NEW YORK (CNNMoney.com) -- Gary Aguirre, a former Securities and Exchange Commissioner, testified Wednesday before a Senate committee that the SEC blocked his attempts to subpoena Morgan Stanley CEO John Mack because of his political connections.

Aguirre sought to speak to Mack as part of an investigation the SEC is reportedly conducting into whether Pequot, a $7 billion hedge fund, engaged in insider trading when it bet against General Electric and bought stock in Heller Financial ahead of GE's announced acquisition of Heller in 2001, a trade that netted the firm $18 million.

In prepared remarks, Aguirre said evidence suggested that Pequot's CEO acted on an unlawful tip from the CEO of a large investment bank. Pequot has vehemently denied any wrongdoing and maintains that its trades were proper. Officials from the SEC were not immediately available for comment.

Hedge funds are private investment partnerships limited to institutional investors and wealthy individuals. Collectively, these funds manage about $1.2 trillion in assets, according to Chicago-based hedge fund tracker Hedge Fund Research.

It is not clear why Aguirre believes Mack had knowledge of the trades. Mack knows Pequot chairman Art Samberg and briefly worked at Pequot in 2005 before returning to Morgan Stanley.

"No one has provided any evidence that Mr. Mack has engaged in any wrongdoing and Mr. Aguirre provided none today," Morgan Stanley said in a statement.

Aguirre claims he was fired from the SEC in September just after he had received praise from supervisors for his work on the Pequot probe and that he was told that it would be difficult to get approval to take testimony from Mack because of his political connections.

Aguirre testified that the investigation of Pequot came to "a grinding halt" after he suggested subpoenaing Mack.

"I was left out of meetings," Aguirre testified at a hearing on hedge funds before the Senate Judiciary Committee that was monitored by Webcast. "High-powered attorneys contacted my supervisor."

Aguirre said that that he sent e-mails to a supervisor outlining his belief that Pequot had acted on insider information.

Aguirre said this supervisor "would not discuss the case with me. He was angry. He refused my request that we take Mr. Mack's testimony."

Aguirre added that when he presented the supervisor with two spreadsheets, the supervisor "threw one of the spreadsheets at me physically. He was unwilling to discuss the case."

The hearings come just days after the Washington, D.C. court of appeals threw out an SEC rule that required hedge funds to register with the commission as investment advisers. The SEC is currently re-evaluating whether to re-write the rule or to challenge the court's ruling. Whether or not they are registered, hedge funds are still subject to the SEC's anti-fraud provisions.

Much of the hearing on Wednesday concerned whether hedge funds have colluded with independent stock research firms to issue negative reports on certain companies to benefit hedge funds' short positions on certain stocks. Shorting is betting that a share price of a company will fall.

Patrick Byrne, the colorful CEO of Utah-based Internet retailer Overstock.com, has filed suit against hedge fund Rocker Partners and research firm Gradient Analytics, claiming that Rocker and Gradient conspired to drive down the shares of Overstock.com.

Demetrios Anifantis, a former employee of Camelback Research Alliance - which later changed its name to Gradient Analytics - testified that when the firm's clients, mostly mutual funds and hedge funds, ordered a custom report on a stock, Anifantis was instructed to ask whether the client had a position in the stock. Anifantis claimed his boss used that information in making judgments on stocks. Gradient has denied these allegations.

"If some of these allegations are true, then we've got some work to do here on Capitol Hill," Hatch said to Anifantis. "If this activity is widespread, it has the potential to destroy investor confidence.

People in the business say short sellers like Rocker Partners, one of the oldest hedge-fund firms on Wall Street, short the stocks of companies that the manager feels are overvalued or poorly managed - traits that these people say apply to Overstock.com.

They argue that short sellers are often the first to call attention to companies that are engaging in fraud, such as when many short sellers began questioning the business practices at Enron in 2001.

"The fact is, these allegations on the part of public companies have seldom been substantiated," said Joseph McLaughlin, a partner at law firm Sidley Austin LLP and a member of the Managed Funds Association, a hedge fund industry lobbying group, in his testimony at the hearing. "Short sellers often turn out to be right."

McLaughlin said the MFA believes that if short sellers' ability to communicate with third parties is obstructed, "it would raise constitutional issues," he said.

Richard Blumenthal, the Attorney General of Connecticut - where many U.S.-based hedge funds are headquartered - testified that he would like to see more disclosure about hedge funds' relationships with the analysts who provide them with research.

"If the federal (government) doesn't do anything, then states will join forces to proactively protect consumers," he said.

Meanwhile, Democrats in the U.S. House of Representatives are drafting legislation to reverse the court's decision to invalidate the SEC's hedge fund registration rule, according to a Reuters report.

Massachusetts Rep. Barney Frank told Reuters a bill is being drafted that will give the SEC clear authority to require registration and monitoring, and the bill could be introduced as early as Thursday.

"Given the increasing size of hedge funds and the growing role they are playing in the economy, it would be a grave error to allow the court decision denying any authority by the SEC to stand," Frank told Reuters in a statement.

"At the very least, Congress should give the SEC the power it has sought to require registration," he said, adding that Congress should also consider whether the agency needs more authority.

Additional reporting by Rob Kelley

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