A new development related to the government's investigation of possible insider trading at a major hedge fund has raised questions in the case and caught the attention of two key senators.

The Securities and Exchange Commission has been investigating whether the now-liquidated core hedge fund of Pequot Capital Management Inc. traded Microsoft Corp. shares on confidential information provided by a former employee of the technology company that it later hired. Last summer, the SEC sent notices to Pequot and its founder and chairman, Arthur Samberg, indicating that the agency could bring civil charges against them. Pequot and Samberg have denied any wrongdoing.

The SEC closed an earlier investigation of Wesport, Conn.-based Pequot in December 2006. The agency reopened it after documents emerged last December in a divorce proceeding in Connecticut that showed that Pequot began paying $2.1 million to a key witness in the case, David Zilkha, in mid-2007. Zilkha was a former Microsoft employee who Pequot hired in 2001.

Now, Zilkha's therapist has said in sworn testimony that Zilkha told her he was fired by Pequot because he stopped providing the insider information the hedge fund wanted, according to a transcript of the Oct. 15 interview in Zilkha's ex-wife's suit against him.

The documents that came out in the divorce case between Zilkha and his ex-wife show that he received an initial payment of $700,000 in mid-2007 and another $700,000 a year later. He was slated to receive the same amount this year, according to the documents.

The initial payment to Zilkha was made a few months after Sens. Charles Grassley, R-Iowa, and Arlen Specter, D-Pa., spoke critically on the Senate floor about the SEC's handling of the Pequot investigation.

The psychologist, Peggy Thomson, testified Zilkha told her "that his supervisor (at Pequot) expected him to provide sort of insider information about his previous company," according to the transcript. "He said that Mr. Samberg wanted him to get inside information on Microsoft and that (when) Mr. Zilkha stopped providing it he was fired."

In a letter Wednesday to SEC Chairman Mary Schapiro, Grassley and Specter cited Thomson's disclosure "that Mr. Zilkha admitted that he provided Arthur Samberg with insider information (i.e. tips) and was fired after he was unable to provide additional tips."

The senators also noted that Zilkha invoked his Fifth Amendment right against self-incrimination more than 100 times in his sworn interview on Oct. 20 when questioned about his finances.

"The breadth of questions he would not answer suggests the need to conclude the SEC's investigation — one way or another," they wrote.

Spokesmen for the SEC and Pequot declined to comment Friday. Zilkha's attorney, Norm Pattis, didn't immediately return telephone calls seeking comment.

Pequot has said that the payments to Zilkha were made to settle a civil claim related to his employment and firing by the company.