Barry Minkow spent last week in plea negotiations regarding a federal indictment on which he is hoping to receive only 5 years, says his lawyer. (LA Weekly: Barry Minkow to plead guilty to insider trading).  In December, 2010, a Florida judge threw her proverbial book at Barry Minkow, and it glanced off Sam Antar, who had been paid Barry’s paymaster to the tune of $250,000, Barry had testified. In addition, the judge found as a matter of fact that Sam Antar destroyed documents necessary for her trial. Minkow also gave sown testimony that well-known New York hedge fund manager Whitney Tilson paid him $40,000: more on this below.

Sam Antar, generally not short of opinion, has suddenly developed laryngitis.

Barry Minkow and Sam Antar are two of the most remarkable swindlers in recent American history, each guilty of frauds measured in the hundreds of millions of dollars. Two decades ago their names gave off the same foul stench that Bernie Madoff’s does today. So Deep Capture invites Whitney Tilson to explain why he would join legendarily convicted financial criminal Sam Antar in making payments to also-legendarily convicted financial criminal  Barry Minkow, who now is pleading guilty to his 58th financial felony. (You know how to reach me, Whitney. DeepCapture will give you 250 words, with no editing. But we may provide commentary.   )

What is more to the point of DeepCapture, however, is that until this latest turn of events, Barry Minkow and Sam Antar had, notwithstanding their prior convictions on massive financial crimes, successfully repositioned themselves within the US financial media as experts in crime-fighting (see 60 Minutes‘ 2006 puff-piece on Barry Minkow, “It Takes One to Know One“, and Fortune Magazine’s 2007 lotion-job on Sam Antar, “Takes One to Know One“). Barry and Sam used the imprimatur of the mainstream press to return to criminal behavior (which Barry has now acknowledged). The ease with and degree to which the New York financial media swallowed this remarkable bullshit  will attest for a generation to the intellectual corruption and broad imbecility of broad swathes of the US financial media.

No, seriously. That really happened.  Two convicted financial felons, the Madoff’s of their generation, made comebacks by gulling the financial press into writing lotion-job stories saying that they were now reformed and devoted to stopping crimes, not committing them.  Here is UPI on Barry Minkow: “Barry Minkow: Cleaning up, reaching out.” Here is, again, Fortune Magazine from late 2007: “Takes one to know one -Sam Antar, the felonious former CFO of Crazy Eddie, is now teaching students and prosecutors how to spot fraud in public companies.” And then, it turns out, both used their new-found status as authorities to whom the press turned in order to resume their criminal activity, which again, as of yesterday, leaves Barry hoping for only a five year sentence, and his paymaster Sam Antar with laryngitis.

In the spirit of reconciliation and forgiveness, however, I will offer the US financial media one concession: your gullibility is understandable. In high school I had a history professor who brought an actual American Nazi to class, and let us argue with him. For many of my classmates debating the Nazi was like trying to nail Jell-O to the wall. I discovered that only if one can grasp the concept of “complete venality” can one defeat a scoundrel. Many people, however, are intellectually helpless against such people, because deep down they cannot grok the possibility that anyone can spin and lie and spin and lie and spin and lie and spin some more, then lie and lie on top of it.

I believe that the preceding accurately describes the mentality of some US journalists who gave these knuckleheads more credit than they should have. For others, however, giving credence to Sam Antar or Barry Minkow was simply an expression of an ideological commitment: those publications favor Wall Street over the United States, and they were willing to give credence to Barry and Sam’s work in order to further the agenda of Wall Street, which is more or less the purpose of their publications.

I know that is a lot to accept. So don’t trust me, trust a Florida state court judge, The Honorable Gill Freeman, who brought her hammer down on Barry Minkow.  Judge Freeman’s entire  opinion can be read here: Order Granting Lennar’s Motion for Sanctions–Dec 27 2010 (warning: It is so scathing one almost feels sorry for them. Or, well… maybe not.)

I cannot help resist quoting at length from it: as you read Judge Freeman’s words, please remember my description of the American Nazi.

THIS CAUSE came before the Court on Plaintiffs Motion for Sanctions and for entry of default and other relief against Defendants Barry Minkow and the Fraud Discovery Institute, Inc. for their willful and egregious litigation misconduct. The parties filed extensive papers in support and in opposition of the motion, and the Court held a two-day evidentiary hearing on August 26 and 27, 2010 at which time Mr. Minkow was examined by Plaintiffs’ and Defendants’ counsel, as well as the Court.

Having carefully considered all the papers, the evidence filed by both parties, evidence introduced at the hearing, including Mr. Minkow’s testimony, and arguments of counsel, it is ORDERED and ADJUDGED that Plaintiffs’ Motion be, and the same is hereby, GRANTED as set forth below, based on the following findings of fact and conclusions of law.

With full knowledge of the rules and his obligations as a litigant in this Court, Mr. Minkow has withheld key documents, destroyed or discarded important evidence, concealed the identity of material witnesses, willfully violated court orders, and engaged in actions to cloud his misconduct. Minkow repeatedly intentionally misrepresented these matters to his own lawyers, in sworn affidavits filed with this Court, at depositions in this case, and at the evidentiary hearing itself, including in response to questions from this Court. Mr. Minkow was repeatedly impeached by his own documents, documents he never produced in this case as to material issues. The evidence clearly and convincingly established that Minkow has acted knowingly, unilaterally, and improperly in deciding what evidence is relevant and what information Lennar, the Court, and his lawyers should and should not know.

Minkow’s misconduct has been pervasive, intentional, and committed to gain unfair advantage over Plaintiffs and to deceive this Court. Lennar and its counsel spent numerous hours investigating Minkow’s activities in this litigation, and evidence which Plaintiffs have repeatedly requested has been discarded and/or irretrievably lost.

Plaintiffs’ right to fair process and trial has been severely and irrevocably compromised. No remedy short of default, together with full reimbursement of the attorneys’ fees and costs incurred in connection with Plaintiffs’ extensive and continuous efforts to obtain evidence and discovery, can restore Plaintiffs to “the position [it] would have occupied in the absence of [Minkow's] willfulness and bad faith.”

…

In its papers and at the evidentiary hearing, Lennar introduced substantial evidence that Minkow created and tendered false documents in this case.

…

Fact No.7: In this case, Minkow has been represented by three experienced, capable attorneys: Alvin Entin and Joshua Entin of Florida, and Michelle Baker of California. The Court finds that Minkow misled his attorneys multiple times on material issues.

…

Fact No.9: Minkow testified he could not recall whether he sent the letter to any person with whom he worked on the Lemlar investigation, including Tracy Coenen, Terry Gilbeau, Paul Palladino, Jeff Sachs, Sam Antar, or Shannon Boelter, or otherwise instruct any person to preserve documents in connection with this litigation. [emphasis added]

…

Fact No. 11: The evidence also showed that Tracy Coenen, Terry Gilbeau and Sam Antar deleted emails about Lennar they had exchanged with Minkow…

…

Fact No. 21: On October 7, 2009 Minkow submitted an affidavit swearing that he had produced all documents in his possession, custody, and control responsive to Lennar’s document demands and this Court’s June 15 and July 9, 2009 Orders. (Ex. 10 at”if”if 5-7; Ex. 8; Ex. 16; Ex. 20.)

Fact No. 22: These sworn statements in Minkow’s October 7, 2009 affidavit were false. At the time he represented that he had made a complete production, Minkow had possession, custody, or control of numerous documents responsive to Lennar’s document demands and this Court’s June 15 and July 9, 2009 Orders, including but not limited to, the following documents material to this case:

• a version of the November 30, 2008 engagement agreement between Minkow and Nicolas Marsch containing a six-page, 11-point “confidential proposal” (Ex. 202); .

• another version of the November 30, 2008 engagement agreement between Minkow and Nicolas Marsch containing materially different compensation terms (Ex. 200);

• numerous emails with Mr .. Marsch, Paul Palladino, Tracy Coenen, Sam Antar,Terry Gilbeau, Shannon Boelter, and other individuals involved in the Lennar investigation;

Fact No. 23: Minkow knew he had possession, custody, or control of these and other documents, but made the decision to withhold them.

…

Fact No. 25: At the August 26,2010 hearing, Minkow admitted that he withheld these documents and others but said it was “negligent” because, at the time he represented he had produced all responsive documents, Minkow was working “18 hours a day” filming a movie about his life and he was “swamped and overwhelmed.”  The Court does not find this testimony credible and rejects this excuse.

Fact No. 26: On several subsequent occasions, when he was not filming a movie including as recently as August 11, 2010, Minkow continued to withhold documents and falsely represent that he had produced all documents in his possession, custody, or control responsive to Lennar’s document demands and this Court’s June 15 and July 9, 2009 Orders.

Fact No. 27: On each occasion, Minkow knew he had possession, custody, or control of such documents responsive to the Court’s Orders, but he–alone-made
the decision to withhold them.

