The Devil and Gary Aguirre

Spurred by a strong sense of justice and a desire for public service, Gary Aguirre has taken on the SEC and a devilish can of worms

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A routine check of Wall Street activities turned up a curious spate of heavy trading by a company called Pequot. In one series of transactions, Pequot—a giant hedge-fund operator—bought an unusual number of shares in a company called Heller Financial, shortly before the latter was bought out by G.E. The move was a windfall for Pequot. By law, those sorts of transactions are recorded by market-surveillance units at the New York and other stock exchanges and handed over to the SEC. The curious Pequot moves ended up on Aguirre’s desk. It didn’t take him long to realize something shady was going on.

“First of all, the profit on it was $18 million in one month,” Aguirre says, “and it was handled solely by the CEO of the hedge fund [Arthur Samberg] without collaboration by anybody else. In fact, their internal regulations about how you were supposed to make these kinds of decisions—talk to other people, visit the company—none of these things was done. There were no e-mails, there were no reports, there was no research, no contact with any companies, no contact with third parties. There was just nothing. One day this guy [Samberg] just says, ‘Heller Financial!’

“As it says in the Senate report, Samberg’s orders were sometimes for twice as much stock as sold on that day. So if you’re selling 200,000 shares that day, he wanted to buy 400,000. Well, how come you’re buying all of this if you’ve never done any research, you haven’t talked to these guys, you don’t follow the stock? There was no rational explanation why this guy bought more stock than anybody else in the country during these 30 days. So then we began to backtrack—who did he talk to immediately before he bought it that could’ve known anything about this stock? Well, of course, there was only one person, and that was John Mack.”

Mack, former head of Morgan Stanley, is one of the most inside of Wall Street insiders—a financial sector untouchable. After a bit more digging, Aguirre surmised that Mack had been in Switzerland before the G.E. buyout and had talked to one of Heller’s advisers, Credit Suisse. (Mack was being courted by the company during the time of the suspicious trades and later became its CEO.) He figured out that Mack had been tipped off by the people at Credit Suisse to the fact that Heller was about to be bought by G.E., which of course would mean its stock prices would skyrocket. The real question was: Did Mack share that insider knowledge with Pequot CEO Samberg?

Aguirre, who was praised and given a raise at the SEC in the spring of 2005, told his bosses he wanted to subpoena Mack. That was the beginning of the end of the investigation. Aguirre was told that Mack had “juice” (meaning he had access to senior-level SEC officers) and that he had heavy political connections to the Bush White House. Aguirre persisted. In the middle of June 2005, his superiors told him to take a week’s vacation—go back to San Diego and relax. Before the week was up, he was unceremoniously fired, and the investigation was scuttled.

IT WAS CLEAR TO AGUIRRE a cover up was taking place, and so he went to Congress and was lucky enough to catch the attention of Republican Senators Charles Grassley (Iowa) and Arlen Specter (Pennsylvania)—on the Judiciary and Financial Committees—who opened hearings into the SEC’s handling of the Pequot investigation. The senators chastised the SEC for its woeful handling of that case and its investigative capacity in general.

As a result of the Senate hearings, the SEC reopened the Pequot case and, in fact, subpoenaed John Mack (though by the time he testified, the statute of limitations on the Pequot case had expired by five days). Grassley and Specter went on to make a list of recommendations regarding SEC procedure.

Three years after the investigation was killed, the entire Pequot fiasco—shot through with improprieties—has resulted in a list of recommendations but no real castigation. Aguirre, meanwhile, has opened a new law firm, specializing in investment cases. He’s also writing a book about his experience with the SEC. But he’s more concerned about a system of American capitalism that seems to have spun out of control (ironically) since the fall of the Berlin Wall.

The SEC is a poster child, he points out, for government agencies that have deteriorated—in the past two decades—from private-industry watchdogs into clandestine protectors. Top-level SEC administrators, he says, jump back and forth through a revolving door between Wall Street and the agency—ensuring cozy relations between two entities that are supposed to maintain a prejudiced separation. The fox is guarding the henhouse, and Aguirre worries that the SEC is only part of the story. The systematic failure he saw in the agency’s policing ability (and the hypocrisy that came with it) appears to extend to the FDA, the EPA and a host of other government agencies. It’s a situation with fertile parallels to The Master and Margarita.

“The novel, as I see it, is a morality tale told through humor and satire,” Aguirre says. “If I had to single out a value, it is truth. The further a character strayed from it, the less [the devil’s] tolerance. Bulgakov [the book’s author] would have a field day using the devil to expose the hypocrisies in USA 2008.”

Lack of effective oversight, he says, has resulted in a set of financial conditions that are uncomfortably similar to those that precipitated the 1929 stock market crash—rampant corruption and an uncontrolled, unregulated market. Aguirre points out that the hedge-fund market, outside the purview of the SEC, now controls trillions of dollars and will soon be as powerful as the regulated market. The recent government bailout of Bear Stearns is writing on the wall, he says.

“You and me, we are now underwriting the cowboy speculation of Wall Street,” he says. “The financial markets have been operating like a casino, at a magnitude that makes Las Vegas look like a miniature-golf game. Gigantic gambling going on, in the trillions of dollars. If we have a Bear Stearns style of meltdown at a JPMorgan . . . there won’t be enough money to bail them out.

“What happened at Bear Stearns, the thing failed when they went too far, when they became too opaque, when they gambled too much—to make that extra profit. It failed. And what happened? Now the public is underwriting them with almost $60 billion dollars. Bear Stearns had a net worth of $12 billion. Our underwriting is five times that amount. We, the public, guaranteed $55 billion to cover $12 billion.

“Now what’s the moral dynamic there? On the way up, they’re figuring, ‘How can we squeeze a little more out of subprime debt? How can we up the price of mortgage-backed securities? How can we increase that profit?’ When that happens on the upside and investment bankers are making $100 million —or in the case of three hedge-fund operators, $3 billion each, last year—that kind of wealth involves high levels of risk, and that risk is not just the risk these guys are taking with their own money, it’s the risk they’re taking with the capital markets.

“The capital market is the circulatory system of the economy. If it freezes up, the economy freezes up. And instead of deterring that conduct by agencies that enforce the statutes and laws that were created to prevent abuse, we’re underwriting the abuse. We’re giving them free license to it. You’ve got government money now underwriting Bear Stearns. When it didn’t work out, when they threw the dice and it came back snake eyes, the bet was supposed to come off the table, but [Ben] Bernanke [head of the Federal Reserve] stepped over and said, ‘No, we’re standing behind this one.’

“It’s a fusion of government with the greediest interests of the society. And if that isn’t a late stage of capitalism, I don’t know what is.”

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