In every case a prosecutor or regulator has to walk the line between pursuing miscreants and letting innocent people go on with their lives, undisturbed. While we would all like the benefit of having bad guys put away, we would also like to avoid the considerable expense and jeopardy of the government pursuing us unfairly. Thus, we hope that those in authority will weigh these issues appropriately.
In reading the Aguirre letter, I was struck by the paucity of evidence against the Mack tipper. Aguirre had searched through "millions of e-mails", yet he had not a single shred of evidence that identified the tipper directly. All he had was his deduction by a process of elimination that a certain guy had to be the tipper. He had already pursued this investigation by questioning Mack himself, yet this was all he had.
In the letter Aguirre makes a big deal about the profits Pequot made from this transaction: "$18 million in 30 days". Yet, he conveniently forgets to mention that this particular deal had been written up in the Wall Street Journal as a likely acquisition just before Pequot had done the trade.
Yes, insider trading ahead of PIPE's or acquisitions is a problem. Yes, the SEC is right to be looking into it. But Aguirre's bosses were also right to be concerned about whether they had the correct case in which to make a stand.
Would we all have received the protection from overzealous prosecution that Mack's supposed tipper got? Undoubtedly not. He was wealthy and powerful. But the solution is not to go after the wealthy and powerful with flimsy evidence. It is to accord the same protection to the poor and powerless. Or better still, to develop cases carefully so that they have a high probability of success. It doesn't matter whether O.J. Simpson killed his wife and Mr. Goldman; a prosecutor still has to competently assemble a case to prove it in court.
In fairness, Mack and his supposed tipper may yet be guilty. If you embark on enough witch-hunts, sooner or later you might find a witch. But in the meantime you run the risk of having some trials like the one in Salem.
Yes, Aguirre's firing appears to have been handled sloppily. Unless there is more in his file than the commendation Aguirre cites, then his bosses are going to look pretty foolish over the coming weeks. That doesn't mean they were wrong in letting him go, though. And there is evidence in Aguirre's own letter that he is not the kind of guy you would like to have working at the SEC.
The letter is sensationalistic, trying to paint a picture of broad abuse where in certain instances it simply is not true. The letter certainly begins reasonably enough, acknowledging that hedge fund assets under management are but a small part of global financial assets. But by the end Aguirre is in territory he does not understand--but ought to. To bolster his case of widespread SEC incompetence, he details the market-timing abuses, but he seems not to understand the critical point about them. He writes, "'70 percent of the brokers said they were aware that some of their customers were timing the market.' They just looked the other way. The SEC survey showed that 25 percent of brokerage companies allowed late trading." Huh? Market timing was perfectly legal. Not only that, but it was available to the retail investor. I remember seeing a description on Silicon Investor in 1997 by a poster (George Cole?) who described exactly how to do it and who mentioned that the profits were extraordinary. What was not legal was working out arrangements with the funds to give yourself a special deal and cutting the fund insiders in on the action. That's what Canary did, and that's why they quickly coughed up tens of millions in a settlement. One would hope that a regulator and lawyer like Aguirre would understand these distinctions.
But of even greater concern is Aguirre's citing of the Sacane case at the end of the letter. Sacane's case certainly makes for great, lurid reading. But the whole point of Aguirre's letter is that hedge funds need greater regulation. Who was victimized in the Sacane case? The companies, Esperion and Aksys, got his short-swing profits. The ordinary shareholders of the stocks saw their holdings go through the roof. And what about the investors in the fund? Well, my sister and mother were both investors. Yes, there was a lot of legal wrangling, but in the final accounting the investors ended up with a handsome profit.
So who were the victims? I don't know. Shortsellers? And that's why we need new, extensive regulation--to protect shortsellers?
AI