Fact No. 28: Minkow’s year-long withholding of documents was not inadvertent, accidental, or negligent.

Fact No. 29: Minkow withheld documents he perceived to be harmful to his case. Among other things, the concealed documents demonstrate:

• that Minkow’s investigators questioned the accuracy of statements of fact he included in his report on Lennar;

• the perfunctory nature of Minkow research and investigation before he accused Lennar and its executives of operating like a ponzi scheme, giving its COO a disguised kickback, being a financial crime in progress, and other statements; and

• Minkow’s use of possibly illegal means to obtain personal, confidential information about Lennar, its executives, and others.

Fact No. 30: By withholding these documents, Minkow wilfully violated the Court’s June 15,2009 Order and the Court’s July 9, 2009 Order.

…

Fact No. 31: Minkow introduce~ no credible evidence to substantiate his assertion that he was unable to produce documents because his Hewlett Packard computer was stolen, crashed, and/or was hacked.

Fact No. 32: The evidence showed that in February 2010, Minkow was named as a defendant in another matter by a company called Medifast, Inc. … Lennar is not a party to that case.

Fact No. 33: In April and May 20 I 0, Medifast had· served Minkow with requests for documents in their case. On July 1, August 10,16, and 23,2010, Minkow produced more than 4,000 pages of documents to Medifast, including scores of emails. Among the documents produced to Medifast were documents that should have been, but were not, produced in this case despite this Court’s June 15 and July 9,2009 Orders.

Fact No. 34: When confronted at the evidentiary hearing with a document from the Medifast production, but not produced here, one that was responsive to Lennar’s document requests-Minkow testified, “I never even thought this had anything to do with it… What in the world would make me think I had to tum it over to Lennar?”

Fact No. 35: This testimony is not credible and, even if it were, demonstrates Minkow’s contemptuous disregard for the rules of litigation and his belief that he–not the Court-determines what is relevant.

Fact No. 36: The documents Minkow produced to Medifast-but not in this case-refute Minkow’s testimony that he was unable to produce emails in this case because his computer had been stolen, crashed, and/or hacked.

Fact No. 37: Lennar has incurred great expense to procure some evidence from third parties, and it is highly probable considerably more evidence that Minkow should have produced has been withheld, deemed irrelevant by Minkow himself, concealed and/or destroyed. Due to Minkow’s misconduct, neither Lennar nor the Court has any way of knowing the nature, extent, or volume of evidence that should have been produced but has been concealed and destroyed.

…

Fact No. 40: Minkow had represented that the Hewlett Packard computer on which he performed the vast majority of work related to his investigation of Lennar (and on which he had exchanged untold numbers of emails with Tracy Coenen, Terry Gilbeau, Paul Palladino, Jeff Sachs, Sam Antar, Shannon Boelter and others) had earlier been hacked, and likely was destroyed and/or discarded; after Minkow was added as a defendant in this case, after being served with a preservation letter, after being served with a Notice of Deposition Duces Tecum requiring the production of documents, and after Plaintiff had filed its first sanctions motion.

Fact No. 41: Minkow has not introduced any credible evidence that all information from the Hewlett Packard was copied, duplicated, stored, and preserved without the loss of discoverable evidence.

Fact No. 42: Minkow admitted that the transfer of his email archives from the Hewlett Packard to a new computer was “incomplete.”

Fact No. 43: On July 21,2010, the Court ordered Minkow to appear and provide testimony at an evidentiary hearing scheduled for August 4, 2010. The
Court allowed Minkow to appear in San Diego and provide testimony via videoconference.

Fact No. 44: Lennar made significant preparations to arrange the videoconference for the hearing on August 4.

Fact No. 45: On July 30,2010, Minkow agreed to voluntarily appear live in Miami at the evidentiary hearing scheduled for August 4, 2010.

Fact No. 46: Lennar relied on Minkow’s representation and Lennar’s counsel made significant preparations to attend and examine Minkow in person at the
hearing on August 4 in Miami.

Fact No. 47: On the morning of August 3, 2010, Minkow informed the Court that he would not attend the hearing scheduled for August 4, 2010 in person or via video conference from California. Minkow asserted that on August 2, 2010, while in Los Angeles awaiting a flight to Miami, he became ill and went to the emergency room at a Los Angeles hospital. Minkow represented that he was restricted from traveling to Florida for the hearing.

Fact No. 48: On August 4 and 10, 2010, the Court ordered Minkow to produce, among other things, evidence that he had been to the emergency room / hospital.

Fact No. 49: Ten days later, on August 20, 2010, Minkow submitted an affidavit wherein he admitted that he had not gone to the emergency room.  Minkow had lied to Plaintiffs, the Court, and his own lawyers.

Fact No. 50: Minkow swore that he could not “recall” what he had said to his lawyers and his assistant the morning of August 3, 2010 because he was on pain medications. The Court does not find this testimony credible.

Fact No. 51: The Court finds that Minkow intentionally deceived Plaintiffs and the Court regarding the emergency room visit because he knew that such a claim would require this Court to postpone the August 4, 2010 hearing.

Fact No. 52: At the August 26,2010 hearing, Minkow testified that he “didn’t think it [whether he went to the emergency room] mattered. I had a doctor verifying I was ill, and I thought that is all that mattered.”

Fact No. 53: This testimony is not credible and demonstrates Minkow’s contemptuous disregard for the rules of litigation and his belief, again, that he-not the ermines what is relevant.

Fact No. 54: At the August 26, 2010 hearing, when Minkow was impeached by the fax header on his own doctor’s letter, Minkow testified for the first time that the assistant who picked him up in Los Angeles was not in San Diego, California, as he earlier had testified, but rather was in Orange County, California.

Fact No. 55: This testimony contradicts his affidavit ofless than a week earlier in which he swore that his assistant “drove to Los Angeles from San Diego, California.”

Fact No. 56: When confronted with his contradictory. affidavit, Mr. Minkow testified that the location of his assistant was “irrelevant.”

Fact No. 57: This testimony is not credible and demonstrates Minkow’s contemptuous disregard for the rules of litigation and his consistent belief that he, not the Court, determines what is relevant.

…

PERVASIVENESS OF MINKOW’S MISCONDUCT

Fact No. 95: Minkow’s withholding and destruction of evidence, concealment of witnesses, and false testimony constituted a fraud on the Court.

Fact No. 96: Minkow has displayed no regard for the Court’s Orders, his testimonial oaths, the administration of justice, or his obligations as a litigant.

Fact No. 97: Minkow had ample opportunity to correct his misconduct and avoid sanctions. Minkow chose not to do so.

Fact No. 98: Minkow has wrongfully acted as though it is his right, not that of the Court, to determine what documents are relevant, what issues are material, and what information the Plaintiffs, the Court, and even his own lawyers should and should not know.

Fact No. 99: Minkow has displayed no appreciation of, or remorse for, the burden and expense that his withholding and destruction of evidence, concealment of
witnesses, false testimony, and other misconduct have caused Plaintiffs and the Court.

Fact No. 100: The Court finds that the likelihood Minkow would comply with his discovery obligations or the Court’s Orders in the future is unlikely.

Remember what I said above about the American Nazi? How if someone lies and spins and lies and lies some more, they can actually keep going for a long time?  When you catch them out in a lie, they often apologize, say they are sorry. Lots of them even cry (really, I see it every time I deal with sociopaths). They then continue with a new lie, a new spin, until you catch them again. They just keep going and going.

That is a pretty fair description of Judge Freeman’s description of Barry Minkow. Withhold evidence and lie about it by saying the evidence was destroyed; Destroy the evidence then lie about that; when confronted, say that your computer was hacked and that evidence is gone (even though it is not); when told to appear in court, claim that you have been in an emergency room; when asked for evidence you were in an emergency room, say that a doctor gave you advice; when confronted with the fact that the doctor’s letterhead reveals a forgery that shows you were lying, change the city. And so on and so forth.

Incidentally, this pattern continues almost to this day. In February, 2011, LA Weekly reported: “Pastor Barry Minkow’s Community Bible Church Hit by $50,000 Burglary; Ex-conman Minkow Has a History of Faked Burglaries”.

I assume that Barry will go find God again, or claim he was off his medications, or or or. A guy like this can never own what he does. However, simply as a tactical matter, he can apologize. That will come someday, and he will sound sincere, and Fortune Magazine or Bloomberg or Portfolio Magazine will trumpet the redemption of a fraudster, who will then go on and attack a list of companies that bears striking resemblance to the list of companies being bet against by the favorite hedge fund sources of those same publications.

However, I would like to draw attention to the names “Tracy Coenen” and “Sam Antar“, which appeared repeatedly in the judge’s order.  “The evidence also showed that Tracy Coenen, Terry Gilbeau and Sam Antar deleted emails about Lennar they had exchanged with Minkow,” wrote Judge Freeman. They destroyed emails, says the judge, but “Minkow testified he could not recall whether he sent the letter”  Tracy Coenen and Sam Antar instructing them to preserve documents.

