Journalists who write about short selling hedge funds fall into three categories.

The first category is comprised of a very small number of journalists who have deliberately whitewashed the dubious activities of their short selling sources. These journalists–such as Herb Greenberg (whose stories for MarketWatch.com invariably served the interests of the same short sellers who are now paying Herb’s salary), and former BusinessWeek reporter Gary Weiss (who works with a cast of convicted criminals and flimflammers to smear the reputations of people who are critical of short selling crimes)–are, at some level, corrupt.

The second, larger category is comprised of journalists who gorge on the junk food fed to them by the hedge fund lobby, subsequently farting out the predictable fog – “short sellers are vital to the markets;” “short sellers are vital media sources;” “short sellers were right about company X because company X is now bankrupt.” To which you say, yeah, but some of those short sellers commit crimes that destroy companies – and the journalists say, yeah, that might be, but it’s hard to prove a crime, deadlines loom, and sloth has its appeal, so “fart, fart, fart.”

The third category is comprised of the small but growing number of journalists who have actually spent some time chewing on the data and the evidence – and are now digesting this nourishing roughage into something a bit more solid – something like stories that show that short selling shenanigans just might have contributed to the near total collapse of the American financial system.

As evidence that the latter sort of journalists do, indeed, exist, consider that no less than five Wall Street Journal reporters spent several weeks working together on an investigative story about how short selling might have helped fuel the panic that nearly took down Morgan Stanley in September.

The result, published yesterday, revealed that:

• Hedge fund managers Dan Loeb and Israel Englander pulled their money out of Morgan after taking large short positions in the company. Jim Chanos, head of the short seller lobby, also yanked his money, though he claims not to have been short Morgan. (The unstated suggestion is that the shorts might have worked together – simultaneously pulling their billions in order to create the illusion of a run on the bank.)

• At the same time that the hedge funds were yanking their money and taking big short positions, somebody bombarded the market with false rumors about Morgan losing access to credit. New York Attorney General Andrew Cuomo and the Securities and Exchange Commission are looking into whether short sellers were responsible for these rumors.

• While the false rumors circulated, the price of Morgan Stanley credit default swaps soared. The New York AG and the SEC are examining “whether traders bought swaps at high prices to spark fear about Morgan’s stability in order to profit on other trading positions [short sales], and whether trading involved bogus price quotes and sham trades.”

• This “pattern of trading, which previously had battered securities firms Bear Stearns Cos. and Lehman, now is dogging Citigroup, whose stock fell 60% last week to a 16-year low.” (The unstated suggestion, contrary to what the Journal used to tell us all the time, is that it is not just “bad management” that causes stock prices to lose half their value in a few days.)

The Journal might have done one better by noting that Loeb, Englander, and Chanos are part of a tight clique of hedge fund managers who tend to attack the same companies.

The Journal might also have pointed out that when these hedge fund managers attack, they often “share ideas” (ie., spout the same false information and distorted analysis about their victim companies, sometimes anonymously on Internet message boards).

And it would have been worth noting that the companies targeted by these hedge fund managers are invariably victimized by naked short selling. That is, whenever these particular hedge funds are swarming, somebody is selling a lot of stock that they do not possess, and therefore failing to deliver the stock on time.

The SEC’s “failure to deliver” data for September will become public in a couple of weeks. If the data shows, as I suspect it will, that Morgan Stanley was targeted by illegal naked short selling, then maybe The Wall Street Journal will do a follow-up report.

Before that, The Journal’s reporters could take a look at the data through June, which shows quite clearly that in addition to the “pattern of trading” cited in yesterday’s story, Bear Stearns was buried under waves of naked short selling, beginning in January. On the day that CNBC’s David Faber reported the false news (fed to him by a hedge fund “I have known for twenty years”) that Goldman Sachs had cut off Bear’s access to credit, more than a million shares of Bear Stearns were sold naked, failing to be delivered within the allotted three days. Most of those shares – and another 10 million Bear Stearns shares sold short in March – have, to this day, never been delivered.

Then there is the data that shows that, market wide, “failures to deliver” doubled between 2007 and 2008, and peaked at 2 billion shares at the end of June – just before the SEC issued its July 15 “emergency order” protecting 19 big financial institutions from naked short selling.

