The Securities and Exchange Commission Under surveillance

A top regulator tastes its own medicine

THESE are trying times for America's chief markets watchdog, the Securities and Exchange Commission (SEC), which is being blamed for acting too tough and not tough enough both at the same time. A report last week by an independent panel suggested it was overzealous in enforcing its rules. At Senate hearings this week, the question was whether it pulls its punches when investigating the great and good.

The hearings focus on the SEC's handling of a probe into alleged insider trading. A former investigator with the agency, Gary Aguirre, claims his supervisors there blocked his efforts to look into whether a hedge fund, Pequot Capital Management, traded on private information provided by John Mack, chief executive of Morgan Stanley, ahead of mergers. Mr Mack was chairman of Pequot briefly last year before taking over at the big investment bank.

Mr Aguirre was fired last year after claiming that the SEC was reluctant to tackle influential figures. Mr Mack was eventually interviewed in connection with the probe, after Congress had started to take an interest. Senior SEC staff insist there was never enough evidence to link him to dodgy trades. The case was formally dropped last month. Mr Mack and Arthur Samberg, Pequot's founder, have repeatedly denied wrongdoing.

On December 5th Mr Aguirre's former supervisors testified that he was generally erratic, aggressive towards colleagues and obsessed with nailing Mr Mack. To some, this characterisation sits oddly with the fact that he received a merit-based pay rise less than a month before leaving. Moreover, it has emerged that he was not alone in his suspicions: a market-surveillance lawyer who is still at the SEC confirmed to senators that he had given warning in an e-mail that “something smells rotten” about the investigation. The politicians seem to be siding with Mr Aguirre too. “At best, it looks like extraordinarily lax enforcement... At worst, it has the overtone of a possible cover-up,” said Arlen Specter, head of the Senate's judiciary committee.

Getting to the truth will take time. Further testimony will be heard, with the Senate expected to publish a report early next year. To make matters worse, the SEC's enforcement and compliance departments are being investigated by the Government Accountability Office, an arm of Congress. The watchdog has arguably never been so closely watched.