So Tracy and Sam just happen to have deleted  all their email traffic on the precise subject of the lawsuit, and did so in some magically irrecoverable way. Sure, it happens all the time. “What judge, those emails? Oh, I was watching NBA and hit my laptop’s magic delete key and all those emails vanished from my laptop, and from my server, and coincidentally as I passed in front of my microwave my hard drive got wiped the recommended 3-7 times to US Department of Defense clearing standard DOD 5220.22, and gosh, I’m sorry, but none of those emails can be recovered.”

The strangest thing about such folks, like the strangest thing about the American Nazi, is the fatuity with which they tell lies, knowing they are lies, knowing that you know they are lies, and knowing that you know that they know that you know they are lying. I have had to deal with it a few times in business settings, and it really is remarkable. Again, only when they are completely cornered (and I have had reason to do so on occasion), they burst into tears, own everything they did as long as you have already proven it, promise they will never do it again, and watch out of the corners of their eyes to see if you are buying it. Like Barry Minkow is probably doing in a federal interview room right now.

That is the dynamic you need to be understand in order to comprehend people like this. Those familiar with Sam Antar’s work will recognize how his modus operandi is indistinguishable from his friend Barry’s: the rules do not apply, just lie and attack and lie and attack and lie and pretend to do “fraud research” as a cover for your own criminal activity, and chum friendly journalists into buying into it all, and hope no one digs deeper into your smears.

That said, now that you understand the nature of Barry Minkow, might it be worthwhile for some actual journalist to pursue the following line of research:

• Judge Freeman found as Fact 29:  “Among other things, the concealed documents demonstrate the perfunctory nature of Minkow research and investigation before he accused Lennar and its executives of operating like a ponzi scheme, giving its COO a disguised kickback, being a financial crime in progress, and other statements”. In other words, Minkow took payments, did bogus research, then made wild criminal accusations.  The Feds have now hit him with criminal charges, and he is (according to his lawyer) in the middle of plea bargaining, hoping to get only 5 years. But Minkow is small potatoes. He was paid to do these things by someone.  Who was paying Minkow?
• Barry Minkow testify under oath that Sam Antar, paid him over $250,000 in two wires in 2006. But Sam Antar is a bankrupt, and claims to be broke. Do broke people normally send quarter-million dollar wires?
• Barry Minkow testified (see around 9:59) that Whitney Tilson, the well-known New York hedge fund manager, paid Minkow $40,000 to write a “report”? Does that strike anyone as odd?  Given how “perfunctory” Minkow’s investigations are, why would a money manager like Whitney Tilson pay Barry Minkow? When Whitney Tilson took his clients’ funds to manage, did he tell them that he would be making decisions based on the insights of the inestimable Barry Minkow? Or, did Whitney Tilson pay Barry Minkow for other reasons?

If we actually had journalists in this country, they would not need this laid out in such a paint-by-the-numbers fashion.

Still, hope springs eternal….

Today was a red-letter day for Barry Minkow and Sam Antar, who have provided DeepCapture so many Rosencrantz and Guildenstern moments. To summarize:

1) Barry Minkow turned out to be, once again, a crook. See Bloomberg: Minkow in Plea Talks With US Prosecutors Over Fraud Case, Lawyer Says, and LA Times: Barry Minkow to plead guilty to insider trading.

2) Sam Antar went unusually silent about his long-time colleague and friend, Barry Minkow, resorting once again to spewing hateful off-topic smears on message boards rather than address why it is that Sam has spent years working with and defending a fellow who can now look forward to another 5 years of jailhouse stew.

So for those new to this tale, let me fill in some missing pieces.  For documentation of all the following claims, see “The ties that bind Sam Antar and Barry Minkow” and “Why Are Fortune Magazine and the New York Financial Media Suddenly Pimping Sam Antar the Crook?“  (Here is more on Minkow, and more on his paymaster, Sam Antar).

Sam Antar is upset because Sam has long defended Barry Minkow. In fact, they are close associates, and have much in common:

• At the age of 23, Barry Minkow was convicted on 57 counts of fraud (Minkow Is Convicted on All Charges : Jury Decides That ZZZZ Best Founder Masterminded Fraud) then sentenced to prison for 25 – 30 years for financial crimes (he served 7).
• Sam Antar was CFO of one of the greatest financial scams of the 1980′s, also committed financial crimes for which he also became a convicted felon (though he ratted on his cousin, Crazy Eddie, to get by with house arrest and skip prison). As Fortune Magazine described the scam: “When the company, which went public in 1984, blew up in a financial scandal in 1987, Sam Antar, an accountant, was its CFO. The debacle cost investors roughly $145 million and involved just about every kind of accounting fraud then known to man, including receipt skimming, money laundering, and the counting of bogus inventory.” Of Sam himself, Fortune wrote, “Sam E. Antar is a convicted felon, and he will not let anyone forget it for a minute. Whenever you find yourself starting to think of him as merely a fast-talking yet charming New York character, he’ll come out with something like: ‘I had no remorse whatsoever as a criminal. I had no concern about any other human being. I enjoyed being a criminal.’” To understand Sam better, I recommend that you re-read the preceding sentence, substituting the word “sociopath” for the words “felon” and criminal”. It will make much more sense.
• In the last five years these two remarkable swindlers  successfully repositioned themselves as (I-shit-thee-not) “fraud investigators”, and a gullible financial media not only allowed this to happen by blindly parroting their claims with no scrutiny, they actually (again, I-shit-thee-not) championed the reemergence of Barry Minkow and Sam Antar. In fact, since 2006 the US media have portrayed Barry and Sam as intellectual luminaries and legitimate sources. In 2006 60 Minutes, normally a show with higher journalistic standards than the financial press, devoted a full 14 minute segment to Barry Minkow titled “It Takes One to Know One“.  A year later Fortune Magazine displayed their originality of thought and style by doing an identical lotion job on Barry’s colleague Sam Antar, with the title, “Takes One to Know One” (demonstrating literally how a Party Line gets “parroted” by journalists). Here is Sam Antar yucking it up on CNBC with journalistic worthy Herb Greenberg, sharing his deep thoughts with Larry Kudlow, and being  given a rub-down in Portfolio Magazine. (Note Portfolio’s URL: “SEC hounding whistle-blowers such as Antar and Einhorn“. That would be David Einhorn, another hedge fund manager whose name turns up in  DeepCapture investigations of this riff-raff: How odd). In addition, note that the author of the Portfolio piece is Gary Weiss, about whom one of the most respected journalists in America once warned me, ““I’ve known Weiss for years. Be careful. He’s a psychopath.” (One can read about Gary here: “Gary Weiss, Psychopath and Scaramouch“).
• As convicted felons  who played roles in massive financial swindles that became the stuff of legend, Barry Minkow and Sam Antar may have been perplexed at the ease of their return to society as noted economists. But if they were they did not show it, and instead, slid comfortably into new roles that let them return to committing financial crimes, this time with the imprimatur of the mainstream press.
• in 2007 Barry gave sworn testimony (see depositions part 1 and part 2) that Sam Antar had recently sent him a $150,000 wire, then another $100,000 wire, in order to provide vaguely defined services related to the stock market. Given that Sam is a bankrupt and claims to be penniless, that might strike some as odd. I don’t recall penniless people of my acquaintance sending $250,000 wires. When one allegedly penniless convicted swindler wires another convicted fraudster $250,000 for services that neither can explain, I get suspicious. Call me madcap.
• In December, 2010 Barry Minkow was sanctioned by a judge in a civil case involving stock manipulation.  Because the LA Weekly is not a New York-based financial publication it was able to report the information fairly, without the glossy spin characteristic of the normally-fawning Wall Street media.
  • December, 2010 – LA Weekly wrote:   “Barry Minkow Destroyed Evidence And Lied To Court In Extortion of Lennar Corp., Judge Rules“.
  • January, 2011 – LA Weekly wrote: “Barry Minkow’s New Scandal: A judge slams the purportedly redeemed con man with huge sanctions. A Miami judge has ruled that former Los Angeles con man Barry Minkow lied, concealed material witnesses and destroyed or discarded key evidence in the libel and extortion lawsuit filed against him by home-building giant Lennar Corp.“
• Today, Barry Minkow pleads guilty in yet another criminal financial case, and according to his lawyer, is hoping to go away for only 5 more years.

If only there were a pattern, if only there were a pattern….

Incidentally, the Third Musketeer with Barry Minkow and Sam Antar is Gary Weiss, about whom one can read here and, more generally, here.

