Category | Journalists Tried to Be Players But Became Pawns

Slow Learner

The second time I heard the joke I was standing on a hilltop in the middle of the night overlooking Kabul, Afghanistan in February, 2004. I finally got the joke that second time I heard it, but only because I had just had the same gag pulled on me while appearing on CNBC’s Kudlow & Cramer show a few weeks earlier. I’ll start there.

Overstock had gone public in May 2002 and, by the end of 2003, in the eyes of some, it was doing well. In 2003, its fourth year of business, Overstock’s revenue was just shy of $300 million. Many competitors had come and gone, amassing losses of half-a-billion or more, before shutting their doors. Amazon, the 800-pound gorilla in our industry, had burned $3 billion in its start-up cycle before having a profitable quarter. By comparison, Overstock had lost $68 million but had already had one GAAP-profitable quarter (“GAAP” = “Generally Accepted Accounting Principles,” the strictest accounting measure of profitability). In addition, Overstock had had two EBITDA-positive quarters (“EBITDA” = “Earnings Before Interest, taxes, Depreciation, and Amortization,” a somewhat looser standard that some on Wall Street apply to companies on the grounds that it better approximates the “true” economics of a firm). Moreover, in 2002 Overstock had a full year (2002) of positive operating cash-flow (cash-generating ability is another way, and to some the people, the most important way, of measuring a firm’s real economics). In addition, Overstock had ended 2003 with a bang-up quarter, growing 94% and generating $21.9 million in operating cash flow for Q4. All this occurred while we were jockeying around capital and infrastructure that were miniscule in comparison with the hundreds of millions, or even billions, that “Wall Street’s darlings” had been employing.

As was becoming my custom, at the end of the quarter I wrote a lengthy shareholder letter explaining what was going on in the business, where my colleagues were doing well, where I was screwing up, and projects the company needed to accomplish in the future. In that letter I mentioned, “Gross profit,” a term about as common in the discussion of financial statements as, I’d estimate, the term “wide receiver” is in discussions of football (in the case of my letter, 2.5% of the letter concerned gross profit).

The day our earnings press release appeared (with my letter embedded in it), Larry Kudlow & Jim Cramer of CNBC invited me to appear on their TV show. I had been on Kudlow & Cramer once or twice by then and they seemed like smart, decent fellows, so I agreed, and drove to the studio in Salt Lake City from whence one does remote interviews. This interview was different from our prior ones, however, in that they attacked me aggresively. The basis of their attack was my use of the mysterious phrase, “Gross profit,” in my discussion of Overstock’s financials. Cramer in particular berated me as if he had caught me in some heinous incantation. They gave me a brief moment to respond, then quickly signed off.

As I drove away from the studio feeling somewhat mystified, my cell phone rang. The caller was a man from deep within Wall Street “smart money” circles, someone known widely within the hedge fund community, who has been friendly to me, and even has looked out for me when he could. He speaks in charming if profane emphatics.

He said, “You know what just happened, don’t you?”

“What do you mean?” I asked.

You want to know what just happened? I’ll f—ing tell you what just happened. Here’s how it works. Those two guys are part of the short-seller community. Cramer especially is part of this ring of hard-charging short-sellers on Wall Street. I’ll bet you anything that one of his buddies is short your company. Whoever it is saw your earnings release, saw you blew your numbers away, got on the phone to Cramer and said, ‘Don’t you dare let this thing start moving. Don’t you f—ing dare let this move!’ So Cramer goes on TV and screams that nonsense at you. I bet my last f—ing dollar that’s what happened. It’s been like this all my career, but it’s never been like this.”

Later that week, a fund manager who had seen the interview told me, “That was the most unprofessional interview I have ever seen in my life.” In time, others would mention it to me, so that months and even a year later, I’d meet people who said, “I saw you on with Cramer one time. That was the craziest interview I ever saw.”

That was the first time I heard the joke, but I did not get it until I heard it the second time, a few weeks later, in February, 2004, while I was in Kabul (because it is a natural next question: I was in Afghanistan searching for artisans to become suppliers for Worldstock). Our PR Director at the time, a calm, mellow Californian named “Scott,” had sent an urgent message saying that a BusinessWeek reporter, Tim Mullaney, was going to write a story attacking the price comparisons listed on Overstock’s website. Mullaney was asking about a set of products which were precisely the same products that another two reporters had called asking about that same week. Since Overstock had about 12,000 products at the time, the coincidence was odd. In addition Scott said, Mullaney was acting as though he wanted us to know he planned on writing a hatchet job.

Scott wanted me to contact Mullaney at BusinessWeek. I had a rented satellite phone in my luggage, so I charged it and walked up a hill overlooking my hotel on the outskirts of Kabul, and called Tim Mullaney at BusinessWeek’s offices in New York.

As background, here is the lowdown on price comparisons. Price comparisons are imperfect because price data is imperfect. Overstock does the best it can to give real price comparisons, updating data as we learn it (electronic products are the most troublesome because prices can drop suddenly when new models are introduced). Above all, Overstock is clear about its price comparison methods. Every month Overstock sells a million items, and a few dozen times a customer informs us that a price comparison is wrong, at which point we update our system with the new data, if we have not already caught it ourselves. This always seemed like a pretty fair system (but recently Overstock adopted Amazon’s price comparison methods).

So in February 2004 I was standing in the wind on a hilltop outside Kabul in the middle of the night trying to explain this to a BusinessWeek reporter through the static of a satellite phone. As I spoke he started saying, “Uh-huh, uh-huh, uh-huh.” I paused, thinking he was indicating he understood and had another question to which he wished to move on, but none came. “I’m sorry, were you asking me something?” I asked.

“No, no, go ahead, I’m with you,” Mullaney answered, adding “Uh-huh, uh-huh uh-huh” as soon as I started to speak.

Mullaney asked me about a few electronic products, and I explained to him the issue with electronics: that when a manufacturer introduces a new product the comparison price on the older product drops, and can catch Overstock off-guard until we catch the change ourselves or a consumer notifies us. He had an example of a competitor selling a television for a price that was $20 below Overstock’s: he had not factored in the fact that they were charging $100 shipping, and Overstock charged $2.95 shipping, so in reality their real price was $77 higher than Overstock’s. I began to explain this to him. “Uh-huh uh-huh uh-huh,” he said, cutting me off.

I signed off, perplexed.

The next day I got a message from that same man within Wall Street’s “smart money” set, the one who had called me after the bizarre Kudlow & Cramer interview. His message to me in Kabul was that the word was out around Wall Street that negative stories on Overstock were about to appear in BusinessWeek and The New York Post. He even predicted the days they would appear and the lines of attack.

The stories did subsequently appear on the days he predicted they would, and they said just what he had told me they were going to say.

That was odd, because hedge funds are not supposed to know the timing and content of articles coming out in the press before the general public does. I’m not sure, but I think I read that somewhere.

That’s when I got the joke. It was the second time I’d heard it (Kudlow & Cramer was the first) but I’ve always been a bit slow on the uptake.

Since that time there have been many strange moments and I’ve learned a lot. I will not try to convince you of anything, but for the rest of this chapter I am going to tell you that same joke, in numerous ways. Most of the things I write here you will be able to check, but some you will not, in which case you’ll have to decide for yourself if I am telling the truth.

Even if you never heard of or cared about Overstock.com, you should know this: if you invest in the US stockmarkets, then whether or not you get this joke, it gets you.

Posted in Journalists Tried to Be Players But Became PawnsComments (3)

Why Are Fortune Magazine and the New York Financial Media Suddenly Pimping Sam Antar the Crook?

I will briefly recount the sordid history of Sam Antar the Crook. Then, and only then, will the reader grasp the import of the question, “Whose interests are being served by the recent promotion of Sam Antar the Crook? Why him, why suddenly, and why now?”

1. In the 1980’s a New York electronics retailer named Eddie Antar, running a chain of discount electronics stores called, “Crazy Eddie,” perpetrated an enormous swindle. As a recent Fortune Magazine article put it, “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.” A key player in the swindle was the company’s CFO (and Eddie Antar’s cousin) Sam E. Antar.