While the “emergency order” was in place, stock prices increased dramatically. Within weeks after the “emergency order” was lifted, a number of those 19 protected companies – including Lehman Brothers, Merrill Lynch, Morgan Stanley, Citigroup, Fannie Mae, and Freddie Mac – saw their stocks plunge to crisis levels, and were then vaporized, nationalized, or bailed out.

The data through June shows that nearly all of those companies had been hit with massive levels of naked short selling, with between one million and 12 million shares failing to deliver in multiple spurts of several days. Washington Mutual, IndyMac, and a few dozen other now-defunct financial companies were clobbered with even higher levels of fails — day after day for weeks on end. Many non-financial companies have been hit even harder.

In fact, the available data understates the problem. There could be ten, 100, or many more times as many failures to deliver, but we cannot know for sure because that black-box Wall Street outfit called the Depository Trust and Clearing Corporation refuses to release more complete data. It also refuses to reveal which criminal hedge funds are engaged in naked short selling.

Meanwhile, the DTTC vehemently denies that naked short selling is a problem and attacks journalists, critics, and former DTTC employees who say otherwise – all part of a disinformation campaign orchestrated with help from the corrupt former BusinessWeek reporter Gary Weiss and his criminal accomplices, some of whom are paid by Dan Loeb, the hedge fund manager who features in yesterday’s Journal story.

Gary has gone so far as to hijack Wikipedia in cahoots with a Wikipedia administrator and former MI6 agent named Linda Mack. Anybody is supposed to be able to edit the online encyclopedia, but until recently only Gary and Linda Mack could touch the entry on “naked short selling” (which of course said there is no such crime). Gary flat out denies working with the DTCC and says that if somebody saw him go into the DTTC’s office, it was to “use an ATM machine.” He also continues to flat-out deny that he has ever edited Wikipedia, even though he has been exposed by The Register, a respected British publication.

After The Wall Street Journal figures out why the DTTC is protecting criminals, it could investigate why the SEC has never prosecuted a hedge fund for naked short selling, and why the Wall Street cronies who run the commission quashed at least two major investigations into suspected short selling crimes.

One of those investigations (targeting research firm Gradient Analytics, but meant to be the beginning of larger inquiry into the activities of Gradient’s short selling clients, was shut down under pressure from the aforementioned corrupt journalists, several of whom (Herb Greenberg, Jim Cramer, and Carol Remond of Dow Jones Newswires) had received government subpoenas because of their unusually close ties to Gradient and the aforementioned clique of short sellers.

Another investigation (into suspected naked short selling that SEC whistleblower Gary Aguirre described in a letter to the U.S. Congress as having the potential to “seriously injure the financial markets”) was shut down under pressure from Morgan Stanley CEO John Mack, who apparently had “juice” at the SEC. (For details see the U.S. Senate’s 700 page report on the matter. When the Senate refers to “market manipulation,” it is describing naked short selling.)

In yesterday’s story, The Journal notes that “sales of credit-default swaps were a profit gold mine for Wall Street. But, ironically, during those tumultuous few days in mid-September, the swaps market turned on Morgan Stanley like a financial Frankenstein.”

The Journal should have noted that naked short selling, too, was a gold mine for Morgan Stanley, and that given Mack’s role in shutting down the SEC investigation, it is kind of ironic that the Morgan CEO later found himself complaining to the SEC that short sellers had illegally manipulated his stock to single digits. Indeed, this was a stunning admission that a crime long denied by Wall Street does, in fact, occur.

The Journal could also investigate why the aforementioned corrupt journalists smeared Gary Aguirre, circulating the story (completely false, according to the U.S. Senate and the SEC inspector general, and all available evidence) that the SEC whistleblower had been fired for poor performance. There is also the question as to why these journalists, most of whom have yet to publish a story that was not sourced from the aforementioned clique of hedge funds, went to such lengths to smear other critics of naked short selling – everybody from Deep Capture reporter Patrick Byrne to the blogger who calls himself the Easter Bunny. .

