“The plot grows thicker,” declared Senate Judiciary Committee Chairman Arlen Specter at the conclusion of a Tuesday hearing aimed at finding out if the Securities and Exchange Commission mishandled an investigation into Pequot Capital Management and later violated the rights of a whistleblower.
“It is very, very troubling what the SEC has done,” asserted Specter, a Pennsylvania Republican, after SEC Inspector General Walter Stachnik told the Senate panel that the Department of Justice had advised him not to discuss a related matter with the Senate Judiciary Committee.
The committee is investigating the SEC’s commitment to the Pequot investigation as well as whether the regulator retaliated against a former employee who accused the SEC of quashing the investigation because a key subject of the investigation, Morgan Stanley Chief Executive Officer John Mack, had “powerful” political connections.
Last Friday, the SEC cleared Mack of all charges. However, to judge from their tenacious questioning, the Judiciary Committee is bullish on continuing their investigation in the new year. At that time, Specter and other lawmakers are expected to introduce new whistleblower protection bills.
Specter and Senate Finance Committee Chairman Charles Grassley, an Iowa Republican who is also a member of the Judiciary Committee, vigorously defended former SEC investigator Gary Aguirre as a whistleblower during the hearing. Aguirre and another SEC investigator, Eric Ribelin, testified that they were uncomfortable with the way the commission handled the Pequot investigation.
The senators used Aguirre and Ribelin’s accusations as a springboard to aggressively question current and former SEC officials about the details of the Pequot probe and the timing of Aguirre’s termination. Earlier in the hearing, Ribelin had testified that the Pequot investigation “smelled rotten.”
Specter fired questions at Aguirre’s former boss, Robert Hanson, a branch chief in the SEC’s enforcement division, about why the commission delayed questioning Mack until after the statute of limitations had expired on certain enforcement rules. By waiting, Specter noted, prosecutors were limited to the types of penalties that could be levied against Mack if he was found guilty of insider trading.
Hanson contended that the SEC did not question Mack earlier than it did because the case presented by Aguirre against the investment-banking executive was not strong. Aguirre had alleged that Mack illegally passed along inside information to help Pequot benefit from an as-yet-undisclosed merger.
But Specter offered another theory about why Mack was questioned late. The senator read an E-mail message to the committee in which Hanson wrote that Mack had “juice,” or what Specter characterized in his closing remarks as political sway. For his part, Hanson replied that he simply wanted the SEC to have “all of its ducks in a row,” before it asked Mack to testify.
Specter also asked Hanson and other SEC officials why a supplemental performance evaluation was added to Aguirre’s personnel file—without Aguirre’s knowledge—after the whistleblower accused the SEC of going easy on Mack. The supplemental evaluation gave Aguirre an unfavorable performance rating two months after he received a favorable rating on his regular evaluation.