatory capture.’’160

5. The SEC Fires its Lead Investigator

On August 24, 2005, while Aguirre was away on vacation,

Kreitman sent Paul Berger an e-mail suggesting that the SEC terminate Aguirre’s employment. Kreitman captioned the e-mail,

‘‘Gary and Pequot.’’ This e-mail was appended to a series of

Aguirre’s earlier e-mails labeled, ‘‘Mack Testimony.’’161

Approximately one week later, in a memorandum dated September 1, 2005, the SEC terminated Gary Aguirre’s employment.162 The termination became effective at the close of business

on September 2, 2005—a mere five days shy of the end of Aguirre’s

one-year probationary period. According to the memorandum, the

termination was based upon Aguirre’s ‘‘demonstrated inability to

work effectively with other staff members and [his] unwillingness

to operate within the Securities and Exchange Commission (SEC)

process.’’163 Though the memorandum represents that it is from

Enforcement Director Linda Thomsen, it is initialed by Paul

Berger.

38

D. The Investigation Shifts Focus

1. Attempts to Identify other Potential Tippers/Tippees

After Aguirre’s supervisors interfered with his efforts to take

John Mack’s testimony and fired him, the investigation changed

focus. James Eichner, a staff attorney in the Enforcement Division

newly assigned to the Pequot case, suggested ‘‘broadening our focus

from Samberg to Pequot as a whole.’’164 Eichner recommended

searching for a potential recipient of the inside information (or

tippee) other than Samberg, even though Samberg testified that he

directed the trades without consulting anyone else. Eichner recommended three steps: (1) have each person who knew about the

deal at the five investment banks and GE-Heller identify who they

knew at Pequot at the time of the deal, (2) search all Pequot e-mail

to everyone at the five investment banks and GE-Heller, and (3)

try to identify anyone at Pequot who got promoted soon after the

GE-Heller deal. These proposed steps failed to identify any leads

suggesting other likely recipients or sources of information about

the acquisition.

In addition to searching for other possible tippees, the SEC also

began looking for other possible tippers. Even before Aguirre left,

he drafted a subpoena to CSFB aimed at identifying other potential

tippers. The SEC issued the subpoena on September 1, 2005, just

as Aguirre was being fired. On October 6, 2005, the SEC issued another subpoena to Pequot, also aimed, as Eichner explained, at

identifying potential sources of inside information other than John

Mack:

The purpose of that subpoena was we had started to get into

the Microsoft transaction, and the person who we believed was

the tipper in that was David Zilkha, and he had gone from

Microsoft to Pequot. . . . [W]e had a theory that Samberg was

wooing Zilkha to get information from him about Microsoft.

And so it seemed that maybe there had been a similar dynamic

in play in regard to GE/Heller or other companies . . . that

Samberg was trying to hire people who had information about

companies they came from . . . then used those to get inside

information. And so we subpoenaed Pequot for all of its new

hires for some period, . . . and we looked hard at the people

whose names were identified to see if we could find a potential

tipper for GE/Heller.165

As with Eichner’s other proposals, this effort produced no significant leads:

Question: Did you ever take any of the testimony of any of those

people, that is, suspected tippers?

Mr. Eichner: We didn’t take the testimony because we couldn’t find

enough of a connection, but we actually—I spent a fair amount

of time working up those leads and trying to find connections

between those people and the entities—the entities that were

involved in the deal and Pequot. . . . [W]e couldn’t find anyone

who—we couldn’t place them with the information, and we

couldn’t find anything that suggested that they had provided

the information. So, unfortunately, it seemed like a good idea,

39

and I spent a fair amount of time on it, but it didn’t pan

out.166

These unsuccessful efforts in the fall of 2005 appear to be the end

of any serious SEC attempt to pursue Pequot’s suspicious trading

in advance of the GE-Heller acquisition.

2. Dropping the Microsoft Trades

When we initially asked the SEC in early 2006 whether it was

pursuing the GE-Heller aspects of the Pequot investigation after

having fired Gary Aguirre, the SEC said that the investigation had

shifted to focus on the Microsoft trades as more likely to lead to

an enforcement action.167 Given this statement and the draft Wells

notice, the SEC appeared to be on the verge of an enforcement action. Eichner wanted to share the draft Wells notice with prospective defendants for the purpose of extracting an agreement to extend the statute of limitations.168 The SEC, Pequot, Samberg, and

Zilkha agreed to extend the statute of limitations for any SEC enforcement action.169

However, the SEC never filed an enforcement action. Therefore,

we sought to determine what changed and why. When asked why

the Microsoft case never progressed, SEC Enforcement Assistant

Director Mark Kreitman said the case weakened because of two

factors: (1) Zilkha was an unreliable witness, and (2) Goldman

Sachs had provided some of the same information to Pequot that

Zilkha had, before publishing it in an analyst report.170 According

to Kreitman, these two reasons served to dampen what had previously been pretty significant interest by the U.S. Attorney in the

Microsoft trading:

They lost interest as soon as they got a taste of Zilkha, unfortunately. They were very enthusiastic at first, and that’s what

Gary [Aguirre] got the big Perry [Mason award] for, his presentation to the U.S. Attorney, getting them interested in Microsoft. . . . So, we lost the support of the U.S. Attorney in the

case, and I think rightfully so. I think it became a civil case

you couldn’t try, much less a criminal case.171

Moreover, Kreitman suggested that Eichner’s draft Wells notice

was premature and suggested that Eichner’s plan to use the draft

to encourage defendants to enter an agreement as to the statute of

limitations was somehow inappropriate.172

E. The Universe Shifted: Returning to the GE-Heller Trades

1. The Decision to Finally Question John Mack

After firing Aguirre, the Enforcement Division appeared to lose

interest in John Mack until the Pequot investigation became public. With the exception of a single subpoena issued on the effective

date of Aguirre’s termination, the SEC did virtually nothing to investigate John Mack as the potential tipper in Pequot’s GE and

Heller Financial trading. Only after the New York Times printed

Aguirre’s allegations and he testified before the Senate Judiciary

Committee did the SEC begin to re-evaluate Mack as the potential

tipper in June 2006.173

40

As it became clear that the SEC would have to answer more detailed questions about its handling of the case, it took the testimony of two CSFB executives who had recruited John Mack. Taking their testimony was the SEC’s first step toward preparing to

take Mack’s testimony in the nine months since Aguirre was fired.

As Eichner described it:

Mr. Eichner: [I]n June the Times article came out about all of this.

And so after that, there was a discussion—I mean, the universe

sort of shifted a little bit, and so after that there were discussions about sort of . . . what more needed to be done on the

case and what should be done[.]

***

Question: And so was that testimony [of CSFB executives] in preparation—the purpose of that testimony was to prepare for the

John Mack testimony?

Mr. Eichner: It was a precursor. I mean, it was supposed to be—

yes, it was supposed to help us. . . . So that was the sole purpose of those two gentlemen, was sort of to explore this issue

about whether Mack got the information in their recruitment

period.

The way in which the SEC approached the testimony of these

CSFB executives does not suggest that it was taken very seriously.

For example, Mark Kreitman did not assign an attorney to take

the testimonies until less then two days before they were scheduled.

On Monday, July 24, 2006, Kreitman asked Staff Attorney Liban

Jama to take the testimonies, which were scheduled for following

Thursday, July 27, 2006. Jama was uncomfortable with the request

and sent a carefully worded e-mail to Kreitman around noon on

July 24, asking that someone else be assigned to the task:

[G]iven the critical nature of the testimony that is to be taken,

the lack of preparatory time for the testimony . . . and my lack

[of] specific knowledge of the record regarding this portion of

the investigation, I would not feel comfortable taking the testimony this Thursday. . . . [I]f I was given a sufficient period of

time to familiarize myself with the documents . . . and sufficient preparatory time . . . I would be willing to pitch in. My

goal, as always, is to do [a] complete and thorough job on any

matter.174

In his interview with Senate staff, Jama described his conversations with his colleagues about the request:

I don’t remember who I spoke to. I know I talked to other folks

just to say, in general . . . I got a request to take some testimony and I have . . . a day-and-a-half. . . . I do remember saying, ‘‘Is a day and a half enough time, in your opinion, if you

haven’t been involved?’’ ‘‘No’’ was the universal response.175

By contrast to his colleagues, Jama described Kreitman’s attitude

toward taking this ‘‘critical’’ testimony as oddly nonchalant:

41

He said, ‘‘You don’t need to prepare that much for it,’’ which

I found to be strange, and I relayed that to folks. So, yeah, he

didn’t feel like I needed to be prepped, . . . which I thought was

unusual in my mind.

***

I just thought it was an unusual request to make of me—and,

quite frankly, unfair. I thought he put me in a difficult position.176

Following Jama’s e-mail, Kreitman re-assigned the duty to James

Eichner. Eichner took the testimony of the two CSFB executives

and, on August 1, 2006, he took John Mack’s testimony.

When asked why the Enforcement staff failed to pursue investigative leads on Mack sooner, Eichner, stated:

After the events of the previous fall, we hadn’t really focused

on him as—we had not focused on him as a tipper or as a potential tipper. We were focusing on other things. So there was

a—once there was a lack of evidence that he had information,

he ceased to be a primary focus of the investigation.177

The five-year statute of limitations for any Department of Justice

criminal enforcement action against Pequot, Samberg, and Mack

expired on or around July 27, 2006, leaving only the potential for

the SEC to obtain other remedies such as disgorgement.178 When

the SEC finally did take Mack’s testimony on August 1, 2006, it did

so five days after the statute of limitations period applicable to civil

and criminal penalties expired.

2. Unasked Questions: The Mack Transcript

During the interview with the SEC, Mack, among other things,

denied having any foreknowledge of the GE acquisition of Heller

until after he began working at Credit Suisse First Boston on or

around July 13, 2001—nearly two weeks after Samberg began purchasing large volumes of Heller stock, and about two weeks before

the public announcement of the deal.

During his August 1, 2006 testimony, Mack claimed that

Samberg had asked him to invest in an opportunity called ‘‘Fresh

Start’’ because Pequot could not invest anymore than it already

had.179 However, e-mail exchanges between Samberg and others at

Pequot suggest that the courtship was in the other direction. In

short, according to Pequot e-mails, Mack was ‘‘busting chops’’ to invest in Fresh Start and some were unhappy that Samberg allowed

him to do so. Eichner did not inquire about this apparent contradiction, nor did the SEC seriously test the Aguirre’s theory that

investment in Fresh Start was a reward for inside information. For

example, the SEC did not determine whether Mack’s participation

in Fresh Start diluted Pequot’s profits or whether Pequot faced

some limitation on the amount it could invest in the deal and genuinely needed additional capital from Mack. Although Mack testified

to the SEC that he ‘‘doubled’’ his money in the Fresh Start deal,180

it appears more accurate that he more than tripled his $5 million

investment. None of the SEC investigators who testified before the

Judiciary Committee or in interviews with staff have refuted this

42

fact which tends to suggest a potential motive for Mack to tip

Samberg about the GE acquisition of Heller.

F. The SEC’s Case Closing Report

On November 30, 2006, the SEC Division of Enforcement issued

a Case Closing Report (‘‘Report’’) in the Pequot investigation.181

The seven-page Report describes the SEC’s findings related to: (1)

insider trading ahead of the GE acquisition of Heller, (2) insider

trading in Microsoft, (3) insider trading in AstraZeneca and Par

Pharmaceutical, (4) Pequot’s Private Investment in Public Equities

(‘‘PIPES’’), and (5) concerns about potential market manipulation

through wash sales.

1. GE-Heller

The SEC investigation into Pequot’s GE-Heller trades had three

primary phases: (1) summer of 2005, (2) September 2005 through

December 2005, and (3) June 2006 until the investigation was

closed on November 30, 2006. During the period from December

2005 through June 2006, ‘‘the focus of the insider trading case

shifted to Microsoft, where it remained until June 2006.’’

Aguirre was the lead SEC investigator on the case during the

first period. The closing memo describes this period as follows:

Emails . . . suggest that Mack spoke by telephone with

Samberg about a potential investment the night of Friday,

June 29, 2001, the business day before Pequot began purchasing Heller, but that the conversation related to an unrelated non-public company.[182] Credit Suisse First Boston . . .

an investment adviser to Heller in the transaction, hired Mack

as its CEO on July 12, 2001, ten days after Pequot began to

buy Heller stock. However, counsel for CSFB advised the staff

that the CFO of CSFB who met with Mack before Mack joined

CSFB did not have deal information on specific pending deals

on which CSFB was working.183

The Report indicates that Mack could not have learned about the

deal from the Chief Financial Officer of CSFB and leaves the impression that the CFO was his only potential source of information.

In fact, there were other potential sources of information whom the

SEC never interviewed and whom the Report never mentions.

In the months after Aguirre was fired, SEC Enforcement staff

took no testimony concerning the GE-Heller trades. After Aguirre’s

allegations were publicized in June 2006, however, the SEC Enforcement staff reversed course. Beginning in late July, ‘‘the staff

took the testimony of two CSFB employees, a former CFO and a

company lawyer, who were both involved in recruiting Mack.’’184

Both witnesses denied knowing about the GE acquisition of Heller

before it was publicly announced and both denied telling Mack anything about it.185 On August 1, 2006, SEC staff took John Mack’s

testimony. Mack ‘‘denied knowing about the merger before he became CSFB’s CEO in mid-July 2001 and denied having any discussions with Samberg or anyone else at Pequot about the merger before it was announced.’’186 Finally, on September 8, 2006, SEC Enforcement staff ‘‘took the testimony of an analyst at a brokerage

43

firm who provided . . . coverage on Heller during the relevant time

period, appeared to have met with Pequot in June 2001 shortly before Samberg started buying Heller, and went to work at Pequot

in early 2002.’’187 Once more, the witness denied having any inside

information and the SEC found nothing to contradict him.

The case closing report concludes its analysis of the GE-Heller

trades by finding, among other things, that ‘‘it is extremely unlikely that Mack tipped Samberg about the merger between GE

and Heller, having found no evidence that Mack knew about the

merger before Samberg started purchasing Heller stock.’’188 How

hard did the SEC look for such evidence? Significantly, the case

closing report fails to mention Mack’s trip to Switzerland on June

26-28, 2001, to meet with Credit Suisse officials about the prospect

of Mack accepting a position as CEO of CSFB. This was the period

just before he spoke with Samberg and was let in on the Fresh

Start deal. During his August 1, 2006, testimony, Mack confirmed

that a copy of his Swiss trip itinerary indicated that he met with

other Credit Suisse personnel who may have had knowledge of the

GE-Heller deal.189 During the Judiciary Committee’s December 5,

2006, hearing, then-Chairman Specter asked Mr. Hanson about

Mack’s trip to Switzerland:

Sen. Specter: Was Mr. Mack questioned about that, Mr. Hanson?

Mr. Hanson: Of course.

Sen. 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.

Sen. 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 [sic] that it had no

relevance to him. Not only that, but the people from CS First

Boston that we talked to and received e-mails from said that

there is no possible way that they had the information, let

alone passed it on to Mr. Mack.

However, the SEC did not question the individuals from Credit

Suisse who met with Mack during that trip. While on the trip,

Mack met with numerous Credit Suisse officials and discussed various management issues.190 Mack denied receiving any information

concerning the GE-Heller deal during any of the many meetings

with named Credit Suisse representatives. However, at one point

during Mack’s testimony he was asked the following question and

gave the following answer:

Question: During that trip to Switzerland in 2001 or any of the

contacts you had with representatives of Credit Suisse or First

Boston, up until the time you began work, did anyone convey

any information to you about a transaction involving GE and

Heller?

Mr. Mack: Not that I remember.191

44

Mack was hired as the CEO of CSFB during the second week of

July 2001. Shortly thereafter, Mack believes a CSFB banker named

Bob Clymer must have told him about the upcoming GE-Heller

deal.192 When asked whether he knew of the deal prior to its public

announcement on July 30, 2001, Mack testified, ‘‘I’m sure I knew

about the trade; yes.’’193

The most significant aspect of the Mack testimony is his acknowledgement that he went to Switzerland to discuss becoming

CSFB’s CEO from July 26-28, 2001. While there, Mack met with

senior representatives of Credit Suisse—CSFB’s parent company.

In view of the fact that Mack also spoke with Samberg immediately

upon his return to the United States on July 29, 2001, the trading

day before Samberg began heavily betting on Heller Financial

stock, and on the same night Mack was permitted into a lucrative

deal, there was more than a sufficient basis to justify taking

Mack’s testimony in the summer of 2005.

2. Microsoft

Despite the evidence, the SEC closed the Microsoft investigation

and discounted the trades as unworthy of an enforcement action.

Among other things, the SEC cited the unreliability of Zilkha as a

witness. It is unclear, however, why a case would be harder to

make rather than easier if one of the potential defendants lacked

credibility. The SEC also cited the fact that other Microsoft-related

information was in the marketplace and could theoretically have

spurred Samberg’s trades and the fact that Goldman Sachs provided Pequot early access to information on Microsoft that it later

published in an analyst’s report, which may have been the basis of

Pequot’s trading rather than information from Zilkha. Nevertheless, James Eichner indicated just before the SEC issued its Case

Closing Report his continued belief that Pequot had done something improper if not technically illegal in its Microsoft trading:

[M]y opinion was certainly that Samberg thought he was getting inside information and trading on it. That was my opinion

and continues to be my opinion. . . . I think Samberg thought

he was committing insider trading, but it’s not clear that he

was, in fact, committing insider trading.

***

[A]t the end, you know, when I was trying to get my ducks in

a row on materiality and a couple other things, it kind of fell

apart. But then we thought, well, they got this Goldman stuff,

too, and that looks bad so let’s look at that. Maybe they traded

based on both the Zilkha tip and the Goldman thing. So then

we did the Goldman piece, and then that turns out not to be—

you know, it turns out to be Goldman policy [to provide certain

clients advanced access information in unpublished analyst reports] and not illegal.

***

[I]t seems terribly unfair to me[.] . . . [W]hat I learned from

this whole thing is that, you know, people at Pequot, they get

a lot of good information from a lot of sources that allows them

45

to make money. And, you know, it’s no wonder a lot of these

hedge funds do really well. I mean, they give Goldman tons of

money in brokerage commissions, and Goldman gives them the

best information, and the poor schmoes out there, that is a

tough hurdle, but, you know, it’s not against the law, and

that’s the limit of our authority. . . . I don’t speak for the SEC

on this, but, I mean, I think Samberg committed insider trading on Microsoft[.]

***

I mean, I came to agree at the end that—what I’m saying is

I think if you asked me in my heart of hearts, hold a gun to

my head, did he do it or not, I would say yes. But I don’t—

I mean, I don’t think we could try this case. You know, I don’t

think we could win the case[.]194

If Eichner’s assessment is accurate, then perhaps these circumstances illustrate a need to consider whether changes in the

law are necessary to ensure a more even playing field in our public

markets. In any event, given the apparently inculpatory e-mails

from Samberg telling Zilkha, (e.g. ‘‘I shouldn’t say this, but you

have probably paid for yourself already!’’) it is difficult to understand why the SEC would not, at bare minimum, invite Pequot,

Samberg and Zilkha to respond to a Wells notice.

3. AstraZeneca and Par Pharmaceutical

In its closing memo, the SEC described its reasoning for ultimately deciding not to pursue further investigation into the

AstraZeneca and Par Pharmaceutical trades: ‘‘It seems unlikely

that Pequot had inside information about the court decision because it made investment decisions contrary to that information in

the weeks leading up to the decision.’’195 Specifically, the SEC contends that Pequot bought Par after it bought AstraZeneca, which

it would not have done had it been tipped about the outcome of the

patent case.

However, this contention ignores the information included in the

SEC’s own formal order memorandum that there were two potential insider trading events rather than just one: (1) a September

earnings announcement, that caused Par stock to rise suddenly,

and (2) the October court decision which caused Par stock to fall

suddenly. The analysis in the SEC’s closing memo neither addresses nor acknowledges the first event. Instead, the memo claims that,

‘‘staff’s initial inquiry presented an incomplete and misleading picture of Pequot’s trading in the stocks of Astra and Par.’’196 While

the description of the trades in the formal order of investigation

adopted by the SEC may have been incomplete, as one would expect at the outset of an investigation, we found no evidence that

the description was misleading. In fact, one could argue that the

SEC’s closing memo was itself misleading in its use of Pequot’s

September purchases of Par to excuse the October sales. The SEC

does not reference the fact that the September purchase preceded

a positive earning report or that it was a separate instance of potential insider trading for investigation. Nor does the SEC explain

46

why it presumably concluded that the September purchases were

not themselves insider trading.

G. Conclusion

The investigation of Pequot Capital Management could have

been an ideal opportunity for the SEC to develop expertise and visibility into the operations of a major hedge fund while deterring institutional insider trading and market manipulation through vigorous enforcement. Instead, the SEC squandered this opportunity

through a series of missteps, including (1) unnecessary delays, (2)

understaffing, (3) excluding many of the suspicious transactions, (4)

allowing inadequate and untimely document production, (5) disclosing case information to John Mack’s prospective employer, Morgan Stanley, and (6) preventing the staff from questioning Mack

until after the statute of limitations had expired.

As will be discussed in the next section, Associate Director Paul

Berger contacted Debevoise & Plimpton about potential employment just days after he initialed Aguirre’s termination notice. Even

though Debevoise had represented Mack’s employer, Morgan Stanley, Berger did not recuse himself until four months later, in early

2006. Although Robert Hanson testified that the SEC took Mack’s

testimony, ‘‘as soon as we could,’’ it appears that the SEC did very

little to investigate Mack’s potential role in the period between

Aguirre’s firing in September 2005 and Berger leaving the Commission in the spring of 2006.

47

48

49

ENDNOTES

1. SEC 7209, Arthur Samberg, Chief Executive Officer, Pequot Capital Management, Inc., testimony (May 3, 2005) (Exhibit 1).

2. Id. at SEC 7242.

3. Id. at SEC 7245-46, 7249.

4. Id. at SEC 7250

5. Id. at SEC 7272.

6. Nikhil Deogun, GE Capital to Acquire Heller Financial, WALL ST. J., July 30,

2001, at A3.

