Watchdog criticizes SEC's conduct of probe

H. David Kotz, the SEC's inspector general, said there was a connection between the firing of SEC lawyer Gary Aguirre and Aguirre's efforts to interview an influential Wall Street executive in connection with the probe.

Kotz also said he had found evidence that "raised serious questions about the impartiality and fairness" of the SEC's investigation of possible insider trading at the Pequot Capital Management hedge fund.

The findings were earlier reported by the New York Times. Sen. Charles Grassley, the ranking Republican on the Senate Finance Committee, released a copy of the report on Tuesday.

With the new report, "we have more information about how the SEC pulled punches against big players in our financial system," Grassley, from Iowa, said in a statement.

Kotz also condemned what he called the "common practice" of giving outside lawyers' clients access to high-level SEC officials when they had complaints about front-line investigators.

SEC spokesman John Nester said the inspector general's report had confirmed the major findings of two previous inquiries into the matter and had cited evidence that the Division of Enforcement had a legitimate basis for terminating the attorney.

"Of greater significance, the IG's report concluded that the Pequot matter at issue was 'aggressively pursued' and that 'the investigation did not find that Enforcement cases are generally affected by political decisions or the prominence of defendants,'" Nester said in an e-mailed statement.

"The agency's administrative review process will now determine appropriate personnel actions," Nester said.

The IG's report recommended the SEC take "appropriate disciplinary and/or performance-based action" against enforcement director Linda Thomsen. It recommended similar action against SEC supervisors Mark Kreitman and Robert Hanson, along with removal of their supervisory responsibilities.

Aguirre has said he was fired after his inquiry got too close to Mack, now the chief executive of Morgan Stanley , and he was stopped by supervisors because of Mack's political clout.

Kotz said in his report that the "investigation finds that there was a connection between the decision to terminate Aguirre and his seeking to take Mack's testimony."

No enforcement action was taken in connection with the Pequot inquiry and Mack has denied any wrongdoing.

Last year, the Senate Finance and Judiciary committees said the SEC's office of inspector general, then headed by Walter Stachnik, had failed to conduct a serious, credible investigation of Aguirre's claims.

(Reporting by Lisa Richwine, Karey Wutkowski and Tim Dobbyn in Washington, and Ajay Kamalakaran in Bangalore; editing by Gerald E. McCormick and Maureen Bavdek)