Capital Markets

SEC Clears John Mack

In early 2007, Congress will report on allegations that the SEC halted its insider-trading probe because of Mack's status.
Helen ShawDecember 1, 2006

The Securities and Exchange Commission has formally cleared John Mack, chairman and chief executive officer of Morgan Stanley, of violating insider-trading rules in connection with hedge fund Pequot Capital Management.

The SEC informed Mack in a letter that it will not pursue enforcement action against him, according to news reports. The commission had been investigating “suspected insider trading and market manipulation” by Pequot. At issue was whether the hedge fund, which invested in Heller Financial before the commercial lender was acquired by General Electric in 2001, had been tipped off with inside information.

In June 2006, Gary Aguirre, the former SEC investigator who was part of the probe, testified to the Senate Judiciary Committee that SEC officials aborted the examination because one of the subjects “had powerful political connections at the highest level,” as reported previously. However, SEC officials point out that the Inspector General’s office noted in a report to Congress that Aguirre’s charges were never substantiated.

Aguirre had testified that his former supervisor, branch chief Robert Hanson, instructed him to identify an individual who may have leaked information to Pequot chief executive officer Arthur Samberg. Hanson then stopped the investigation and said “it would be difficult to obtain the authority to issue the subpoenas because the suspected tipper had powerful political connections,” testified Aguirre. That suspected tipper has since been identified by The New York Times and other news organizations as John Mack. Aguirre says he was fired after the probe’s scrutiny neared Mack.

The investigation, according to Aguirre, discovered that Pequot had traded in two companies just before a cash tender offer of one company for the other was announced at a 50 percent premium over the last trading price. The hedge fund profited by $18 million in 30 days, stated Aguirre.

In related news, the Senate Finance Committee will issue a report, possibly as early as next February, regarding allegations that SEC officials derailed the investigation into Pequot because of Mack’s prominence. Sen. Charles Grassley (R-Iowa) has stated that so far, the committee’s inquiry has found that Pequot was “supportive” overall of accusations by Aguirre.