Senior SEC officials stopped a hedge fund probe because one of the subjects of the investigation “had powerful political connections…at the highest level,” according to former Securities and Exchange Commission investigator Gary Aguirre.

Testifying on Wednesday before the Senate Judiciary Committee, Aguirre said that when he questioned the commission’s top enforcement officials about the propriety of halting the probe, “they fired me,” and when he told Chairman Christopher Cox about those events, “he did not lift a finger.”

SEC spokesman John Nester said he could not comment specifically on SEC investigations, but said, “Any suggestion that preferential treatment was sought or given in an investigation for political reasons is absolutely without merit.”

Aguirre testified that from September 2004 through September 2005, he had “primary responsibility” for investigating “suspected insider trading and market manipulation” by hedge fund Pequot Capital Management. In May 2005, said Aguirre, his former supervisor, Branch Chief Robert Hanson, directed him to spend all his time identifying an individual who may have leaked information to Pequot chief executive officer Arthur Samberg. That suspected tipper has since been identified by The New York Times and other news outlets as John Mack, currently chairman and chief executive officer of Morgan Stanley.

In June 2005, Aguirre’s testimony continued, Hanson first reacted positively to Aguirre’s suggestion that he subpoena the suspected tipper for testimony and ask for key documents, then “abruptly reversed course.” Hanson also said that “it would be difficult to obtain the authority to issue the subpoenas because the suspected tipper had powerful political connections,” stated Aguirre. The Times has identified Mack as “a major fund-raiser for President Bush.”

Further, the ex-investigator stated that Paul Berger, the SEC’s associate director of enforcement, stressed in his presence that “no case would be filed against the suspected tipper, but gave no reason or clue for his decision.” Aguirre also testified that although he informed Cox, Berger, and SEC Enforcement Director Linda Thomsen about “the special and favored treatment my supervisors were giving to the suspected tipper,” none of them questioned why the probe was stopped.

The SEC’s Nester disputes Aguirre’s accusation that his letter to Cox never got a response, noting that the letter was referred to the Inspector General’s office, as is standard SEC policy. In its latest report to Congress, the Inspector General’s office noted that it had “investigated allegations that Commission supervisors had provided favorable treatment to an individual because of his political connections,” an apparent reference to Aguirre’s charges. The Inspector General’s office said its investigation “failed to substantiate the allegations.”

Aguirre testified that the investigation had found that the hedge fund 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, he also recounted.

On Wednesday, the Times reported that a Morgan Stanley representative said that no evidence of wrongdoing by Mack has yet emerged and that the SEC had never contacted him. A Pequot spokesperson told the newspaper that its trades were all proper and not based on inside information.

Updated:
This story has been updated to include additional response from the SEC and reporting regarding the Inspector General’s investigation of Aguirre’s charges.