2. When Sam was busted, he ratted out his two cousins, who each served several years in prison on the strength of Sam’s testimony (I guess Eddie was Crazy after all, to trust Cousin Sam). Sam Antar ratted out family members in return for a reduced sentence of six months’ house arrest and 1,200 hours community service.

3. Barry Minkow is a convicted stock cheat who, at the ripe age of 23, was sentenced to 25 years for his various stock fraud schemes (no small feat). He was released after 6 years. Recently he became entangled in a new stock manipulation case. Three months ago Minkow was subpoenaed and deposed, and in that deposition (pages 8-10), disclosed that Sam Antar the Crook had paid Minkow $250,000 (in two payments, one of $100,000 and one for $150,000) to turn his skills against a public company that he, Sam Antar the Crook, was shorting.

4. Within months of Sam Antar the Crook paying Minkow $250,000, the State of New York issued a $471 tax warrant against Sam Antar the Crook (it turns out that Sam has quite a history of these, so it cannot be put down to forgetting to put a stamp on an envelope). Is the fact that a fellow could not pay a $471 tax lien, but could wire a quarter-million dollars to an ex-con stock cheat, odd?

5. At the request of Sam Antar the Crook, Utah Attorney General Mark Shurtleff met with Sam on the condition that Sam not attempt to spin it as an endorsement of Sam’s views. Sam had his meeting then immediately welched on that promise. The Attorney General wrote a letter describing this chain of events, along with a disclaimer against believing Sam, that he twice attempted to post on Sam’s blog. Sam refused to let the Attorney General post it. At that point, Attorney General Shurtleff made public this letter scolding Sam for welching, and discouraging the public from listening to Sam about pretty much anything (“In light of Mr. Antar’s background as a convicted white collar criminal, we believe that the public should carefully scrutinize and objectively examine any public statements Mr. Antar makes.”)

6. Sam and Sam-cronies (Gary Weiss and Howard Sirota) regularly accuse those who disagree with them, or try to expose their shenanigans, as anti-Semites. Ed Manfredonia, one of the many whom they have repeatedly accused of anti-Semitism, asked the Anti-Defamation League to get involved. Displaying great class, the ADL got involved, and wrote this letter utterly rejecting those allegations. Notwithstanding the ADL’s statement, Sam continues to make endless allegations of anti-Semitism towards those who cross him.

7. These days Sam spends much time posting dozens of deposition-style posts directed at me and my colleagues, over-and-over, dozens if not hundreds per week (what an odd “hobby” for Sam to have). Generally they are inconsequential half-truths, quarter truths, or flat non sequiturs. Even people who formally tolerated him have begun pointing out his lunacy to him.

8. Sam attempted to intimidate one of my colleagues by posting on a public message board the names and address of my colleague’s wife and two little girls, ages 6 and 9:

Sam Antar Threatening Children

___________________________________________________________________

How would reputable journalists treat Sam? They would not touch him with a ten-foot pole. Which would explain why several figures within the New York financial media are anxiously and suddenly promoting him.

That’s right: though Sam is a swindler who ratted out his own family, a $500 tax cheat capable of paying a convicted stock swindler $250,000, and a message board basher who threatens 6 and 9 year old girls, Sam Antar the Crook has recently received heavy, positive promotion from the New York financial media.

For example, Sam Antar has recently appeared on CNBC, Herb Greenberg has salivated over him at lunch, and Forbes columnist Gary Weiss cannot stop fondling Sam in print (more on them anon).

Most significantly, Fortune Magazine recently published a 2,738 word profile of Sam Antar (“Takes One to Know One”) in the style known among journalists as, “a lotion job.” What was most remarkable about Fortune’s profile of the reformed Sam was that, as Fortune mentioned 4/5 of the way through:

“As a would-be fraudbuster, Sam E. has yet to notch his first kill. (Although in fairness he doesn’t hold himself out to be a full-time 10-Q detective. ‘I don’t have 40 people working for me like the SEC,’ he says.) He hasn’t brought any companies down or caused any regulators to open any investigations.”

That is, Fortune wrote a lotion-job profile of an ex-con swindler whose discernible contributions to humanity consist of nothing noteworthy beyond taking part in an infamous and massive scheme of fraud and embezzlement then saving his own skin by ratting out two family members in return for a reduced sentence, and whose recent “reform” has amounted to being a paymaster to another ex-con stock manipulator and threatening two little girls, but nothing beyond this that Fortune can name.

Does that seem odd of Fortune? Because it seems a little odd to me.

Is the sudden, major promotion that Sam Antar the Crook is receiving from the New York financial media due to some inexplicable lapse in their research or understanding, or is there a motive behind it? If there is a motive, whose motive is it? What interests are being served?

Cui bono?

Which question brings us one step closer to the heart of the problem: Gary Weiss, The New York Post, Herb Greenberg & CNBC, and Fortune Magazine.

sam_antar.03.jpg

——————————-

Sam E. Antar, the Crook

Posted in Journalists Tried to Be Players But Became PawnsComments (2)

Anti-Investigative Reporter Joe Nocera and The Newspaper of Non-Record (New York Times)

Joe Nocera has a problem.

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

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

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

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

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

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

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

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

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

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

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

On 9/12/07, Patrick Byrne wrote:

Dear Mr. Nocera,

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

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

Sincerely,

Patrick Byrne

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

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

–On 9/12/07, Patrick Byrne wrote:

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

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

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

On 9/12/07, Patrick Byrne wrote:

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

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

Patrick

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

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

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

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

Dear Joe,

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

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

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

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

Warm personal regards,

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

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

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

Dear Patrick,

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

All best,

Joe Nocera

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

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

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

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

Dear Joe,

You write:

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

Are you claiming that it is false?

Again, with warmest personal regards,

Patrick

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

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

Yes, my answer is that his claim is false.

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

Dear Joe,

Thank you so much for the courtesy of your response.

Now the follow-ons:

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

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

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

Yours truly,

Patrick M. Byrne
Reporter, DeepCapture.com

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

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

Good luck.

Joe Nocera

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

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

If only there were a pattern….

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

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

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

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

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

Best,

Joe Nocera

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

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

all best,

Joe Nocera

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

Dear Joe,

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

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

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

Best regards,

Patrick

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

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

all best,

Joe Nocera

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

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

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

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

Dear Joe,

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

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

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

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

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

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

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

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

Would you like to revisit any of these answers?

Fond regards always,

Patrick

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

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

best,

Joe

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

Dear Joe,

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

Regards,

Patrick

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

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

Dear Joe,

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

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

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

Very respectfully,

Patrick

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

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

Joe Nocera

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

Dear Patrick,

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

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

Thanks for your consideration.

all best,

Joe Nocera

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

Dear Joe,

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

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

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

The Final Word on Gary Weiss and Wikipedia

Gary Weiss and his Yahoo Gnomes

Gary Weiss doesn’t like Liz Moyer

Gary Weiss, Usenet Troll

Gary Weiss: his DTCC Ties and Lies

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

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

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

• We did not contact Roger. Roger contacted us.

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

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

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

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

Most respectfully,

Patrick M. Byrne

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

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

all best,

Joe Nocera

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

Dear Joe,

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

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

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

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

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

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

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

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

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

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

Please comment.

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

Most respectfully,

Patrick

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

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

all best,

Joe Nocera

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

Dear Joe,

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

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

Warmest regards,

Patrick

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

They haven’t changed.

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

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

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

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

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

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

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

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

Dear Messieurs Ingrassia and Headlam:

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

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

With true respect,

Patrick M. Byrne

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

Mr. Byrne,

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

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

Yours sincerely,

Larry Ingrassia

Business editor

The New York Times

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

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

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

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

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

If this article concerns you, and you wish to help, then:

1) Let the New York Times know how you feel about their columnist by writing Business Editor Lawrence Ingrassia (ingrassia@nytimes.com), Media Editor Bruce Headlam (headlam@nytimes), and public@nytimes.com (post copies in the comment section here!);

2) email it to a dozen friends;

2) go here for additional suggestions: “So You Say You Want a Revolution?

