Wednesday, June 28, 2006

Who's backing Mack?

Today’s congressional testimony from fired SEC hedge fund investigator Gary Aguirre is a reminder of the US’s dual system of justice. Those who pay the powerful are above the law. Those who don’t… as Jon Stewart would say, “not so much.”

If we compare last Friday’s
New York Times article with Aguirre’s congressional testimony today, it is hard to escape the conclusion that Aguirre – who was fired from his SEC job 11 days after getting a two-step merit pay raise -- believes that Morgan Stanley CEO John Mack tipped off hedge fund Pequot Capital Management’s Art Samberg of GE’s pending acquisition of Chicago business financier, Heller Financial.

Here are the relevant passages from the New York Times

..according to government officials, the trades Mr. Aguirre said had made the fund $18 million involved one of the biggest mergers in 2001: the General Electric Capital Corporation’s $5.25 billion buyout of Heller Financial, a Chicago-based lender to businesses. Heller's stock rose 50 percent the day the acquisition was announced.

Mr. Aguirre said the investigation was halted last summer when S.E.C. officials, bowing to political considerations, stopped him from taking testimony from the person he identified only as a former head of an investment bank.

Government officials with knowledge of the allegations say he was referring to John J. Mack, chief executive of Morgan Stanley, who was being considered to run the investment firm at the time and who had previously been chief executive of Credit Suisse First Boston. Mr. Mack, a long-time acquaintance of Pequot's founder and a major fund-raiser for President Bush, was chairman of Pequot briefly during June 2005; his family foundation has invested in Pequot funds, public records show.

And here’s an excerpt from Aguirre’s official testimony before Congress today
By May 2005, one of the insider trading matters dwarfed all others: the hedge fund’s trading in two companies just before the announcement of a cash tender offer by one for the other at a 50% premium over the last trading price. The hedge fund profited by $18 million in 30 days.

The evidence suggested that the hedge fund’s CEO acted on an unlawful tip in directing the hedge fund’s trades. But the question remained: who tipped him? In May 2005, Branch Chief Robert Hanson, directed me to spend all my time on the one matter and focus on finding the tipper. Accordingly, beginning in May 2005, I searched through millions of emails and other records for clues indicating who tipped the hedge fund CEO and, in June 2005, questioned the hedge fund’s CEO--the suspected tippee--on this issue.

By mid-June, growing evidence pointed to one person: the former CEO of a large investment bank. The suspected tipper likely knew about the tender offer, spoke with the hedge fund’s CEO just before he began to trade, profited by the trades, and had other personal and financial motives for tipping the hedge fund’s CEO. The two suspects trusted each other, did financial favors for each other, and exchanged stock tips. The evidence yielded no other viable

It doesn’t take a genius to figure out that Aguirre’s tipper is likely none other than John Mack. The $18 million profit and the 50% premium match the GE/Heller fact pattern published in the New York Times. In June 2005, Mack had been former CEO of First Boston. And Mack contributed to the current president’s 2004 campaign. According to, in 2004 Mack gave $45,000 to the Republican National Committee and $2,000 to George W. Bush.

And here’s the part where history – to paraphrase Mark Twain – may be rhyming. According to
The American Prospect, a single bank, Morgan Stanley’s predecessor, JP Morgan & Co., ruled the US capital markets from the late 19th century right through to the 1929 stock market crash.

J. Pierpont Morgan, the bank’s founder, exerted tremendous government influence, particularly with the Republican Party. During the presidential administrations of the 1920s, Morgan men represented the U.S. government at international monetary meetings. Moreover, an important source of Morgan’s government influence was its abuse of the securities markets. During the Roaring 20s, Morgan used its influence to promote its own stock offerings and profits at the expense of its investors' best interests.

This abuse came out in public during a May 1933, U.S. Senate Banking Committee hearing when the Committee’s counsel Ferdinand Pecora exposed how Morgan reserved shares at reduced prices for leading politicians and client executives – “giving guaranteed profits to former President Calvin Coolidge, Franklin Delano Roosevelt's sitting treasury secretary, the chairmen of the Republican and Democratic national committees, and the CEOs of General Electric, AT&T, and Standard Oil.”

To clean up such abuses, FDR signed the 1933 Glass-Steagall Act, which prohibited commercial banks from underwriting securities, and in 1934 signed the Securities Exchange Act, which created the Securities and Exchange Commission (SEC) to police Wall Street and prevent stock manipulation.

Today, no single bank rules Wall Street – although Goldman Sachs seems to be head and shoulders above the rest at the moment. And it’s a bit too soon to be calling the next Great Depression based on hedge fund shenanigans. Nevertheless, the SEC’s decision to fire the messenger, Aguirre, rather than investigating the suspect suggests that John Mack, or whomever Aguirre’s tipper might be, could be keeping secrets for some powerful people


Blogger Chris Thompson said...

The heat on Morgan Stanley and others to respond to this storyline should be quite intense. It will be interesting to see if Wall Street is as good at killing stories as it is as killing SEC investigations.

6:41 PM  

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