7. ‘‘Short selling’’ or ‘‘shorting’’ is a way to profit from the decline in price of a

security. Usually, investors ‘‘go long’’ on an investment, meaning they purchase shares in hopes that the price will rise. To profit from the stock price

going down, short sellers borrow a security and sell it, expecting that it will

decrease in value so that they can buy it back at a lower price and keep the

difference.

8. SEC 7267, Samberg testimony (May 3, 2005) (Exhibit 1).

9. Id. at SEC 7272.

10. Memorandum from Walter G. Ricciardi to file (June 15, 2006) (Exhibit 2).

11. SEC 7159-62, NYSE Advisory Memorandum to the SEC (Jan. 30, 2002) (Exhibit 3).

12. SEC 7266, Samberg testimony (May 3, 2005) (Exhibit 1).

13. Id. at 7268-69 (describing Heller’s ten percent growth rate, ‘‘the attractiveness

of the franchise,’’ and several other factors).

14. Id. at 7269.

15. Id. at 7272.

16. Id. at 7274.

17. Examining Enforcement of Criminal Insider Trading and Hedge Fund Activity,

2006: Hearing Before the Senate Comm. on the Judiciary, S. HRG. 109-898,

at 708 (Dec. 5, 2006) (hereinafter ‘‘S. HRG. 109-898’’).

18. SEC 7159-62, NYSE Advisory Memorandum to the SEC (Jan. 30, 2002) (Exhibit 3).

19. S. HRG. 109-898, at 966 (Foster Tr.).

20. Id. at 544 n.182.

21. Id. at, at 1103-04 (Ribelin Tr.).

22. Transcribed Interview with Paul Berger, Associate Director of Enforcement Division, SEC, at 74-75 (Nov. 2, 2006) (Exhibit 4) (hereinafter ‘‘Berger transcript

(Nov. 2, 2006)’’); Transcribed Interview with Mark Kreitman, Assistant Director, Division of Enforcement, SEC, at 17-18 (Sept. 6, 2006) (Exhibit 5) (hereinafter ‘‘Kreitman transcript (Sept. 6, 2006)’’).

23. S. HRG. 109-898, at 193, 314 (May 9, 2005 e-mail from Gary Aguirre, May 3,

2005 e-mail from Eric Ribelin: ‘‘It’s my strong belief that gary needs the assistance of another attorney. Hilton is on his way out fast and gary is absolutely swarmed under’’).

24. See, General Accounting Office, SEC Operations: Increased Workload Creates

Challenges, GAO 02-302 (Mar. 2002).

25. See, S. HRG. 109-898 at 337 (SEC Case Closing Report n.12) (noting, inter alia,

‘‘Section 9(a)(1) of the Exchange Act prohibits certain manipulative practices,

including wash sales and matched orders, when such transactions are done

for the purpose of creating the false or misleading appearance of active trading in a security listed on a national securities exchange, or a false or misleading appearance with respect to the market for any such security’’).

26. S. HRG. 109-898 at 337 (SEC Case Closing Report at 5) (emphasis added).

27. See S. HRG. 109-898, at 337 (SEC Case Closing Report at 5).

28. Transcribed Interview with Robert Hanson, Branch Chief, Division of Enforcement, SEC, at 132-34 (Nov. 9, 2006) (hereinafter ‘‘Hanson transcript (Nov. 9,

2006)’’) (Exhibit 6).

29. SEC 0753, Memorandum from Tom Conroy to file (Aug. 3, 2005) (Exhibit 7).

30. An ‘‘agency cross’’ is a trade that has only one agent acting for both the buyer

and the seller.

31. SEC 0753, Conroy memo (Aug. 3, 2005) (Exhibit 7).

32. SEC 0753, Conroy memo (Aug. 3, 2005) (Exhibit 7).

33. Id. (emphasis added).

34. SEC 4919-23, Memorandum from Craig Miller, Tom Conroy, and Eric Ribelin

to file (Nov. 14, 2005) (Exhibit 8).

35. SEC 4919-23, Miller, Conroy, and Ribelin memo (Nov. 14, 2005) (Exhibit 8).

36. Id. at 4919.

37. Id.

50

38. Id. (emphasis added).

39. Id.

40. Id. at 4920.

41. Id. at 4923.

42. Id.

43. SEC 4924, E-mail from Joseph Cella to Larry Bergmann and James

Brigagliano (Nov. 4, 2005) (Exhibit 9).

44. Id.

45. Court Finds that two Prilosec® Formulation Patents are Valid—3 of 4 Defendants Found to Infringe, PR NEWSWIRE ASSOCIATION, Oct. 14, 2002.

46. S. HRG. 109-898, at 336 (SEC closing memo, Nov. 30, 2006).

47. Memorandum from the Division of Enforcement to the Commission (Dec.16,

2004) (Exhibit 10).

48. S. HRG. 109-898, at 336 (SEC closing memo, Nov. 30, 2006).

49. E-mail from Gary Aguirre to Richard Grime and Charles Cain (Nov.1, 2004),

e-mail from Gary Aguirre to Hilton Foster (Nov. 2, 2004) (Exhibit 11).

50. E-mail from Charles Cain to Aguirre (Nov. 1, 2004) (Exhibit 11).

51. S. HRG. 109-898, at 336 (SEC closing memo, Nov. 30, 2006).

52. Transcribed Interview with James Eichner, Attorney, Division of Enforcement,

SEC, at 48-53 (Nov. 14, 2006) (hereinafter ‘‘Eichner transcript (Nov. 14,

2006)’’) (Exhibit 12).

53. See SEC 2868-76 (Exhibit 13). According to one authority, ‘‘[t]he ‘Wells submission’ process represents a critical phase in SEC investigations. These submissions provide prospective defendants the opportunity to dissuade the SEC

from bringing formal actions against them; likewise, the Commission and its

staff rely upon the arguments contained in these submissions when making

their charging decisions.’’ Joshua A. Naftalis, ‘Wells Submissions’ to the SEC

as Offers of Settlement Under Federal Rules of Evidence 408 and their Protection from Third-Party Discovery, 102 COLUM. L. REV. 1912, 1912 (2002).

54. See Transcribed Interview with Mark Kreitman, Assistant Director, Division of

Enforcement, SEC, at 81 (Nov. 15, 2006) (hereinafter ‘‘Kreitman transcript

(Nov. 15, 2006)’’) (Exhibit 14).

55. Eichner transcript, at 48-49 (Nov. 14, 2006) (Exhibit 12); Kreitman transcript,

at 65-66 (Nov. 15, 2006) (Exhibit 14).

56. Eichner transcript, at 51 (Nov. 14, 2006) (Exhibit 12) (noting his ‘‘opinion was

certainly that Samberg thought he was getting inside information and trading

on it. That was my opinion and continues to be my opinion.’’).

57. SEC 2868-69 (internal numbering omitted) (Exhibit 13).

58. Id. at SEC 2871 (emphasis added, internal numbering omitted).

59. S. HRG. 109-898, at 601.

60. Id. at 562, 601. See also SEC 3875 (Exhibit 16).

61. S. HRG. 109-898, at 266. See, 15 U.S.C. 78q(b).

62. SEC 5653-57, e-mail to Eric Ribelin (Feb. 25, 2005) (Exhibit 15)

63. SEC 3875 (Exhibit 16).

64. S. HRG. 109-898, at 579.

65. Id. at 562.

66. Id. at 601.

67. SEC 3875 (Exhibit 16).

68. Id.

69. Berger transcript, at 71-73 (Nov. 2, 2006) (Exhibit 4); see also Kreitman transcript, at 56 (Sept. 6, 2006) (Exhibit 5).

70. Kreitman transcript, at 56 (Sept. 6, 2006) (Exhibit 5).

71. Id. at 60-61.

72. S. HRG. 109-898, at 30, 33.

73. Kreitman transcript, at 61-63 (Sept. 6, 2006) (Exhibit 5).

74. SEC/OIG Document Production at 0323 (Exhibit 17).

75. Kreitman transcript, at 63 (Sept. 6, 2006) (Exhibit 5); S. HRG. 109-898, at 71

n.158.

76. Kreitman transcript, at 65 (Sept. 6, 2006) (Exhibit 5); see also, SEC 6765-67,

letter from James Eichner to Audrey Strauss (Oct.20, 2005) (Exhibit 18).

77. S. HRG. 109-898, at 1112.

78. Id. at 645.

79. SEC 7267-70, Samberg testimony (May 3, 2005) (Exhibit 1).

80. SEC 7579-83, Arthur Samberg, Chief Executive Officer, Pequot Capital Management, Inc., testimony (June 7, 2005) (Exhibit 19).

81. Transcribed Interview with James Eichner, Attorney, Division of Enforcement,

SEC, at 61-64 (Sept. 1, 2006) (hereinafter ‘‘Eichner transcript (Sept. 1, 2006)’’)

(Exhibit 20). Hilton Foster, a retired SEC attorney who has ‘‘trained thouVerDate 11-MAY-2000 14:44 Aug 07, 2007 Jkt 095484 PO 00000 Frm 00058 Fmt 6621 Sfmt 6621 36960.000 SFIN1 PsN: SFIN1
51

sands of people’’ on how to conduct insider trading investigations, told us that

he decided to use this section of Aguirre’s Samberg examination in his training sessions. S. HRG. 109-898, at 1010, 1024-1025 (Foster Tr.). See SEC 7553-

83, Samberg testimony (June 7, 2005) (Exhibit 1).

82. Berger transcript, at 75-76 (Nov. 2, 2006) (Exhibit 4).

83. 15 U.S.C. § 78u(d).

84. See United States v. Moses, 2005 U.S.Dist. LEXIS 40187 (Aug. 31, 2005), aff’d,

2007 U.S. App. LEXIS 178 (11th Cir. Jan. 5, 2007).

85. See Senate Committee Report on Foreign Corrupt Practices Act, S. Rep. No.

114, 95th Congress, 1st Session 12 (1977).

86. Kreitman transcript, at 73 (Nov. 15, 2006) (Exhibit 14). Kreitman explained to

Aguirre that he typically gave three versions of the award, each of which was

a different size photo to signify different levels of achievement. ‘‘The Big

Perry’’ was the largest of the three. S. HRG. 109-898, at 548-49.

87. S. HRG. 109-898, at 602-611 (SEC 871-80).

88. Id. at 659 (SEC 3770).

89. SEC 3742 (note: capitalization has been corrected when quoting e-mails) (Exhibit 21).

90. SEC 3764 (Exhibit 22).

91. S. HRG. 109-898, at 659 (SEC 3770).

92. Id. at 529 (Aguirre’s Written Testimony) (modification in original).

93. Id. at 529 n.116.

94. Id. at 611 (SEC 0880).

95. Id. at 612 (SEC 0907).

96. Id. at 613 (SEC 0908).

97. Id.

98. Id. at 1002.

99. Id. at 986.

100. Id. at 1008.

101. Id. at 1088-89.

102. Id. at 1089-90.

103. Id. at 1102.

104. Id. at 1118.

105. Id. at 1201.

106. Id. at 1118.

107. Id. at 1127.

108. Id. at 1125-27.

109. Transcribed Interview with Joseph Cella, Chief, Office of Market Surveillance,

SEC, at 4 (Sept. 7, 2006) (hereinafter ‘‘Cella transcript (Sept. 7, 2006)’’) (Exhibit 23).

110. Id. at 20.

111. Id.

112. Id. at 24.

113. Id. at 29.

114. Id.

115. Id. at 30.

116. Id. at 38.

117. Id. at 40.

118. Id. at 50-52.

119. Hedge Funds and Independent Analysts: How Independent are Their Relationships?, 2006 Hearing before the Senate Comm. on the Judiciary, S. HRG. 109-

696, at 34 (June 28, 2006) (hereinafter ‘‘S. HRG. 109-696’’).

120. Id. at 36 (‘‘When I brought up the possibility of issuing a subpoena with [my

branch chief, Hanson], he told me that Mack—that this would be very difficult, Mack had very powerful political connections. He would not authorize

it and I would have to speak with Kreitman.’’).

121. Id. at 93.

122. Id.

123. Id. at 35.

124. Compare Kreitman transcript, at 76-77 (Sept. 6, 2006) (Exhibit 5) with Berger

transcript, at 103-104 (Nov. 2, 2006) (Exhibit 4).

125. Transcribed Interview with Mary Jo White, Partner, Debevoise & Plimpton, at

9-10 (Sept. 25, 2006) (hereinafter ‘‘White transcript (Sept. 25, 2006)’’) (Exhibit

24).

126. Id. at 10.

127. Id. at 9.

128. Id. at 9-10, 22.

129. SEC 3702 (Exhibit 25).

52

130. S. HRG. 109-898, at 534.

131. White transcript, at 12, 15 (Sept. 25, 2006) (Exhibit 24).

132. S. HRG. 109-898, at 535-36 (Aguirre: ‘‘Had Thomsen or Berger directed

Kreitman to block the Mack subpoena based on e-mails White had delivered

to Tbomsen? If so, why was Thomsen making decisions that could unravel the

investigation without a complete briefing?’’).

133. Transcribed Interview with Linda Thomsen, Director, Division of Enforcement,

SEC, at 86 (Sept. 8, 2006) (hereinafter ‘‘Thomsen transcript (Sept. 8, 2006)’’)

(Exhibit 26).

134. Transcribed Interview with Paul Berger, Associate Director of Enforcement Division, SEC, at 25, 31 (Nov. 7, 2006) (hereinafter ‘‘Berger transcript (Nov. 7,

2006)’’) (Exhibit 27).

135. S. HRG. 109-898, at 944-52 (emphasis added).

136. Id.

137. SEC/OIG Document Production at 0444 (Exhibit 28).

138. S. HRG. 109-696, at 35.

139. See Section VII.B, infra.

140. Kreitman transcript, at 107-1-08 (Sept. 6, 2006) (Exhibit 5).

141. S. HRG. 109-898, at 331.

142. Id.; see also id. at 242 (Kreitman indicating ‘‘I have indicated repeatedly that

concrete evidence of when Mack obtained access to material nonpublic information re the GE/Heller deal is the sine qua non for focused investigation of

Mack’’).

143. S. HRG. 109-898, at 1008-09 (Foster Tr., emphasis added).

144. SEC/OIG Document Production at 0002 (Exhibit 29).

145. Berger transcript, at 97-98 (Nov. 7, 2006) (Exhibit 27).

146. SEC 2989 (Exhibit 30).

147. Eichner transcript, at 128-1-29 (Nov. 14, 2006) (Exhibit 12); see also Memorandum from Walter G. Ricciardi to file (June 15, 2006) (Exhibit 2).

148. SEC/OIG Document Production at 0002 (Exhibit 29).

149. S. HRG. 109-898, at 29.

150. Id. at 20.

151. Id. at 455.

152. Id. at 1001-02 (Foster Tr.).

153. Berger transcript, at 53-54 (Nov. 7, 2006) (Exhibit 27).

154. S. HRG. 109-898, at 510 n.3.

155. Id.

156. Emily Thornton and Richard S. Dunham, John Mack Backs Clinton, BUS.

WEEK, May 7, 2007, at 13.

157. Ben White, Ex-Bush Donor Hosts Clinton Fundraiser, FIN. TIMES, July 16,

2007, at 5.

158. S. HRG. 109-898, at 662-66 (SEC 5749)

159. Id. at 662-63 (SEC 5748).

160. See, Mark Jickling, Congressional Research Service, Barriers to Corporate

Fraud: How They Work, Why They Fail, at 37 (Dec. 27, 2004).

161. S. HRG. 109-898, at 830-34 (SEC/OIG 0367-74).

162. Id. at 828-29 (SEC 001243-121243-45).

163. Id. at 828 (SEC 1243).

164. SEC 3641 (Exhibit 31).

165. Eichner transcript, at 16-17 (Nov. 14, 2006) (Exhibit 12).

166. Id. at 17-18.

167. Memorandum from Walter G. Ricciardi to file (June 15, 2006) (Exhibit 2).

168. See Eichner transcript, at 46-47, 50 (Nov. 14, 2006) (Exhibit 12).

169. See, e.g., unsigned tolling agreements at SEC 2888-91 (Exhibit 32).

170. Kreitman transcript, at 65-66 (Nov. 15, 2006) (Exhibit 14).); S. HRG. 109-898,

at 335 (According to the SEC’s Case Closing Report: ‘‘To examine whether

Goldman’s actions were themselves improper, the staff obtained information

from Goldman and in early June took the testimony of two Goldman employees. Both told the staff that during this time they regularly provided research

information to Goldman customers [such as Pequot] in advance of publishing

this information, and that Goldman policy explicitly allowed this practice.).

171. Kreitman transcript, at 73-74 (Nov. 15, 2006) (Exhibit 14).

172. Id. at 95-96, 98 (emphasis added).

173. Walt Bogdanich and Gretchen Morgenson, S.E.C. is Reported to be Examining

a Big Hedge Fund, N.Y. TIMES, June 23, 2006, at A1.

174. SEC 2877 (Exhibit 33).

53

175. Transcribed Interview with Liban Jama, Attorney, Division of Enforcement,

SEC, at 90 (Oct. 11, 2006) (hereinafter ‘‘Jama transcript (Oct. 11, 2006)’’) (Exhibit 34).

176. Jama transcript, at 94-95 (Oct. 11, 2006) (Exhibit 34).

177. Eichner transcript, at 39-40 (Nov. 14, 2006) (Exhibit 12).

178. See United States v. O’Hagan, 139 F.3d 641 (8th Cir. 1998) (citing 18 U.S.C.

§ 3282 for relevant criminal statute of limitations). Similarly, the SEC’s ability to bring a case for civil penalties pursuant to 15 U.S.C. § 78u-1 was also

extinguished on this date.

179. SEC 1919, John Mack, Chief Executive Officer, Morgan Stanley, testimony

(Aug. 1, 2006) (Exhibit 35).

180. Id. at SEC 1921, Mack testimony (Aug. 1, 2006) (Exhibit 35).

181. See S. HRG. 109-898, at 333-38 (SEC Case Closing Report, Nov. 30, 2006).

182. The ‘‘unrelated non-public company’’ was Fresh Start—an investment in which,

according to Aguirre’s testimony, Mack more than tripled his $5 million investment.

183. S. HRG. 109-898, at 334 (SEC closing memo, Nov. 30, 2006) (internal notes

omitted).

184. Id.

185. See id.

186. Id.

187. Id.

188. S. HRG. 109-898, at 335 (SEC closing memo, Nov. 30, 2006)

189. See SEC 1845-46, Mack testimony (Aug. 1, 2006) (Exhibit 35).

190. See generally SEC 1845-64, Mack testimony (Aug. 1, 2006) (discussing Mack’s

meetings with Lukas Muhlemann, Walter Kielholz, Daniel Vasella, Thomas

Wellauer, Oswald Grubel, Peter Brabeck, and Aziz Syriani—all Credit Suisse

managers, directors or board members) (Exhibit 35).

191. SEC 1869, Mack testimony (Aug. 1, 2006) (Exhibit 35).

192. Id. at SEC 1870.

193. Id.

194. Eichner transcript, at 51-65 (Nov. 14, 2006) (Exhibit 12)

195. S. HRG. 109-898, at 336 (SEC closing memo, Nov. 30, 2006).

196. Id. (emphasis added).

(55)

VII. Gary Aguirre’s Employment at the SEC

A. Background

Prior to his application for employment with the SEC, Gary

Aguirre enjoyed a long and successful career in both the public and

private sectors. After earning his law degree from the University

of California, Berkley in 1968, Aguirre served as a public defender

in San Diego, California for several years before entering private

practice. During his private sector career, Aguirre successfully argued 95 consecutive complex cases worth more than $200 million

in total awards including three securities fraud class actions.1 In

the majority of these cases, he served as lead counsel.2 During this

time, Aguirre also published widely and made numerous presentations on civil litigation and advocacy law.3 Having earned substantial sums as a partner at Aguirre & Eckmann, he later retired.4

Wanting to re-enter public service, at age 61, Aguirre enrolled in

the Georgetown University Law Center in 2001.5 While a student

at Georgetown, Aguirre focused on financial regulation and securities law. He received numerous honors while at Georgetown, including the second place prize in a prestigious national writing

competition and the top grade in his Financial Reporting and Accounting class. He was described by Professor Mark Kreitman, who

later became Aguirre’s supervisor at the SEC, as the ‘‘best student

he had ever had.’’6 After two years of study, Aguirre received an

LLM with distinction, concentrating in securities regulation and

international law. He then applied for employment at the SEC.

1. Applications for Employment and EEO Claim

The SEC rejected Aguirre’s first 23 applications for employment.

During his application processes, Aguirre received top ratings in

the categories of reasoning ability, writing ability, relevant work

experience, enthusiasm for SEC, and knowledge of securities law.

He also received the next-highest rating in the category of ‘‘poisematurity.’’ Another interviewer noted Aguirre to be ‘‘one of the

most qualified candidates [he’d] interviewed.’’7 Nevertheless the

SEC declined repeatedly to hire him. Aguirre then filed a complaint with the EEO office of the SEC charging discrimination.8

Immediately following Aguirre’s EEO complaint, the SEC contacted him to set up an interview and offered to hire him as a ‘‘superior qualifications appointment.’’9 Despite being hired, Aguirre

did not withdraw his complaint. On June 14, 2006, an administrative law judge entered an Order and Judgment in favor of the SEC

on Mr. Aguirre’s age discrimination claims after evaluating the

claims in a 19-page decision.10

56

2. Transfer to another Branch Chief

Gary Aguirre began employment at the SEC’s Division of Enforcement on September 7, 2004, as a general attorney. He initially

worked under Charles Cain and Richard Grimes, the branch chief

and assistant director of his branch. Soon after starting, he was assigned to work on allegations of insider trading by the hedge fund

Pequot Capital Management, Inc.

