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Former SEC lawyer discusses ethics

Emily McConville | Tuesday, November 19, 2013

Gary  Aguirre, the lawyer who “blew the whistle” on Pequot Capital’s illegal insider trading activity and catalyzed a 2007 investigation on the hedge fund, delivered a lecture Monday night as the final installment of Mendoza’s John A. Berges Lecture Series in Business Ethics.

At the beginning of his lecture, Aguirre told his audience at DeBartolo Hall to raise their hands if any of them planned to become a whistleblower. Nobody did.
“That’s the point,” Aguirre said, showing pictures of Edward Snowden, Daniel Ellsberg and others who had leaked government secrets. “No one plans on becoming a whistleblower. It’s a choice you make when you’re faced with options.”

Aguirre, a former lawyer at the U.S. Securities and Exchange Commission (SEC) blew the whistle on his previous employer’s preferential treatment of some business executives Aguirre said his first assignment with the SEC involved Pequot Capital CEO Arthur Samberg. In July 2001, Pequot had bought a large amount of stock in a company called Heller Financial, seemingly for no reason, he said.

At the end of that month, Heller Financial was purchased by General Electric, which sent its stock up and earned Pequot millions of dollars. The problem, Aguirre said, was there was no way Pequot could have known about the purchase so far in advance, a red flag for a case of insider trading.  

Aguirre said his team soon found similar cases involving the hedge fund and investigated further.

“I went to the New York Stock Exchange to ask about one of the cases, and they said, look, this hedge fund is being perennially referred to and perennially coming up on our radar for insider trading,” Aguirre said. “We’re constantly sending referrals to the [SEC]. They’re way too lucky, and there are 200 other companies that are just as lucky as them. We’re sending referrals over, and nothing happens.”

Aguirre said the Pequot investigation next needed Credit Suisse CEO John Mack to testify. Credit Suisse managed Heller Financial.

Mack, he said, had spoken with Samberg on the phone shortly before Pequot started buying stock and later made $5 million in four months. Aguirre said his supervisors at the SEC were “excited” about the findings and wanted proceed with the investigation.

Then, he said, the news hit that Mack, whose testimony Aguirre needed for his investigation, was about to become CEO of Morgan Stanley, one of the biggest financial firms in the world. Mack suddenly had too much “political clout” to be investigated, Aguirre said.

“There was a phone call [that] came one week after I got the case elevated to a criminal case,” he said. “… Within a few days, the word came down that there would be no testimony coming from John Mack. He was off bounds.”

Aguirre said he expressed his concerns about Mack’s preferential treatment to several supervisors and was eventually told to go on vacation. Before he came back, Aguirre received word he had been fired.

Aguirre said he decided to go to the U. S. Senate with some records from his investigations and evidence against Pequot and the SEC. As he worked on his report, he said the SEC threatened him with criminal prosecution, attacked his character in the media, sued him and opened their own investigations, saying he had acted outside the law.

“This is the government striking back at a whistleblower,” Aguirre said. “[In] my situation, I was a lawyer, I was a smart lawyer, I was an experienced lawyer, and when I became a whistleblower, I stayed within what I perceived to be the law.”

Spearheaded by Senator Charles Grassley, two Senate committees investigated the issue and subpoenaed several high-ranking SEC officials, he said. After 18 months of hearings, in August 2007 the Senate sided with Aguirre, saying the SEC had fired him improperly and given preferential treatment to Mack.

Aguirre said while the ruling was important, the SEC had missed its chance to get Mack to testify and “squandered” an opportunity for meaningful reform. Because he still wanted to pursue his investigation of Pequot, Aguirre requested the rest of the SEC records under the Freedom of Information Act. Those, along with a series of anonymous phone calls and emails proving that insider trading occurred in a similar case involving Microsoft stock, confirmed in 2009 that Pequot had broken the law.

Aguirre said his subsequent letter to the SEC prompted it to reopen its own investigation, leading to a $28 million settlement with Pequot, which then closed down.

“Mine was, in a sense, a happy story,” Aguirre said. “It was five years, [and] it was at times anguishing to think the government is coming after me, to know that you’ve done nothing illegal, that in fact, it’s the government that’s illegal … and yet the government felt comfortable in threatening prosecution.”

Aguirre, who now represents other whistleblowers, said his decision to become one was not a big choice, but a “series of small decisions” that built up.

“I wouldn’t have raised my hand either,” Aguirre said, referring to his opening remarks. “You face these moments where you are either a part of it or you’re not … I took an oath at the SEC to enforce securities laws without that kind of bias.”

Contact Emily McConville at emcconv@nd.edu