Well, predictably enough: Arturo is back!

As our regular readers will recall, Arturo Bris, a professor in Switzerland, issued a report last summer claiming that the SEC’s emergency order banning naked short selling of 19 financial stocks had harmed “market efficiency.” He even claimed that the ban had caused the 19 stocks to lose value relative to the rest of the market.

Professor Arturo plainly fudged his numbers. For example, throughout his report, he calculated percent differences using subtraction instead of division — (X-Y) instead of (X-Y)/X.

Really, his errors were that elementary.

I recalculated Professor Arturo’s raw data, using mathematics instead of a magic hat, and it showed quite the opposite of what he had claimed. The emergency order improved the performance of the 19 affected stocks and had no discernible effect on “market efficiency.”

By then, however, it was too late. The financial media and the short seller lobby had glommed on to Professor Arturo’s report as evidence that the emergency order was a grave mistake. Caving into this pressure, the SEC let the order expire without further adieu. The naked short sellers were given free reign.

You know what happened next – and it wasn’t “market efficiency.”

As for those 19 stocks – including Lehman Brothers (vaporized), Goldman Sachs (nearly vaporized); Morgan Stanley (nearly vaporized); Fannie Mae (nationalized); Freddie Mac (nationalized); and Merrill Lynch (cannibalized) – you could say their “performance” wasn’t so hot. On September 18, the SEC freaked out and banned all short-selling in 800-plus stocks.

Banning legitimate short-selling was a bad idea. But soon, this ban will be lifted, and then we’ll be back to square zero – with illegitimate naked short sellers once again threatening to crater the financial system. To prevent this from happening, the media should be clamoring for the SEC to enforce a permanent, market-wide ban on naked short selling – forcing hedge funds to borrow real stock before they sell it.

Instead, The Wall Street Journal has once again trotted out Professor Arturo to regale readers with more of his mutterings about “market efficiency.” In a Journal op-ed today, the Professor makes the same sort of sweeping claims that he made last summer, though this time he has wisely avoided publishing his raw data, so it is hard to know whether he is once again botching the math.

In any case, I will address each of his points.

PROFESSOR ARTURO POINT NO. 1: “Short selling activity was not excessively high for the 799 stocks from January to the ban’s start. While the percentage of short sales to total shares outstanding hit 19.1% in March, that percentage fell to 14.8% in July, when the sector’s stock prices experienced the greatest drops since March 2007. From Sept. 1 to Sept. 12, short sales in the 799 stocks amounted to a low 6% of shares outstanding. Short sales in relation to trading volume display the same pattern.”

So what? The question is not whether short-selling increased or decreased. It is whether specific criminal hedge funds manipulated the prices of specific stocks. Of those 799 stocks, more than 50 appear on the SEC’s “threshold” list of companies experiencing excessive “failures to deliver” – pretty good evidence of illegal manipulative naked short selling.

Meanwhile, it is important to note that many companies that do not appear on the “threshold” list might nonetheless have been victimized by market manipulators The SEC’s data is incomplete and does not register much illegal naked short selling – such as that which takes place “ex-clearing.” Moreover, a company makes the “threshold list” only if excessive “failures to deliver” occur for five consecutive days.

In the cases of many big financial institutions, the data through June shows unbridled naked short selling (with “failures to deliver” often exceeding 1 million shares) in stretches of less than five days. Typically, these stretches are followed by a brief pause (keeping the stock off the threshold list), after which there is another round of unbridled naked short selling.

The SEC has ordered a couple dozen hedge funds to hand over records of their trading in American International Group, Merrill Lynch, Washington Mutual, Goldman Sachs, Lehman Brothers, and Morgan Stanley. It is not difficult to see why the SEC is investigating. Though only Washington Mutual has appeared on the threshold list, the data through June shows that each of these stocks were exposed to repeated stretches of massive “failures to deliver,” often coinciding with the circulation of false rumors. No doubt, the data through September (soon to be made public) will be even uglier.

PROFESSOR ARTURO POINT NO. 2: “Short-selling activity typically picked up after a stock fell in price, not generally before. Increases in short selling of individual stocks more often occurred the day after a sharp price drop, not before. This is consistent with research conducted by Karl Diether and Ingrid Werner of Ohio State University, and Kuan-Hui Lee of Rutgers, showing that short sellers trade in response to past negative news, and that they reveal information about forthcoming price drops. They may also want to protect their long positions from further declines by locking in prices through short sales… A detailed look at the short-selling transactions on Sept. 9, 2008 — the day Lehman Brothers fell 45% — shows that short sales were much more frequent during the second part of the day, after Lehman shares had already fallen 30%.”

Again, so what? I have no doubt that most short-selling occurs after prices start to drop. Most short selling is legitimate. What should concern The Wall Street Journal is the vast amount of illegitimate naked short selling that is occurring just before hedge funds leak distorted information and false rumors to The Wall Street Journal.

For example, one day last June, somebody naked shorted, and ultimately failed to deliver more than 1 million shares of Lehman Brothers – just before the world was treated to the false rumor that Lehman had gone to the Fed for a bailout.

PROFESSOR ARTURO POINT NO. 3: “Prior to the ban’s start, spreads, liquidity and other metrics for the financial services sector roughly matched the entire market’s norms.”

Yes, “prior to the [current] ban’s start” – namely, during the July to August period when the SEC banned naked short selling of 19 financial stocks – spreads, liquidity and other metrics did, indeed, “roughly match the market’s norms.” In other words, banning naked short selling did no harm whatsoever to the markets. Professor Arturo’s raw data showed this, though he suggested to the press that the opposite was true.

PROFESSOR ARTURO POINT NO. 4: “After the [total ban on short selling] took effect last week, we saw a dramatic shift for the worse (market quality and stock liquidity declined) as investors found it increasingly difficult to hedge market risks. Liquidity dried up.”

In August, Professor Arturo similarly claimed that “liquidity” had dried up after the SEC banned naked short selling in 19 financial stocks. However, his raw data showed precisely the opposite.

This time, he provides no raw data, so who knows if liquidity dried up? In any case, the total ban on short-selling will be lifted, so there is little sense in arguing against it. The question, again, is whether naked short selling has been used to manipulate stocks, and whether the SEC is going to do anything about it.

PROFESSOR ARTURO POINT NO. 5: Bid-ask spreads increased more for the 799 stocks than for the market overall. Comparing the period Jan. 1, 2008, through the ban’s first week shows that relative spreads (that is, the bid-ask spread relative to the quote mid-point) increased from 3.38% to 5.33%. This increase is not due to the financial crisis itself, as relative spreads have also increased from the beginning of September to the past week (from 3.87% to 5.33%).”

I cannot believe this gobbledygook was allowed to appear in the Wall Street Journal. So, from a randomly selected date in January, through a day one week after the short selling ban took affect, spreads increased. From the beginning of September (whenever that was) to “the past week” (whenever that was) spreads increased by precisely the same amount.

What does this mean? Nothing. The question is whether spreads increased during the period of the ban, which went into affect on September 18 — not “at the beginning of September.”

More importantly, since nobody is suggesting that the total ban on short selling will remain in effect, the question is whether spreads increased by some catastrophic amount during the period when the SEC banned naked short selling (temporarily preventing the market from collapsing by a catastrophic amount). In his earlier report, Professor Arturo wrote that “spreads increased” during the ban on naked short selling. However, his raw data showed that spreads on the 19 affected stocks increased by more than any other stocks..

PROFESSOR ARTURO POINT NO. 6: “The intra-day trading range has almost doubled for the 799 stocks over the past week. This means that liquidity deteriorated. Less liquidity makes it more difficult for investors to trade without a severe market impact, and prices are less transparent.”

In his last report, Professor Arturo cited “trading range” as a measure of volatility, not liquidity. As a measure of liquidity, he cited “increased spreads” (which, I have noted, did not, in fact, increase). I suppose it is a matter of convenience for him to now use trading range numbers to support his theory about liquidity (which did not worsen during the more important ban on naked short selling).

PROFESSOR ARTURO POINT NO. 7: “By last Friday, share prices for the 799 stocks did rise 0.11% relative to the market and adjusted for risk. However, such an increase is not statistically significant. The 799 stocks had performed much better in the two previous weeks: Between Sept. 1 and Sept. 19, they outperformed the market on a risk-adjusted basis by 6%. To be sure, one has to believe that much of this movement was attributed to the likelihood of some type of bailout package being passed.”

Financial stocks outperformed the market from Sept 1. to Sept. 19? Tell that to Lehman Brothers, Morgan Stanley, Goldman Sachs, American International Group, Washington Mutual, Merrill Lynch, Bank of America, etc., etc.

Were these stocks manipulated? Why is the Journal not asking that question?

