Morgan Stanley denies insider trading claims

John Mack, the chief executive of Morgan Stanley, is at the centre of an insider-dealing storm, after allegations from a former investigator at the Securities and Exchange Commission that he passed trading tips to the head of one of Wall Street's oldest hedge funds.

Morgan Stanley said yesterday the allegations, reported in The New York Times, were simply not true. The hedge fund involved, Pequot Capital, said it had been investigated by the SEC but had never done anything wrong.

The SEC investigator, Gary Aguirre, claims he was ousted from the organisation after insisting it subpoena Mr Mack, a powerful ally and fundraiser for President George Bush.

Mr Aguirre said in a letter to senior members of Congress his inquiry into Pequot had led him to the conclusion that a senior Wall Street executive had been passing information to the hedge fund at the beginning of the decade. Mr Mack was the president of Morgan Stanley until 2001 and then co-chief executive of CSFB from 2002 to 2004. The letter does not refer to Mr Mack by name but it has since emerged he is the figure to whom Mr Aguirre was referring.

His superiors did not agree Mr Mack should be subpoenaed and, after rowing over the issue, Mr Aguirre was sacked in September. A spokesman for Morgan Stanley said: "We have no reason to believe the SEC has any interest in Mr Mack in connection with this matter and he has never been contacted on this matter by the SEC."

The SEC declined to comment on the issue.

Before being hired to restore morale at a beleaguered Morgan Stanley, Mr Mack was briefly the chairman of Pequot Capital in 2005. The hedge fund is run by his long-time friend Arthur Samberg. The former securities analyst set up the business in 1986 and has grown Pequot into a manager of $7bn (£4bn) of assets, making it one of the 50 biggest hedge funds.

A Pequot spokesman said it conducts hundreds of thousands of trades and it was unsurprising some attracted the attention of regulators, but no investigation had led to charges. "Pequot securities trading has been entirely proper, and not based on insider information," he added.

The allegations of insider trading come at a sensitive time for the hedge fund industry, which faces criticism on Capitol Hill over the actions of some short-sellers.

The SEC's attempts to get a grip on the $1.1 trillion industry were left in disarray when an appeal court threw out its rules requiring funds with more than 15 clients, or $30m, to register with the regulator. Ruling on a lawsuit brought by Philip Goldstein, the manager of the hedge fund Opportunity Partners, the court said the rule was arbitrary.