In October 2004, Aguirre was asked to prepare a draft formal

order memorandum regarding the Pequot insider trading investigation. A formal order is the procedure by which the SEC authorizes

staff to conduct a full-fledged investigation. In the prepared draft

submitted to Cain on October 6, Aguirre included the language,

‘‘over the past two years, SROs have referred or ‘highlighted’ at

least six matters involving possible insider trading by the Pequot

Management and one or more of Pequot Funds to the Division of

Enforcement.’’11 The following day, Cain delivered revisions to

Aguirre, removing the sentence and replacing it with, ‘‘subsequent

investigation by the staff identified at least six transactions involving possible insider trading by the Pequot Management and one or

more Pequot Funds.’’ In a subsequent interview, Berger described

that he understood this exchange to be over ‘‘a rather routine

memorandum to the Commission on a relatively ministerial matter.’’12

Aguirre explains the issue quite differently. Aguirre recalled, ‘‘I

told Cain that the revision about SRO referrals . . . was not accurate because it suggested that I had uncovered six insider trading

matters, when in fact those had been discovered by SROs and had

been referred to the SEC.’’13 According to Aguirre, Cain responded

that ‘‘the memorandum was not going to state that Joe Cella [The

Director of Market Surveillance] had been informed but had failed

to act’’ on the SRO referrals. The following morning, on October 8,

2004, Aguirre explained his concerns in an e-mail to Cain and

Grimes:

The proposed revisions . . . [are] unsupportable. Neither I nor

anyone on the staff has discovered an insider trading transaction involving Pequot. Yes, I have prepared a spreadsheet of

suspected Pequot insider trading activity since 1999 . . . in

each one of those 11 cases, an SRO identified the transaction

and referred it to Enforcement (Market Surveillance), where it

stopped. Under these circumstances, the quoted revision is not

merely unsupportable; it could be the source of embarrassment

or worse for each of us.14

Grimes subsequently agreed to Aguirre’s changes, yet the incident

contributed to Aguirre’s decision to request a branch transfer two

months later.

On January 10, 2005, Aguirre wrote a letter to Associate Director

Paul Berger formally asking to be transferred to another branch.

He requested that he be transferred to another branch.15 Telling

Berger that he would prefer to be in his former Georgetown professor’s section, Aguirre wrote, ‘‘I understand that there will be an

opening in Mark Kreitman’s section in the near future and I would

appreciate being transferred there if possible.’’16

57

After running a draft response by SEC personnel officials, Berger

replied to Aguirre’s request in an e-mail on January 13, writing

‘‘Mark Kreitman’s assistant director does not have an opening right

now.’’17 Aguirre was transferred to Kreitman’s section on January

18, 2005, notwithstanding Berger’s January 13 e-mail suggesting

the absence of an opening.

3. Positive Performance Evaluations

On June 1, 2005, Aguirre received a performance evaluation from

Mark Kreitman. The evaluation covered Aguirre’s performance

from October 2004 to April 2005, and rated performance in four

critical elements: knowledge of field or occupation, planning and organizing work, execution of duties, and communications. In each

category, the rating official had the option of rating an employee

‘‘acceptable,’’ or ‘‘unacceptable.’’ On Aguirre’s June 1 evaluation, his

performance was rated ‘‘acceptable’’ in each of the four categories.18

However, Kreitman claimed to Senate staff that ‘‘ ‘acceptable’ is a

pretty low threshold . . .’’ and checking ‘‘unacceptable’’ would have

been ‘‘too heavy a hammer at that point . . .’’19

Having been evaluated at an ‘‘acceptable level,’’ Aguirre qualified

for a merit pay increase. On June 29, 2005, Robert Hanson transmitted an evaluation of Aguirre to the Enforcement Division’s Compensation Committee.20 On the cover sheet, the supervisor is given

four options in making recommendations: (1) made contributions of

the highest quality, (2) made contributions of high quality,

(3) made contributions of quality, and (4) made no significant contribution beyond an acceptable level of performance. In the June 29

evaluation, Hanson checked ‘‘made contributions of high quality,’’

and attached an evaluative narrative praising Aguirre’s work ethic

and performance:

Gary worked extremely hard on one investigation during his

time in the group, a significant matter involving the trading by

Pequot Capital, one of the nation’s largest hedge funds. Gary

has an unmatched dedication to this case (often working well

beyond normal work hours) and his efforts have uncovered evidence of potential insider trading and possible manipulative

trading by the fund and its principals. He has been able to

overcome a number of obstacles opposing counsel put in his

path on the investigation. Gary worked closely with the Office

of Compliance Inspections and Examinations to develop the

case and worked with several self-regulatory organizations to

develop a number of potential leads. He has consistently gone

the extra mile, and then some.21

Hanson also offered a critique of Aguirre, saying that he ‘‘can work

on presenting information in a clearer and more concise manner to

enhance effectiveness. . . .’’22 The evaluation recommending Aguirre

for a merit pay increase was then transmitted to the Compensation

Committee.

4. Merit Pay Increase

The decision whether to grant a merit pay increase is decided by

the Compensation Committee, which consists of all the associate directors, the chief counsel, the head of regional operations, the chief

58

litigation counsel, and the deputy litigation counsel.23 The Compensation Committee met on July 18, 2005. While SEC witnesses

were unable to recall details of the process leading up to Aguirre’s

merit pay increase, the SEC has confirmed that the Compensation

Committee gave its recommendations to Linda Thomsen on July

19, 2005.24 Then, on July 27, Thomsen completed the merit pay

process for the Enforcement Division, which then transmitted the

final results to the Office of Human Resources on August 1, 2005.

On August 21, 2005, the Associate Executive Director of the Office

of Human Resources approved a Form 50-B Notification of Personnel Action raising Aguirre’s total salary from $130,257 to

$134,110.25

B. Objections to Blocking Mack Testimony

For the reasons explained earlier, at least three experienced SEC

officials believed in the summer of 2005 that questioning John

Mack was an appropriate next step in the Pequot Investigation.26

These officials included Director of Market Surveillance Joseph

Cella, Market Surveillance Branch Chief Eric Ribelin, and a former

Branch Chief responsible for training SEC staff attorneys on how

to conduct insider trading investigations, Hilton Foster. However,

none of these officials were in Aguirre’s direct line of supervision.

Aguirre’s direct supervisor was Robert Hanson. Hanson reported to

Mark Kreitman, and Kreitman reported to Paul Berger.

At first, Aguirre’s supervisors did not seem overly deferential to

John Mack. For example, after Aguirre’s initial June 3, 2005 e-mail

suggesting Mack as a potential tipper in Pequot’s GE-Heller transactions, Robert Hanson replied that he believed Mack was ‘‘another

bad guy in my view.’’27 Two weeks later, on June 14, Aguirre

briefed his supervisors on his progress in the investigation, including the aspects relating to John Mack.28 Mark Kreitman gave

Aguirre a ‘‘Perry Mason Award’’ in recognition of his work on the

case and then instructed him to brief criminal authorities in the

Southern District of New York. Following Aguirre’s presentation,

authorities in the Southern District opened their own investigations. On the evening of June 20, Robert Hanson again expressed

approval of Aguirre’s pursuit of the theory that Mack may have

tipped Arthur Samberg about the GE-Heller acquisition. In an email with the subject line, ‘‘Pequot: Connecting the dots with the

CSFB-Mack-Samberg-theory,’’ Hanson wrote to Aguirre, ‘‘Okay

Gary you’ve given me the bug. I’m starting to think about the case

during my non-work hours.’’29

However, his supervisors’ attitudes shifted dramatically, beginning on June 23, 2005. That is the date when officials from Morgan

Stanley began contacting the SEC to learn about the potential impact of the investigation on its prospective CEO, John Mack.30 According to Aguirre, June 23 was also the date that his direct supervisor, Robert Hanson, first said it would be difficult to subpoena

John Mack because of his ‘‘powerful political connections.’’

1. Supervisor’s Reference to Mack’s ‘‘Powerful Political Connections’’

As discussed earlier, it appears that the driving force behind the

reluctance to question John Mack was not a partisan consideration.

Rather, Aguirre’s supervisors cited his prominent position on Wall

59

Street and the ability of his counsel to appeal directly to very senior SEC officials, bypassing staff attorneys.31 However, in order to

assess the reasonableness of Aguirre’s reaction to the controversy

over Mack, it is necessary to examine whether Aguirre’s supervisor

actually used the word ‘‘political’’ when referring to Mack’s clout

and connections. If so, then one might view Aguirre’s reactions to

be more reasonable.

An apparent admission of such a blatantly partisan political

favor by the SEC might, in the view of some people, justify a more

drastic reaction than indications of a more subtle form of deference

to prominent witnesses. For example, Aguirre initially resigned,

but later withdrew his resignation in order to resist his supervisors’ decision regarding Mack. If no one told Aguirre that decisions were being made based on Mack’s ‘‘politics,’’ then his resignation and withdrawal could arguably be viewed as a sign of instability. However, if someone did refer to Mack’s politics, then his

resignation and withdrawal should arguably be viewed in a more

favorable light.

Aguirre alleged that Robert Hanson referred to Mack’s political

connections in several conversations about taking his testimony.

Regardless of what Hanson may have meant, there is evidence suggesting he said that his concerns about questioning Mack were ‘‘political.’’ The first instance occurred on June 23. Aguirre said that

‘‘in a face-to-face meeting’’ that day, Hanson said it would be very

difficult to get permission to question Mack because of Mack’s

‘‘powerful political connections.’’32

Aguirre reported Hanson’s June 23 ‘‘political connections’’ comment to Hanson’s supervisors, Paul Berger and Mark Kreitman in

a July 27, 2005 e-mail, marked urgent:

I sent two e-mails to Bob during the week of June 20 (see attachments 3 and 8) proposing that we proceed with the Mack

testimony and broaden the CSFB subpoena. When I did not

hear back from Bob, I spoke with him directly about these proposals. Bob told me (1) that these decisions were for Mark to

make and (2) it would be an uphill battle because Mack had

powerful political connections. Bob also mentioned this concern

during a meeting with Mark and me.33

When asked about this e-mail by Senate investigators in 2006,

Hanson claimed not to remember making the comment:

Question: And what about number two, ‘‘it would be an uphill battle because Mack had powerful political connections?’’

Mr. Hanson: That doesn’t sound like something I would say.

Question: So you don’t think you said that?

Mr. Hanson: I don’t think so, no.

Question: You don’t recall saying that?

Mr. Hanson: I do not.

60

***

Question: So you never told him at any time that it would be an

uphill battle to subpoena Mr. Mack?

Mr. Hanson: That doesn’t sound like something I would say. It’s

possible, but it doesn’t sound like something I would say.

Question: You don’t recall saying it?

Mr. Hanson: I do not.34

He denied the comment more directly when questioned by the SEC

Office of Inspector General in 2005.35

Later, in August 2005, the evidence suggests Hanson again referred to Mack’s political connections during conversations about

taking his testimony. For example, on the evening of Wednesday,

August 3, 2005, Aguirre and Hanson discussed the issue at some

length. Their e-mails the following morning provide a near contemporaneous account of what was said. Aguirre described the conversation in his August 4 e-mail as follows:

I came to your office last night to discuss Pequot because, as

I told you, I realized we would not be seeing each other for the

next month.

***

I told you that Mark was not listening to the rationales for the

steps I had proposed in the Pequot investigation, that this represented a major shift that occurred overnight in our relationship, that we had an excellent relationship before, [and] that

I believe other people at the Commission were involved in

Mark’s sudden shift[.]

***

Second, I told you that the decision not to take Mack’s testimony because of his powerful political connections was the

event that triggered my decision [to resign]. We then discussed

at some length what standard had to be met to take Mack’s

testimony. You told me that Mack was ‘‘an industry captain,’’

that he had powerful contacts, that [Former U.S. Attorney]

Mary Jo White, [Former SEC Director of Enforcement] Gary

Lynch, and others would be representing him, that Mary Jo

White could contact a number of powerful individuals, any of

whom could call [Director of Enforcement] Linda [Thomsen]

about the examination. I told you I did not believe we should

set a higher standard for a political captain than anyone else.

***

You also mentioned, as you did last night, that Mack’s testimony would be difficult because Mack had powerful political

connections. For that reason, the political hurdle, I spent a big

chunk of my weekend preparing two lengthy memos . . . suggesting that we focus on [Mack] to eliminate him or establish

it was in fact him.36

61

In Hanson’s reply, he explained that part of his reticence to take

Mack’s testimony had to do with the ability of Mack’s counsel to

bypass staff attorneys at his level and appeal directly to senior

SEC management:

As a general matter I try to alert folk above me about significant developments in investigations that may trigger calls and

the like so that they are not caught flat footed. I also think

that Paul [Berger] and Linda [Thomsen] would want to know

if and when we are planning to take Mack’s testimony so that

they can anticipate the response, which may include press calls

that will likely follow. Mack’s counsel will have ‘‘juice’’ as I described last night—meaning that they will reach out to Paul

and Linda (and possibly others).37

It seems clear that Hanson was more reluctant to take the testimony of someone whose counsel could get the ear of the Director

of Enforcement than he would be of someone whose counsel did not

have that kind of ‘‘juice.’’ However, it is not clear why a discussion

about the merits of taking Mack’s testimony would turn on the

question of keeping supervisors informed. When asked why he responded to Aguirre’s concerns about improper political influence by

referring to the need to keep supervisors informed, Hanson provided no clear rationale.38

On a third occasion, just before he was fired, Aguirre wrote to

Hanson alleging that Hanson had spoken of Mack’s ‘‘political

clout.’’ On the morning of August 24, 2005, Aguirre’s supervisors

began sending e-mails about firing him.39 With no knowledge of

those e-mails, Aguirre wrote to Hanson later that day, ‘‘before and

after the Mack decision, you have told [me] several times that the

problem in taking Mack’s exam is his political clout, e.g., all the

people that Mary Jo White can contact with a phone call.’’40 Hanson’s reply appeared to admit using the phrase and then, again, attempted to explain what he meant by it:

Most importantly the political clout I mentioned to you was a

reason to keep Paul and possibly Linda in the loop on 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 this 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 and figure out a number

of things about him before scheduling him up, not least of

which is whether he knew about the deal.41

Before sending this e-mail in which he admits using the phrase,

Hanson drafted a shorter, much different reply: ‘‘My recollection is

different about a couple of things. Most importantly I have not said

that the problem is Mack’s political clout.’’42 However, there is no

indication that Hanson ever sent this reply, as it was recovered

from his ‘‘drafts’’ folder.

When asked about the e-mail he did send, Hanson indicated he

did not recall using the phrase:

Question: [M]y question is: do you recall using the phrase ‘‘political

clout’’ in a conversation with Gary Aguirre?

62

Mr. Hanson: I don’t. It’s possible I used it, but it just doesn’t sound

like something I would say.

***

Question: So why did you use the term ‘‘political clout’’ in your response to Mr. Aguirre?

Mr. Hanson: I’m responding to his use of that term. If you look at,

he responds and says political clout meaning all the people

that Mary Jo White could contact with a phone call.

***

Question: You don’t think that you independently said it previous

to his using the term?

Mr. Hanson: It’s possible, but it doesn’t sound like something I

would say. It is possible. Again, as far as I know, politics aren’t

involved in the decision to take someone’s testimony.43

By contrast, in his written testimony submitted at the Judiciary

Committee’s December 5, 2006, hearing, Hanson reversed himself

and again appears to admit using the phrase:

Accordingly, consistent with my general practice, I made Mr.

Kreitman aware that we were considering taking Mr. Mack’s

testimony. I explained this practice to Mr. Aguirre, perhaps

inartfully choosing the words ‘‘juice’’ and ‘‘political clout’’ to describe the fact that any influential counsel Mr. Mack chose

could easily pick up the phone and call my supervisors about

the case and I wanted them to be fully aware of the facts before answering any calls.44

Hanson’s equivocation and inconsistent statements are unpersuasive. His only clear denials that he referred to Mack’s political

connections occurred (1) in an e-mail which was drafted, but never

sent, in response to Aguirre’s third written objection, and (2) in his

interview with the OIG during their investigation. If Hanson did

talk about Mack’s political clout in connection with his testimony,

then Aguirre would be justified in resisting that sort of special

treatment and refusing to take part in it.

The weight of this evidence suggests that Hanson likely referenced Mack’s ‘‘political connections,’’ ‘‘political clout,’’ or words to

that effect. The evidence suggests Hanson did so on multiple occasions in conversations about taking Mack’s testimony during the

summer of 2005, beginning around the same time as Morgan Stanley’s inquiries about the SEC’s interest in Mack on June 23. However, the evidence also suggests Hanson was not referring to partisan political considerations, but rather to his prominence and his

ability to hire counsel with direct access to senior SEC officials.

2. Notice and Withdrawal of Resignation

In late June, Aguirre saw his supervisors suddenly reverse themselves, putting the brakes on the Pequot investigation just after

Morgan Stanley contacted senior SEC officials to inquire about

John Mack’s exposure. Aguirre saw himself and others involved in

63

the day-to-day aspects of the investigation excluded from more senior SEC contacts with Morgan Stanley. Aguirre also heard his direct supervisor explicitly state that it would be hard to take Mack’s

testimony because of his political connections. Aguirre’s initial reaction to these circumstances was to resign on principle.

On Monday, June 27, Aguirre sent an e-mail summarizing the

Pequot investigation and his reasons for suspecting that Arthur

Samberg acted on material non-public information in the GE-Heller

trades and that the tipper may have been John Mack.45 On the

morning of Tuesday, June 28, he sent a more detailed e-mail outlining five areas for further investigation of how Samberg may

have learned information about the pending GE-Heller acquisition.

The e-mail included proposed steps aimed at testing his theory that

Mack may have been the tipper, as well as exploring Samberg’s

other possible sources of information.46 On Tuesday, June 28,

Aguirre and Kreitman had a ‘‘heated discussion’’ about Kreitman’s

refusal to authorize Aguirre to take John Mack’s testimony.47

Aguirre returned to his office and drafted an e-mail to Kreitman

explaining specifically why he believed that taking testimony from

Mack would be the next logical step. The e-mail confirms that

Kreitman had denied not only Aguirre’s request to take Mack’s testimony, but also his request to issue a subpoena to obtain documents from CSFB:

Your refusal to permit this testimony, along with other limitations, has significantly affected this investigation.

***

I have proposed that we obtain the documents from CSFB that

would show when Mack obtained information about GE-HF. .

. . Evidence that Mack learned near or on Friday June 29,

[2001] the night of his call to Samberg, would tend to focus the

matter more on Mack. Evidence that he did not learn until

July 3 or never learned would eliminate him.

***

I understand you have denied my request to proceed with the

CSFB and Mack subpoenas.48

Kreitman did not reply to this e-mail until nearly four weeks later.

After sending the e-mail, Aguirre met with Associate Director Paul

Berger. He had sent Berger an e-mail the previous day asking if

Berger had an ‘‘open door policy’’ and requested a meeting.49 At the

meeting, Aguirre expressed his concerns about being prevented

from taking Mack’s testimony and told Berger of his intention to

resign after completing the Pequot investigation. However, Aguirre

did not specifically refer to Hanson’s statements about Mack’s political connections.50 The next morning, Thursday, June 30, Aguirre

verbally tendered his resignation notice to Paul Berger. That same

day, Morgan Stanley announced it had hired John Mack. In response to requests from his supervisors for a certain departure

date, Aguirre agreed to stay at the Commission through the end of

September. Aguirre sent an e-mail to assure Berger that he would

not neglect his duties during his remaining time at the SEC.

64

Aguirre wrote, ‘‘I just want to assure you that Pequot will get 110%

between now and September 30th.’’51

Aguirre continued to work on the case during the first few weeks

of July and continued to find evidence pointing to the need to question John Mack. During these weeks, Eric Ribelin encouraged

Aguirre to withdraw his resignation and help pursue the investigation.52 By late July, Aguirre had decided to stay and challenge his

supervisors to follow the investigation wherever the facts led. On

or around July 21, 2005, Aguirre had another conversation with

Berger about the roadblocks to questioning John Mack. According

to Aguirre, he ‘‘met with Berger and told him that Hanson had informed me the Mack subpoena had been blocked because of Mack’s

powerful political connections.’’53

As Aguirre describes the conversation, Berger took personal offense at the suggestion that political influence was a factor in the

decision about Mack’s testimony. Aguirre told Berger that the reason he was concerned about improper political influence was because he had specifically been told that Mack’s political connections

were an issue. Berger replied, ‘‘Who told you that?’’ Aguirre answered, ‘‘Bob [Hanson].’’54 However, when asked about this conversation, Berger claimed not to recall Aguirre informing him of

Hanson’s comments:

I had two conversations that I can remember with Gary where

he mentioned Mack’s influence, neither one I think he mentioned political influence. Gary presented it in terms of we

were afraid to take his testimony,

***

I don’t remember him talking about Bob Hanson or what Bob

Hanson said, but I do remember him saying that, you know,

he felt that Mark and Bob were afraid to take this guy’s testimony, and I think he used the word ‘‘afraid,’’ and that Mack

had a lot of influence.55

If the conversation occurred as Aguirre claimed, it seems unlikely

that Berger would not recall an allegation as serious as the one

against Hanson. Nor is it likely that he would fail to recall his own

offense at the suggestion or his question about who gave Aguirre

the idea that Mack’s political clout was an issue. However, as was

Aguirre’s usual practice, he documented his allegation in an e-mail

shortly thereafter.56

On Monday of the following week, July 25, 2005, Mark Kreitman

finally replied to Aguirre’s June 29 e-mail on proposed subpoenas

to Mack and CSFB. On the heels of Aguirre’s second, more pointed

confrontation with Paul Berger over the Mack issue, Kreitman’s belated reply asked Aguirre for ‘‘greater specificity.’’ Kreitman also

claimed that he did not deny permission to subpoena CSFB:

The fact of Mack’s transfer from Morgan-Stanley to CSFB,

without information about when he was over the wall, is insufficient justification for compelled testimony and intrusive subpoenas at this point, in my view. . . . The evidence of motive

you cite may have substance, but it’s too vague as articulated

to be meaningful. . . . I have at no time ‘‘denied [your] request

65

to proceed with the CSFB . . . subpoena.’’ To the contrary, I

have indicated repeatedly that concrete evidence of when Mack

obtained access to material nonpublic information re the GEHeller deal is the sine qua non for focused investigation of

Mack.57

If Kreitman had not denied Aguirre’s request to subpoena CSFB

for documents on July 29—when he denied the request to subpoena

Mack for testimony58—then it is difficult to understand why he

waited nearly four weeks before correcting Aguirre on that point.

The most charitable conclusion from these circumstances is that

Kreitman’s failure to communicate in a clear and timely manner

caused inordinate delay in a case where the statute of limitations

would soon become a problem.59 Another view is that the timing

of Kreitman’s reply was prompted by Aguirre’s conversation with

Berger.