Posted in Journalists Tried to Be Players But Became Pawns, The Deep Capture CampaignComments (51)

David Einhorn, Cheryl Strauss, and the “Unavailable” Bethany McLean

As will be explored in a subsequent piece, it would be fair to describe my relationship with Bethany McLean of Fortune as “strained”. However, it is not unusual for her to write or call me seeking comment, generally regarding spurious allegations fed her by crony hedge funds which she dutifully regurgitates on command, and sometimes regarding other things, too. I make it a point to respond promptly. On rare occasion when I have contacted her, she has responded promptly as well.

Thus I was a bit surprised at the turn taken by the following correspondence:

From: Patrick Byrne
Sent: Thursday, February 28, 2008 10:46 PM
To: Bethany Mclean
Subject: comment sought

Dear Bethany,

For the record, do you have any comment on either of these stories?

http://community.overstock.com/deepcaptureblog/why-is-sam-antar-the-crook-being-pimped-by-fortune-magazine-and-the-rest-of-the-new-york-financial-media/

http://community.overstock.com/deepcaptureblog/gary-weiss-scaramouch-psychopath/


Respectfully,
Patrick

From: Patrick Byrne
Sent: Friday, March 14, 2008 12:37 PM
To: Bethany Mclean
Subject: Three requests

Dear Bethany,

1) I understand Roddy has become a co-worker at your fine magazine. I am not confident I have his correct email. Would you mind sending it to me (or ask him to do the same)?

2) I have posted a new piece about Michael Steinhardt (if I do say so myself, it’s frightfully good). Would you please provide comment it?

http://community.overstock.com/deepcaptureblog/category/9-the-players/

3) If you do not intend to provide comment on this or any of my stories, would you please let me know that? Any further explanation you would be willing to share in that regard would be much appreciated.

Your friend,

Patrick

From: Patrick Byrne
Sent: Thursday, March 27, 2008 12:49 PM
To: ‘bmclean@fortunemail.com’
Subject: Hello

Dear Bethany,

Hello. I hope you are well. As you are perhaps aware, I am working on an article in which you will figure. I want to treat you justly and have your point of view represented fairly. Unfortunately, you have not called or written me back (though I have always been prompt in my responses to your inquiries, I believe). I do not wish to publish and have you feel slighted. Therefore, on the off-chance that the reticence of your reply stems from a fear that I will not quote you accurately, may I propose a solution? I would like to ask you two questions. If you will answer these questions, I will commit to using your answers in full, unedited (I propose an upper limit on the length of each reply: 50 words). Since this is far more generous a deal than I generally extract from the New York financial journalists of my acquaintance, surely it should ease any discomfit you may have in being the recipient, rather than the purveyor, of questions.

Very respectfully,

Patrick

—–Original Message—–
From: bethany_mclean@fortunemail.com
[mailto:bethany_mclean@fortunemail.com]
Sent: Thursday, March 27, 2008 1:57 PM
To: Patrick Byrne
Subject: your email

Hey, Patrick. The only communication I’ve received from you (apart from today’s email) was another email in which you asked me to comment on a piece you’d written on Michael Steinhardt. (I think.) You’re correct that I didn’t respond to that. My editor has asked that you speak to our PR people. You can contact Katy Reitz at katy_reitz@timeinc.com.
Thanks.


—–Original Message—–
From: Patrick Byrne [mailto:PByrne@overstock.com]
Sent: Friday, April 04, 2008 3:07 AM
To: Reitz, Katharine – Fortune/Money
Cc: McLean, Bethany – Fortune
Subject: RE: your email

Dear Ms. Reitz,

As you can see below, I am writing at the suggestion of Ms. Mclean regarding the possibility of her answering several on-the-record questions for a story I am writing. Is this something you would be willing to facilitate?

Respectfully,
Patrick M. Byrne


—–Original Message—–
From: katy_reitz@timeinc.com [mailto:katy_reitz@timeinc.com]
Sent: Friday, April 04, 2008 8:12 AM
To: Patrick Byrne
Subject: RE: your email
Patrick,

Can you please email me the questions and I will see if Bethany is
available to answer. Also, please let me know what your deadline is and
what publication this interview will appear in. Thanks.

Katharine S. Reitz
Director of Communications
Fortune|Money Group
o. 212.522.6724
m. 917.543.9176
katy_reitz@timeinc.com


—–Original Message—–
From: Patrick Byrne
Sent: Friday, April 04, 2008 1:11 PM
To: ‘katy_reitz@timeinc.com’
Subject: RE: your email

Katy,

My questions for Bethany concern her state of knowledge at the time she wrote SGR regarding the investment track record of Jim Chanos prior to Enron (attached please find discussion of Jim Chanos in Bethany’s book on Enron; I can also provide Mr. Chanos partners’ letter if she needs).

What was Bethany’s understanding of that track record? Did she know what it was when she wrote SGR?

If she did not know, why not? Did she ask?
If she did know, does she believe her account on page 319 adequately summarizes it?


An answer within the next week would be deeply appreciated. You may assume that the first place her answer would be published would be within Overstock.com, or at DeepCapture.com.


Most respectfully,
Patrick


—–Original Message—–
From: katy_reitz@timeinc.com [mailto:katy_reitz@timeinc.com]
Sent: Tuesday, April 08, 2008 10:42 AM
To: Patrick Byrne
Subject: RE: your email

Patrick,

Bethany is unavailable to comment.

Thanks,

Katy



—–Original Message—–
From: Patrick Byrne
Sent: Tuesday, April 08, 2008 11:50 AM
To: katy_reitz@timeinc.com
Subject: RE: your email

Dear Katy,

Thank you for your kind response. I can wait, as it turns out, given the collapse of Bear and some subsequent comments made last week in the Senate, my publication schedule has changed. When would she be available for comment?

Very respectfully,

Patrick

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


I received no further reply, no elucidation of when Bethany would no longer be “unavailable for comment.”

However, this evening, just as I was preparing to leave work, I checked my email, and found this. Since it was sent at a quarter to 1 PM East Coast time, and Bethany gave me to “the end of the day” (which came four hours later for her), the time to respond has elapsed, obviously. And since Bethany neglected to call my office, cell, or assistant, though these are all numbers she has and has called in the past, I was not aware of her email until this evening.

—–Original Message—–
From: Bethany McLean [mailto:bethany_mclean@fortunemail.com]
Sent: Tuesday, April 22, 2008 10:43 AM
To: Patrick Byrne
Subject: Fact checking question

Hi, Patrick –

I’m doing a short book review of a new book by a hedge fund manager named
David Einhorn. The book isn’t about you, and nor is the review. But
Einhorn does write about your August 2005 conference call because you
mentioned both him and his wife on it. You also made some statements about
his business. Einhorn says you were factually inaccurate about both his
business and his relationships. You also made some unsubstantiated and very
negative allegations about his wife. Do you want to comment on this at all?

The column is shipping off at the end of the day, so please let me know.

Thanks,

Bethany

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


I’m new to this reporting gig, so I have to ask: Is that odd? Is it odd that for weeks Bethany would not be “available” to answer two simple questions such as the ones I posed her (even given the generous terms I offered regarding the timing of her reply and the use of her quote), but then would be available to describe vaguely some criticisms David Einhorn has made about me, and ask for my comment by end-of-day? Is this asymmetry of responsiveness, time, and use of quotes, odd?

What makes these people feel so threatened by a level playing field?

Given that I just sat down at my email I have evidently missed Ms. McLean’s timetable: besides, given the vagueness of her description, it is hard to know what a reasonable reply would look like (beyond noting that it is not clear if David Einhorn is saying my allegations about his wife were false, or rather, simply that he felt they were unsubstantiated and negative). But Bethany does raise interesting points with which the reader should become familiar.

David Einhorn’s wife is Cheryl Strauss-Einhorn, who is, or was, an editor at Barron’s. It’s fair to say that Cheryl Strauss Einhorn’s favored sources over the years have been the short-selling friends of her boyfriend/husband. As a couple, they illustrate the intersection of money management and compliant journalism whose description is Deep Capture’s mission.

By way of example, here is Cheryl writing on Jim Chanos (yes, this is the same Jim Chanos mention above, the one about whom Bethany wrote a book-length lotion-job, about which she is now refusing to answer two simple questions). Note also Cheryl’s mention of David Rocker. Importantly, Cheryl notes (as if it’s all kosher) that most “bear” short interest (as opposed to arbitrage) is actually naked shorting (by the way, that is the same “naked short selling” which the New York financial press has spent the last three years denying exists).

