Pequot Capital Management Inc. and the hedge-fund firm’s founder, Arthur Samberg, will pay almost $28 million to settle regulatory claims they illegally tapped information from a Microsoft Corp. employee to bet on the software maker’s stock in 2001.
Samberg, who said last year he was winding down what was once the world’s biggest hedge fund, agreed to be barred from working as an investment adviser, the Securities and Exchange Commission said today in a statement announcing the case. The SEC also brought a civil claim against the former Microsoft worker, David Zilkha, saying he concealed his actions during an earlier probe.
“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,” Robert Khuzami, the agency’s enforcement director, said in the statement. “Both are high-priority targets.”
Senators including Iowa Republican Charles Grassley have criticized the SEC’s decision in 2006 to close an examination of Pequot’s trades, including scrutiny of Morgan Stanley Chairman John Mack. Interest was rekindled last year after investigators got copies of e-mails between Zilkha and a Microsoft colleague from a hard drive in possession of Zilkha’s ex-wife.
“Federal regulators have finally followed the evidence to its logical conclusions after years of unnecessary delays and timidity,” Grassley said in a statement today. “There was clearly a case to be made against Pequot, and the SEC has finally admitted it.”
Jonathan Gasthalter, a spokesman for Samberg, 69, and Wilton, Connecticut-based Pequot, declined to comment. Samberg and Pequot didn’t admit or deny wrongdoing when agreeing to settle.
Zilkha’s attorney, Henry Putzel, didn’t return a phone call seeking comment. Microsoft spokesman Peter Wootton declined to comment. The Redmond, Washington-based company wasn’t accused of wrongdoing.
In April 2001, Zilkha, now 41, was planning to leave Microsoft and join Pequot when Samberg e-mailed him, seeking information on whether the company would miss quarterly earnings estimates. “Any tidbits you might care to lob in would be appreciated,” Samberg wrote, according to the SEC’s claim.
Zilkha contacted colleagues, learned that earnings would meet or beat expectations, and advised Samberg to buy the stock, according to the agency’s complaints. Samberg invested in Microsoft stock options, helping Pequot funds generate $14.8 million in illegal profits, the SEC said. Afterward, he credited Zilkha for counteracting Pequot’s bearish view of personal computer sales, referring to the company by its ticker, MSFT.
Samberg wrote in a message to Zilkha, “our tech group has a very dim view of pc demand, and consequently msft,” according to the SEC. “in fact, they are short the stock in one account, while it is my largest long. (I shouldn’t say this, but you have probably paid for yourself already!)”
Regulators have examined Pequot’s trades since at least 2004, according to documents an SEC official gave lawmakers for a 2006 hearing. Initially, the agency also focused on whether Mack fed Pequot information about a General Electric Co. deal.
The SEC closed the first inquiry in 2006, writing in an internal memo that it was “extremely unlikely” that Mack leaked information. A simultaneous probe of the Microsoft trades also found “insufficient evidence,” the memo said.
Samberg told federal investigators in 2006 that he couldn’t remember why he made the Microsoft bets and downplayed Zilkha’s role, according to the memo. One tip Zilkha might have provided was “vague” and another was information that didn’t move Microsoft’s stock, investigators wrote in the memo.
Some e-mails cited by the agency today were known to investigators at the time. Others surfaced in January 2009 during a legal fight between Zilkha and his ex-wife. Those were the first “direct evidence that Zilkha had material, nonpublic information about Microsoft,” the SEC wrote in today’s claim.
In one message, Zilkha asked a colleague, “Have you heard whether we will miss estimates? Any other info?” The co-worker responded that “march was the best march of record,” and Microsoft was “on track for revised forecast.”
Zilkha invoked the U.S. Constitution’s Fifth Amendment last year in declining to say why he hadn’t handed over those e-mails during the first SEC investigation, the agency said today.
Grassley’s interest in the inquiry was fueled by former SEC attorney Gary Aguirre, who said agency supervisors stymied the investigation. Aguirre, who was fired by the SEC in 2005, said in an interview today that he would have obtained Zilkha’s e- mails and brought the case if not for the interference.
In the second probe, “the SEC hung with it despite the fact that it was a chapter in their history they would probably rather forget, and they seemed to get a very tough insider- trading sanction,” said Bradley Bennett, a former SEC investigator who’s now a partner at Baker Botts in Washington.
Samberg started Pequot Partners fund in 1986 while he was at Dawson-Samberg Capital Management Inc., a money-management firm based in Southport, Connecticut. He spun off Pequot Capital at the start of 1999, and by 2001 the firm had $15 billion in assets, making it the largest hedge fund in the world.
In a May 2009 letter, Samberg told investors he planned to liquidate his main hedge funds after the new insider-trading investigation “cast a cloud” over the firm.
Samberg and Pequot agreed to forfeit almost $18 million in profits and interest and pay $10 million in fines, the regulator said in its statement. The ban on his work as an investment adviser includes exceptions “aimed solely at winding down Pequot,” the SEC said.