Oh, and lastly, I suppose journalistic ethics require that I disclose that some time ago DeepCapture’s investigations turned up much information and evidence that, as concerned citizens, we turned over to Lennar Corp, which Lennar put to great effect in developing their civil suit, which ultimately resulted both in the Miami judge sanctioning Barry Minkow and (today) in Barry Minkow’s guilty pleading in a criminal case. I thought it only fair that DeepCapture’s intimate involvement in exposing Barry Minkow be known by the reader, and by Barry himself. He can stew on that for the next 5 years.

You may remember Peter Weir’s 1998 film, The Truman Show, in which the protagonist (Jim Carrey) is enjoying what he perceives as a picture-perfect life in the idyllic town of Seahaven, but which is in fact a 24/7  TV show being broadcast globally from an enormous Hollywood sound stage.  The process by which he comes to recognize that he lives within a constructed and ersatz reality provides the narrative arc of the story. One seminal moment in his awakening occurs in this scene:

My long crusade (or Mitzvah, or Jihad, depending upon what side you’re on) against Wall Street corruption has seen similar  Truman Show moments. As is described in Mark Mitchell’s The Story of Deep Capture, in November, 2004 a fellow calling himself “Bob O’Brien” called me to explain some wild-sounding theories about Wall Street criminality. I did not pay  much attention to him, because he opened the conversation candidly letting me know that “Bob O’Brien” was not his real name, and that he was living out of a backpack in foreign lands for fear of getting whacked by Organized Crime. He sensed my disbelief, so before he signed off he told me he was going to make four long-shot predictions, and when they came true, to get back in touch with him. His predictions were as follows: a specific set of journalists (from whom, incidentally, I had never previously heard) would all be calling to do hatchet jobs on me; that Overstock stock would be getting listed on numerous obscure foreign exchanges; that I would become the target of a federal investigation; and that the SEC had recently adopted a regulation, Reg SHO, mandating that starting in January 2005 (two months hence), US exchanges would have to start listing stocks which were seeing excessive failures to deliver (a sign of market manipulation), and Overstock would be one of them. I thanked him and hung up, chuckling to myself.

A day or so after “O’Brien” called I received a call from the first of the journalists he named, and over the following two weeks, all of them called me. Our stock became listed on exchanges in Stuttgart, Munich, Berlin, Bavaria, Hamburg, Bahamas, and Australia. I went under the first of numerous federal investigations (when one ends another immediately starts in its place, and through litigation discovery and FOIA requests we have confirmed the existence of a minor industry of hedge funds and hedge fund choagies who perpetually lobby various government agencies to investigate me on trivial, obscure, and even Kafkaesque matters: remarkably, those government employees compliantly obey, in some cases shortly before taking jobs with the hedge funds who requested such concierge service). And in January, 2005, NASDAQ stared publishing its Reg SHO list of manipulated stocks: there are almost 3,000 firms listed on NASDAQ, a few dozen of which were on the Reg SHO list, and OSTK was one of them.

It was a minor Truman Show moment: if the world is organized as it appears on the surface, it should not be possible for a spotlight to fall out of the blue sky onto the street. And it should not be possible for a guy to make four wild predictions and have them all come true. The philosophers of science tell us that the power of any theory is its ability to make predictions. This guy made some far-out predictions, they all came true, and it would have been intellectually dishonest of me to dismiss him just because he said he was calling from a payphone at a Guatemalan bus stop to keep the Mob from whacking him, and was laying down a rather heavy rap about market manipulation, Organized Crime, and some of the major players on Wall Street.

So I began studying the issue he had been describing to me, that is, our capital market’s stock settlement system and its various loopholes.  Over time, I came to understand that it was not just sloppy, it was sloppy to an almosst inconceivable degree. I could not imagine how it had been designed to tolerate that much slop, unless someone wanted it to be sloppy.

But the real Truman Show moment came in April, 2005, from the SEC itself, which never lets me down. It came in the form of a memo they posted on their sec.gov website. It has been taken down, but thanks to the wonders of the WayBack Machine we can still visit it in archived form. In it, they described their purpose in implementing Reg SHO, what it did and did not mean, and crucially, why they decided to “grandfather” (that is, forgive) all the failed trades that were in the system at the time of the passing of Reg SHO. If you are paying attention, you will have the same reaction to this as Jim Carrey did when the spotlight fell from the sky onto the street in front of his home:

Division of Market Regulation:

Key Points About Regulation SHO

Date: April 11, 2005

…

F. Grandfathering Under Regulation SHO

The requirement to close-out fail to deliver positions in threshold securities that remain for 13 consecutive settlement days does not apply to positions that were established prior to the security becoming a threshold security. This is known as “grandfathering.” For example, open fail positions in securities that existed prior to the effective date of Regulation SHO on January 3, 2005 are not required to be closed out under Regulation SHO.

The grandfathering provisions of Regulation SHO were adopted because the Commission was concerned about creating volatility where there were large pre-existing open positions.

Why that explanation struck me as so bizarre is because the SEC passed Reg SHO only under intense and unprecedented public pressure, insisting the whole time that it was not needed because naked shorting was not going on and there were no significant failed positions in the market. Then, they passed it with a loophole saying that it “does not apply to positions that were established prior to the security becoming a threshold security”, justifying this “grandfathering” on the grounds that: ” the Commission was concerned about creating volatility where there were large pre-existing open positions.”

If you are following along, the preceding statement by the SEC should seem Truman-Show-strange to you.  Think of it this way: The SEC was simultaneously arguing that there were no large open failed positions and even if there were they would not affect the market; but, they had to forgive all of them already in the system because if those non-existent large open positions were forced to cover it would create volatility. In sum: The large open failed positions do not exist, and if they existed they would not be affecting prices, but reversing those non-existent, non-price-affecting large open positions would crack the market.

To me, seeing that posted on the SEC website was like seeing a spotlight crash into the street out of a blue sky.

I am going to expand this story a bit, in a way that it will become even stranger.

Again, the SEC passed Reg SHO only under intense public pressure in 2003-2004. My source from inside the SEC has told me that never in his career had there been an issue that Wall Street’s lobby fought with such intensity, and that throughout that battle, the upper echelons of the SEC (e.g., Annette Nazareth, Linda Thomsen, James Bragagliano, Eric Sirri)  were carrying water for Wall Street. During that period, the SEC’s push-back to the public was that Reg SHO was not needed because there naked short selling was not going on, and hence, there were no significant delivery failures in the market.

Under the Administrative Procedures Act (APA), before making final decision is reached about the wording of a new regulation, a US regulator has to propose to the public the regulation that is being considered, in order to give the public time to comment.  Following this process, in 2004, under this intense public pressure, the SEC proposed a version of Reg SHO that had tiny teeth in it. After a period of public comment that was overwhelmingly in favor of making Reg SHO tougher, the SEC adopted a version that had no teeth at all.  Even within the SEC this was regarded as a transparent legalistic bait-and-switch, one that let them thwart public pressure yet keep the SEC in technical compliance with the APA.

In early 2005 the exchanges (such as NASDAQ and NYSE) began publishing Reg SHO lists. The persistence of names on these lists demonstrated that failing to deliver stock was, in fact, a regular feature of our capital market, the SEC’s protestations notwithstanding. In response, the SEC began arguing that, while yes, it was occurring after all, it was minor, inadvertent, and random, a result of random human error. Then in June, 2005, a consulting economist they hired, Dr. Lesli Boni, published Strategic Delivery Failures in U.S. Equity Markets, which told just the opposite tale. In her summary she wrote:

“Using a unique dataset of the entire cross-section of U.S. equities, we document the pervasiveness of delivery failures and provide evidence consistent with the hypothesis that market makers strategically fail to deliver shares when borrowing costs are high. We also document that many of the firms that allow others to fail to deliver to them are themselves responsible for fails-to-deliver in other stocks. Our findings suggest that many firms allow others to fail strategically simply because they are unwilling to earn a reputation for forcing delivery and hope to receive quid pro quo for their own strategic fails.”

People who were calling for transparency on this issue found themselves fighting the SEC to obtain even the most basic data. Many resorted to Freedom of Information Act requests, and even then, had to fight for each morsel of data. The SEC stuck to its guns, insisting that this was a non-issue, yet opposing the public release of data that could instantly determine who was right.

In the years following that I became part of a movement that fought skirmishes with the SEC.  I funded the deployment to Washington of entire legal and lobbying teams who tried to convince Congressmen and Senators of the seriousness of this problem, and take even the most obvious, commonsensical steps to address it (not for the company I happen to run, but for the marketplace as a whole). We tried to get Congress to pressure the SEC simply to disclose the data, or better yet, to eliminate the grandfather clause and the option market maker exception, and (our greatest hope) enforce a pre-borrow requirement on all shorting. Throughout this period, I was frequently made aware that lobbying on the other side of the table were the Wall Street banks, and the SEC itself.