PROFESSOR ARTURO POINT NO. 8: As a result of the ban on short selling, stocks “reacted sluggishly to news. The 799 shares reacted more slowly to news than stocks outside the ban’s umbrella — a key sign of market inefficiency. In an efficient market, individual stocks should be affected primarily by company-specific news rather than overall market activity.”

Professor Arturo made a similar claim about the stocks affected by the July-August ban on naked short selling. His raw data, however, showed precisely the opposite to be the case. During the ban on naked short selling, the affected stocks reacted to news faster than before.

In the absence of any raw data to support this latest claim, I am not inclined to believe it.

PROFESSOR ARTURO POINT NO. 9: In recent weeks, “Investors had difficulty getting pricing for stocks. Trading was down, stock-borrowing costs had soared, and uncertainty hung over the market due to the bailout’s fate and the SEC’s increase of stocks the ban originally covered. The balance of buying and selling that is so critical for markets to function was effectively gone.”

In other words, the market went haywire. That is hardly news. The news (though you don’t read it in The Wall Street Journal) is that this mess could have been prevented if the SEC had expanded its emergency order banning the naked short selling that was quite demonstrably destroying our markets.

More than two years ago, Patrick Byrne, the future Deep Capture reporter, had dinner with an editor of one of the nation’s most important newspapers. The editor said, “I know the media has not been fair to you on the naked short selling issue. Would you like to write an editorial?”

Patrick said, “Sure, but it won’t get published.”

The editor said, “I decide what gets published.”

Patrick wrote the editorial. A day after he submitted it, the editor, known to be a gentleman, called Patrick and said, “I am terribly embarrassed to have to tell you this, but it appears that I will not be able to publish your editorial – or, for that matter, anything else written by you.”

Other publications seemed to have a similar attitude, so Patrick put his editorial in a drawer.

But he didn’t shut up about naked short selling. He said that this problem would eventually crash the financial system. He lambasted the media for failing to cover it.

The media did not listen. Influential journalists, I am embarrassed to tell you, went out of their way to silence or ridicule people who said naked short selling was a problem.

Well, now that Wall Street has suffered the biggest calamity since the Great Depression, almost everyone agrees that naked short selling is a problem. John McCain, Hillary Clinton, the Chairman of the SEC, the Secretary of the Treasury, and the CEOs of some of the very investment banks that have long participated in naked short selling – they all said last week that this crime must be stopped, or the financial system is toast.

So, just for kicks, Patrick dusted off his editorial.

This time, it was published – by Forbes.com.

Too late now, perhaps. But, please, read this editorial. Read it because it is so simple. Read it because you will see what some of our most sophisticated financial journalists failed, or refused, to grasp.

Read it because the media could not, or would not, and this says something very important about the quality of our public discourse.

Make no mistake: what you witnessed this week was not some natural process – an economy “souring,” a bubble “bursting.” This was not the “invisible hand” at work. This was not even capitalism.

This was the premeditated, systematic destruction of market value by an elite crowd of Wall Street cronies who no doubt cackled with delight in the cleverness of their mischief-making. This was criminal behavior on an ungodly scale – the unprecedented looting of America.

Do you think I’m overstating this? Consider that the hedge funds who did this employed precisely the same tactics that precipitated the stock market crash of 1929 and the Great Depression that followed.

One of these tactics, as almost everybody now finally realizes, is called “naked short selling.” It involves hedge funds and their brokers selling stock that they do not possess – phantom stock – to dilute supply and drive down prices.

Often, the short-selling saboteurs engage in other shenanigans – whispering scurrilous rumors, oozing innuendo, orchestrating bogus class action lawsuits, deploying armies of Internet message boards to foment negativity, paying seedy “independent” financial research shops to publish distorted analysis, hiring thugs to harass executives and their families, conducting corporate espionage, and instructing government cronies to launch dead-end investigations.

You never heard about this from the mainstream financial media. You never heard it because the market saboteurs were writing the media’s talking points. Some reporters were merely addicts, dependent on the dealers of distortion for negative stories. Other reporters were genuinely corrupt. They thought the market machinations were good fun. “I wanna play, too,” they said. They reveled in taking down companies, and then they asked their short-selling accomplices for jobs.

Our nation’s most influential financial journalists knew that naked short selling was rife. They knew that hundreds of companies had been victimized. They had all the data and they had every reason to believe that billions of phantom shares floating around the system could not be good. But they said naked short selling never happens. They said only bad CEOs and crazy people complain about short seller crimes. They whitewashed the biggest scandal of our lifetimes, and then our markets crumbled.

It was the darkest moment in the history of American journalism.

* * * * * * * *

In July, the SEC issued an “emergency order” to prevent naked short selling from destroying the financial system. The order required short sellers of stock in 19 financial companies to actually obtain real stock before selling it.

This was hardly intrusive, but the media, copying straight from the hedge fund lobby’s script, said that the SEC should leave the short sellers alone. The emergency order had hurt “market efficiency,” the journalists wrote, though common sense would suggest that a market cannot efficiently set prices when it is bloated by phantom supply. The emergency order decreased “liquidity,” the reporters wrote, though they provided no credible data to support this claim, and failed to explain how a liquid market in phantom stock benefits anyone other than a few hedge fund billionaires.

Even worse, some reporters argued that the SEC should not crack down on naked short selling because short sellers are “vital” sources of negative information to the media. What if some of these “vital” sources are manipulating markets? Criminals, apparently, are untouchable, so long as they dish dirt to reporters. The abomination riles all the more when you know (as I do, having studied thousands of these dirt-strewn stories) that the majority of them contain insinuation, omissions, and outright falsehoods.

At any rate, the financial media convinced the SEC to let its emergency order expire. Even as the markets nosedived, journalists, including CNBC’s Charlie Gasparino, were calling the emergency order “ridiculous,” and the SEC cowered. Within a few weeks Lehman Brothers was gone, Merrill Lynch was gone, Fannie Mae and Freddie Mac were nationalized, and American International Group, a company with a trillion dollars in assets, was trading for a dollar a share and soliciting handouts from the Fed.

On Wednesday of this week, the SEC rushed out new rules that purported “zero tolerance” for naked short selling. According to the SEC, there would now be a “hard” close out rule, requiring hedge funds to deliver real stock within three days of selling it.

Even if the SEC were to enforce a three day settlement, it wouldn’t do much, because the manipulators work like this: A hedge fund tells his broker to sell a million shares of XYZ. The broker doesn’t have any shares, but he sells them anyway. That is phantom stock and for three days it dilutes supply, and eats away at the financial system. When settlement day comes, the broker asks a second broker to sell him a million shares of XYX. The second broker doesn’t have any shares, but he sells a million shares of XYZ (the price now much lower) to the first broker, who uses the phantom stock to settle his initial sale of phantom stock.

When the second broker has to settle, he calls the first broker…and the phantom stock shuffle continues until the falling price makes it impossible for the company to raise capital. Then it’s bankruptcy, the stock is zero, and nobody has to deliver anything.

In any case, “Oooh, weee…‘zero tolerance.’ Really scary.” For years, hedge funds have habitually violated stock delivery requirements, and the SEC has done nothing. Big words didn’t scare anybody. When the SEC announced its new rules, the hedge fund lobby cheered, the media reported the cheers, and the manipulators went hog wild.

By Thursday afternoon, it was looking like Goldman Sachs, Morgan Stanley, and countless smaller banks were on death row. Call this “liquidity.” Call it “market efficiency.” Call it what you like, but it wasn’t good. The meltdown was so severe that traders on Wall Street genuinely believed that Al Queda was taking down the financial system.

More likely, it was the small clique of terrorist hedge fund managers who are most beloved by our financial media. Alas, the SEC panicked. To forestall the end of the world, it decided on Thursday night to ban all short selling of stocks in 700-plus financial companies.

It is a shame that it had to come to that. Short-selling is a legitimate practice, and lots of people do it the legal way. Proper short selling probably keeps the markets honest. If the SEC had cracked down on illegal short selling long ago, the cataclysm would have been averted.

At any rate, maybe now would be a good time for the media to take a closer look at the naked short selling scandal. Stephen Moore, who works for the Wall Street Journal editorial page, said on CNBC that naked short selling caused this week’s turmoil. Why has the Journal not published an editorial expressing outrage?

The Journal’s editorial page, the finest in the country, rightly abhors government interventions, but this is not about free markets. It is about preserving property rights – the basic capitalist tenet that people must own what they sell. It is about stopping criminals.

Aside from the Journal’s editorial page, there is a world of media that has not been compromised by short sellers – a world of good reporters who live far from Wall Street and could be covering this scandal from multiple angles. They need to do so quickly. The SEC will lift its current ban. And if it doesn’t start prosecuting people – if we don’t get a permanent, market-wide, and properly enforced rule requiring short sellers to pre-borrow real stock – then it will once again be open season for hedge fund terrorism, and where our towering financial system once stood, there will be nothing but a gaping, smoldering hole.

