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Pequot Employee Told His Therapist That Samberg Sought Tips

Date: Friday, November 20, 2009
Author: David Scheer and Jesse Westbrook, Bloomberg

The ex-Pequot Capital Management Inc. employee now at the center of a U.S. insider-trading probe told his therapist that the hedge-fund firm fired him in 2001 after he stopped delivering secret information on Microsoft Corp., the psychologist said in a deposition.

David Zilkha, who had worked at Microsoft, said his supervisor, Pequot founder Arthur Samberg, pressed him for insider information, psychologist Peggy Thomson testified in an Oct. 15 proceeding tied to Zilkha’s divorce, according to a transcript obtained by Bloomberg. Thomson said she performed a psychological evaluation of Zilkha in June and July last year.

“He said that Mr. Samberg wanted him to get inside information on Microsoft,” the transcript quotes Thomson as saying, recalling their conversations. “Mr. Zilkha stopped providing it, he was fired.”

Samberg, 68, and Pequot, once the world’s biggest hedge- fund manager, told investors in August that the Securities and Exchange Commission had sent them a so-called Wells notice, warning it may bring civil claims against them after an investigation of their trades in Microsoft, the world’s biggest software maker. Such allegations “are without merit” and would be defended “vigorously,” the firm wrote in the letter.

Jonathan Gasthalter, a spokesman for Samberg and for the Wilton, Connecticut-based firm, declined to comment on the deposition. Authorities haven’t accused them of wrongdoing. SEC spokesman John Nester declined to comment. Kim Kuresman, a spokeswoman for Microsoft, said in an e-mail the company won’t comment.

Hedge-Fund Crackdown

Norman Pattis, an attorney representing Zilkha, didn’t respond to phone messages and an e-mail seeking comment. Calls to Zilkha’s mobile phone were answered by a voicemail system that wouldn’t accept new messages. Thomson didn’t respond to a message left at her office. She gave the deposition with Zilkha’s consent, the transcript shows.

During a separate deposition in the divorce, Zilkha repeatedly cited the U.S. Constitution’s Fifth Amendment in declining to answer questions about Pequot, a transcript shows.

The regulator, working in tandem with federal prosecutors, is in the midst of the biggest U.S. crackdown on hedge fund insider trading. Since October, it has sued more than 20 people and firms, including billionaire Raj Rajaratnam and his New York-based hedge fund operator, Galleon Group. They deny wrongdoing.

‘Insider Information’

While that case has shaken Wall Street, the agency’s oversight of Pequot has repeatedly drawn criticism from senators including Iowa Republican Charles Grassley and Pennsylvania Democrat Arlen Specter. In a joint letter to SEC Chairman Mary Schapiro, they said they have obtained the depositions and offered to pass copies to the SEC. Federal prosecutors in Manhattan already have the documents, they said.

Thomson’s testimony “revealed that Mr. Zilkha admitted that he provided Arthur Samberg with insider information (i.e. tips) and was fired after he was unable to provide additional tips,” the lawmakers wrote.

The senators’ interest began in 2006, after former SEC attorney Gary Aguirre claimed supervisors had blocked him from investigating whether Pequot got confidential tips from Morgan Stanley Chief Executive Officer John Mack. The agency fired Aguirre in 2005, and supervisors later told Congress he refused supervision and worked poorly with colleagues.

Case Is Reopened

An August 2007 report released by Senate staff members working for Grassley and Specter found “no convincing evidence” that Aguirre behaved unprofessionally while working at the agency. The SEC’s inspector general said in an October 2008 report that the agency mishandled Aguirre’s termination and recommended that supervisors be disciplined.

The first Pequot probe closed in 2006, with the agency writing in an internal memo that it was “extremely unlikely” Mack leaked information. Separately, Samberg gave an alternate justification for some Microsoft bets, the memo said.

The agency reopened the case after learning of documents showing Zilkha may have obtained previously unknown information about Microsoft, people familiar with the matter said in January.

Investigators and Zilkha’s ex-wife also learned Pequot had secretly agreed to pay Zilkha $2.1 million. Pequot has said that Zilkha, who spent less than a year at the firm, had threatened to file an employment claim related to his termination by the firm. His ex-wife has been using the divorce proceeding to get information on the deal. Thomson began her testimony by recalling Zilkha’s work, including time at Pequot.

‘Different Expectations’

“He was fired from that position apparently according to my notes because they had different expectations,” Thomson said, according to the transcript. “Mr. Zilkha stated that his supervisor expected him to provide sort of insider information about his previous company.”

Samberg started Pequot Partners fund in 1986 while he was at Dawson-Samberg Capital Management Inc., a Southport, Connecticut-based money-management firm. He spun off Pequot Capital at the start of 1999, and by 2001 the firm had $15 billion in assets, making it the largest hedge fund in the world at that time.

In a letter in May, he told investors he planned to liquidate his main hedge funds after the new federal insider- trading investigation “cast a cloud” over the firm. In a regulatory filing this week, Pequot said it had $25.3 million invested in three remaining stocks, Advanced Micro Devices Inc., FiberTower Corp. and InterOil Corp.

To contact the reporter on this story: David Scheer in New York at dscheer@bloomberg.net; Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.