Anyway, here are excerpts from this fine example of Cheryl’s work:

Short Fuses: Romping Dow leaves professional bears Bloodied; is this the sign of a market top?

By Cheryl Strauss Einhorn
1113 words
17 July 1995
Barron’s
15
English
(Copyright (c) 1995, Dow Jones & Company, Inc.) ….

….

“As the stock market charges ever higher, pros are increasingly asked if short selling continues to make sense as an investment discipline,” laments Jim Chanos, head of Kynikos Associates in New York and a dean of the short-selling community. “The frustrating thing has been trying to nail down just what has changed in the market such that it hasn’t had a 10% correction since 1990. Is it a new era? We are questioning the discipline as a whole, wondering if the short side of the market will ever work again.”

Well, it worked last year — for Chanos, at least. Even as other shortsellers were having problems, Chanos’s flagship Ursus Partners reaped a hefty 46.2% return, while the S&P 500 Index was up 1.3%. So far this year, though, Chanos has lost more than 20%, bringing his assets under management to $200 million, down from $250 million on Jan. 1. In recent weeks there have been rumors swirling that Chanos was giving up the shorting game, rumors that he denies vigorously. “It just isn’t true,” he says.

Chanos recently received another large chunk of money to manage on behalf of a wealthy New York family, and as he puts it, “It is our intention to remain fully invested.”

“Besides this one client, though, no one else is stepping up and saying, `Now is the time to give money to a short fund,'” Chanos concedes. “But if not now, when? Valuations are crazy and the public is in the market with both feet.”

Between now and the stock market’s eventual downfall, Chanos expects to see “a lot of shorts throw in the towel.” And a lot already have. By one calculation, assets in funds dedicated to shorting stocks have shrunk to somewhere between $600 million and $800 million in total, down from a peak of $3.5 billion in 1990. Put another way, it’s less than 1% of the $6 trillion that comprises today’s equity market capitalization.

….

There was also talk in the market last week that David Rocker, head of the hedge fund Rocker Partners LP, was thinking about giving up his penchant for going short. Rocker conceded that it’s been a tough year, but he says he remains net short because he believes the market is highly overvalued. With folks like Chanos and Rocker so demoralized, it’s easy to understand why short interest has slipped in such highflying stocks as Boston Chicken and Electronic Arts. Despite all the shorting in months past, these stocks just keep climbing. In fact, Boston Chicken’s short interest fell 17% between May 15 and June 15, and Electronic Arts’ fell 10% during the same period.

Nonetheless, overall short open interest on the New York Stock Exchange rose 3% in the month ended June 15, while short interest in the Nasdaq National Market was about flat. It’s important to note, though, that these numbers do not discriminate between naked short positions, taken by outright bears, and short positions that are part of arbitrage activity, such as a fund buying S&P futures while shorting the underlying stocks.

Short-sellers have been further hurt by a Nasdaq rule put into effect in September 1994 that prohibits shorting a stock on a downtick. “The brutal reality of the short-selling business is that one has to be there before the bad news hits,” says Chanos.

Still, Chanos continues to be drawn like a magnet to segments of the market he sees as most overvalued. Technology stocks, he wrote in a recent letter to investors, “increasingly look like a bubble, with many questionable companies receiving ludicrous valuations. Institutional investors are now horribly overweighted in this sector and most have the view that nothing can go wrong.”

….— Still Flying High

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

A more remarkable example of Cheryl’s work can be found in her October, 2000 article regarding the “uptick rule”. As I discussed in my essay “Jim Cramer is a Complicated Man“, this is a rule that were implemented in the 1930’s to curtail the ability of stock manipulators to destroy companies. According to someone who worked for him, Jim Cramer flouted this while managing money at Cramer Berkowitz. The rule was repealed in the summer of 2007. Recently Cramer has been on TV explaining (correctly if insincerely) how the repeal of this rule is a disaster for our markets, allowed hedge funds to steal from hard-working Americans, and perhaps contributed to the implosion of Bear Stearns.

So it is instructive to see in retrospect how Cheryl analyzes this rule.

Cheryl’s article begins with the nice neutral title, “SEC may drop biased trading restrictions”, then goes downhill from there. I will make bold those sentences that represent the point of view of those who think that hedge funds should not be encumbered by the uptick rule. I will italicize those that represent the point of view who think the uptick rule a necessary check on the powers of stock manipulators. I will leave untouched any sentences that are simply factual, about which neither side would disagree.

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

Clock Ticks For Short-Sale Rule- SEC may drop biased trading restrictions

By CHERYL STRAUSS EINHORN (Barrons, 10/2/00)

The SEC is considering dropping its restrictions on short sales of securities. The rules were implemented in 1938 to prevent stock manipulators from driving down share prices through short-selling. Proponents of the so-called short-sale rules have long maintained they are needed to help promote stock-market stability. But detractors consider the regulations outmoded in today’s increasingly transparent market. Besides, they point out, no precautions have ever been legislated to rein in manipulators seeking to drive up prices through similar means.

Although the SEC has put out a concept release seeking comment on the restrictions from securities-industry participants, Annette Nazareth, head of the market regulation division, acknowledges the whole subject is up for grabs. “Personally, I can find no economic basis for the short-sale rule,” she says.

Short-sellers hope to profit by selling borrowed shares that they can buy back later at lower prices. Under current restrictions, stocks can be shorted only on an uptick — that is, at a price above the preceding trade.

While the short-sale rule has remained fundamentally unchanged for the past 62 years, financial markets have changed radically since the 1930s. For openers, there has been substantial improvement in market surveillance. And as the volume, velocity and complexity of trading escalate, restrictions on short-selling “may inject unnecessary inefficiencies” into the market, Nazareth says.

John Damgard, president of the Futures Industry Association, agrees. “It makes no sense to prejudice a sale up or down,” he says.

The uptick requirement, he adds, just serves “to make people feel warm and fuzzy, because they like things to go up.”

Short-sellers, on the other hand, make other investors feel neither warm nor fuzzy. Through the years they have often been tarred as naysayers, doomsdayers and all-around troublemakers who love to gloat when the market tumbles. Yet there is little data linking their activities to price movements in the securities markets.

Dan Loeb, a New York hedge-fund manager, would like to see the uptick restriction abolished because it increases the difficulty of implementing short sales. Besides, he notes, “Shortsellers provide a service to the market by increasing liquidity and providing a cap on speculative stocks.” While the evidence in recent years suggests the last is merely wishful thinking, in fact short-sellers’ skepticism sometimes does inject a sorely lacking dose of reality into phantasmic situations.

Many institutions use short selling as a hedging tool, to protect their stock and bond portfolios from market declines. Gains in such short positions theoretically will offset any declines in the value of the firm’s portfolio.

Not all market participants want to do away with the short-sale rule, however. Major brokerages such as Merrill Lynch are conflicted about the shortsale regulations. While trading desks consider the rules excessively cumbersome, investment bankers and brokers believe the restrictions will protect their clients’ shares from potential “death spirals,” in which stocks are hammered by repeated waves of selling.

The SEC, according to its concept release, is considering eight different measures regarding short-sale regulations. In addition to outright elimination, these include suspending the short-sale rule when a stock or the market rises above a certain price threshold; providing exceptions for actively traded securities; focusing shortsale restrictions on certain corporate events, such as mergers, or trading strategies, such as options expirations; exempting hedging transactions and revising the definition of “short sale.”

The commission, which has received many complaints about short-sale abuses in the over-the-counter market, also is exploring whether to extend the rule to non-exchange-listed securities.

The short-sale issue is timely in part because Congress this week is expected to pass legislation lifting the 1982 ban on trading stock (as opposed to stockindex) futures. With trading volume in bond and currency futures down 10% this year, the futures business would welcome the opportunity to move into the equity market. Global competition, too, is propelling the issue forward. Beginning in January, the London International Financial Futures and Options Exchange plans to begin trading futures on a handful of U.S. stocks, including AT&T, Cisco Systems, Citigroup, Exxon Mobil and Merck.

