Pequot Folds Under Weight Of Probe

Pequot Capital, once the world's biggest hedge fund manager, is to liquidate its main funds because a US government investigation into suspected insider trading has "cast a cloud" over the firm.

Art Samberg knows something about that. The 68-year-old hedge fund manager is shutting down Pequot Capital amid a lingering investigation into insider trading by the Securities and Exchange Commission that has "cast a cloud" over the operation.

In a letter to investors late Wednesday, Samberg, who started Pequot in 1986, said the government continues to investigate his trading for the firm in 2001, and the probe had become an increasing "personal distraction."

"With the situation increasingly untenable for the firm and for me, I have concluded that Pequot can no longer stay in business as an investment advisor," he said in the letter.

Jonathan Gasthalter, a spokesman for Pequot, would not comment beyond the letter.

Pequot has been the subject of multiple insider-trading probes in the last five years. Late last year, the government reopened a case it closed in 2006 that focused on a former Microsoft employee, David Zilkha, who joined Pequot in April 2001 and left in November of that year.

The SEC and the U.S. Justice Department investigated communications between Zilkha and Samberg during the time Pequot hired him, and around the time Pequot was trading in Microsoft shares, netting profits of more than $2 million. The case was closed in 2006 after investigators found “insufficient evidence."

But in December, the government reopened the probe because of information that came out of Zilkha's divorce proceedings in Connecticut. The former Microsoftie turned Pequot employee was paid $2.1 million by Pequot, a divorce filing revealed.

Samberg told a Senate panel investigating the matter that the payment was to settle a civil claim related to Zilkha's employment and termination.

Before that, Pequot was mired in another insider-trading probe, this time involving Samberg's friend John Mack, a longtime Morgan Stanley executive who is now CEO of the investment bank.

The SEC had investigated allegations that in the summer of 2001, Mack, then an executive at Credit Suisse, had informed Pequot about a pending deal between General Electric and Heller Financial. The probe was abruptly halted in 2005 and the investigator, SEC staff lawyer Gary Aguirre, was fired. Aguirre contended that he was dismissed for pursuing the powerful Wall Street figures.

A Senate probe and internal SEC investigation later sided with Aguirre's version of events and faulted the SEC.

Samberg said in his letter Wednesday he would liquidate his core fund and return money to investors by the end of June. Pequot is much-diminished from its heyday, as investors have shied away from the firm, in part due to the insider-trading charges. Once as big as $15 billion, Pequot currently has about $3 billion of assets under management.

Other funds will be separated and run by current Pequot executives, including the Matawin fund, run by Mike Corasaniti, and a special opportunities fund run by Rob Webster and Paul Mellinger.

Pequot gave no indication as to whether a formal case is close to being filed. "This has been an extremely difficult decision for me," Samberg said in the letter.