Report of SEC Investigation
Floor Speech
REPORT OF SEC INVESTIGATION -- (Senate - August 03, 2007)
Mr. GRASSLEY. Mr. President, today along with Senator Specter, I present the findings of a joint investigation by the minority staffs of the Committees on Finance and the Judiciary. It will be posted today on the Finance Committee Web site. I urge all my colleagues to read this important report.
Together, our committees conducted an extensive investigation of allegations raised by former Securities and Exchange Commission attorney Gary Aguirre concerning the SEC and insider trading at a major hedge fund.
During the course of this investigation, the staff reviewed roughly 10,000 pages of documents and conducted over 30 witness interviews. The Judiciary Committee held three related hearings. Our joint findings confirm a series of failures at the SEC: (1) Failures in its enforcement division, (2) failures in personnel practices, and (3) failures at the Office of Inspector General.
There was, however, one bright spot. The Chairman of the Securities and Exchange Commission cooperated fully with our inquiry. I would like to take a moment to thank Chairman Christopher Cox for recognizing the value of congressional oversight instead of resisting it like most other agencies do. In my years in the Senate, I have overseen many investigations of Federal agencies. I am happy to say that Chairman Cox--who inherited these problems in 2005--was a model of transparency and accountability.
I also thank Senator Specter for his hard work on this issue, and for the way our committees were able to work together so effectively.
Our investigation focused on three allegations: (1) The SEC mishandled its investigation of a major hedge fund, Pequot Capital Management. (2) The SEC fired Gary Aguirre, the lead attorney in the Pequot investigation, after he reported evidence of political influence corrupting the investigation. (3) The SEC's Office of Inspector General failed to thoroughly investigate Aguirre's allegations.
In 2001, Pequot made about $18 million in just a few weeks of trading in advance of the public announcement that General Electric was acquiring Heller Financial. Pequot accomplished this by buying over a million shares of Heller Financial and shorting GE stock. The New York Stock Exchange highlighted these suspicious and highly profitable trades for the SEC.
When the SEC finally got around to investigating the matter 3 years later, the only full-time attorney working on it, Mr. Aguirre, was up against an army of lawyers from Pequot and Morgan Stanley.
Those lawyers could easily bypass the commission staff and go directly to the Director of Enforcement. In other words, attorneys from Wall Street law firms had better access to SEC management than the staff attorney working on the case, and they used it.
When Aguirre wanted to question Wall Street executive John Mack, his supervisors blocked his efforts and delayed the testimony as long as they could. Mack was about to be hired as the CEO of Morgan Stanley. This raised a critical question in our investigation: Did Mack get special treatment, and if so, why? Gary Aguirre was told by one of his supervisors that it was because of his ``political connections.''
Our investigation uncovered no evidence that Mack's special treatment was due to partisan politics. However, internal e-mails do show that SEC managers cared about something else: prominence--not partisanship.
They put hurdles in the way of taking Mack's testimony because he was an ``industry captain'' and well-known on Wall Street. His lawyers would have ``juice,'' according to SEC management--meaning they could easily pick up the phone and talk to senior officials three and four layers above Aguirre. Mack's prominence protected him from the initial SEC inquiry, protection that would not have been afforded to him had he been from Main Street rather than Wall Street.
Our investigation also found that Mr. Aguirre's firing from the SEC was closely connected to his objections to the special treatment afforded to John Mack. Unfortunately, that was not the only retaliation we found at the SEC. Another employee was also penalized for objecting to problems similar to Aguirre's. This sort of retaliatory firing of a whistleblower is not acceptable, and must be stopped.
Finally, our investigation found failures at the SEC's Office of Inspector General. When Mr. Aguirre presented the Inspector General's office with serious allegations, there was no attempt to conduct a serious, credible investigation.
The Inspector General merely interviewed SEC management, accepted their side of the story, and closed the case. This is unacceptable. It is the role of the inspector general to be an independent finder of fact, not a rubberstamp for agency management. I understand that the current inspector general is retiring, and his last day is today. I hope Chairman Cox chooses the next inspector general very carefully.
Our investigation has uncovered real failures at the SEC, and fixing these problems will take real reform. We have proposed six recommendations. These recommendations include the creation of a uniform, comprehensive manual of procedures for conducting enforcement investigations along the lines of the U.S. Attorney's Manual. If the SEC had such a manual, there would have been clear guidance regarding the standard for issuing a subpoena to any suspected tipper, whether John Mack or John Q. Public.
Other recommendations include the reform of the SEC's Office of Inspector General, firmer ethics requirements, and standardized evaluation procedures to prevent the sort of retaliatory personnel practices that took place with Gary Aguirre. By implementing real reforms such as those our report outlines, the SEC can begin to regain public confidence, and I look forward to working with the SEC as these reforms are implemented.
Mr. President, in closing, I ask unanimous consent to print in the Record, the report's executive summary and list of recommendations.
There being no objection, the material was ordered to be printed in the Record, as follows:
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