Then, in 2008, our financial system began imploding, and the SEC immediately passed an unprecedented emergency order (“SEC Enhances Investor Protections Against Naked Short Selling“) granting the most aggressive form of protection we had been seeking (imposing a pre-borrow requirement on short selling), yet extending it only to the 19 most significant financial firms at the heart of Wall Street. That seemed odd on many levels, not the least of which was that many of those firms were prime brokers who had been enabling hedge funds to do it to other publicly traded companies.

Then, in September, 2008, the SEC rolled out a market-wide reform that was, once again, carefully designed to be toothless. It was around this time that I began publicly describing the SEC as bootlick of Wall Street (“Overstock CEO Comments on SEC’s New Rules Against Naked Short Selling: ‘Nerf penalties for financial rapists’ declares Byrne”).

In October and November of 2008, regulators around the globe began taking emergency measures:

September 21, 2008 Associated Press: “Dutch ban ‘naked’ short selling for 3 months: The Dutch Finance Minister is banning ‘naked’ short selling of financial stocks for the next three months to increase the stability of financial markets…”

October 28, 2008 Wall Street Journal: “Japan Cracks Down on Naked Short Selling: Tokyo: Japan moved Tuesday imposed new restrictions on so-called “naked” short selling of stocks…”

November 14, 2008 “Australia bans naked short-selling: CANBERRA: Australia moved to slap a permanent ban on the most controversial form of short-selling yesterday amid an historic fall in share prices, part of a crackdown that is also targeting hedge funds and credit rating agencies.”

November 21, 2008 – The Financial Times: “Regulators to discuss short selling rules: Global securities regulators will gather on Monday to discuss rules on short selling and disclosure of credit derivatives, the head of the US Securities and Exchange Commission said on Thursday.”

November 24, 2008 Reuters “Global regulators focus on abusive short selling”

Then, in December, while regulators in the rest of the modern world focused on cracks in their respective settlement system, the SEC switched back to dragging its feet:

December 9 – Reuters: “SEC urged to do more to curb naked short selling”

Since then, settlement issues have been at the forefront of discussions of the financial crisis in Europe and the rest of the world.  Germany:  “Merkel sticks to her guns, calls for global market reform: Angela Merkel told a meeting of international financial leaders that the G-20 must work together to reform the finance system. Merkel is pushing for tougher market regulations….” Britain, March 7, 2011: “MEPs vote for ‘naked’ short-selling restrictions”.  European Union: “Merkel, Sarkozy seek EU ban on naked short selling, CDS“. Japan: “Japan to extend naked short selling ban to Oct”. Etc.

Yet in the US, the issue has, once again, disappeared. How utterly odd.

In sum, then,  since 2003 the settlement system which underlies our capital markets has seen problems that disappeared, reappeared, disappeared, reappeared, and disappeared to suit the needs of the Wall Street elite and their handmaidens at the SEC. Initially, in 2003-2004, there were (according to the SEC) no problems in the settlement system worth speaking of. Then in 2004, the SEC passed a rule, Reg SHO, that did nothing of substance beyond drawing draw bull’s-eyes on firms already being manipulated: to do so, they danced within the outer limits of the Administrative Procedures Act, whose purpose is precisely the opposite of the use to which it was put by the SEC. Yet in April, 2005 the SEC explained that the rule they passed had grandfathered the problem “because the Commission was concerned about creating volatility where there were large pre-existing open positions” that until then they had insisted did not exist. Simultaneously, the SEC continued to claim that the problems in the settlement system were negligible and inadvertent, until in June 2005 their own economist, Lesli Boni, showed they were pervasive and deliberate. From 2005-2007 the SEC continued to insist that they were not significant, but fought tooth-and-nail to prevent being released to the public the data that would decide things one way or another. Then in 2008 the SEC suddenly considered it a massive problem requiring an unprecedented emergency regulation to stop it, but just for those Wall Street banks which had for years been enabling it against other publicly traded companies. Then while regulators in the rest of the modern world have spent 2009 -2011 figuring out how to fix holes in their settlement systems, the SEC has switched back to regularly scheduled Muzak on the subject.

The government and Wall Street lawyers who went along for this ride display a mentality best described in this passage from Orwell’s 1984:

“The power of holding two contradictory beliefs in one’s mind simultaneously, and accepting both of them….To tell deliberate lies while genuinely believing in them, to forget any fact that has become inconvenient, and then, when it becomes necessary again, to draw it back from oblivion for just so long as it is needed, to deny the existence of objective reality and all the while to take account of the reality which one denies — all this is indispensably necessary. Even in using the word doublethink it is necessary to exercise doublethink. For by using the word one admits that one is tampering with reality; by a fresh act of doublethink one erases this knowledge; and so on indefinitely, with the lie always one leap ahead of the truth.”

But the greatest Truman Show weirdness comes from the rest of us, driving away, listening to the radio.

“I am really going to enjoy watching Goldman Sachs try to justify its nefarious schemes to a jury box with 12 Americans in it,’ he said.”

That was Fortune Magazine quoting me on January 28, 2011, regarding the escalation of Overstock’s claims against Goldman Sachs, in an article entitled, “Nastiest CEO lashes out at Goldman”. The title underscores their sympathies and journalistic objectivity.  Displaying identical logic and equanimity there were, perhaps, similar “Nasty Belgians Lash Out at Fatherland” articles in the Nazi press of May, 1940.

Expecting Fortune Magazine to provide critical reporting of Wall Street in this first decade of the 21st century would be like expecting  Sports Illustrated to provide critical reporting on Michael Jordan in the last decade of the 20th century. They cannot: it’s a fan-mag. But Fortune‘s choice of title betrays its orientation more clearly than a dozen deconstructions of my own could accomplish.

One should note, however, that beneath its hysteria there are two facts on which Fortune Magazine is reporting. Those facts are:

1.       As my Overstock colleague Jonathan Johnson, Esq., put it, “Recently discovered revelations of concerted action among certain market makers and these two brokerages necessitate that we amend our complaint to include additional claims. We expect that this conduct of Goldman Sachs and Merrill Lynch is fully actionable under anti-racketeering laws.”

2.       I wish to make Goldman Sachs explain its actions not to a White House to which Goldman is the largest donor (“Goldman Sachs was top Obama donor“, CNN, April 2010); not to FINRA, its own industry’s self-regulating body in which Goldman is the dominant member (“Goldman Action Highlights FINRA Facade“);  not to an SEC which has been hopelessly captured beyond repair (“Why Isn’t Wall Street in Jail?“, Matt Taibbi, Rolling Stone); not to members of the Senate Banking Committee from both sides of the aisle (“Goldman Sachs Congressional Inquisitors Also Beneficiaries of Firm’s Financial Largesse“). I simply want to see Goldman to explain itself to 12 Americans whom they don’t own.

Because Fortune Magazine is allergic to both of these facts, this is how they treat them:

1.       Regarding the escalation of our lawsuit to RICO, Fortune provides this anodyne description: “Overstock said it made a filing with a New Jersey court allowing it to seek triple damages in its 2007 suit against the brokers.” In comparison, note how the same fact was treated by various news organizations whose business model is not tied to  regular and profound supplication before Wall Street:

a.       Reuters:  ”Overstock accuses Goldman. Merrill of racketeering. Overstock says RICO charges apply in case” (December 16, 2010).

b.      Associated Press: “Overstock adds RICO claim to short-sale suit: Overstock.com Inc. said Thursday that it sought to add racketeering charges against Goldman Sachs and Merrill Lynch….” (December 16, 2010)

c.       Benzinga:  “Overstock Adds RICO Claim To Goldman Sachs/Merrill Lynch Suit: As a result of evidence gathered through discovery in its prime brokerage lawsuit, Overstock.com, Inc. has filed a motion in California State Court to amend the suit to include claims under New Jersey’s Racketeer Influenced and Corrupt Organizations (RICO) Act.” (December 16, 2010).

d.      TechRockies: “Overstock Sues Goldman Sachs, Merrill Lynch Over Racketeering” (December 17, 2010).

e.      Benzinga: “Goldman Sachs Engaged In Interstate Racketeering, Says Overstock’s Patrick Byrne” (February 15, 2011).

2.      Regarding my insistence that Goldman answer for itself within the one system it cannot rig, Fortune’s title and subtitle say it all: “Nastiest CEO lashes out at Goldman: It is hard to know who (sic)to root for in this one”. Overstock conducted four years of discovery,  obtained documents to support a RICO action, and filed that RICO action, which in the eyes of Fortune Magazine makes me a “nasty CEO” who is “lash[ing] out” against Goldman Sachs. The thought of poor, defenseless Goldman Sachs having to answer to 12 Americans whom they don’t own and cannot buy clearly gives Fortune Magazine’s staff the vapors.

It is the thesis of DeepCapture that the banksters have hijacked not just the regulators and  industry self-regulators, but the politicians who oversee them, the academics who serve them, and much of the New York-based financial press. Of this observation Fortune once again provides fine confirmation. I am sure that Soviet apparatchiks could have wished for no more supine and obedient press coverage from their own state media services as Goldman Sachs (and by extension, Merrill Lynch) have received here from Fortune Magazine.

