[Senate Hearing 109-898]
[From the U.S. Government Publishing Office]
S. Hrg. 109-898
EXAMINING ENFORCEMENT OF CRIMINAL INSIDER TRADING AND HEDGE FUND
ACTIVITY
=======================================================================
HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
TUESDAY, DECEMBER 5, 2006
__________
Serial No. J-109-121
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
ARLEN SPECTER, Pennsylvania, Chairman
ORRIN G. HATCH, Utah PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina RUSSELL D. FEINGOLD, Wisconsin
JOHN CORNYN, Texas CHARLES E. SCHUMER, New York
SAM BROWNBACK, Kansas RICHARD J. DURBIN, Illinois
TOM COBURN, Oklahoma
Michael O'Neill, Chief Counsel and Staff Director
Bruce A. Cohen, Democratic Chief Counsel and Staff Director
C O N T E N T S
----------
STATEMENTS OF COMMITTEE MEMBERS
Page
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa. 5
prepared statement........................................... 1248
Specter, Hon. Arlen, a U.S. Senator from the State of
Pennsylvania................................................... 1
WITNESSES
Aguirre, Gary J., former Investigator, Securities and Exchange
Commission, Washington, D.C.................................... 13
Berger, Paul R., former Associate Director, Division of
Enforcement, Securities and Exchange Commission, Washington,
D.C............................................................ 22
Blumenthal, Richard, Attorney General, State of Connecticut,
Hartford, Connecticut.......................................... 3
Hanson, Robert B., Branch Chief, Division of Enforcement,
Securities and Exchange Commission, Washington, D.C............ 15
Kreitman, Mark, Assistant Director, Division of Enforcement,
Securities and Exchange Commission, Washington, D.C............ 19
Ribelin, Eric, Branch Chief, Office of Market Surveillance,
Securities and Exchange Commission, Washington, D.C............ 25
Stachnik, Walter J., Inspector General, Securities and Exchange
Commission, Washington, D.C.................................... 38
Tenpas, Ronald J., Associate Deputy Attorney General, Department
of Justice, Washington, D.C.................................... 6
Thomsen, Linda C., Director of Enforcement, Securities and
Exchange Commission, Washington, D.C........................... 17
QUESTIONS AND ANSWERS
Responses of Gary J. Aguirre to questions submitted by Senators
Grassley and Specter (Note: This material has been redacted by
the staffs of Senators Specter and Grassley.).................. 44
Responses of Paul R. Berger to questions submitted by Senators
Specter and Grassley........................................... 440
Responses of Robert B. Hanson to questions submitted by Senators
Specter and Grassley........................................... 447
Responses of Mark Kreitman to questions submitted by Senators
Grassley and Specter........................................... 453
Responses of Eric Ribelin to questions submitted by Senator
Specter........................................................ 457
Responses of Walter J. Stachnik to questions submitted by
Senators Specter and Grassley.................................. 459
Responses of Ronald J. Tenpas to questions submitted by Senator
Specter........................................................ 479
Responses of Linda C. Thomsen to questions submitted by Senators
Grassley and Specter........................................... 499
SUBMISSIONS FOR THE RECORD
Aguirre, Gary J., former Investigator, Securities and Exchange
Commission, Washington, D.C., statements and attachments (Note:
This material has been redacted by the staffs of Senators
Specter and Grassley.)......................................... 509
Berger, Paul R., former Associate Director, Division of
Enforcement, Securities and Exchange Commission, Washington,
D.C., statement and attachment................................. 1221
Blumenthal, Richard, Attorney General, State of Connecticut,
Hartford, Connecticut, statement............................... 1244
Hanson, Robert B., Branch Chief, Division of Enforcement,
Securities and Exchange Commission, Washington, D.C., statement 1250
Kasowitz, Marc E., Counsel, Alliance for Investment Transparency,
Washington, D.C., statement.................................... 1256
Kreitman, Mark, Assistant Director, Division of Enforcement,
Securities and Exchange Commission, Washington, D.C., statement
and attachment................................................. 1262
Tenpas, Ronald J., Associate Deputy Attorney General, Department
of Justice, Washington, D.C., statement........................ 1268
Thomsen, Linda C., Director of Enforcement, Securities and
Exchange Commission, Washington, D.C., statement and
attachments.................................................... 1276
Wood, John P., CEO & Chairman of the Board, Telos Corporation,
Ashburn, Virginia, statement................................... 1315
EXAMINING ENFORCEMENT OF CRIMINAL INSIDER TRADING AND HEDGE FUND
ACTIVITY
----------
TUESDAY, DECEMBER 5, 2006
U.S. Senate,
Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice, at 9:32 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Arlen
Specter, Chairman of the Committee, presiding.
Present: Senators Specter and Grassley.
OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM
THE STATE OF PENNSYLVANIA
Chairman Specter. Good morning, ladies and gentlemen. The
Judiciary Committee will now proceed with this hearing on
enforcement of insider trading and the issue of hedge funds,
where we now find enormous growth, to more than $1 trillion a
year, some 30 percent of the U.S. stock transactions.
Sarbanes-Oxley had included in it provisions for criminal
law enforcement which came out of hearings from the Judiciary
Committee, and this is the third in a series of hearings by the
Judiciary Committee into this very important subject.
We have circulated draft legislation which will be the
subject of comment here today. A concern about Federal court
decisions prohibiting coordination between the Securities and
Exchange Commission and the Department of Justice invalidating
two criminal prosecutions. A question arises as to why that
should be. What is the problem with having the SEC and the
Department of Justice coordinate?
We find that the whistleblower provisions of existing law
have not been utilized by the Securities and Exchange
Commission, and the draft legislation has a proposal to make
awards at the discretion of the Attorney General in substantial
amounts to whistleblowers who have proceeds going to the
Federal Government by way of fine or settlement or other
enforcement mechanisms.
And with the development of the hedge funds so that there
are many who are now investing, the so-called smaller
investors, the issue arises as to whether there ought to be
regulation. That is really essentially a matter for the Banking
Committee, and I have talked to Senator Shelby, the Chairman,
about that.
The Judiciary Committee is making an inquiry, as is the
Finance Committee, led by Chairman Senator Grassley, who is
also a member of this Committee. And the draft legislation has
a provision which would call for regulation where there are
pension funds involved. Those are subjects which we are going
to be considering in the course of today's hearing.
The issue of the investigation into charges brought by Mr.
Gary Aguirre has attracted the attention of the Committee.
There are a number of factors which raise issues. We have had
the unusual result of Mr. Aguirre being involved in a very
important SEC investigation and having favorable evaluations of
his job and two pay raises, and then when he presses an
investigation to have suddenly a re-evaluation as to what he
has been doing and to have him terminated.
We have another investigator in the SEC expressing concerns
about the nature of the investigation, what has been happened,
and submits an e-mail after being asked to be relieved of his
responsibilities that there is something smelly going on.
Then you have no action taken by the SEC until the Senate
investigation is initiated. You have the deposition taken of
Mr. Mack long after it might have been taken in the ordinary
course of business, and, curiously, 5 days after the statute of
limitations has run.
You have the Inspector General of the SEC closing out an
investigation without interviewing Mr. Aguirre. A little hard
to understand that kind of investigative technique.
What is the explanation? Well, that is something that this
Committee is going to try to find out. At best, it looks like
extraordinarily lax enforcement by the Securities and Exchange
Commission. That is at best. And at worst, it has the overtone
of a possible coverup. And those are difficult matters to
ascertain, but we are dealing here with a very, very important
subject.
We are dealing with communications between individuals
where there appears to be inside information on a pending
merger and some $11 million is gained by transactions related
to that. And the matter is referred to the SEC, and nothing is
done for 2 years. Then finally, when the investigation by Mr.
Aguirre is picked up, those events occur.
Well, maybe it is just smoke and maybe there is no fire,
but where you have hedge funds with as dominant a role as they
are playing in the economy, more than $1 trillion, and their
expansive nature in picking up smaller investors, pension
funds, and this Committee is charged with oversight on
enforcement, these are very, very important matters.
In reviewing the orderly sequence for today's hearing, I
had wanted the witnesses who were at the table now as to panel
one, but I believe it would be more efficient to alter the
presentation.
So we are going to hear first from Associate Deputy
Attorney General Ronald Tenpas and Connecticut Attorney General
Richard Blumenthal. So if you gentlemen would step back, and
Mr. Tenpas and General Blumenthal will step forward, and Ms.
Linda Thomsen will be in the second panel.
Our first witness this morning will be Connecticut Attorney
General Richard Blumenthal, an outstanding record in public
service, having served in the Connecticut State Senate, State
House of Representatives, and as a U.S. Attorney for the
District of Connecticut, was law clerk to Justice Harry
Blackmun, formerly assistant to Senator Abraham Ribicoff, and
Presidential assistant to Daniel Patrick Moynihan before he
became a Senator; Phi Beta Kappa graduate of Harvard and law
school from Yale and editor of the Yale Law Journal. Pretty
good pedigree, Mr. Blumenthal. We welcome you here and look
forward to your testimony.
STATEMENT OF RICHARD BLUMENTHAL, ATTORNEY GENERAL, STATE OF
CONNECTICUT, HARTFORD, CONNECTICUT
Mr. Blumenthal. Thank you very much, Mr. Chairman. I
appreciate this opportunity to be with you again, and I want to
thank you, as Chairman of this Committee, as well as the
Committee itself for its leadership in this absolutely critical
area, focusing not only on the specific instance--that you have
just outlined so well--of potential problematic laxity in
investigation, but also on the more general problems that arise
with respect to hedge funds. And with your permission, I would
like to present a much abbreviated version of my testimony and
then have the full text entered in the record.
Chairman Specter. Attorney General Blumenthal, your full
statement will be made a part of the record, as will all other
statements, and we appreciate your summarizing.
Mr. Blumenthal. Thank you.
As you very correctly observed, hedge funds have become
more and more retailed in the financial markets to investors
who are no longer the wealthy and sophisticated individuals who
once were viewed as the sole kind of investors in hedge funds,
and now the $1 trillion and 9,000 hedge funds that are involved
in this industry span a much broader section of the American
public.
But, equally important, they involved investment vehicles
and instruments such as credit default swaps and increasing use
of public offerings, bonds and so forth, that can impact the
markets.
The investments in commodities, as we saw with Amaranth,
can have a huge, sweeping effect on those markets and
potentially for good, but also for ill. And so I think that the
emphasis in the draft discussion bill on greater disclosure of
risk strategy and of other very relevant factors in operation
of hedge funds is absolutely going in the right direction.
I want to emphasize also the importance of protecting
whistleblowers, and I think that point is directly relevant to
the specific subject relating to Pequot Capital that brings us
here today or has elicited the Committee's attention.
The kinds of rewards for whistleblowers we have found in
our investigation, protection for people who are willing to
risk their lives and livelihoods, their careers and
reputations, is critical, and the idea of providing, for
example, 30 percent of any sort of civil fines and penalties,
as a maximum 30 percent, as much as 30 percent, is a very, very
promising concept, and I think in my view, based on my
experience in our investigation, is a very worthwhile avenue to
pursue.
I want to also emphasize the importance of concurrent
jurisdiction--it is mentioned in my testimony, but I think,
again, it is an area that acquires even greater importance in
light of the potential problems in the Pequot Capital
investigation by the SEC--concurrent jurisdiction that enables
States to be active participants and partners, but also
empowered to conduct their own investigations in this area if
necessary has been one of the lessons, I think, in recent
history, whether in securities, insurance, environment, the
role of States in active, aggressive law enforcement where the
Federal Government, either purposely or inadvertently, abandons
the field or fails to be sufficiently aggressive is a lesson
that I think is applicable here as well.
The kinds of experiences we have had in Connecticut with
hedge funds, whether Amaranth or Bayou, others obviously across
the country where there have been failures, I think emphasize
the importance of that concurrent jurisdiction where States
like Connecticut which have a very heavy representation of
hedge funds can be an active participant is very important, in
my view.
And, finally, I want to just emphasize one very important
feature of changing the law that I think should be examined by
the Committee. Raising the net worth or income levels that are
required for participation in hedge funds is one of the most
important steps that this Committee could take or that the SEC
could take, because it will raise the bar, so to speak, and
enable investors themselves to be of the type that can do their
due diligence, that will have the assets and the sophistication
that hedge funds initially were supposed to provide, and that
hedge fund investors were supposed to have.
And so I would suggest, for example, that the net worth
requirements be raised to $2 million--presently they are $1
million--or higher, and that the minimum income requirements
for investors be raised far higher than the $200,000 now, as an
alternative to that $2 million, perhaps on the order of
$500,000.
These numbers are illustrative, as I indicate in my
testimony, but, again, such requirements would help ensure that
hedge fund investors are capable of doing the due diligence and
assessing the risk that informed hedge fund participation
requires.
I want to again thank the Committee for giving me this
opportunity and look forward to continuing my contribution as
someone who comes from a State where hedge funds are a big part
of our economy. We want there to be Federal action rather than
a patchwork of different State rules or guidelines.
We want the Federal Government to take the lead because we
want to avoid disadvantaging hedge funds in any single State,
and instead we should have uniform national rules, stronger
protections for investors in disclosure and accountability than
we do now.
Thank you.
[The prepared statement of Mr. Blumenthal appears as a
submission for the record.]
Chairman Specter. Well, thank you, Attorney General
Blumenthal. We appreciate your coming back to testify, and we
appreciate what you are doing on the State level, and we thank
you for being with us.
We have been joined now by Senator Grassley, who, as I had
mentioned earlier, has taken the lead with the Finance
Committee on inquiries into what is happening with hedge funds.
He is chairing another hearing, so since he is a distinguished
member of the class of 1980, one of the two remaining members
of that class, I am going to yield to him at this time.
STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM THE
STATE OF IOWA
Senator Grassley. Thank you. I appreciate your courtesies.
