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July 25, 2006 > SEC to interview Morgan Stanley CEO over hedge fund

SEC to interview Morgan Stanley CEO over hedge fund

by Michael J. Martinez

NEW YORK (AP), Jul 21 _ John Mack, chief executive of Morgan Stanley, will be interviewed by the Securities and Exchange Commission in an investigation of a hedge fund he participated in prior to taking over the Wall Street firm, the company said Friday.

The SEC has been looking into whether Pequot Capital Management Inc. acted on insider information in 2001 when trading shares potentially involved in an upcoming merger. A former SEC staff attorney testified before Congress last month that he believed Mack to be the tipster, which Mack has denied.

In a statement, Morgan Stanley spokeswoman Jeanmarie McFadden said the SEC contacted Mack Thursday to ask for an interview. ``John immediately responded that he is happy to meet with the commission staff, and he welcomes the opportunity to put to rest any issues surrounding this matter.''

Mack had been actively involved in the hedge fund after his departure as CEO of Credit Suisse First Boston in 2001, and was briefly named chairman of the fund in June 2005, a few weeks before he took over at Morgan Stanley.

No charges have been brought against Pequot, a hedge fund with some $6.5 billion in assets that is overseen by Arthur Samberg, a well-known money manager and philanthropist and a longtime friend of Mack. Pequot has denied that there was any improper activity by the fund.

Former SEC attorney Gary Aguirre, who led the SEC's investigation into Pequot, told the Senate Judiciary Committee last month he was fired last year because he attempted to subpoena Mack, a major fundraiser for President Bush, in connection with the probe. SEC officials denied meddling in the investigation.

Aguirre said his evidence led him to believe that Mack had tipped the hedge fund off on the merger, which would allow the fund to buy and sell shares ahead of the announcement and potentially make millions. As head of Credit Suisse, he would have been privy to the major merger deal the company was hired to advise on.

On Friday, the Government Accountability Project, the organization representing Aguirre in his federal lawsuit seeking SEC records related to the probe, said Mack should have been interviewed last year.

``The evidence pointed in this direction 13 months ago, evidence which Mr. Gary Aguirre shared with his supervisors at the time,'' the group said in a statement.

This is the first time that the SEC has asked to speak with Mack in its 18-month investigation. The request for an interview is not a subpoena, and Mack's participation is voluntary. There was no word on when the interview might take place.

Hedge funds like Pequot are a kind of mutual fund for wealthy individuals. Unlike mutual funds, which simply buy and hold stocks, hedge funds can invest in anything from commodities to real estate. Some funds even buy up companies whole, much like a private equity firm, while others buy and sell stocks like day traders _ but with billions of dollars at stake. The nation's hedge funds hold at least $1 trillion in assets.

Hedge funds are also largely unregulated, though the SEC has become more active in prosecuting funds for insider trading and other illegal activities. Congress has been holding hearings this summer to discuss ways to regulate them.

In a related development, the Government Accountability Project also said that an investigation by the SEC's inspector general into Aguirre's charges of favoritism and retaliation by the agency has been reopened.

The office of SEC Inspector General Walter Stachnik, who functions as an independent watchdog, had previously conducted an inquiry and found that the evidence it developed did not support Aguirre's allegations. Aguirre was not interviewed as part of that inquiry.

Stachnik's office now has informed Aguirre's lawyers ``that it has reopened the investigation ... and is seeking to interview Aguirre,'' the GAP said.

SEC spokesman John Heine in Washington declined comment on the SEC's decision to interview Mack and would neither confirm nor deny a new investigation by the inspector general. Stachnik also declined comment and would not confirm or deny an investigation.


AP Business Writer Marcy Gordon in Washington contributed to this report.

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