In light of the news today that the SEC might not permanently apply its naked short selling “emergency order” to the entire market, and media reports that a study by Professor Arturo Bris is influencing this decision, we republish the following Deep Capture installment, which shows that Professor Bris quite blatantly fudged his numbers.

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“The SEC’s public data say that on any given day over the first three months of this year, there were more than one billion shares that had been sold and failed to deliver (within the allotted 3 days) and that 70% of those fails were concentrated in just 100 companies. That’s a real red flag for the SEC that naked short selling is very widespread, is highly concentrated, and consequently might be being used today to manipulate the price of scores of stocks.”

-Former Deputy Secretary of Commerce Robert Shapiro on CNBC

It’s great that CNBC allowed someone to report this news. It seems pretty interesting – criminals manufacturing piles of phantom stock in order to systematically manipulate the share prices of perhaps 100 companies. Come to think of it, it sounds like a really big financial scandal.

Strange that in the week since Secretary Shapiro’s CNBC debut, naked short selling has not been mentioned even once in any mainstream news publication. And last we heard from some publications, they were arguing that the SEC should allow hedge funds to continue selling stock that they have not borrowed or purchased.

Which was different from a few months ago, when hedge funds and journalists were telling us that there was no such thing as naked short selling. As of last week, the new line was that naked short-selling happens all the time, but cracking down on it would cause irreparable harm to “market efficiency.”

This line even appeared in an editorial by the Economist. If it was in the Economist, it must have been true. Or maybe not. As someone who spent several years writing for the Wall Street Journal editorial page, which is similar to the Economist, I can tell you that the opinions of these places are informed by paradigms, not reporting. String together the words “market” and “efficiency,” throw in a threat of “regulation,” and they’ll be on your side, even if you’re defending criminals.

As it were, the articles in the Economist and every other publication were based almost entirely on a report by a guy named Arturo. As I noted in an earlier blog, some of these same publications reported that the SEC’s emergency order banning naked short selling in 19 financial stocks had caused the stocks to lose value, “according to Arturo Bris, a professor in Switzerland,” even though Arturo’s numbers showed quite clearly that the performances of those stocks had improved dramatically.

I don’t mean to pick on Professor Arturo, but when even the Economist is giving this guy the last word on naked short selling, it seems worth noting that the professor, with considerable help from the American hedge fund lobby, has poured into the media’s credulous gullets a mind-bending brew of cherry-picked numbers and calculated balderdash. Nearly every single number in his report contradicts his thesis that the SEC’s emergency order “significantly” harmed “market efficiency.”

I doubt any journalists read the report, but it should be obvious on the surface that its thesis is absurd.Markets are efficient when prices properly reflect supply and demand. You’d think that preventing people from diluting supply with a bunch of phantom stock would improve “market efficiency.” But apparently there is a “debate” over whether the market can efficiently set prices without criminals manipulating prices, so I hope some journalist, somewhere, will join me as I trudge through the only “expert” report on the planet that makes such a claim.

The report’s relevant section, “The Effect of the Emergency Order,” analyses the 19 affected stocks compared to a sample of 59 U.S. financial stocks not directly impacted by the order, and to a sample of non-U.S. financial stocks that, obviously, will be unaffected by any current or future SEC regulations. Professor Arturo chooses to focus his analysis on the following:

1. Volatility (measured by “open-to-close” price volatility; “close to close” price volatility; and the so-called “trade price range”).
2. Liquidity (measured by “Quoted Spreads” and “Relative Quoted Spreads”).
3. Pricing Efficiency (measured using five statistics that show the extent to which there is a correlation between stock prices and swings in the overall market).

Professor Arturo would have us believe that the emergency order increased volatility, decreased liquidity, and increased market correlation (suggesting less efficient pricing). In fact, his numbers (and, indeed, his words, if you read them closely) suggest precisely the opposite.

I will work, line by line, through the report’s section titled “The Effect of the Emergency Order,” addressing Professor Arturo’s claims in order.

Professor Arturo begins by referring to table IX. Take a look.

According to this table, Professor Arturo writes,the SEC’s emergency order caused “significant volatility increases: open-to-close and close-to-close volatility [of the 19 affected stocks] increased 158 percent and 188 percent respectively. Trade price range increases 4.37 percent in the post-EO period.The table reports similar results for other measures.”

Professor Arturo has determined that open-to-close volatility of the 19 stocks “increased 158%” merely by subtracting the pre-EO open-to-close volatility (168.1%) from the post-EO volatility (327.4%) to get the “difference” of 158.23%.

Similarly, for close-to-close volatility, he merely subtracts the pre-EO number (216.18%) from the post-EO number (404.67%) to get the “difference” of 188.49%.Same for the trade price range: he subtracts pre-EO (2.74%) from post-EO (7.11%) to get the 4.37 number.

He highlights these “differences” throughout his text and in the above table, clearly intending for us to believe that they are important.

But the “differences” are completely irrelevant. They do not tell us by what percentage these numbers increased. And what is important is the whether the percent increases of the 19 stocks exceeded the percent increases of the U.S. and non-U.S. samples.

So let’s compare the increases of open-close volatility, close-close volatility, and trade price range.

Open-to-Close Volatility: For the 19 stocks, the increase is (difference) / (pre-EO volatility) = 158 / 168.1 =94.4%.For the U.S. sample, the increase is 79.68 / 123.65 =64%. For the non-U.S. sample, the increase is 70.60 / 64.34 = 109.7%.

In other words, open-close volatility of the non-U.S. stocks increased far more than that of either the 19 stocks or the U.S. sample. Given that the non-U.S. stocks are in no way affected by an SEC action in the U.S., we can assume the professor’s open-to-close volatility numbers say nothing about the effects of the emergency order.

Close-to-Close Volatility: For the 19 stocks, the increase is (difference) / (pre-EO close-close volatility) = 188.49 / 216.18 = 86.7%. For the U.S. sample, the increase is 170.37 / 93.65 = 182%.And for the non-U.S. sample, the increase is 120.87 /125.52 =102.5%.

In other words, the close-close volatility of the 19 affected stocks increased far less than that of both the U.S. and the non-U.S. sample.

Trade Price Range: For the 19 affected stocks, the increase is (difference) / (pre-EO trade price range) = 4.37 / 2.74 = 159%.For the U.S. sample, the increase is 4.20 / 2.79 =151%.For the non-U.S. sample, the increase is 1.53 / 2.39 = 64.01%.

The increase in the trade price range of the 19 stocks increased more than the U.S. and non-U.S. samples. But given that this contradicts the close-close and open-close volatility numbers, we certainly are not able to conclude that “volatility increased” as a result of the emergency order.

This might explain why, a few paragraphs after pointing to “significant volatility increases,” which is the line that was apparently fed to the press, Professor Arturo admits that “we do not find significant differences in volatility in either the pre or post EO period between G19 and US financial firms.”

Moving on to liquidity, Professor Arturo writes that “differences in liquidity [of the 19 affected stocks] significantly deteriorate.”

As noted, Professor Arturo measures liquidity by looking at quoted spreads and relative spreads. Again, he seems to see some significance in the “differences,” but what matters is the relative increases.

Look back up at that table. What you see is that for the 19 stocks, quoted spreads increased from $0.08 to $0.12 (50%). For the U.S. financial institutions, the increase was from $.0.04 to $0.06 (50%).

Isn’t 50 the same as 50?What “significantly deteriorated”?

As for relative quoted spreads, Professor Arturo writes in the introduction to his report that“from the pre-EO period to the post EO period, relative quoted spreads for G19 stocks have increased from 18 to 48 percent, but they have increased only from 11 percent to 29 percent for comparable US financial stocks. “

“Only from 11 percent,” he writes. Only? If something increases from 18 to 48, that’s a 166 percent increase. If something increases from 11 to 29 percent, that is a 163 percent increase. Isn’t 163 and 166 pretty much the same? This does not suggest that the 19 protected stocks “significantly deteriorated” relative to the sample of U.S. financials.

It is true that the spreads increased a lot more in the U.S. than they did overseas, but by this point Professor Arturo’s picture of what he calls “market quality” is looking pretty fuzzy.

Indeed, a bit further down, he writes that “controlling for firm and market characteristics, the EO has led to a significant increase in market liquidity.”

You read that right. Before he said there was a “deterioration” in liquidity. Then he said that the EO led to a significant increase in liquidity.

By the way, why am I wasting my time with this? Who cares about these screwball statistics?The SEC is talking about protecting companies from getting clobbered by illegal market manipulation. The SEC is talking about stopping a crime and upholding the basic tenet of capitalism and correct human conduct that says that someone who sells something had darn well better deliver it.

