Gary Aguirre, who was fired by the SEC in September 2005, alleged that he was let go by the organisation after attempting to probe trades made by hedge fund Pequot Capital Management.
The ex-lawyer claimed that senior officials at the regulator prevented him from interviewing John Mack, an executive who at the time was a candidate for the role of chief executive officer at Morgan Stanley.
It was alleged by the legal expert that his determination to pursue the investigation led to his eventual dismissal by the SEC.
The SECâs pay out will include the cost of his legal fees and salary equivalent to that of four years and ten months.
John Nester, SEC spokesman, said: âThe settlement resolves all outstanding litigation between the parties and reflects the agencyâs determination to focus on its core mission of protecting investors.â
In May Pequot Capital and Arthur Samberg, the hedge fundâs founder and chairman, agreed to pay $28 million in fines to the SEC to settle charges of insider trading in relation to shares in Microsoft Corp.
By Jim Ottewill