Pequot Capital, Samberg paying $28 million to settle SEC charges of insider trading

Pequot, Samberg paying $28M to settle SEC case

WASHINGTON — An investment firm and its founder and chairman, Arthur Samberg, have agreed to pay a total of $28 million to settle regulators’ charges of insider trading in Microsoft shares, in a long-running case that prompted scrutiny in Congress and by an agency watchdog.

The Securities and Exchange Commission announced the settlement Thursday with Pequot Capital Management Inc., whose core hedge fund was liquidated last year, and with Samberg, a well-known money manager and philanthropist. They neither admitted nor denied wrongdoing in settling the SEC’s civil lawsuit filed in federal court in Connecticut.

The SEC alleged that the hedge fund traded shares of Microsoft Corp. on confidential information provided by a former employee of the technology giant whom it later hired.

That alleged tipster, David Zilkha, was hired by Pequot in April 2001. The SEC alleges in a new administrative proceeding against him that Zilkha concealed from the agency staff that he had gotten inside information on Microsoft’s earnings and recommended to Samberg that he buy the stock based on the advance information.

Zilkha, 41, left Pequot in November 2001. His attorney, Henry Putzel III, didn’t immediately return telephone calls seeking comment Thursday.

Pequot Capital and Samberg together are paying $10 million in civil fines and $18 million in restitution of trading profits plus interest. In addition, Samberg is barred under the settlement from working for any investment adviser firm.

Samberg, 69, who has been Pequot’s chairman and CEO since founding the firm in 1998, has been winding down Pequot, which was a major investment firm managing about $15 billion in assets at its peak. It had been based in Westport, Conn., but moved its headquarters to Wilton, Conn., in May 2009, when it liquidated its core hedge fund amid the SEC’s insider-trading investigation.

Jonathan Gasthalter, a spokesman for Pequot and Samberg, declined to comment.

In December 2006, the SEC closed an earlier investigation of Pequot that it had started in late 2004. No enforcement action was taken. The agency reopened the probe in January 2009 after documents emerged in a divorce proceeding in Connecticut that showed that Pequot began paying $2.1 million to Zilkha in mid-2007.

As rumors swirled in April 2001 that Microsoft would miss its earnings estimates for the latest quarter, Samberg sought information from Zilkha, who had just accepted Samberg’s offer to work at Pequot, the SEC alleged in its suit. Zilkha then asked a former Microsoft colleague, who told him that the company would meet or exceed the earnings estimates, the agency said.

By trading on the information from Zilkha, Pequot and Samberg made more than $14 million for the Pequot funds, the SEC said.

“The cases have two particularly troubling aspects — a hedge fund manager trading on illegal insider information, and his tipper source who withheld crucial information about the scheme during an SEC investigation,” SEC Enforcement Director Robert Khuzami said in a statement. “Both are high-priority targets” for the agency’s enforcement division, he said.

The Pequot case created a high-profile controversy for the SEC, starting in 2006. Gary Aguirre, a former SEC attorney who worked on the first Pequot investigation and was fired by the agency in 2005, alleged there was interference in the probe by SEC officials and improper deference to a prominent Wall Street figure whom Aguirre wanted to interview. Aguirre’s allegations became public in 2006 and prompted an investigation by Republican staff of the Senate Judiciary and Finance Committees.

Sens. Charles Grassley, R-Iowa, and Arlen Specter, D-Pa., spoke critically on the Senate floor in 2007 about the SEC’s handling of the Pequot investigation.

The SEC has “finally followed the evidence to its logical conclusions after years of unnecessary delays and timidity,” Grassley, the senior Republican on the Senate Finance Committee, said Thursday. “There was clearly a case to be made against Pequot, and the SEC has finally admitted it. Today’s announcement bears out what (Aguirre) argued years ago.”

The SEC’s inspector general, David Kotz, found in a 2008 report there were “serious questions” about the impartiality and fairness of the agency’s initial probe of Pequot. An administrative law judge at the SEC declined Kotz’s request for disciplinary action against the agency’s enforcement director at the time and another official over the handling of the probe.

The relaunching of the investigation in January 2009 came at a time when the SEC was sustaining intense public and congressional criticism for lapses in its oversight and enforcement efforts. As the scandal involving disgraced money manager Bernard Madoff stunned Wall Street in December 2008, revelations surfaced that staff at the SEC repeatedly failed over the course of a decade to fully investigate credible allegations against him.