The Journal might also be interested to know that one of those short selling hedge funds, Kingsford Capital (managed by corrupt journalist Herb Greenberg’s former co-editor at TheStreet.com) announced that it would begin paying my salary at the Columbia Journalism Review (where I was then an editor), just before CJR was going to publish a story about naked short sellers (including Kingsford Capital) and captured journalists (including Herb). Indeed, three of the four journalists who have begun work on major stories about naked short selling have ended up shelving or watering down their stories, not long before receiving funding or salaries from this same clique of hedge funds (more on this in a coming dispatch).

Perhaps a shifty hedge fund will offer jobs to the Journal’s hard-working reporters, too. Either that, or they will get smeared as “conspiracy theorists” or “knuckleheads who don’t understand markets and were fired from their previous jobs.” Maybe the hard-working reporters will give up.

Or maybe they’ll keep chewing on the facts and publish a story about how captured regulators, corrupt journalists, a colorful cast of convicted criminals, the black box DTTC, and the aforementioned clique of hedge funds all sought to cover-up a crime that is now implicated in the greatest market cataclysm since 1929.

Now, that would be some good shit.

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Tipsters, crusaders, and thinkers — feel free to contact me at mitch0033@gmail.com. Same goes for journalists wishing to obtain data and evidence — free of charge, of course.

History was made last night.

At 9:30 pm, CNBC broadcasted these words: “naked short selling is what’s causing a lot of the problems in the market.”

The words came from former SEC Chairman Harvey Pitt, who added that “there’s a very simple solution…if you want to sell a stock short, you have to have a legally enforceable rule to produce that stock on settlement day. That’s all it takes.”

Force hedge funds to actually deliver the shares that they sell. Force them to actually purchase or borrow real stock before they sell it. If market manipulators sell what they do not possess, put them in jail.

Yes, that’s “all it takes.” It really is that simple.

But until last night, we’d never heard it on CNBC.

If the SEC completely stops naked short selling, then demand will more closely reflect the supply of real stock. Prices could get a boost, as they did last summer, when the SEC issued an “emergency order” temporarily cracking down on naked short selling of stock in 19 big financial companies. And the massacres of public companies would stop.

Of course, it might be too late. A sinking economy can’t revive a sinking market – no matter who threw us down the well. The criminals should have been stopped before they put us in here.

It says something awful about the state of the nation that we began having a half-conversation about this issue only after CEOs of big Wall Street banks – the very banks whose prime brokerages happily profited from the naked short selling of their hedge fund clients – found themselves looking down the gun barrels of their former partners in crime.

A few quivering Mafiosi pee in their pants, and now we wonder whether one Mob boss should be protected from another Mob boss. Not a word about the hundreds of smaller, innocent companies that have been brutalized by these goons.

How sad that when CNBC airs a simple truth – “naked short selling is what’s causing a lot of the problems in the market” – we have to call it “history.” How sad that this “history” took place at 9:30 pm, when nobody was watching. How sad that it took place only because the CEO of Citigroup has been begging for an ill-advised, outright ban on short selling.

Sure, Jim Cramer has been ranting about “diabolical” naked short sellers on “Mad Money.” Tonight he said (with some justification) that naked short selling was destroying capitalism. But never on CNBC proper. Never in the segments that CNBC portrays as “news” — as opposed to the loony rantings of a bald sociopath.

I am reminded of Russia, where the television news stations are tools of the government-mafia oligarchy, but make sure to air the occasional late-night interview with some dissident – carefully selected for his squirrely appearance and checkered background. The illusion of “balance” makes the propaganda all the more insidious.

America is not yet Russia. But with its ransacked financial system, its billionaire cronies, its captured regulators, and media like CNBC, our nation is not quite “America” either.

By some quirk of human psychology, it remains difficult for a certain segment of the population to accept the “deep capture” thesis – the notion that our nation’s regulatory bodies and parts of our media have been “captured” (at times, outright “corrupted”) by a powerful, moneyed elite. “No way,” we are told. “Maybe in Nigeria. Europe, sure. But to think it happens in America? That’s a conspiracy theory.”

Yeah? Well, read this:

That is an email to Paul Berger, then the associate director of enforcement at the Securities and Exchange Commission. The author, a Washington lawyer, is referring to Ralph Ferrara, a former SEC lawyer who apparently managed to parlay his government service into mansions, maids and millions – by way of a plum position at a law firm called Debevoise & Plimpton.

