Pequot Capital Management -- a pioneering and well-connected hedge fund that gained fame for racking up years of strong returns -- is shutting its doors amid a revived insider-trading probe.
As recently as 2001, Pequot Capital Management Inc. managed about $15 billion, making it one of the largest hedge funds in the world. But in recent years, investors have shunned it, partly because of an off-again, on-again investigation into insider trading, including allegations that founder Arthur Samberg may have engaged in insider trading in Microsoft Corp. stock with the help of one of his then employees, who joined Pequot from the software giant.Mr. Samberg, 68 years old, has strenuously denied any impropriety.
Late Wednesday, he threw in the towel. In a letter to investors, Mr. Samberg wrote: "Public disclosures about the continuing investigation have cast a cloud over the firm and have become a source of personal distraction." Calling the situation "increasingly untenable for the firm and for me," he said, "I have concluded that Pequot can no longer stay in business."
The closure caps a half-decade of legal and public-relations headaches at Pequot -- including the allegations of insider trading in Microsoft stock, which eventually spawned Senate hearings that excoriated the Securities and Exchange Commission's handling of the matter. In addition, a SEC staffer alleged that John Mack, then a top executive at Credit Suisse, had tipped off Mr. Samberg about a merger deal.
At that time, the SEC brought no charges against Pequot, Mr. Samberg or Mr. Mack.
The matter flared up again for Pequot and Mr. Samberg amid new questions about $2.1 million Pequot in 2007 agreed to pay to David Zilkha, the former Microsoft employee. That payment came to light in Mr. Zilkha's divorce proceedings. Mr. Zilkha left Pequot in September 2001. A Pequot spokesman earlier this year said the payment was related to a civil claim regarding Mr. Zilkha's employment and termination. A lawyer for Mr. Zilkha didn't return a call seeking comment.
More recently, Pequot was among several investment firms mentioned in court documents regarding a "pay to play" investigation of a major New York's state pension fund, in which several firms are alleged to have made payments to a middleman in order to secure investments from the pension fund.
Pequot hasn't been accused of wrongdoing in the case. A person familiar with the matter said that investigation didn't spur Mr. Samberg's decision to close the firm.
There is no indication that charges in the insider-trading case are imminent.
Mr. Samberg, along with George Soros, Michael Steinhardt and Julian Robertson, ranks among hedge-fund pioneers. Over his 22 years as a stock-picker, Mr. Samberg racked up annualized gains of 16.8% after investor fees were deducted, compared with 8.5% for the S&P 500, according to his letter to investors.
Despite returns like these, investors have been reluctant to sign up, partly due to concerns about the investigation. It also became harder for Mr. Samberg to recruit top talent to join the firm's staff.
Currently, Mr. Samberg manages about $3 billion. Earlier this decade, Mr. Samberg and Pequot's co-founder, Daniel Benton, split the firm, with each continuing to oversee roughly half the assets under management.
Mr. Samberg has told associates that he now plans to retire. Jonathan Gasthalter, a spokesman for Mr. Samberg, said he wasn't available for comment.
The news comes at a precarious time for the hedge-fund industry. Just a year or so ago, investors flocked to investments like these. The managers of hedge funds -- who operate with relatively little oversight and earn outsize performance fees -- were the envy of Wall Street.
While hedge funds generally have held up better than investment banks and mutual funds, many irked their investors last year with disappointing returns. Others didn't let their investors pull money out, citing difficult trading conditions.
The current insider-trading investigation concerns whether Pequot used information provided by Mr. Zilkha in trades that helped yield Pequot more than $2 million, according to an SEC report.
The SEC and the Justice Department had investigated emails sent by Mr. Zilkha as he was in the process of joining the hedge fund. After a two-year probe, interviews and review of emails, the SEC concluded there was insufficient evidence to bring a case, the agency report said.
The investigation has generated controversy not only for Pequot but also for the SEC. A former SEC enforcement attorney, Gary Aguirre, alleged to Congress several years ago that he had been fired after supervisors stopped him from issuing subpoenas to Mr. Mack, in connection with the insider-trading investigation.
Mr. Aguirre was investigating potential insider trading by Pequot officials in 18 different stocks. He suspected Mr. Mack, a long-time friend of Mr. Samberg, of tipping him off about a merger that his then firm-CSFB had advised on, according to Mr. Aguirre's report to Congress, the Senate report and other documents.
Mr. Aguirre said he was fired for trying to seek Mr. Mack's testimony. SEC officials said they fired Mr. Aguirre because his behavior became erratic and he couldn't get along with his colleagues. SEC officials also said that they never called in Mr. Mack because there was never enough evidence to warrant his testimony.
After a Senate hearing and scrutiny in early 2006, the SEC called Mr. Mack to Washington to provide testimony in the insider-trading case. Mr. Mack cooperated and the SEC found no wrongdoing. The SEC closed its investigation in November 2006.
The Senate in 2007 issued a report sharply criticizing the SEC's handling of the case. The SEC's Inspector General also investigated and found that the staff could have handled Mr. Aguirre's complaints differently and also said then SEC enforcement director Linda Thomsen improperly shared information about the case with a lawyer representing Morgan Stanley's board when she told them there was "smoke" around then allegations but not "fire."
At the time, Morgan Stanley was vetting Mr. Mack to hire him as CEO. The Inspector General's report found no evidence that Mr. Mack was given special treatment and concluded that the insider-trading allegations were aggressively pursued until the case was closed. Nobody was charged with wrongdoing.
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