Ironically, if the ban on stock futures is lifted, the short-sale rule could become moot. Not only are there no ticks in futures, but also short-sellers would not have to borrow shares to short them. Thus, they wouldn’t face having their shares “bought in,” which is what happens in a short squeeze, a form of market manipulation. Investors then would be able to sell futures on stocks without cumbersome restrictions or regulatory bias.

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

That sure looks like thoughtful, unbiased analysis to me. Please keep in mind that the elimination of this “regulatory bias (sic)” in 2007 is now being brought up in US Senate hearings (as well as by Jim Cramer) as contributing to the take-down of Bear Stearns and the current market crisis in general. Also, note that Annette “Personally, I can find no economic basis for the short-sale rule” Nazareth is a lawyer, not an economist, and is one of the two SEC commissioners who stepped down within days of the publication of the Senate investigation into the whistle-blowing claims of SEC Senior Investigator Gary Aguirre, as is described by my piece on the regulatory capture of the SEC. She is also the person to whom I was referring when I wrote, “who, as we shall see later, is via marriage directly linked to the issue whose exposure is the ultimate purpose of this blog: unsettled trades in our settlement system.” But these are stories for another day.

These two articles demonstrate my point, I believe: writing articles favorable to one’s husband and his friends is a pretty clear conflict of interest. Call me madcap.

In August 2005 I mentioned Cheryl’s work in the Miscreants Ball conference call. The only objections I ever received were claims that she was no longer, in fact, employed at Barron’s. To these objections I simply sent people a link to the Barron’s masthead, which on that day did (and for all I know, still does) list her as an editor. No other inaccuracies were ever reported to me.

About six months later, Mark Mitchell from the Columbia Journalism Review began asking questions about Cheryl Strauss. According to him, her stories literally began disappearing from the Barron’s database within days. That is a good indication of how proud they were of the work of Cheryl Einhorn, née Cheryl Strauss.

In late 2005 I had lunch with Bethany. I mentioned that I had recently been shown the trading records of David Einhorn, and while Overstock was not among his positions, there were other statistical anomalies of note. It was the only time I saw her flinch.

In the summer of 2006 I had lunch with Whitney Tilson, a paymeister of convicted felon Barry Minkow (according to a deposition Barry gave). Whitney invited me to address a group of hedge funds at that year’s Value Investor Congress, which he organized. Whitney’s friend David Einhorn protested my appearance to Whitney, whereupon Whitney rescinded his invitation to me. (One year later a different conference organizer, Brett Goetschius of “The Pipes Report” gave me a similar invitation to address 800 hedge funds. I told him I could accept his invitation, but that he would just have to rescind his invitation later. He replied, “No no, in the last year the whole community has changed: at least 50-60% of hedge funds are now on your side.” I went and gave the talk and received a nice ovation: the recording of this became the body of Deep Capture: The Movie.)

Last year Bethany devoted some serious effort to trying to prove that I was collaborating in a vast secret scheme with someone. Unfortunately for her case, I had never met my supposed collaborator.

But Bethany is nothing if not persistent. Some weeks ago Bethany visited a hedge fund for an interview. According to them, she regurgitated the criticisms of one obscure analyst who was trashing a firm in which they had invested, criticisms they were immediately able to dispel, with documentation (including a recent FDA approval about which she was unaware). She got visibly irritated, then brought up my name. When they told her that they thought I was right about compliant journalists being spoon-fed stories by select hedge funds, she got very irritated, and left somewhat abruptly, they say.

If only there were a pattern….

Your humble servant,

Patrick

PS Bethany, if you know any of the specifics of David Einhorn’s allegations of error on my part, please let me know. Deep Capture is in the final stages of preparing a major piece, and would not want to repeat being “factually inaccurate about both [Einhorn’s] business and his relationships.” Since you are writing a column about his book, you probably are familiar with the substance of his claims (of course, most reporters would have actually given some clearer indication of his claims when asking for my comment on them, beyond saying he thought I was “factually inaccurate”). In any case, out of an abundance of caution, please let me know of any specifics about which you or David Einhorn believe I was in error, so that such error would not be replicated in the coming piece. We journalists have our standards, of course.

PPS To the casual reader: have any of you noticed that, for all that these journalists like to write about me and how improbable are my claims, none of them mentions DeepCapture.com? The Wall Street Journal once practiced a remarkable circumlocution in order to avoid mentioning where to find my blogs. It is almost as if…. they fear their own writing will not stand up on its own. What do you bet Bethany’s upcoming column avoids mentioning it as well?

Posted in Journalists Tried to Be Players But Became Pawns, The Deep Capture CampaignComments (13)

David Einhorn, Cheryl Strauss, and the "Unavailable" Bethany McLean

As will be explored in a subsequent piece, it would be fair to describe my relationship with Bethany McLean of Fortune as “strained”. However, it is not unusual for her to write or call me seeking comment, generally regarding spurious allegations fed her by crony hedge funds which she dutifully regurgitates on command, and sometimes regarding other things, too. I make it a point to respond promptly. On rare occasion when I have contacted her, she has responded promptly as well.

Thus I was a bit surprised at the turn taken by the following correspondence:

From: Patrick Byrne
Sent: Thursday, February 28, 2008 10:46 PM
To: Bethany Mclean
Subject: comment sought

Dear Bethany,

For the record, do you have any comment on either of these stories?

http://community.overstock.com/deepcaptureblog/why-is-sam-antar-the-crook-being-pimped-by-fortune-magazine-and-the-rest-of-the-new-york-financial-media/

http://community.overstock.com/deepcaptureblog/gary-weiss-scaramouch-psychopath/


Respectfully,
Patrick

From: Patrick Byrne
Sent: Friday, March 14, 2008 12:37 PM
To: Bethany Mclean
Subject: Three requests

Dear Bethany,

1) I understand Roddy has become a co-worker at your fine magazine. I am not confident I have his correct email. Would you mind sending it to me (or ask him to do the same)?

2) I have posted a new piece about Michael Steinhardt (if I do say so myself, it’s frightfully good). Would you please provide comment it?

http://community.overstock.com/deepcaptureblog/category/9-the-players/

3) If you do not intend to provide comment on this or any of my stories, would you please let me know that? Any further explanation you would be willing to share in that regard would be much appreciated.

Your friend,

Patrick

From: Patrick Byrne
Sent: Thursday, March 27, 2008 12:49 PM
To: ‘bmclean@fortunemail.com’
Subject: Hello

Dear Bethany,

Hello. I hope you are well. As you are perhaps aware, I am working on an article in which you will figure. I want to treat you justly and have your point of view represented fairly. Unfortunately, you have not called or written me back (though I have always been prompt in my responses to your inquiries, I believe). I do not wish to publish and have you feel slighted. Therefore, on the off-chance that the reticence of your reply stems from a fear that I will not quote you accurately, may I propose a solution? I would like to ask you two questions. If you will answer these questions, I will commit to using your answers in full, unedited (I propose an upper limit on the length of each reply: 50 words). Since this is far more generous a deal than I generally extract from the New York financial journalists of my acquaintance, surely it should ease any discomfit you may have in being the recipient, rather than the purveyor, of questions.

Very respectfully,

Patrick

—–Original Message—–
From: bethany_mclean@fortunemail.com
[mailto:bethany_mclean@fortunemail.com]
Sent: Thursday, March 27, 2008 1:57 PM
To: Patrick Byrne
Subject: your email

Hey, Patrick. The only communication I’ve received from you (apart from today’s email) was another email in which you asked me to comment on a piece you’d written on Michael Steinhardt. (I think.) You’re correct that I didn’t respond to that. My editor has asked that you speak to our PR people. You can contact Katy Reitz at katy_reitz@timeinc.com.
Thanks.


—–Original Message—–
From: Patrick Byrne [mailto:PByrne@overstock.com]
Sent: Friday, April 04, 2008 3:07 AM
To: Reitz, Katharine – Fortune/Money
Cc: McLean, Bethany – Fortune
Subject: RE: your email

Dear Ms. Reitz,

As you can see below, I am writing at the suggestion of Ms. Mclean regarding the possibility of her answering several on-the-record questions for a story I am writing. Is this something you would be willing to facilitate?

