Did Morgan Stanley's CEO tip off an insider trade?

Posted Jul 21st 2006 2:02PM by Peter Cohan

This is the question that the SEC will seek to answer when it takes testimony from John Mack, Morgan Stanley (NYSE: MS) CEO in the coming weeks. According to the New York Times, an SEC lawyer investigating insider trading in a 2001 acquisition, was fired 11 days after receiving a promotion when he sought Mack's testimony as an alleged tipper in this case. If Mack tipped off an insider trade and gets away with it, the implications for market transparency could shake investor confidence.

This story got me riled up last month when, according to the New York Times, Gary Aguirre, the SEC lawyer investigating possible insider trading at hedge fund Pequot Capital Management, was fired 11 days after receiving a two-step merit pay raise. I argued that with Mack having been a significant fund raiser for the president, someone high up in government may have been protecting Mack.

A former SEC commissioner whose opinion I respect called my rant "beneath me." We both agreed, however, that there was a need for a logical explanation for Aguirre's dismissal.

The facts in this case are still being discovered. However, my understanding is that before Mack took over as CEO of Morgan Stanley he was an investor in Pequot.

According to the Wall Street Journal [subscription required] In July 2001, Aguirre alleged, Mack tipped off Pequot to the $5.3 billion acquisition of Heller Financial Inc. by General Electric Co. (NYSE: GE). Earlier that month, Mack was named CEO of Credit Suisse First Boston, which advised Heller. He had stepped down as the number two executive at Morgan Stanley, which advised GE, in March.

Pequot made a 50% return on its investment in Heller -- totaling $18 million -- according to the New York Times.

Aguirre had been investigating Pequot and has said he was fired on September 1, 2005 after losing an argument at the SEC over whether he could take testimony from a well-known Wall Street executive -- who it turns out was Mack.

In the interest of justice, I am encouraged that the SEC decided that Aguirre's argument had merit. Whether his allegations about Mack are supported by the evidence remains to be seen. But at this point, the wheels of justice appear to be creaking forward.

I am neither long nor short shares of Morgan Stanley. I own shares of GE. For more about me, click here.

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Reader Comments (Page 1 of 1)

7-22-2006 @ 10:29AM

Ava Marie Tunney said...

(Here you go Chris Thompson). There is no law which says you need to shuffle your feet to get your pants on. Mack is in ,Yikes, Deep Water, and I would say this is a (likely to be) political hum. If you want your high tech, this market is your way. Morgan Stanley is a fine trading house and great things are expected from CEO, Mr. Mack. Mrs. Ava M. Tunney, Palatine, IL.

7-23-2006 @ 10:17PM

Mr. noitall said...

I've read a couple of your articles and I'm impressed. It's refreshing to hear from a blogger who is thoughtfull and intelligent. THANK YOU.
First I would like to comment on the Mack-Samburg connection. Unfortunately I'm afraid you're right, our country has reached a level of corruption where the laws are enforced "selectively", and it's this way at all levels of our society. These insider trading and option backdating scandles shouldn't be a suprise to anyone.
I would like to make one more comment on one of your other articles, where you mentioned that some "New solutions" will be needed to fix our economy. Well here's a NEW ONE...how about we actually CUT government spending, and reduce the amount of government workers for a change. Now I'm not talking about the governments definition of budget cuts (when they spend less then they had planned on spending and call it a cut). I mean spend less next year than you spent this year!!