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Case 3:10-cv-00831 Document 1 Filed 05/27/10 Page 1 of 14

UNITED STATES DISTRICT COURT


DISTRICT OF CONNECTICUT

)
SBCURITIES AND EXCHANGB COMMISSION, )
)
Plaintiff, )
) Civil Action No.
v. )
)
PEQUOT CAPITAL MAIIAGEMENT, INC. ) JURY TRIAL
and ARTHUR J. SAMBERG, ) REQUESTED
)
Defendants. )
)

COMPLAINT

Plaintiff SecuritiesandExchangeCommission(the"Commission")alleges:

SUMMARY

l. This matterconcernsinsidertradingin the securitiesof MicrosoftCorporation

("Microsoft") in April 2001by PequotCapitalManagement,Inc. ("Pequot"),d registered

investmentadviser;Arthur J. Samberg("Samberg"),its chairmanand chief executiveofficer;

and David E. Zilk,ha("Zill<ha"),then a Microsoft employeewho had acceptedan employment

offer from Pequot.On Friday,April 6,2001, amidstrumorsthat Microsoftwould missits

earningsestimatesfor the quarterthat had endedon March 3l (the "Third Quarter"),Samberg

emailed Zill<haseekinginformationaboutwhetherMicrosoft would hit its estimates.That

weekend,Zill<hacontactedcolleaguesat Microsoft and learnedthat Microsoft would meetor

beatthoseestimates.He promptly conveyeda recommendation


to purchasebasedon this

material,nonpublicinformationto Samberg,who, on April 9 andthereafter,tradedin Microsoft


Case 3:10-cv-00831 Document 1 Filed 05/27/10 Page 2 of 14

optionson behalfof fundsmanagedby Pequotwith the expectationthat Microsoft's stockprice

wouldrise.

2. On April 19,2001,afterthe markethadclosed,Microsoftannounced


its Third

Quarterearnings.Consistentwith the informationZilh,hahad conveyedto Samberg,Microsoft

beatits earningsestimates.Microsoft'sstockclosedat $69per shareon April 20, the first

tradingday afterthe announcement,


a rise of 96 centsper sharefrom the closethe previousday

and of $12.43per sharefrom the morningof April 9. As a resultof illegaltradingby Samberg

andPequot,the Pequotfundsreceivedgainsof $14,769,96A,


approximately$4.1million of

which were attributableto stakesheld by Pequotand Sambergin the funds andto certain

performanceand management
feesthey generated.

3. By virtue of their respectiveconduct,Pequotand Sambergengagedin fraud in

connectionwith the purchaseor saleof securities,


in violationof Sectionl0(b) of the Securities

ExchangeAct of 1934("ExchangeAct") [5 U.S.C.$ 78j(b)]andRule l0b-5 thereunder|7

C.F.R.$ 240.10b-51.
Accordingly,the Commissionseeksthe following relief asto each

Defendant:(i) the entry of a permanentinjunctionprohibitingthat Defendantfrom engagingin

futureviolationsof the federalsecuritieslaws; (ii) disgorgementof ill-gotten gains,includingon

a joint and severalbasis,the ill-gottengainsresultingfrom the illegaltradingin Microsoft

plus prejudgmentinterest;and(iii) the impositionof a civil monetarypenalty.


securities,

JURISDICTION

4. The Commissionbringsthis actionpursuantto the enforcementauthority

conferredupon it by Sections2l(d) and2lA of the ExchangeAct [5 U.S.C.gg 78u(d),78u-l].

This Courthasjurisdictionoverthis actionpursuantto Sections2l(e),21A and27 of the


Case 3:10-cv-00831 Document 1 Filed 05/27/10 Page 3 of 14

Exchange
Act [5 U.S.C.$$ 78u(e),78u-1
and 7&aal.Additionally,manyof the actsand

practicesallegedhereinoccurredwithin the District of Connecticut,which is alsowhere

DefendantPequotis headquartered.

5. In connectionwith the conductdescribedin this Complaint,DefendantsPequot

and Sambergdirectly or indirectly madeuseof the meansor instrumentalitiesof interstate

commerce,of the mails,of the facilitiesof a nationalsecuritiesexchange,


and/orof the means

and instrumentsof transportationor communicationin interstatecommerce.

6. DefendantsPequotand Samberg,unlessenjoined,will continueto engagein the

acts,practices,transactionsand coursesof businessallegedherein,or in acts,practices,and

coursesof businessof similarobjectandpurpose.