Point #1: Agents in a marketplace first commit to a trade, and then exchange the property rights they committed to trade.  The financial jargon for the mechanism which permits this exchange of property rights is “clearing and settlement”.

Point #2: In the USA there is much slop in these “clearing and settlement” mechanisms. Processes that you would expect to be one-to-one, or fixed-number-to-one, are actually sponge-to-one. People who understand this slop can loot the system knowing that it will not be discovered for a long time (and not in the ruins, if it comes to that).  Unfortunately, their activity leaves behind a residue that is a form of financial derivative, which in large quantities poses systemic risk.[1]

Point #3: In the last two years this issue has been the common denominator underlying scandals involving stocks,[2] Mortgage Backed Securities (MBS),[3] Credit Default Swaps (CDS’s),[4] commodities,[5] and Exchanged Traded Funds (ETF’s).[6]

Point #4: The line between Organized Crime and the financial community has grown fuzzy.[7] In particular, clearing and settlement is all mobbed-up, and wherever one pokes into it one quickly comes upon Bad Boys and Bad Boy Firms.

Point #5: You hope that financial regulators and journalists are protecting you from things like this, but they are not. Why not? Some have been co-opted intellectually: Our financial intelligentsia holds an inappropriately fervent commitment to the Efficient Market Hypothesis, and this leads them to overlook the ways that slop in the system is pernicious (even if is fungible slop).[8] Some lack the horsepower to follow along.[9] And some, like Jim Cramer, are dirty.[10]

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

[1] As Warren Buffett’s partner Charlie Munger put it, “Those delays in delivering sometimes reflect tremendous slop in the clearance process. It is not good for a civilization to have huge slop. Sort of like how it isn’t good to have a lot of slop in nuclear power plants.” Berkshire Hathaway Annual Shareholders’ meeting, May 2007.

[2] “SEC Extends Naked Short-Sale Order on Fannie, Freddie” (“The U.S. Securities and Exchange Commission extended an emergency limit on short sales in shares of Freddie Mac, Fannie Mae and 17 brokerages as it prepares broader rules to thwart stock manipulation”), Bloomberg, July 29, 2008. “Naked Short-Selling Blamed in Wall St Crisis” Associated Press, 9/16/2008.

[3] In “The End of Wall Street” (Portfolio Magazine, November 2008) Michael Lewis wrote:

““That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. ‘They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,’ Eisman says. ‘They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?’”

For an explanation of how this ties in to the ongoing foreclosure crisis, see “Foreclosure Crisis: Punchline to a Michael Lewis Joke from 2008?” (Deep Capture, October 18, 2010).  For an explanation of the systemic stakes, see “The Real Danger From the Foreclosure Crisis”, Zerohedge, 10/15/2010.

[4] “Regulation: EU Comes Out Against Naked CDS Shorting”, Euromoney Magazine, March, 2010.  Regarding the claim that naked shorting of CDS is a benign activity, “Richard Portes, professor of economics at the London Business School, says that’s a nonsense. He uses the example of the 1992 sterling crisis, when George Soros bet around $10 billion against sterling, which most observers believe significantly affected the market and the outcome, even though daily trading volumes at the time were $100 billion. As Portes sees it, naked CDS as a speculative instrument might be a key link in a vicious chain that eventually could lead to a run on a sovereign’s credit quality.”

[5] “Silver Market Probe: Act Now, CFTC Is Urged”, Wall Street Journal, October 27, 2010. “The CFTC’s investigation of silver has heated up in recent weeks. The agency’s enforcement staff has circulated a packet of information to CFTC lawyers and commissioners, outlining some of its findings in the silver probe, including documents that could suggest there have been attempts to manipulate prices.”

[6] “New Report Outlines Causes of Market Distortions Choking Recovery and Preventing New Growth Companies from Going Public: Derivatives known as ‘ETFs’ are the true culprits in artificially setting stock prices and posing threats to market stability“, Kaufman Foundation, November 8, 2010. “New Report Blasts ETF’s For Systemic Risk” CNBC, November 8 2010. “Can Naked Shorts Collapse an ETF?”, Barron’s, December 7, 2010.

[7] See FBI Operation Uptick: “In what authorities are calling the largest securities-fraud bust in U.S. history, 120 defendants — including members of all five New York City Mafia crime families and the treasurer of New York City’s police-detectives pension fund — were indicted Wednesday…” CNN, June 14, 2000. For a more recent investigation into how Organized Crime has become entwined in our market, see “Michael Milken, 60,000 Deaths, and the Story of Dendreon“, DeepCapture, July 2009.

[8] For explanation, see “The Deep Capture Analysis: Systemic Risk”.

[9] See for example “Anti-Investigative Reporter Joe Nocera and the Newspaper of Non-Record (New York Times)”.

[10] See Jon Stewart’s magisterial public dismemberment of Jim Cramer at “Daily Show: Jim Cramer Extended Interview Parts 1, 2 and 3”. For fuller background, see “Deep Capture: Jim Cramer is a Complicated Man”.

On Thursday Overstock, a company for which I work by day (and most evenings and weekends, too) issued the following press release:

“Overstock Adding Racketeering Allegations to Ongoing Lawsuit vs. Goldman Sachs and Bank of America Subsidiary Merrill Lynch: Company Files Motion to Amend its Lawsuit to Add Claims of Civil RICO“

Numerous stories quickly appeared in Reuters (“Overstock accuses Goldman. Merrill of racketeering; Overstock says RICO charges apply in case“) and Associated Press (“Overstock adds RICO claim to short-sale suit“).

At first Goldman punted its reply (“A Goldman Sachs spokesman said the bank opposes the motion, but did not elaborate”, read the early version of the Reuters story), but, after having an hour to think of it, managed this witticism:

“‘The motion is the latest attempt by Overstock to shift the blame for its poor share price performance,’ a Goldman Sachs spokesman said.”

Coming  from an institution that recently (Bloomberg, December 1, 2010: “Fed Names Recipients of $3.3 Trillion in Crisis Aid“) fastened itself to the public sugar teat for tens of billions in indirect bailouts and $24 billion of direct capital support lest it go the way of the wild buffalo and vaudeville,  that statement is funny.

Truly.

Readers may have noticed my relative absence of late.

I assure you that the mission of DeepCapture is often front-of-mind, but to pay the hosting fees and other expenses of our investigative journalism I maintain a day job, and some periods are busier than others.  Also, I have been comfortable watching events take their natural and overdue course.

However, the time of year has arrived when things slow down a bit for me. I have been going through my files, and given events of the last two years they present such a target-rich environment it is hard to know where to start.

So let us begin by revisiting an oldie-but-goodie.

I think the image was a particularly concise way to express the dynamic I was trying to get across to the public.  Sometimes folks challenge me on my language, which is at times, admittedly, earthy. De gustibus non disputatum est, and all that. My response is simple: once I understood what I was up against I decided to punch through the distortion by adopting imagery and metaphors that I knew they could not resist quoting. (Also, I suppose it represents a certain form of intellectual snobbery: I’ll debate the Chief Economist of the SEC on equal terms, but when having to deal with the riff-raff I cannot resist slipping into a Hunter S. Thompson frame of mind. It’s a failing, I’m sure.) On the other hand, one may ask, Why did Bethany give this the special fly-out? I think it was a writer’s professional jealousy: judging from All the Devils are Here, Bethany McLean and Joe Nocera couldn’t turn an interesting phrase if it had a handle bolted to it.

Given the events of the interceding five years, I only wish Bethany had not buried the lead.

The foreclosure crisis is being written and spoken of as though it were exclusively a paperwork crisis. For example, an October 18, 2010 Associated Press  wire described the scandal as one concerning “questions on the accuracy of documents used in the foreclosure process” and “faulty paperwork”. The narrative is that banks got behind in their processing, hired robo-signers, bluffed folk out of homes, etc.

That all sounds true and unsurprising. However, there may be another element that is being missed.

In late 2008 Michael Lewis wrote a Portfolio article (“The End“) weaving together a story line concerning a then-recent  lunch  between himself and John Guttfreund of Salomon Brothers and Liar’s Poker fame (thus, arguably, nemeses), and another concerning Steve Eisman, a money manager who bet heavily against the MBS market.   The climax of the Eisman story runs as follows:

“That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. ‘They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,’ Eisman says. ‘They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?’”

Investors who bought mortgage-backed securities believed that if interest payments stopped coming through the piping they would be able to recapture some value via the foreclosure process.  If Michael Lewis was right, sometimes there were actually no underlying homes on which to foreclose.