If some economist sees a change in some decimal point – big deal!If some blogging media critic had the stupid idea to stare cross-eyed at the economist’s decimal points until he noticed that they’d been completely fudged – well, big deal!Unless these numbers measure radioactivity, I don’t know why we’re even discussing them.Criminals are destroying market value and ruining lives. Decimal points be damned!

Sorry. Onwards with the report.

I notice that Professor Arturo throws some “semi-variance” numbers into the table that I posted above. Semi-variance increased dramatically for the 19 stocks. That must mean that “market quality” got really bad, right?

Wrong. Semi-variance isn’t a measure of volatility or liquidity. It is a measure of how much stocks could fall, based on their performance during a previous period. Perhaps Professor Arturo stuck the semi-variance numbers in the table to create a misimpression, but he doesn’t include them in his written discussion of the effects of the emergency order, no doubtbecause he knows they are not particularly relevant to “market quality” and “market efficiency” (though they do suggest that the performance of the 19 stocks soared during the emergency order, relative to the previous period, which is the opposite of what the professor and his media mimics said they did).

Moving on, Professor Arturo measures the correlation between the movement of stock prices and the movement of the market as a whole. If there’s a higher correlation, it supposedly suggests that the market isn’t efficiently processing information – that stock prices are determined by general market sentiment, rather than specific data points about the companies’ track records.

Professor Arturo measures correlation using five statistics, shown in the table below.

Referring to this table, the professor writes that there has been “an important deterioration of market efficiency as a result of the EO. The R squared increases from 22 to 33 percent for US financial firms (an absolute increase of 11 percent). R-squared increases 12 percent for G19 firms.”

You see? He did it again. He subtracted 22 from 33, which is 11. Since that’s less than 12, we’re supposed to believe that the R-squared for the 19 protected firms increased more than the R-squared of the U.S. financial firms. The table similarly displays these “absolute differences” as if they were the key to understanding the effects of the SEC’s ban on naked short selling.

But, again, the “difference” numbers are irrelevant. The relevant number, cited nowhere, is the percent increase of R-squared.For the sample of U.S. financial firms, the increase is 10.82 / 22.46 = .481, or 48%. For the 19 affected firms, the increase is 11.5 / 32.22 = .356 or 35.6%.

So the R-squared for the 19 firms increased less than the R-squared for the sample of U.S. financial firms, which is the opposite of what the professor would have us believe.

In the next line, Professor Arturo writes that “Cross-autocorrelation increases by the same magnitude in G19 and US financial stocks. However, cross-autocorrelation increases much more for G19 than for U.S. financial stocks.”

Yes, he said it increases by “the same magnitude.” Then he said the opposite–that it“increases by much more.” If this were the first time, I’d call it a mistake.

In any case, look at the table, and you will see what happened to the cross-autocorrelation of the 19 stocks. Before the emergency order there was a correlation of 8.24%. After the emergency order there was an inverse correlation of -24.4%.

In other words, the emergency order made it exceedingly less likely that the stocks would move with the market, which by professor Arturo’s standards, means the market became more efficient.

The professor goes on to say that “downside cross-correlation increases 3.26 percent for G19 stocks, while it decreases 4.05 percent for U.S. financial institutions.” So market efficiency “significantly deteriorated,” right?

No. Look at the table. Before the emergency order, downside cross-correlation for the 19 stocks was an insignificant -1.61%. After the emergency order, it was an insignificant 1.65%. In other words, there was never much of a correlation. By this standard, the market in the 19 stocks was almost perfectly efficient before the emergency order. And it remained almost perfectly efficient after the emergency order.

As for the sample of U.S. financials, downside cross-correlation was inversely correlated (-1.79%) before the emergency order. After the emergency order it was even more (-5.84%) inversely correlated. By this standard, the market for the U.S. sample of stocks became more efficient.

The downside cross-correlation numbers for foreign stocks show that they became less inversely correlated to the market after the emergency order. So, according to this statistic, the market in foreign stocks, but not U.S. became less efficient as a result of the emergency order in the United States. I don’t know what to conclude from that, but it certainly isn’t that U.S. market efficiency “significantly deteriorated” as the result of a ban on naked short selling.

Lastly, the downside R-squared of the 19 stocks increased 26.9 / 21.94 = 123%. That is significantly more than the increase in the U.S. financial stocks.However, the downside R-squared for overseas companies increased 56%, so obviously something other than an American regulatory action can affect downside R-squared.

All in all, most of the statistics in this report contradict the hedge fund party line that a ban on naked short selling harmed “market efficiency” – and that speaks volumes about the way in which our financial media processes and delivers information.

As for the data showing that criminals are hammering around 100 companies – destroying not just stocks but the lives of employees and small investors…Well, if you’ve read this far, you give a hoot, and that sets you apart from a great many journalists.

The mainstream financial media says that the SEC should not crack down on criminal short sellers because short sellers are vital to the markets (and vital ghost-writers of a lot of what appears in the financial media). But much of the world has come to understand the enormity of the illegal short selling scandal, and there is a palpable feeling that the days are numbered for the miscreants who are turning our markets to mush.

Consider the events of just the last 24 hours.

Yesterday, we received word that Jonathan Curshen of Red Sea Management was arrested in New York. As described in “The Story of Deep Capture,” Curshen used to work for Pacific International, a Mafia-infested brokerage that has been favored by criminal naked short sellers and serves as a popular source to journalists, such as Dow Jones Reporter Carol Remond, who insist that illegal naked short selling isn’t a problem.

A Deep Capture team member, working undercover, once traveled to Costa Rica to meet Curshen. On multiple occasions, this creep admitted to our undercover vigilante that he participated in illegal naked short selling – and threatened to kill anyone who revealed this. Curshen also admitted laundering money for criminal short sellers, and described special debit cards that could not be traced to their users. These cards, Curshen said, were used to pay off government officials and journalists.

We are awaiting details of the charges against Curshen. They should be interesting.

Meanwhile, it was announced today that Deutsche Bank Securities has agreed to pay the largest fine ever levied by the New York Stock Exchange for short-selling violations. Only the Associated Press and Reuters reported this news. Reuters noted that Deutsche Bank completed sales of securities “without borrowing the securities or having reasonable grounds that they could be borrowed.” This is otherwise known as illegal naked short selling.

Strangely, however, Reuters suggested it wasn’t naked short selling at all. It wasn’t naked short selling,said Reuters, because the case involved “failures to locate the securities to cover short sales, not necessarily a failure to deliver the securities.”

How does one deliver securities that one has not located? Late in the day, Reuters put out a corrected story with a quote from a NYSE official who said, yes, “if you can’t locate the securities, it may lead to a fail to deliver” – and, yes, that is naked short selling, which is another way of saying that Deutsche Bank Securities sold massive amounts of phantom stock.

This is not at all surprising. For years, a devoted crew of bloggers have pegged Deutsche Bank as a central player in the naked short selling scandal. This was a big reason why the bloggers were called “conspiracy theorists” and “crazies,” and I suppose it would be pretty nutty of me to suggest that one of these days there’s going to be jail time for the criminal hedge funds that ordered Deutsche Bank to sell all that phantom stock in an effort to destroy public companies for profit.

But short sellers are vital to the markets, so let’s pretend not to notice the third interesting news item of the day, which is that Morgan Keegan & Co., a Tennessee-based brokerage, has fired stock analyst John Gwynn for allowing short-selling clients to see his research reports before they were made available to the public. As Deep Capture reporter Judd Bagley noted in our previous blog post, the reports in question all concerned a company called Fairfax Financial.

A small group of short-sellers are alleged to have participated in a scheme – dubbed the “Fairfax Project” – to drive down Fairfax’s stock price. We noted in “The Story of Deep Capture,” that one of the short selling hedge funds, an affiliate of Steve Cohen’s SAC Capital, went so far as to hire a thug named Spyro Contogouris to threaten Fairfax’s executives and their families. The thug (later jailed for ripping off a Greek shipping magnate) even wrote a letter to the church pastor of Fairfax’s CEO, accusing the CEO, who is an honest family man, of being a sado-masochist group-sex afficionado who had scammed the Catholic Church out of millions of dollars.

In a lawsuit filed in 2006, Fairfax claimed that this group of short sellers – Steve Cohen, David Rocker, Jim Chanos and Dan Loeb – conspired with Morgan Keegan to manufacture false, negative research about Fairfax. Morgan Keegan, no doubt to avoid liability, maintains that the research was accurate, but I’ve seen some of that research, and it can hardly be called “truth.” In any case, by firing Gwynn, Morgan Keegan makes it plenty clear that the short-sellers who attacked Fairfax were up to no good.