DEFENDANTS

7. PequotCapital Management,Inc. is an investmentadviserincorporatedin

Connecticut.It was headquartered


in Westport,Connecticutuntil May 2009,at which time its

officeswere movedto Wilton, Connecticut.Pequothasbeenregisteredwith the Commission

since1998as an investmentadviser.

8. Arthur .J. Samberg,dga69,a residentof Ossining,New York, hasbeenChairman

and CEO of Pequotsinceits foundingin 1998.

RELEVAI\T INDIVIDUAL AND ENTITY

9. David E. Zilkha, d9a4l , currentlya residentof Southbury,Connecticut,was a

July 20, 1998until May 7,2001. From approximately


Microsoftemployeefrom approximately

August 15,2000 until his departurefrom Microsoft, he was a productmanagerwithin its MSN

division. Zill<hawasemployedby Pequotfrom April 23,2001 until November16,2001.


Case 3:10-cv-00831 Document 1 Filed 05/27/10 Page 4 of 14

10. Microsoft Corporationis a public companyincorporatedand headquartered


in

Redmond,Washington.Its securitiestradeon the NASDAQ and areregisteredunderSection

12(g)of the ExchangeAct U5 U.S.C.$7Sl(g)1.It hastradedat all pertinenttimesunderthe

ticker symbol,"MSFT."

FACTS

SambereHires Zilkha

I l. In January2001,Zilk'ha,a productmanagerat Microsoft,was seekingto enterthe

investmentmanagementfield for the first time.

12. On January18,he interviewedwith Sambergin the hopesof gettinga position

with Pequotas an analyst.

13. On February28, SambergextendedZilkha an offer to work as a Vice Presidentat

Pequot,reportingdirectly to Samberg.

14. That night, SambergemailedZilk'haconfirmingthat he had sentout the offer

letter. In the email, Sambergexpressed


the view that the technologymarkethad declinedtoo far

and that the Pequotfundshe was managingshouldpurchasesecuritiesof Mic,rosoftand another

high tech companybasedon the new productsthey were introducing.

15. Sambergstatedthatwhile Pequot'sanalystsdid a goodjob coveringthe other

high-techstock,

i'm not as impressedwith our researchon msft. do you haveany currentviews


that could be helpful? Might aswell pick your brain beforeyou go on the
payroll!!

16. Zilk,harepliedthe next day. Agreeingwith Samberg,he saidthat he sensedthat

"the worst is over for Microsoft."


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17. On or aboutMarch 4, ZilV'haacceptedSamberg'soffer to work at Pequotandthey

determinedthat he would commencehis employmenton or aboutApril 23,2001.

18. On or aboutMarch 15, Sambergmet with Zill<haat Pequot. On March 16,

SambergboughtMicrosoft call optionsand sold a coffespondingnumberof put optionsat the

samestrikeprice. A call option givesthe buyeran optionto purchasefrom the seller 100shares

of stockat a strikeprice at anytime up until expiration. A put option givesthe buyeran option

to assignto the seller 100sharesof stockat a strikeprice at anytime up until expiration. By

numberof put options,an investoris ableto reap


buyingcall optionsandsellinga coffesponding

essentiallythe sameprofit or lossasa stockownerwould,but with a muchsmallerinvestment.

This combinationof optiontradesis known asa'olongsyntheticstockposition."

19. Microsoft'searningsweresetto be announced


on April 19. In March andearly

April 2001,the belief of a numberof analystsat Pequotand elsewherewas that Microsoft would

fall shortof Microsoft's previouslyannouncedearningsestimatesfor the Third Quarter.

20. On March2l,200L afterreceivingemailsfrom a colleaguethat expressed


dim

views of Microsoft'searningsprospects,
Sambergsoldhis long position.

21. On April 2,2001, Sambergreceivedresearch


that includedthe view of the Chief

TechnologyOfficer of a major investmentbanklaudingMicrosoft'snew Windows2000

product.

22. On April 3 andApril 5, Sambergtook anotherlong syntheticpositionin

Microsoftoptionson behalfof the Pequotfundshe managed.


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Zilkha ProvidesSamberswith Inside Information and SambersTrades on It

23. On Friday,April 6,2001,while Zill<hawasstill employedby Microsoft,Samberg

d Zilkha at his Microsoft email address.Sambergwrote:


contacte

I own somemsft basedon the win2000cycle,despiterecurringindicationsfrom


knowledgeablepeoplethat the companywill eitherpreonnounceor takeguidance
down. Any tidbits you might careto lob in would be appreciated

added)(the"Tidbits Email").
(emphasis

24. to the TidbitsEmail,telling Samberghe


On Saturday,April7, Zilkharesponded

would get backto him "on MSFT ASAP."

