Connecting the Dots: The US Attorney, the SEC, Art Samberg, Pequot Capital, Hush Money, Lying, and More
Posted by Larry Doyle on December 27, 2010 12:22 PM |
This commentary and attached story are a little lengthy but very important. I hope you will take the time to read, review, and share. LD
Is it possible that our nation can experience a historic demise in our economy and markets with little if any criminal activity involved in that process? Was our economic and market meltdown largely ‘a perfect storm’?
I do not buy those who would put forth that line of reasoning. Nor do I think should you.
Does it defy logic to think that our nation has been hit with trillions of dollars in losses and untold economic pain but only a relative handful of individuals were involved in criminal behaviors connected to this turmoil? Yes, that does defy logic.
Where are the criminal prosecutions?
Is our nation’s desire for justice supposed to be satisfied by a huge fine against Goldman Sachs, a handful of cases against a mix of hedge funds, and little else? Is that the best we can get? Do you get the sense that the American people are being played? Do you think that the strength of the Wall Street-Washington incest is inhibiting the pursuit of real justice? How so? Let’s navigate.
In mid-November U.S. Attorney Preet Bharara spoke at a conference on the topics highlighted above. Recall that Bharara is the point person in the ongoing insider trading scandal currently making waves on Wall Street. Bharara shared the following,
I can also tell you that you can expect greater discussion about coordination among and between authorities because of that elephant in the room that people have talked about a little bit already and will continue to talk, that’s Dodd-Frank, and it is unclear exactly how some of the areas of Dodd-Frank will play out, but one of them is the question of how whistlebowers will be handled and how criminal referrals will be made.
That is another source of expected cooperation and collaboration among us all. We always work as well as we can alongside and in parallel to the Securities and Exchange Commission and a lot of other partners.
There are two other ways that I think it is important to understand how we can help the mission of securities enforcement independently when we bring cases that look like an SEC case, but also to support the mission to ensure that the markets are fair and make sure that when people come in to report on their own conduct or if they get audited, they tell the truth.
I can tell you that I have had conversations with Rob and folks in my office and I have had conversations with John Cannallis, who heads the New York office of the SEC and Lauren Riser and others about making sure that when the exam staff or the Enforcement staff of the SEC talks to somebody that person tells the truth and if that person is not telling the truth that we think very seriously about taking criminal action, a perjury action against that person. And we are looking for opportunities to make those kinds of cases because there is no greater way, I think, to send a message of deterrence to people who think that they can game the system by not telling the truth to the SEC.
Outstanding. We love people who pursue the truth. Bharara certainly appears to be a strong advocate. Let’s continue to navigate and maintain Bharara’s ‘focus on the truth’ while simultaneously reviewing a high profile insider trading scandal.
For those on Wall Street, Art Samberg needs no introduction. Art ran Pequot Capital, a once highly regarded hedge fund. Art and Pequot were entangled in an insider trading scandal earlier this decade. As a result, Art was hit with a $28 million fine and Pequot was shut down. Is that the end of the story? No, there is a lot more to it than that. Let’s continue.
Please keep in mind Mr. Bharara’s comments about ‘telling the truth’ as you read a fascinating review of the Pequot saga recently put forth by the Project on Government Oversight (POGO), which recently released SEC Describes Possible Criminal Activity in Major Unprosecuted Hedge Fund Case,
The Obama administration has stated it will aggressively go after Wall Street criminals, but is the government letting two defendants off easy?
As part of a big crackdown on Wall Street fraud, Attorney General Eric Holder recently revealed an “investigation is ongoing” that is “very serious,” believed to involve hedge funds and insider trading. He also has announced “Operation Broken Trust,” a Department of Justice-led task force targeting hundreds of illicit investment schemes. One of Holder’s wingmen is Preet Bharara, U.S. Attorney for the Southern District of New York. Bharara has threatened to file criminal charges including perjury against those who mislead federal investigators looking into stock fraud.
But what neither Holder nor Bharara have highlighted is a major case involving Pequot Capital Management, once the world’s largest hedge fund, and alleged insider trading in shares of Microsoft. The target of a DOJ-Securities and Exchange Commission investigation stretching back to 2005, the Pequot case is only now wrapping up. Last month, the SEC held an administrative proceeding in New York where government lawyers detailed new and serious accusations of what appears to be criminal wrongdoing, yet experts say there is little indication that DOJ intends to follow up with a criminal prosecution.
Time may be running out. The criminal statute of limitations on insider trading, the underlying alleged crime, has already expired. The clock is ticking on any DOJ prosecution of the SEC’s latest accusations in the case.
