Report: SEC Gave "Preferential Treatment" to Wall Street CEO

Attempts to question Morgan Stanley's CEO "connected" to firing of SEC lawyer.

October 6, 2008, 11:21 PM

October 6, 2008— -- The SEC gave "preferential treatment" to Wall Street executive John Mack during an insider trading investigation three years ago because Mack was about to become CEO of the Morgan Stanley investment banking firm, the SEC's inspector general concluded in a report obtained by ABC News.

The report recommended disciplinary action against the SEC's chief of enforcement, Linda Thomson, and said the firing of an SEC lawyer was "connected" to his persistent attempts to take Mack's testimony. Read the report's conclusion and recommendations here.

"There's a culture at the SEC that they're not willing to take on the big boys, whether big economically or big politically," said Sen. Charles Grassley (R-IA) who requested the inspector general's investigation.

It is a damning indictment of the SEC at a time when it is being asked to step up its enforcement action against Wall Street.

"They ought to be able to challenge anybody regardless of their economic might or regardless of their political might," said Sen. Grassley.

Grassley asked for the investigation after a SEC lawyer who sought to take Mack's testimony, Gary Aguirre, was fired.

"I was told that it would be very difficult to get approval to take his testimony because of his powerful political connections," Aguirre told ABC News in an interview for Good Morning America.

When he says he persisted, he was told to go on vacation and then notified he had been fired.

"We were trying to immediately sit the people down and nail them down to a story, this was the sole exception," Aguirre said.

Aguirre said the inspector general's findings are "about as close to the truth as you can expect from an agency whose mission has been so deeply compromised."

The report concluded, "there was a connection between the decision to terminate Aguirre and his seeking to take Mack's testimony."

"Wall Street has long tentacles," said Aguirre, "and those tentacles reached into the SEC and cost me my job."

The Inspector General found Aguirre's superiors at the SEC provided Mack and his lawyers with information that "could prove very useful in preparing a defense."

The report also said, "the information was provided specifically because John Mack was being considered for a high-level position in a large investment bank, and would not be available to another potential target of lesser means or reputation."

Watch Brian Ross' full report on Good Morning America Tuesday morning.

After Aguirre was fired, the SEC ultimately took Mack's testimony and cleared him of wrongdoing.

A statement issued on his behalf by Morgan Stanley said, "John Mack had nothing to do with the SEC's decision if or when it would seek his testimony in 2005. As soon as he was asked, John Mack immediately agreed to provide his testimony and has cooperated fully with the SEC throughout this matter."

Regarding Mack's testimony, the report says "the OIG investigation did not find sufficient evidence to establish that Mack was given improper referential treatment regarding the taking of his testimony".

Aguirre says Mack hired a former Manhattan US attorney, the former head of the SEC enforcement division and other former SEC officials to pressure his bosses to curtail the investigation.

The SEC says changes have been made since its current chairman, Christopher Cox, took over.

The Inspector General did not find that "cases are generally affected by political decisions or the prominence of the defendants."

Read a statement from the SEC here.

The SEC would not say what, if any, disciplinary action would be taken against Aguirre's superiors, as recommended by the Inspector General.

Click Here for the Investigative Homepage.

ABC News Live

ABC News Live

24/7 coverage of breaking news and live events