As you can see, the email was sent in January 2005, soon after the SEC had launched an investigation into alleged naked short selling, insider trading and other misconduct at Pequot Capital, a powerful hedge fund. That same month, the SEC’s lead investigator in the case, Gary Aguirre, was shut out of meetings in which the Commission’s top officials gave Pequot’s lawyers privileged information about the investigation.

By the summer of 2005, some of the SEC’s top officials, including Paul Berger, were maneuvering to have the Pequot investigation whitewashed. When Aguirre tried to interview John Mack, formerly chairman of Pequot and then CEO of Morgan Stanley, he was told to lay off because Mack’s lawyers had “juice” with Berger and SEC Director of Enforcement Linda Thomsen.

Aguirre complained about this in a formal letter to Berger. In response, Berger arranged for Aguirre to be fired – never mind that the SEC had just commended Aguirre for his “unmatched dedication.” At precisely the same time, Berger told Mack’s law firm that he was quite ready to leave public service, and that what he’d really like is to have a job at Mack’s law firm. The name of Mack’s law firm (the law firm with “juice”) was Debevoise & Plimpton – i.e., the same law firm whose multi-million dollar paychecks to former SEC officials had inspired that salivating email.

Perhaps the lawyer who sent that email was merely updating Berger on his colleague’s career trajectory. I have no evidence that the lawyer was trying to influence Berger or the SEC. But the email is a good example of the kinds of conversations that occur with disturbing regularity at our nation’s market regulator. No doubt, those maids and millions were top of mind as the SEC’s associate director of enforcement considered whether he ought to bury an investigation into some serious crimes, fire the whistleblower, and simultaneously apply for a job at the alleged criminal’s law firm.

In the summer of 2006, Aguirre wrote an 18-page letter to the U.S. Congress, blowing this scandal wide open. In this letter, Aguirre noted that his rank-and-file colleagues at the SEC believed that the naked short selling they were investigating had the “potential to seriously injure the financial markets.” So it was all the more appalling when–in November, 2006–the SEC leadership officially closed the investigation into Pequot. In doing so, the SEC said it had found no evidence of insider trading, but it said nothing about the far more serious charges of naked short selling and market manipulation.

Two U.S. Senate Committees spent more than a year looking into this matter. In multiple reports (one more than 700 pages long), Senate investigators did not refer directly to “naked short selling,” but from their descriptions of “market manipulation” and “wash sales” (which are often used to hide naked shorts) it is clear that they believed that Pequot engaged in naked short selling, and that this crime did, indeed, have the potential to “seriously injure the financial markets.”

The Senate concluded that everything about the case – the special treatment received by Pequot and Mack’s lawyers, Aguirre’s dismissal, Berger’s solicitation of Debevoise & Plimpton – was as seedy as can be.

“At worse,” the U.S. Senate stated in one report, “the picture is colored with tones of a possible cover-up.”

Last month – after naked short selling and other hedge fund tricks contributed to the biggest financial cataclysm since 1929 – the SEC inspector general issued a 191-page report confirming just about everything in the U.S. Senate reports. It is impossible to read these reports without concluding that this is the biggest scandal in the history of the SEC–a scandal that entailed a cover-up of precisely those same crimes that “severely injured” (or rather, nearly vaporized) our financial markets.

The SEC leadership responded to the inspector general last week by assigning an SEC employee, who happened to be an administrative judge, but who had no jurisdiction and was not acting in her capacity as a judge, to issue a short document stating that the SEC was innocent – that nobody had acted inappropriately in the case of Aguirre and Pequot Capital. With this document in hand, the SEC announced that it had been “cleared” by “a judge” – making it sound as if there had been some sort of official, independent ruling.

In other words, the corrupt SEC leadership tried to convince us that the corrupt SEC leadership would have the final say on whether the SEC’s leadership was corrupt. The cover-up continued. There was a time when the nation’s journalists would swarm on an abomination such as this. But, alas, there was hardly a peep from our media. Indeed, The Wall Street Journal and other publications helpfully reported that a “judge” had “cleared” the SEC leadership of wrong-doing.