I also appreciate your continued cooperation that you have
given with my Committee in working on this issue.
I also ought to appreciate the cooperation of the
Securities and Exchange Commission, and particularly Chairman
Cox, in providing documents, information, and witnesses to both
the Finance and Judiciary Committees during this investigation.
The SEC is recognizing the constitutional responsibility of
Congress to conduct oversight of Federal agencies. A lot of
other Federal agencies, especially Health and Human Services
and the Justice Department, could learn a lot from this good
example set by the SEC.
Now, today's hearing is the second by this Committee
relating to penalties for criminal enforcement of illegal
insider trading, and the third that has discussed the evolving
role involving hedge funds.
And so I want everybody to know that I share Chairman
Specter's concerns about the extent of insider trading and its
impact on public confidence in the fairness and integrity of
the stock market.
This Committee has jurisdiction over criminal laws, and
with today's hearing we need to see if the laws on the books
are strong enough to see that they are enforced in a way that
Congress intended.
We are also here today to discuss allegations brought by
the former SEC Attorney Gary Aguirre. His allegations led to a
joint Finance/Judiciary Committee investigation on whether
there was retaliation against this SEC lawyer for his role in
the investigation of a large hedge fund. The Senate
investigation also focused on the original investigation of
these allegations by the Inspector General of the SEC.
Today we will hear about findings from the Senate
Committees' investigation along with information learned
through witness interviews and an extensive review of SEC
documents. We will dig into why the Inspector General failed to
uncover important evidence corroborating many of these
allegations.
We will also question Mr. Aguirre's supervisors about the
debate that went on inside the SEC about whether and when to
ask a high-profile Wall Street executive some key questions
during its insider trading investigation.
The resistance of the SEC to taking Mr. Mack's testimony
until after the press and Congress put a spotlight on issues
raised serious questions for me about whether captains of
industry get the same treatment as regular investors or whether
they get treated with kid gloves.
Finally, we will question Mr. Aguirre's supervisors about
the SEC's personnel process and why they created an alternative
negative evaluation of Mr. Aguirre that was not submitted into
his personnel file until after they fired him.
I would like to hear how they can square that with his
original positive evaluation and the pay increases that he got.
It looks like that negative evaluation was only created after
Mr. Aguirre started complaining to his supervisors that it was
unfair to treat John Mack differently than the SEC would treat
an average investigation in the same situation. That is not a
legitimate reason to go back and change an employee's
performance evaluation.
These issues point to problems within the agency that
distract from the core mission of protecting investors. This
hearing can kick-start some necessary changes at the SEC. This
hearing is about finding solutions as well as exposing
problems.
I thank you, Mr. Chairman. I will be back to ask questions.
[The prepared statement of Senator Grassley appear as a
submission for the record.]
Chairman Specter. Thank you very much, Senator Grassley.
Thank you for your leadership and extensive work this on this
important subject.
Senator Grassley. Thank you.
Chairman Specter. We now turn to Associate Deputy Attorney
General Ronald Tenpas, who has responsibilities including
coordinating work by the President's Corporate Fraud Task Force
and reviewing policy proposals related to preventing and
punishing crimes in the corporate world.
Previously, Mr. Tenpas was U.S. Attorney for the Southern
District of Illinois and an Assistant U.S. Attorney in both the
Middle District of Florida and the District of Maryland. He
clerked for Chief Justice Rehnquist and Judge Pollak of the
Eastern District of Pennsylvania; bachelor's degree from
Michigan, law degree from the University of Virginia, and a
Rhodes scholar.
Thank you for being with us today, Mr. Tenpas, and the
floor is yours.
STATEMENT OF RONALD J. TENPAS, ASSOCIATE DEPUTY ATTORNEY
GENERAL, DEPARTMENT OF JUSTICE, WASHINGTON, D.C.
Mr. Tenpas. Thank you, Senator Specter. Thank you for the
opportunity to be back and talk again about this issue.
I thought in my opening I would focus my remarks on the
bill's criminal provisions, the draft bill that you have shared
with us, and try to highlight the effect some of those
provisions would have on our criminal enforcement efforts.
As we discussed in my prior appearance here, there is a
division of labor in this arena between the civil and criminal
enforcement effort, with DOJ having the lead in the criminal
enforcement arena.
Let me start my discussion with Section 4 of the bill. This
section would amend Title 18, Section 1348, by adding a new
subsection (b) that would expressly prohibit insider trading.
We believe it could be helpful to put insider trading
offenses on a firmer statutory footing than they now stand,
which is really as a species of judicially recognized Title 15
offenses where Title 15 prohibits schemes to deceive associated
with the offering and sale of securities. So creating some
statutory clarity here in that court-created arena could be
helpful to us.
We do have a number of concerns about the specifics
reflected in the bill. For example, the section is entitled
``Willful misuse of material nonpublic information.'' Yet the
new paragraph (b)(2)(1)(A) incorporates a ``knowingly''
standard, while paragraph (b)(2)(1)(B) provides no explicit
scienter requirement.
The new subsection (b) as currently worded introduces at
least two substantial changes from current law. It eliminates
the element that a person who is charged with insider trading
be shown to have a ``duty'' with respect to that information.
We have concerns that eliminating this requirement
potentially subjects to criminal sanctions those who might
innocently come by valuable information and trade on it.
Conversely, the draft bill essentially adds a new affirmative
defense that trading on inside information is acceptable if
that information was ``gained by...research and skill.''
Such a formulation will make it more difficult to prove
insider trading than is the case under current law where no
such defense exists. Similarly, some of the phrases, such as
``of a specific nature'' and the phrase ``significant factor,''
which are included in the legislation, would impose burdens
that we do not currently face, and so give us concern.
We think perhaps a better model may be to look to the
definition of ``insider trading'' that the SEC has already
promulgated through its regulatory process and then build from
that if any adjustments are necessary. Obviously, we would be
happy to work with you and other members of the Committee on
such an effort going forward.
Similarly, in Section 4, paragraph (c), we welcome the
effort to make clear the Department's authority to investigate
insider trading offenses and to do so in a manner that involves
express coordination with our partners at the SEC.
As you noted, there have been a couple of court decisions
in this arena recently, and the United States has appealed one
of those decisions that has, unfortunately, created potential
barriers to the conduct of parallel investigations.
Thus, while we welcome the thrust of the effort to cure
some of this, we would urge that any final decisions on how to
respond be made after the appellate court releases its decision
so that we can ensure that any legislation provides as
comprehensive a fix as possible in light of where the law will
stand at the time of that decision.
Even as that section is framed right now, there are things
that we would hope to have a chance to work with you and the
Committee on to perhaps tweak a bit. Proposed paragraph (c)(2)
of Section 1348 would provide that neither the Attorney General
nor any other Federal agency would have a duty to disclose any
investigation or to disclose any contacts made with a companion
agency to ``request or receive evidence,'' is the language in
the bill.
But we have traditionally coordinated our efforts with the
SEC through more than just requesting or receiving evidence.
Thus, this language might be argued to cut back on rather than
to confirm the proprietary of some of these traditional
coordination efforts.
And, similarly, the language in the proposed bill applies
only to investigations of violations of ``this section,'' i.e.,
Section 1348 of Title 18. Yet we continue to have parallel
proceedings that involved other criminal provisions of Title 18
and Title 15, which could be equally frustrated or affected by
these court decisions. And so, again, we would be concerned
about some of the particular language contained in the bill.
Let me also briefly turn to Section 5, the section to
create incentives for private citizens to report and assist in
the investigation of insider trading. We always welcome the
assistance of private citizens who report criminal acts.
However, giving such substantial financial incentives to
individuals to make criminal allegations would be a fairly
dramatic departure from past practice in the criminal arena and
will introduce new complexity for us and, thus, raise concerns.
Such financial incentives may produce not only meritorious
allegations that are helpful, but also false allegations that
can result in individuals being false accused.
It will be important grist for impeachment of key
government witnesses, and we are concerned about whether the
factors the statute indicates should be considered in
fashioning a reward amount are meant to be exhaustive or only
illustrative.
For example, we think it would be significant to consider
whether the person who provides the information was himself
complicit in the crime, and that is not a factor that is
identified as a factor for consideration.
Let me conclude there. I have laid out in more detail in
the written testimony other examples of specifics that we
observe we would like the opportunity to work with the
Committee on further.
Thank you.
[The prepared statement of Mr. Tenpas appears as a
submission for the record.]
Chairman Specter. Thank you very much, Mr. Tenpas.
I will include in the record at this point a statement from
Mr. John P. Wood, Chief Executive Officer and Chairman of the
Board of the Telus Corporation, a four-page analysis favoring
the draft legislation.
[The prepared statement of Mr. Wood appears as a submission
for the record.]
Chairman Specter. Mr. Tenpas, the jurisdiction of the
Judiciary Committee led to the enactment of 18 United States
Code 1348 Criminal Code in 2002, and the question I have for
you at the outset is: How many indictments have been brought
under that statute?
Mr. Tenpas. We have brought just over 50. I think the
number is around 53, 54, something in that neighborhood.
Chairman Specter. And how many of those involved insider
trading?
Mr. Tenpas. We do not have a good way to measure that,
Senator.
Chairman Specter. Why not?
Mr. Tenpas. Because as I alluded to earlier, insider
trading is a species of schemes to defraud, and so we simply--
in our statistical programs that track this, we track the
statute that has been charged. We do not necessarily track sort
of the underlying theory that has been used. Is it insider
trading? Was it accounting fraud or any of the other kinds of
things that might be a violation of the statute?
Chairman Specter. Mr. Tenpas, insider trading is
sufficiently important so that I think it would be very useful
to this Committee if you would make that identification,
because that is a little different species. So would you
endeavor to do so?
Mr. Tenpas. We will do so.
Chairman Specter. Mr. Tenpas, just last Thursday, on
November 30th, Mr. Michael Tom of Global Time Capital Growth
Hedge Fund was given 3 years' probation in Boston involving a
trading tip that Citizens Bank would be acquiring Charter One
Financial. He made a $750,000 profit on that transaction and
got 3 months' probation. Is that sentence adequate?
Mr. Tenpas. I am not--
Chairman Specter. You have been an Assistant U.S. Attorney
in two districts, a U.S. Attorney in one district. The
assistant prosecutors have a pretty good feel for that, and I
recall my days as an Assistant D.A. Three months' probation for
$750,000? That is more than you get paid, $250,000 a month.
What do you think?
Mr. Tenpas. I am simply not familiar with the specifics. We
would be happy to go back and look at it and advise the
Committee of what went into fashioning that sentence.
Obviously, as you are aware, the sentence ultimately is
determined by the court, and I am not--
Chairman Specter. Oh, is that so?
Mr. Tenpas. I am not certain whether the United States made
a particular recommendation in that case or not.
Chairman Specter. Well, is there any coordination on DOJ
recommendations? The Department of Justice does make
recommendations. We do know that it is up to the judge.
Mr. Tenpas. Certainly the United States Attorney's Office
will--the prosecutor assigned to the case will typically make
some--give some indication at the sentencing of the appropriate
sentence.
Chairman Specter. Well, that is a pretty big case. I would
have thought that you would have had some familiarity with
that. You are in a key position. Aren't those matters brought
to your attention for your input?
Mr. Tenpas. A case of that magnitude would not necessarily
or routinely--
Chairman Specter. What magnitude would it take?
Mr. Tenpas. It is usually going to be bigger than that, in
the several millions of dollars. Our U.S. Attorney's Offices
routinely handle matters in which the loss or the fraud is in
the hundreds of thousands of dollars, and so a case of that
magnitude, given what you have described, is not something that
I would routinely expect to come to officials in Washington.
Chairman Specter. Mr. Tenpas, let me suggest to you that
$750,000 is significant and that it is a very bad sign to get 3
months' probation on that kind of a case.
Attorney General Blumenthal, there has been the overall
approach that voluntary procedures within the industry would be
sufficient, and after the Long Term Capital Management collapse
8 years ago, voluntary industry changes were implemented to
control potential abuses in hedge funds.
And then as you noted in your testimony, Amaranth came
along recently, some $9 billion in losses. How do you evaluate
the overall approach that the industry can regulate itself,
that the bank's involvement puts them sufficiently at risk so
that they will make independent inquiries and that it is not
necessary to have governmental regulation?
Mr. Blumenthal. I think that there is a growing consensus
within the hedge fund industry that measures to require greater
transparency are inevitable and necessary. The voluntary self-
policing I think continues to put at risk lenders to the hedge
funds, commodity markets, as well as individual investors that
now include pension funds, university endowments, a much
broader cross-section of the investing public.
Chairman Specter. When you mention voluntary procedures,
just what does that involve?
Mr. Blumenthal. Essentially it involves primarily the
investor doing the due diligence and getting from the hedge
fund information that is thought necessary about investment
strategies, types of investments, degrees of return, past
performance, baseline performance, compensation for hedge funds
managers--all of the key areas that are identified in your
proposed draft bill.
And I think that is one of the very central points about
this draft bill, that it identifies that information, through
Subdivisions A, B, C, D, E, the investment objectives and
strategies, the risks, the side agreements, the extent of
audits.
I think those are the key pieces of information that right
now, to answer your question directly, are voluntarily
provided, supposedly, by the hedge funds. The problem is that a
lot of the investors, even some of the largest pension funds
and endowments and others that should have that analytical
ability, simply either lack it or are not provided with
complete information. And right now there really is not the
kind of oversight and scrutiny that this bill envisions for
that truth-telling process, that disclosure.
Chairman Specter. Did Amaranth involve pension funds?
Mr. Blumenthal. There were pension funds that lost money in
Amaranth. Indeed, I believe one in California lost about $87
million, the pension funds of one of the cities in California.
And as you know also, Amaranth involved use of the
electronic trading issues through the intercontinental exchange
that right now is not subject to the kind of disclosure
requirements that NYMEX is. So that is another area where hedge
funds are involved in practices where more disclosure should be
required by--
Chairman Specter. Were small investors involved in Amaranth
as well?