The Project On Government Oversight (POGO) obtained a transcript of the previously unreported November administrative proceeding (note: a large file) involving Pequot. In it, Mike Foster, one of three SEC lawyers who presented the case, said that a defendant had engaged in “deception” by having “concealed” evidence from FBI agents and SEC investigators. Foster also said in court that the defendant solicited $2.1 million in “hush money” from another defendant, Pequot’s chairman, who settled civil charges with the SEC earlier this year. Most of the $2.1 million was paid.
The SEC closely coordinated with DOJ and Bharara’s office in the Pequot investigation. As recently as March, an assistant U.S. Attorney working for Bharara’s Southern District offered a sworn statement in a related federal court proceeding in which he said he was conducting an investigation “into potential violations of the criminal laws” in the Pequot matter. Two months later, the SEC settled insider trading charges with one of the defendants. So far, no criminal charges have been filed against anyone.
Contacted by POGO, neither agency would comment on when or if the case would ever be prosecuted.
However, a powerful Senator did not hesitate to comment on the matter. “The Department of Justice owes the public an explanation for why there have been no criminal prosecutions despite the SEC openly making accusations of a witness being bought off,” Senator Charles Grassley of Iowa told POGO. Grassley is slated to be the top Republican on the Senate Judiciary Committee, which oversees the DOJ. “The public has a huge interest in the case, congressional hearings were held, and the SEC has now characterized the payments as ‘hush money.’ So where is the Justice Department?”
The SEC’s latest accusations in the Pequot case have come to light as a chorus of nay-saying lawyers, securities specialists, and lawmakers have argued that Holder and Bharara’s stock fraud crackdown is overblown. But their larger beef is that in the two years since the peak of America’s recent financial meltdown, DOJ has not brought a criminal case against any major Wall Street figure in connection with the financial crisis. While there has been some heightened enforcement involving big companies, the current docket is heavy on minor Ponzi schemes and small-time stock fraud.
“We have seen very little in the way of senior officer or boardroom-level prosecutions of the people on Wall Street who brought this country to the brink of financial ruin,” noted then-Democratic Senator Ted Kaufman of Delaware at a recent hearing of the Senate Judiciary Committee. “Why is that?”
“The government has tended to be gun shy lately,” said Dan Hurson, a former federal prosecutor and former SEC enforcement lawyer. “Given the investment on every case, they’re mostly going after what they consider sure winners.”
As a result, bigger fish are swimming away, say critics. At times these defendants may face administrative penalties or fines, but they have avoided criminal prosecution and possible jail time, which many say is a more effective deterrent against Wall Street abuses. The roster of Wall Street behemoths whose officers did not face prosecution reads like a “Who’s Who” of the U.S. financial meltdown, extending from AIG to Lehman Brothers to Fannie Mae and Freddie Mac, and including big cases in 2010 like Citigroup and Bank of America, as well as mega-mortgage lender Countrywide Financial. While it’s impossible to assess all the factors that might influence prosecutors to hold their fire in a particular matter, critics charge that the list of unprosecuted corporate cases is so extensive that it amounts to a pattern.
“There is a pattern,” said William K. Black, a well-known former bank regulator now at the University of Missouri-Kansas City School of Law, who has been critical of the government’s role in policing the financial crisis. “There seems to be a belief that people who wear nice suits don’t commit crimes.”
PEQUOT: A CASE IN POINT
While there has been a great deal of publicity surrounding DOJ’s latest Wall Street crackdown, little attention has been paid to the endgame in Pequot, one of the SEC’s biggest, headline-grabbing insider trading cases in recent years, investigated both by the SEC and the Southern District of New York, where Bharara is the current boss. The SEC has so far brought only civil charges against the hedge fund’s former chairman, Arthur Samberg, 69, and a one-time employee, David Zilkha, 42, the scion of a socially prominent international banking family. Scandal surrounding the alleged insider trading contributed to Pequot’s 2009 announcement that it would close.
The SEC charges that Zilkha began giving Samberg illegal insider tips about Microsoft when Zilkha worked at the software giant and, later, when Zilkha briefly joined Pequot in 2001. The hedge fund fired him later that year. After getting the illegal tips, says the SEC, Samberg traded in Microsoft securities, racking up $14 million in “ill-gotten gains.”
But DOJ apparently decided not to bring a criminal case for insider trading in Pequot because its investigation, conducted with the SEC, took so long to complete that the statute of limitations had run out.
Now, the SEC has accused Zilkha of withholding evidence and Samberg of giving him a “payoff.” These new allegations were presented in November at Zilkha’s administrative proceeding in New York.
