Senate report faults SEC on hedge fund probe

By Kevin Drawbaugh

WASHINGTON (Reuters) - The Securities and Exchange Commission mishandled an investigation of suspicious hedge fund trading that led to the 2005 firing of an SEC attorney, a U.S. Senate report says.

The report from the Senate Finance and Senate Judiciary committees, released late on Friday, ends a year-long inquiry into the dismissal of former SEC staffer Gary Aguirre.

Aguirre says he was forced out of the agency after a probe he was leading got too close to prominent Wall Street banker John Mack. His claims prompted three Senate hearings and drew heavy press coverage.

The final Senate report criticized SEC management of the investigation and expressed concerns about whether allegations of improper political influence had damaged the agency.

"The public airing of evidence in support of those allegations undoubtedly had an adverse impact on public confidence in the SEC," the report said.

"However, the controversy is more than merely an issue of perception. Our investigation uncovered real failures that need real solutions," the report said.

It recommended that the SEC, among other steps, standardize investigative procedures; make supervisors keep records on outside communications involving investigations; and improve the independence of its internal inquiry staff.

"We will follow up on the report and recommendations ... with energy and urgency," SEC Chairman Christopher Cox said.

"The agency's commitment to prosecuting insider trading has never been stronger," Cox said in a statement.

FOCUS ON PEQUOT CAPITAL

The lengthy report found numerous faults in the handling of the 2005 dismissal of Aguirre and the inquiry he headed into stock trades by hedge fund Pequot Capital.

Before he was fired from the SEC almost two years ago, Aguirre was leading an insider trading probe involving Pequot.

Aguirre has said his investigation led him to suspect that Mack, now chief executive of Morgan Stanley, tipped off Pequot while he was briefly involved with the hedge fund to the 2001 buyout of Heller Financial by General Electric Co..

Aguirre has charged that Pequot traded ahead of the deal and made an illegal $18 million insider-trading profit.

He has said publicly that he wanted to subpoena Mack, but was stopped by SEC supervisors because of Mack's political clout. Afterward Aguirre was fired by the agency.