Not surprisingly, Kreitman’s e-mail prompted Aguirre to respond. On the morning of Wednesday, July 27, 2005, Aguirre sent

an e-mail to Berger rescinding his previous resignation.60 Then

Aguirre sent a comprehensive e-mail to Berger and Kreitman. It replied to Kreitman point-by-point and supplied a comprehensive set

of supporting documents. His e-mail also provided formal, written

notice of his claims about what Hanson had said about Mack’s political influence:

I also believe Mack’s testimony should have been taken

promptly for the same reason that staff normally takes early

testimony of suspected participants in an insider trading investigation—to pin them down. This is particularly true here because CFSB and Morgan Stanley are still producing e-mails. .

. . Further delay allows Mack to concoct a story that is consistent with the information contained in the e-mails. On the

other hand, if he did not provide information, that also may become clear. As discussed in my June 28 e-mail to Mark . . . this

would allow us to focus on other possible sources for the tip.

I had different and more troubling input why it was difficult

to move ahead with the second CSFB subpoena and the Mack

testimony. I sent two e-mails to Bob during the week of June

20 . . . proposing that we proceed with the Mack testimony and

broaden the CSFB subpoena. When I did not hear back from

Bob, I spoke with him directly about these proposals. Bob told

me (1) that these decisions were for Mark to make and (2) it

would be an uphill battle because Mack had powerful political

connections. Bob also mentioned this concern during a meeting

with Mark and me. . . . Bob also met privately with Paul about

the investigation I was handling. Likewise, Mark and Bob did

not invite me to participate in the meeting on June 27 when

they discussed Mack’s possible testimony. This combination of

events suggests to me that the issue whether Mack’s testimony

would be taken was being handled differently than the same

issue for other witnesses in this investigation and different from

the same issue in other investigations. Further, I do not believe that treating Mack differently is consistent with the Commission’s mission, at least as I understand it.61

66

When asked about this e-mail and what he did after receiving it,

Berger’s responses indicate that he failed to take the allegations seriously. Essentially, Berger did nothing to ensure that the allegations were thoroughly and independently reviewed:

Question: In your mind, does this constitute an allegation of wrongdoing?

Mr. Berger: If someone was preventing someone from taking testimony because of certain influence where we thought it was appropriate to take the testimony, I think it’s something that is

of concern, yes. But as I said, you know, I talked with Gary

about it, and I talked with Mark about it. We all, you know,

concluded that that’s not what was happening and, in fact, we

were going to take the testimony.

***

Question: And my question to you is: Do you believe that’s an allegation of wrongdoing that needed to be brought to someone

else’s attention? And what, if anything, did you do to bring it

to anyone else’s attention?

Mr. Berger: Well, I think I’ve told you now several times what I

did is I had a conversation with Gary about this. We talked

about it.

***

What I did subsequent to that was I talked with Mark

[Kreitman] about this again. I had more than one conversation

with Mark about the influence issue. And, you know, Mark assured me there is nothing about influence that was preventing

us from taking testimony.

***

Question: Did you forward this e-mail to Linda Thomsen?

Mr. Berger: I don’t remember if I did or not.

***

Question: Did you refer it to the Inspector General?

Mr. Berger: No.

Question: Did you consider referring it to the Inspector General?

Mr. Berger: No.

Question: Why not?

Mr. Berger: Because I took the actions that I thought were appropriate.62

Apparently, Berger did not advise Hanson to stop talking about

Mack’s political clout because Hanson did it again just a few days

later on August 3, 2005.63

67

C. Terminating Gary Aguirre

It is unclear when the SEC supervisors first gave consideration

to terminating Gary Aguirre. His decision to stay at the SEC and

challenge what he believed to be inappropriate special treatment

for John Mack was certainly followed by a rapid deterioration of

the relationship with his supervisors. Through the month of August, Aguirre continued to make the case for taking Mack’s testimony and responding to his supervisors’ arguments and objections,

although the pace of the investigation generally slowed because of

overlapping annual leave taken that month by various staff, including Aguirre. The first record of anyone suggesting his termination

is an August 24, 2005 e-mail from Kreitman to Burger. Aguirre

was fired on September 2, while on vacation.

1. Accusations of a ‘‘Coup,’’ August 1, 2005

Just a few days after Aguirre withdrew his resignation and sent

his comprehensive July 27 e-mail, Robert Hanson and Paul Berger

had a conversation that would lead to an attempt to undo Aguirre’s

positive performance evaluations, which had already been submitted and approved by the Compensation Committee. On August

1, his supervisors drafted a negative re-evaluation of Aguirre and

one other employee: John Smith.64 Aguirre and Smith had one

thing in common: they had both complained about the way Mark

Kreitman managed his group. Aguirre had just complained by email on July 27 about Hanson and Kreitman blocking Mack’s testimony. Smith had complained on July 21 about another case in an

e-mail to his supervisor, Dave Fielder (who, like Hanson, reported

to Mark Kreitman). Smith wrote to Fielder regarding a matter apparently related to a mutual fund market timing investigation involving Mario Gabelli. Smith indicated that he believed a contact

may have occurred between Gabelli’s counsel, Vince DiBlasi, and

Director of Enforcement Linda Thomsen:

Could you quietly find out from Mark why he over-reacted

. . . last night?

My sense is Vince DiBlasi—because Mario Gabelli is mad he

has to answer questions—called . . . Linda [Thomsen] with

some misrepresentations, which went to Paul [Berger.] . . .

Since you have the e-mail, I suspect you can find out innocently. You should know that Mario Gabelli is mad because

. . . he doesn’t think he should have to answer our questions—

even though we have e-mails showing he approved timing arrangements, involving quid pro quo exchange for timing capacity, with . . . two of the leading groups caught by Spitzer

. . . and the staff isn’t getting adequate support. We should be

unified here, not questioning one another from within.

Mark’s reaction fed into DiBlasi’s strategy, since it left us feeling undermined. That [is] a recurring problem here, but I want

to make sure I have the right facts in this particular instance

before drawing any conclusions. If it is DiBlasi he should be

put in his place, not treated solicitously (for reasons we can

discuss). If not, I am somewhat troubled by Mark’s way of handling this. If this were the first, or the second, or the tenth

68

time, I wouldn’t write. Who wants to? I have better things to

do, as I’m sure you do.

***

In any event, the staff just [did] not get the kind of support

it needs here. [Redacted names], Aguirre, and perhaps others,

have all become disturbed at their treatment. I do not want my

name used in this breath, but it’s not any fun to come to work.

It’s sad, because it could be a great place.65

Smith’s complaints in this e-mail seem remarkably similar to

Aguirre’s. Just as in the Pequot case, it appears as if someone outside the Commission went over the staff attorney’s head and contacted the Director of Enforcement. Just as in the Pequot case, the

outside contact to senior SEC officials was followed by a disagreement between Kreitman and a staff attorney. And just as in the

Pequot investigation, the staff attorney who objected received a

negative re-evaluation shortly thereafter. Despite Smith’s request

to keep his concerns confidential, Fielder forwarded Smith’s e-mail

to Mark Kreitman at 3:42 p.m. on Monday, August 1, 2005.66

Paul Berger also knew about Smith’s concerns. Earlier that

morning, he asked Robert Hanson about them. As Hanson explained to Committee investigators:

I met with Paul Berger that morning of August 1st. He called

me probably about 8:30 or so in the morning, called me down

to his office, so I went down to his office.

He said I’d like to talk to you about Mark Kreitman. He said,

I have heard some complaints about Mark Kreitman, his management style or something to that effect. I want you to keep

this on a confidential basis, but I feel as though I need to look

into this. So tell me about Mark Kreitman, what is your view

on him?

I said, before you go any further, I’d like to just say that there

[are] two employees whose input you should heavily discount.

I mentioned Gary and this other individual that also had gotten a supplemental review.

We talked about, Paul and I probably talked for a half hour

to 45 minutes, somewhere in that range. We talked about

those individuals. Paul asked about them and he asked what

their ratings were, or what I had given them for ratings. I told

him, and he said— . . . I told him I gave them the second from

the top.67

In this narrative, Hanson describes a discussion that began as an

attempt to investigate complaints about a manager, which Berger

quickly shifted toward a discussion about the performance evaluations of the individuals who had lodged the complaints. Hanson

then went on to describe Aguirre and Smith as disloyal employees,

criticizing and plotting against Mark Kreitman:

Question: What did you tell him about them as to why he should

discount their input?

69

Mr. Hanson: At that point, which was August lst, Gary was no

longer talking to Mark, and [Smith] or . . . the other individual, excuse me, was looking to raise trouble in my view

with——

Question: Is the other individual [John Smith]?

Mr. Hanson: Yes, it is. He was also clearly at odds with Mark and

Mark’s management style. From my vantage, it might look like

they were meeting together and talking about things. I just

thought it was improper that they would be doing a coup

against Mark. I thought both of their work was not so great,

and expressed those kinds of views to Paul. He asked what I

evaluated them as, and I told him that it was the second from

the top. . . . He said, you’re [not] doing them any favors or

you’re not doing the Commission any favors by giving them

those ratings. I agreed, and actually apologized to Paul a number of times because I agreed that my evaluations were somewhat inflated with respect to those two individuals. He suggested that we write a supplemental evaluation that was more

candid than what was written in the evaluations that I had

told him. That day, Mark and I drafted supplemental evaluations for those two individuals.

Question: What do you mean by ‘‘a coup?’’

Mr. Hanson: I think they were trying to do damage to Mark or

have Mark removed as a manager, or something to that effect.

Question: Did they have complaints about him, is that what you

mean? Did they have complaints about any misconduct on his

part? Or what do you mean?

Mr. Hanson: I could see them, well, particularly one of the individuals, I could see him talking with other people and complaining about Mark. He complained a lot about Mark.

Question: Just to clarify, is that Mr. Aguirre, or [Mr. Smith]?

Mr. Hanson: [Mr. Smith]. I could see them in the hallways talking

a lot about things, and what I suspected.

Question: About what things?

Mr. Hanson: I don’t know what they were talking about, but they

were certainly very vocal in their criticisms of Mr. Kreitman.

. . . So in terms of the time of August, it was clear that the

relationships were very poor between Mark and Gary. [Mr.

Smith] was also very critical of Mr. Kreitman.68

Being critical of a manager or a manager’s decision, however, is not

necessarily the same thing as poor job performance.

The Compensation Committee had already met nearly two weeks

before the conversation between Hanson and Berger. It had reviewed employee evaluations and made merit pay decisions.69

Berger was on that Committee. He had already seen and approved

merit pay decisions based on the evaluations of Aguirre and Smith.

It is difficult to imagine a legitimate need at that point to re-evaluVerDate 11-MAY-2000 14:44 Aug 07, 2007 Jkt 095484 PO 00000 Frm 00077 Fmt 6601 Sfmt 6601 36960.000 SFIN1 PsN: SFIN1
70

ate only these two employees. For Berger to ask about the performance evaluations of these two employees in this context is disturbing. When coupled with Hanson’s allegations of a ‘‘coup’’ and

their negative re-evaluations later that day, the retaliatory purpose

of the re-evaluations appears evident.

2. The Negative Re-Evaluations

a. Timing

Shortly after Berger’s and Hanson’s confidential early morning

meeting, Mark Kreitman apparently learned of Berger’s desire for

negative re-evaluations to be prepared. He began drafting them at

10:54 a.m., sent a first draft to Robert Hanson at 12:13 p.m., and

received comments back from Hanson at 1:13 p.m.70 A few hours

later, Dave Fielder forwarded Kreitman a copy of Smith’s confidential July 21 e-mail complaining about Kreitman undermining staff

attorneys following outside contacts with senior officials such as

Thomsen and Berger.71 At 6:17 p.m., Kreitman sent his draft reevaluations to Fielder. He wrote, ‘‘Paul has asked for supplementation of these two evaluations.’’72 One minute later, Kreitman sent

the negative re-evaluations to Berger. He wrote, ‘‘My draft, Bob’s

comments included. Will have [Dave Fielder’s], if any, tomorrow

morning.’’73 It is unclear whether Fielder provided any comments.

Just 13 minutes later, Kreitman sent the following e-mail to Paul

Berger:

Though I emphasize that I don’t discount, indeed welcome, constructive criticism regardless of the source, my inquiries of Bob

and Dave concerning their sense of the morale of the group

lead me to believe that it continues to be strong, with the obvious exception of [John Smith] and Gary [Aguirre.]

***

I will of course continue to monitor the group for signs or expressions of dissatisfaction with their work environment, including but not limited to the style and substance of my management.74

When asked if he learned of Aguirre’s and Smith’s complaints directly from Berger, Kreitman said, ‘‘I think so. I don’t specifically

recall, but I would assume that’s the case because I addressed this

e-mail to Paul [Berger].’’75 The close connections between the complaints by the employees and the negative re-evaluations that followed strongly suggests that the motivation for the latter was retaliation for the former—not a legitimate attempt to objectively assess job performance.

The re-evaluations were not an authorized part of the SEC’s

evaluation process.76 SEC officials could not recall other instances

of such ‘‘supplemental evaluations’’ ever being drafted for other employees.77 Although Kreitman transmitted it to Berger on August

1, the evaluation was not immediately placed in Aguirre’s personnel file. In late September, about four weeks after Aguirre was

fired, Kreitman e-mailed a copy to Human Resources. However, the

version he sent to Human Resources appears to be his first draft

rather than the version he sent to Berger, incorporating Hanson’s

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comments.78 At the time it was drafted, Berger and Kreitman had

just recently learned of the complaints by Aguirre and Smith.

Berger and Hanson had their ‘‘confidential’’ conversation on the

morning of August 1 about the problems Aguirre and Smith were

having with Kreitman. Kreitman received Smith’s confidential email to Fielder that afternoon. These events were intricately intertwined with the process of drafting the supplemental evaluations.

Under these circumstances, the re-evaluations appear to be improper and retaliatory because of their timing. Therefore, it is necessary to evaluate the content of the re-evaluations as well.

b. Content of Supplemental Evaluation

Aguirre’s negative re-evaluation began by briefly acknowledging

that Aguirre ‘‘works very hard, puts in long hours,’’ and ‘‘is willing

to go the extra mile.’’ However, Kreitman and Hanson then claimed

that Aguirre (1) was resistant to supervision; (2) was insufficiently

aware of institutional protocol; (3) failed to fully and openly share

information with others; (4) had difficulty explaining the significance of evidence in a clear and well-organized manner; and (5) expressed resentment at perceived attempts by supervisors to thwart

his success.79

(1) Resistance to Supervision: Kreitman and Hanson did not

cite any examples for their first contention, that Aguirre was ‘‘resistant to supervision.’’ Moreover, in the course of this investigation, we did not find evidence suggesting that Aguirre’s ‘‘resistance’’

to his supervisors was inappropriately insubordinate. While he did

voice strong disagreements with his supervisor’s decisions on occasion, we found no convincing evidence that he did so unprofessionally or inappropriately. Moreover, in examining those disagreements in detail, we find no evidence that he acted in contravention

of his supervisor’s instructions, even when he offered persuasive arguments that they were wrong.

(2) Unaware of Institutional Protocol: For the second contention, that Aguirre was unaware of institutional protocol, Kreitman

and Hanson cited two examples. The first example was that

Aguirre retracted two of the subpoenas he had issued ‘‘to avoid violating privacy statutes.’’80 The second example was that he ‘‘inaccurately stated Commission policy in communication with defense

counsel.’’81

Regarding the subpoenas, Aguirre drafted subpoenas seeking email and instant message traffic for Arthur Samberg around the

time of his trading of Heller. Aguirre sent the drafts to Hanson

early on the morning of May 23.82 According to Aguirre, Hanson

was not responsive:

By the afternoon of May 24, I had not received a response from

Hanson to any of the emails I had sent to him on the prior day.

I sent him two emails regarding the same subpoenas. In one

email, I pasted the text of the document description in the

body of the email; its subject was ‘‘Urgent, Samberg subpoena.’’

Hanson responded to that email. I also sent him all of the subpoenas in a second email with this text: ‘‘These are the subpoenas that I forwarded Monday that still have not gone out.’’

72

Hanson did not respond to this email. Later that afternoon, I

went to Hanson’s office to speak with Hanson about another

matter. He casually mentioned there could be ‘‘some privacy

concerns’’ with the subpoenas that had gone to Bloomberg and

Reuters, but he did not specify what the problem was or offer

any guidance how to correct it.83

Aguirre quickly discovered that the subpoena did not contain a notice to the recipient that the SEC intended to comply with a statute

requiring that the subscriber (i.e., Samberg) be notified of the subpoena. An example of the appropriate paragraph can be found in

one of Aguirre’s corrected subpoena cover letters, dated May 31,

2005:

Certain of the records called for by the subpoena may constitute ‘‘contents of electronic communications’’ within the

meaning of the Electronic Communications Privacy Act of 1986

[18 U.S.C. 2510, et. seq.] (the ‘‘ECPA’’). Pursuant to Section

2703(b) of the ECPA [18 U.S.C. 2703(b)], you may not release

these records to us until I have provided the ‘‘subscriber’’ or

‘‘customer’’ with prior notice of this request. I will send you

confirmation that the customer notice requirement has been

complied with in approximately 14 days.84

Contrary to claims by Aguirre’s supervisors after his firing, failure

to include this paragraph in the cover letter to a subpoena does not

make mere issuance of the subpoena ‘‘illegal.’’ Moreover, we found

no contemporaneous documents suggesting that his supervisors

thought this was a serious error when it occurred in May 2005.

That contention did not arise until after Aguirre withdrew his resignation and challenged their decision not to question John Mack.

Regarding Kreitman’s second example—the claim that Aguirre

inaccurately described Commission policy to defense counsel—the

re-evaluation does not go into detail. However, Robert Hanson later

told the OIG that ‘‘former Enforcement Director Gary Lynch called

[him] about an improper request Aguirre had made to Lynch to

keep information confidential, which violates Enforcement policy.’’85 While the SEC cannot require third parties to keep information about its investigative activities confidential, there is nothing

inappropriate about merely requesting they do so. According to

Aguirre, this conversation with Lynch occurred around June 8,

2005,86 shortly before he faxed a subpoena to CSFB, where Lynch

was General Counsel. According to Aguirre, the call began as an

attempt to arrange for another CSFB attorney, Patrick Patalino, to

accept service of the subpoena:

During the call, I also requested Patalino to treat the issuance

of the subpoena confidentially, as I had heard other staff do in

similar situations before. Patalino replied that CSFB also desired that the matter be treated confidentially and then left

the line for a moment. When he returned, Lynch was patched

into the call. Lynch asked aggressively: Are you saying that I

should keep this matter confidential from John Mack? I responded politely: ‘‘No, I am just requesting that you keep the

matter confidential.’’ Lynch asked the same question two more

times and I gave the same answer. On the fourth occasion that

73

Lynch asked the same question, I replied: I have answered the

question three times.’’ Lynch promptly left the call.

Kreitman came to my office about an hour later, said that

Lynch had called Berger, and asked what happened during the

call. I told him and he seemed satisfied. He never indicated

that I mishandled the call in any way. He later told me that

he had discussed the matter with Berger and he was fine with

the manner in which I handled the call.87

Aguirre later e-mailed Hanson about Lynch’s close ties to John

Mack, pointing to evidence that Lynch had advised Mack on investing in Pequot, as a possible explanation for Lynch’s call to Paul

Berger.88 As with the issue of the retracted subpoenas, there is no

contemporaneous e-mail or document suggesting that his supervisors were concerned about Aguirre’s interactions with Lynch at

the time. The first documentation is a vague reference in the negative re-evaluation, followed by more detail in his supervisor’s interviews with the OIG after his termination.

(3) Failure to Share Information: Hanson and Kreitman cited

no example to support the claim that Aguirre failed to share information about the Pequot investigation. In interviewing staff who

worked with Aguirre on the day-to-day aspects of the investigation,

such as Hilton Foster, Eric Ribelin, and Liban Jama, we found that

none of them described having an issue with Aguirre’s willingness

to share information. To the contrary, Jama told us:

So any documents that I would need he would usually provide

to me either a hard copy or an electronic e-mail.

. . . Gary answered my questions. Whenever I asked him a

question, he would answer the question for me. So I did not

have really at that time [have] a high level of frustration.89

Eric Ribelin also contradicted the claim that Aguirre was unwilling

to share information:

Question: Did [Aguirre] keep individuals informed about his thinking?

Mr. Ribelin: Yes.

Question: Did he—so he was not an individual who would surprise

people.

Mr. Ribelin: No.

Question: So he kept everyone fully advised.

Mr. Ribelin: I—I think so. Yeah. I mean, he was frequently talking

to Mark and talking to Bob and sending e-mails, and talking

to me and sending e-mails. . . . I believe that he was keeping

people fully informed.90

Moreover, a review of the documents produced to the Committees

generally confirms that Aguirre provided frequent and detailed updates on the progress of the investigation via e-mail. In fact, on occasion his supervisors complained about being ‘‘bombarded’’ with

too many e-mails from Aguirre.91

74

(4) Difficulty Explaining the Significance of Evidence: The

fourth contention in the negative re-evaluation, that Aguirre had

difficulty explaining the significance of evidence, is vague and subjective. Again, Hanson and Kreitman cited no specific examples of

miscommunication. It is unclear whether they are referring to written, oral communication skills, or both. However, the criticism

seems inconsistent with Kreitman’s statement that when he taught

Aguirre at Georgetown Law, ‘‘He was the best student in the

class.’’92 As a general matter, in the course of our investigation, we

found that Aguirre had no trouble explaining the significance of

evidence. Judging from his contemporaneous e-mails as well as

submissions to the Committees and his testimony before the Judiciary Committee, his communications were generally clear, convincing, and responsive.

(5) Resentment at Perceived Attempts to Thwart his Success: The fifth contention in the negative re-evaluation—that

Aguirre ‘‘expressed resentment’’ at his supervisors’ ‘‘perceived attempts to thwart his success’’—appears to be merely a reference to

his objection to blocking John Mack’s testimony. There is no doubt

that Aguirre voiced intense opposition to his supervisor’s decision,

and the stated reason for it (i.e., Mack’s powerful political connections). That is not a sign of poor job performance. However, it does

appear to be the primary motivation for drafting his negative reevaluation.