The new accusations are all the more startling because they seem to indicate criminal behavior that could still be prosecuted. According to statements made by the SEC’s Foster in a transcript of the proceeding obtained by POGO, Zilkha “offered only deception,” and “fraudulently concealed” information to mislead federal agents. Foster’s statements were supported by the sworn testimony of an FBI agent and an SEC investigator. The SEC then accused Zilkha of soliciting “hush money” from Samberg, who approved its payment.
The FBI agent and SEC investigator described to the court how Zilkha allegedly concealed evidence of insider trading from the government’s investigation in 2005 and 2006. Some of that same evidence later found its way into a 2007 document in which Zilkha solicited compensation from Pequot for having fired him years earlier in 2001. According to court testimony and other records, Zilkha’s demand was presented to Pequot by one of Zilkha’s lawyers. Samberg then agreed to pay Zilkha a total of $2.1 million. The first of three $700,000 payments was made in 2007, the second in 2008. When or even if the final payment will be made remains unclear.
In court, the SEC put into evidence Zilkha’s 2007 “employment claim” document against Pequot, recently obtained by POGO, which included information that was not public at the time, and has never been publicly reported. The document contained a blank space for Zilkha’s sworn signature, if and when the claim was ever filed in court. But there was no filing. Instead, Pequot agreed to a $2.1 million settlement, covered by a strict confidentiality clause. The document, if made public, could have been damaging to Samberg and Pequot.
To begin with, the “employment claim” set forth a detailed account of how, in 2001, Zilkha provided Samberg with information about Microsoft, noting that Samberg had acted on this information by trading in Microsoft securities.
As Zilkha’s never-filed complaint put it, Samberg “continued to ask [him] to obtain information from his contacts at MSFT [Microsoft] and to ask Zilkha for his opinion of MSFT stock based on this information.”
“Zilkha observed that Samberg acted on his MSFT recommendations only when they appeared to be based on information obtained from MSFT employees,” the document’s narrative continues.
The description comes close to a textbook definition of insider trading.
At another point in Zilkha’s complaint, he accuses Samberg of lying to him about his employment at Pequot to “induce Zilkha to remain at Pequot and continue to obtain information on MSFT which Samberg hoped to use to his benefit.”
The complaint notes that Samberg was so happy to receive information on Microsoft from Zilkha that Samberg emailed him saying, “I shouldn’t say this, but you have probably paid for yourself already!”
Perhaps to underscore the gratitude that Samberg ought to have felt, Zilkha cites four occasions when Zilkha says he met with FBI agents and SEC investigators. They discussed “information that Zilkha had provided to Samberg concerning MSFT” before the SEC closed the case for lack of evidence—evidence that the SEC has since accused Zilkha of withholding.
After Samberg agreed that Zilkha should receive $2.1 million, Zilkha and his lawyers did not file their complaint against Pequot in court, where its contents would have become public.
As a result, Zilkha’s statements purporting to document Samberg’s stock trading remained under wraps, but only for a time. Later, during Zilkha’s divorce from his wife Karen, Pequot lawyers showed up in court and
Zilkha’s ex-wife Karen Kaiser also discovered her ex-husband’s computer hard drive and her new husband, Dr. Glen Kaiser, handed it over the government. The hard drive turned out to contain new evidence of insider trading, causing the SEC to forge ahead with its case against the Pequot defendants in 2008.
As for Zilkha’s unfiled “employment claim” against the hedge fund, it became public in court this November where it was presented as evidence of “hush money” by the SEC. Its details have not been reported until now.
The fact of Pequot’s payments to Zilkha is not in dispute, nor that they were personally approved by Samberg in 2007 on the advice of Pequot lawyers. But until November, the government had described them only as satisfying an “employment law claim.” Now, in court, the SEC has characterized the same payments in language (“hush money”) that strongly suggests criminal intent.
Zilkha’s 2007 demand for financial compensation for a job he lost nearly six years earlier was highly unusual, especially given that Samberg had ignored all of Zilkha’s previous demands. Zilkha had also been advised by several attorneys over the years that he had no standing to file an employment claim since he was hired and fired as an at-will employee.
The SEC’s Mike Foster, one of three agency attorneys who argued the case, did not mince words in explaining Zilkha’s apparent obstruction. Foster charged that Zilkha and Pequot’s Samberg approved the agreement obliging the firm to pay Zilkha $2.1 million that was, “essentially hush money to prevent Mr. Zilkha from exposing this insider trading scheme.”
“Isn’t it true that you viewed this as a payoff?” a second SEC lawyer, Luke Cadigan, asked Zilkha. The defendant issued a prompt denial.