This same clique of short-sellers has attacked dozens of other companies, almost always resorting to similar tactics: false “independent” research (dictated by the short-sellers, who trade ahead of it); harassment of targeted executives by thugs and criminals; scurrilous rumor-mongering; so-called “bashers” who are paid by the shorts to flood the Internet with smears and distortions; corporate espionage; government investigations (which are instigated by the shorts, and drain corporate resources, but usually end in no action); and bogus class action lawsuits (usually filed by a corrupt law firm called Milberg Weiss until Milberg’s top partners went to jail for bribing plaintiffs).

A hugely disproportionate number of the companies that have been targeted by this clique of short-sellers have also been victimized by massive levels of phantom stock. Ultimately the SEC will have to say who was behind the illegal naked short selling, and so far it has not prosecuted anyone. However, it has launched an investigation into Dan Loeb, who aside from being named as a leader of the “Fairfax Project,” has featured prominently on Deep Capture for paying a minion to manage a stable of criminals and knaves to smear corporations and whitewash the naked short selling scandal.

The media has dutifully mimicked Loeb’s claim that the SEC is only investigating whether he has “communicated” with other hedge fund managers – and, golly, there can’t be anything wrong with sharing ideas with one’s colleagues. But we’ll wager that Loeb isn’t telling the whole truth, and the SEC is investigating the full range of tactics employed by his crew of short-selling scallywags.

It is par for the course that the media has been kind to Loeb. For years, his clique of short-sellers have been the primary sources of negative information for a small cast of influential, but dishonest journalists. The journalists’ stories were often false, but they — along with the phony financial research, the criminal bashers, the hired thugs, the bogus lawsuits, the dead-end government investigations, and the piles of phantom stock – helped pummel stock prices. When the stock prices fell, the journalists wrote more stories blaming the companies for their falling stock prices.

Not once have any of these journalists written about the shenanigans of their short-selling sources. Not once have the journalists suggested that the short-sellers’ tactics or phantom stock could have contributed to the falling stock prices that were the subjects of so many of their stories. Indeed, the most degenerate of these journalists — CNBC’s Herb Greenberg, former BusinessWeek reporter Gary Weiss, Bethany McLean of Fortune Magazine, Carol Remond of Dow Jones, Joe Nocera of the New York Times – have gone to lengths to convince the American public that short-sellers do not commit crimes.

Perhaps following the lead of their eminent colleagues, or perhaps because they simply don’t have time to clear away the smoke blowing from the hedge fund lobby, a number of other journalists continue to behave as if illegal naked short selling is not a problem. And today, with the emergence of yet more evidence to the contrary — with the criminals backed against the wall, and the search light creeping closer — there was from the complicit journalists nothing but silence.

In July of 2006, Fairfax Financial Holdings (NYSE: FFH) filed a lawsuit alleging stock manipulation on the parts of several hedge funds, contract hedge fund operatives, and John Gwynn, an analyst with stock brokerage Morgan Keegan & Co.

The complaint is very enlightening and detailed in its claims, which can be broadly summarized as follows: certain hedge funds, which stood to profit by scuttling Fairfax’s stock price, illegally conspired and acted to do as much.

More specifically, the complaint says:

As a result of [S.A.C. Capital]’s frequent communications with Morgan Keegan and Gwynn, S.A.C. learns when Gwynn intends to issue reports and what they will say and, indeed, frequently directs Gwynn on when to issue reports and what to say. (p.14)

Also like S .A.C., Exis is a significant client of Morgan Keegan and has substantial influence over Gwynn, with whom Exis also collaborates closely. (p.15)

…[convicted hedge fund operative Spyro Contogouris] orchestrat[ed] negative analyst coverage — particularly through Gwynn… (p.18)

Gwynn collaborated with certain hedge funds, including Enterprise member Trinity Capital, in developing extreme criticisms of Fairfax to support both short-term and long-term shorting strategies dubbed “the Fairfax Project.” Gwynn communicated these developed criticisms and his intention to release a highly negative report containing those criticisms in a series of road show presentations to major hedge funds including, among others S.A.C., Lone Pine, Kynikos, Highfields, Greenlight Capital, and Perry Capital . The hedge funds participating in this discussions understood at their conclusion that Gwynn intended to initiate coverage of Fairfax with an extremely critical report, they understood and contributed to the substance of the criticisms to be included in the report, and they understood that the report’s release would be timed to provide them an opportunity to establish their short positions. These critical Morgan Keegan clients also understood that once they had established a short position in Fairfax, Gwynn would continue to support that position with negative reports until they covered. This understanding was critical because the Fairfax Project contemplated short-term and longer term components, the latter of which involved enormous potential exposure to the Enterprise if the stock price increased substantially. (p.20)

The S.A.C. Defendants, Exis Defendants, Lone Pine Defendants, Rocker Defendants, Third Point Defendants and Trinity Defendants…frequently had communications and coordinated with [John Gwynn] and caused [Gwynn] to disseminate [his] reports to numerous clients, investors, journalists, and media outlets… (p.62)

Reading the complaint in full, it’s clear that Gwynn’s actions played a pivotal role in the execution of the defendant hedge funds’ manipulation efforts.

So clear, in fact, it may have contributed to Gwynn’s decision, six months later, to terminate coverage of Fairfax Financial (a fact bemoaned by Herb Greenberg, not surprisingly one of Gwynn’s biggest fans).

As expected, the suit’s many named defendants responded to the complaint with indignant denials and, in the case of John Gwynn, a countersuit filed in November of 2007, accusing Fairfax of making him “a scapegoat” for the company’s “financial, legal and accounting problems.”

Today, ten months after Gwynn’s countersuit was filed, a spokesman for Morgan Keegan told Bloomberg that Gwynn has been fired “for violation of a firm policy relating to his apparent advance disclosure of his pending research coverage of Fairfax Financial Holdings.”

In other words, Fairfax was correct about what Gwynn was doing.

Given that fact, what are the chances Fairfax was not also correct about who benefited from Gwynn’s corruption: mega hedge funds such as S.A.C. Capital, Third Point Partners, Greenlight Capital, Rocker Partners, et al?

And, supposing that aspect is true, there would appear to be quite a bit of coordination between short-selling hedge funds and shady stock research outfits.

And that sounds suspiciously like the claim Deep Capture reporter Patrick Byrne has been making, ad nauseum, for over three years.

Joe Nocera has a problem.

Nocera’s problem is not what Apple CEO Steve Jobs thinks of him (”Steve Jobs Doesn’t Have Cancer, Calls NYT Columnist a ‘Slime Bucket’“).

No, Joe’s problem is that the naked short selling issue went mainstream this summer. In the last 6 weeks there have been literally hundreds of articles that describe the reality of this crime, its effects on individual companies, the risk it poses to firms at the core of our financial system, the extraordinary steps the SEC has taken to protect them from that risk, the demands of a former SEC Chairman to take draconian steps to rid our markets of the practice, the promises of the current SEC Chairman to do so, and so on and so forth.

The problem this presents for Joe Nocera is not simply that he is on record as maintaining that “most people who understand the issue or have looked into it think it’s pretty bogus” (New York Times, June 10, 2006). Joe’s problem is that he went so far as to discourage other journalists from digging into the subject.

I possess a secretly-recorded tape of a talk Joe Nocera gave two years ago to SABEW, the Society of Business Editors & Writers, wherein Joe preached the virtue of being an anti-investigative journalist. In it, Joe says, “…naked short selling… makes my eyes glaze over…So I asked Patrick Byrne exactly this question…I said, ‘Well why do you…why are you in this naked shorting fight since it’s not really what you are litigating?’ And he said, ‘Well, it’s like supporting education; it’s a good thing to do.’” The other journalists in the audience, that “herd of independent minds,” readily agreed with a knowing yuck-yuck-yuck to an assertion about which they had no knowledge whatsoever. (Consider their yuck-yucking in the context of the fact that I have, in fact, sunk what most would consider a fair bit of change into private scholarships and education reform in the US, and built 19 schools across Africa and Central Asia that educate about 6,000 kids).

New York Times’ Joe Nocera continues, “So it’s hard to take [Patrick] seriously on that issue when you hear him say something like that. Having said that, you know, I think it probably would be worth somebody’s time to say, Is there something to naked shorting or not? What is naked shorting? What does it mean? What is the problem here? But, you know, life’s too short. I don’t want to do it.”

So Joe’s problem is not that he is on record as ignoring (though he did that too), not just derisively dismissing (though he did that as well), but discouraging journalists from investigating something that has turned into a crisis for our financial system. Joe dismissed it as “pretty bogus”, with no argument, simply asking his audience to rely upon his authority instead. He turned out to be wrong. One might just put it down to honest error, but philosophically Joe keeps close company with various hedge funds whose names turn up wherever naked short selling becomes an issue, and he has had (as you will see) a curious relationship with Gary Weiss (whose involvement in a cover-up on behalf of the DTCC has been amply demonstrated within DeepCapture).