Respectfully,
Patrick M. Byrne


—–Original Message—–
From: katy_reitz@timeinc.com [mailto:katy_reitz@timeinc.com]
Sent: Friday, April 04, 2008 8:12 AM
To: Patrick Byrne
Subject: RE: your email
Patrick,

Can you please email me the questions and I will see if Bethany is
available to answer. Also, please let me know what your deadline is and
what publication this interview will appear in. Thanks.

Katharine S. Reitz
Director of Communications
Fortune|Money Group
o. 212.522.6724
m. 917.543.9176
katy_reitz@timeinc.com


—–Original Message—–
From: Patrick Byrne
Sent: Friday, April 04, 2008 1:11 PM
To: ‘katy_reitz@timeinc.com’
Subject: RE: your email

Katy,

My questions for Bethany concern her state of knowledge at the time she wrote SGR regarding the investment track record of Jim Chanos prior to Enron (attached please find discussion of Jim Chanos in Bethany’s book on Enron; I can also provide Mr. Chanos partners’ letter if she needs).

What was Bethany’s understanding of that track record? Did she know what it was when she wrote SGR?

If she did not know, why not? Did she ask?
If she did know, does she believe her account on page 319 adequately summarizes it?


An answer within the next week would be deeply appreciated. You may assume that the first place her answer would be published would be within Overstock.com, or at DeepCapture.com.


Most respectfully,
Patrick


—–Original Message—–
From: katy_reitz@timeinc.com [mailto:katy_reitz@timeinc.com]
Sent: Tuesday, April 08, 2008 10:42 AM
To: Patrick Byrne
Subject: RE: your email

Patrick,

Bethany is unavailable to comment.

Thanks,

Katy



—–Original Message—–
From: Patrick Byrne
Sent: Tuesday, April 08, 2008 11:50 AM
To: katy_reitz@timeinc.com
Subject: RE: your email

Dear Katy,

Thank you for your kind response. I can wait, as it turns out, given the collapse of Bear and some subsequent comments made last week in the Senate, my publication schedule has changed. When would she be available for comment?

Very respectfully,

Patrick

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


I received no further reply, no elucidation of when Bethany would no longer be “unavailable for comment.”

However, this evening, just as I was preparing to leave work, I checked my email, and found this. Since it was sent at a quarter to 1 PM East Coast time, and Bethany gave me to “the end of the day” (which came four hours later for her), the time to respond has elapsed, obviously. And since Bethany neglected to call my office, cell, or assistant, though these are all numbers she has and has called in the past, I was not aware of her email until this evening.

—–Original Message—–
From: Bethany McLean [mailto:bethany_mclean@fortunemail.com]
Sent: Tuesday, April 22, 2008 10:43 AM
To: Patrick Byrne
Subject: Fact checking question

Hi, Patrick –

I’m doing a short book review of a new book by a hedge fund manager named
David Einhorn. The book isn’t about you, and nor is the review. But
Einhorn does write about your August 2005 conference call because you
mentioned both him and his wife on it. You also made some statements about
his business. Einhorn says you were factually inaccurate about both his
business and his relationships. You also made some unsubstantiated and very
negative allegations about his wife. Do you want to comment on this at all?

The column is shipping off at the end of the day, so please let me know.

Thanks,

Bethany

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


I’m new to this reporting gig, so I have to ask: Is that odd? Is it odd that for weeks Bethany would not be “available” to answer two simple questions such as the ones I posed her (even given the generous terms I offered regarding the timing of her reply and the use of her quote), but then would be available to describe vaguely some criticisms David Einhorn has made about me, and ask for my comment by end-of-day? Is this asymmetry of responsiveness, time, and use of quotes, odd?

What makes these people feel so threatened by a level playing field?

Given that I just sat down at my email I have evidently missed Ms. McLean’s timetable: besides, given the vagueness of her description, it is hard to know what a reasonable reply would look like (beyond noting that it is not clear if David Einhorn is saying my allegations about his wife were false, or rather, simply that he felt they were unsubstantiated and negative). But Bethany does raise interesting points with which the reader should become familiar.

David Einhorn’s wife is Cheryl Strauss-Einhorn, who is, or was, an editor at Barron’s. It’s fair to say that Cheryl Strauss Einhorn’s favored sources over the years have been the short-selling friends of her boyfriend/husband. As a couple, they illustrate the intersection of money management and compliant journalism whose description is Deep Capture’s mission.

By way of example, here is Cheryl writing on Jim Chanos (yes, this is the same Jim Chanos mention above, the one about whom Bethany wrote a book-length lotion-job, about which she is now refusing to answer two simple questions). Note also Cheryl’s mention of David Rocker. Importantly, Cheryl notes (as if it’s all kosher) that most “bear” short interest (as opposed to arbitrage) is actually naked shorting (by the way, that is the same “naked short selling” which the New York financial press has spent the last three years denying exists).

Anyway, here are excerpts from this fine example of Cheryl’s work:

Short Fuses: Romping Dow leaves professional bears Bloodied; is this the sign of a market top?

By Cheryl Strauss Einhorn
1113 words
17 July 1995
Barron’s
15
English
(Copyright (c) 1995, Dow Jones & Company, Inc.) ….

….

“As the stock market charges ever higher, pros are increasingly asked if short selling continues to make sense as an investment discipline,” laments Jim Chanos, head of Kynikos Associates in New York and a dean of the short-selling community. “The frustrating thing has been trying to nail down just what has changed in the market such that it hasn’t had a 10% correction since 1990. Is it a new era? We are questioning the discipline as a whole, wondering if the short side of the market will ever work again.”

Well, it worked last year — for Chanos, at least. Even as other shortsellers were having problems, Chanos’s flagship Ursus Partners reaped a hefty 46.2% return, while the S&P 500 Index was up 1.3%. So far this year, though, Chanos has lost more than 20%, bringing his assets under management to $200 million, down from $250 million on Jan. 1. In recent weeks there have been rumors swirling that Chanos was giving up the shorting game, rumors that he denies vigorously. “It just isn’t true,” he says.

Chanos recently received another large chunk of money to manage on behalf of a wealthy New York family, and as he puts it, “It is our intention to remain fully invested.”

“Besides this one client, though, no one else is stepping up and saying, `Now is the time to give money to a short fund,'” Chanos concedes. “But if not now, when? Valuations are crazy and the public is in the market with both feet.”

Between now and the stock market’s eventual downfall, Chanos expects to see “a lot of shorts throw in the towel.” And a lot already have. By one calculation, assets in funds dedicated to shorting stocks have shrunk to somewhere between $600 million and $800 million in total, down from a peak of $3.5 billion in 1990. Put another way, it’s less than 1% of the $6 trillion that comprises today’s equity market capitalization.

….

There was also talk in the market last week that David Rocker, head of the hedge fund Rocker Partners LP, was thinking about giving up his penchant for going short. Rocker conceded that it’s been a tough year, but he says he remains net short because he believes the market is highly overvalued. With folks like Chanos and Rocker so demoralized, it’s easy to understand why short interest has slipped in such highflying stocks as Boston Chicken and Electronic Arts. Despite all the shorting in months past, these stocks just keep climbing. In fact, Boston Chicken’s short interest fell 17% between May 15 and June 15, and Electronic Arts’ fell 10% during the same period.

Nonetheless, overall short open interest on the New York Stock Exchange rose 3% in the month ended June 15, while short interest in the Nasdaq National Market was about flat. It’s important to note, though, that these numbers do not discriminate between naked short positions, taken by outright bears, and short positions that are part of arbitrage activity, such as a fund buying S&P futures while shorting the underlying stocks.

Short-sellers have been further hurt by a Nasdaq rule put into effect in September 1994 that prohibits shorting a stock on a downtick. “The brutal reality of the short-selling business is that one has to be there before the bad news hits,” says Chanos.

Still, Chanos continues to be drawn like a magnet to segments of the market he sees as most overvalued. Technology stocks, he wrote in a recent letter to investors, “increasingly look like a bubble, with many questionable companies receiving ludicrous valuations. Institutional investors are now horribly overweighted in this sector and most have the view that nothing can go wrong.”