25. Thatnight,usinghis Microsoftemailaddress,Zilk.haemailedtwo Microsoft

colleaguesexplicitly askingfor informationaboutMicrosoft's earningsresultsfor the Third

Quarter.

26. In an email to one of the colleagues,Zilkha asked,"Any ideason how the quarter

hasshapedup for MSFT?"

27. ZilV,hasenta separateemail to his neighborand colleagueMark Spain("Spain"),

a regionaltechnologyspecialistin Microsoft'sU.S. Salesand Servicesdivision. In the subject

headingof the email, Zill<haasked,"Any visibility on the recentquarter?" In the body of the

email, Zilk,hafurtheraskedSpaindirectly,"Have you heardwhetherwe will missestimates?

Any other info?" (emphasisadded).

28. to Zilkha in an email,notingthat Microsoftwas "on


On April 8, Spainresponded

track" to meetits earningsestimates:

marchwas the bestmarchof record.madeup the shortfallin us sub. w2k pro


major contributor. on track for revisedforecast(MYR).
Case 3:10-cv-00831 Document 1 Filed 05/27/10 Page 7 of 14

29. On April 8 or April 9,2001, Zilk'hathencommunicated


to SambergZilkha's

understanding,
basedon the email Zilk'hahad receivedfrom Spain,that Microsoft would meetor

beatits earningsestimatesfor the Third Quarter,informationthat had not yet beendisclosedto

the public. Zilk'haconveyedthis informationwith the intentof both benefitingPequotand

enhancinghis staturewith his new employer.

30. Duringthe periodfrom April 9 throughApril I1,2001, Sambergpurchased


an

additional28,200call optionsand sold a coffespondingnumberof put optionsat the samestrike

price for the Pequotfundsthat he managed.

3l . On April 16,anotherportfoliomanagerat Pequot"sold short" 800,000Microsoft

sharesin tradestotalingalmost$50 million. A "short sale"is the saleof securitieswhich the

sellerdoesnot own or one consummated


by the deliveryof a securityborrowedby, or for the

accountof, the seller. A sellermakesa shortsalein anticipationof a declinein the stockprice.

32. The tradesmadeby the otherportfolio managertook placein Pequotfundsthat

were not managedby Samberg,but Sambergwas awareof the orders. Sambergthen sought

the substantialpositionhe had amassedin the companyin


further comfort from ZilV'-haon

anticipationof an increasein stockprice. Minutesafterthe otherportfolio managerplacedthe

orderto shortMicrosoft, Sambergemailed Zilk.ha,who was in Washingtonstate,asking Zilk'ha

for any "further [c]olor" on Zilkha's 'oalmamater"(i.e.,Microsoft).

33. Zil?,hadidnot get backto Samberguntil the eveningof April 17,by which time

Samberghad already(earlierthat day) reducedhis long Microsoft position. Even reduced,

Samberg'slong Microsoftremainedsubstantial,
comprising21,000call options.
Case 3:10-cv-00831 Document 1 Filed 05/27/10 Page 8 of 14

34. Zilk'ha,who had goneto Microsoft's offices on April 17,respondedto Samberg

that eveningwith an email statingthat he had "heardthat afternoonfrom the MSN finance

controllerthat our CFO hasbeenmuch more relaxedbeforethis next earningsreleasethan he has

beenin the lastyear. Augurswell."

35. On April 19,beforethe Microsoftearningsannouncement,


andby thenhaving

receivedZilkha's reply, Sambergincreased


his longpositionin Microsoft,buying6,000more

call optionsandselling6,000put optionson behalfof the Pequotfunds. In addition,at

Samberg'srecommendation,
a friend of Samberg'spurchased300,000sharesof Microsoftstock.

36. As a resultof Samberg'stradingactivity,just prior to the Microsoftearnings

announcement,
the Pequotfundsmanagedby Sambergowned21,000Microsoftcall optionsthat

had beenpurchasedafter Zill<hahad first conveyedto Sambergmaterial,nonpublicinformation.

Eachof the call optionpurchases that Microsoft'sstockprice


reflectedSamberg'sexpectation

would increase.

