Pequot Capital Management Closing Its Doors

Pequot Capital Management Inc., once one of the largest and most revered hedge fund firms in the world, has announced that it will be shutting its doors.

Arthur Samberg, who manages Pequot, cited a SEC probe of the company as the main reason why he has decided to walk away from the industry.

Samberg said that "with the situation increasingly untenable for the firm and me, I have concluded that Pequot can no longer stay in business." Samberg, in his letter to clients (who were surely surprised by the news), said that "public disclosures about the continuing investigation have cast a cloud over the firm and have become a source of personal distraction".

Pequot Capital Management Inc., according to Bloomberg, currently has around $3.47 billion dollars under management. The firm will be liquidating and returning funds to its investors as soon as possible.

Pequot, which was once the largest hedge fund company in the world, has seen its assets under management decline dramatically over the past 7-8 years. The decline in assets came due to a split with Daniel Benton, who started his own fund (Andor Capital Management LLC), investor concerns over the SEC investigation and a general exodus of assets from the hedge fund industry.

The situation between the SEC and Pequot is a long-standing and controversial one.

The SEC, in late 2008, announced that they were re-opening an insider-trading investigation that had previously focused on John Mack (who previously served as the chairman of Pequot) and Arthur Samberg.

The SEC was originally investigating whether or not the firm had illegally profited from 17 "suspicious" transactions. The SEC was investigating whether or not Mack had tipped off Samberg about upcoming acquisitions. Gary Aguirre, who was an attorney at the SEC at the time, alleged that Mack had tipped Samberg off about an upcoming acquisition of Heller Financial by GE. Aguirre alleged that Samberg's firm had made $18 million dollars off of this insider information.

The SEC eventually cleared both men of wrong-doing in the matter, which led to charges that the SEC was corrupt and looking the other way in the matter.

The SEC announced that they were re-opening their investigation into Pequot after it surfaced that an ex-employee of the firm (David Zilkha) had received a $2.1 million dollar payment from the firm in late 2007. The SEC believes that Zilkha, who was a former employee of Microsoft, may have obtained confidential information about Microsoft - information that Pequot subsequently profited from.

In an interesting twist, Zilkha's ex-wife reportedly copied these sensitive Microsoft documents off of their computer while the two were in the middle of a divorce.

Pequot has maintained all along that its trading in Microsoft was "proper", but you really have to wonder after yesterday's news. Why would they close their doors if they knew that they were 100% innocent? Samberg can spin this however he wants, but it looks really bad to a casual observer.

I can't help but think that Gary Aguirre, the SEC attorney who originally investigated Pequot and was subsequently fired, is feeling a bit vindicated today.

Filed under: Hedge Fund News