By Elana Schor - 06/29/06 12:00 AM EDT
Steering the Senate Judiciary Committee into the secretive world of hedge funds, Chairman Arlen Specter (R-Pa.) yesterday encountered an uncooperative federal regulator and assertions from skeptical colleagues that he was encroaching on their turf.
What could have been a routine oversight hearing became a hot ticket in recent days as the committee added Gary Aguirre, a former Securities and Exchange Commission (SEC) lawyer who alleges he was fired for pursuing aggressive enforcement of hedgers, to the witness list. But Aguirre told Specter he had scrapped his original testimony after the SEC informed him of possible penalties for revealing new information.
Specter took umbrage at the SEC’s request to silence Aguirre without alerting his panel. “There is a constitutional responsibility of this committee. We need to know the facts,” Specter said, offering the whistle-blower a chance to tell his full story in a closed session.
Aguirre shared little that was not already made public in his May 30 letter to Sens. Chuck Hagel (R-Neb.) and Chris Dodd (D-Conn.), senior members of the Banking subcommittee with jurisdiction over hedge funds. Aguirre charges senior SEC officials with firing him for trying to subpoena a top investment-bank CEO during the agency’s probe of alleged insider trading at Pequot Capital Management, a $7 billion hedge fund.
But the chairman of the full Banking Committee, Sen. Richard Shelby (R-Ala.), and the ranking Democrat, Sen. Paul Sarbanes (Md.), openly questioned Specter’s authority to examine the $2-trillion-plus hedge-fund industry. In a letter delivered by Sen. Charles Schumer (D-N.Y.), the only member of both panels, the Banking leaders warned Judiciary off their turf.
“While we appreciate your interest in these important participants in the capital markets,” Shelby and Sarbanes wrote to Specter, hedge funds “fall within the exclusive jurisdiction of the Banking Committee.”
Shelby plans to hold another hedge-fund hearing before the August recess, spokesman Andrew Gray said. “We’re pleased that they are interested in our issues,” he added.
Specter asserted that he would confine his work to the adequacy of Justice Department prosecution of, and criminal penalties for, hedgers who manipulate the market. Schumer, whose state is home to many of the nation’s biggest hedge funds, nonetheless worried that the hearing’s broad focus “raises a yellow flag of caution.”
Specter called the hearing to trace the relationship between hedge funds and independent stock analysts, a link that has sparked two lawsuits against a research firm accused of illegally colluding with hedgers to reap maximum profits by driving down stock prices.
Sen. Chuck Grassley (R-Iowa), whose Finance Committee is the third panel in the upper chamber to join in the burgeoning Aguirre investigation, compared the high anxiety over hedge funds to the decade’s most explosive corporate scandal.
“The allegations we’re hearing today remind me of the Enron debacle,” which inspired Congress to rein in Wall Street through the Sarbanes-Oxley Act, Grassley said. Business groups have escalated their lobbying assault on that law, looking to ease its accounting rules, but Grassley speculated that the hedge-fund flap means that “maybe we didn’t do enough.”
The prospect of unreported “naked shorting” — where hedge funds sell stocks they do not technically own, then try to buy the shares back at a lower price — aroused the concern of Sen. Orrin Hatch (R-Utah), and he appeared convinced by the hearing’s end that Congress should try to regulate hedge funds.
Untraceable naked short-selling “could really kill the marketplace, if that’s widespread,” Hatch said. “[The SEC] had better get on the ball and start questioning these things.”
The SEC’s attempt to curb the wild growth of hedge funds, which now manage more than double their 2004 assets, was a hedger-registration rule that a federal appeals court struck down last week. Aguirre is adding to recent hedge-fund public attention with his criticism of the SEC’s enforcement, however, and Connecticut Attorney General Richard Blumenthal yesterday urged senators to step in.
“Right now hedge funds are in a regulatory void without any accountability,” Blumenthal said. “If federal agencies abandon the field, states will join together” and pass their own hedge-fund laws. Connecticut, destination of a mini-exodus of hedge funds from Wall Street, is reportedly considering one of its own.
The SEC declined to comment on the hearing but provided a copy of the letter it sent to Aguirre reminding him of regulations covering the disclosure of nonpublic information. Aguirre has retained a counsel from the Government Accountability Project, a whistle-blower advocacy group that helped lobby for a package of new legal protections included in the Senate’s recent defense authorization bill.
Pequot continues to defend itself against Aguirre’s charges that he was blocked from questioning Morgan Stanley CEO John Mack for political reasons. Aguirre says he believed Mack tipped Pequot executives to potential profits by disclosing insider information.
“Mr. Aguirre has still failed to produce a shred of evidence to support his unfounded allegations against Pequot,” a fund spokesman said yesterday.
Pequot investors and managers have donated about $20,600 to federal candidates since 2000, the majority of that going to Democrats, according to the Center for Responsive Politics. Mack is a heavyweight GOP donor, earning Bush “Pioneer” status during the president’s reelection campaign.