Note that mortgage-backed securities backed by phantom mortgages are actually “mortgage”-backed securities. Such instruments are in reality derivatives that in calm markets would track the  performance of securities that are really mortgage-backed. In calm markets one security may track another security (or basket thereof), but when a market reaches its shear strength nothing tracks anything. In fact, “shear strength” actually means “the point at which parallel internal surfaces in a material slide past one another” (a strangely beautiful discussion of which can be found on this engineering site). That’s a good way to think about what happens in markets under sufficient stress: surfaces which had previously stayed parallel begin sliding past each other.

If Michael Lewis was right, banks packaging up mortgages did not just do sloppy packaging. They were also selling the packages several times over. Buyers of the “fake” packages were kept unaware of the situation because they continuously received the “interest payments” they were due, those payments being funded out of the money Goldman charged investors like Eisman to keep their bearish positions in place.

Which, to readers of DeepCapture.com, may sound familiar.

If this is really what happened down below, how would things appear on the surface? Like this: A bunch of lawyers representing the interests of owners of these “mortgage”-backed securities would be going into court trying to foreclose on homes, but not be able to establish clear chain of title. Which is precisely what is happening. That’s not the same as saying it is why it is happening. However, if Lewis’ story about Steve Eisman is correct, then eventually this would have to happen.

Whatever the cause (or amalgam of causes) of this foreclosure crisis, its effects could ripple into our financial system in a way that some say will become catastrophic (e.g., “The Real Danger from the Foreclosure Crisis“, George Washington, Zerohedge).  Banks which believe that millions of people owe them money suddenly realize that no specific people owe them money while millions of borrowers suddenly realize they don’t owe money to any specific bank; banks suspend foreclosures, but people thrown out of their homes by banks who lacked chain of title form classes to recover what is rightfully theirs; title insurance becomes impossible on a non-negligible fraction of homes. Etc.

Yet the foreclosure crisis may become an opportunity for the United States.  DeepCapture has, I think, adequately documented that one of the great problems within American society is that Wall Street’s megabanks have Washington, D.C. under their thumb. Two years ago this country drew a firebreak around those Wall Street megabanks and said, “We won’t let them burn.” The better answer would have been to draw the firebreak around them and say, “Let them burn first.”

Next time around, let’s do it.

At least it will take care of the thumb.

The backstory on this post comes in two parts:

The Illustrious Henry Blodget Thinks I Am A Very Bad Man, Part 1

The Illustrious Henry Blodget Thinks I Am A Very Bad Man Man, Part 2: The Essay Business Insider Requested Then Refused To Publish

Today’s late-morning mailbag brought quick response from Mr. Henry Blodget.  Before trying to make sense of it, I respectfully suggest the reader consider the two links above (especially the first).  Also note that Mr. Blodget has over time, and especially in the last two months, published and republished “every yellow journalism hit-piece written by any slack-jawed mouth-breathing jackanapes who can manage to sit on a keyboard”, as I wrote earlier today, language which seems to have given New York Times’ reporter Floyd Norris the vapors (perhaps because Floyd could not turn a phrase if it had a handle on it).   Given this background, some might find Mr. Blodget’s response odd:

From: hblodget@gmail.com [mailto:hblodget@gmail.com] On Behalf Of Henry Blodget
Sent: Tuesday, February 02, 2010 11:12 AM
To: Patrick Byrne
Subject: Re: Overstock CEO Byrne

Patrick,

I didn’t realize we had reached a permanent impasse on the post, but judging from your Deep Capture entry, I guess we have.  I’m sorry you experienced the recent exchange as “nastiness.”  I certainly didn’t.

I don’t think you are a “very bad man.” (I don’t know you well enough to know).  I’m very impressed with the company you’ve built, as well as with your intelligence, accomplishments, and willingness to challenge convention.  I do wonder why you occasionally do things that, from my perspective, seem self-destructive.  But I suspect a lot of people who have watched and interacted with you over the years feel that way.

Henry

I won’t editorialize, instead choosing to leave it to interested parties to read the correspondence published in   The Illustrious Henry Blodget Thinks I Am A Very Bad Man, Part 1 and privately decide the measures of truth versus rationalization in Mr. Blodget’s reply.  Feel free to share an opinion below.

Of course, Henry Blodget could save us all the effort, and simply publish the essay that Business Insider requested that I write almost two months ago, and that I wrote over a month ago, and whose publication he then stalled, dodged, and temporized (though he seems to manage to republish the yellow journalism hit pieces within hours of their first appearance). After all, weeks ago I faxed Henry the signed indemnity he requested (with but the one change described in the earlier blog, and that is, that I, not he, get to fight any lawsuit that those of his acquaintance might choose to file), and posted the essay today myself, thereby eliminating all elgal risk for him. So, if Henry was being truthful in suggesting that this was not a dead issue, and he was not merely temporizing, then there is really a way he could show it.

After all, Henry Blodget would not be just trying to spin the public, would he?

The backstory on the following essay appears in “The Illustrious Henry Blodget Thinks I Am a Very Bad Man, Part 1“.

OVERSTOCK CEO PATRICK BYRNE REPLIES TO HEDGE FUND CHOAGIES: WE’RE THE GOOD GUYS, YOU’RE THE BAD GUYS

“It isn’t what we don’t know that gives us trouble, it’s what we know that ain’t so.” – Will Rogers

I have spent five years trying to expose and disrupt bad behavior on Wall Street. I conducted this campaign through public appearances and DeepCapture.com, a site of investigative journalism I fund. Those I have attempted to expose have sought to prevent public understanding of my claims by generating a mish-mash of things for the public to “know [but] that ain’t so.”

Henry Blodget has graciously invited me to respond to them here.  When some years ago Henry first wrote of me he prefaced his thoughts with something along the lines of, “I’m the last guy in the world to criticize someone for what he puts in an email, but…”: that, and the present invitation to which I now respond, demonstrate to me that Henry has a sense of intellectual integrity and, it appears, humor. I thank him for his invitation, and welcome this chance to set the story straight.

I will do so in three sections: The Fight, The Result, and The Cover-Up.

THE FIGHT

My argument can be expressed in three points:

1)      Participants in our capital market take for granted the settlement system running behind the scenes, but more slop exists in that settlement system than is commonly understood.

2)      Stock manipulators can employ this settlement-slop when they conduct bear raids. One of their techniques is “naked short selling” There are others that are not, technically, “naked short selling” but which have essentially the same effect  (e.g., failed long sales, failed offshore deliveries, abuse of the option market maker exception to create married puts or “bullets”, swaps, daisy-chaining, “bed-and-breakfasting” and perhaps other methods understood only by a handful guys who are bright lights in that lofty firmament which is Caribbean banking).

3)       In August, 2005 I gave a webcast (“The Miscreants’ Ball”) where I discussed the pattern of modern bear raids.  The pattern I described included such elements as:

a)      a group of hedge funds which seemed to be on the scene wherever stock manipulation occurred;

b)      some putatively independent analysts and journalists who seemed to be shilling for those hedge funds;

c)       an “independent” research shop named Gradient who was writing hatchet-jobs on cues given by hedge funds like Rocker Partners (I made public affidavits from three ex-Gradient employees attesting to this and to reporter Herb Greenberg’s participation in the scheme);

d)      Milberg Weiss, a class-action law firm which filed lawsuits in coordination with these bear raids;

e)       Jim Cramer, the man in whom the stock manipulators and journalists seemed to intersect;

f)       Eliot Spitzer, a New York Attorney General with problematic ties to this group;

g)      and the SEC, whom I accused of not protecting the public due to having grown inappropriately close to powerful Wall Street interests.

In closing, I suggested that this network centered on someone I referred to as “the Sith Lord”. In interviews that followed I explained this by repeating a specific formulation:  “I really think in terms of a composite of two people.  Someday I might sack up and let the world know who the master minds are, but not now” (a hint broad enough for Wall Street to understand, I assumed).

Note that while the Miscreants’ Ball was occasioned by a lawsuit Overstock.com had filed, little of it (less than ¼) actually concerned Overstock. The remaining ¾ of the webcast mapped this pattern of bear raids in our markets.

I followed up on the Miscreants’ Ball with a three year campaign expounding on the possibility that these manipulative techniques were creating a settlement residue which degraded corporate voting, destroyed firms, and might be destabilizing the financial system.

THE RESULT

Since that day in 2005:

1)      Milberg Weiss imploded under DOJ indictment, and its leaders were jailed, for using “paid plaintiffs” (i.e., shills). The indictment has a remarkable line (pages 29-30) to which no journalist has turned attention: “Unlike the other class members in the Lawsuits, the Paid Plaintiffs purchased the securities at issue anticipating that the securities would decline in value, in order to position themselves to be named plaintiffs in securities fraud class actions and to obtain kickback payments from MILBERG WEISS, BERSHAD, SCHULMAN, and others.”  No journalist has yet asked, How did Milberg Weiss know which securities to direct its “Paid Plaintiffs”  to purchase, and why were they “anticipating that [those] securities would decline in value”? Are Lerach and Weiss stock pickers?

