The SEC lawyer who is at the center of an investigation into possible insider trading at the prominent hedge fund Pequot Capital has agreed to appear as at witness during Senate Judiciary Committee hearings that are focusing on the secretive hedge-fund business, CNBC has learned.

         Former SEC attorney Gary J. Aguirre, (pronounced a-GEER-ray) headed SEC's investigation and then criticized the agency's handling of the case after the commission fired him. Aguirre has agreed to testify in the hearings, scheduled to take place Wednesday in Washington, according to a preliminary witness list obtained by CNBC and a person with knowledge of the committee's activities. Other witnesses include a representative of the Department of Justice as well as Connecticut Attorney General Richard Blumenthal, the chief law enforcement official of the state where most hedge funds reside. Committee Chairman Arlen Specter may also ask a representative of the SEC to appear at the hearings.

       Aguirre's testimony would mark his first public comments since

news of a letter he sent members of Congress leaked last week that

rocked the massive and growing hedge-fund business. In an 18 page

letter, Aguirre alleges that he was fired from the SEC as he was

investigating possible insider trading violations at Pequot and

preparing to depose Morgan Stanley CEO John Mack as a witness. Before taking the Morgan Stanley post, Mack was the vice chairman of the hedge fund, but more importantly for the investigation, he was the CEO of Credit Suisse when the firm was serving as a banker in a deal that has come under scrutiny during Aguirre's insider trading probe. Both Pequot and officials at Morgan Stanley say they've done nothing wrong.

      According to people with knowledge of the committee's activities, Specter believes Aguirre could provide what has since been missing from the witness list as he gears up for the hearings: A genuine, inside look into the secretive world of hedge funds and some indication if the business needs closer scrutiny from regulators at the SEC and the Department of Justice.

People with knowledge of Specter's activities say the Senator may also use the hearings as a springboard to introduce legislation that would increase hedge fund regulation. Just last week a federal appeals court says the SEC doesn't have the authority to enhance its regulation of the hedge fund business.

     All the congressional activity won't be good news for the hedge

fund business, which for years operated on the periphery of Wall Street, catering to the super rich. More recently, hedge funds

have grown in popularity with more mainstream investors, and as a

result, they've caught the eye of regulators.

     CNBC has learned that the committee's interest in the hedge fund business stemmed in large part from the complaints of Overstock.com's CEO Patrick Byrne, who convinced Utah senator Orin Hatch, a ranking member of the judiciary committee, to take a

close look at hedge funds, short selling and the use of research to drive down stock prices. Overstock is located in Utah, and Byrne has waged a  public campaign attacking short sellers for using potentially illegal tactics to drive the stock.

     But Specter, the committee chairman, chose not to focus on

Overstock and include Byrne as a witness because he feared the

hearings would turn into a spectacle given some of Byrne's recent

comments, and instead began to focus on larger issues involving hedge funds, namely whether the Justice Department and other regulators like the SEC has done enough to crack down on hedge-fund fraud.

      People with knowledge of the committee's activities say he

believes Aguirre would make a perfect witness given his inside

knowledge of both hedge funds and regulatory attempts top crack downon the business. These people also say that Specter and the committee will examine why Aguirre was fired.

Charles Gasparino - CNBC