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According to several sources close to the case, the SEC is in final negotiations to settle insider trading charges against Pequot Capital Management, over a year after it issued the firm and its founder, Arthur Samberg a so-called Wells notice, indicating the agency was going to formally charge the firm.
It’s unclear what the final settlement will be, but sources said the two sides have recently discussed an agreement that includes a total of about $25 million in fines with Pequot neither admitting nor denying wrongdoing.
Last May, Samberg announced he was closing Pequot, once one of the largest hedge funds on Wall Street, because the long-standing insider trading investigation that began in 2005 had been re-opened. At the time, he said the decision to wind down the $3 billion fund was “painful” but he could no longer focus on investing for clients. (Pequot’s assets under management peaked in 2000 at roughly $15 billion.)
Sources cautioned that settlement negotiations have been ongoing for months and could still fall apart, although both sides have incentives to end the investigation. A spokesman for Pequot and the SEC declined to comment.
In November 2006, the SEC closed its controversial investigation into whether Samberg traded on tips about General Electric’s takeover of Heller Financial in June 2001 for lack of evidence. (Read full closing report here and note on the bottom of page 3 that the SEC concluded Goldman Sachs had a policy of releasing analyst reports to preferred clients before they were published.)
As part of the initial investigation, the SEC also looked into possible insider trading in Microsoft shares based on tips Pequot received from a low-level Microsoft employee named David Zilkha, who was eventually hired by Pequot in 2001.
Zilkha claims he never had inside information on Microsoft and was told by senior managers that he was not “important enough” to be restricted from selling his Microsoft options. In his conversations with Samberg, Zilkha says he gave his opinion on the direction of the company’s stock, but didn’t pass along anything material. Still, the information seemed to pay off, netting Pequot $2.1 million in profits, according to the SEC.
In late 2008, the SEC decided to re-open the Pequot case after members of the Senate Finance and Judiciary Committees discovered that Zilkha had been promised $2.1 million in payments from Pequot six months after the 20006 SEC inquiry was concluded.
The evidence came when Zilkha’s ex-wife made a claim for the money three and a half years after their divorce was settled in May 2005. (Pequot has still not delivered the final $700,000 payment to Zilkha.)
Around the same time, Zilkha’s ex-wife decided to turn over a computer hard drive to investigators after being in possession of it for nearly five years. Zilkha says the hard drive, which his ex-wife had removed from their home computer at the beginning of their divorce after telling him it had crashed, was turned over to Federal authorities a few days after he made a motion to obtain more visitation time with his children.
The SEC discovered the hard drive contained emails sent by Zilkha to Microsoft employee Mark Spain asking, among other things, about earnings rumors. In one email in June 2001 with the subject line “missing earnings rumor,” Zilkha asks Spain, “Do you believe this? Should I sell my shares today or wait until after earnings come out? I have until 8/7 to do so.”
Zilkha said Spain relayed information about Microsoft that had already been announced and then gave his opinion on the stock, which he says was taken from published analyst reports. Microsoft eventually beat earnings estimates for the quarter and the stock rose.
In January of this year, Zilkha was interviewed by federal investigators and they questioned him again on the information he gave Samberg. Sources said the SEC has also been pushing Zilkha to settle the case and want him to forfeit his final $700,000 payment from Pequot and agree to a lifetime ban from the securities industry. So far, he has resisted settling.