SEC Trolling The Boudoir And Hiding It?

The Securities and Exchange Commission has elected to pursue a claim against David Zilkha for insider trading, after settling a similar claim against his former employer, Pequot Capital, for a whopping $28 million. The financial press is agog over this turn of events. The investigation of the claim was first opened, then closed, then opened, then closed. Senators raged. There were suspicions that people in high places quashed the truth.

Pequot Capital was accused of insider trading by using information obtained from an employee of Microsoft. The employee, David Zilkha, later worked briefly for Pequot.

Then all Hell broke loose in the divorce proceedings in 2009 involving Mr. Zilkha and his ex-wife over who gets to visit with their children and when. During the divorce proceedings, it came to light that Mr. Zilkha settled an employment claim against Pequot Capital. The SEC got back in the game when it received a copy of Mr. Zilkha's computer hard drive, allegedly containing damning emails between Mr. Zilkha and a former employee of Microsoft.

The New York Times reports it is still a mystery just how the SEC got its hands on Mr. Zilkha's computer hard drive. In its White Collar Watch, the paper goes on to note that the SEC's enforcement action against Zilkha is unusual. Whereas the case against Pequot was filed, and quickly settled, in the Connecticut District Court, the SEC has chosen to file the action against Mr. Zilkha as an administrative action. By depriving Mr. Zilkha of his day in court, the SEC will also deprive his lawyer of meaningful discovery rights. In other words, it may never come to light just how Mr. Zilkha's computer hard drive fell into the hands of the SEC.

Permit me to shed a little light. Mr. Zilkha is a former client of mine. What I will relay here is no more than what has been said in open court in his post-judgment divorce proceedings.

What was at issue in those proceedings is whether and under what circumstances he will see his twins. It is a legendarily bitter custody dispute by Connecticut standards. In the course of that dispute, he disclosed receipt of settlement proceeds from litigation. He was later compelled to disclose the source of those settlement funds.

Apparently before the couple headed to divorce court, his now ex-wife downloaded a copy of his computer hard drive. That was in 2004. Whether she left an in tact copy of the data in the computer is an open question. From 2004 until 2009, the ex-wife presumably kept a copy of the hard drive, or entrusted someone else with its safekeeping. The hard drive did not find its way into the hands of the SEC until Mr. Zilkha filed motions in the family court to see more of his children.

At the time the hard drive founds its way into federal custody, Mr. Zilkha's ex-wife retained separate counsel to handle her appearances before federal investigators, including, I believe, the FBI. At or about this time, negotiations took place about whether Mr. Zilkha would withdraw his custody-related motions. It was represented that he would be in a lot of trouble if he did not. Mr. Zilkha did not stand down in the fight to see his children. Shortly thereafter, United States Senator Arlen Spector was on the floor of the Senate demanding that Pequot investigation be re-opened based on "newly discovered" emails in the case. Those emails, I am certain, came from the down-loaded hard drive.

I am no longer representing Mr. Zilkha in the family matter. He has experienced New York counsel to represent him before the SEC. There was talk at one point that he would retain Mark Geragos of Scott Peterson fame to handle the SEC matter.

My sense is that the SEC has opted for administrative hearings in this matter to deprive Mr. Zilkha of the discovery rights he would otherwise have if the case were handled in the District Court. Mr. Zilkha may never have the right to test the well-founded hypothesis that his ex-wife, or someone acting with her knowledge and consent, caused the hard-drive seized in 2004 to find its way into the SEC's hands as part of a full-court press to keep Mr. Zilkha from focusing on the fight to see his children. The SEC, in short, became a pawn in bitter family-court custody dispute.

Of course, regulators are now laughing all the way to the bank. The press reports that Pequot is paying $28 million to settle the case. That includes a $10 million fine. The SEC is not the only party laughing, however. Mr. Zilkha's ex-wife reportedly stands to collect a $1 million whistleblower's bounty, representing 10 percent of the fine amount.

From where I sit, the SEC looks like it is trying to hide something. Whatever the merits of the claim against Pequot and Mr. Zilkha, the decision to bring the Zilkha matter in an administrative proceeding, thus preventing Mr. Zilkha from discovering just how the contents of his computer hard-drive found its way into federal hands, looks like tawdry pocket pool.

Were I a Wall Street worker subject to SEC regulation, I would raise questions about federal investigators raiding the boudoir for evidence against me. I'd be outraged that my ex-wife could potentially use material she took from me during our marriage as leverage in a custody dispute. I'd be appalled that this game could be played, and that my ex could keep the kids, and get a bonus to boot. But must of all, I would be disgusted that the SEC would seek to hide its tracks by depriving me of the right to discovery.

Transparency, we say, is important in the regulation of the financial industry. But is there no transparency about the regulator's activities, and to what depths they will descend when they turn their sights on the regulated? When the day ends and I engage in a little pillow talk with my spouse, should I assume that the SEC is sharing our bed?


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