I believe this constellation of facts is meaningful,  that Joe Nocera took part in the cover-up of a financial scandal, and the New York Times was used in that cover-up.

I’m going to share some email correspondence with Joe Nocera, correspondence which will, I believe, shed light on this bold claim. As you will see, I have given Joe ample opportunity to request that this be off-the-record, or clarify his position one way or another in that regard, and he has failed to do so. Thus freed of any duty to keep them private, I publish them now, organized into flurries of back-and-forths, with minimal editorial explanation in bold italic font.

========================================================================================

Here is an exchange from one year ago that establishes the tone of my communications with Joe Nocera. Note that his replies are oblique, if not unresponsive altogether.

========================================================================================

On 9/12/07, Patrick Byrne wrote:

Dear Mr. Nocera,

I’d like to ask for your comment on Dr. Angel’s Reg SHO comment letter.

I’d prefer your comment be on-the-record, but let me know and I will respect your decision either way.

Sincerely,

Patrick Byrne

From: Joe Nocera [mailto:joe.nocera@gmail.com]
Sent: Wednesday, September 12, 2007 10:34 AM
To: Patrick Byrne
Subject: Re: Jim Angel’s Reg SHO Comment Letter

If I come back at Reg SHO, I’ll do it in my column. but thanks for asking.

–On 9/12/07, Patrick Byrne wrote:

Thanks. May I safely assume that your response was on-the-record?

From: Joe Nocera [mailto:joe.nocera@gmail.com]
Sent: Wednesday, September 12, 2007 4:44 PM
To: Patrick Byrne
Subject: Re: Jim Angel’s Reg SHO Comment Letter

i’m in the middle of a magazine story right now, and simply don’t have time to dive into this issue. if you want to use that fact to blast me, etc etc., not much I can do about it.

On 9/12/07, Patrick Byrne wrote:

Not interested in “blasting” anyone, Joe: I am just a seeker of truth.

You would have saved time with a simple “yes” or “no” but, that said, best of luck on your magazine story.

Patrick

========================================================================================

In anticipation of wider readership of Mark Mitchell’s exposé of naked short selling on Wall Street, I contacted Joe Nocera for comment on one of Mitchell’s allegations. Including New York Times designated “Readers’ Representative” Clark Hoyt on the email, I wrote:

========================================================================================

From: Patrick Byrne
Sent: Sunday, June 29, 2008 2:52 PM
To: Joe Nocera
Cc: public@nytimes.com
Subject: Comment requested

Dear Joe,

Behold a line from Mark Mitchell’s story on Deep Capture quoting an email from Mr. Gary Weiss.

“Deep Capture has come to possess a great number of emails between various journalists and miscreants. In one, the former BusinessWeek reporter brags to the crooked mortgage broker of influencing the contents of Nocera’s ‘Campaign of Menace’ article in The New York Times. ‘This is totally my doing,’ Gary writes. ‘Yuk. Yuk. Yuk.’ “

I am writing for any comment from you regarding Mr. Weiss’ claim, or, if you wish, regarding the more general claims of Mitchell’s piece, before its more widespread publication.

If you are unwilling to comment, please let me know that too.

Warm personal regards,

Patrick M. Byrne
CEO, Overstock.com & Reporter, DeepCapture.com

PS I am new to this reporting gig: to be fair, how long does one normally give the subject of a piece to comment before publishing? In the past, you have emailed me in the afternoon hours before deadline and, since I was not on my computer at that precise moment, I missed opportunity to comment on something you wrote about me. I suspect that such treatment was unusual. So please let me know.

From: Joe Nocera [mailto:joe.nocera@gmail.com]
Sent: Sunday, June 29, 2008 3:13 PM
To: Patrick Byrne
Cc: public@nytimes.com
Subject: Re: Comment requested

Dear Patrick,

Gary Weiss can write whatever he wants in emails, just as you can write whatever you want in the various forums available to you. Just because he says something in an email doesn’t make it true, just as your various faux-polite rants aren’t true just becuase you make a claim of one sort or another. I don’t know how you find the time to root out us corrupt journalists in addition to the corrupt government officials and the corrupt hedge fund managers! Most CEOs I know believe that running their companies is a full-time job. Anyway, it is always a pleasure corresponding with you, and I look forward to reading your “more-in­ sorrow-than-in-anger” posting about how I didn’t answer your question the way you had hoped.

All best,

Joe Nocera

========================================================================================

The churlishness of Joe’s reply (”faux-polite”?) took me aback, and Joe was wrong about something (he had answered the question just as I’d hoped, though we professionals are not swayed by soft concerns). But what struck me most odd about Joe’s reply was that he had constructed it in a way that he did not have to answer the question: If I say “Gary asserts X” and Joe says, “Gary can say anything he wants”, then Joe is not really saying whether or not X is true. So I decided to dig a bit.

========================================================================================

From: Patrick Byrne
Sent: Sunday, June 29, 2008 3:19 PM
To: Joe Nocera
Cc: public@nytimes.com
Subject: RE: Comment requested

Dear Joe,

You write:

“Just because [Gary Weiss] says something in an email doesn’t make it true”.

Are you claiming that it is false?

Again, with warmest personal regards,

Patrick

–Original Message–
From: Joe Nocera [mailto:joe.nocera@gmail.com]
Sent: Sunday, June 29, 2008 3:21 PM
To: Patrick Byrne
Subject: Re: Comment requested

You are such a dogged reporter! You have a future in this business.

Yes, my answer is that his claim is false.

From: Patrick Byrne
Sent: Sunday, June 29, 2008 3:26 PM
To: Joe Nocera
Subject: RE: Comment requested

Dear Joe,

Thank you so much for the courtesy of your response.

Now the follow-ons:

1) Did you claim that you did not communicate with Mr. Weiss about the subject of that piece before its publication?

2) Do you have any explanation as to why Mr. Weiss would be “Yuck yuck yuck[ing]” about its appearance being “totally [his] doing”?

I look forward to your promt reply. Until then, I remain,

Yours truly,

Patrick M. Byrne
Reporter, DeepCapture.com

From: Joe Nocera [mailto:joe.nocera@gmail.com]
Sent: Sunday, June 29, 2008 3:30 PM
To: Patrick Byrne
Subject: Re: Comment requested

Patrick, as you must surely know, since you’re a reporter and all, I just can’t talk about who I talk to when i write my column. As for question number 2, I have truly no idea.

Good luck.

Joe Nocera

========================================================================================

So to relate this to current events and findings documented within Deep Capture: there is a financial crime called “naked short selling”, against which this summer the SEC took emergency action to prevent the center of our financial system from Chernobyling. For several years evidence had developed regarding the existence of this problem and its locus in a corporation called, “DTCC”. Since January 2006 pseudo-reporter Gary Weiss has worked full-time to downplay, deny, and deride that evidence, but has been exposed doing so from within the DTCC (that is, the corporation at the heart of the scandal). In 2006 Joe Nocera wrote a column that hewed tightly to Gary’s (now discredited) party line regarding this crime, and Gary Weiss yuck-yuck-yucked to a friend about Joe’s column being “totally my doing”.

If only there were a pattern….

And the best explanation for this constellation of facts that Joe Nocera can muster is, “I have truly no idea.”

Clever answer, that, capable of throwing all but the most dogged reporters off the scent.

========================================================================================

From: joe.nocera@gmail.com [mailto:joe.nocera@gmail.com]
On Behalf Of Joe Nocera
Sent: Wednesday, July 16, 2008 1:31 PM
To: Patrick Byrne
Subject: that Weiss email

Dear Patrick, Did your or Mr. Miller (sic) ever post anything about Gary Weiss’ email regarding me? The one you asked me about a few weeks ago? If you could send me the URL I would appreciate it. Also, could you please tell me how you got a hold of it?

Best,

Joe Nocera

From: joe.nocera@gmail.com [mailto:joe.nocera@gmail.com]
On Behalf Of Joe Nocera
Sent: Wednesday, July 16, 2008 10:22 PM
To: Patrick Byrne
Subject: that gary weiss email

Patrick, I spent some time today at Deep Capture and Antisocial Media looking to see if you had posted anything about the email you had asked me about from Gary Weiss. Never did find anything. I’d like to reiterate my request that if you’ve posted could you point me to the URL? I’d be grateful. Also, have been to Deep Capture, of course, I know now how you got the emails, so no need to answer that. Thanks.

all best,

Joe Nocera

From: Patrick Byrne
Sent: Wednesday, July 16, 2008 10:26 PM
To: Joe Nocera
Subject: RE: that Weiss email

Dear Joe,

As you have apparently learned, I obtained a computer containing the correspondence (i.e., 8,000 emails) of a number of New York financial journalists, hedge funds, paid bashers, convicted stock swindlers, lawyers, and even a private eye or two. Interesting reading. We call that computer The Enigma (after the WWII story), and I personally take full responsibility for having come into its possession (though credit for the investigative journalism that led to that moment is all Judd Bagley’s). And the answer to the question you are asking yourself is: yes.