At another point, an SEC attorney presented the court with a 2007 email in which Zilkha spoke directly of the money he received from Pequot. “[M]aybe I got what I did [the money] because Samberg realizes that I know enough about how he operates to undo him,” according to the transcript of the administrative proceeding.
After the SEC made its newest accusations, both an FBI agent and a senior SEC investigator testified under oath that Zilkha withheld evidence during the SEC’s multi-year probe of Pequot, which began in 2005. The SEC lawyer presenting the case said Zilkha had made “false” statements and engaged in “deception,” calling his alleged withholding of evidence from federal investigators, “concealment.” Zilkha denied these accusations.
Robert Khuzami, the SEC’s Director of Enforcement, has issued a public statement saying that the Pequot case involved “two particularly troubling aspects—a hedge fund manager trading on illegal insider information, and his tipper source who withheld crucial information about the scheme during an SEC investigation.”
WILL THE GOVERNMENT PROSECUTE?
In the past, the government has not hesitated to criminally prosecute those who have withheld evidence, or engaged in deceit, such as the 2004 case in which domestic diva Martha Stewart was convicted and sent to jail on charges of obstructing investigators and lying to them about a well-timed stock sale.
In Pequot, no prosecution was possible for the alleged insider trading because the government’s investigation took so long to complete that the criminal statute of limitations had run out. The government closed the investigation because of a lack of evidence which they later said Zilkha had withheld. When provided with that evidence, the SEC reopened the case. However, the criminal statute of limitations on insider trading had expired.
But the criminal statute of limitations for at least several of the recently alleged offenses has not run out. That would allow DOJ to bring a criminal case, if it chose to do so, based on the SEC’s accusations that Zilkha “fraudulently concealed information pertinent to [the Pequot] investigation” and Samberg paid him “hush money.”
Yet many observers of the controversial Pequot case now expect the case to close sometime early next year with only civil penalties.
“A prosecution certainly appears unlikely at this stage,” noted University of Missouri-Kansas City Law School expert William Black. “The DOJ has had evidence for a long time of alleged crimes of the kind that undermine our judicial system and typically drive prosecutors crazy, yet there is little sign of an active investigation.”
Referring to Pequot, an SEC spokesman said that criminal charges, if any, would have to be brought by DOJ. Neither agency would comment further. The Southern District of New York, which assisted in the Pequot investigation, also declined comment.
The prospect that there will be no criminal prosecutions has shocked two key figures in the drama. They say they have written letters of protest to U.S. Attorney Bharara and Attorney General Holder, as well as to several U.S. Senators and Representative Darrell Issa, the powerful incoming Republican chairman of the House Oversight and Government Reform Committee. The letters, so far not public, pointedly question why the DOJ has avoided moving ahead with criminal prosecutions.
Gary Aguirre, a former senior SEC lawyer who uncovered much of the evidence in Pequot and later became a celebrated SEC whistleblower, said he is writing Holder. Aguirre is concerned that the statute of limitations may be about to run out on several crimes the government has so far not prosecuted. “The failure of DOJ to prosecute Wall Street players like Samberg and Zilkha is the Achilles heel in its overall handling of the financial crisis,” Aguirre said. “It invites Wall Street to do an encore.”
Dr. Glen Kaiser, a Connecticut physician who, with his wife, Karen, who is Zilkha’s ex-wife, shared a $1 million reward from the SEC for coming up with new evidence in the case, said he is also upset. In his letter to Bharara, Holder, and others, Kaiser charges that an assistant U.S. Attorney from the Southern District of New York mishandled the investigation into Pequot and repeatedly ignored evidence of what Kaiser says is criminal wrongdoing by the two defendants.
Now that Zilkha’s administrative proceeding is over, his fate rests in the hands of an administrative judge. The SEC has asked Zilkha to pay what could amount to millions of dollars in “disgorgement” and other penalties, and face a lifetime ban from the securities industry.
Zilkha has denied all charges, and refused to settle with the SEC, which is why he faced the administrative proceeding in early November. If the SEC wins, however, Zilkha will face only civil penalties. A lawyer representing Zilkha had no comment.
Samberg accepted a lifetime ban on working in the financial sector in May and agreed to pay the SEC $28 million, a tiny fraction of his net worth and the $15 billion Pequot had under management at the time the alleged insider trading occurred. Samberg made no admission of wrongdoing. Of the two defendants, Samberg is better known, both on Wall Street as the hedge fund’s former chairman and as a philanthropist. Contacted by POGO, a representative of Samberg and Pequot offered no comment and said no one else would speak on their behalf.