The content of the re-evaluation does not withstand scrutiny. For

those portions that are specific enough to judge against the documentary evidence, the negative comments are unsupported. Viewed

in light of the suspicious timing discussed earlier and the lack of

substantiation for its claims, we find that the re-evaluation appears

both improper and retaliatory.

3. The Merit Pay Calendar and Aguirre’s Raise

Despite this negative re-evaluation, Aguirre received a merit pay

increase just before he was terminated on September 2, 2005.93 Obviously, employees who receive a negative evaluation and are about

to be terminated do not ordinarily receive merit pay raises. However, this unusual outcome can be better understood by comparing

the timing of the SEC’s merit pay process94 to the sequence of

events in the confrontation between Aguirre and his supervisors

over John Mack’s testimony.

Figure 3: Key Events in Merit Pay Calendar

June 29, 2005—Hanson writes positive evaluation of Aguirre.

June 30, 2005—Aguirre tenders his resignation because of the

Mack issue, but does not report Hanson’s ‘‘political connections’’ comment.

July 18, 2005—SEC Compensation Committee Meets; Recommends

two-step merit pay increase for Aguirre.

July 19, 2005—Linda Thomsen receives Compensation Committee

Recommendations.

75

July 27, 2005—Merit Pay package is completed. Aguirre withdraws

resignation and sends lengthy e-mail to Paul Berger complaining about roadblocks in the investigation, including

Hanson’s ‘‘political connections’’ comment.

August 1, 2005—Thomsen transmits the final merit pay results to

Human Resources. Berger has Hanson and Kreitman draft

negative re-evaluation.

On June 29, Robert Hanson drafted a positive evaluation of

Aguirre’s performance. On June 30, Aguirre tendered his resignation, effective September 30, because of his supervisors’ decision to

block the questioning of John Mack. The SEC’s Compensation Committee met on July 18. As a member of the Compensation Committee, Berger reviewed Hanson’s positive evaluation of Aguirre at

that time, concurred, and recommended a two-step merit pay increase.95 When Berger made this recommendation, he believed that

Aguirre was leaving the Commission at the end of September. So,

although they had already clashed about Mack’s testimony, Aguirre

had essentially accepted Berger’s decision by deciding to leave the

Commission on principle rather than stay and fight it.

Director of Enforcement Linda Thomsen received the Compensation Committee Recommendations on July 19 and completed the

merit pay process for the Division of Enforcement on July 27. That

same day, Aguirre withdrew his resignation and signaled his intent

to challenge his supervisors by sending a comprehensive e-mail on

the need to take John Mack’s testimony. For the first time, his email contained written documentation of his allegation about Hanson’s reference to Mack’s powerful political connections.

However, Thomsen did not transmit the final merit pay results

to Human Resources until August 1, the same day that Aguirre’s

negative re-evaluation was drafted. When asked about the timing

of the re-evaluation in connection with the transmittal of the final

package to Human Resources, Berger claimed not to remember

whether that was a factor, but admitted that it might have been:

Question: [W]hen you were discussing the supplemental evaluations with Mr. Kreitman and Mr. Hanson, was it in your mind

that you were trying to get this done by August 1st so that it

could be transmitted to the Office of Human Resources along

with the other evaluations?

Mr. Berger: I don’t remember. I remember that we—I don’t remember.

Question: Do you remember there being any sort of time pressure

to get the supplemental evaluations——

Mr. Berger: Yeah, it’s possible that there was. I just—Mark would

be—would know better.96

At 2:28 p.m. on August 1, Berger sent an e-mail saying, ‘‘I need to

make another change to the merit pay schedule.’’97 In response, he

was told that unless it was merely a typo, he would have to circulate the change to all members of the Compensation Committee

for approval.98 Berger indicated that it was ‘‘not a typo.’’99 It is unclear whether the change he wanted to make was to reverse the

76

merit pay increase he had recommended for Aguirre on July 18.

When asked, Berger said his e-mail was unrelated to Aguirre, ‘‘as

far as I can recall[.]’’100 He then explained that evaluations should

not contain words such as ‘‘highest’’ and ‘‘high’’ and that he, ‘‘was

trying to contact . . . the coordinator for the Division’s Compensation Committee, to ask whether [his] changes had been incorporated into the written evaluations.’’ This explanation is inconsistent with the language of the e-mail in question, which speaks

of a ‘‘need to make another change,’’ not a desire to double-check

changes already made. Moreover, the SEC’s own forms ask supervisors to rate employees on the quality of their contributions with

check boxes for quality, high quality, and highest quality, so it is

unclear what Berger’s explanation refers to or why the words

‘‘high’’ and ‘‘highest’’ would need to be removed from evaluations.101

None of Aguirre’s supervisors transmitted the negative re-evaluation to the Offices of Human Resources until after Aguirre was terminated. Berger could not have shared it with the rest of the Compensation Committee as required by internal SEC procedures, because the Committee had already met and did not meet again after

August 1. Moreover, there is no record that he circulated it by email. The merit pay process essentially ended on August 1 with

transmittal of the final results from the Director’s Office to Human

Resources. Given these circumstances, the negative re-evaluation

could have been part of an aborted attempt to reverse Aguirre’s pay

increase. That increase had been approved before he withdrew his

resignation and documented Hanson’s comments about Mack’s political connections. Perhaps when it became clear that such a

change could not be made without alerting the rest of Compensation Committee, the idea was abandoned. This would explain why

the re-evaluation was not placed in the file until after Aguirre was

terminated.

4. The Director of Enforcement and the Termination Notice

Because Aguirre was in his initial one-year probationary period,

the SEC took the position that it needed no cause to fire him. In

fact, the SEC took the unusual step of terminating his employment

over the phone while he was on vacation. Had they waited until his

return, his probationary year might have expired. Then, it might

have been necessary to show cause for their action. The irregular

process in drafting the negative re-evaluation and the SEC’s failure

to place it in his personnel file would have made it difficult for the

SEC to show cause for his termination. The SEC would also have

had difficulty showing cause in light of Aguirre’s positive evaluation on June 29 and the approval of his pay increase on July 27.

Even though the SEC saw no requirement to show cause, his termination notice, like the re-evaluation, listed various allegations

about negative aspects of Aguirre’s performance and conduct.102

The notice was sent on Thursday, September 1, 2005. The notice

listed as reasons for termination included (1) Aguirre’s ‘‘inability to

work effectively with other staff,’’ (2) his ‘‘unwillingness to operate

within the [SEC’s] process,’’ (3) his ‘‘conduct was inappropriate’’ on

several occasions, (4) that he ‘‘ignored the chain of command,’’ and

(5) that he indicated he was ‘‘uninterested in participating’’ in the

Pequot case beyond the investigatory stage.

77

As with the allegations in the negative re-evaluation, each of

these contentions is supported only by the claims of his supervisors. The claims lack contemporaneous documentation and many

of them are contradicted by other SEC employees. In particular,

Eric Ribelin, Hilton Foster, and Liban Jama did not indicate that

Aguirre was incapable of working effectively with them. In fact, at

his retirement party, Hilton Foster made a point to introduce

Aguirre to Director of Enforcement Linda Thomsen. Foster said:

‘‘Linda, this is Gary. I don’t know if you know him or not, but he’s

working on what I consider to be one of the most significant cases

I’ve seen at the Commission, and he’s doing a hell of a job.’’103 Foster also told us, ‘‘I found him easy to work with. . . . [H]e’s obviously a smart guy, but he’s willing to listen, and he would listen

to what I said.’’104 Eric Ribelin told us, ‘‘I think Gary Aguirre is

one of the smartest, most tenacious, intelligent, thoughtful lawyers

that I had worked with in 18 years, and I thought he was aggressively, but appropriately, pursuing an investigation that was moving forward.’’105 For a comprehensive reply to his supervisors’ various allegations, see Aguirre’s answers to questions for the record

posed after the December 5, 2006, Judiciary Committee hearing.106

His responses to those allegations are generally persuasive and

rely heavily on documents to corroborate and reconstruct events in

greater detail than that offered by his former supervisors.

More important than what was in the termination notice, however, is what was missing from it. Specifically, it contained no explanation of how the termination could be reconciled with the merit

pay increase he had just received. During the process of drafting

his termination notice, one SEC labor attorney suggested explicitly

addressing that issue in the notice, ‘‘We have also discussed in our

office the possibility of including in the letter a sentence explaining

why he received a two step increase but is now being terminated.’’107 Although Kreitman replied, indicating that the suggestion would be implemented, the notice contains no such sentence.

In approving his termination, Linda Thomsen accepted the

claims of his supervisors and the representations in the termination at face value. She had no first-hand knowledge of the matters outlined in the termination notice, and relied principally upon

representations from Berger, Kreitman, and Hanson.108 She did

not get Aguirre’s side of the story from Aguirre or from any of the

experienced SEC staff who worked directly with Aguirre and who

might have disputed his supervisor’s claims, such as Eric Ribelin,

Joe Cella or Hilton Foster. She failed to consult them even though

she knew that Aguirre and his supervisors had a dispute about

whether and when to take John Mack’s testimony and even though

she knew that the decision to terminate Aguirre’s employment was

likely to be challenged:

Question: When Mr. Aguirre was terminated . . . you are aware

that he was having a dispute about taking the testimony of

Mr. Mack, correct?

Ms. Thomsen: I was aware of that, yes.

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Question: Were you concerned that it might appear that his termination was related to that or in reprisal for his being adamant

on that?

Ms. Thomsen: Yes. Yes. We all were.

***

[His supervisors] advised that they expected this to be potentially litigious given the fact that Mr. Aguirre had been litigating with us before, that he was unhappy about the Mack

testimony issue.109

Despite these concerns, Thomsen failed to solicit or consider any

independent view of the facts from anyone other than his supervisors. She even rebuffed Aguirre’s attempt to contact her directly

and confidentially to express his concerns. On August 4, he sent

her an e-mail asking if she had ‘‘an open door policy’’ and telling

her that the Pequot case was ‘‘nearly killed 5 months ago and is

now moving in circles.’’110 After forwarding Aguirre’s e-mail to Paul

Berger, Thomsen rejected his request for a chance to speak confidentially, ‘‘I would be happy to meet with the team working on the

matter.’’111

5. The Connections between the Mack Dispute and the Decision to

Fire Aguirre

If Aguirre was fired for refusing to accept his supervisor’s decision to prevent or delay Mack’s testimony, then the propriety of the

termination would turn on the merits of that decision. If it was reasonable to object to the decision, and Aguirre did so appropriately,

then his termination would arguably be improper.112 However, first

it is necessary to examine whether he was fired because of the

Mack dispute. The timing and circumstances of the events suggest

that he was. If he had not disagreed with his supervisors over their

refusal to question Mack and if he had not bristled at their references to Mack’s political connections as the reason for their

decision— it is unlikely that he would have received a negative reevaluation and then a termination notice. The Mack dispute and

Aguirre’s firing are so intricately connected that it simply is not

credible to assert, as his supervisors did, that the two are unrelated. The stated reasons for his termination simply do not hold up

under close scrutiny, leaving the Mack dispute as the more persuasive explanation.

In addition to the timing and sequence of events already discussed in detail, two particular pieces of evidence point to a direct

connection between the Mack dispute and the termination:

(1) Kreitman’s e-mail initially proposing termination, and (2) discussion of the Mack issue at the termination meeting.

a. The Termination Proposal

On Wednesday, August 24, 2005, Mark Kreitman sent an e-mail

to Paul Berger and Robert Hanson, which appears to be the first

recorded suggestion that Aguirre be fired.113 Kreitman wrote, ‘‘Bob

and I both feel that it may be appropriate at this juncture, before

Gary’s probationary period elapses, to consider his termination.’’114

79

The subject line of Kreitman’s e-mail is ‘‘Gary and Pequot.’’ However, Kreitman’s e-mail is actually a reply to one earlier that morning from Paul Berger, which forwarded an e-mail from Aguirre

with the subject line, ‘‘Mack Testimony.’’ The attached e-mails in

the chain provide Aguirre’s August 4th e-mail to Hanson outlining

his reason’s for wanting to take Mack’s testimony.

By drafting his termination proposal as a reply to this e-mail and

changing the subject line from ‘‘Mack Testimony’’ to ‘‘Gary and

Pequot,’’ Kreitman implicitly acknowledged that the two issues

were linked. In the text of the e-mail, he does so more explicitly,

‘‘I fear Gary’s view of things here is not a healthy element for the

group.’’115 Aguirre’s ‘‘view of things’’ on the ‘‘Mack testimony’’ was

that it should not be delayed because of his prominence or his politics. While conflict between Aguirre and his supervisors on that

issue may well have been disruptive, Aguirre should not bear sole

responsibility for it. His supervisors bear much of the responsibility

for that conflict because of their adamant resistance in the face of

persuasive arguments for taking Mack’s testimony.116

b. The Termination Decision Meeting

The merits of the Mack issue were discussed during the same

meeting at which Linda Thomsen approved the proposal to terminate Aguirre. This is a tacit recognition that the Mack testimony

was connected to the termination decision. Robert Hanson described the conversation this way:

Question: You said you talked to Linda Thomsen about it?

Mr. Hanson: Yes.

Question: Do you recall the conversation?

Mr. Hanson: I recall parts of it. I recall saying that [Aguirre] was

the proverbial loose cannon in that meeting, and that I thought

he was a net negative for the Commission.

I recall Linda asking, saying something that she had gotten an

email from him awhile ago about the testimony of Mack.117

She said she had suggested that we all meet or something like

that to discuss whether it made sense to take Mack’s testimony. She said does it make sense to take Mack’s testimony

at this point?

I said something to the effect of it would be a pretty short session. There wouldn’t be much to ask him, nor would there be

anything to confront him with. She said something to the effect, well, don’t we sometimes ask, you know, get people on the

record right away.

Paul said, well, this investigation . . . is from 2001. It is not

like it happened last week and we can call a bunch of people

and get them on the record.

Mark said something that he had been saying for awhile, . .

. that we have no information suggesting that Mack had the

information to pass it onto Samberg, who is the head of

Pequot.

80

Question: Are you describing one conversation?

Mr. Hanson: This was a meeting that we had.

Question: A meeting?

Mr. Hanson: Yes.

***

Question: This was in August when you were talking about the decision to fire him?

Mr. Hanson: Correct.118

A couple things are of note in this description of the conversation:

Hanson’s use of the term ‘‘loose cannon’’ to describe Aguirre, and

the focus on the merits of the Mack decision in the context of deciding whether to fire Aguirre.

Hanson’s use of the term ‘‘loose cannon,’’ is troubling because it

is often one of the phrases used to identify whistleblowers for retaliation. When someone is identified as a ‘‘loose cannon’’ or a ‘‘troublemaker’’ it can convey a warning to others in the organization

that the individual is unwilling to look the other way when it

comes to evidence of misconduct or mismanagement. These terms

were applied to Aguirre on several occasions. For example, in May

2005, an SEC trial attorney named Kevin O’Rourke wrote an email to Mark Kreitman saying that Aguirre, ‘‘has shown strong

signs of being a loose cannon.’’119 This followed an exchange of emails where O’Rourke criticized Aguirre for language he had circulated in a draft letter to opposing counsel, and Aguirre responded

to the criticism with a detailed explanation of the issue and how

it had arisen.120 Both the tone of O’Rourke’s e-mail criticizing

Aguirre and the ‘‘loose cannon’’ comment may be better understood

in light of an e-mail O’Rourke sent nine days earlier.121 Unknown

to Aguirre, O’Rourke had been assigned to defend the SEC against

Aguirre’s EEO complaint for age discrimination. In his e-mail,

O’Rourke was asking another SEC official if it was okay for him

to continue to work on the Pequot investigation without telling

Aguirre that O’Rourke was on the opposite side in the EEO matter.122

When asked about the connection between questioning Mack and

Aguirre’s termination, Paul Berger admitted that it played ‘‘some

part’’ and also referred to Hanson’s ‘‘loose cannon’’ comment at the

termination meeting:

Question: Do you contend, as you sit here today, that Mr. Aguirre’s

repeated insistence upon taking Mr. Mack’s testimony did not

play a role in the decision to terminate him?

Mr. Berger: I think that his inability to listen to his supervisors

and, you know, make decisions based on strategy and judgment and the experience that they had played a factor. And so

I think that the fact that he simply wouldn’t listen with respect to Mack must have played some part in Mark and Bob’s

assessment of his conduct. But that went to—the issue was—

and it was the primary issue—his conduct. . . . The issue was

81

that he couldn’t listen and he didn’t want to listen, and he was,

I think as you say, Bob who said it, a loose cannon.123

In his interview with the OIG, Hanson also described a conversation with Berger in which he told Berger to discount certain complaints about Mark Kreitman, ‘‘if it were either Aguirre or another

‘troublemaker’ [Berger] should consider the source.’’124 This is an

apparent reference to the August 1 conversation during which

Berger suggested that Hanson and Kreitman draft the negative reevaluation of Aguirre.

Kreitman’s e-mail, Hanson’s comments, O’Rourke’s e-mail, and

Berger’s admission all suggest that Aguirre would not have been

terminated were it not for the Mack issue. Just as Aguirre’s decision to stay at the SEC and press for Mack’s testimony led directly

to his negative re-evaluation, so too his continued efforts to obtain

approval for questioning Mack led directly to Aguirre’s termination.

When combined with the circumstances reviewed earlier, the termination appears to be merely the culmination of the process of reprisal that began with the August 1 re-evaluation. Thus, in its totality, the evidence we reviewed suggests a retaliatory motive for

Aguirre’s dismissal.

The dangers of retaliation against good-faith efforts by employees

to expose wrongdoing are clear. In this case, the actions taken

against Aguirre by SEC management could very well create an atmosphere in which employees are overly averse to raising concerns

regarding actions by the agency. In an effort to assist protecting

against this concern, we have three suggestions.

First, the SEC should adopt clear, written whistleblower protections to safeguard all employees against adverse personnel actions

in retaliation for reasonable good faith allegations or disclosures of

perceived wrongdoing, even when done in the context of an employee’s assigned duties. A fair hearing without fear of retaliation for

internal complaints could not only increase morale and resolve disputes earlier—it could also assist the SEC in its mission by identifying problems that need attention and action from senior management.

Second, in this case, senior management’s decision to terminate

Aguirre was closely connected to the internal disagreement about

whether to question John Mack. Before approving Aguirre’s termination, Director of Enforcement Linda Thomsen relied solely on information from the supervisors who disagreed with Aguirre. When

dealing with an investigator or attorney who is responsible for a

major investigation, careful adherence to established procedures is

necessary to ensure that the SEC considers all relevant information and avoids the appearance of impropriety. Even if the agency

is not legally required to show cause for the action, as may be the

case with a probationary employee or an employee who resigns,

standard written procedures are needed to ensure public confidence

in the integrity of the SEC’s operations.

Finally, the SEC should adopt clear, written guidance establishing alternate, confidential channels of communication to resolve

potential issues early and without public controversy. The SEC

should encourage employees to use such procedures to raise serious

issues that they cannot resolve with their managers. Complaints

82

should be taken seriously and considered independently, not merely referred back to the complainant’s supervisor. In this case, Director of Enforcement Linda Thomsen responded to Aguirre’s attempt to speak with her directly about the problems he was facing

by agreeing to meet only with his supervisors present. When an

employee seeks to appeal to someone other than his immediate supervisors, the employee should be given a fair and confidential opportunity to be heard.

6. Paul Berger Leaves the SEC

Nine months after Aguirre was fired, Paul Berger joined the law

firm that contacted the SEC about John Mack on behalf of Morgan

Stanley’s Board of Directors. Mary Jo White, a former U.S. Attorney for the Southern District of New York and a partner at

Debevoise & Plimpton, was one of the attorney’s whose ‘‘juice’’ Hanson had cited as a concern in taking Mack’s testimony. In June

2005, she led the effort by Debevoise to vet John Mack in advance

of bringing him back to Morgan Stanley. In the course of the six

days during which she represented the Morgan Stanley Board,

White contacted Director of Enforcement Linda Thomsen about

John Mack and produced e-mails directly to Thomsen.125 Other

representatives of Morgan Stanley also contacted Associate Director Paul Berger directly about the case.126 However, when a friend

asked Berger about Debevoise & Plimpton a few days after the termination, Berger expressed interest in working for Debevoise.

Although we found no evidence of a connection between Berger’s

role in the Mack controversy and his subsequent employment,

Berger apparently: (1) failed to recuse himself from the Pequot investigation in a timely manner, and (2) gave incomplete answers

to Senate staff when initially questioned.

a. The Initial Story

When the issue of Berger’s employment and the appearance it

created first arose, Senate staff contacted Berger by phone to question him about it, as well as other matters related to the Aguirre

controversy. During the July 28, 2006, conversation, Berger said

his last day at the Commission was May 31, 2006, and that he

began working as a partner at Debevoise & Plimpton on June 2,

2006. When asked about why his biography was not yet on the

firm’s website nearly two months later, Berger said he had been on

vacation and would continue to be on vacation until Labor Day.

