Continuing with my chain of thought from yesterday.
Personally, I can't get too worked up about the underlying charge, i.e. that the possibility of insider trading regarding the GE/Heller merger wasn't pursued as it might have been.
I don't believe in the prohibition of insider trading per se. I suspect, in fact, that it is economically counter-productive. Yes, in many cases "insider trading" actually means "breach of fiduciary obligation." And, when that is the case, there ought to be remedies for the victims of that breach. But then the proper term to use is, precisely, "the breach of fiduciary obligation." Or if that's too many syllables, call it BFO!
The problem with "insider trading" is that it doesn't very snugly overlap with the long-standing legal understanding of a BFO.
Former hedge fund manager Ralph Cioffi stands accused of insider trading, for example. I know of no plausible BFO claim in that matter. [Subscription will be required if you follow that link].
Nor is it clear to me that Pequot Capital was the sort of "insider" who in a rational world would be prohibited from trading on the basis of what its execs knew about the upcoming acquisition of Heller by GE.
"Ah," you might reply, "but the law is what it is, whether you like it or not, and ought to be applied equally to all persons without fear or favor."
To which, IMHO, a shrug is a sufficient response. The problem with the prosecution of insider trades beyond the BFO limits is that it has a very strong detterent effect upon the best informed traders: which necessarily means that it slows the process of aggregating information -- the process of price discovery in the broadest sense, which is what the markets are for.
None of this, BTW, is to concede anything as to the facts in dispute on Mr. Mack's or Pequot's behalf, BTW. I of course have no authority to make any concession for them, and they have denied any insider trading.
In a statement in June 2006, Pequot said that it has $7 billion in assets under management, and that it had made some 136,000 trades during the period under review by the SEC. This allows for statistical cherry picking.
It is only natural that, because of the consequence of timing, some of those 136 thousand trades could be identified as possible insider trades by market surveillance. In other words, any trade that comnes just before a merger looks suspicious if seen in isolation, though the cherry was in fact only part of a much larger sundae.
Showing posts with label Pequot Capital. Show all posts
Showing posts with label Pequot Capital. Show all posts
12 October 2008
11 October 2008
New IG sides with Aguirre
It has been a year and a half since I mentioned Gary Aguirre in this blog.
It's time for an update.
The Inspector General of the Securities and Exchange Commission has put out a 191 page report on the controversy that arose in 2005, when supervisors fired Aguirre while (and allegedly because) he was pursuing insider-trading charges involving the hedge fund Pequot Capital Management, and GE's plans to acquire Heller Financial.
The New York Times ran a story on his termination in June 2006, making the matter a political hot potato.
By December 2006, at a Senate Judiciary Committee hearing, some of those supervisors offered their own accounts of wht Aguirre was actually fired. Of course, they didn't say, "We were trying to protect our buddy John Mack, formerly of Pequot, from this whipper snapper."
What they said was perhaps put best by Mark Kreitman, the assistant director of enforcement at the SEC. Kreitman testified that when Aguirre began working under Kreitman at the SEC, "I refused his request for special treatment to be allowed to report outside the chain of command directly to me."
Kreitman further: Aguirre came to believe "primarily on the basis of speculation, that Mr. Mack was the tipper in Pequot's trading prior to announcement of GE's acquisition of Heller Financial, and repeatedly and heatedly insisted that we subpoena John Mack for testimony immediately, before he had developed evidence that Mr. Mack had access to material nonpublic information, or indeed any potentially inculpatory evidence with which to confront Mr. Mack."
The contention, then, is that Aguirre may have been rather too full of himself even at the start of his employment there, and may have overstretched in terms of his own speculations.
Nonetheless, in August 2007 the two relevant Senate Committees, Judiciary and Finance, but out a joint report on the matter, sympathetic to Aguirre and critical of the then-Inspector General of the SEC for failing to pursue the issue of the true reason for his termination. The IG at that time, Walter Atchnik, "retired" from his office, simultaneous with the release of the Senate report.
So this new report is obviously the product of another IG, H. David Kotz. Excerpts have been quoted in a lot of publications but I don't believe the whole 191 pages is publicly available yet.
Here's a link to the account in The New York Times.
Kotz, like the Senate committees, finds Aguirre's version of events credible. He doesn't focus on the underlying insider-trading case, which is now closed (and all involved have denied wrongdoing, BTW) but he does conclude that Aguirre's supervisors, including Kreitman, allowed "inappropriate reasons" to factor into their decision to fire Aguirre.
I'll have some further observations on the whole mess in tomorrow's entry.
It's time for an update.
The Inspector General of the Securities and Exchange Commission has put out a 191 page report on the controversy that arose in 2005, when supervisors fired Aguirre while (and allegedly because) he was pursuing insider-trading charges involving the hedge fund Pequot Capital Management, and GE's plans to acquire Heller Financial.
The New York Times ran a story on his termination in June 2006, making the matter a political hot potato.
By December 2006, at a Senate Judiciary Committee hearing, some of those supervisors offered their own accounts of wht Aguirre was actually fired. Of course, they didn't say, "We were trying to protect our buddy John Mack, formerly of Pequot, from this whipper snapper."
What they said was perhaps put best by Mark Kreitman, the assistant director of enforcement at the SEC. Kreitman testified that when Aguirre began working under Kreitman at the SEC, "I refused his request for special treatment to be allowed to report outside the chain of command directly to me."
Kreitman further: Aguirre came to believe "primarily on the basis of speculation, that Mr. Mack was the tipper in Pequot's trading prior to announcement of GE's acquisition of Heller Financial, and repeatedly and heatedly insisted that we subpoena John Mack for testimony immediately, before he had developed evidence that Mr. Mack had access to material nonpublic information, or indeed any potentially inculpatory evidence with which to confront Mr. Mack."
The contention, then, is that Aguirre may have been rather too full of himself even at the start of his employment there, and may have overstretched in terms of his own speculations.
Nonetheless, in August 2007 the two relevant Senate Committees, Judiciary and Finance, but out a joint report on the matter, sympathetic to Aguirre and critical of the then-Inspector General of the SEC for failing to pursue the issue of the true reason for his termination. The IG at that time, Walter Atchnik, "retired" from his office, simultaneous with the release of the Senate report.
So this new report is obviously the product of another IG, H. David Kotz. Excerpts have been quoted in a lot of publications but I don't believe the whole 191 pages is publicly available yet.
Here's a link to the account in The New York Times.
Kotz, like the Senate committees, finds Aguirre's version of events credible. He doesn't focus on the underlying insider-trading case, which is now closed (and all involved have denied wrongdoing, BTW) but he does conclude that Aguirre's supervisors, including Kreitman, allowed "inappropriate reasons" to factor into their decision to fire Aguirre.
I'll have some further observations on the whole mess in tomorrow's entry.
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