….— Still Flying High

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

A more remarkable example of Cheryl’s work can be found in her October, 2000 article regarding the “uptick rule”. As I discussed in my essay “Jim Cramer is a Complicated Man“, this is a rule that were implemented in the 1930’s to curtail the ability of stock manipulators to destroy companies. According to someone who worked for him, Jim Cramer flouted this while managing money at Cramer Berkowitz. The rule was repealed in the summer of 2007. Recently Cramer has been on TV explaining (correctly if insincerely) how the repeal of this rule is a disaster for our markets, allowed hedge funds to steal from hard-working Americans, and perhaps contributed to the implosion of Bear Stearns.

So it is instructive to see in retrospect how Cheryl analyzes this rule.

Cheryl’s article begins with the nice neutral title, “SEC may drop biased trading restrictions”, then goes downhill from there. I will make bold those sentences that represent the point of view of those who think that hedge funds should not be encumbered by the uptick rule. I will italicize those that represent the point of view who think the uptick rule a necessary check on the powers of stock manipulators. I will leave untouched any sentences that are simply factual, about which neither side would disagree.

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

Clock Ticks For Short-Sale Rule- SEC may drop biased trading restrictions

By CHERYL STRAUSS EINHORN (Barrons, 10/2/00)

The SEC is considering dropping its restrictions on short sales of securities. The rules were implemented in 1938 to prevent stock manipulators from driving down share prices through short-selling. Proponents of the so-called short-sale rules have long maintained they are needed to help promote stock-market stability. But detractors consider the regulations outmoded in today’s increasingly transparent market. Besides, they point out, no precautions have ever been legislated to rein in manipulators seeking to drive up prices through similar means.

Although the SEC has put out a concept release seeking comment on the restrictions from securities-industry participants, Annette Nazareth, head of the market regulation division, acknowledges the whole subject is up for grabs. “Personally, I can find no economic basis for the short-sale rule,” she says.

Short-sellers hope to profit by selling borrowed shares that they can buy back later at lower prices. Under current restrictions, stocks can be shorted only on an uptick — that is, at a price above the preceding trade.

While the short-sale rule has remained fundamentally unchanged for the past 62 years, financial markets have changed radically since the 1930s. For openers, there has been substantial improvement in market surveillance. And as the volume, velocity and complexity of trading escalate, restrictions on short-selling “may inject unnecessary inefficiencies” into the market, Nazareth says.

John Damgard, president of the Futures Industry Association, agrees. “It makes no sense to prejudice a sale up or down,” he says.

The uptick requirement, he adds, just serves “to make people feel warm and fuzzy, because they like things to go up.”

Short-sellers, on the other hand, make other investors feel neither warm nor fuzzy. Through the years they have often been tarred as naysayers, doomsdayers and all-around troublemakers who love to gloat when the market tumbles. Yet there is little data linking their activities to price movements in the securities markets.

Dan Loeb, a New York hedge-fund manager, would like to see the uptick restriction abolished because it increases the difficulty of implementing short sales. Besides, he notes, “Shortsellers provide a service to the market by increasing liquidity and providing a cap on speculative stocks.” While the evidence in recent years suggests the last is merely wishful thinking, in fact short-sellers’ skepticism sometimes does inject a sorely lacking dose of reality into phantasmic situations.

Many institutions use short selling as a hedging tool, to protect their stock and bond portfolios from market declines. Gains in such short positions theoretically will offset any declines in the value of the firm’s portfolio.

Not all market participants want to do away with the short-sale rule, however. Major brokerages such as Merrill Lynch are conflicted about the shortsale regulations. While trading desks consider the rules excessively cumbersome, investment bankers and brokers believe the restrictions will protect their clients’ shares from potential “death spirals,” in which stocks are hammered by repeated waves of selling.

The SEC, according to its concept release, is considering eight different measures regarding short-sale regulations. In addition to outright elimination, these include suspending the short-sale rule when a stock or the market rises above a certain price threshold; providing exceptions for actively traded securities; focusing shortsale restrictions on certain corporate events, such as mergers, or trading strategies, such as options expirations; exempting hedging transactions and revising the definition of “short sale.”

The commission, which has received many complaints about short-sale abuses in the over-the-counter market, also is exploring whether to extend the rule to non-exchange-listed securities.

The short-sale issue is timely in part because Congress this week is expected to pass legislation lifting the 1982 ban on trading stock (as opposed to stockindex) futures. With trading volume in bond and currency futures down 10% this year, the futures business would welcome the opportunity to move into the equity market. Global competition, too, is propelling the issue forward. Beginning in January, the London International Financial Futures and Options Exchange plans to begin trading futures on a handful of U.S. stocks, including AT&T, Cisco Systems, Citigroup, Exxon Mobil and Merck.

Ironically, if the ban on stock futures is lifted, the short-sale rule could become moot. Not only are there no ticks in futures, but also short-sellers would not have to borrow shares to short them. Thus, they wouldn’t face having their shares “bought in,” which is what happens in a short squeeze, a form of market manipulation. Investors then would be able to sell futures on stocks without cumbersome restrictions or regulatory bias.

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

That sure looks like thoughtful, unbiased analysis to me. Please keep in mind that the elimination of this “regulatory bias (sic)” in 2007 is now being brought up in US Senate hearings (as well as by Jim Cramer) as contributing to the take-down of Bear Stearns and the current market crisis in general. Also, note that Annette “Personally, I can find no economic basis for the short-sale rule” Nazareth is a lawyer, not an economist, and is one of the two SEC commissioners who stepped down within days of the publication of the Senate investigation into the whistle-blowing claims of SEC Senior Investigator Gary Aguirre, as is described by my piece on the regulatory capture of the SEC. She is also the person to whom I was referring when I wrote, “who, as we shall see later, is via marriage directly linked to the issue whose exposure is the ultimate purpose of this blog: unsettled trades in our settlement system.” But these are stories for another day.

These two articles demonstrate my point, I believe: writing articles favorable to one’s husband and his friends is a pretty clear conflict of interest. Call me madcap.

In August 2005 I mentioned Cheryl’s work in the Miscreants Ball conference call. The only objections I ever received were claims that she was no longer, in fact, employed at Barron’s. To these objections I simply sent people a link to the Barron’s masthead, which on that day did (and for all I know, still does) list her as an editor. No other inaccuracies were ever reported to me.

About six months later, Mark Mitchell from the Columbia Journalism Review began asking questions about Cheryl Strauss. According to him, her stories literally began disappearing from the Barron’s database within days. That is a good indication of how proud they were of the work of Cheryl Einhorn, née Cheryl Strauss.

In late 2005 I had lunch with Bethany. I mentioned that I had recently been shown the trading records of David Einhorn, and while Overstock was not among his positions, there were other statistical anomalies of note. It was the only time I saw her flinch.

In the summer of 2006 I had lunch with Whitney Tilson, a paymeister of convicted felon Barry Minkow (according to a deposition Barry gave). Whitney invited me to address a group of hedge funds at that year’s Value Investor Congress, which he organized. Whitney’s friend David Einhorn protested my appearance to Whitney, whereupon Whitney rescinded his invitation to me. (One year later a different conference organizer, Brett Goetschius of “The Pipes Report” gave me a similar invitation to address 800 hedge funds. I told him I could accept his invitation, but that he would just have to rescind his invitation later. He replied, “No no, in the last year the whole community has changed: at least 50-60% of hedge funds are now on your side.” I went and gave the talk and received a nice ovation: the recording of this became the body of Deep Capture: The Movie.)

Last year Bethany devoted some serious effort to trying to prove that I was collaborating in a vast secret scheme with someone. Unfortunately for her case, I had never met my supposed collaborator.

But Bethany is nothing if not persistent. Some weeks ago Bethany visited a hedge fund for an interview. According to them, she regurgitated the criticisms of one obscure analyst who was trashing a firm in which they had invested, criticisms they were immediately able to dispel, with documentation (including a recent FDA approval about which she was unaware). She got visibly irritated, then brought up my name. When they told her that they thought I was right about compliant journalists being spoon-fed stories by select hedge funds, she got very irritated, and left somewhat abruptly, they say.

If only there were a pattern….