Microsoft AnnouncesEarninss and SambersCredits Zilkha with PequotProfits

37. On April 19,2001,oncethe markethadclosedat4:30p.m. EasternStandard

Time, Microsoft announcedits earningsresults,which were betterthan its previouslyannounced

revenueof $6.46billion anddilutedearningsper


estimates.In particular,Microsoftannounced

of $6.3-$6.4billion in revenueand$.42-$.43in diluted


shareof $.44,beatingits estimates

earningsper share.

38. By the endof the nexttradingday,Microsoft'sstockpriceper sharejumped96

centsfrom $68.04at the closeon April l9 to $69 at the closeon April 20.
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39. The Microsoft securitiesthat Samberghadpurchasedon behalfof Pequotfunds

on or afterApril 9 andheld asof April 20 increased


in valueby approximately$14,769,960.

The gainsby Pequotand Sambergflowing from their interestsin the fundsamountedto

approximately$4.1million. The balanceof the gainswent to the benefrtof the Pequotfundsand

their investors.In addition,the friend of Samberg'swho had purchasedMicrosoft sharesat

Samberg'srecommendation
on April l9 hadgainsof $372,060.

40. In the daysfollowing the Microsoft earningsannouncement,


Sambergcredited

with his Microsoft tradingand beganrecommendinghim to othercolleaguesat Pequot.


Zilk=ha

41. In an emailsentthe morningof April 20,for example,Sambergwroteto a Pequot

analysttelling him, "david zilkhajoins me Mondayfrom Microsoft. You might want to talk to

him aboutwhat he thinks is going on at the company."

42. Sambergthen forwardedthe email to Zilk.ha,with a note in which he attributed

his successfulMicrosoft tradingto Zilkha:

our tech grouphasa very dim view of pc demand,and consequentlymsft. in fact,


they are shortthe stockin one account,while it is my largestlong. (I shouldn't
say this, butyou haveprobablypaidfor yourselfalready!) [emphasisadded.]

43. In anotheremail,datedApril 23, Sambergtold two of his colleagues,


"our new

guy, david zill<ha,isin ct today. Checkhim out. He's alreadygot a greatp&l basedon his msft

;input."

44. Zilkhareportedto work at Pequoton April23,200l, but technicallyremainedan

employeeof Microsoftuntil May 7.

45. On April 24,Zilkha emailedSambergwith a list of companieshe proposedto

cover for Pequot. In the email,he alsoexpresseda concernaboutoverlappingwith otherPequot


Case 3:10-cv-00831 Document 1 Filed 05/27/10 Page 10 of 14

analysts.Sambergrespondedwith an email stating,in part, "do not worry over every little thing

- just get to know the companiesyou listed,andtell me what to do with my msft position,which

hasbeenso successfulalreadythanksto your help."

46. Zilkha alsolaterreceiveda complimentaryemail from a managingdirectorat

Pequot,who stated,"I am sitting herewith 'the greatone' aka art [Samberg];who sayswe've

mademore moneyin msft in the last monththan in the entiresevenyearsbeforethat!"

47. On or aboutSeptemb
er 25, 2001,Sambergtold ZilV'hathat Zilkha's employment

at Pequotwas going to be terminated,but that he could continueto work at Pequotfor a short

periodas he lookedfor a newjob.

48. Zilkha's employmentat Pequotwasterminatedon or aboutNovember16, 2001.

Zilkha's Fiduciarv Dutv to Keep ConfidentialAll Material. Nonpublic Information about


Microsoft

49. ZilV'ha'knew
that as a Microsoft employee,he had a duty to keepconfidentialall

material,nonpublicinformationaboutMicrosoft andthat it was illegal to conveysuch

informationto Samberg.

50. Microsoft'sinsidertradingpolicy, in effectduringthe relevantperiodandto

which Zilkha was subject,madeit clear thatZilkha could be held liable for tipping othersto

tradeon insideinformation:

Justas you may not tradein the stockof Microsoft when you know material
nonpublicinformation,you may not disclosesuchinformationto any third party
who thentradesin Microsoftstock. This is considered illegal"tipping" andyou
couldbe held liableevenif you yourselfdid not tradeany Microsoftshares.You
could alsobe held liableif you arefoundto haverecommended to anotherthat he
or shebuy or sell Microsoftstock,evenif you do not disclosethe material
nonpublicinformation.