The place to start reading is Mark Mitchell’s piece here. Just search for your name (skip the time it appears associated with a recording we made of you, unless that interests you too). Then if you read around in Deep Capture you will see that we have started to dribble out the content of these emails in blogs that elucidate their full meaning.

How did we get this material? Within DeepCapture you will see that we have recently been revealing more about the circumstances by which I obtained these emails. Beyond what you see there, however…You know that as a journalist I cannot reveal my sources or methods.

Best regards,

Patrick

From: joe.nocera@gmail.com [mailto:joe.nocera@gmail.com]
On Behalf Of JoeNocera
Sent: Thursday, July 17, 2008 5:53 AM
To: Patrick Byrne
Subject: Re: that gary weiss email

Patrick- here’s another question- do you think there is anything wrong with mining Mr. Schneider’s hard drive to extract personal emails and other personal information?

all best,

Joe Nocera

========================================================================================

This is where it started to get interesting: Joe was now asking a vaguely-worded question (which “Mr. Schneider”?) based on a false assumption (that information I had extracted from a corporate computer, given to me by the owner of that corporation, was in fact someone else’s “personal information”). In any case, I thought it was time to press Joe about his early “I have truly no idea” response, simply by sharing Gary’s email about Joe, with Joe.

========================================================================================

From: Patrick Byrne
Sent: Wednesday, July 16, 2008 10:46 PM
To: Joe Nocera
Subject: RE: that gary weiss email

Dear Joe,

It seems we are both working late. So as long as you are up…

I am attaching an email that Gary Weiss wrote to a crony.

Two weeks ago I told you, “I am writing for any comment from you regarding Mr. Weiss’ claim, or, if you wish, regarding the more general claims of Mitchell’s piece, before its more widespread publication.”

To this, your response was: “Just because [Gary Weiss] says something in an email doesn’t make it true”.

I then asked, “Are you claiming that it is false?”

To which you responded, “Yes, my answer is that his claim is false.”

I then asked, “Do you have any explanation as to why Mr. Weiss would be ‘Yuck yuckyuck[ing]‘ about its appearance being ‘totally [his] doing’?

To which you responded, “I have truly no idea.”

Would you like to revisit any of these answers?

Fond regards always,

Patrick

From: joe.nocera@gmail.com [mailto:joe.nocera@gmail.com]
On Behalf Of JoeNocera
Sent: Thursday, July 17, 2008 6:00 AM
To: Patrick Byrne
Subject: Re: that Weiss email

Patrick, thanks for your response.. I might be writing about this next week; if I decide to do so, I’ll be in touch on Wednesday. I know you prefer email, but I think a phone conversation might be in order, if you’re willing. The fluidity of a conversation works, with the ability to ask new questions based on your answers, better for me than a series of emails etc. I did ask you a question in another email this a.m. about the ethics of mining this computer for its emails-something, frankly, no journalist would do. I hope that you will give me the courtesy of a response.

best,

Joe

From: Patrick Byrne
Sent: Thursday, July 17, 2008 9:05 AM
To: Joe Nocera
Subject: RE: that gary weiss email

Dear Joe,

Does the “you” in your question refer to “Patrick Byrne” or “anyone on the Deep Capture team”?

Regards,

Patrick

PS In the future, I think that all you have to do is go to DeepCapture and search for “Nocera” to find anything about you.

From: Patrick Byrne
Sent: Thursday, July 17, 2008 9:29 AM
To: Joe Nocera
Cc: nytnews@nytimes.com; public@nytimes.com
Subject: RE: that gary weiss email

Dear Joe,

Given our history, I respectfully request more precision in your questions. You write for the New York Times, and that is something of which you should be capable.

In this case, as you know, there are two Mr. Schneider’s at issue. The owner of the hard drive, Roger Schneider, gave it to me with instructions to mine it and turn my findings over to the authorities. I think that my doing so was, therefore, not unethical, but good citizenship.

Given your history of obfuscating such salient details with a consistency that seems determined, I thought it best to cc: several of your editors on this conversation, purely as a prophylactic measure. I do not know Mr. Okrent’s email, but would be obliged if you would supply it.

Very respectfully,

Patrick

From: joe.nocera@gmail.com [mailto:joe.nocera@gmail.com]
On Behalf Of Joe Nocera
Sent: Thursday, July 17, 2008 9:30 AM
To: Patrick Byrne
Subject: Re: that gary weiss email

really, I’m asking whether you, Patrick Byrne, think there is anything wrong with taking a computer and mining it for Floyd’s personal emails? The computer, as i understand it, also contains personal mortgage data for customers of XXXXX, so there is a data theft issue here. So I would also like to know whether you view the possession of this computer, which contains private data of mortgage customers, a form of data theft? Thanks for your consideration.

Joe Nocera

From: joe.nocera@gmail.com [mailto:joe.nocera@gmail.com]
On Behalf OfJoe Nocera
Sent: Thursday, July 17, 2008 10:28 AM
To: Patrick ByrneCc: nytnews@nytimes.com; public@nytimes.com; Lawrence Ingrassia;Bruce Headlam
Subject: Re: that gary weiss email

Dear Patrick,

As you know, I am perfectly happy to have you send our exchanges to anyone you want, including my editors. My boss is Larry Ingrassia (XXXXX@nytimes.com), and my direct editor is Bruce Headlam (XXXXX@nytimes.com.) I have attached this series of emails to them so that you don’t have to do so. Also the public editor is currently Clark Hoyt. However, sending an email to him at public@nytimes.com will get this exchange to him.

For the record I disagree that I have distorted any of our conversations or other exchanges. And yes, I understand that the computer belonged to Roger Schneider. However, the material on the computer belonged to two entities, it seems to me: Floyd Schneider, whose private emails you have now exhumed, and XXXXX, which has private data about their mortgage customers and potential mortgage customers. You have given me an explanation why you believe exhuming Floyd Schneider’s emails is not data theft. However, you have not explained how being in possession of this private mortgage data does not constitute data theft.

Thanks for your consideration.

all best,

Joe Nocera

From: Patrick Byrne
Sent: Thursday, July 17, 2008 10:45 AM
To: Joe Nocera
Cc: nytnews@nytimes.com; public@nytimes.com;bizday@nytimes.com; XXXXX; XXX
Subject: RE: that gary weiss email

Dear Joe,

Again, simply as a prophylactic measure of unknown worth, I am cc:’ing some charged with providing adult supervision at your fine newspaper in my response.

The facts regarding how we can into possession of 8,000 emails of traffic among various convicted stock swindlers, paid message board bashers, hedge fund patrons, and financial journalists is fully and accurately described The Enigma.

For examples of the kinds of information we have pulled off of it, you might also familiarize yourself with these posts:

• The Final Word on Gary Weiss and Wikipedia

• Gary Weiss and his Yahoo Gnomes

• Gary Weiss doesn’t like Liz Moyer

• Gary Weiss, Usenet Troll

• Gary Weiss: his DTCC Ties and Lies

For just one, small instance of how this material concerns you, please see “The Story of Deep Capture” by Mark Mitchell, and search for the word, “yuk”. There is other material on The Enigma that very directly concerns you. Thus, in any sane world you would not be allowed to use the New York Times to cover your tracks, but I’m not making any bets on that.

I have heard from the CEO of XXXXX regarding the wildly false claims you made to him regarding XXXXX customer data. Therefore, I will clear up here your (once again, seemingly deliberate) misapprehensions:

• The computer in question belonged to Roger Schneider, who owns a small home mortgage operation in New Jersey, and who employed his brother, Floyd Schneider, until he caught Floyd involved in dubious financial transactions.

• We did not contact Roger. Roger contacted us.

• Roger deleted all XXXXX customer information from the computer before turning it over to me, so that it just contained Floyd’s emails. I instructed Judd that he was to verify that it contained no customer information as a first step (and quarantine any if it did): Judd verified that it contained no such information.

• Roger gave (not “sold”) me this computer he owned, with the request that I mine it for evidence of illegal activity and turn it over to the authorities.

• DeepCapture quickly culled through the material and provided the results of that first pass to XXXX with a complete briefing on the origins of the material.

I think these were the laudable acts of a concerned citizen. If you believe there is something wrong with these acts (or simply if, given the fact that naked short selling has been implicated in the current systemic crisis in our financial system, precisely as I predicted and you did everything possible to obfuscate, you regret such statements you have made as this), then you ought to rethink the difference between being an investigative journalist, and an anti-investigative journalist.

