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Pequot's Puzzling Payments

Documents in a divorce case show that Pequot Capital Management or its C.E.O., Arthur Samberg, is paying millions to a figure in a notorious S.E.C. probe. But why?
Arthur Samberg
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Documents filed in a Connecticut divorce case disclose that Pequot Capital Management C.E.O. Arthur J. Samberg or his hedge fund is making so-far-unexplained payments of $2.1 million to a former Microsoft employee who figured in a now-closed insider-trading investigation of Samberg.

The Securities and Exchange Commission closed its investigation of Samberg in 2006 without filing any charges, although the Senate Judiciary Committee a year later faulted the S.E.C. for the way it conducted the investigation and allegations that a related case had been influenced by politics.

Records obtained from Connecticut Superior Court in Stamford show that Samberg or his firm has paid the former employee, David Zilkha, $1.4 million in two equal installments since April 30, 2007, and has promised an additional $700,000 in April 2009.

Zilkha's lawyer and a Samberg spokesman declined to explain the payments or to answer any questions from Condé Nast Portfolio about them, and so far neither Zilkha nor Samberg have provided an explanation in court.

The Senate Judiciary Committee has obtained the documents from the divorce case and is monitoring developments in court to see if there is any evidence that the payments to Zilkha are related to the insider-trading investigation.

In a 2007 report, the Judiciary Committee and the Finance Committee criticized the S.E.C.'s investigation of suspicions that Samberg had inside information when he made particularly profitable trades in several companies' securities.

One part of the S.E.C. investigation centered on suspicion that Zilkha had given Samberg insider information about Microsoft which he used to make a quick $12 million profit in April 2001, according to commission records.

A separate facet of the S.E.C. investigation looked into whether Morgan Stanley C.E.O. John Mack had fed inside information to Samberg about a planned General Electric acquisition of Heller Financial, a lender to businesses. Samberg's hedge fund had bought Heller shares and shorted G.E. stock in advance of the announcement, and made $18 million on the trading, the S.E.C. said.

The Mack aspect of the case hit the headlines because the S.E.C. fired the government lawyer investigating the allegations, Gary Aguirre. Aguirre claimed he was fired for insisting on subpoenaing Mack, a move which he said higher-ups at the S.E.C. overruled because of Mack's connections and political clout.

The S.E.C. denied that, but a joint investigation by the Senate judiciary and finance committees in August 2007 sided with Aguirre and sharply faulted the S.E.C. for failing to pursue the case, including the evidence concerning Zilkha and Samberg’s Microsoft trading.

In a report issued in October 2008, the S.E.C.'s own inspector general recommended disciplining senior S.E.C. officials for their handling of the case. A month later, however, an S.E.C. administrative law judge ruled against any disciplinary measures.

The trading investigated in the case occurred in 2001. Zilkha had been working as a product manager at Microsoft when Samberg that year offered him a job as an analyst of technology stocks at Pequot.

Records made public in the investigation show that in February 2001, in the same email in which he offered Zilkha a job, Samberg pressed him for information about Microsoft. Zilkha then was still employed by Microsoft. The email said "might as well pick your brain before you go on the payroll!"

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