10
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51. The Microsoftinsidertradingpolicy listed"fiscal quarter. . . financialresults"

amongexamplesof materialinformationand statedthat "there is a considerablerisk you will pay

dearlyif you engagein insidertradingin Microsoftstock,"listingsomeof the possiblecivil and

criminalsanctionsto which violatorsaresubject.

52. Zill<hahad also signedan employeeagreementthat expresslyprohibitedhim from

disclosingconfidentialinformationaboutMicrosoft to personsoutsideof the company.

53. Sambergknew or was recklessin not knowing that when Zilkha providedhim

informationaboutMicrosoft'sThird Quarterearnings,Zill<hawas
doingso in breachof Zilkha's

duty to Microsoft to keepsuchinformationconfidential.

54. Pequot'scompliancemanualin effectin April 2001expresslyprohibited"trading

. . . on the basisof material,nonpublicinformationwhen the informationeitherwas disclosedin

violation of an insider'sduty to keepit confidentialor was misappropriated."The manualmade

clearthat suchconduqtwas illegalandsubjecteda violatorto a varietyof possiblecivil and

criminalremedies.

55. Samberghad signeda statement Pequot'sinsidertradingpolicy


acknowledging

and he was thereforeawareof the policy at the time he solicitedinformationfrom ZilV,ha.

ll
Case 3:10-cv-00831 Document 1 Filed 05/27/10 Page 12 of 14

CLAIM

Unlawful Insider Trading


(Violation of ExchangeAct Section10(b)and Rule 10b-5Thereunder)

56. The SEC repeatsand reallegesparagraphsI through55 above.

57. By reasonof the foregoing,Pequotand Sambergeachdirectlyor indirectly,by

useof meansor instrumentalitiesof interstatecommerceor of the mails, or any facility of any

nationalsecuritiesexchange,in connectionwith the purchaseor saleof securities:(a) employed

devices,schemesor artificesto defraud;(b) madeuntruestatements


of materialfact or omittedto

statematerialfactsnecessaryin orderto makethe statements


made,in light of the circumstances

underwhich they weremade,not misleading;or (c) engagedin acts,practicesor coursesof

businesswhich operatedor would operateas a fraud or deceitupon any persons,in violation of

Section10(b)of the ExchangeAct [15 U.S.C.$ 78j(b)]andRule l0b-5 thereunder[7 C.F.R.$

240.1Ob-sl.

PRAYBR FOR RBLIEF

58. Accordingly,the SECrespectfullyrequeststhatthis Court issuea Final Judgment

of PermanentInjunctionand OtherRelief:

A. Permanentlyrestrainingand enjoiningeachDefendant,their agents,servants,

andassigns,andthosepersonsin activeconcertor participation


attorneys,successors
employees,

with them,andeachof them,from violating,directlyor indirectly,Section10(b)of the

Exchange
Act [15 U.S.C.$ 78j(b)]andRulel0b-5 thereunder
[7 C.F.R.$ 240.10b-5];

B. OrderingeachDefendantto disgorgethe ill-gottengainsfrom their illegalconduct,

including,on a joint andseveralbasis,the ill-gottengainsresultingfrom the illegaltradingof

plus prejudgmentinterest;
Microsoftsecurities,

t2
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C. OrderingeachDefendantto pay civil penalties,pursuantto the InsiderTrading

Sanctions
Act of 1984,codifiedat Section2lAof the Exchange
Act, asamended[15 U.S.C.$

78u-ll;

D. Retainingjurisdictionoverthis actionto implementandcarryout the termsof all

ordersand decreesthat may be entered;and

E. Grantingsuchotherand furtherrelief asthis Court may deemjust andproper.

l3
Case 3:10-cv-00831 Document 1 Filed 05/27/10 Page 14 of 14

JURY DEMAND

The SECherebydemandsa trial by jury on all claimssotriable.

Respectfullysubmitted,

SECURITIESAND EXCHANGE
COMMISSION,

By its attorneys,

e T. Cadigan(F No. phv0552)


Assistant Regional Director
JamesS. Goldman(Mass.Bar No. 648488)
Senior Enforcement Counsel
33 Arch Street,23rd Floor
Boston, Massachusetts A2lrc
(617)s73-89r9
(tel)
(617)s73-49s0
(fax)

Local Counsel:

. Hughes(Fed. No. CT-05289)


Assistant United StatesAttorney
Chief, Civil Division
United StatesAttorney's Office
Connecticut Financial Center
157 Church Street,23'dFloor
New Haven,CT 06510
(203) 821-3802 (ter)
(203) 773-s373(fax)

Dated:May 27,2010

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