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Hedge fund under investigation

Pequot Capital Management is getting a look from the Securities and Exchange Commission for possible insider trading.

By TIMES STAFF WRITER
Published June 24, 2006

Hedge fund Pequot Capital Management is being investigated for possible insider trading, the New York Times reported.

As is its practice, the Securities and Exchange Commission declined to confirm or deny an ongoing investigation of the $7-billion fund, and a Pequot spokesman called the trades ordinary. But a lawyer who once led the SEC inquiry told Congress that Pequot's trading had prompted 18 referrals from stock exchange officials. In one case, Pequot made $18-million by investing in the stocks of companies soon before they announced a merger.

Pequot's investment reach extends to the Tampa Bay area. As of March 31, the fund, one of the country's oldest and most powerful, owned 22 percent of the shares of First Advantage Corp., a St. Petersburg provider of screening services. Pequot controlled 19.8 percent of the stock of Shells Seafood Restaurants Inc. of Tampa, also as of March 31.

A Pequot spokesman denied that there was any improper activity. "The trades at issue were made in the ordinary course of the firm's business and were entirely normal within the context of its daily investing activities," said the spokesman, Jonathan Gasthalter.

"In the period under review, Pequot conducted over 136,000 trades, and it is natural that some limited number would be kicked out by (stock exchange) market surveillance efforts," Gasthalter added. "At all times, Pequot's securities trading has been entirely proper and not based on insider information."

The SEC investigation came to light in a report Friday by the New York Times that an SEC attorney who led the investigation has told Congress he was blocked by superiors when he tried to question a prominent Wall Street executive. Senate investigators are examining the allegations by the attorney, Gary Aguirre, that his firing from the SEC last September was related to his efforts to take testimony in the Pequot inquiry from John Mack, the chief executive of investment house Morgan Stanley Inc.

No charges have been brought against Pequot, which is overseen by Arthur Samberg, a well-known money manager and philanthropist.

In a related development Friday, a federal appeals court overturned a rule bringing hedge funds under new supervision by the SEC.

The decision by the U.S. Court of Appeals for the District of Columbia Circuit sent the rule - which bitterly divided the five-member SEC when it was adopted in October 2004 - back to the agency to be reviewed.

The SEC rule for hedge funds, which are high-risk, largely unregulated and secretive investment pools, took effect Feb. 1.

Hedge funds have traditionally been the investment domain of the wealthy but have become popular with smaller investors in recent years. Today some 7,000 hedge funds in the United States command an estimated $750-billion to $1-trillion in assets and leave a wide footprint in the financial markets, as they are believed to account for as much as 20 percent of all U.S. stock trading.

Regulators' concern about the funds' explosive growth and virtually unbridled operations prompted the SEC rule, which requires most hedge fund managers to register with the agency. That opens the funds' books to SEC examiners.

But the appeals court called the SEC rule "arbitrary." The agency failed to make a compelling case for the necessity of the rule, it said.

--Times staff writer Scott Barancik contributed to this report.

[Last modified June 24, 2006, 06:39:11]