Most respectfully,

Patrick M. Byrne

From: joe.nocera@gmail.com [mailto:joe.nocera@gmail.com]
OnBehalf Of Joe Nocera
Sent: Thursday, July 17, 2008 11:01 AM
To: Patrick Byrne
Cc: nytnews@nytimes.com; public@nytimes.com;bizday@nytimes.com; XXXXX; XXX
Subject: Re: that gary weiss email

Patrick- thanks for your response. Just so you understand, there was nothing “deliberate” about my “misapprehensions.” I had heard something that I was trying to track down. That is why I called Paul at XXXXX, and why I emailed you. You have now given me your answer. You will note that nothing has been published. But to find out things, I journalist has to ask questions and try to get answers. That is how it works. I will try to call you next week.

all best,

Joe Nocera

From: Patrick Byrne
Sent: Thursday, July 17, 2008 11:17 AM
To: Joe Nocera Cc: nytnews@nytimes.com; public@nytimes.com;Lawrence Ingrassia; Bruce Headlam; XXXXX; XXXXX
Subject: RE: that gary weiss email

Dear Joe,

Thank you for sending me the names and emails of those who supervise you: given that you have previously dropped cc:’s from our traffic, I was unsure how squeamish you were about their inclusion in our communication.

For the benefit of Messieurs Ingrassia and Headlam I am resending my email of moments ago, responding to your false allegation about private mortgage data. I am also cc:ing the CEO of XXXXX, and Roger himself.

In addition, I have five questions for you, although any of your colleagues are welcome to respond:

1) In one email to Floyd Schneider (enclosed), Gary Weiss takes credit for one of Joe’s columns, saying “This is totally my doing! Yuk yuk yuk.” Do you have any explanation as to why Mr. Weiss would do this?

2) In another email (not enclosed) Weiss makes it clear that he is familiar with the substance, sentiment and timing of at least one of your Overstock.com-focused columns before it is published. How might Weiss have come to posses this information?

3) Are you (or anyone at the New York times) at all concerned that someone with foreknowledge of a column critical of a public company might use it to trade ahead of its publication?

4) What does the Times’ code of ethics say with respect to this kind of situation?

5) Given the national media’s breakthrough understanding of “naked short selling” being implicating in our current systemic crisis, what are your feelings now about this 50 second statement you made at a SABEW conference?

The following question is for either Mr. Ingrassia or Mr. Headlam:

Some time ago I was told by an employee of the New York Times, “Patrick, I do not want to get into the newsroom politics too much, but I want to tell you that the word we use around here regarding Nocera’s writing on you is ‘surreal’. We say that it is ‘surreal’ that the New YorkTimes has published what Joe Nocera has written about you.”

Please comment.

Joe, Earlier today you suggested that you would prefer a telephone conversation to email. When would you like to have that call?

Most respectfully,

Patrick

From: joe.nocera@gmail.com [mailto:joe.nocera@gmail.com]
On Behalf Of JoeNocera
Sent: Thursday, July 17, 2008 11:31 AM
To: Patrick Byrne
Cc: nytnews@nytimes.com; public@nytimes.com;Lawrence Ingrassia; Bruce Headlam; Paul Lamparillo; XXX
Subject: Re: that gary weiss email

Dear Patrick, everybody drops CC:s from time to time, by hitting reply instead of reply all by mistake. very few people would view that action as darkly as you do. as for your questions, as I have said I have no idea why Mr. Weiss would make those claims, nor has he ever had any “inside information” about any of my columns. I don’t give out such information.

all best,

Joe Nocera

From: Patrick Byrne
Sent: Thursday, July 17, 2008 1:57 PM
To: Joe Nocera
Cc: nytnews@nytimes.com;public@nytimes.com; Lawrence Ingrassia; Bruce Headlam
Subject: RE: that gary weiss email

Dear Joe,

Boundless is my relief at your assurance that the fine standards of our “newspaper of record” remain upheld. One question thus remains:

Given the national media’s breakthrough understanding of “naked short selling” being implicating in our current systemic crisis, what are your feelings now about this 50 second statement you made at a SABEW conference?

Warmest regards,

Patrick

From: joe.nocera@gmail.com[mailto:joe.nocera@gmail.com]
On BehalfOf Joe Nocera
Sent: Thursday, July 17, 2008 2:05 PM
To: Patrick Byrne
Subject: Re: that gary weiss email

They haven’t changed.

From: joe.nocera@gmail.com[mailto:joe.nocera@gmail.com]
On BehalfOf Joe Nocera
Sent: Thursday, July 17, 2008 2:06 PM
To: Patrick ByrneCc: nytnews@nytimes.com;public@nytimes.com; Lawrence Ingrassia; Bruce Headlam
Subject: Re: that gary weiss email

just realized that I hadn’t send previous email to all the cc:s. I wrote; “They haven’t changed.”

========================================================================================

OK…. So concerning an issue that has been implicated in the near-collapse of our financial system, and drawn furious demands for reform from Wall Street bankers, The US Chamber of Commerce, the American Bankers Association, dozens of Senators and Congressional representatives, and a former and the sitting SEC Chairmen, Joe Nocera stands by his statement from two years ago discouraging other journalists from investigating this issue. His stands by his statement claim that “most people who understand the issue or have looked into it think it’s pretty bogus.”

This, dear reader, is why I say that Joe Nocera is an anti-investigative journalist.

Surely those charged with providing supervision to Joe might be troubled by his counseling journalists not to investigate a crime that has since been implicated in the most severe financial crisis of our lifetime, I thought. So I decided to write them and see. Unfortunately, I discovered that Joe Nocera is not the only New York Times employee capable of oblique response.

========================================================================================

From: Patrick Byrne [mailto:PByrne@overstock.com]
Sent: Thursday, July 17, 2008 4:04 PM
To: Lawrence Ingrassia; Bruce HeadlamCc: nytnews@nytimes.com; public@nytimes.com
Subject: request for comment
Importance: High

Dear Messieurs Ingrassia and Headlam:

1) Given the national media’s breakthrough understanding of “naked short selling”being implicating in our current systemic crisis, what are your feelings now about this 50 second statement made by Mr. Nocera at a SABEW conference two years ago?

2) Some months ago a widely-known and well-respected journalist at the New York Times, “Patrick, I do not want to get into the newsroom politics too much, but I want to tell you that the word we use around here regarding Nocera’s writing on you is ‘surreal’. We say that it is ‘surreal’ that the New York Times has published what Joe Nocera has written about you.” Do you have any comment on this?

With true respect,

Patrick M. Byrne

From: Lawrence Ingrassia [mailto:ingrassia@nytimes.com]
Sent: Thursday, July 17, 2008 2:24 PM
To: Patrick Byrne
Cc: nytnews@nytimes.com; public@nytimes.com; ‘Bruce Headlam’
Subject: RE: request for comment

Mr. Byrne,

Regarding your first point, Joe Nocera is a columnist. As a columnist, he is allowed a point of view.

Regarding your second point, Mr. Nocera is a very widely-known and very well-respected columnist. Moreover, he is an award-winning columnist, having won both a Loeb Award for commentary and a Sabew best columnist award this year, and having been a finalist for a Pulitzer Price for commentary in 2007. The journalistic honors awarded for his work speak volumes.

Yours sincerely,

Larry Ingrassia

Business editor

The New York Times

========================================================================================

When a nation’s central bank has to open its windows to recapitalize its banking sector while regulators construct an emergency levee around the trading in 19 firms at the heart of its financial system, I think it is safe to call that “a crisis”. Much blame for this crisis can be laid at the doorstep of our indolent and incurious New York financial press, the output of which is typified by Mr. Ingrassia’s response. Regarding his own columnist deriding, and discouraging other journalists from investigating, a crime that has since been implicated in the deepest financial crisis of our lifetime, the New York Times business editor can muster no more defense than, “Joe Nocera is a columnist. As a columnist, he is allowed a point of view.”

Actually, Mr. Ingrassia, Joe Nocera is “allowed” a point of view whether or not he is a columnist. The question is whether Joe Nocera will be “allowed” to use the New York Times to shill for crooked hedge funds by spewing apologetics for a crime that may have come close to toppling the US financial system, or whether the editorial staff of the New York Times is able to provide adult supervision.

The free press are the white blood cells of the body politic. When they fail, that body’s other systems remain in equilibrium only so long. That principle is well-illustrated by this situation.

Mr. Ingrassia says one thing with which I agree. “The journalistic honors awarded for [Nocera's] work speak volumes.” Those awards were all given to Joe by colleagues in the industry of financial journalism. I agree, this does in fact “speak volumes.” And that such awards would be made to an anti-investigative journalist like Joe Nocera (listen to him again) goes along way towards explaining the predicament in which our nation currently finds itself.