Mr. Blumenthal. I know some of them personally. Amaranth
was and continues to be a Connecticut hedge fund. I think it is
now non-operational, but many smaller investors in my own
community, in Greenwich-Stamford, Connecticut, generally, were
involved in Amaranth, as they were involved in Bayou.
Chairman Specter. Do you have any idea of how much they
lost?
Mr. Blumenthal. Well, the total losses probably were in the
range of $6 billion out of the $9 billion that Amaranth had
because $6 billion was approximately the amount that was
invested in natural gas futures. But some of these were losses
of life savings and some on the part of people who couldn't
afford to lose them.
Chairman Specter. And when you talk about small investors,
how do you define ``small''?
Mr. Blumenthal. Well, a small investor would, in my view,
be anyone who cannot afford to lose the amount invested, and in
different communities it may be different amounts.
Right now the million-dollar net worth threshold for an
accredited investor in parts of Connecticut, New York, New
Jersey, Pennsylvania, many areas of our country, is still a
small investor, but many of the investors that I have in mind
have net worths well below that $1 million.
Chairman Specter. Mr. Tenpas, what is your evaluation of
the adequacy of these so-called voluntary industry practices to
safeguard against inappropriate practices by hedge funds?
Mr. Tenpas. I think that is a little beyond the
Department's ken. The President's Working Group on Financial
Markets that is chaired by the Treasury Department includes the
SEC, the Federal Reserve, and the CFTC is really the group that
is looking at that, understands those markets and the way they
work better than we do. And so I think I would have to defer to
that group of folks to give you a sensible evaluation.
Chairman Specter. Well, OK. Let's come back squarely within
your so-called ken. On the parallel investigations by the SEC
and the Department of Justice, you do favor a change in the law
or a specification in the law to deal with the Federal court
decisions which have stricken prosecutions on the ground that
it was inappropriate to have parallel or coordination between
the SEC and the Department of Justice?
Mr. Tenpas. We would welcome, I think, some clarification.
We think those cases were wrongly decided, so I would be
reluctant to say that we think a change in the law is needed.
There have been a couple of cases decided since the Stringer
case that have rejected some of the language in Stringer and
the Scrushy case. So I am not sure we need a change, but we
need some clarification that the view we have taken is, in
fact, the correct view of--
Chairman Specter. Clarification that you can have parallel
investigations appropriately.
Mr. Tenpas. Yes. I think clarification that the Department
and the SEC or other similar regulatory agencies can
communicate with each other about and coordinate their
investigations for appropriate purposes.
Chairman Specter. When you mention that we ought to await
the decision by an appellate court, what is the status there?
How long do we have to wait?
Mr. Tenpas. It is still being briefed. Oral argument has
not been held, so it would probably be, at best, sometime this
spring, early summer. It is in the Ninth Circuit so it is a
little hard for us to predict how long they would have it under
advisement.
Chairman Specter. So you think it might happen sometime
next year.
Mr. Tenpas. I think so.
Chairman Specter. Congress has a pretty good record at
waiting, even without a specific reason, but I think this is
something we really ought to be acting on.
Attorney General Blumenthal, you talk about protecting
whistleblowers. I agree with you. It is not easy to come
forward and to make an identification, but it is indispensable
to have real law enforcement. You are a prosecutor. Mr. Tenpas
was. We know from our common experience how hard it is to
gather this information which is done behind closed doors and
in secrecy.
Do you think the current protections for whistleblowers are
adequate?
Mr. Blumenthal. Overall, I think not, Mr. Chairman. I think
there needs to be a stronger shield, protection against
retaliation, indirect as well as overt, and direct forms of
revenge or retaliation.
Often, as you know, they can be subtle, pernicious, but
long-lasting on a person's career. We see it at the State
level, obviously, which is the arena where I practice now. Just
yesterday, as a matter of fact, my office produced a report
that culminated a 13-month investigation of the Internal
Affairs unit of our State Police that resulted from State
Troopers themselves having the courage and conviction to come
forward with complaints about a system that was in disarray.
And we have protected those whistleblowers. We are able to
do so as best we can at the State level. But we need the kind
of rewards, I think, and incentives that your draft bill
proposes.
As well as the shield, we need the kind of incentives that
will provide a financial security--maybe the best way to
characterize it--for people who come forward and take the risk
that government may not be able to protect them.
We saw it in the tobacco cases where we were guided
initially by whistleblowers, now well known, but, arguably, the
States would not have had the evidence and the guidance that we
needed there without whistleblowers from the tobacco industry.
Again and again what we see is not just disclosure of
information, but also providing a road map.
As you know from your prosecutorial days, and I am sure Mr.
Tenpas does as well, one of the classic tactics of potential
defendants is to deluge prosecutors with documents. Having a
road map, having someone to guide that effort, to pinpoint the
documents that are critical, often is invaluable. And, again,
whistleblowers provide that service.
So I apologize for the long-winded answer, but I believe
that a greater measure of protection, as you have sought, as
the Committee is seeking to do in this bill, is absolutely
vital.
Chairman Specter. That is not long-winded at all, Mr.
Blumenthal, by Senate standards.
[Laughter.]
Chairman Specter. Well, thank you very much, Mr. Tenpas and
Attorney General Blumenthal. We very much appreciate your
testimony.
Mr. Tenpas, if you would followup on those outstanding
issues, and, Attorney General Blumenthal, keep going.
Mr. Blumenthal. Thank you very much, Mr. Chairman.
Mr. Tenpas. Thank you.
Chairman Specter. Thank you very much.
We will now turn to Mr. Aguirre, Mr. Stachnik, Mr. Hanson,
Mr. Kreitman, Mr. Berger, Mr. Ribelin, and Ms. Thomsen.
At this point I will put into the record a lengthy analysis
of six pages by Mr. Mark Kasowitz of the Alliance for
Investment Transparency, dated September 4, 2006, in support of
the draft legislation.
[The prepared analysis of Mr. Kasowitz appears as a
submission for the record.]
Will all of you please stand for the administration of the
Oath? Raise your right hands. Do each of you solemnly swear
that the testimony you will give before this Committee will be
the truth, the whole truth, and nothing but the truth, subject
to the laws on perjury?
Mr. Aguirre. I do.
Mr. Stachnik. I do.
Mr. Hanson. I do.
Mr. Kreitman. I do.
Mr. Berger. I do.
Mr. Ribelin. I do.
Ms. Thomsen. I do.
Chairman Specter. May the record show that each of the
witnesses has said ``I do.''
Mr. Aguirre, thank you for returning to testify before this
Committee. Mr. Aguirre is a former senior counsel with the
Division of Enforcement in the Securities and Exchange
Commission, has nearly 40 years of litigation experience,
including the areas of construction disputes, environmental
regulations, securities litigation, and criminal defense;
published many scholarly legal articles, including one arising
from litigation from the Enron debacle and the application of
Section 10(b) of the Securities Act for fraud; bachelor's
degree in politics and a law degree from the University of
California at Berkeley; a master of fine arts from UCLA and a
master of law from Georgetown University Law Center.
Thank you for being with us, Mr. Aguirre, and we look
forward to your testimony again.
STATEMENT OF GARY J. AGUIRRE, FORMER INVESTIGATOR, SECURITIES
AND EXCHANGE COMMISSION, WASHINGTON, D.C.
Mr. Aguirre. Thank you, Senator Specter. I would like to
express my gratitude for the time that your staff has taken to
look into this matter and your leadership in looking into this
matter.
Before I touch on the Pequot case, I would like to speak
briefly about the SEC's track record on the subject you are
looking at. The SEC has brought--and I am talking, of course,
about insider trading investigations of hedge funds, and
specifically those that result--
Chairman Specter. Mr. Aguirre, is your microphone on?
Mr. Aguirre. I will move a little closer. Specifically
about SEC cases that have been filed against hedge funds for
insider trading. It is a short record. There are six cases.
Three of those cases are PIPEs cases. PIPE transactions are a
filament, a tiny, tiny, thin aspect of our capital markets.
Last year they were $20 billion. Compare that, for example,
with our merger and acquisitions market, which is $1.46
trillion. Half the focus was on this.
On all the other types of insider trading, whatever it is--
mergers, acquisitions, tips before earnings, tips before
drugs--everything else, there are three cases. The total
recovery in those three cases is $110,000. That is the track
record of the SEC in pursuing insider trading with the
exception of the PIPEs cases, and in the PIPEs cases they
recovered $25 million.
Now, those three cases deserve a little more comment. Two
of them involved tiny, tiny hedge funds, and the third, it took
them 5 years to file a case.
Now, I would like to talk for a moment about the Pequot
case, and in particular on the date of June 14th. On that date,
I was meeting with Mr. Hanson and Mr. Kreitman. I was reviewing
for them the status of the case at that moment. I had reviewed
the status of the evidence involving Pequot itself, Mr.
Samberg, and as well as Mr. Mack. That day, they authorized me
to meet the next day with the FBI and the U.S. Attorney and
present the same facts to initiate a criminal investigation.
Now, that is a serious matter. That is why I was so shocked
when, 9 days later, they would not permit the issuance of an
administrative subpoena for Mr. Mack's testimony. Of course,
something had changed during those 9 days.
On June 23rd, the Wall Street Journal announced that Mr.
Mack would be a candidate as the CEO for Morgan Stanley. On
June 22nd or 23rd, Mr. Hanson explained to me that I could not
issue that subpoena for Mr. Mack for one reason, and he gave me
only one reason, and that reason was his powerful political
contacts.
Chairman Specter. Mr. Hanson told you that?
Mr. Aguirre. Face to face, twice that week.
Now, that event was followed very quickly by a phone call
from Morgan Stanley in which I was told by Morgan Stanley's
compliance officer, ``We've got a problem with Mr. Mack if you
guys are going to go after him.''
That investigation vanished in a week, and in that same 7
days, Mr. Mack went from a candidate for CEO to CEO. The rest
of my time I continued minding the evidence against Mr. Mack. I
continued presenting that evidence. And every time I presented
it, the bar went up another notch and the bar went up another
notch. And, finally, it was a 9-foot bar.
I would like to say just a few words about my evaluations.
They were touched on by Senator Grassley, the remarkable way I
had a re-evaluation out of nowhere. I read this morning the
testimony that has come in from the SEC and the attacks. I have
not seen a single piece of paper backing anything that they
have said through my history with the SEC, and I have been
trying to get them through FOIA and Privacy Acts.
Thank you. I think my time has run out.
[The prepared statement of Mr. Aguirre appears as a
submission for the record.]
Chairman Specter. Thank you, Mr. Aguirre.
Mr. Hanson, I am going to go to you out of order so that
you will have a prompt opportunity to respond to Mr. Aguirre's
statement that he and you face to face had an exchange where,
according to Mr. Aguirre's testimony, you told him not to
proceed with an administrative subpoena as to Mr. Mack because,
as Mr. Aguirre puts it, of his powerful political contacts. The
floor is yours, Mr. Hanson.
STATEMENT OF ROBERT B. HANSON, BRANCH CHIEF, DIVISION OF
ENFORCEMENT, SECURITIES AND EXCHANGE COMMISSION, WASHINGTON,
D.C.
Mr. Hanson. Thank you, Senator Specter. I did not say that
to Mr. Aguirre, as he states. I have no recollection of making
that statement. In fact, I had no knowledge at all about Mr.
Mack's political connections at that point.
I certainly knew that Mr. Mack was a very high profile
individual, but I had no idea until I read in the New York
Times recently about Mr. Mack's political connections. I didn't
even know what a Ranger was until I read that in the New York
Times and looked it up. So I had no idea what that was at the
time Mr. Aguirre alleges that I told him that.
Chairman Specter. You may proceed with your testimony
generally, Mr. Hanson, as you choose.
Mr. Hanson. Thank you, Senator Specter. Thank you for the
opportunity to testify today and to respond to false
allegations of abuse of authority that have been advanced by a
former staff attorney of the United States Securities and
Exchange Commission. I appreciate the opportunity to set the
record straight on the matter about which Mr. Aguirre testified
to this Committee last summer.
I have spent my entire legal career in Federal Government
service, currently a branch chief at the SEC, where I have
worked for approximately 8\1/2\ years. Every day I get the
chance to work with motivated professionals dedicated to the
agency's mission. It is a great honor and privilege to do so.
Let me state that in my experience the Division of
Enforcement of the SEC has never considered an individual's
political connections in deciding whether to take his or her
testimony. No one has ever asked or suggested that I refrain
from taking a person's testimony because of his or her
political connections. In conducting and supervising
investigations, I have followed the evidence wherever it leads,
even if the trail points to a prominent executive or a public
figure.
In the investigation concerning the hedge fund Pequot
Capital, I have no reason whatsoever to believe any outside
source ever attempted to influence a decision on taking the
testimony of anyone.
I supervised Mr. Aguirre before he was terminated. I found
him to be highly energetic, but his conduct was erratic and
unprofessional. It was extremely difficult to communicate with
Mr. Aguirre, and miscommunications were common.
Information that Mr. Aguirre presented as fact often turned
out to be mere speculation, and he omitted information that did
not support his hypothesis. He did the same thing in his
written testimony he provided today.
Failing to bring to the Committee's attention the
inconvenient fact that CS First Boston counsel had told Mr.
Aguirre that the individual who Mr. Mack met with before Mr.
Mack joined CS First Boston did not even have the information
that Mr. Aguirre had relied on to support his theory that Mr.
Mack had received the information from CS First Boston before
joining the firm.
One by one, Mr. Aguirre alienated the other staff attorneys
and the assigned trial attorney on the case, treating them with
open hostility for no valid reason. At least twice, Mr. Aguirre
angrily stormed out of the office during the workday after
disagreements with other attorneys in the spring of 2005.
