Bitter breakup brings down mega hedge fund, Pequot Capital

The Stamford Advocate

Jeff Morganteen, Staff Writer
Published 06:24 p.m., Monday, September 20, 2010
 
karen-kaiser

STAMFORD — It began seven years ago as an acrimonious divorce case.

Millions of dollars and countless bitter accusations later, the divorce helped bring down Pequot Capital, the Wilton company that managed billions of dollars and was once among the world’s biggest hedge funds. Besieged by complaints from federal regulators, the fund announced its closing in May 2009 amid an insider-trading investigation, the genesis of which was found amid a divorce lawsuit in state Superior Court in Stamford.

Over the course of several years, what began as a bitter divorce case filed at the Stamford courthouse became a high-stakes legal drama that involved federal regulators, U.S. senators, financial titans and a Connecticut couple who ended up with the largest whistle-blower award ever for insider-trading evidence.

And it all began with a computer hard drive found by Karen Kaiser and her lawyers. A family computer contained evidence of insider trading, and it also caused U.S. senators to pressure the Securities and Exchange Commission into reopening an investigation into Pequot.

Years later, Pequot is closing down its Wilton offices. It has no website, and an automated voicemail system greets callers on its listed phone number. Its founder, Arthur Samberg, is now prohibited from being an investment adviser because of the SEC investigation.

“Whistle-blowers usually come out of personal and intense emotions and relationships gone wrong,” Columbia University law professor John Coffee said.

Inside information

A former independent documentary filmmaker turned financial analyst, David Zilkha began working at Pequot Capital in April 2001, fresh out of his job as a product manager at the Microsoft office campus in Redmond, Wash. Educated at Oxford and Columbia universities, Zilkha wanted to enter investment management after working in the technology industry. He landed an interview with Pequot founder Arthur Samberg in January 2001.

The next month, Samberg e-mailed Zilkha, asking him for his current views on the software giant’s fiscal situation. Samberg said he was not impressed with his analysts’ research on Microsoft. That’s where Zilkha came in. In the first of several e-mails Zilkha wrote to Samberg, he replied, “The worst is over for Microsoft,” according to a SEC complaint. The next month Samberg bought a long position in Microsoft stock.

During the following weeks Samberg was buying and selling Microsoft stock based on conflicting information. He sold his long position because of predictions that Microsoft would fall short of its quarterly earning estimates. A few weeks later, however, he bought another long position when he heard good news about Microsoft’s latest operating system, Windows 2000.

In April, Zilkha was still employed by Microsoft. He got an e-mail from Samberg, asking for “tidbits” about Microsoft’s earnings. Zilkha told him to buy Microsoft stock as soon as possible. He then e-mailed coworkers, asking them about the quarterly earnings.

They told him Microsoft would meet or surpass its earning estimates. Zilkha relayed the information to Samberg. In April, just before the earning estimates went public, Zilkha told Samberg that the Microsoft chief financial officer seemed relaxed and that his disposition “augurs well.”

By the time Microsoft’s earning statements were released in April 2001, Samberg had bought 21,000 call options in the software conglomerate’s stock. A friend of Samberg also bought 300,000 shares based on his recommendations. Pequot’s Microsoft stock increased in value by $14 million. Samberg’s friend made $372,000 on his own trades.

Zilkha reported for work at Pequot in Wilton on April 23, 2001, days after Microsoft released its quarterly earnings. An SEC complaint shows Samberg greeted Zilkha with an e-mail that “I shouldn’t say this, but you have probably paid for yourself already.”

Read more: http://www.stamfordadvocate.com/news/article/Billion-dollar-divorce-667035.php#ixzz1ceEJHzqX