When asked when he ‘‘started the process of leaving the SEC,’’

Berger stated he began reaching out to firms and they began reaching out to him in January 2006.127 He went on to say, in reference

to his current employment and his past work on the Pequot case,

‘‘one has nothing to do with the other.’’128

In an effort to corroborate this version of events, Senate staff

sought SEC records to determine whether and when Berger

recused himself from the Pequot investigation and when he first

began having discussions about employment with Debevoise &

Plimpton. The SEC produced copies of e-mails in which Berger

communicated his recusal on matters related to Debevoise. On January 9, 2006, Berger sent an e-mail to his immediate subordinates

(four assistant directors) asking whether Debevoise had entered an

83

appearance in any of their matters.129 On February 10, 2006, he

sent another e-mail explicitly informing them that he was recused

from any matters involving Debevoise.130 When asked on the

record about when he stopped working on the Pequot case, he said,

‘‘in January 2006, I think.’’131

When Director of Enforcement Linda Thomsen was asked about

Berger’s search for outside employment, she said she believed

Berger likely began seeking outside employment sometime after

the end of October 2005, after he was not selected for a deputy director position.132 SEC counsel also argued that this was circumstantial evidence as to when Berger’s first contacts with firms

were likely made.133

b. The Full Story

Although Berger and the SEC initially implied that he did not

start discussing the possibility of employment at Debevoise until

months after Aguirre’s termination, rumors circulated at the SEC

that Berger’s search had begun much earlier. Further investigation

led to confirmation that others at the SEC were talking about

Berger leaving and working for Debevoise long before he recused

himself from the Pequot case.134 One SEC attorney indicated her

impression that Berger was going to Debevoise and that she believed that he was looking to leave the Commission as early as the

beginning of 2005.135

Given this evidence, we continued to press the SEC to do more

comprehensive e-mail searches. As early as September 8, 2006, the

Committees formally requested records from the SEC relating to

Berger’s recusal and potential employment with Debevoise. We

then interviewed two witnesses on the record about e-mails discussing speculation regarding Berger’s eminent departure long before he recused himself.136 Finally, on October 31, 2006, the SEC

produced a key e-mail, which definitively established that Berger

had expressed an interest in employment at Debevoise through an

intermediary much earlier. Specifically, he communicated his interest indirectly through a friend to a partner at Debevoise just days

after Aguirre was terminated. The e-mail was from Lawrence West,

another SEC official who was in employment talks with Debevoise

at the time. The e-mail was dated September 8, 2005 and addressed to Paul Berger with the subject line, ‘‘Debevoise.’’ The body

of the message read, ‘‘Mary Jo [White] just called. I mentioned your

interest.’’137

This raised a number of questions for staff, including why Berger

failed to disclose this contact when questioned in July 2006. Berger

described the events surrounding the September 8 e-mail from

Lawrence West as follows:

[O]ne of my colleagues at the Commission, Larry West, who

was an Associate Director, was looking for a position to leave

the Commission. And he came to me—Larry and I were good

friends, still are good friends—and said that he was looking for

a position, that he wanted to—was it okay if he could share information with me about his looking and get my advice, bounce

ideas off me, et cetera. I said sure.

84

At one point he came to me and he said, ‘‘You know, wouldn’t

it be great if the two of us worked together someplace?’’ And

I said, ‘‘Well, it would be great, but it’s never going to happen.’’

And he said, ‘‘Why?’’ And I said, ‘‘Because no firm is going to

absorb two of us without any book of business, no matter what

our experience is.’’ And I said, ‘‘That’s just not going to happen,

Larry, so we’re going to have to get comfortable with that.’’

And at some point he came to me and he said, ‘‘Well, would

it be okay if I told Debevoise, who I’m talking with, that you’re

interested in leaving?’’ And I said, ‘‘Okay. Sure.’’ You know,

‘‘It’s okay to go ahead and do that.’’ And then he went and did

that.138

West did not recall sending the e-mail or his conversation with

Paul Berger.139 However, in the September 8 e-mail, West appears

to be reporting back on the results of the conversation Berger had

authorized him to have with Debevoise. Berger said that he got ‘‘a

little concerned’’ and contacted ethics counsel for advice on whether

it was appropriate, given his work on the Pequot case.140 According

to Berger, the ethics counsel advised that if the intermediary acts

‘‘as an agent’’ then it is necessary for the job seeker to recuse himself from cases involving that potential employer.141

c. Berger’s Failure to Mention Pre-Recusal Contacts

During his on-the-record interview, Berger disclosed that in addition to this contact in September 2005 with Debevoise, Goodwin

Proctor approached him about employment in fall 2005.142 When

asked about his earlier telephone interview and why he had not

disclosed these contacts, Berger claimed alternatively that he either did not remember them or that that he did not consider the

September 8 contact to be reaching out. We find it difficult to reconcile his initial statement that he began reaching out to firms and

they began reaching out to him in January 2006 with the September 8 Debevoise contact and the fall 2005 Goodwin Proctor contact. However, Berger argued that neither he nor Debevoise had

‘‘reached out’’ to one another and that his earlier statements were

technically true:

Question: So did you tell [Senate staff] that you began reaching out

to firms and they began reaching out to you in January of

2006?

Mr. Berger: I don’t remember. That would be true that I didn’t

start reaching out until January, but I don’t remember.

Question: Well, you just told us about that Goodwin Procter

reached out——

Mr. Berger: Right. They reached out.

Question: ——prior to January.

Mr. Berger: They reached out to me prior to that, right.

Question: You didn’t tell [Senate staff] about that?

Mr. Berger: I don’t remember.143

85

Regardless of whether Berger’s initial statement was technically

true, it caused the Committees and the SEC to expend unnecessary

time and resources to discover the full story. We eventually learned

from documents what Berger should have volunteered when first

asked. In explaining why he was not more forthcoming, Berger

claimed that he did not understand the SEC rules governing disclosure of non-public information and implied that the rules might

prevent him from talking about his own efforts to seek outside employment:

Question: Do you have any explanation as to why you didn’t tell

[Senate staff] about those contacts during that call?

Mr. Berger: Well, primarily because I was very concerned about

having any discussions without first talking with the SEC and

getting authorization to discuss anything.

***

You know, I was concerned about having any kind of discussions with someone outside of the SEC at that point, and so

I don’t know if—you know, why I did or didn’t say something.

I mean, I really don’t remember what I said.

***

Question: So do you think that you were completely honest and

forthcoming with [Senate Staff] during that conversation?

Mr. Berger: Yes, I think I was completely honest.

Question: But not forthcoming?

Mr. Berger: I was concerned about providing any information without authorization from the Commission so that I would not violate any rules. . . .144

Commission rules do not restrict former employees from discussing

when or under what circumstances they began seeking outside employment. Perhaps Berger genuinely did not remember in July

2006 that he had authorized a friend to inquire about potential employment with Debevoise in September 2005. Or, perhaps he wanted to avoid the questions raised by a contact so far in advance of

the date on which he recused himself and so close to Gary Aguirre’s

termination.

d. Berger’s Failure to Recuse Himself Immediately from the

Pequot Case

The Commission’s ethics officer, Bill Lenox, did not recall the

conversation with Berger about the September contact with

Debevoise.145 However, Lenox did tell us that during their 12 years

together at the SEC, Berger frequently called to ask questions and

was concerned not to violate ethics rules.146 He also indicated that

the advice Berger described is consistent with the advice he would

normally give.147

‘‘Seeking employment’’ is defined in 5 C.F.R. 2635.603:

86

An employee has begun seeking employment if he has directly

or indirectly:

(i) Engaged in negotiations for employment with any person. . . . The term [negotiations] is not limited to discussions

of specific terms and conditions of employment in a specific position;

(ii) Made an unsolicited communication to any person, or such

person’s agent or intermediary, regarding possible employment

with that person[;] or

(iii) Made a response other than rejection to an unsolicited

communication from any person, or such person’s agent or

intermediary, regarding possible employment with that person.148

By Berger’s own version of events, in early September 2005, he engaged in indirect communications with Debevoise regarding possible employment through Lawrence West. Moreover, he authorized

West to engage in the communications on his behalf, so West might

be said to have been acting as his agent. According to West, however, he mentioned Berger’s interest only to ensure that Debevoise

would not be more interested in Berger than West if it learned of

Berger’s attempts to gain outside employment.149 In any event,

merely because Berger’s efforts to seek employment did not

progress beyond that initial contact until January 2006, does not

necessarily mean that Berger should have continued to participate

in the Pequot case for the next four months. According to a memo

to all SEC staff from Ethics Counsel Bill Lenox:

The most common error is to assume that no restrictions apply

to preliminary inquiries and that no consideration need be

given to disqualifying oneself until actual negotiations begin.

This is not correct. An employee may not even begin to seek

employment with any entity that has a financial or other interest in a matter in which the employee is participating.150

It appears Berger began seeking employment with Debevoise in

early September when he authorized West to discuss Berger’s employment prospects with one of the firm’s partners. According to

Lenox’s memo, there are three options at that point: (1) recusal, (2)

termination of attempts to seek employment, or (3) a waiver.

Berger did not seek a waiver, and he did not recuse himself until

four months later. According to the SEC’s ethics counsel, discussions must be ‘‘terminated, not just suspended.’’151 It is unclear

whether Debevoise communicated a rejection to Berger, or he to

them, in September 2005. The SEC ethics counsel recommends

that terminations of employment discussions be committed to writing.152 The SEC did not produce any such written termination.

However, even if Berger did not terminate employment discussions, did not have a waiver, and did not recuse himself, one might

argue that given the limited duration of the Debevoise involvement

in the case (June 24-30), the firm no longer had a ‘‘financial or

other interest’’ in the investigation after June 2005. Under these

circumstances and under the obligations described by the SEC’s

87

ethics counsel, Berger may or may not have had an obligation to

recuse himself in September 2005. However, even if he had no

duty, the mere appearance of impropriety warranted a recusal if

only on prudential grounds.

88

ENDNOTES

1. Memorandum from Stephen M. Cutler to Jayne Seidman (July 15, 2004) (Exhibit

36).

2. Id.

3. Id.

4. During his last three years as a partner with Aguirre & Eckman, Aguirre earned yearly income of $2,330,000, $1,961,000, and finally $25,000 as the firm was

closing down its operation. Id.

5. Complainant’s Memorandum in Opposition to Summary Judgment (Exhibit 37).

6. Id.

7. Id.

8. Id.; SEC 0137, EEOC No. 100-2005-00413X Decision (June 14, 2006) (Exhibit 38).

9. Complainant’s Memorandum in Opposition to Summary Judgment. The SEC

claims to have previously interviewed Aguirre, chose someone else, then

asked him to reapply, at which time they hired him. (Exhibit 37).

10. SEC 0135, 0137, 0145, 0155, Decision and Order Entering Judgment in Aguirre

v. Donaldson, EEOC No. 100-2005-00413X, Agency No. 155120631-48 (Exhibit

38).

11. S. HRG. 109-898, at 118, Aguirre response to QFRs at 46.

12. Id. at 88, Berger testimony, Dec. 5, 2006, at 8.

13. Id. at 89, Aguirre response to questions for the record at 46.

14. Id. at 712, Ex 5 to Aguirre’s responses to questions for the record.

15. Aguirre response to questions for the record at 46.

16. SEC 0393, Aguirre letter to Paul Berger (Jan. 10, 2005) (Exhibit 39).

17. SEC 0592, Berger e-mail to Aguirre (Jan. 13, 2005) (Exhibit 40).

18. S. HRG. 109-898, at 692-693 (SEC 0397).

19. Kreitman transcript, at 125-26 (Nov. 15, 2006) (Exhibit 14).

20. S. HRG. 109-898, at 825 (SEC 0036).

21. Id. at 809.

22. Id.

23. Berger transcript, at 213 (Nov. 2, 2006) (Exhibit 4).

24. S. HRG. 109-898, at 857 (SEC 4939).

25. Id. at 691.

26. See Section VI.C.1, supra.

27. S. HRG. 109-898, at 21-22, 1217 (SEC 5688).

28. Id. at 55.

29. Id. at 651.

30. See Section VI.B.2., ‘‘Morgan Stanley’s Investigation and Contacts with the

SEC,’’ supra.

31. See Section VI.C.4.c., supra.

32. S. HRG. 109-696, at 36 (‘‘When I brought up the possibility of issuing a subpoena

with [my branch chief, Hanson], he told me that Mack—that this would be

very difficult, Mack had very powerful political connections. He would not authorize it and I would have to speak with Kreitman.’’).

33. S. HRG. 109-898, at 761 (SEC 1324) (emphasis added).

34. Transcribed Interview with Robert Hanson, Branch Chief, Division of Enforcement, SEC, at 131-33 (Sept. 5, 2006) (hereinafter ‘‘Hanson transcript (Sept.

5, 2006)’’) (Exhibit 41).

35. S. HRG. 109-898, at 898 (SEC/OIG 0087), 871 (SEC/OIG 1-7) (emphasis added).

36. Id. at 662-66 (SEC 5748).

37. Id. at 662-63 (SEC 5748).

38. Hanson transcript, at 158-64 (Sept. 5, 2006) (Exhibit 41).

39. S. HRG. 109-898, at 830 (SEC/OIG 0367).

40. Id. at 669.

41. Id. at 668 (emphasis added); but see SEC 5827 (Exhibit 42).

42. SEC 5827 (Exhibit 42).

43. Hanson transcript, at 181-85 (Sept. 5, 2006) (Exhibit 41).

44. S. HRG. 109-898, at 1254 (Hanson’s written statement. Emphasis added).

45. Id. at 602.

46. Id. at 612.

47. Id. at 757. That same day, Robert Hanson signed Aguirre’s positive performance

evaluation. See Section VII.A.3., supra.

48. S. HRG. 109-898, at 677 (SEC 0032).

49. E-mail from Gary Aguirre to Paul Berger (Jun 28, 2005) (Exhibit 43).

50. Berger transcript, at 132:14, 134:34 (Nov. 2, 2006) (Exhibit 4).

51. SEC 3664 (Exhibit 44). This e-mail seems inconsistent with claims by Aguirre’s

supervisors that he refused to write an investigative summary of the case.

89

52. See S. HRG. 109-898, at 539, Aguirre’s Prepared Hearing Testimony, p. 31.

53. S. HRG. 109-898, at 539.

54. Aguirre Fax to Committee, Oct. 19, 2006 (Exhibit 45); see also S. HRG. 109-898,

at 539, Aguirre Hearing Testimony, at 33-34.

55. Berger transcript, at 68-70 (Nov. 7, 2006) (Exhibit 27).

56. S. HRG. 109-898, at 757-61 (SEC 3475).

57. Id. at 757-61.

58. See section VII.B.2.

59. See section VII.E.1.

60. (SEC 3669). See also, S. HRG. 109-898, at 61-62.

61. S. HRG. 109-898, at 760-61 (SEC 1324) (emphasis added).

62. Berger transcript, at 83-86 (Nov. 7, 2006) (Exhibit 27).

63. See section VII.B.1.

64. John Smith is not the employee’s true name. We are using this pseudonym given

the sensitive nature of the personnel information discussed and because the

employee continues to be employed by the SEC.

65. E-mail from Dave Fielder to Mark Kreitman (Aug.1, 2005) (Exhibit 46).

66. Id.

67. Hanson transcript, at 35-36 (Sept. 5, 2006) (Exhibit 41).

68. Id. (emphasis added).

69. SEC 4939 (Exhibit 47).

70. SEC 5281 (Exhibit 48).

71. E-mail from Dave Fielder to Mark Kreitman (Aug.1, 2005) (Exhibit 46).

72. SEC 5571 (Exhibit 49). Berger’s description is inconsistent with this contemporaneous record (‘‘I think that I—I don’t remember directing them to do it. You

know, I rely on Bob and Mark on that, too, but my sense was I asked them

to think about it[.]’’ Berger transcript, at 111 (Nov. 7, 2006) (Exhibit 27)).

73. S. HRG. 109-898, at 1209 (SEC 5529).

74. SEC 5568 (Exhibit 50).

75. Kreitman transcript, at 33 (Nov. 15, 2006) (Exhibit 14).

76. SEC/OIG, Enforcement Performance Management, Audit No. 423 (Feb. 8, 2007)

(Exhibit 51).

77. S. HRG. 109-898, at 1209-10 (SEC 5529-30).

78. Id. at 824.

79. Id. at 1209-10.

80. Id. at 1210.

81. Id.

82. E-mail from Gary Aguirre to Robert Hanson (May 23, 2005) (Exhibit 52). This

document was not produced to the Committees by the SEC, although it appears to be responsive to the Aug. 1, 2006, document request. It contradicts

claims by Aguirre’s supervisors that he failed to provide Robert Hanson with

draft subpoenas for review. Berger transcript, at 51:10-14, 59:20-21 (Nov. 2,

2006) (Exhibit 4).

83. S. HRG. 109-898, at 91; see also SEC 3467 (Exhibit 53).

84. Letter from Gary Aguirre to Custodian of Records, Bloomberg L.P. (May 31,

2005) (Exhibit 54).

85. S. HRG. 109-898, at 876 (SEC/OIG 0007); see also Berger transcript, at 204:24,

209:3-9 (Nov. 2, 2006) (Exhibit 4); Berger transcript, at 102:11-13 (Nov. 7,

2006) (Exhibit 27). Lynch was General Counsel for Credit Suisse First Boston

(CSFB), which had worked on the GE-Heller acquisition.

86. The rating period covered by the re-evaluation process ended on April 30, 2005.

Therefore, even if the events occurred as Aguirre’s supervisor’s claimed, it

would be inappropriate to reference them in this evaluation because they occurred after the rating period ended.

87. S. HRG. 109-898, at 58-59 (Aguirre’s answers to questions for the record at 13-

14).

88. Id. at 619-20 (SEC 0896).

89. Jama transcript, at 12-13 (Oct. 11, 2006) (Exhibit 34).

90. S. HRG. 109-898, at 1135-36.

91. SEC 2049 (Exhibit 55); Berger transcript, at 122:8-10 (Nov. 2, 2006) (Exhibit 4);

Hanson transcript, at 125 (Sept. 5, 2006) (Exhibit 41) (‘‘I tried to answer

Gary’s emails, but there were so many of them that it was almost a full-time

job just answering his emails’’).

92. Kreitman transcript, at 10 (Sept. 6, 2006) (Exhibit 5).

93. See Section VII.A.4, supra.

94. S. HRG. 109-898, at 857 (SEC 4939).

95. Berger transcript, at 247 (Nov. 2, 2006) (Exhibit 4).

96. Berger transcript, at 234 (Nov. 2, 2006) (Exhibit 4).

90

97. S. HRG. 109-898, at 1208 (SEC 5333).

98. Id.

99. Id.

100. Id. at 445-46, Berger’s answers to questions for the record.

101. Id. at 808.

102. Memorandum from Linda Thomsen to Gary Aguirre (Sept. 1, 2005) (Exhibit

56).

103. S. HRG. 109-898, at 978.

104. Id. at 984, 986.

105. Id. at 1101.

106. Id. at 44-92.

107. Id. at 864 (SEC 1291).

108. Thomsen transcript, at 120-24 (Sept. 8, 2006) (Exhibit 26).

109. Id. at 55, 118.

110. S. HRG. 109-898, at 684 (SEC 1421).

111. Id. at 685 (emphasis added).

112. See Section VI.C.3.a, supra. 113. S. HRG. 109-898, at 830 (SEC/OIG 0367).

114. Id.

115. Id.

116. See Section VI.C.4, supra. 117. S. HRG. 109-898, at 684 (SEC 1421) In fact, Aguirre’s e-mail did not mention

Mack’s testimony, which suggests that Thomsen knew of the Mack controversy from another source.

118. Hanson transcript, at 59-61 (Sept. 5, 2006) (Exhibit 41).

119. SEC 1368 (Exhibit 57).

120. S. HRG. 109-898, at 69, 82-84.

121. SEC 5664 (Exhibit 58).

122. SEC 5664 (Exhibit 58). Again, a few days latter, O’Rourke sent an e-mail commenting on several employees describing Aguirre as ‘‘very dedicated and quite

skilled, but is somewhat of a loose cannon that needs to be supervised.’’ SEC

5686 (Exhibit 59).

123. Berger transcript, at 97-98 (Nov. 7, 2006) (Exhibit 27).

124. SEC/OIG Document Production at 0451 (Exhibit 60).

125. See Section VI.C.3.b, supra. 126. Judith Burns, SEC Associate Director Stepping Down, DOW JONES NEWSWIRES

(May 18, 2006) (Exhibit 61).

127. Telephone Interview with Paul Berger, Associate Director of Enforcement Division, SEC, (July 28, 2006) (hereinafter ‘‘Berger interview (July 28, 2006)’’).

128. Berger interview (July 28, 2006).

129. S. HRG. 109-898, at 858 (SEC 1670).

130. Id. at 861.

131. Berger transcript, at 81 (Nov. 2, 2006) (Exhibit 4).

132. Thomsen transcript, at 92 (Sept. 8, 2006) (Exhibit 26).

133. Id. at 201:21-24.

134. SEC 4928 (Exhibit 62), SEC 4929 (Exhibit 63).

135. Transcribed Interview with Margaret Cain, Attorney, Division of Enforcement,

SEC, at 7:13-19, 20-25, 33 (Oct. 13, 2006) (Exhibit 64).

136. SEC 4988-89, E-mail from Lawrence Renbaum to Timothy P. Peterson (Feb.

15, 2006) (Exhibit 65).

137. S. HRG. 109-898, at 863 (SEC 5007).

138. Berger transcript, at 83 (Nov. 2, 2006) (Exhibit 4).

139. Telephone Interview with Lawrence West, Partner, Latham & Watkins, (Nov.

14, 2006) (hereinafter ‘‘West interview (Nov. 14, 2006)’’).

140. Berger transcript, at 84 (Nov. 2, 2006) (Exhibit 4). The SEC’s ethics officer, Bill

Lenox, did not recall a specific conversation with Berger on this particular

issue. Telephone Interview with William (Bill) Lenox, Ethics Counsel, Office

of General Counsel, SEC, (Nov. 17, 2006) (hereinafter ‘‘Lenox interview (Nov.

17, 2006)’’).

141. Berger transcript, at 84 (Nov. 2, 2006) (Exhibit 4). Berger also described a subsequent conversation with West, in which he told West that he had spoken

to the ethics counsel and decided that he should not mention his name again.

However, West had no memory of such a conversation. West interview, (Nov.

14, 2006).

142. Berger transcript, at 17:3-10 (Nov. 7, 2006) (Exhibit 27).

143. Id. at 19-20.

144. Id.

145. Lenox interview, (Nov. 17, 2006).

91

146. Id.

147. Id.

148. SEC 1534 (emphasis added) (Exhibit 66).

149. West interview (Nov. 14, 2006)

150. SEC 1534 (emphasis added).

151. Id. at SEC 1537 (Exhibit 66).

152. Id.

(93)

VIII. The Inspector General’s Investigation

A. Background

Inspectors General (IGs) enjoy a unique role in federal agencies.

Created by the Inspector General Act of 1978,1 IGs are tasked with

(1) conducting audits and investigations, (2) promoting economy, efficiency, and effectiveness, and (3) detecting and preventing fraud

and abuse in their agency’s programs and operations.2 While IGs

receive general supervision from the heads of their respective agencies, the agency head may not prevent or prohibit the IG from initiating, carrying out, or completing any audit or investigation.3

The SEC established its Office of the Inspector General (SEC/

OIG) in March 1989. Soon after, Walter Stachnik was appointed as

the first SEC Inspector General, a position he continues to hold

today. Prior to this appointment, Stachnik had served in a variety

of positions throughout the government. His office is charged with

conducting internal audits and investigations at the SEC.

