Friday, May 28, 2010
Remember Pequot Capital Management? The SEC was harshly criticized in an earlier investigation of the hedge fund for not aggressively pursuing insider trading charges. (The SEC's Inspector General investigated and found no misconduct.) The SEC again investigated the firm when an ex-wife of a former employee brought it evidence of another instance of insider trading, and yesterday it settled charges against Pequot Capital Management, Inc., and its Chairman and CEO Arthur Samberg involving insider trading in Microsoft Corporation securities. The SEC separately brought an enforcement action against a former Microsoft employee who later worked at Pequot for allegedly tipping the firm and Samberg with nonpublic information about Microsoft's earnings.
Pequot and Samberg agreed to pay nearly $28 million to settle the SEC's charges. The SEC Division of Enforcement's case against the tipper, David Zilkha, will continue in an administrative proceeding before the Commission.
The SEC's complaint against Pequot and Samberg, filed in U.S. District Court in Connecticut, alleges that amid rumors in April 2001 that Microsoft would miss its earnings estimates for the quarter that had just ended, Samberg sought information from Zilkha, a Microsoft employee who had just accepted an offer from Samberg to work at Pequot. Zilkha quickly reached out to a Microsoft colleague, who sent him an e-mail stating that the company would meet or beat its earnings estimates for the quarter.
According to the SEC's complaint, Zilkha then conveyed to Samberg his understanding that Microsoft would meet or beat its earnings estimates. Samberg thereafter traded in Microsoft on behalf of funds managed by Pequot. On April 19, after the market had closed, Microsoft announced that it beat its earnings estimates, driving up the price of Microsoft's stock. As a result of the illegal trading by Pequot and Samberg, the Pequot funds made more than $14 million.
Pequot and Samberg agreed to settle the SEC's charges without admitting or denying the SEC's allegations against them. Pequot and Samberg agreed to pay a total of nearly $18 million in disgorgement of trading profits and prejudgment interest as well as $10 million in penalties. With the exception of certain activities aimed solely at winding down Pequot, Samberg also has agreed to be barred from association with an investment adviser.
In the insider trading enforcement action against Zilkha, the SEC Division of Enforcement also alleges that during a prior investigation into his conduct, Zilkha concealed from the SEC staff that he had received inside information about Microsoft's earnings and then recommended that Samberg buy Microsoft securities on the basis of this information. The Enforcement Division alleges that in 2005 and 2006, Zilkha did not produce nor disclose the existence of the e-mail he had received from a Microsoft colleague concerning Microsoft's earnings, despite subpoenas and direct questions that required him to do so.
In January 2009, the SEC staff first received direct evidence that Zilkha had material, nonpublic information about Microsoft — when staff was provided copies of e-mails that had been located on a computer hard drive that was then in the possession of Zilkha's ex-wife.