Both times he said he was going to think about what he was
going to do, which I understood him to mean that he was
planning to leave the Commission. He formally tendered his
resignation in June 2005, but later withdrew that resignation.
I learned that he had withdrawn his resignation through the
grapevine rather than from him directly, even though I was
responsible for staffing the case.
Mr. Aguirre then said he would be willing to work to
complete the investigation but would not document his findings,
which was essential to completing the investigation. It became
apparent that Mr. Aguirre was a significant risk to leave at a
moment's notice, regardless of the impact such action would
have on the investigation. His erratic behavior and the
negative impact it had on the other attorneys on the case, on
the investigation compelled me to strongly urge that Mr.
Aguirre be terminated before his probationary period ended.
I was not the first supervisor to recommend that Mr.
Aguirre be terminated. Mr. Aguirre's public assertion that the
Pequot investigation was halted is utterly false. After he was
terminated, the Division of Enforcement continued the
investigation unabated, devoting hundreds of hours to the
matter.
After Mr. Aguirre's termination, investigative staff took
testimony from or interviewed more than a dozen individuals,
made numerous formal and informal document requests, reviewed
and analyzed thousands of documents, and participated in two
proffer sessions with the FBI and the Office of the U.S.
Attorney for the Southern District of New York. No shrinking
violets.
Ultimately, after a thorough investigation, we closed the
matter after finding insufficient evidence to warrant bringing
an enforcement action.
While at the SEC, every investigation I have worked on has
been conducted with fairness, diligence, and integrity. We did
so in the Pequot investigation.
Thank you. I would be glad to answer any questions you may
have.
[The prepared statement of Mr. Hanson appears as a
submission for the record.]
Chairman Specter. Thank you, Mr. Hanson. I want to make it
a part of the record as to your background. You are Branch
Director in the SEC's Division of Enforcement, and you were Mr.
Aguirre's immediate supervisor at the time of his termination.
Prior to joining Enforcement, you were a staff attorney
with the SEC's Office of Compliance and previously had served
with IRS in the Office of Chief Counsel; a graduate of the
University of Delaware and the University of Maryland School of
Law.
Mr. Hanson, let me bring up at this point as a matter of
sequence a couple of memoranda, one from you to Mr. Aguirre
dated August 4th, or an e-mail, which you have involved with
other comments this statement, ``Mack's counsel will have
`juice' as I described it last night, meaning that they may
reach out to Paul and Linda and possibly others.''
Do you recollect writing that statement?
Mr. Hanson. I do.
Chairman Specter. What did you mean by ``juice''?
Mr. Hanson. Well, as I explained in my written testimony,
although I had no reason to know who would represent Mr. Mack
if he was called to testify, I knew he would retain experienced
SEC counsel, who would likely, as is not uncommon, directly
contact my superiors about the testimony.
Chairman Specter. A second written communications was from
you to Mr. Kreitman dated August 24th, and the second paragraph
says, ``Most importantly, the political clout I mentioned to
you was a reason to keep Paul, and possibly Linda, in the loop
of the testimony.
As far as I know, politics are never involved in
determining whether to take someone's testimony. I've not seen
it done at the agency. It does make sense, though, to have all
your ducks in a row before approaching a significant witness
like Mack; hence, the reason to try to figure out a number of
things about him before scheduling him up, not the least of
which is whether he knew about the deal.''
Was there some special precaution or preparation you took
as to Mr. Mack within the context that, as I have quoted here
your statement, politics are never involved in determining
whether to take someone's testimony? Was there any special
precaution taken as to Mr. Mack?
Mr. Hanson. The precaution I did want to take was I wanted
to see what information we could learn about Mr. Mack before
trying to take his testimony. And as I do mention in that e-
mail, politics have never been involved in deciding whether to
take someone's testimony.
Chairman Specter. We are going to go now to Ms. Linda
Thomsen, who is the Director of the Securities and Exchange
Commission's Division of Enforcement, joined the Securities and
Exchange Commission in 1995; prior to that served as Assistant
U.S. Attorney for the District of Maryland; bachelor's degree
from Smith and a law degree from Harvard University.
I am going to have to take you out of sequence, Ms.
Thomsen, at this time because I think that there ought to be as
early an opportunity as possible to respond to Mr. Aguirre, and
then we will have further questioning. But you may proceed at
this time.
STATEMENT OF LINDA C. THOMSEN, DIRECTOR OF ENFORCEMENT,
SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C.
Ms. Thomsen. Chairman Specter, thank you for inviting me to
testify today. I have submitted written testimony and ask that
it be made part of the record.
Chairman Specter. Your statement will be made a part of the
record.
Ms. Thomsen. Thank you, Mr. Chairman.
I would like to start briefly on some of the broader issues
that you raised in the first panel, and as that earlier panel
discussed and, indeed, as Mr. Tenpas and I discussed with the
Committee earlier this fall, the pursuit of illegal insider
trading is an important and challenging part of the overall
enforcement of the Federal securities laws. The same is true
for illegal activity by hedge funds, important and challenging.
We at the SEC are committed to pursuing enforcement actions
related to insider trading and to hedge funds. Indeed, insider
trading cases typically constitute 8 to 12 percent of our filed
cases in any given fiscal year. As to hedge funds, and
purported hedge funds, they are a growing focus of our efforts.
Just to illustrate, in fiscal year 1999 we had one case
involving a hedge fund. During the last three fiscal years, in
each year we have brought in excess of 20 cases, and since that
time, since 1999, over 100.
The cases against hedge funds fall into two general
categories: abuses that are directed at the investors in the
funds, and abuses that are directed more at the market, such as
insider trading or market manipulation. To date this fiscal
year, which has just started, we have already brought two cases
involved hedge funds. We very much appreciate your support of
this important work.
My written testimonies both for today and from September go
into greater detail on some of the programmatic issues, but I
think it is important, in light of your expressed concern about
the investigation of Pequot, to address it here very briefly.
As you indicated, a former SEC attorney has alleged that
the investigation was impeded and he was terminated because he
sought to take the testimony of a prominent individual.
Speaking for the Division of Enforcement, these allegations are
simply not true.
After an unhappy probationary period of employment, the
former employee was terminated on September 1, 2005, because of
his inability to work effectively with other staff and his
unwillingness to operate within the Securities and Exchange
Commission process.
As discussed in the SEC's termination letter, which is
attached to my testimony, he had continued personality
conflicts with other staff, he resisted standard supervision,
and he ignored the SEC's chain of command.
Despite these problems, the SEC attempted to accommodate
him. He was, at his request, transferred from his original
supervisor to a supervisor he selected and about whom he now
bitterly complains.
He also requested and received official time to pursue an
unsuccessful age discrimination claim against the SEC for
failing to hire him on 22 prior occasions. The EEOC denied
those claims in a thorough written opinion, which is also
attached to my testimony.
Regarding the substance of his work, among other things he
issued, without his supervisor's review or approval, subpoenas
that violated Federal privacy law, which were withdrawn after
his supervisor's learned of them.
But for the supervisor's corrective actions, the former
employee's work product could have been extremely damaging to
the SEC, and his continued resistance to supervision created a
substantial risk of future error. After the SEC had expended
considerable effort to make the employment relationship work,
we decided not to extend his employment beyond the 1-year
probationary period.
Moving to the investigation of Pequot, the potential
insider trading by Pequot, as well as other potential
securities law violations, were thoroughly investigated. The
investigation was conducted in large part by staff other than
the former employee and was continued long after he left.
Ultimately, we did not find sufficient evidence to support
an enforcement action. Accordingly, our investigation was
closed for lack of evidence. The closing memorandum summarizes
the many hours of hard work by the SEC staff that did this
investigation, and it too is attached to my testimony.
Finally, and perhaps most importantly, Mr. Chairman, the
three supervisors working on the Pequot investigation
collectively have decades of experience and have brought some
of our toughest cases. They are also, each of them, smart,
dedicated, and honorable.
Their decisions in Pequot were not influenced by who any
potential witnesses were but, rather, by the facts and the
evidence. This is consistent with the finest traditions of our
agency.
We follow the facts, and if those facts take us to John or
Jane Doe, or some more famous John or Jane, so be it. We have
gathered evidence from and about, and in some instances we have
sued, captains of industry, Presidential Cabinet members,
Members of Congress, and celebrities, as well as thousands of
people who are less well known. Indeed, a long list of
prominent and not-so-prominent individuals would undoubtedly
testify that the Enforcement Division does not pull its
punches.
I want to assure you and the Committee that we are
passionate about our work and we will pursue it with vigor,
skill, and fairness. And I, too, would be happy to take any
questions.
[The prepared statement of Ms. Thomsen appears as a
submission for the record.]
Chairman Specter. Thank you very much, Ms. Thomsen.
We turn now to Mr. Mark Kreitman, Assistant Director,
Division of Enforcement, of the SEC, supervises a 15-lawyer
investigative group and was one of Mr. Aguirre's superiors
during his time at the SEC. Previously, Mr. Kreitman served as
Assistant Chief Litigation Counsel for the Division of
Enforcement, and prior to joining the SEC was a partner at Shea
& Gould; holds an undergraduate degree from Yale and a law
degree from Harvard.
We appreciate your being with us, Mr. Kreitman, and look
forward to your testimony.
STATEMENT OF MARK KREITMAN, ASSISTANT DIRECTOR, DIVISION OF
ENFORCEMENT, SECURITIES AND EXCHANGE COMMISSION, WASHINGTON,
D.C.
Mr. Kreitman. Thank you very much, Chairman Specter. I have
also prepared written testimony, which I request be made a part
of the record.
Chairman Specter. It will be made a part of the record.
Mr. Kreitman. Thank you for the opportunity to testify. The
concern raised in this inquiry was the possibility that
political influence may have distorted the Commission process.
I can say categorically that no such thing affected the
conduct of the Pequot investigation, Mr. Aguirre's termination,
or the decision not to take testimony from John Mack while Mr.
Aguirre worked at the Commission.
The Pequot investigation was pursued with vigor and
professionalism after Mr. Aguirre departed. When all reasonable
leads were exhausted, the relevant individuals questioned and
documents examined, it was recently closed with no action
taken.
As you have indicated, I have been an Assistant Director
and before that an Assistant Chief Litigation Counsel--trial
lawyer--with the Division of Enforcement for 19 years and have
received a variety of awards and commendations.
I have investigated or tried cases against a department
head at a major New York law firm, a president of a Beverly
Hills bank, the son of a prominent local banker, First Jersey
principal Robert Brennan, and numerous Wall Street luminaries.
I brought one of the cases, insider trading cases, against
a major hedge fund within the past year and a half, and I
recommended successfully the largest whistleblower award that
the Commission has offered. In 26 years of public service, I
have played a role in recovering nearly $1 billion for
investors and for the government.
Mr. Aguirre was a student of mine at Georgetown, where I
teach as an adjunct and have since 1999. I advised him and
supervised his master's thesis, which, as you indicated, was
published in a number of journals. We became friends and
socialized together, and that, Senator, has made this entire
episode particularly painful for me and for my wife.
When Mr. Aguirre graduated from Georgetown, he had not
practiced law for a number of years. He had no experience in
enforcement investigation. He was unfamiliar with a closely
supervised working environment like the Commission, where
investigative zeal must be tempered by a respect for the rights
and legitimate interests of citizens and where collegiality and
mutual respect is the hallmark.
Mr. Aguirre was a hard worker but, unfortunately, treated
his colleagues who questioned him or his methods with
disrespect, bordering on contempt. He was unable to fairly and
impartially balance evidence against his preconceived
conclusions or articulate his thinking in a linear fashion. He
viewed all supervision, direction, even inquiry concerning his
work as unwarranted intrusion.
Beginning in June 2005, he came to believe that John Mack
tipped Pequot about the GE/Heller acquisition. He heatedly
insisted that we subpoena Mr. Mack before he had evidence that
Mr. Mack had access to inside information or indeed, any
potentially inculpatory evidence with which to confront Mr.
Mack.
His supervisors, with, as Ms. Thomsen has indicated, more
than 40 years combined Commission experience, instructed him of
the need for proper foundation to invoke compulsory process and
that premature testimony would likely be fruitless because Mr.
Mack could simply deny any illegal activity or any connection
to the suspicious trading.
Mr. Aguirre concluded that this proved a widespread
conspiracy to thwart him and protect an individual no more
significant or powerful than people from whom we take testimony
every day--including during this same time period a former U.S.
Senator and a former high-ranking White House official.
Toward the end, Mr. Aguirre's behavior became increasingly
unprofessional, irresponsible, and erratic. He threw what can
only be fairly described as ``tantrums,'' storming down the
halls in a furious crouch, abruptly leaving the office without
leave, resigning at least twice, necessitating that, despite
severely limited resources, we were required to double staff
his investigation. Finally, as Mr. Hanson mentioned, he
announced that he refused to write up his investigation in the
required formal memorandum.
Mr. Aguirre did receive a two-step increase effective
shortly before his termination. That was for the rating period
that ended 4 months earlier on April 30. He was a new employee.
He worked a great many hours. I wanted to encourage and help
him readjust after a troubled beginning in another group.
His subsequent behavior, however, so far exceeded the
bounds of acceptable professional conduct that it was incumbent
upon me and his other supervisors to supplement and correct
that overly generous evaluation, which we did on August 1, a
month before Mr. Aguirre's termination.
I would be happy to answer any questions, Senator.
[The prepared statement of Mr. Kreitman appears as a
submission for the record.]
Chairman Specter. Thank you, Mr. Kreitman.
Mr. Kreitman, in your written testimony you state that Mr.
Aguirre's theory regarding John Mack as a potential tipper was
a ``highly suspect and illogical conclusion.'' And yet I note
on a written communication, a June 3, 2005, e-mail to Aguirre
that, ``Mack is another bad guy (in my view.)'' Was that your
memorandum or was that a memorandum from Mr. Hanson?