B. SEC/OIG Investigation of Aguirre’s Claims—

A One-Sided Approach

On September 2, 2005, Aguirre wrote his first letter to SEC

Chairman Christopher Cox detailing his allegations surrounding

the Pequot case and his employment at the SEC.4 This letter

formed the basis of his allegations and detailed his employment

from mid-September 2004 though September 2005.5 Most notably,

the letter contained the core allegation that Aguirre’s request to

interview John Mack was rebuffed by Branch Chief Robert Hanson

due to Mack’s ‘‘powerful political connections.’’6

The September 2, 2005 letter also outlined concerns Aguirre had

with the Pequot investigation. The letter provided further support

of his claim, including the names of other SEC employees who

shared similar concerns regarding the suspect trades that made up

the Pequot investigation. More specifically, Aguirre wrote, ‘‘[s]taff

who worked on this matter from the beginning—Hilton Foster, Eric

Ribelin, Thomas Conroy, and I—believe that PCM engages in an

institutionalized form of insider trading that corrupts the financial

markets.’’7 Further, the letter detailed irregularities Aguirre observed in the investigation, including outside counsel dealing directly with his superiors outside the normal course of business, and

being excluded from meetings with supervisors.8

While this letter contained the basis of Aguirre’s allegations, it

was by no means a complete description of his allegations and the

evidence supporting them. Aguirre specifically noted, ‘‘I state the

facts briefly below, though there is much more to be said.’’9 The Office of the Chairman forwarded the letter for review to the SEC Office of the Inspector General. The OIG ignored this admonition and

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made no attempt to contact Aguirre for additional information.

Aguirre sent a second letter to Chairman Cox on October 11,

2005.10 This second letter raised new allegations surrounding the

key documents related to Aguirre’s termination.11

The OIG’s investigation was riddled with inconsistencies and

failed to address Aguirre’s allegations thoroughly and objectively.

During nearly every stage in the investigation, the OIG appeared

to operate under a presumption that Aguirre’s supervisors had

acted appropriately, and thus, the OIG only sought evidence favorable to the agency. For example, the OIG simply accepted the assertions of Aguirre’s supervisors at face value without even speaking to Aguirre for his side of the story. In this and other respects,

the OIG failed to meet the most basic standards for conducting an

impartial and independent review

1. Investigative Plan: Don’t talk to the Complainant

The Investigative Plan lists the subjects of the investigation as,

‘‘Robert Hanson, Mark Kreitman, Linda Thompsen [sic], Paul

Berger.’’12 It also lists the allegations as, ‘‘abuse of discretionary

authority.’’13 The stated goal of the investigation was to, ‘‘Determine whether Division of Enforcement management gave preferential treatment to person, thereby preventing proper and thorough investigation of matter.’’14 The allegations were categorized as

‘‘administrative’’ and the priority of the case was described as ‘‘medium.’’15

According to Kelly Andrews, Associate Counsel from the Office of

General Counsel, it was her decision to label the investigation as

‘‘medium’’ priority, and Mary-Beth Sullivan, Assistant Inspector

General for Investigations, concurred.16 Sullivan confirmed that

she concurred with Andrews at the time that the investigation was

‘‘medium’’ priority.17 It remains unclear why the OIG did not consider serious allegations about political influence hindering an SEC

Enforcement investigation a ‘‘high priority.’’

In the section of the Investigative Plan marked, ‘‘Planned Investigative Steps (In Order of Priority),’’ the first step listed is ‘‘interview subjects.’’18 Andrews explained that by ‘‘subjects,’’ she meant

those against whom the allegations had been made, namely ‘‘Robert Hanson, Mark Kreitman, Linda Thomsen, Paul Berger.’’19 Andrews explained that the priority to conduct the interviews before

obtaining documents was to, ‘‘see what their story was’’ because the

OIG tries ‘‘to interview them first, if it’s not criminal.’’20 Interviewing Aguirre at a later time was considered optional. The plan

noted the potential to ‘‘possibly interview complainant for clarification of claims and/or additional information.’’21 However, the OIG

eventually made an affirmative decision not to interview Aguirre at

all.22

The OIG had two reasons for failing to interview Aguirre:

(1) that it was precluded by law, and (2) that it was unnecessary.

Neither is persuasive.

a. The Privacy Act

First, the OIG claimed its decision was required by a provision

of the Privacy Act.23 In written response to questions from Senator

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Grassley following the December 5, 2006 Senate Judiciary Committee hearing, Inspector General Stachnik replied that:

[B]ased upon the advice of OIG Counsel, that Section (e)(2) of

the Privacy Act of 1974 requires the OIG, in non-criminal

cases, to obtain information from the subjects of the investigation first before going to other sources to the greatest extent

practicable.24

The provision he referred to states:

Each agency that maintains a system of records shall . . . collect information to the greatest extent practicable directly from

the subject individual when the information may result in adverse determinations about an individual’s rights, benefits, and

privileges under Federal programs. . . .25

The OIG claimed it was bound by a strict interpretation this provision and of the decision in Dong v. Smithsonian.26 As described in

Dong, ‘‘The Privacy Act requires ‘[e]ach agency that maintains a

system of records’ to gather information about a person directly

from that person, to the greatest extent practicable.’’27 It is unclear

why this provision would not place an equal burden on the OIG to

seek information directly from Aguirre as well as directly from his

supervisors. In this context, the use of the term ‘‘subject’’ refers not

to the subject of an OIG investigation, but rather to the subject of

a record in a ‘‘system of records’’ as defined by the Act. Therefore,

one could argue that Aguirre was himself the subject of records

sought by the OIG. In its investigation, the OIG was gathering information about Aguirre just as much as it was gathering information about his supervisors. To the extent that it was storing that

information in a system of records, the opposite of the OIG’s claim

is true. Rather than prohibiting an Aguirre interview, this Privacy

Act provision arguably required one, imposing an equal duty to

seek information directly from him first rather than other sources.

b. The Necessity of an Aguirre Interview

Second, the OIG claimed that ‘‘it had sufficient information from

Aguirre’s letters’’ to preclude an interview with Aguirre.28 Andrews

elaborated in an interview that the OIG, ‘‘thought that [Aguirre’s]

September 2nd and October 11th letters were very clear as to the

allegations he was making so we didn’t feel we needed clarification

as to the allegations, and we had a lot of documents and e-mails.’’29

This claim is simply untenable. First, Aguirre’s initial letter

states on the first page, ‘‘there is much more to be said.’’30 Two

short letters cannot begin to scratch the surface of the evidence relevant to Aguirre’s claims, especially in light of Aguirre’s indication

that much more information was available and the thousands of

pages of documents Aguirre actually possessed. Had the OIG contacted Aguirre, it would probably have had access to many of these

documents before closing its first investigation, and perhaps, could

have avoided drawing conclusions at odds with the documentary

record. By deciding not to interview Aguirre, the OIG closed off arguably its most important source of information.

The fact that Aguirre did have supporting evidence and that the

OIG closed its case without obtaining that evidence demonstrates

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rather conclusively that contacting Aguirre was a necessary step

toward obtaining all the relevant evidence. Yet, the OIG’s office

failed to take that necessary step and has offered no credible explanation as to why. Another possible explanation for not interviewing

Aguirre is that the OIG simply wanted to close the case with as

few complications as possible, based on a pre-judgment that the allegations were not credible. The OIG decided not to interview

Aguirre or anyone likely to support Aguirre’s allegations, despite

the reference in his letter to three individuals who could corroborate his claims.

2. Witness Interviews

a. Hanson Denies Referring to Mack’s ‘‘Political Connections’’

Andrews conducted the first substantive interview on October 17.

She spoke with Robert Hanson via telephone. Hanson outlined the

investigation into Pequot Capital Management and the decision not

to interview Mack, stating SEC staff agreed they should ‘‘get their

ducks in a row’’ first and figure out Mack’s motive before taking

testimony.31 Hanson also described his conversation with Berger

discussing complaints about Kreitman from Aguirre and another

employee. Hanson said Berger should ‘‘consider the source.’’32

Berger told him to do a supplemental evaluation of Aguirre.33

Oddly, Andrews’ notes do not reflect any questions in this first

interview about Aguirre’s core allegation about Hanson’s reference

to Mack’s political connections.

On October 21, 2005, Hanson called Andrews to clarify his previous interview with her, offering to expand upon the involvement

Linda Thomsen had in relation to Aguirre’s employment and the

Pequot investigation, including contacts with counsel for Morgan

Stanley about Mack’s exposure in the investigation.34 These communications are discussed at length earlier.35 However, in this second interview, it appears that Andrews still did not ask about the

‘‘political connections’’ allegation. She did not do so until November

14. Both her handwritten notes and the OIG closing memo indicate

that Hanson denied saying it would be difficult to obtain approval

for Mack’s testimony because of his powerful political connections.36

b. Other Interviews

On October 19, 2005, Andrews spoke with Charles ‘‘Chuck’’

Staiger of the HR Department at SEC seeking a copy of Aguirre’s

personnel file.37 Andrews then made a call to interview Linda

Thomsen, on October 21, 2005.38 During the telephone interview

with Thomsen they discussed Aguirre’s employment and the

Pequot investigation, as well as her conversation with Mary Jo

White.39 Finally, Thomsen detailed a conversation in which she

discussed Aguirre’s termination with ‘‘Berger, Kreitman, and Hanson in her office.’’40 This telephone interview was the only discussion between Thomsen and Andrews.

Andrews next contacted Paul Berger on October 21.41 First,

Berger told her that he ‘‘received lots of e-mails from Aguirre, although he did not keep most of them.’’42 He also stated that he had

a meeting with Hanson during the evaluation period43 regarding

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two employees, one of whom was Aguirre, and described the ‘‘supplemental evaluation’’ of Aguirre.44 Berger stated that he was not

sure if the separate evaluation was in the file sent to the Compensation Committee, on which he served. However, he claimed

that he did see the statement ‘‘before the committee made any decision.’’45 Berger’s claim is doubtful, because the evaluation was created after the last date on which the committee met. Finally,

Berger discussed the decision to terminate Aguirre indicating that

Kreitman proposed the idea but that Berger left the decision to

Kreitman and Hanson.46 The termination was approved in a conversation between Berger and Thomsen.47

On October 24, 2005 the OIG conducted a telephone interview of

Mark Kreitman.48 Kreitman’s interview focused on the supplemental evaluation of Aguirre stating that he created the supplemental evaluation on August 1, 2005, because he felt that ‘‘Hanson

had not addressed problems.’’49 In fact, however, the evidence suggests that he created the negative re-evaluation at Berger’s suggestion, as relayed by Robert Hanson following the latter’s early morning meeting with Berger on August 1. Kreitman told OIG that he

did not know if Aguirre received a copy of the supplemental rating

because he was terminated by the time Kreitman would have met

with staff attorneys to discuss evaluations.50 Kreitman also discussed the Mary Jo White call, noting it was a little out of the ordinary for her to contact Thomsen directly, but not uncommon ‘‘for

someone prominent’’ to have someone intervene on his behalf.51

c. Deference and Informality

The deference provided to the subjects of the OIG investigation

created a serious problem. By conducting them informally, via telephone, and without transcription, the OIG squandered an important investigatory opportunity. Just as the Enforcement Division

failed to ‘‘lock-in’’ a story from Mack, the OIG failed to ‘‘lock-in’’ a

story from Aguirre’s supervisors. Moreover, by not being in the

room with the witnesses, the OIG missed out on non-verbal cues

that are essential to better assessing witness credibility. The OIG’s

decision to conduct the interviews in such an informal manner contributes to the impression that the office did not investigate

Aguirre’s allegations thoroughly.

3. The Failure to Obtain Key Documents

The investigative plan’s second step was to ‘‘review relevant case

documents.’’52 One of the key failures of the initial OIG investigation was its inability to obtain all the relevant documents. The OIG

made none of its requests in writing and was incapable of describing the scope of its requests with any certainty. The OIG investigators did not attempt to obtain any documents from Aguirre until

after the initial investigation was closed and the controversy became public. According to Andrews, she obtained documents merely

by asking the subjects for whatever ‘‘relevant’’ documents they retained, apparently leaving it to Aguirre’s supervisors to determine

for themselves what they believed to be relevant.53 Andrews also

obtained Aguirre’s official personnel file and conduct file.54 These

were the only clearly defined request in the investigation sought

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Aguirre’s official personnel file and the conduct file, which was requested in writing.55

Informal and ill-defined document requests caused the OIG to

miss critically important documents altogether. For example, after

denying that he had referenced Mack’s political connections, Hanson did not provide the OIG with a copy of an e-mail in which he

admits to using the term ‘‘political clout’’ in a conversation with

Aguirre about the difficulty of taking Mack’s testimony.56 Despite

this written admission, Hanson denied to the OIG during his interview that he ever made such a statement verbally or in an email.57

In another example, Mark Kreitman failed to produce an e-mail

to the OIG dated September 30, 2005, in which he responded to an

inquiry from Charles Staiger in human resources. Staiger asked:

During the merit process earlier in the summer, was Gary

[Aguirre] given a copy of Hanson’s supervisory endorsement? If

not in writing, was Gary verbally given Hanson’s supervisory

endorsement? Was the endorsement below [the August 1 reevaluation] given to Gary either verbally or in writing?58

Kreitman replied, ‘‘None of the above.’’59 In other words, it appears

Kreitman admitted to Staiger that he failed to transmit the substance of the negative re-evaluation to Aguirre. However, in his

interview with OIG, Kreitman claimed that he responded to

Staiger verbally, rather than by e-mail, and that he told Staiger he

transmitted ‘‘the substance’’ of the supplemental evaluation to

Aguirre on numerous occasions.60 While the OIG did obtain

Kreitman’s ‘‘none of the above’’ e-mail from Staiger, its final report

failed to note or analyze these apparent contradictions.

4. Failures of the Office of Information Technology

One of the problems with the OIG investigators’ approach to obtaining documents was its inability to rely on the Office of Information Technology (OIT) at the SEC. Even though OIT could have obtained SEC employee e-mails directly from the servers and even recovered deleted e-mails from backup tapes, the OIG did not request

such assistance. We sought to determine why not. Interviews with

other staff investigators at OIG provide some insight as to one possible reason. Richard Woodford, a counsel with the OIG stated that

it was not uncommon for OIT requests to be backlogged and delayed significantly. He said that he could remember at least one instance where an OIG investigation had to be closed because OIT

never responded to the OIG’s request.61 Due to incidents like this,

the OIG staff apparently perceives assistance from OIT as an exercise in futility. That ought to be unacceptable to SEC management

and the Inspector General. Because of this perception, it appears

that Andrews gave no serious consideration to obtaining documents

from OIT. When asked about her decision to obtain documents directly from the subjects of the investigation, she said ‘‘Who else

was I going to get the documents from?’’62

As a result of the failure to request that OIT obtain relevant emails and documents directly from the computer servers at SEC,

the OIG effectively ignored a crucial source of impartial information. For instance, we eventually obtained at least five different

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versions of the August first re-evaluation. Despite the importance

of the facts and circumstances surrounding the creation of that document, the OIG closed its investigation without access to all of the

versions and without a clear understanding of the sequence of

events on the day they were created.

5. Closing Memorandum

On November 29, 2005, the OIG issued its closing memorandum

on the investigation into Aguirre’s allegations.63 The OIG deferred

to Aguirre’s supervisors’ assertions that there were legitimate tactical reasons to delay John Mack’s testimony. Its memo concludes,

‘‘There is no evidence that Enforcement did not want to take

Mack’s testimony because of his ‘powerful political connections.’ ’’64

That statement, and Robert Hanson’s denials to the OIG on which

it is based, is directly contradicted by Hanson’s e-mail to Aguirre.65

The OIG did not address Hanson’s e-mail because it had not seen

the e-mail.

The OIG concluded that ‘‘The evidence fails to show that [Mary

Jo] White contacting Thomsen resulted in preferential treatment or

affected any decision about taking Mack’s testimony.’’66 The OIG

provides no analysis other than to restate the information about

the call relayed from Thomsen herself and note that Kreitman and

Hanson were aware that such a call took place. However, as outlined earlier, Aguirre’s supervisors drastically changed their attitude and behavior after the Director of Enforcement was contacted

about the case.

The most perplexing portion of the OIG’s closing memorandum

is its conclusion that Aguirre was not excluded from any meetings

on the Pequot case. The memo states, ‘‘The evidence shows that

Aguirre was involved in many, often lengthy, discussions about

whether and when to take Mack’s testimony.’’67 As support, the

OIG notes that ‘‘Aguirre would often work late and discuss the case

with Kreitman’’ and that ‘‘Aguirre discussed the case with Berger

at least four or five times and sent him e-mails regarding the

case.’’68 However, just because Aguirre was included in some meetings does not mean he was not excluded from others. Both Gary

Aguirre and Eric Ribelin stated that they were excluded from a

meeting with Berger just after Morgan Stanley counsel started

seeking information from the SEC about its intentions toward

Mack.69 Had the OIG contacted Aguirre or Ribelin, it could have

asked about the specific meeting from which they were excluded.

The OIG noted, ‘‘We found several irregularities with the supplemental evaluation.’’70 However, while noting the irregularities, the

OIG did not consider them related to Aguirre’s allegations. Instead,

OIG referred the matter to its audit staff as an issue for general

review rather than to analyze its meaning with regard to Aguirre’s

specific case.

The last section of the closing memorandum addresses Aguirre’s

alleged unlawful termination. The OIG claimed, ‘‘The evidence

failed to show that Aguirre’s complaints about Mack’s alleged preferential treatment had anything to do with his termination.’’71 To

support this position, the OIG noted that Thomsen recalled discussing ‘‘Aguirre’s termination with Berger, Kreitman, and Hanson

in her office.’’72 Had the OIG probed deeper, it might have learned

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that one topic discussed during the meeting was Aguirre’s stance

toward interviewing Mack.73 Had OIG staff examined the e-mail

which first suggested Aguirre’s termination, they might have noted

that it began as a chain of e-mails in which Aguirre was attempting to convince his supervisors to take Mack’s testimony. Moreover,

Berger admitted during Committee interviews that the two issues

were connected. He said, ‘‘I think that the fact that he simply

wouldn’t listen with respect to Mack must have played some part’’

in the assessment of his conduct.74 These facts contradict the OIG’s

finding.

6. ‘‘Irregularities’’ Deemed Merely an Audit Issue

While the OIG’s closing memorandum purportedly exonerates

Aguirre’s supervisors, it also noted ‘‘deficiencies related to the performance evaluation documentation.’’75 In particular, the OIG indicated:

We found several irregularities with the supplemental evaluation including: it was not dated or signed; it appears to have

been created after the merit pay calendar deadline; it was not

sent to, or considered by, the compensation committee; it was

not in Aguirre’s employee personnel file (EPF); and it was separate from the initial evaluation written by Aguirre’s immediate supervisor, who should be the only one who prepares a

summary on behalf of each employee, according to the merit

pay process guidance. We are referring these issues to the

audit staff.76

These issues are integral to Aguirre’s allegations. Aguirre’s October

11, 2005, letter outlined concerns regarding the records contained

in his personnel file including a cover memorandum stating that

the negative re-evaluation of Aguirre ‘‘mistakenly did not go to the

compensation committee. . . .’’77 Our investigation confirmed that

the negative re-evaluation was prepared outside the regular process, after the Compensation Committee met, and referred to incidents outside the rating period. More importantly, we found that

it was prepared at the same time and within the same document

as John Smith’s irregular re-evaluation. Why were they handled together? What did these two employees have in common? We

learned that both had recently complained about roadblocks in

their investigations following direct contacts between outside counsel and the Director of Enforcement. Determining why these two

evaluations were prepared together, outside the normal processes

is emphatically an investigative issue, not an audit issue.

Documents produced to the Committees show that on November

29, 2005, the same date as the closing memorandum, Andrews referred the irregularities in the personnel evaluation process to an

OIG employee within the audit branch.78 However, it was not until

May 18, 2006, after we began our inquiry and sought briefings

from the OIG about the case that Andrews checked to determine

the status of the audit, which had not yet even begun.79 Had the

OIG addressed this matter in a timely fashion, it could have uncovered the problems with the personnel review system at SEC over

six months in advance of when it finally issued the audit report.

The lack of priority and urgency of this audit is illustrative of the

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casual attitude toward the entire investigation and subsequent

audit.

Moreover, one memo produced by the OIG details a conversation

between audit staff, Inspector General Walter Stachnik, and Mary

Beth Sullivan.80 During the conversation, Stachnik and Sullivan

concluded that the OIG audit staff should delete John Smith’s evaluation from its sample because ‘‘Smith’s memo was the same as

Aguirre’s memo and any questions . . . about the memo could inadvertently apply to Aguirre as well as [Smith].’’81 The OIG’s lack of

investigative curiosity about those questions is disturbing.

C. Other OIG Investigations

During the course of our inquiry, several current and former SEC

employees contacted us to report information about how the SEC’s

OIG had handled or mishandled other investigations. While we

asked the OIG about them briefly, we did not conduct extensive inquiries as the issues were not directly related to the Pequot investigation or the firing of Gary Aguirre. However, we may seek additional information about the following cases in a continuing effort

to monitor the effectiveness of the OIG.

1. A More Vigorous OIG Investigation

Not all investigations by the OIG are as lax and informal as the

one of Aguirre’s supervisors. The way the OIG handled another

case in late 2003 provides a stark contrast. The SEC OIG received

allegations that an employee had made ‘‘improper and inappropriate’’ comments to coworkers. These allegations were investigated

much more thoroughly than Aguirre’s allegations.

For example, the OIG did not contact the subject of the investigation first, as the OIG had claimed was legally necessary in the

Aguirre context. Instead Mary Beth Sullivan began by interviewing

the two complainants.82 So, unlike Aguirre, the complainants in

this case had an opportunity to fully explain their view of the

issues and provide additional corroborating information directly to

the investigator. In her interview with Senate staff, Sullivan did

not recall any discussion of the Privacy Act requirements before

taking this action.83 In fact, the OIG did not even inform the subject of the allegations against him until two months after the investigation was launched and a series of other witnesses had been

interviewed.

