Fordham Law


Finally: Fried Frank, Wachtell on Pequot Insider Trading Settlement

Henry Putzell III in The AM Law Daily, May 27, 2010

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Fried, Frank, Harris, Shriver & Jacobson and Wachtell, Lipton, Rosen & Katz played key roles brokering a $28 million settlement that resolves a long-simmering allegation that Pequot Capital Management, the Westport-based hedge fund, committed insider trading in Microsoft securities in 2001, according to SEC officials.

The SEC filed suit against Pequot and its chairman, Arthur Samberg, today and announced at the same time that Pequot and Samberg agreed to pay $28 million combined in disgorged profits and penalties to settle the case. (They did not admit or deny guilt.) Federal investigators had been looking into the allegations since at least 2005 but closed early investigations after failing to find enough evidence to bring a case, according to our prior reporting. But then something happened that didn't help Pequot: The employee at the center of the case got divorced, and e-mails implicating the employee, David Zilkha, in the insider trading scheme came to light in filings. Zilkha joined Pequot in 2001 after working for Microsoft, and he used his contacts at Microsoft to tip Pequot to the fact that Microsoft was about to release a better-than-expected earnings report in the spring of 2001. Pequot then made $14 million on trades of Microsoft securities, according to the SEC's complaint.

Kevin Harnisch, the lead Fried Frank partner who advised Pequot, did not immediately respond to a message seeking comment. We reported in August that Fried Frank would advise Pequot in any SEC insider trading case after tipsters informed us that Fried Frank lawyers showed up unexpectedly at Zilkha's divorce case in state court in Stamford, Conn. Lawrence Pedowitz, the Wachtell partner who advised Samberg personally, also did not return our call seeking comment. Samberg is winding down Pequot, which at its peak managed about $15 billion; the settlement with the SEC bars him from ever associating with an investment adviser aside from whatever such association is necessary to wind down Pequot.

The case against Zilkha, meanwhile, goes on. The SEC alleges that Zilkha misled them during the initial investigation in 2005. Zilkha is being advised by Henry Putzell III, a solo practitioner who also teaches at Fordham University School of Law.

In separate news from the SEC, the agency also charged the investment adviser Kenneth Starr (no, not the lawyer) with misappropriating $7 million in client funds to furnish what sounds like the greatest apartment in Manhattan, according to Dow Jones. The five-bedroom townhouse contains a wet bar, a granite lap pool and a 1,500 square foot (!) garden, the WSJ says. A lawyer for Starr could not immediately be reached