Mr. Kreitman. I do not believe those were my words,
Senator.
Chairman Specter. Not your words.
Mr. Kreitman. I do not believe so.
Chairman Specter. Were those your words, Mr. Hanson?
Mr. Hanson. I believe they were.
Chairman Specter. Why did you say that Mr. Mack was another
bad guy?
Mr. Hanson. I can't remember why I said that at that time.
In hindsight, I was trying to encourage probably the
investigation to wherever it led, and looking back in
hindsight, those words are probably inappropriate. I have
subsequently met Mr. Mack, and--
Chairman Specter. You don't remember?
Mr. Hanson. I am sorry?
Chairman Specter. You do not remember?
Mr. Hanson. I do not remember.
Chairman Specter. Well, it was your written testimony that
Mr. Aguirre's theory regarding John Mack as a potential tipper
was a ``highly suspect and illogical conclusion.'' Do you still
stand by that?
Mr. Hanson. I do.
Chairman Specter. But you can't explain why in a memo
contemporaneously with these events back on June 3rd that you
said Mack is ``another bad guy (in my view)''?
Mr. Hanson. I can't remember why I sent the first e-mail.
That is correct.
Chairman Specter. Well, was Mack another bad guy, in your
view?
Mr. Hanson. At the time that I wrote that, I can't remember
the basis for which I wrote it. But I certainly do not believe
Mr. Mack is a bad guy.
Chairman Specter. It did not come out of thin air, did it,
Mr. Hanson? Is this your statement at that time?
Mr. Hanson. It was.
Chairman Specter. Your statement at that time.
Mr. Hanson. That is correct.
Chairman Specter. ``Bad guy.''
Mr. Hanson. Correct.
Chairman Specter. But you don't know any reason you had to
say that.
Mr. Hanson. Excuse me?
Chairman Specter. You don't know any reason that you had to
say that at that time?
Mr. Hanson. The only thing I can think of, sitting here
today, is that he had the reputation as Mack the Knife.
Chairman Specter. Well, tell me a little bit more about the
reputation. What was his reputation as Mack the Knife?
Mr. Hanson. I think he had the reputation of--again, his
name was--or his nickname was Mack the Knife because he had
terminated a number of employees when he went to work at a
couple of brokerage firms.
Chairman Specter. Because Mr. Mack had terminated
employees?
Mr. Hanson. I believe that is correct.
Chairman Specter. Anything else?
Mr. Hanson. No.
Chairman Specter. Well, terminating other employees, why
would that lead you to call him a bad guy?
Mr. Hanson. Again, Senator, I cannot remember why I wrote
that e-mail, and thinking back today, I just can't come up with
anything other than that.
Chairman Specter. OK. We now turn to Mr. Paul Berger,
partner at Debevoise & Plimpton; joined the Securities and
Exchange Commission in 1992 and served as senior counsel,
branch chief, Assistant Director, and Associate Director; and
in his latter capacity, he oversaw Mr. Kreitman's unit.
Prior to joining the SEC, he practiced law with Jenner &
Block and was a staff attorney to the D.C. Circuit Court of
Appeals; undergraduate degree with honors from American
University, and a law degree from the Antioch School of Law.
We appreciate your being with us, Mr. Berger, and the floor
is yours.
STATEMENT OF PAUL R. BERGER, FORMER ASSOCIATE DIRECTOR,
DIVISION OF ENFORCEMENT, SECURITIES AND EXCHANGE COMMISSION,
WASHINGTON, D.C.
Mr. Berger. Thank you, Chairman Specter. Good morning.
Thank you for the invitation to appear before this Committee
today and to respond to allegations of abuse of authority that
have been made by a former staff lawyer with the United States
Securities and Exchange Commission.
I believe that accountability and oversight are healthy,
and I commend you, Mr. Chairman, for taking these matters
seriously. Indeed, I welcome the opportunity to respond to
these allegations.
For months now, allegations have circulated around town
about this matter that the SEC and I have been unable to
respond to because of our obligation to refrain from discussing
confidential SEC investigations. Finally, we have a chance to
put these allegations to rest, for they are completely false.
As background, let me give you a sense of who I am. I spent
14 years as a career law enforcement officer for the United
States Securities and Exchange Commission, the last 6 of which
as an Associate Director of Enforcement.
As an Associate Director, I had anywhere from 150 to 200
open investigations under my indirect supervision, as well as
supervising current litigation. I authorized the opening of the
Pequot investigation before Gary Aguirre joined the Commission
because I believed then, as I do now, that hedge funds play an
important role in our capital markets.
And I, along with my colleagues, wanted to ensure that
hedge funds conduct their affairs consistent with the laws
prohibiting insider trading. When issues arose as to possible
insider trading, I decided that, despite the considerable age
of this particular matter, we should take a hard look.
As I am sure you are aware, insider trading investigations
are some of the most difficult cases to make. Establishing that
someone had material nonpublic information and used that
information to violate the anti-fraud provisions of the Federal
securities laws is exceedingly difficult. In fact, it is more
difficult than making a financial fraud case. Nevertheless, we
opened the Pequot matter to look into concerns about possible
insider trading.
Now, there have been various allegations about that
investigation that need to be addressed.
First, I have heard that the SEC's investigation was
stopped. Nothing could be further from the truth. Not only did
the investigation continue for a year after Gary left, but we
added two terrific staff lawyers to the case because, in part,
we had become concerned with Gary's reliability since he had
resigned on a number of occasions.
Next--and this is particularly key--the major issue that we
confronted in the investigation was not if we would take Mr.
Mack's testimony but when we would take it. As I told Gary at
least twice, the SEC is not and never has been afraid to take
anyone's testimony. What we needed to do in the Pequot
investigation was to get our ducks in a row. We needed to do
our homework before we took Mr. Mack's testimony.
The SEC supervisors made a judgment based on years of
experience conducting SEC investigations, and particularly
insider trading investigations, that the best time to take the
testimony was at the conclusion of the investigation when all
of the evidence had been assembled, all of the leads had been
run down, and when the U.S. Attorney, who I had contacted in
the first instance about this matter, had reviewed the evidence
and completed their investigation. It was our professional
judgment that the best and most efficient use of our resources
was to conduct the investigation in this manner.
Now, there are those who might say, well, what is the harm
in taking the testimony when Gary wanted? Well, that would be
an interesting standard for determining when to take testimony:
as long as we do no harm. But that is not the standard.
Now, experience shows that the most efficient and
productive way to conduct an investigation is to take testimony
when you have marshalled all of the facts necessary to take the
witness. As I am sure you are aware as a former prosecutor,
taking the testimony of witnesses multiple times creates a
murky and sometimes unusable record.
There has also been the suggestion that Mr. Mack was given
special treatment when in 2005 lawyers not for Mr. Mack, but
for Morgan Stanley's Board of Directors called to see if Mr.
Mack had regulatory exposure.
Both my Assistant Director and I told counsel that it was
premature to draw any conclusions about the investigation. That
was the right call. Why? Because it was consistent with SEC
policy not to disclose confidential information about the
investigation.
I told counsel that we could not say whether Mr. Mack had
any exposure or not, that we could not help Morgan Stanley with
its decision; it would have been inappropriate for SEC staff to
insert itself in a regulated entity's business decision. That
was true since, at the time, as Gary admits, we didn't know
whether Mr. Mack had violated the law.
This investigation was conducted like every other
investigation. Experienced supervisors made sure that we were
balancing all of the facts and the evidentiary record and
making the correct professional judgments. One can disagree
with those professional judgments. That is fine. But it is
beyond the pale when one turns those judgments into a
conspiracy that ropes in SEC supervisors and the Commissioners
themselves.
I was a public servant who worked for 14 years on behalf of
our Nation's investors and our capital markets. I tried to
bring a passion for my work each and every day. Not a day
passed that I did not ask whether a judgment that we made was
the right thing to do. I believed then and I believe now that
our judgments were sound and our investigations were exemplary.
Thank you. I would be happy to answer any questions and ask
that my testimony that was submitted be made part of the
record.
[The prepared statement of Mr. Berger appears as a
submission for the record.]
Chairman Specter. Thank you very much, Mr. Berger.
We now turn to Mr. Eric Ribelin. He joined the SEC in 1988,
currently Branch Chief in the Division of Enforcement's Office
of Market Surveillance; previously served as a market
surveillance specialist and senior market surveillance
specialist; numerous honors at the SEC, including Chairman's
Award for Supervisory Excellence in 2002 and Enforcement
Division Director's Award in 2000; bachelor's and master's
degree in economics from Eastern Illinois University.
Thank you very much for your contribution here, Mr.
Ribelin, and we look forward to your testimony.
STATEMENT OF ERIC RIBELIN, BRANCH CHIEF, OFFICE OF MARKET
SURVEILLANCE, SECURITIES AND EXCHANGE COMMISSION, WASHINGTON
D.C.
Mr. Ribelin. Thank you, Mr. Chairman. I do not have any
opening statements.
Chairman Specter. Mr. Ribelin, there is a document which
you sent to Mr. Hanson, a memorandum or communication from you
to Mr. Hanson, dated September 9, 2005, re: Pequot saying this,
``Bob, I have serious misgivings about many decisions made in
this investigation. I don't know what all has driven the
decisions. Something smells rotten, though. I am accusing you
of nothing. You seem like a good guy, and you are certainly a
good soldier. But I am nonplussed by issued big and small about
the course of events going back to January. I really do need to
contemplate my involvement going forward.''
Mr. Ribelin, what did you mean by ``something smells
rotten''?
Mr. Ribelin. Mr. Chairman, we had an aggressive
investigation into possible insider trading by Pequot and
possible stock manipulation. Gary Aguirre is a tenacious
investigator. He had an aggressive investigation. In my
judgment, he was professional.
We had a very worthy adversary, the best lawyers, the
smartest lawyers who could be hired to defend, and they were
extremely aggressive, and let me give a couple of examples. In
a subpoena requesting the production of e-mail, we frequently
didn't get production of those e-mails in a timely fashion.
We took testimony of witnesses and had documents that had
been subpoenaed to be associated with testimony of those
witnesses, and documents would show up in the 11th hour prior
to testimony or on the day of testimony. And it is
extraordinarily difficult to conduct a testimonial session when
we do not have documents.
Repeatedly, Mr. Aguirre attempted to hold the feet to the
fire of the attorneys on the other side to get e-mail
production pursuant to subpoena, to get documents produced on
time so that we could take testimony and do it appropriately.
He continued to aggressively try to enforce the subpoena,
if you will, and continued to go to his supervisors to get
assistance from them that these subpoenas get enforced
internally. And there was certainly a period of time when Mr.
Kreitman and Mr. Hanson seemed to agree with Gary.
But I can tell you that I was surprised from January of
2005 that Paul Berger, who had a reputation for being an
aggressive and smart attorney, did not seem as though he was
aggressive in supporting the attempts of Mr. Aguirre to get
subpoenaed documents on time and to get e-mail production so
that we can conduct an investigation. That is one example of
what I was referring to when I said ``something smells
rotten.''
That went through a very long period of time of the
investigation where it was my sense that there was not the
support for the aggressiveness and the tenacity of the
investigator.
There are other examples I can give you.
Chairman Specter. Would you please do that?
Mr. Ribelin. I can do that. As I said, for a very long
period of time, we had a hard time getting e-mail production,
and I can tell you that if you subpoena a document or subpoena
e-mails and you don't get them, you are not going to be able to
do the investigation. And so we continued to push.
There was a period of time when a very significant, large
portion of e-mails were put out of our ability to get a hold of
and to examine. Part of the reason given was because these e-
mails may be privileged e-mails, communications between
attorney and client.
We thought certainly there was a possibility that some of
those e-mails fell into that category, but there was a very
large number of e-mails that we suspected fell outside of that
category. And there was one point that an attorney was hired
who had custody of some of those e-mails--I can't remember how
many thousands they were. Mr. Aguirre was not allowed by Mr.
Kreitman to speak to that attorney about trying to get
production of e-mails. To this day I don't know why that is.
And I can tell you that Mr. Mack had been the CEO of Morgan
Stanley. He was being courted to become the CEO of CS First
Boston. We did not have information that he had material
nonpublic information as it related to the GE/Heller merger.
That is for sure.
It was Gary's theory--I agreed; I think other people
supported the idea--that it wasn't unlikely, it was certainly
possible that he could have gotten access to the information
based on the fact he had been the former CEO of Morgan Stanley
and he was being courted at the time by CS First Boston of the
trades engaged in by Pequot.
After the word came down that the testimony of John Mack
was not going to be taken, I had a conversation within a week
or so of that with Bob Hanson, and Bob Hanson said to me that
because Mr. Mack was a prominent person or because he had
connections--I don't remember exactly how he put it--that we
would have to be careful about taking his testimony, we would
have to, my impression is, move maybe more carefully than we
would if it was somebody other than somebody of prominence. And
I said, ``Well, Bob, if that is the case or not, just call him
up on the phone instead of bringing him in for testimony and
ask a couple of basic questions.''
And this is something, by the way, that Gary proposed, Gary
Aguirre proposed a couple of times. Mr. Hanson didn't respond
to me.
And then finally, of course, Gary Aguirre was fired when he
was on vacation. I was stunned. I was outraged. And the e-mail
that you just referred to was soon after these events.
Chairman Specter. Mr. Hanson, do you recall the comment
that Mr. Ribelin has testified to, that you called Mr. Mack a
``prominent person'' and then suggested that there would have
to be treatment of him a little different?
Mr. Hanson. I certainly felt he was a prominent person and
I wanted to, as I have said to Mr. Aguirre and Mr. Ribelin,
make sure we had our ducks in a row before taking Mr. Mack's
testimony. And what I meant by that was, let us figure out what
we can about whether he had the information before taking his
testimony.
Chairman Specter. Well, what would you be looking for as to
what information that he would have had?
