In what may be the largest settlement of its kind, the Securities and Exchange Commission (SEC) has agreed to pay $755,000 to settle the wrongful termination claim of Gary J. Aguirre, the attorney who headed the SEC’s insider trading investigation of Pequot Capital Management until his firing in September 2005.
A judge with the Merit Systems Protection Board (MSPB), the federal agency with jurisdiction over Aguirre’s termination claim, issued an order today finalizing the settlement. The settlement sum equals Aguirre’s pay for four years and ten months (the elapsed period since his September 2005 discharge), plus his attorneys’ fees. Aguirre agreed to dismiss two related cases against the SEC.
Government Accountability Project Legal Director Tom Devine stated “Unfortunately, this large settlement is the exception that proves the rule. Until Congress provides real protections for financial regulatory employees such as Aguirre, existing law will remain the best excuse for government regulators to turn a blind eye.”
The SEC’s settlement with Aguirre comes one month after the SEC filed insider trading charges against Pequot, its founder, Arthur Samberg, and David Zilkha, a former Pequot employee, based on facts uncovered by Aguirre. Pequot and Samberg paid the SEC $28 million to settle the charges against them. The case against Zilkha continues.
In August 2007, two Senate committees published a scathing 108-page report criticizing the SEC’s decision to fire Aguirre and close the Pequot investigation, which included Pequot’s suspected insider trading in securities of 20 publics companies.
The Senate report chronicles Aguirre’s promising career at the SEC, including management’s decision to give him a two-step pay raise at the end of his first year for “consistently [going] the extra mile, and then some.”
But the praise vanished when Aguirre tried to subpoena an elite Wall Street banker, John Mack. His supervisors blocked the subpoena, telling Aguirre that Mack had “juice” and “political clout.”
Aguirre’s July 27, 2005, email to his supervisors explained why the Mack subpoena was essential and expressed concern that “treating Mack differently is [not] consistent with the Commission’s mission.” The Senate Report tells what happened next: “Just days after Aguirre sent an e-mail to Associate Director Paul Berger detailing his allegations, his supervisors prepared a negative re-evaluation outside the SEC’s ordinary performance appraisal process.”
One month later, the SEC fired him without warning. The Senate report concluded that Aguirre’s “termination appears to be merely the culmination of the process of reprisal that began with the August 1 re-evaluation.”
Approximately one year after the Senate report, SEC Inspector General H. David Kotz delivered his own report on Aguirre’s firing to then-SEC Chairman Christopher Cox. Kotz recommended that Aguirre’s supervisors be disciplined. To date, neither the current SEC Chairman, Mary Schapiro, nor Cox, has done so.
The Pequot investigation appeared to have run its course when the SEC released its “Case Closing Report” in December 2006, explaining its decision to close the entire investigation, including Pequot’s trading in Microsoft options, without filing charges.
But Aguirre did not stop his Pequot investigation. He continued to collect and piece together the evidence that Samberg had used illegal tips to trade options on Microsoft stock. In April 2008, Aguirre obtained a court order forcing the SEC, over its objection, to turn over to him key records of its Pequot investigation.
In late 2008, Aguirre uncovered the last pieces of evidence necessary to prove an insider trading charge against Pequot, Samberg, and Zilkha. On January 2, 2009, Aguirre sent a letter to SEC Chairman Cox enclosing the new evidence.
Aguirre’s 16-page letter explained how this new evidence, when combined with the evidence uncovered by him in 2005, proved that Samberg had used illegal tips in directing trades in Microsoft options, generating $14.2 million in profits to Pequot hedge funds under his management. But still the SEC would not file a case.
On May 26, 2010, Aguirre filed papers in his FOIA case seeking an order directing the SEC to release additional Pequot records to him. He argued the SEC had to turn over the records under FOIA, because it had filed no case against Pequot or anyone else. Early the next morning, the SEC filed charges against Pequot, Samberg, and Zilkha. The allegations closely track the facts stated in Aguirre’s January 2, 2009 letter.
Asked how he feels about the settlement, Aguirre replied, “I think it’s fair to the public that the SEC pays for my work over the past four years and ten months, since it generated $28 million to the U.S. Treasury. But it’s a shame the team I worked with at the SEC did not get to complete the Pequot investigation. The filing of the case in 2005 or 2006, before the financial crisis, would have been exactly what Wall Street elite needed to hear at the perfect moment: the SEC goes after big fish too.”
Dylan Blaylock is Communications Director for the Government Accountability Project, the nation's leading whistleblower advocacy organization.