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August 13, 2009 12:29 PM

Sources: Fried Frank Defends Pequot in Coming SEC Case

Posted by Zach Lowe

Fried, Frank, Harris, Shriver & Jacobson has been retained to defend the once-prominent hedge fund Pequot Capital Management against insider-trading charges that federal regulators have indicated they may file soon, according to sources familiar with the matter. 

The firm declined to comment. The SEC has sent Pequot a so-called Wells notice, which indicates the SEC's staff plans to recommend the commission file a civil case against Pequot. In a letter to investors, Pequot denied the inside- trading charges, The New York Times reports.

As we told you in January, hints that Pequot may have committed insider trading violations in its trades of Microsoft securities in 2001 emerged earlier this year in a divorce case involving a Pequot employee who worked for the fund for just five months in 2001.

That employee, David Zilkha, left Microsoft for a job at Pequot, and e-mails emerged in Zilkha's divorce case (ongoing in Stamford, Conn.) showing Zilkha kept in close touch with his former colleagues at Microsoft.

Through those contacts, he allegedly received private information about upcoming Microsoft earnings reports in 2001, according to The Wall Street Journal. Pequot, which once managed about $15 billion, earned $2 million on Microsoft trades during that time, the WSJ says.

Zilkha's wife also found records of $2.1 million in payments from Pequot to her husband in 2001 and requested more information about those payments, court records show. Pequot and its founder, Arthur Samberg, filed papers in the divorce case seeking to quash that request. (Day Pitney represented Pequot and Samberg in the divorce case). The fund indicated the payments were related to Zilkha's departure from the fund in September 2001. 

The SEC has been investigating allegations of insider trading at Pequot since 2005, but closed its initial investigation in 2006, citing a lack of sufficient evidence.

Pequot now manages about $3 billion and is liquidating, in part because of the continued attention from regulators, the WSJ reports.

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