Mr. Hanson. Whether he had the information regarding the
deal, whether he had the inside information. I mean, there are
hundreds of suspects or possible witnesses we could take the
testimony from, almost an endless number of them.
One of the things you want to try to look at as a criterion
is whether or not they have access to the information. These
merger and acquisition deals are highly sensitive matters
within investment banking firms and they do not give that
information out willy nilly.
Chairman Specter. Well, it is not a matter of who else has
access. It is a question of whether Mr. Mack would have access.
And is it not true that, in his position with Credit Suisse,
that he did have information about the prospective merger
between GE and Heller in the July of 2001 timeframe?
Mr. Hanson. After he joined Credit Suisse First Boston, it
is certainly entirely likely that he would have had that
information, but prior to that time, no. That is the trading
period we were looking at, prior to that time.
Chairman Specter. How about that, Mr. Aguirre? What time
period was in question?
Mr. Aguirre. The timeframe in question was from July 2
through July 25. There were three dramatic trade moves by Mr.
Samberg during that time. July 2, he opened the trading. July 9
to 10, he went from 15,000 shares to 450,000 shares, in terms
of what he was trying to buy. Then on September 25, he shorted.
Now, that fit perfectly with the timing of Mr. Mack. Mr.
Mack, according to Mr. Padalino, who was CSFB's attorney, told
me that Mr. Mack had met with the CSFB people on approximately
June 28 or June 29.
Chairman Specter. So Mr. Mack had met with people who had
the insider information prior to the July timeframe you
testified about?
Mr. Aguirre. Well, he met with CSFB. I was told he met with
CSFB people at that time on June 28. Now, that is coming from
the lawyer on the other side. Of course, I would want to verify
that and talk to Mr. Mack: who exactly did you meet with?
Chairman Specter. But that would have required questioning
Mr. Mack.
Mr. Aguirre. That would require it.
Chairman Specter. But there was that contact in late June,
June 28, as you testify.
Mr. Aguirre. That was the first one.
Chairman Specter. Let me finish the question.
Mr. Aguirre. Sorry, sir.
Chairman Specter. Where Mr. Mack would have had access to
the inside information.
Mr. Aguirre. Potential access to that information.
Chairman Specter. Well, how about it, Mr. Hanson?
Would that not establish the necessary predicate for
questioning Mr. Mack?
Mr. Hanson. Mr. Aguirre believed that Mr. Mack may have
gotten the information from--I think one of his hypotheses was
that he may have gotten it as part of a courting process with
CS First Boston. It seemed highly unlikely that CS First
Boston, in courting Mr. Mack, would tell him confidential,
nonpublic information about a deal in their courting process.
Not only that, but Mr. Aguirre was told by CS First Boston
counsel--and this is the part that he excludes from his
testimony to the Senate--that the person that Mr. Mack met with
did not have the information.
Chairman Specter. Well, what other information did you have
about Mr. Mack's potential involvement when you finally did
take his deposition, 5 days after the statute of limitations
expired?
Mr. Hanson. When we finally took Mr. Mack's testimony,
subsequent to Mr. Aguirre's termination, we had actually gone
to CS First Boston, subpoenaed their records to see whether or
not the people that Mr. Mack had met with actually had the
information. We first did that.
Chairman Specter. And did you find they did have the
information?
Mr. Hanson. We did not.
Chairman Specter. Why did you wait so long to subpoena
those records?
Mr. Hanson. We subpoenaed them September 1, the day that
Mr. Aguirre was terminated, so there was no time delay at all.
Chairman Specter. Why was Mr. Mack's deposition taken so
long after that?
Mr. Hanson. I am getting there. We subpoenaed CS First
Boston records. We did an extensive e-mail review of Mr. Mack's
records. We found additional exculpatory evidence that sort of
suggested that the likelihood of Mr. Mack being the tipper was
minuscule.
We turned our attention and our focus to another
transaction that Pequot was engaged in in approximately
November of 2005. We followed that through until approximately
June of 2005.
At that point, we decided whether or not we were going to
take additional individuals in connection----
Chairman Specter. When was that?
Mr. Hanson. I am sorry. 2006. Additional individuals in
connection with the GE Heller transaction. At that point in
time we took the testimony, before the statute of limitation
expired, of the individuals at CS First Boston who potentially
could have passed the information on to Mr. Mack.
Chairman Specter. Why not take Mr. Mack's deposition before
the statute of limitations expired?
Mr. Hanson. We took the testimony of the two individuals
who could have given Mr. Mack the tip or the information before
the statute of limitations expired. If we found out from them
that Mr. Mack had gotten the information or they had the
potential of giving the information to Mack, we probably would
have sought a tolling agreement. We sought tolling agreements
from Pequot in March of 2006.
Chairman Specter. Well, that is all very interesting about
tolling agreements for somebody else. But you did not seek a
tolling agreement for Mr. Mack.
Mr. Hanson. I do not think we could have. We did not have
the evidence that he had the information.
Chairman Specter. All right. If the tolling agreement is
out, I wonder why you mentioned it. If it was not relevant to
Mr. Mack, why did you wait until after the statute of
limitations had expired to take Mr. Mack's testimony?
Mr. Hanson. We took Mr. Mack's testimony, as I described in
my written statement, which I will ask to be made part of the
record.
Chairman Specter. But that does not tell us why you waited
until after the statute of limitations had expired.
Mr. Hanson. We got to it as soon as we could. The predicate
to trying to figure out whether to take Mr. Mack's testimony or
not was whether he had the information.
We did not think, at the time that we took Mr. Mack's
testimony, that there was any--there was virtually no
likelihood, by the time we took Mr. Mack's testimony, that he
had any information regarding the transaction that he could
have passed on.
Chairman Specter. So why did you take his testimony?
Mr. Hanson. As I explained in my written statement, one
consideration was the harm Mr. Aguirre had caused by taking
this confidential, nonpublic investigation public for his own
purposes, and the need to maintain public investor confidence
in the work of the Division of Enforcement.
Mr. Kreitman. Senator, I wonder whether I could clarify.
Chairman Specter. You may, Mr. Kreitman, but in just a
minute.
Mr. Hanson, did the fact that this Committee held a hearing
on June 28 have any effect on your moving ahead with Mr. Mack's
deposition, or was that just entirely coincidental?
Mr. Hanson. No. I think that, as I said, one consideration
in taking Mr. Mack's testimony was the harm Mr. Aguirre had
caused by taking the confidential, nonpublic investigation
public.
Chairman Specter. Mr. Kreitman, if you wanted to add
something there, you are welcome to do so.
Mr. Kreitman. Yes. Thank you, Senator. I would just like to
clarify that the statute of limitations you referred to bars
only penalty. It does not bar injunction. It does not bar other
equitable remedies. It does not bar disgorgement of illegal
profits or pre-judgment interest.
Chairman Specter. But there is a significant limitation on
what can be done after a statute of limitations expires. Is
that not correct, Mr. Kreitman?
Mr. Kreitman. That is correct, Senator. It does preclude
imposition of penalties, financial penalties. That is the only
impact.
Chairman Specter. Mr. Kreitman, you heard what Mr. Ribelin
said about the effort by Mr. Aguirre to acquire e-mails and
your refusal to back him up on that. Do you want to comment on
that?
Mr. Kreitman. I do not think it is accurate. It is not
uncommon for us to encounter push-back when we send out broad
subpoenas. In this case, the subpoenas--and I believe there
were more than 100 of them that Mr. Aguirre sent out--resulted
in the production of, I believe, more than 19 million e-mails.
I considered it so important to try to enforce these
subpoenas--and it is unusual--I became personally involved in
negotiation with Pequot's counsel. We do have available to us
the remedy of subpoena enforcement in the District Courts,
however, our experience is that that is neither a speedy, nor
efficacious, remedy.
But, short of bringing a subpoena enforcement action, I
believe that we did everything that we could to facilitate and
expedite production of documents in response to our subpoenas.
Mr. Aguirre. Senator, may I just dip in my oar on that
comment for just a moment?
Chairman Specter. Yes, you may, Mr. Aguirre. Anybody who
wants to comment as we proceed here, if you feel that something
has been said which bears on your own participation in the
matter, feel free to ask for recognition because the Committee
wants to give you, as we always do, every opportunity to
explain or comment as to anything which is said, because this
hearing is filled with accusations, counter accusations, and
denials. So if you have any denials to make, do not wait for me
to ask.
Go ahead, Mr. Aguirre.
Mr. Aguirre. I think that Mr. Ribelin was referring to the
prohibition of my speaking to attorneys who had control of the
documents. Those two attorneys were a former Commissioner of
the SEC, Irving Pollack, and another attorney by the name of
Larry Storch. They were some of Mr. Kreitman's closest friends.
Mr. Storch was a next-door-neighbor.
Mr. Hanson pointed out to me, it was very troubling that
they had been brought in exclusively to deal with documents
which I thought were a critical aspect of that case, and Mr.
Kreitman had given me an injunction not to talk to them about
those critical documents. I think that was what Mr. Ribelin was
speaking about.
Let me just add a couple of points of why I suspected Mr.
Mack. It was not just one contact on June 28 or June 29 that I
had been told about by Mr. Padalino that came just before Mr.
Mack talked with Mr. Samberg, which had come just before Mr.
Samberg suddenly started trading ferociously the next trading
day.
But again, there was another contact by Mr. Mack on July 9
with CSFB. The following day, Mr. Samberg's trades jumped from
15,000 to 450,000 in terms of his order. Then once again on
July 25, when Mr. Mack was already there and obviously had
access to that information, it fit with the fact that Mr. Mack
began shorting. So, there were those three connections.
Then during the phone call on June 29 between Mr. Mack and
Mr. Samberg, Mr. Mack got into a deal for $5 million. He got a
piece of a deal that nearly tripled in 8 months. Nobody else
got into that deal.
Chairman Specter. What was that deal related to?
Mr. Aguirre. It was called Fresh Start. There was an e-mail
saying that he had been ``beating on Mr. Samberg's chops'' on
June 20 to get into this deal. Then he talks with the CSFB
people. He calls them on June 29. That night, he gets into this
deal.
If you look at the SEC filings, you will see that he put in
his $5 million on October 15, and in late February of 2006 it
was announced that that was paying about 3:1 on what he had put
in. Nobody else got into those kinds of deals except Mr. Mack.
Pequot got nothing out of that. So the question is, how come he
got that favor at the same time that we think he gave the tip
back going the other way?
Chairman Specter. Mr. Hanson, any idea as to why Mr. Mack
would be benefited, as Mr. Aguirre just described?
Mr. Hanson. I am sorry. I did not follow your question.
Chairman Specter. Mr. Aguirre has set forth a sequence of
events. First of all, he mentioned three contacts--not one
contact, three contacts--between Mr. Mack and people who had
the inside information, and the contacts that Mr. Mack then had
with Mr. Samberg.
Were you aware of all of those matters? Mr. Hanson. Mr.
Mack did not have contact with those three people during the
timeframe that Mr. Aguirre alleges.
Chairman Specter. Mr. Aguirre----
Mr. Aguirre. Let me----
Chairman Specter. Let me finish my question.
Mr. Aguirre. I am sorry.
Chairman Specter. Be specific about them so Mr. Hanson can
comment on them, please.
Mr. Aguirre. It is in my written testimony.
Chairman Specter. Mr. Hanson, have you seen Mr. Aguirre's
written testimony?
Mr. Hanson. I looked at it last night for a brief period of
time.
Chairman Specter. Go ahead, Mr. Aguirre.
Mr. Aguirre. The cases talk about looking at the trades and
looking at the contacts. In this case, we saw three dramatic
moves by Mr. Samberg: July 2, July 10, and July 25. We know
that Mack met with CSFB just before the July 2 trade, and we
know that he talked to Mr. Samberg just before that trade.
Mr. Hanson. The first of those is inaccurate.
Chairman Specter. Were you aware of that, Mr. Hanson?
Mr. Hanson. Of the fact that he did not meet with the
individual from CS First Boston, as Mr. Aguirre alleges.
Chairman Specter. He did not?
Mr. Hanson. He did not.
Chairman Specter. Mr. Aguirre, how do you know that he did?
Mr. Aguirre. Well, I was told by Patrick Padalino, who was
the CSFB attorney, that that contact had occurred around the
28th or the 29th. Now, I was relying on what the attorneys from
CSFB were telling me, because I could not ask Mr. Mack.
I, to this day, think that there were likely more contacts
in exactly that timeframe involving Mr. Mack or CSFB. Perhaps
Mr. Hanson can enlighten us whether Mr. Mack was in fact
meeting with people from Credit Suisse or CSFB during this
timeframe around June 27 or June 28. I was told of one version
by Mr. Padalino, the attorney. I relied on that.
Chairman Specter. Had you informed Mr. Hanson about what
you had learned from Mr. Padalino?
Mr. Aguirre. Absolutely. They were all in my e-mails.
Chairman Specter. Is that true, Mr. Hanson?
Mr. Hanson. He had informed me that Mr. Padalino had told
him that Mr. Mack may have met with CS First Boston's CFO
approximately 2 weeks before he joined Credit Suisse First
Boston. That was not correct.
Chairman Specter. What was not correct?
Mr. Hanson. He did not meet with Mr. Mack during that
timeframe.
Chairman Specter. How do you know that?
Mr. Hanson. I took the testimony of the CS First Boston
CFO.
Chairman Specter. You had contrary information at that
time, Mr. Aguirre?
Mr. Aguirre. Yes, I did, at that time. And I think, more
importantly, the question is, what did Mr. Mack say about his
meetings with Credit Suisse during the 27th, 28th, and 29th of
June? He took his testimony. They should know.
Chairman Specter. Was Mr. Mack questioned about that, Mr.
Hanson?
Mr. Hanson. Of course.
Chairman Specter. And what did he say?
Mr. Hanson. That the information that Mr. Aguirre alleged
or speculated that Mr. Mack may have had was so far down in the
weeds for Mr. Mack.
