13.4 million????!!!!?????
Wire: BLOOMBERG News (BN) Date: 2009-02-04 05:01:00
SECâs Madoff Miss Fits Pattern Set With Pequot: Gary J. Aguirre
Commentary by Gary J. Aguirre
Feb. 4 (Bloomberg) -- Shakespeare tells us to âgive the
devil his due.â So forget for a moment the harm Bernard Madoff
caused his victims, and focus on his singular achievement.
Measured by the sheer amount of his alleged theft, he could go
down, if convicted, as the greatest thief of all time.
In fairness to his competition, one question begs an answer:
how skilled and dedicated was Madoffâs adversary? Arthur Conan
Doyle pitted Professor Moriarty, the diabolical genius, against
Sherlock Holmes, who showed his brilliance by spotting and
connecting the subtlest clues.
Errant Wall Street elite, such as Madoff, go up against the
U.S. Securities and Exchange Commission. Congress created the SEC
in 1934 after Wall Street titans -- the Madoffs of 1929 --took
the capital markets over a cliff with the economy in tow. The SEC
was supposed to keep a watchful eye on Wall Street, especially
its elite.
So far, the SECâs six investigations of Madoff read more
like Keystone Cops than Sherlock Holmes. The SEC didnât merely
fail to spot and connect the clues. Someone else -- Harry
Markopolos, a former money manager -- did that work for it. His
November 2005 letter to the SEC made a compelling case that
Madoff was running a Ponzi scheme. Somehow, the SEC managed to
bungle the Madoff investigation while holding Markopolosâs
blueprint.
So the biggest Ponzi scheme of all time morphs seamlessly
into a gripping mystery: What went wrong inside the SEC?
A 2007 report by two Senate committees provides a window
into the SECâs inner workings when Wall Street elite are under
scrutiny.
Pequot Investigation
The Senate Judiciary and Finance committees conducted an
exhaustive review of my allegations that the SEC mishandled its
insider-trading investigation of Pequot Capital Management Inc.,
a hedge fund. I led that SEC investigation until September 2005,
when I was fired, as the Senate report concluded, for questioning
my supervisorsâ preferential treatment of John Mack. Mack was
chairman of Pequot before taking his current job as chief
executive officer of Morgan Stanley.
The SEC closed its Pequot investigation in November 2006
without filing a case against anyone. The SEC ignored the call in
February 2007 by Senators Charles Grassley and Arlen Specter to
reopen it. The agency reopened the case last month only after
receiving compelling new evidence that left it with no choice.
This new evidence suggests the SEC ignored a road map of
possible insider trading by Pequot in Microsoft Corp. options.
In 2005, I uncovered e-mails between Arthur Samberg,
Pequotâs chief executive officer, and David Zilkha, a Microsoft
employee, shortly before Microsoft announced its third quarter
2001 results. (Zilkha had recently accepted a job offer from
Samberg.) Samberg asked Zilkha for âtidbitsâ on those results.
Possible Tip
I left my supervisors a single-page timeline, in effect a
blueprint where to focus the investigation, along with a notebook
of backup. It pinpointed April 9, 2001, as the date of a possible
tip from Zilkha to Samberg.
The 2007 Senate report suggests the SEC bungled the
Microsoft piece of the Pequot investigation, just as it did the
Mack piece. It never examined Zilkha or any other Microsoft
employee under oath. By all signs, the SEC ignored my blueprint
on Pequotâs Microsoft trading, just as it would later ignore the
Markopolos blueprint of Madoffâs theft.
Last November, I received new information on the Microsoft
piece, including court records suggesting that Samberg or Pequot
had begun paying Zilkha $2.1 million a few months after the SEC
closed its investigation.
E-Mail Exchange
I also obtained a copy of a purported e-mail exchange
between Zilkha and another Microsoft employee, Mark Spain,
relating to Microsoftâs third quarter. Zilkhaâs April 7, 2001, e-
mail asked in the subject block, âAny visibility on the recent
quarter?â and in the body asked, âHey there. Have you heard
whether we will miss estimates? Any other info?â
The next day, Spainâs e-mail replied in part, âmarch was
the best march of record,â and, âon track for revised
forecast.â In May 2007, the Senate released the timeline that I
had left with my SEC supervisors in 2005. For April 9, 2005, the
timeline reads: âPresumed MNI (material nonpublic information)
Communication.â
I provided this new information to Senate investigators as
it became available, then to the Federal Bureau of Investigation,
and only then to the SEC, which had shown so little interest or
initiative in the case.
In December, Specter wrote then-SEC Chairman Christopher
Cox: â(R)ecent events provide the SEC with an opportunity to
make good its Pequot investigation, despite having precipitously
and unjustifiably closed the case in November 2006.â
The SEC has now reopened its Pequot investigation. Like
Specter, I hope the SEC will âmake good its Pequot
investigation,â but I have my doubts.
Traveling Rolodexes
The SECâs vigilant eye on Wall Street has gotten clouded
with dollar signs. For many SEC attorneys, especially those atop
the enforcement division, their time at the agency is a stop on
their way to seven-figure jobs representing Wall Street elite.
And they take their Rolodexes with them.
I dealt with three ex-SEC enforcement directors and other
well-connected attorneys, including a former White House counsel,
on the other side of the Pequot case. They had âjuiceâ with the
SECâs hierarchy, according to my supervisor, and they knew how to
use it. One of them, Gary Lynch, at Credit Suisse First Boston,
would follow Mack to Morgan Stanley in the fall of 2005, where he
would start at $13.2 million as its top lawyer, according to SEC
filings.
For Congress and the new SEC chairwoman, Mary Schapiro,
solving the Madoff mystery may not be such a challenge. It may
ultimately boil down to this: Did Madoff and his attorney -- a
former head of the SECâs New York office -- also use their juice?
(Gary J. Aguirre, a lawyer in San Diego, was a s