2)      Jim Cramer appeared in a video recounting how his hedge fund engaged in practices that he described as illegal but common, practices that were precisely what I had alleged (Cramer’s lawyers had managed to get that video removed from every spot on the Internet except DeepCapture, and I am proud it played a role in Jim’s undoing at the hands of Jon Stewart);

3)      Eliot Spitzer suffered his well-known comeuppance with Ashley Dupre (no disrespect to these fine ladies intended). Less discussed is the fact that Ashlee turned out to be living rent-free in the home of Jim Chanos, a hedge fund manager who was both one of Spitzer’s earliest and largest supporters, and a key member of the network of hedge funds I had been spotlighting. So far the press corps has accepted that as coincidence, apparently assuming that one day Eliot Spitzer just picked up the Yellow Pages and called a cat-house. The possibility that hedge funds may have been involved in the procuring of Ashlee or her colleagues, and thus enjoyed joint ownership of the Attorney General of the State of New York, is something that to my knowledge only one national publication is pursuing.

4)      In late 2008, Gradient settled with Overstock, issuing apology for and retraction of their scurrilous claims (sums paid, if any, have not been disclosed). In late 2009, Rocker Partners paid Overstock $5 million to settle for its part in the scheme (without admitting said scheme’s existence, to be fair).

5)      Much correspondence among hedge funds, journalists, analysts, hired thugs, and Mafiosi has gotten public (some in essays published on DeepCapture, some in actions taken by the feds), and it reveals precisely the relationships which I had posited in that call.

6)      Bloomberg Magazine published “The Corporate Voting Charade”, an investigative piece by Bob Drummond, describing how slop in our settlement system makes corporate elections a “sham”. As Drummond wrote, “the results of high-stakes company decisions may hinge on the invisible influence of millions of votes that shouldn’t be counted, says Thomas Montrone, chief executive officer of Cranford, New Jersey–based Registrar & Transfer Co., which oversees shareholder elections. ‘It is an abomination,’ Montrone, 58, says. ‘A lot of the time we have no idea who’s entitled to vote and who isn’t. It’s nothing short of criminal.’” Drummond proceeds, “There are votes cast twice on almost every matter of substance,” Hagberg, 63, says. “It definitely can and does, in my experience, affect the outcome of corporate elections and proposals.”

7)      By 2008 numerous journalists were covering how companies were destabilized by these techniques of settlement-system gaming. Bloomberg TV did a half hour Special Report, “Phantom Shares”, that was nominated for an Emmy – Long Form Investigative Journalism.

8)      In 2008’s systemic crisis settlement-gaming was repeatedly implicated:

a)      Two Wall Street firms which had been saying the crime of naked short selling didn’t exist went under screaming it had been their undoing;

b)      The SEC implemented an unprecedented emergency order to protect our financial system from the crime they had been saying didn’t exist;

c)       In autumn, 2008 regulators from the G-20 held emergency meetings directed towards keeping the financial system from Chernobylling from this non-existent crime;

d)      Also in autumn, 2008, the SEC finally closed some of the settlement loopholes that enabled the crime that didn’t exist, and several hedge funds (including Rocker Partners) imploded when the loopholes they weren’t using were suddenly closed.

9)      In December, 2008, Bernie Madoff turned himself in, and everyone from 60 Minutes to the United States Congress learned about “regulatory capture” and the SEC under George Bush;

10)   As I write, feds seem to be rolling up a network of hedge fund players, and press reports put at the center of that network one Steven A. Cohen, or “SAC” as his fund is called (while the hedge fund community reduces its ties to SAC, Reuters recently killed a story on Cohen, at his request).

So may we agree that the DeepCapture Team turned out to be at least directionally correct?

The Cover-Up

When I started my campaign I was curious to discover how far extended the intellectual corruption of the New York financial press. I mapped it with sonar-pings, and in time became convinced that, with some exceptions (notably, several Bloomberg journalists, Fox Business, and a few islands of reporters isolated here and there) the bulk of the New York financial press lack a faculty for critical thought and the courage to take a position contrary to a well-accepted truth, and a few are actually hostile to truth.  If I were still teaching, I would say that most performed like Continental Philosophy hysterics forced to take an econ class. Their conformity and indolence permitted a cover-up to persist.

1)      Their list of Wash-Rinse-Repeat instructions was short:

a)      Do not report what Byrne is saying about bear raids; pretend he is just talking about Overstock.

b)      Do not report what Byrne says about naked short selling; pretend he is talking about Overstock.

c)       Pretend not to understand the “Sith Lord” reference. It’s a metaphor. Say: “Who uses metaphors? That’s crazy, right?”

d)      Prime directive – Do not feed the “bear raids” meme. Bear raids do not exist.

2)      The social media cover-up: DeepCapture.com ‘s investigative journalist/technologist Judd Bagley acquired a computer filled with emails that confirmed the relationships among hedge funds and law firm cut-outs, convicted stock manipulators, message board posters and Wikipedia sock-puppets that all sane observers already saw.  This network conducted the following activities:

a)      Two million pages on Wikipedia run by one set of rules. The page on Naked Short Selling runs by a different set of rules. In what became the largest internal scandal in Wikipedia’s history, it turned out that a down-and-out journalist named Gary Weiss had been given control of this page by the Wikipedia higher-ups. In fact, Weiss ultimately made a mistake that revealed he was manipulating social media from within the DTCC, the Fort Knox-like corporation at the heart of the settlement system, as Judd Bagley uncovered.  What followed was an enormous Wikipedia civil war in which, ultimately, the Wikipedia community caught Gary Weiss red-handed. The Register, a British on-line publication focusing on Silicon Valley, covered this story extensively.  Their first stories were skeptical, but as a staggering amount of evidence accumulated in support of them, they shifted sides and confirmed what we had been claiming: “reporter” Gary Weiss was part of a remarkable campaign to manipulate social media to cover up financial crime.

b)      We and our sympathizers were frequently threatened. One journalist who took our side was jumped, beaten up, and told to stay away from this story. One fellow traveler, Dave Patch, saw his and his wife’s names, addresses, and social security numbers posted at an online message board. Mary Helburn (another fellow traveler) saw someone using as aliases the names of her nephew (a head-injury-survivor) and deceased sister to post nasty and vaguely-threatening messages. Judd Bagley, an investigative journalist who works for DeepCapture, saw the names, ages and home address of his two young daughters posted online by Sam Antar (naturally, shortly thereafter Sam became a favored presense for Fortune Magazine and CNBC). None in the press would report on any of this. However, in a display of selective outrage which demonstrates the low intellectual integrity of which I write, when Judd recently documented and questioned the appropriateness of the fact that the hedge fund folk and the journalists of whom we write are Facebook Friends with each other (which one would not see, for example, among political reporters and the politicians they cover), that was written about as though it were an incredibly intrusive thing for Judd to do, even though the material he assembled was already self-published on Facebook by those later claiming it was intrusive of Judd to gather and display. Interestingly, in their stories criticizing Judd most choagies went far out of their way to bury mention of DeepCapture (some did not even mention it at all, though that is where Judd’s work appeared). Instead, “Overstock” was substituted for “DeepCapture.com”, my name for Judd’s (at least in titles), they claimed it was “hacking” when no hacking occurred (they’re just technologically illiterate), and they write of lists of “Overstock’s enemies and critics” when, in fact, this and most of what Judd writes nothing to do with Overstock. This song isn’t about me: it’s about the extraordinary deference show by the financial press to some bear raid-conducting hedge funds. But that is the meme that must be suppressed.

A year ago DeepCapture was voted the Internet‘s Best Business Blog, and recently, named  best for Business Investigative Journalism.  The Wall Street Journal graciously listed mine as among the “Best Calls of 2008”, and CNBC talking heads recently acknowledged  we turned out to be right all along.  Ye the CNBC/Fortune/New York Times crowd, who once leapt on obscure issues related to me (Herb Greenberg wrote a story the thesis of which was that sometimes I answered emails quickly, but sometimes slowly), went mute as soon as we launched DeepCapture. I believe they realized from that point forward reporting on my allegations would require mentioning DeepCapture, which would make it too easy for the public to investigate. They thus suddenly ceased coverage altogether, or only engaged in circumlocution-filled slurs.  When DeepCapture blossomed the choagies lost control of the narrative, so their best hope became to avoid its mention.

So Henry, that is my rebuttal to the choagies: We were right and their outrage about Judd is as selective as their cover-up was transparent. Their Roar of Criticism became a Cloak of Silence the day DeepCapture launched, which tells the objective readers all she needs to know.

I look forward to meeting someday, Henry, and until then, I remain,

Yours in good humor,

Patrick M. Byrne

And so ends the story of recent “nastiness” with the Illustrious Henry Blodget.  And I must say, it is good to see how much personal growth he has achieved since his days at Merrill Lynch.