Another way in which the investigation differed from Aguirre’s

was the more aggressive and confrontational procedures. For example, the way the subject says he learned of the investigation was

that a senior SEC official summoned the subject to his office. Two

armed guards stood watch while he was given a memorandum informing him of an investigation for unspecified ‘‘bad acts.’’84 By

contrast, the OIG simply called Aguirre’s supervisors and interviewed them over the phone.

The number and type of witness interviews and the length of the

investigative reports also differed dramatically. In all, the SEC

OIG interviewed more than 18 employees during the course of this

investigation, six of which were transcribed verbatim.85 However,

the OIG did not conduct as many interviews in the Aguirre matter,

and it had none of them transcribed. While the closing memo in

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Aguirre’s case was only seven pages long, Sullivan drafted a ‘‘pretty

long report’’ on the investigation with voluminous attachments.86

This investigation provides a stark contrast to that undertaken

in response to Aguirre’s allegations against Hanson, Kreitman, and

Berger. These contrasts are disturbing given the nature of the allegations in each case. On the one hand, the OIG spent considerable

time and resources looking into a dispute between co-workers over

alleged use of inappropriate language in the workplace. On the

other, the OIG gave short shrift to an allegation that the integrity

of the agency’s mission was being compromised by improper political influence.

2. Geek Securities and Commissioner Cynthia Glassman

We also learned of an allegation that was referred to the OIG involving Commissioner Cynthia Glassman. It was related to a criminal investigation involving a company called Geek Securities.87

One of the individuals involved in the case allegedly claimed that

Commissioner Glassman was his cousin and that she had provided

him with advanced warning of what was supposed to be a surprise

SEC examination of Geek Securities books and records.88 Nick

Sichi, a chief witness in the criminal matter, told investigators that

he learned about the alleged tip off at breakfast on the morning of

the examination.89

The OIG confirmed that it did conduct an investigation into the

allegation.90 When asked about the investigation, Mary Beth Sullivan indicated that she interviewed Commissioner Glassman, a

Special Assistant U.S. Attorney, and an SEC employee who was at

the interview where Sichi made the allegation. The OIG did not

transcribe any of the interviews and did not interview the person

claiming to be Commissioner Glassman’s cousin. When asked how

long the investigation took, Sullivan said, ‘‘I think I did it pretty

quickly, but I’m not sure.’’91 Sullivan could not recall many additional details.92

According to Sullivan, the OIG ultimately concluded that ‘‘there

appeared to be insufficient evidence to support the allegation.’’93

D. The Reopening of the Aguirre Investigation

On July 6, 2006, the SEC Chairman requested that the OIG reopen its investigation into Aguirre’s allegations based on new information that was produced to various Committees of the United

States Senate. The OIG officially reopened its investigation on the

same day after it considered ‘‘all relevant factors.’’94 These relevant

factors appear to include the request of the Chairman of the SEC,

new allegations that arose, and information learned from the Congressional inquiry.95

1. Relationship to Congressional Investigations

The OIG stated clearly that the reopening of the investigation

was based in part on the corresponding investigation being conducted by the Committees. The investigation conducted by Committee staff generated a significant volume of information that the

OIG did not have in its original investigation.

As early as May 2006 when Committee staff first reviewed the

closing memorandum at SEC Headquarters, the OIG was aware of

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our concerns and questions. However, it wasn’t until July 2006 that

the investigation was formally reopened. Further, the OIG only reopened its investigation once it was requested by the SEC Chairman. The timing of the decision to reopen the investigation may

have had more to do with an attempt to limit the production of documents to the Committees. OIG cited to Committee staff an opinion by the Department of Justice regarding the sharing of information related to ongoing investigations as justification for refusal to

produce certain documents.96

2. Attempt to Compel Disclosure of Confidential Communications

with Congress

The most egregious problems caused by the OIG’s reopened investigation involved a subpoena issued to Aguirre by the OIG on

August 11, 2006. This subpoena was formally served upon Aguirre

on August 14, 2006, and requested among other things confidential

communications between Aguirre and Congressional committees.97

On November 3, 2006, the Department of Justice filed a motion to

show cause in the U.S. District Court for the District of Columbia

seeking enforcement on behalf of the OIG.

The subpoena sought confidential communications between

Aguirre and Congress. Following the issuance of the subpoena,

Committee staff spoke with Mary Beth Sullivan, Counsel to the IG

and inquired about the intent to obtain confidential communication

from Aguirre. Sullivan affirmed that the OIG request included

Aguirre’s communications with Congress.

As a result of this statement, Committee staff began to prepare

to litigate the issue should it arise. Through repeated negotiations,

the OIG continued to state through the attorneys of the Federal

Programs Branch at the Department of Justice that these documents were the subject of the subpoena and that the OIG would

continue to seek these communications through judicial enforcement. It was not until after the December 5, 2006, public hearing

on Aguirre’s allegations raised questions about the OIG subpoena

that the OIG finally agreed to a limited production from Aguirre,

withholding his confidential communications with Congress.98

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E. Conclusion—Independence of the OIG

The OIG investigation into Aguirre’s allegations was flawed from

the beginning and hindered by missteps during the entire process.

Every step seems to have been based on a desire to go through the

motions and close the case. How the OIG could assess Aguirre’s

credibility without ever speaking to him remains a mystery.

One of the major problems with the OIG seems to be the perception within the SEC regarding the independence of the office and

whether or not employees who approach the OIG are treated fairly.

We interviewed a number of current and former SEC employees

who indicated that the OIG is not well respected and that there is

a general reluctance to approach the OIG with concerns. Aguirre

was no exception. Aguirre told us that he took his concerns to the

Chairman rather than the OIG for just that reason. The OIG’s reputation is essential to completing its mission. The SEC needs to

take immediate action to restore the independence, competence,

and confidence in the OIG.

One area in need of attention is the OIG’s independence from

SEC management. The SEC/OIG’s investigation of Aguirre’s allegations was conducted by Kelly Andrews, who told Committee staff,

‘‘We don’t second-guess management decisions.’’ Indeed, the OIG’s

closing memo was based only on representations or explanations

from Aguirre’s supervisors and documents selectively forwarded to

the OIG by those same individuals. Moreover, in its ‘‘second’’ investigation, the OIG attempted to subpoena records of Aguirre’s communications with Congress and refused to explain this action at a

Judiciary Committee hearing, allegedly based on instructions from

the Justice Department. The IG also forwarded internal e-mails regarding Aguirre and the IG’s investigation to Director of Enforcement, Linda Thomsen, a potential subject in the Committees’ investigation. These facts and circumstances do not suggest a sufficient

degree of independence.

Another concern of the committees is the competency of the SEC

Office of Information Technology. SEC/OIG staff told us that the

Office of Information Technology was extremely slow in providing

e-mails requested in connection with its investigations. In fact, on

at least one occasion, an investigation was closed because the OIG

request went completely unanswered.99 In its Aguirre investigation, the OIG failed to identify and obtain a key e-mail that corroborated Aguirre’s account of his supervisor’s reference to John

Mack’s ‘‘political clout’’ because it relied on the supervisors themselves to provide documents. Had the OIG been able to obtain a

timely response from disinterested personnel in the Office of Information Technology, it may have obtained the e-mail and thus

avoided closing the case based on findings that were inconsistent

with the documentary evidence. The SEC directive should give the

OIG authority to set specific deadlines for responses to its document requests and impose meaningful consequences for failure to

comply with the deadlines.

The OIG has a position of enormous responsibility. Congress

passed the IG Act in 1974, with the goal of ensuring that the public

would have faith in government by providing an impartial arbiter

tasked with independently overseeing the operations at an agency,

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protecting the integrity and promoting the efficiency of government. Based on our review, the OIG at the SEC seems to have

failed in its mission. Other SEC employees perceive it as a tool of

management, used for retaliatory investigations against disfavored

staff. The OIG’s number-one priority should be to restore confidence in its ability to conduct professional investigations to ensure the highest standard of integrity at the SEC.

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ENDNOTES

1. Inspector General Act of 1978, Pub. L. No. 95-452, 92 Stat. 1101 codified as

amended at 5 U.S.C. App. 3 (2006).

2. General Accountability Office, Highlights of the Comptroller General’s Panel on

Federal Oversight and the Inspectors General, GAO 06-931SP, at 1 (Sept. 11,

2006).

3. Id.

4. S. HRG. 109-898, at 689 (SEC/OIG 0493).

5. Id.

6. Id.

7. Id.

8. Id. at 690.

9. S. HRG. 109-898, at 689 (SEC/OIG 0493) (emphasis added).

10. Id. at 717-18.

11. Id.

12. Id. at 868-69.

13. Id.

14. Id.

15. Id. at 868.

16. Transcribed Interview with Kelly Andrews, Associate Counsel, Office of Inspector General, SEC, at 22 (Nov. 21, 2006) (hereinafter ‘‘Andrews transcript (Nov.

21, 2006)’’) (Exhibit 67).

17. Transcribed Interview with Mary-Beth Sullivan, Assistant Inspector General for

Investigations, Counsel to the Inspector General, SEC, at 60 (Nov. 22, 2006)

(hereinafter ‘‘Sullivan transcript (Nov. 22, 2006)’’) (Exhibit 68).

18. S. HRG. 109-898, at 869 (SEC/OIG 0489).

19. Andrews transcript, at 23 (Nov. 21, 2006) (Exhibit 67).

20. Id. at 23-24. See also, Sullivan transcript, at 57-58 (Nov. 22, 2006) (Exhibit 68).

21. S. HRG. 109-898, at 869 (SEC/OIG 0489).

22. Andrews transcript, at 27 (Nov. 21, 2006) (Exhibit 67).

23. Privacy Act of 1974, Pub. L. No. 93-579, 88 Stat. 1896, codified as amended at

5 U.S.C. § 552a (2006).

24. S. HRG. 109-898 at 469, Responses of Inspector General Walter Stachnik to

Questions from Hearing Record at 7.

25. Privacy Act of 1974, Pub. L. No. 93-579, 88 Stat. 1896, codified as amended at

5 U.S.C. § 552a (2006).

26. Dong v. Smithsonian Institution, 943 F. Supp. 69 (D.D.C. 1996).

27. Privacy Act of 1974, Pub. L. No. 93-579, 88 Stat. 1896, codified as amended at

5 U.S.C. § 552a (2006).

28. S. HRG. 109-898 at 469, Response of Inspector General Walter Stachnik to Questions from Hearing Record at 7.

29. Andrews transcript, at 27 (Nov. 21, 2006) (Exhibit 67).

30. S. HRG. 109-898, at 689 (SEC/OIG 0493).

31. SEC/OIG Document Production at 0451 (Exhibit 60).

32. Id.

33. Id.

34. SEC/OIG Document Production at 0452 (Exhibit 69).

35. See Section VI.B.3, supra.

36. SEC/OIG Document Production at 0002 (Exhibit 29); S. HRG. 109-898, at 898-

901.

37. S. HRG. 109-898, at 934 (SEC/OIG 0504).

38. SEC/OIG Document Production at 0447-48 (Exhibit 70).

39 Id. at 0447.

40. Id.

41. SEC/OIG Document Production at 0449-50 (Exhibit 71).

42. Id. at 0449.

43. This statement appears to be inconsistent with the dates that surrounded the

evaluation period. While the OIG never mentioned this inconsistency in its final

closing memorandum, it is important to note that this meeting took place after

the evaluation period had closed. According to Hanson, this meeting took place

on August 1, 2005, which was after the Compensation Committee had met and

approved the merit pay increase for Aguirre. See Section VI.c.2 (discussing the

date of the Compensation Committee meeting), supra.

44. SEC/OIG Document Production at 0449 (Exhibit 71).

45. Id.

46. Id. at 0450.

47. Id.

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48. SEC/OIG Document Production at 0444 (Exhibit 28).

49. Id.

50. Id.

51. Id. at 0445.

52. S. HRG. 109-898, at 869 (SEC/OIG 0489).

53. Andrews transcript, at 25 (Nov. 21, 2006) (Exhibit 67).

54. Id.

55. Id. at 25-26.

56. S. HRG. 109-898, at 668 (SEC 0832).

57. See id. at 898 (SEC/OIG 0087) (noting Hanson’s reply of ‘‘No’’ to the question,

‘‘Did you tell Aguirre, or anyone, that it w/b very difficult to obtain approval

to take Mack’s testimony b/c of his powerful political connections?’’).

58. S. HRG. 109-898, at 824 (SEC/OIG 0126).

59. Id.

60. SEC/OIG Document Production at 0443 (Exhibit 72).

61. Telephone Interview with Richard Woodford, Associate Counsel, SEC/OIG (Nov.

17, 2006).

62. Andrews transcript, at 24 (Nov. 21, 2006) (Exhibit 67).

63. S. HRG. 109-898, at 870-76 (SEC/OIG 0001-07).

64. Id. at 872 (emphasis added).

65. SEC 1932 (Exhibit 35).

66. S. HRG. 109-898, at 872 (SEC/OIG 0003).

67. Id.

68. Id. at 873.

69. S. HRG. 109-898, at 576, Letter from Gary J. Aguirre to Sens. Shelby and Sarbanes 23 (Aug. 21, 2006), see also S. HRG. 109-898, at 1150-51 (Ribelin Tr.).

70. S. HRG. 109-898, at 873 n.2.

71. Id. at 876 (emphasis added).

72. Id.

73. See Hanson transcript, at 59-61 (Sept. 5, 2006) (Exhibit 41).

74. See Section VI.C.5, supra.

75. S. HRG. 109-898, at 870 (SEC/OIG 0001).

76. Id. at 873.

77. Id. at 717.

78. SEC/OIG Document Production at 0543 (Exhibit 73).

79. Id.

80. Id. at 0644 (Exhibit 74).

81. Id.

82. Sullivan transcript, at 151 (Nov. 22, 2006) (Exhibit 68).

83. Id.

84. Draft letter from SEC employee, SEC, to Chairman Christopher Cox, SEC 2

(Feb. 27, 2006) (on file with the Committee).

85. Draft letter from SEC employee, SEC, to Chairman Christopher Cox, SEC Addendum pg. 1 (Feb. 27, 2006) (on file with the Committee); Sullivan transcript,

at 148-49 (Nov. 22, 2006) (Exhibit 68).

86. Sullivan transcript, at 148 (Nov. 22, 2006) (Exhibit 68).

87. Telephone Interview with James Fay, Staff Attorney, SEC (Sep 28, 2006).

88. Id.

89. Id.

90. Sullivan transcript, at 152 (Nov. 22, 2006) (Exhibit 68).

91. Id. at 157.

92. Id. at 157-58.

93. Id. at 154. In addition to these matters, we also asked the SEC/OIG staff about

two other allegations reported during the course of our investigation. One allegation related to an insider trading referral involving Gary Taffet, an aid to

New Jersey Governor Jim McGreevey. A supervisor allegedly approved delaying

the investigation until after the next election after receiving a memo from SEC

staff that referenced polling data. The SEC/OIG staff could not recall investigating the matter. The second allegation related to an SEC employee allegedly

viewing child pornography on his computer. The SEC/OIG confirmed that it did

substantiate the allegation and referred the matter to the FBI for further investigation. However, the employee resigned before being terminated and authorities declined to prosecute due to an inability to identify the child in the images.

94. SEC/OIG Document Production at 1063 (Exhibit 75).

95. Andrews transcript, at 63-64 (Nov. 21, 2006) (Exhibit 67). See also 9/11/2006 Ltr.

from W. Stachnik to Sens. Grassley and Specter at 4.

96. Letter from Walter Stachnik, Inspector General, Securities and Exchange Commission, to Sens. Charles E. Grassley and Arlen Specter 3 (Aug. 28, 2006) (citVerDate 11-MAY-2000 14:44 Aug 07, 2007 Jkt 095484 PO 00000 Frm 00115 Fmt 6621 Sfmt 6621 36960.000 SFIN1 PsN: SFIN1
108

ing Department of Justice Office of Legal Counsel memorandum 13 Op. O.L.C.

77 (Mar. 24, 1989), which cites DOJ’s ‘‘longstanding policy to decline to provide

Congressional committees with access to open law enforcement files’’) (Exhibit

76).

97. See Subpoena Duces Tecum (Exhibit 77).

98. See Settlement Agreement between Mr. Aguirre and DOJ (Exhibit 78). See also

S. HRG. 109-898, at 39-41, 470-71, Stachnik responses to questions for the

record to Dec. 5, 2006, Senate Judiciary Committee hearing at 8.

99. Interview with Richard Woodford, Associate Counsel, Office of Inspector General, SEC (Nov. 30, 2006).

(109)

APPENDIX I: EXHIBITS

(111)

Exhibits List

——————

1: Testimony of Arthur Samberg, excerpt (May 3, 2005)*

2: Memorandum from Walter Ricciardi (June 15, 2006)

3: NYSE Advisory Memo to SEC (Jan 30, 2002)

4: Transcribed interview of Paul Berger, excerpt (Nov 2, 2006)*

5 Transcribed interview of Mark Kreitman, excerpt (Sept 6,

2006)*

6: Transcribed interview of Robert Hanson, excerpt (Nov 9,

2006)*

7: Memorandum from Tom Conroy (Aug 3, 2005)

8: Memorandum from Craig Miller, Tom Conroy, and Eric

Ribelin (Nov 14, 2005)

9: E-mail from Joseph Cella (Nov 24, 2005)

10: Memorandum from Division of Enforcement (Dec 16, 2004)

11: E-mail from Gary Aguirre (Nov 1, 2004)

12: Transcribed interview of James Eichner, excerpt (Nov 14,

2006)*

13: Wells Notice on Pequot matter (July 14, 2006)

14: Transcribed interview of Mark Kreitman, excerpt (Nov 15,

2006)*

15: E-mail to Eric Ribelin (Feb 25, 2005)

16: E-mail from Gary Aguirre (May 20, 2005)

17: Memorandum from Gary Aguirre (June 28, 2005)

18: Letter from James Eichner to Audrey Strauss (Oct 20, 2005)

19: Testimony of Arthur Samberg, excerpt (June 7, 2005)*

20: Transcribed interview of James Eichner (Sept 1, 2006)*

21: E-mail from Art Samberg (May 11, 2001)

22: E-mail from Art Samberg (June 20, 2001)

23: Transcribed interview of Joseph Cella, excerpt (Sept 7, 2006)*

24: Transcribed interview of Mary Jo White, excerpt (Sept 25,

3006)*

25: E-mail from Mary Jo White to Linda Thomsen (June 26, 2005)

26: Transcribed interview of Linda Thomsen, excerpt (Sept 8,

2006)*

27: Transcribed interview of Paul Berger, excerpt (Nov 7, 2006)*

28: SEC/OIG notes on Kreitman

29: Memorandum from Kelly Andrews (Nov 29, 2005)

30: E-mail from Jim Eichner to Robert Hanson (July 19, 2006)

31: E-mail from Jim Eichner (Aug 3, 2005)

32: Unsigned tolling agreement

33: E-mail from Liban Jama (July 24, 2006)

34: Transcribed interview of Liban Jama, excerpt (Oct 11, 2006)*

35: Testimony of John Mack, excerpt (Aug 1, 2006)*

36: Memorandum from Stephen Cutler (July 15, 2006)

37: Gary Aguirre’s Memorandum in Opposition to Summary Judgment

38: Order Entering Judgment, Aguirre v. Donaldson (June 14,

2006)

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39: Gary Aguirre letter to Paul Berger (Jan 10, 2005)

40: Paul Berger e-mail to Gary Aguirre (Jan 13, 2005)

41: Transcribed interview of Robert Hanson, excerpt (Sept 5,

2006)*

42: Draft e-mail from Robert Hanson to Gary Aguirre

43: E-mail from Gary Aguirre to Paul Berger (Jun 28, 2005)

44: E-mail from Gary Aguirre to Paul Berger (June 30, 2005)

45: Gary Aguirre Fax to Committee (Oct. 19, 2006)

46: Dave Fielder e-mail to Mark Kreitman (Aug 1, 2005)

47: Compensation Committee Dates (summer 2005)

48: Mark Kretiman’s supplemental evaluation of Gary Aguirre

(Aug 1, 2005)

49: E-mail from Mark Kreitman (Aug 1, 2005)

50: E-mail from Mark Kreitman to Paul Berger (Aug 1, 2005)

51: SEC/OIG Audit (Feb 8, 2007)

52: Gary Aguirre e-mail to Robert Hanson (May 23, 2005)

53: E-mails between Gary Aguirre and Robert Hanson (May 25,

2005)

54: Gary Aguirre letter to Bloomberg, L.P. (May 31, 2005)

55: E-mail from Robert Hanson (July 7, 2006)

56: Gary Aguirre’s Notice of Termination (Sept 1, 2005)

57: E-mail from Kevin O’Rourke to Mark Kreitman (May 25,

2005)

58: E-mail from James Clarkson to Kevin O’Rourke (March 15,

2005)

59: E-mail from Kevin O’Rourke (May 31, 2005)

60: SEC/OIG notes on Hanson

61: Judith Burns, SEC Associate Enforcement Director Stepping

Down, DOW JONES NEWSWIRE (May 18, 2006)

62: E-mail from Margaret Cain to Eric Ribelin (Oct 21, 2005)

63: Additional e-mail from Margaret Cain (Oct 21, 2005)

64: Transcribed interview of Margaret Cain, excerpt (Oct 13,

2006)*

65: E-mail from Lawrence Renbaum to Timothy P. Peterson (Feb

15, 2006)

66: SEC Memorandum on seeking and negotiating employment

67: Transcribed interview of Kelly Andrews, excerpt (Nov 21,

2006)*

68: Transcribed interview of Mary-Beth Sullivan, excerpt (Nov 22,

2006)*

69: SEC/OIG notes on Hanson (Oct 24, 2005)

70: SEC/OIG notes on Thomsen (Oct 21, 2005)

71: SEC/OIG notes on Berger (Oct 21, 2005)

72: SEC/OIG notes on Kreitman (Oct 26, 2005)

73: Kelly Andrews e-mails

74: Memo of SEC/OIG discussion (Aug 16, 2006)

75: Memorandum from SEC/OIG to SEC (Aug 18, 2006)

76: Letter from Walter Stachnik to Senators Grassley and Specter

(August 28, 2006)

77: Subpoena Duces Tecum to Gary Aguirre (Aug 11, 2006)

78: Settlement agreement between Gary Aguirre and DOJ

———————

* Full transcripts are on file with the Committee.

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