SEC Is Ready to File Case Against Pequot

The Wall Street Journal
By KARA SCANNELL and JENNY STRASBURG
AUGUST 13, 2009
The Securities and Exchange Commission is prepared to file insider-trading charges against Pequot Capital Management and its founder Arthur Samberg over its 2001 trading of Microsoft Corp. stock, according to a letter Pequot sent to investors.
The SEC sent a Wells notice to Mr. Samberg and the firm indicating it is prepared to bring civil fraud charges against Mr. Samberg and the firm and to seek a bar preventing him from serving as an investment adviser, according to the letter. The firm received the Wells notice about six weeks ago, a person familiar with the matter said.
A Wells notice is issued to indicate SEC staff will recommend to the five-member commission that it approve the filing of a lawsuit or administrative proceeding. That doesn't mean the SEC ultimately would take action. Pequot's letter said Mr. Samberg would likely fight the charges if the SEC were to move forward with the case. It said the Wells notice was "without merit" and that the firm would "vigorously" fight the charges. Spokesmen for the SEC and Pequot declined to comment.
Mr. Samberg announced in late May that he was closing the firm in the wake of the investigation, saying in a letter to investors that the inquiries "have cast a cloud over the firm and have become a source of personal distraction." Pequot once oversaw $15 billion, but investors have pulled away under the regulatory scrutiny.
As part of the firm's wind-down, Mr. Samberg, 68 years old, told investors in a letter dated Aug. 10 about the Wells notice he and the firm received. The development shouldn't slow Pequot's liquidation, which has already started, the firm said.
The SEC and the Justice Department have been investigating Pequot's trading in 18 stocks on and off since 2005. The SEC closed its investigation in November 2006, citing insufficient evidence. The two agencies reopened the investigation late last year after new information came to light during divorce proceedings involving David Zilkha, a former Microsoft employee whom Mr. Samberg hired in April 2001. The SEC's current investigation is focused on whether Pequot obtained nonpublic information from Mr. Zilkha about the software company's earnings before they were announced in summer 2001. Pequot's trades in Microsoft yielded more than $2 million, according to a 2006 SEC report on its first investigation. Mr. Zilkha was in contact with at least one Microsoft employee during that time, according to the SEC report and emails provided by congressional staffers.
Microsoft spokesman David Bowermaster said, "Microsoft cooperated fully with the earlier SEC inquiry and will continue to do so if we are contacted again."
According to new emails, which surfaced within the past year, Mr. Zilkha used a personal email account to contact Microsoft employee Mark Spain. In the emails, he asked Mr. Spain about earnings rumors, among other things. Mr. Zilkha, who left Pequot in September 2001, and an attorney representing him couldn't be reached for comment Wednesday.
In January, Mr. Spain told The Wall Street Journal there was "absolutely no instance in which I shared information with anyone, David included, that was inappropriate or inside." On Wednesday, Mr. Spain referred calls to his attorney, Angelo Calfo, who said, "Mark did not receive a Wells notice and does not expect one. He's done nothing illegal or wrong." Mr. Calfo added that his client has responded to the SEC's inquiries.
Mr. Spain is no longer employed by Microsoft. His attorney says his departure was unrelated to the SEC investigation.
A spokeswoman for the U.S. attorney's office for the Southern District of New York, which had been investigating the matter, said it wouldn't "confirm nor deny the existence of an investigation."