Unconfirmed reports of Pequot’s payments to Zilkha first circulated in 2008. This prompted Senator Arlen Specter of Pennsylvania, then the top Republican on the Senate Judiciary Committee, and Senator Charles Grassley of Iowa, the top Republican on the Finance Committee, to investigate what was going on. The pair signed a letter reporting the payments to the SEC, and wrote to Samberg asking about the payments.
Samberg responded in a letter that Pequot “agreed to the proposed settlement” with Zilkha. This occurred “after consultation with…advisors and colleagues at Pequot, and based on our judgment that the legal costs, management and employee distraction and adverse publicity of ongoing litigation with Mr. Zilkha would have a negative impact on Pequot’s business and our investors,” Samberg wrote.
But the latest SEC appearance in court appears to directly contradict Samberg by characterizing Pequot’s payments as “a payoff.”
Senator Specter was also unsatisfied with Samberg’s explanation. In a little-noticed 2009 statement on the Senate floor, he objected to the money transfers. “Certainly,” he declared, “this is something that ought to be of major concern to the Securities and Exchange Commissioners, to the Chairman, and to the SEC, generally.”
In Pequot and other securities fraud cases, it is only DOJ that can bring criminal charges, but it works closely with the SEC in investigating violations. When, as in Pequot, the SEC describes apparent criminal activity, those declarations inevitably raise the question of a criminal prosecution, but it falls to DOJ to exercise its discretion.
Yet DOJ must meet a higher standard of proof, “beyond a reasonable doubt,” to win a criminal case. In contrast, the SEC can prevail in a civil or administrative action if it establishes a violation based on a “preponderance of the evidence.”
According to the transcript of a recent speech to a law enforcement group Bharara gave in New York City, he intends to specifically target not just fraudsters, but whistleblowers or anyone else who lies to the SEC or obstructs its investigations.
DOJ wants “to send a message of deterrence to people who think that they can game the system by not telling the truth,” Bharara said. Bharara’s position reflects the SEC’s Form 1662, which warns anyone who supplies information to an SEC investigation, voluntarily or under subpoena, that they could face perjury charges for giving false statements under oath.
Although DOJ may not pursue prosecutions in the Pequot case, in recent months, DOJ has pressed ahead with separate insider trading cases involving the Galleon hedge fund and other companies, and also launched “Operation Broken Trust.”
As for the SEC, the agency insists it is just doing its job, not only bringing more civil cases than in the past, but important ones against the likes of Wall Street icon Goldman Sachs. However, federal judges have complained of excessively lenient SEC-arranged civil settlements with Bank of America and Citigroup, cases in which there were no criminal prosecutions. In October, the SEC settled with mortgage-lender Countrywide Financial, as CEO Angelo Mozilo faced only civil penalties for having “misled investors” in the subprime mortgage crisis. Mozilo admitted no wrongdoing.
Paradoxically, SEC Chairman Mary Schapiro recently touted her agency’s handling of Pequot in a letter to Representative Issa, who is slated to be the next chairman of the House Oversight and Government Reform Committee. She told Issa that Pequot offers an example of enforcement activity that has “increased significantly,” without mentioning possible criminal aspects of the case.
Did DOJ ever contemplate a criminal case against either defendant, perhaps for concealing evidence from the FBI, as detailed by the SEC in court, or for paying or accepting “hush money?”
Neither the SEC nor DOJ would comment.
But as recently as March 2010, Assistant U.S. Attorney Jonathan Streeter, who works in Bharara’s Southern District office and assisted the SEC in the Pequot case, swore an affidavit in federal court in Washington, D.C. In the affidavit, Streeter stated that he was conducting a criminal investigation of Pequot. Two months later, the SEC announced its civil settlement with Samberg.
WOW. POGO once again distinguishes itself. Hush money? Allegations of lying? Is America supposed to be satisifed with slapping the cuffs on small-time financial charlatans but is there a different brand of justice for those at the center of the Wall Street-Washington nexus?
Will Bharara pursue? How could he not? Will he ‘walk the walk’ after having ‘talked the talk’? What about ‘telling the truth?’
What do you think happens to morale within the SEC if/when criminal charges are not brought in the face of a preponderance of evidence?
Not for nothing, but how is it that this story is not on the cover page of The Wall Street Journal, The New York Times, and every other financial periodical and media outlet that would care to be considered credible?
Will there be Congressional hearings to address this case? What about others like them?
Do you ever find ‘just one mouse’?
So many questions. So few answers.
I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own and not those of Greenwich Investment Management. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.
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