But this scandal is not under the rug yet. And it might grow in magnitude. In a civil case brought by Aguirre, a federal district court ruled earlier this year that the SEC is far from “cleared,” and that it must hand over thousands of internal documents pertaining to the Pequot investigation. The SEC has largely ignored the ruling, turning over documents with much of the relevant stuff blacked out, but it is doubtful that the commission will get away with this. Tomorrow, the court will hold a hearing at which the SEC will likely be ordered to hand over more documents – including those containing evidence of the “market manipulation” (read: “naked short selling”) that helped “seriously injure the financial markets.”

Meanwhile, Paul Berger, the former associate director of enforcement who tried to bury this case, has been made partner at the law firm of Debevoise & Plimpton. I’d tell you how much he’s getting paid for his “juice,” but I hesitate to incite a citizen insurrection.

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Mark Mitchell previously worked as a writer for the Wall Street Journal editorial page, chief business correspondent for Time Magazine in Asia, and as the editor responsible for the Columbia Journalism Review’s online critique of business journalism. Send tips to mitch0033@gmail.com

There was an article in The New York Times yesterday about the SEC’s disgraceful ruling that it will take no disciplinary action against the SEC cronies at the center of the Gary Aguirre scandal. Read through the Times’ false veneer of objectivity, and it seems that reporter Walt Bogdanich is trying to say that it’s pretty damn strange that a corrupt SEC has been allowed to adjudicate its own corruption.

Stranger still, no other journalist has expressed outrage over this. Meanwhile, the nation’s mainstream media (The New York Times included) has yet to deliver a story describing the Aguirre scandal’s most important component – the bit that makes it the greatest scandal in the history of the SEC and which helps explain why the commission failed to stop a crime that later contributed to the near total collapse of the American financial system.

Readers of the mainstream media know only that Aguirre is the former SEC attorney who claimed that he was fired for political reasons after pursuing an “insider trading” case against Morgan Stanley CEO John Mack and a hedge fund called Pequot Capital. The real story – the one you don’t read in the papers – is that Aguirre has, all along, made it perfectly clear that his investigation – the one he says that Mack “stopped in its tracks” – was about much more than the relatively minor crime of “insider trading.”

Aguirre blew this scandal wide open in 2006, when he wrote an 18-page letter to the U.S. Congress. The letter reads: “I believe our capital markets face a growing risk from lightly or unregulated hedge funds just as our markets did in the 1920s from unregulated pools of money – then called syndicates, trusts or pools. Those unregulated pools were instrumental in delivering the 1929 Crash….There is growing evidence that today’s pools—hedge funds—have advanced and refined the practice of manipulating and cheating other market participants.”

Aguirre then described the investigation that he had led at the SEC. “The investigation was two-pronged,” he wrote. One prong concerned “insider trading.” However, the second, and far more important prong, concerned “market manipulation.” Specifically, Aguirre and his colleagues were investigating “two suspected violations: wash sales and naked shorts.”

“My colleagues,” Aguirre wrote, “believed [the naked short selling] held a greater potential to severely injure the financial markets.”

That is, Aguirre and his colleagues believed that naked short selling (hedge funds selling stock that they have not yet purchased or borrowed in order to drive down prices and destroy public companies) ranked high among the tactics that “were instrumental in delivering the 1929 Crash” – a repeat of which now seemed entirely possible since the tactic had been “refined” by hedge funds intent on “manipulating and cheating other market participants.” But the SEC rank-and-file’s attempt to investigate this crime was “stopped in its tracks” by SEC leaders who had been corrupted by Wall Street fat cats.

At the time when Aguirre released his letter, a small clique of influential journalists with close ties to certain Wall Street fat cats were going to great lengths to whitewash the crime of naked short selling (see “The Story of Deep Capture” for details). Unsurprisingly, some of these journalists quickly sought to discredit the SEC whistleblower. They reported that Aguirre’s investigation concerned only the minor infraction of insider trading, and that he had failed to present evidence that this minor infraction had occurred. The journalists also declared that Aguirre was untrustworthy – an eccentric who had been fired for poor performance.