Chairman Specter. So far down in the weeds?
Mr. Hanson. It was so far removed from what he was doing
with respect to negotiating with CS First Boston that it had no
relevance to him. Not only that, but the people from CS First
Boston that we talked to and received the e-mails from said
that there is no possible way that they had the information,
let alone passed it on to Mr. Mack.
Chairman Specter. Mr. Hanson, back to the question which
was pending a few minutes ago. Were you aware, as Mr. Aguirre
has just testified, that Mr. Mack was afforded an investment
opportunity by Mr. Samberg which enabled him to triple his
investment?
Mr. Hanson. I am aware that Mr. Mack was often an investor
alongside Pequot in private investments.
Chairman Specter. Now answer my question.
Mr. Hanson. I guess I do not follow your question.
Chairman Specter. My question, again, is were you aware, as
Mr. Aguirre has testified, that Mr. Mack was offered an
investment by Mr. Samberg which enabled him to triple his
investment.
Mr. Hanson. I do not know the specific facts for the
investment that Mr. Aguirre is referring to. I know that one of
the investments that Mr. Mack put money into with Pequot around
that time, he lost all the money on. In another one, he doubled
the money on.
Chairman Specter. I am interested in what he lost money on.
I am interested in a lot of things. But not today. What I want
today is an answer, if you learned from Mr. Aguirre--and this
is the last time I am going to ask it--that Mr. Samberg gave
Mr. Mack an opportunity for an investment that he tripled.
Mr. Hanson. I do not believe so. I think there was an
investment. I am not sure, again, on the facts, which one
doubled and which one he lost money on, which one he is
referring to.
Chairman Specter. Was there one that doubled?
Mr. Hanson. I think so.
Chairman Specter. Was that different from the one that
tripled?
Mr. Hanson. I am not aware of one that tripled.
Chairman Specter. Did Mr. Aguirre tell you about one that
tripled?
Mr. Hanson. Not to my recollection.
Chairman Specter. Mr. Hanson, let us come to the--
Mr. Kreitman. Senator, I wonder whether I could respond to
something both Mr. Ribelin and Mr. Aguirre have said.
Chairman Specter. If you would like to respond, Mr.
Kreitman, you have the floor.
Mr. Kreitman. Thank you. Thank you, Senator. Just to
correct the record, Mr. Storch is not, and has never been, a
next-door-neighbor of mine. He is, however, a classmate from
law school and a friend.
Mr. Pollack is not only a former Commissioner, but the
first Director of Enforcement of the Commission and an icon in
this field, someone whom I regard as a mentor and a giant in
the field.
Nonetheless, as both Mr. Ribelin and Mr. Aguirre have
testified here, I directed them not to speak to Mr. Pollack or
Mr. Storch for a very simple reason, and that was that they did
not represent any party in the investigation.
As I advised Pequot's lawyers, I would be pleased to deal
with them myself, and have my staff deal with them, if we were
advised that they represented, and could therefore bind,
Pequot.
But if they were to occupy, as was proposed, an undefined,
inchoate role in discovery production but could neither speak
for nor bind any party to the investigation, then I was
unprepared to have my staff deal with them.
Chairman Specter. Mr. Aguirre, on page 21 of your testimony
you have stated that ``SEC filings indicate Mack did extremely
well on his $5 million investment'' and in Footnote 116, you
say that ``the value of Mack's interest would have been
approximately $16.43 million.''
Would you amplify what went on here which is the basis for
your saying that Mr. Mack had an investment that tripled in
value?
Mr. Aguirre. Yes. During the conversation on June 29, the
night that we thought that Mack gave Samberg the tip, that
night Mack got promised to get into Fresh Start. He had been
trying to get in it for some time. There is an e-mail the next
day of June 30 confirming the fact that he got into Fresh Start
that night.
Fresh Start is actually Salient Corporation. If you go to
the SEC filings of Salient Corporation for the beginning of
February, 2002--there is a series of SEC filings--you can track
the history. He put the $5 million into Salient on October 15,
2001. He got 3,333,000 shares. He got in on the same exact
terms and conditions that Pequot got into in the same company.
In February, the company was bought out by the Andrews
Corporation for $467 million, but $82 million of that had to go
to somebody else. The bottom line, after you sort that out,
there was approximately $300 and some million. If you took the
amount of the shares, the percentage of the shares that Mr.
Mack got and simply did the mathematics, it came out to around
$16 million.
Chairman Specter. Mr. Hanson, before yielding to Senator
Grassley, I want to take up the subject of the pay increases
and the ratings of Mr. Aguirre.
Is it not true that Mr. Aguirre received two favorable
reviews in September of 2004 and then April of 2005?
Mr. Hanson. Mr. Aguirre, I think, received sort of a
``pass/fail'' rating in, probably, April or March, thereabouts,
of 2005.
Chairman Specter. Would you tell the Committee why there
was a supplemental evaluation which led to Mr. Aguirre's
termination?
Mr. Hanson. Well, I would not say it led to Mr. Aguirre's
termination. But we did draft a supplemental evaluation for Mr.
Aguirre on August 1, 2005.
Chairman Specter. Was it not highly unusual to have that
kind of a supplemental evaluation?
Mr. Hanson. I had never drafted one before, but I felt it
was appropriate in Mr. Aguirre's case.
Chairman Specter. I take that as a ``yes'' answer.
Mr. Kreitman, is it not highly unusual to have that kind of
a supplemental evaluation?
Mr. Kreitman. Well, at that time, Senator, I had only
participated in the evaluation process once before, and I had
not done it in that case. So, I do not know, really, more
generally than that.
Chairman Specter. Well, have you ever seen a supplemental
evaluation under analogous circumstances?
Mr. Kreitman. Prior to becoming an assistant director, I
had never seen any evaluations.
Chairman Specter. Well, you were on the pay raise
committee, were you not?
Mr. Kreitman. No, I was not.
Chairman Specter. Mr. Berger, was this not a highly unusual
thing to have a supplemental evaluation?
Mr. Berger. I think it was fairly rare, Mr. Chairman, to do
a supplemental evaluation.
Chairman Specter. Fairly rare? Happened one time in the
past only?
Mr. Berger. Oh, I could not say how many times it happened
in the past.
Chairman Specter. Do you know if it is happening at all?
Mr. Berger. I think it has happened, yes.
Chairman Specter. Do you know when it happened in the past?
Mr. Berger. No, I do not. I am saying that I think it is
rare. What I was going to say is that----
Chairman Specter. Well, this is a pretty important point
here. With the overtone that suddenly there is a change in
evaluation, a supplemental evaluation, something the Committee
is very concerned about, if this had been something that had
been done in the past, would you not have checked that out
before coming in to testify today?
Mr. Berger. I am sorry. I am not at the SEC and I do not
have access to that information.
Chairman Specter. You are what?
Mr. Berger. I am not at the SEC so I do not have access to
the information.
Chairman Specter. I know. But you are a witness in a matter
which involved you on the evaluation of Mr. Aguirre and a
supplemental evaluation.
Mr. Aguirre, what happened in this situation?
Mr. Aguirre. Well, of course, I did not know anything about
any reevaluation until they fired me, but I have been able to
track what has happened.
Chairman Specter. You were never told you were being
reevaluated?
Mr. Aguirre. No. I had to dig that out. I had to press
these guys to get the records, and they finally gave it to me
in October.
On June 1, I got the first evaluation ``acceptable on all
grounds'', which qualified me for a merit pay increase. On June
17, I submitted my evaluation. On June 29, Mr. Hanson forwarded
the evaluation, saying my work was of high value, and made some
very positive comments. For example, that I ``went the extra
mile, and then some''.
Now, I understand between June 29 and July 18, everyone,
with the exception of Linda Thomsen, approved that merit pay
increase. On July 18, the Compensation Committee met and
approved it.
Now, between July 18 and July 27, Linda Thomsen approved
it. But on the evening of July 27 at 5:30, I sent Mr. Berger an
e-mail for the first time saying to him, this investigation has
been stopped because of Mack's political power.
He did nothing in response to that e-mail. That is, he did
not say, come on in, let us talk about it, let us get to the
bottom of this. Two days later, he reevaluated me. That is the
sequence.
Chairman Specter. Mr. Hanson, there is a form here which is
designated ``Merit Pay Supervisor Transmittal Form--Employee's
Name: Gary Aguirre. Supervisor's Name: Robert Hanson''. Are you
familiar with this document, or would you like to see it up
close?
Mr. Hanson. I am familiar with it.
Chairman Specter. You are familiar with it. On June 29,
2005, you checked off the category here, ``Made Contributions
of High Quality''.
Mr. Hanson. That is correct.
Chairman Specter. Well, what was it that changed your view
as to his qualifications?
Mr. Hanson. As I indicated in my written statement, the
evaluation prepared for Mr. Aguirre was based on his work for
the 3-month period, from the date Mr. Aguirre joined my group
through April 30, 2005.
Chairman Specter. And Mr. Kreitman, are you familiar with a
document dated June 1, 2005 concerning ``Performance Plan and
Evaluation'' as to Mr. Aguirre?
Mr. Kreitman. Yes, I am, Senator.
Chairman Specter. You are familiar. Where you checked off
``Knowledge of Field or Occupation: acceptable. Planning and
organizing work: acceptable. Execution of Duties: acceptable.
Communications: acceptable.''
Mr. Kreitman. Yes, Senator.
Chairman Specter. That was your evaluation of Mr. Aguirre
on June 1 of 2005.
Mr. Kreitman. Yes, it is.
Chairman Specter. Why the change?
Mr. Kreitman. Well, Senator, Mr. Aguirre was a probationary
employee. If I had rated him ``unacceptable'' in any of those
four critical performance evaluation standards, it would
effectively have terminated his employment at that time.
Chairman Specter. He ultimately was terminated.
Mr. Kreitman. That is correct.
Chairman Specter. If he is unacceptable, why should he not
be terminated?
Mr. Kreitman. He should be.
Chairman Specter. If he is acceptable, why was he
terminated?
Mr. Kreitman. He was not acceptable at the time that he was
terminated, Senator, at the end of his probationary period.
Chairman Specter. Well, what was the change that moved from
``Acceptable'' in all those categories to ``Unacceptable''? Is
it not a curious coincidence, Mr. Kreitman, that at the time he
is pursuing these matters which are not meeting with favor by
Mr. Hanson, Mr. Kreitman, and Mr. Berger, that suddenly there
is a reevaluation, highly unusual, and all of these
qualifications where he is ``Acceptable'', and where Mr. Hanson
says, his immediate supervisor, ``Made Contributions of High
Quality''. Suddenly there is a change and he is fired?
Mr. Kreitman. Senator, the only respect in which Mr.
Aguirre's professional judgment received disfavor by any of his
supervisors was, as Mr. Berger indicated, with respect to the
timing of the testimony of Mr. Mack.
However, it was Mr. Aguirre's behavior and conduct, the
contemptuous way in which he treated his colleagues, the
unprofessional way in which he dealt with opposing counsel, his
refusal to accept any kind of directional supervision, that led
to his termination.
Chairman Specter. Well, he worked there for a long time. He
got these very favorable ratings on June 29, and a favorable
rating from you, ``Acceptable'', on June 1. Then on September
1, 2 months later from the Hanson evaluation and 3 months later
from your evaluation, suddenly he is fired.
Mr. Kreitman. Well, Senator, he did not work there for a
long time. He was a probationary employee. He worked in our
group from February until September and, perhaps erroneously in
retrospect, we were very generous with him. We wanted to
encourage him. I had promised him that when he came to my group
after having very serious difficulties in another assistant
director group, that I would give him a fresh start.
He worked an enormous number of hours with very great
energy and diligence, therefore, in my judgment and in the
judgment of his other supervisors, I believe, he made a highly
valuable contribution.
That is very different from the basis upon which he was
terminated, which was his inability to work within a closely
supervised, structured, and collegial environment.
Chairman Specter. Senator Grassley?
Senator Grassley. Before I ask questions, I would like to
ask that a list of documents that I will hand to you now would
be included in the record of today's hearing. Also then, before
they are included, it would be necessary for your Committee and
my Committee staffs to make appropriate redactions.
Chairman Specter. Without objection they will be made a
part of the record, as will all of the documents which have
been referenced during the course of the testimony be made a
part of the formal record.
[The documents appear as submissions for the record.]
Senator Grassley. Yesterday's written testimony was
submitted by the witnesses for today's hearing. Mr. Hanson, in
your testimony you discuss Mr. Aguirre's performance when he
took the testimony of Arthur Samberg. You stated, ``It was
reported to me that Mr. Aguirre behaved unprofessionally and
was extremely disorganized during the testimony.''
Mr. Hanson, were you present at any of the testimonies that
Mr. Samberg gave?
Mr. Hanson. I was.
Senator Grassley. You were there?
Mr. Hanson. Your question was, was I present at any of the
testimonies that Mr. Samberg gave.
Senator Grassley. Yes.
Mr. Hanson. I was.
Senator Grassley. You were there.
Mr. Hanson. I think, just to clarify the record, I was not
at the testimonies that Mr. Aguirre took of Mr. Samberg.
Senator Grassley. All right.
So you would have no direct knowledge of what took place at
Mr. Aguirre's testimony of Mr. Samberg.
Mr. Hanson. Other than reading the transcript, I would not
have direct knowledge.
Senator Grassley. All right.
Hilton Foster, who I understand is an ex-Securities and
Exchange Commission expert on insider trading cases, was there.
He has over 30 years' of experience at the SEC and he trained
new attorneys at the SEC.
He testified in an interview with Committee investigators
that ``did I think anything happened in there that was unusual
or unprofessional? No.'' Foster continued, ``There was a
portion there where I said, `this is dynamite stuff here.'
Further, I remember being impressed with the way that Gary did
the testimony.''
Mr. Foster later stated that he was going to use that
transcript in his training of other attorneys.
