By GRETCHEN MORGENSON
October 27, 2006
SourceThe Securities and Exchange Commission, under scrutiny for its handling of an insider-trading case involving a prominent hedge fund, will be the subject of a broad review by the investigative arm of Congress, the Government Accountability Office.
Charles E. Grassley, the Iowa Republican who is chairman of the Senate Finance Committee, last month asked the office in a letter to conduct a review of the commission because he was growing concerned, he said, about whether it is “faithfully adhering to its mission.”
The S.E.C. is charged with protecting investors by policing the nation’s financial markets and prosecuting violations of securities law by individuals and companies.
Last week, the G.A.O. accepted Mr. Grassley’s request that it review two S.E.C. divisions: its enforcement unit, which brings civil securities suits, and the office of compliance, inspection and examination, which oversees money managers, brokerage firms, stock exchanges and other regulated entities.
The G.A.O. will also examine whether the commission adequately monitors self-regulatory organizations — like the New York Stock Exchange and NASD — that refer cases to the commission for possible enforcement actions.
“Congress needs an independent analysis of whether the institutions that are responsible for protecting investors are keeping up in a fast-changing marketplace,” Mr. Grassley said yesterday in a statement. “It’s been a long time since there’s been this kind of thorough review. The integrity of our financial markets and, in turn, the well-being of individual investors depends on checkpoints that stop insider trading and manipulation.”
John Heine, a spokesman for the S.E.C., said, “We welcome the review and look forward to any recommendations that might follow.”
Mr. Grassley’s request comes amid an inquiry by his staff and by the Senate Judiciary Committee into the S.E.C.’s handling of an insider trading investigation involving Pequot Capital Management, a $7 billion hedge fund run by Arthur J. Samberg. That investigation, which focused on a number of profitable trades by Pequot in advance of mergers or other market-moving news, commenced in 2004 and was being overseen in 2005 by Gary J. Aguirre, a staff lawyer at the S.E.C.
Mr. Aguirre has told the Senate that in the midst of his investigation, his superiors blocked him from taking the testimony of John J. Mack, an influential Wall Street executive and a friend of Mr. Samberg. Mr. Mack now heads Morgan Stanley.
S.E.C. officials argued that Mr. Aguirre was not justified in taking Mr. Mack’s testimony because he could not show that Mr. Mack had inside information or a clear motive for giving it to Mr. Samberg. The investigator said he was simply asking to interview Mr. Mack, not bring charges. Mr. Aguirre protested the decision and was fired in September 2005, a year after he was hired.
Mr. Samberg and Mr. Mack have repeatedly denied any improper conduct.
During the summer, the S.E.C. took Mr. Mack’s testimony. Earlier this month, the agency closed the Pequot investigation, advising Mr. Samberg and Mr. Mack that it would not recommend any enforcement actions against them or the hedge fund.
Mr. Grassley wants the G.A.O. to analyze referrals sent to the S.E.C. by exchanges to see how many actually translate into regulatory actions, to examine what types of cases the S.E.C. brings, and how it begins and tracks its investigations.
Mr. Grassley also asked the office to review how the commission ensures that stock exchanges police their members adequately and whether the systems at these exchanges ensure that “influential individuals” cannot gain access to data that are not public.
Mr. Grassley has shown particular interest in the S.E.C.’s policing of possible insider trading by institutions like hedge funds and brokerage firms. Securities regulators in Britain have made insider trading, especially involving hedge funds, an enforcement priority recently.
Hedge funds are lightly regulated, large pools of capital that play an increasingly powerful role in world markets; they control more than $1.2 trillion in assets.
Richard J. Hillman, managing director of financial markets and community investment at G.A.O., said that his organization gets frequent requests to study the commission’s operations. In 2004 and 2005, for example, the G.A.O. examined the commission’s mutual fund oversight; last year, it reviewed how it assesses and collects fines, penalties and disgorgement in its cases.
S.E.C. officials have not finished compiling data on enforcement cases brought or opened during its most recent fiscal year, which ended Sept. 30. For the 11 months that ended in August, the S.E.C. opened 838 investigations. Full-year figures for investigations opened in 2005 totaled 947, down from 975 commenced in 2004.