After a year long investigation into the matter, however, the Senate Judiciary Committee completely vindicated Aguirre. It noted that Aguirre had been fired just two weeks after his supervisors had raved about his “unmatched dedication” in glowing written evaluations of his performance. It presented clear evidence that Mack’s lawyers were given special access to meetings in which Aguirre’s investigation was discussed. While the SEC was busy quashing the investigation and firing Aguirre for complaining about it, Paul Berger, then the SEC associate director of enforcement, was interviewing for a job at Mack’s law firm.

The Senate investigators concluded that they were “deeply troubled” by the SEC’s failure to look into Aguirre’s claims. “At worst,” the Senate report said, “the picture is colored with overtones of a possible cover-up.”

As part of this cover-up, the SEC eventually claimed that although Aguirre had been fired, the commission had nonetheless pressed forward with its “insider trading” investigation, finding no evidence that Pequot or Mack and committed any violations. However, the SEC has yet to reveal whether its rank-and-file were allowed to complete their investigation into the naked short selling that had the greater potential to “seriously injure the financial markets.”

SEC leaders remained uninterested in the crime until this past summer. Data for June showed that “failures to deliver” (phantom stock sold by naked short sellers) had peaked at more than 2 billion shares – an all time record. More important, the SEC’s cronies on Wall Street were now victims of the very crime that they had perpetrated and covered up. An avalanche of naked short selling, timed to coincide with a false news report on CNBC, had sparked the run on the bank that took down Bear Stearns. Now, other Wall Street institutions (including, yes, Morgan Stanley) were getting similarly clobbered. In mid-July, the SEC pronounced that naked short selling had the potential to “seriously damage” the financial system. It issued an “emergency order” protecting 19 big financial institutions (including Morgan Stanley) from the crime.

That kept the big banks safe for a time. But ultimately, short-sellers proved to be more skilled at cronyism than their former accomplices at the big banks. In August, under pressure from the short seller lobby, the SEC lifted its “emergency order.” In the next three weeks, a half-dozen major financial institutions were eliminated or nationalized. Morgan Stanley CEO John Mack (no doubt regretting that he had quashed the Aguirre investigation) hollered that he was next — that law-breaking short sellers were taking down his bank. The SEC responded by banning short selling outright in 900-plus companies. Meanwhile, everyone from Hillary Clinton to John McCain implicated naked short selling in the biggest financial cataclysm since 1929.

A few weeks later the SEC inspector general issued a 191-page report vindicating Gary Aguirre. The otherwise detailed report conspicuously failed to mention the naked short selling component of Aguirre’s investigation, but it contained many of the same findings that the Senate had described. The report, compiled over many months, concluded that Mack’s interference with Aguirre’s investigation raised “serious questions about the impartiality and fairness” of the SEC. The inspector general recommended that disciplinary action be taken against Aguirre’s supervisors, including SEC Director of Enforcement Linda Thomsen.

But last Friday, having spent no more than a few days reviewing the evidence, an SEC administrative judge declared that the SEC did not mishandle the Aguirre case, and that no disciplinary action would be taken. As Bogdanich’s story in The New York Times makes clear (though in not so many words), the ruling stinks to high hell.

For one, it remains unclear why in the world an SEC judge, as opposed to an independent court, is ruling on this matter. For another, it seems that the judge, Brenda Murray, was not even acting in the capacity of a judge. Rather, she issued her not-guilty verdict in the capacity of “an individual” who was asked by the SEC executive director to evaluate the inspector general’s findings.

In other words, there is good evidence that the leaders of our nation’s market regulator are as corrupt as Banana Republic cops on the brothel beat – that they have engaged in a cover-up that might have helped rock the very foundations of the American financial system – but this evidence will be evaluated in no court. There will be no legal proceeding whatsoever. Instead, an “individual” at the SEC, as a favor to the SEC executive director, says the SEC did no wrong…and that’s it – end of story.

Really, end of story. Because, aside from Walt Bogdanich at The New York Times (a paper that won’t call an “outrage” by its proper name, and which seems incapable of printing the words “naked short selling”), no mainstream journalist seems to give a flying hoot.

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Contact Mark Mitchell at mitch0033@gmail.com