Mr. Hanson, who was your source that said Mr. Aguirre
behaved unprofessionally?
Mr. Hanson. This was a senior counsel in my group.
Senator Grassley. And he was an attorney with the SEC.
Mr. Hanson. That is correct.
Senator Grassley. Or was he an attorney for the defense
bar?
Mr. Hanson. He was an attorney with the SEC.
Senator Grassley. All right.
Did you ever check what you had heard about the testimony
with Mr. Foster?
Mr. Hanson. I did not.
Senator Grassley. Why not?
Mr. Hanson. The attorney that gave me that information is
an individual I think highly of. I respect his judgment. He has
been doing litigation for a number of years, so whatever he
says to me I generally take as a given.
Senator Grassley. How about Mr. Ribelin? Did you ask him
about Gary's conduct during the testimony?
Mr. Hanson. I did not.
Senator Grassley. Well, let us ask Mr. Ribelin.
You were there. Do you think that Gary did a good job
questioning Arthur Samberg?
Mr. Ribelin. Absolutely.
Senator Grassley. Mr. Stachnik, as you know, I was troubled
about your inquiry into Mr. Aguirre's allegation from the
beginning. I have to tell you, the more I learn, the more
troubled I get.
Your office did little more than look at his letter to
Chairman Cox, call his supervisors, accept what they told you
at face value. Just calling up people accused of wrongdoing and
asking them if they did it is not my idea of an investigation
that you should have performed.
You did not talk to any of the people at the SEC who
identified in his letter as agreeing with him. You did not
contact Mr. Aguirre to get more detailed information or learn
whether he had evidence to support his claims, which it turns
out he did.
Since you did not talk to Mr. Aguirre, you closed the
investigation without even looking at an e-mail from Mr. Hanson
where he admits to talking about John Mack's ``political
clout''. In short, you only got one side of the story and you
did not seem very interested in getting the other side.
In my opinion, an Inspector General is supposed to be
independent-minded. When a whistleblower comes forward, you
should take these allegations seriously, not help play defense
for the SEC. So my first question is, can you explain why your
office was not more aggressive in looking at these allegations
when they were first brought to your attention last year?
Mr. Stachnik. Senator, we did do a professional and
thorough investigation, in my judgment, at the time. We did
assign the most senior staff in my office to this matter. They
did review documents, e-mails. They analyzed metadata, as well
as interviewing the personnel within the SEC.
My judgment in this matter was that the allegations in the
two letters that came from Mr. Aguirre to Chairman Cox, the
allegations were not validated by the investigation. These
included Mack's testimony not being taken. That was a matter of
timing rather than whether or not it would or would not be
taken.
It included the phone call between Linda Thomsen and, I
believe it was Mary Jo White, although I may be mistaken about
that, which we determined was normal communications between the
Director of Enforcement.
We looked at documents which indicated that Mr. Aguirre did
have access and did participate in lots of meetings concerning
all of the matters he claimed he was not invited, and did not
participate in the meetings.
We looked at the allegation about his personnel file and
found out, through analysis of metadata, that the supplemental
evaluation, unlike the allegation, was prepared back in an
appropriate time and it was not post-dated.
We also determined that his termination was based on a
dysfunctional relationship between himself and his supervisors.
It was pretty obvious that it had been going on. Based on
contemporaneous memos, e-mails, and so forth, it was pretty
obvious that it was going on for a long period of time. This
was not something that came up suddenly.
Senator Grassley. Well, does it not bother you, if your
office is independent of the SEC and you can do your work as an
Inspector General ought to do the work, and does it not raise a
red flag when somebody says that you ought to be careful
because somebody has got a lot of political clout?
I mean, after all, you are talking about an independent
agency. But any place in the government. When you start
worrying about somebody that has political clout, you are not
doing your job.
Mr. Stachnik. I agree, Senator. That is the reason that we
did open the investigation. I was very disturbed by the
allegations that were made by Mr. Aguirre. The investigation
was designed to validate those allegations.
Senator Grassley. Well, let me ask you, do you still stand
by the closing memorandum that you did? If so, why did you
reopen the investigation?
Mr. Stachnik. The reason that I decided to reopen the
investigation was a combination of factors. The serious
concerns expressed by the Senate, your Committee and Senator
Specter's committee, were clearly part of that decision. The
concerns expressed to me by Chairman Cox of the SEC was also
part of that decision.
In my estimation, we did a professional and rigorous
investigation. However, we are not infallible. We are taking
another look at the matter. That is the reason we reopened it.
I reopened it.
Senator Grassley. All right.
Well, my last question is going to followup on that. Your
office made no written document request to the SEC before
closing this initial investigation. Yet, after Congress started
raising questions, you did reopen it, as we just discussed, and
have since issued a broad subpoena to Mr. Aguirre calling for
records of his communication with this Committee and with my
own Finance Committee.
You are now attempting to have the Justice Department
enforce that subpoena in court, even though you are aware that
we have raised constitutional objections to your office seeking
confidential communications between a whistleblower and a
Congress about an ongoing Congressional inquiry, which includes
questions about the effectiveness of your office, which, if you
are successful, you might as well close down the whole business
of whistleblowing and close down a major source of information
for Congress doing its constitutional job of oversight.
Could you explain to me why it is necessary for you to have
access to communications between Mr. Aguirre and the committees
investigating his allegations?
Mr. Stachnik. First off, I do have a parochial interest in
whistleblowers, as part of the IGs' community that depends on
whistleblowers, as well as other individuals within the
government, to provide information and leads for investigation,
so it is not the case that we find them un-valuable.
I can tell you, in terms of this subpoena enforcement
matter that you were discussing----
Senator Grassley. Yes. Why do you need access to
communications? I mean, you should have all this information.
If you are doing your job and you are talking to
whistleblowers, why do you need what they give us?
Anyway, we have made an entreaty to you to agree to avoid
interfering in our investigation. If you would narrow the scope
of your subpoena to exclude his communications with our
committee, it might get you the information you need and you
are not interfering with any constitutional checks and balances
and things of that nature. Also, you just said that you respect
whistleblowers.
Mr. Stachnik. Yes, sir.
Senator Grassley. Well, then you do not seem to be
respecting Mr. Aguirre very well in this whole process.
Mr. Stachnik. I am unaware I did anything disrespectful to
Mr. Aguirre.
Senator Grassley. Well, I am using that as an example. Do
you really have respect for whistleblowers in that respect? In
other words, if you consider them of value, why do you not take
the word of the whistleblower sitting beside you?
Mr. Stachnik. Well, I am not an advocate for
whistleblowers. That is not the function of the Inspector
General.
Senator Grassley. But you ought to be an advocate for their
information that they give you.
Mr. Stachnik. We did. That is the purpose of the
investigation, was to validate the information and the
allegations made by Mr. Aguirre.
Senator Grassley. What are the chances of narrowing your
request to Congress?
Mr. Stachnik. I have been advised by the Department of
Justice not to comment on that. I can tell you that,
personally, I am not looking to make a fuss about this matter.
It is up to lawyers.
Senator Grassley. You may be playing footsie with an
executive branch of government that wants to curb Congressional
inquiries even beyond this one. That is a precedent that could
be set.
Chairman Specter, I think we need to consider legislation
that ensures that agencies cannot intimidate whistleblowers by
issuing subpoenas to them for all of their communications with
Congress. We need to ensure that people feel free to come to us
with information about waste, fraud and abuse without worrying
that they are going to get slapped with a subpoena.
Chairman Specter. Senator Grassley, there is no doubt about
that. We have some of that included in the draft legislation
which has been circulated, but we need to be sure that Mr.
Ribelin, for example, who stepped forward and has given candid
testimony, backed up by documents, will be protected. There is
no doubt about that.
And the point that you are making with Mr. Stachnik is very
well founded. We had not come to the point of questioning him,
but he closed his investigation without questioning Mr.
Aguirre, which is sort of incomprehensible.
For the Inspector General to seek the testimony, what Mr.
Aguirre told the Finance Committee, what he told the Judiciary
Committee, is just really extraordinary. It is just really
extraordinary that our oversight and our inquiries would be
subject to intimidation. I mean, that is what it is. You are
getting even with Mr. Aguirre for talking to the Finance
Committee and the Judiciary Committee. Is that not about the
size of it, Mr. Stachnik?
Mr. Stachnik. Not from my perspective, no. I am trying to
get the information necessary to complete the reopened
investigation.
Chairman Specter. Well, why do you not ask Mr. Aguirre? Why
not ask Mr. Aguirre for what he has told the committees?
Mr. Stachnik. We have talked to Mr. Aguirre's attorneys. My
attorneys have talked to his attorneys. We will take his
statement from this Committee and look at that carefully.
Chairman Specter. Well, any information you want from Mr.
Aguirre, you can get from him. Why do you have to----
Mr. Stachnik. We have asked Mr.----
Chairman Specter. Let me finish the question. Why do you
have to implicate what the Judiciary Committee has heard from
Mr. Aguirre?
Mr. Stachnik. We have asked Mr. Aguirre directly for
information and he has declined to give us that information.
Mr. Aguirre. I have to speak on that. May I?
Chairman Specter. Go ahead, Mr. Aguirre.
Mr. Aguirre. I provided them 250 pages of details, a 45-
page statement backed up by 200 pages of exhibits, laying out
everything. This statement that I gave them, I have given to
your staff. I have never had anyone come back and say, it is
not enough information for us to understand.
I do not know why they are doing this. I am not sure it is
a search for information any more. I think it is something
else. The information that they have got now is voluminous.
Yet, we continue on.
Chairman Specter. Mr. Berger, do you care to make a
comment? There has been some media speculation as to your
joining the Debevoise firm after there was some involvement by
the Debevoise firm with Morgan Stanley and Mr. Mack. I want to
give you an opportunity to comment about that.
Mr. Berger. Thank you, Senator. I appreciate the
opportunity to comment on that. The first statement, is there
is absolutely no correlation whatsoever between my decision to
seek employment outside of the Commission and the Pequot
investigation, or any investigation.
Chairman Specter. How long a period of time was there
between your involvement in the Pequot investigation and the
involvement of Mr. Mack and the representation by Debevoise and
the time you sought employment with Debevoise?
Mr. Berger. My understanding is that Debevoise represented
not Mr. Mack, but the board of directors of Morgan Stanley, for
6 days in June of 2005. I first approached Debevoise in January
of 2006.
Chairman Specter. Anything further you want to say about
that?
Mr. Berger. I think I have said everything.
Chairman Specter. All right.
Mr. Stachnik, are you saying, in effect, that as far as you
are concerned, you do not want the communications with the
committees?
Mr. Stachnik. I have been advised by the Department of
Justice not to discuss this matter. I apologize.
Chairman Specter. Well, they are representing you. But you
are the investigator. You are the Inspector General. You are
the party in these proceedings. Do you want the information
which was given to the Judiciary Committee?
Mr. Stachnik. We need the information that would allow us
to conduct the investigation.
Chairman Specter. Now answer my question.
Mr. Stachnik. I am sorry. I have to go with the advice
given to me by the Department of Justice and I cannot discuss
the matter.
Chairman Specter. Well, has the Department of Justice told
you that you should get the information from the Judiciary
Committee?
Mr. Stachnik. We did request the information from the
Judiciary Committee. We requested it in writing, as well as
orally. My understanding is, you have a Senate rule----
Chairman Specter. Now see if you can focus on my question.
Mr. Stachnik. All right. I am sorry.
Chairman Specter. Did the Department of Justice urge you to
get the information from the Judiciary Committee or is the
Department of Justice not really your lawyer in the matter to
proceed it in court to see if they can compel it?
The Department of Justice does not make the decision as to
whether the information is necessary for your investigation,
Mr. Stachnik. You make that decision.
Mr. Stachnik. That is correct.
Chairman Specter. Well, so are you saying that you want
that information from the Judiciary Committee?
Mr. Stachnik. Again, Senator, the Department of Justice has
advised me not to discuss the matter. I do not know anything
more----
Chairman Specter. Oh. Now the Department of Justice has
advised you not to discuss the matter with the Judiciary
Committee?
Mr. Stachnik. That is correct.
Chairman Specter. The plot grows thicker all the time.
Well, I think we have gone about as far as we can go here.
The draft legislation which would permit the parallel
activities by the Department of Justice and the SEC, and would
provide greater inducements to whistleblowers and would provide
for some regulation where you have small investors and you have
pension funds, we are going to put that into the legislative
process and introduce that legislation. Obviously nothing is
going to happen in the 109th Congress, but this is going to be
a matter for analysis and pursuit later.
At a minimum, it is very, very troubling what the SEC has
done here, Ms. Thomsen, Mr. Berger, Mr. Kreitman, Mr. Hanson.
At the very minimum, it is very, very troubling. When you have
a matter referred to you and it sits dormant for 2 years, and
you have a very vigorous investigator like Mr. Aguirre coming
forward and you have him working from September of 2004 and
getting very good reports as late as June 29, 2005, and then
because he is pressing on what is admitted by your own
memoranda, Mr. Hanson, to have political overtones, to have
``juice'', and you have one of your professionals of long
standing, Mr. Ribelin, coming in and saying something is
smelly, and then your agency takes no action until there is a
Judiciary Committee hearing in June and you finally get around
to taking Mr. Mack's deposition 5 days after the statute of
limitations has run, and you have the Inspector General of the
SEC taking punitive action against Mr. Aguirre--that is what it
is, Mr. Stachnik.
Senator Grassley expressed it very, very well on the kind
of an investigation you have run here, which is not
professional. You are not the only one who knows something
about running investigations.
But we are not finished with this yet, ladies and
gentlemen. We are not finished with this. We have people under
oath with directly contradictory testimony. It is very, very
troubling, at a minimum.
That concludes the hearing.
[Whereupon, at 12:03 p.m. the hearing was concluded.]
[Questions and answers and submissions for the record
follow.]
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