Your humble servant,

Patrick

PS Bethany, if you know any of the specifics of David Einhorn’s allegations of error on my part, please let me know. Deep Capture is in the final stages of preparing a major piece, and would not want to repeat being “factually inaccurate about both [Einhorn’s] business and his relationships.” Since you are writing a column about his book, you probably are familiar with the substance of his claims (of course, most reporters would have actually given some clearer indication of his claims when asking for my comment on them, beyond saying he thought I was “factually inaccurate”). In any case, out of an abundance of caution, please let me know of any specifics about which you or David Einhorn believe I was in error, so that such error would not be replicated in the coming piece. We journalists have our standards, of course.

PPS To the casual reader: have any of you noticed that, for all that these journalists like to write about me and how improbable are my claims, none of them mentions DeepCapture.com? The Wall Street Journal once practiced a remarkable circumlocution in order to avoid mentioning where to find my blogs. It is almost as if…. they fear their own writing will not stand up on its own. What do you bet Bethany’s upcoming column avoids mentioning it as well?

Posted in Journalists Tried to Be Players But Became Pawns, The Deep Capture CampaignComments (0)

Roddy Boyd Sucks It Like He's Paying the Rent (Fortune Magazine)

In the adult novelty & video arcade shop that is our New York financial establishment, one of the mop-and-spooge-bucket boys is Roddy Boyd, formerly of the New York Post (for folks who move their lips when they read Entertainment Weekly), and currently, of Fortune Magazine (also known as “People Magazine for Capitalists”). I have met Roddy on occasion, and a more seedy and furtive character would be difficult to name. Many years ago I knew a one-eyed Chinese guy named “Chaney” who ran a Bangkok pawn shop/mail-drop who was (it was rumored) working for Taiwanese, Chinese, and Soviet intelligence, simultaneously, but by appearances anyway, Chaney was a model of probity and fair-dealing when compared to Mr. Boyd.

Admittance into Roddy’s New York financial journalism spooge-bucket-brigade is conditional upon acceptance of The Fundamental Principle and First Corollary of that august fraternity:

The Fundamental Principle – Hedge funds can do no wrong, particularly if they belong to a small constellation whose brightest lights are Stevie Cohen, Dan Loeb, David Einhorn, Jim Chanos, David Rocker & Marc Cohodes.

The First Corollary –  If any corporation or individual appears to have been wronged by activities of any of these hedge funds, using methods up to and including stock counterfeiting and manipulation, blackmail, harassment, and intimidation, use of private eyes and internal moles, inciting endless and expensive investigations that go nowhere, and so on and so forth, it must only be because they deserved it (for proof, see The Fundamental Principle).

Today Fortune Magazine’s Roddy Boyd gives fine illustration of these rules in an article on  Copper River Partners (née Rocker Partners). This is the same Copper River/Rocker Partners whose exploits are chronicled throughout DeepCapture, and who have been frequent beneficiaries of reportorial lotion-jobs from Roddy, Karen Richardson (WSJ), Herb Greenberg (CBSMarketWatch), Joe Nocera (New York Times), and Jim Cramer (CNBC & TheStreet.com), and have been long-time recipients of  Bethany McLean’s highly-regarded regulars-only service. (Full disclosure: Copper River is also on the business end of a Marin County lawsuit filed by Overstock.com, in which I played modest role.)

In today’s think-piece, Roddy treats us to such insights as:


  • But for noted short-sellers Copper River Management, a $1 billion hedge fund based in Larkspur, Cal., the month turned into a perfect storm. A devastating combination of counter-party failure, sudden regulatory edicts and margin calls conspired to turn the fund’s performance on its ear, leading to a 55% loss in just two weeks.” Translation: In the last two weeks Copper River lost over half of its billion dollars, though not through any fault of its own. Instead, counter-party failure, regulators, and those pesky margin calls “conspired” to create “a perfect storm” that lost the half-billion dollars.


  • In case the point was lost that none of this had to do with the quality of Copper River’s investments, Roddy Boyd writes it out. He really does, in those words: “What’s worse for Copper River is that the battering had nothing to do with the quality of its investments.”


  • We are treated to a bit of financial arcana: “On top of that, as Lehman unwound its own internal hedges to the Copper River trades, its trading desks bought shares of these companies, driving up their prices and leading to losses for Copper River.” Translation: Lehman sold puts to Copper River that Lehman then hedged by shorting stock (most likely in abuse of the option market-maker exception), and when Lehman covered those shorts it hurt Copper River, whose investment strategy assumed an environment where shorts rarely need cover (and understandably so). As far as Roddy Boyd is concerned, the possibility that a short might “cover” (that is, “at some point obtain and deliver that which they have sold”) and thereby cause loss to a favored hedge fund has “nothing to do with the quality of its investments.”


  • As though that litany of impositions were not harrowing enough, Roddy chronicles further injustices suffered by Copper River: “That was bad enough, but on September 19, the bottom fell out for the fund. That was when the Securities and Exchange Commission ordered unprecedented restrictions in short sales” (as our nation’s financial system was imploding). And further, “As prices in those stocks shot upwards, Copper River was forced to cover – or buy back – some of its positions at steep losses. “ This is intolerable: how could a hedge fund such as Copper River make money if it has to deliver what it sells?


  • And lastly, this chestnut: “The rising stock prices also led to a series of margin calls (demands for additional cash collateral to be deposited in a margin account) from Goldman Sachs, Copper River’s prime broker.” I’m with Roddy on this one: it’s damn inconsiderate of Goldman Sachs to insist that Copper River have funds to back its play.


But perhaps I am too hard on Roddy. “Out of the crooked timber of humanity no straight thing will ever be made,” said Kant. A gal moves to the big city, gets behind, does things of which she is not proud. Molded are we all of imperfect clay.

But normally, she doesn’t write home about it.

It’s just Roddy’s ill fortune to have to perform these acts in national print.

Posted in Journalists Tried to Be Players But Became Pawns, The Deep Capture CampaignComments Off on Roddy Boyd Sucks It Like He's Paying the Rent (Fortune Magazine)

Roddy Boyd Sucks It Like He’s Paying the Rent (Fortune Magazine)

In the adult novelty & video arcade shop that is our New York financial establishment, one of the mop-and-spooge-bucket boys is Roddy Boyd, formerly of the New York Post (for folks who move their lips when they read Entertainment Weekly), and currently, of Fortune Magazine (also known as “People Magazine for Capitalists”). I have met Roddy on occasion, and a more seedy and furtive character would be difficult to name. Many years ago I knew a one-eyed Chinese guy named “Chaney” who ran a Bangkok pawn shop/mail-drop who was (it was rumored) working for Taiwanese, Chinese, and Soviet intelligence, simultaneously, but by appearances anyway, Chaney was a model of probity and fair-dealing when compared to Mr. Boyd.

Admittance into Roddy’s New York financial journalism spooge-bucket-brigade is conditional upon acceptance of The Fundamental Principle and First Corollary of that august fraternity:

The Fundamental Principle – Hedge funds can do no wrong, particularly if they belong to a small constellation whose brightest lights are Stevie Cohen, Dan Loeb, David Einhorn, Jim Chanos, David Rocker & Marc Cohodes.

The First Corollary –  If any corporation or individual appears to have been wronged by activities of any of these hedge funds, using methods up to and including stock counterfeiting and manipulation, blackmail, harassment, and intimidation, use of private eyes and internal moles, inciting endless and expensive investigations that go nowhere, and so on and so forth, it must only be because they deserved it (for proof, see The Fundamental Principle).

Today Fortune Magazine’s Roddy Boyd gives fine illustration of these rules in an article on  Copper River Partners (née Rocker Partners). This is the same Copper River/Rocker Partners whose exploits are chronicled throughout DeepCapture, and who have been frequent beneficiaries of reportorial lotion-jobs from Roddy, Karen Richardson (WSJ), Herb Greenberg (CBSMarketWatch), Joe Nocera (New York Times), and Jim Cramer (CNBC & TheStreet.com), and have been long-time recipients of  Bethany McLean’s highly-regarded regulars-only service. (Full disclosure: Copper River is also on the business end of a Marin County lawsuit filed by Overstock.com, in which I played modest role.)

In today’s think-piece, Roddy treats us to such insights as:


  • But for noted short-sellers Copper River Management, a $1 billion hedge fund based in Larkspur, Cal., the month turned into a perfect storm. A devastating combination of counter-party failure, sudden regulatory edicts and margin calls conspired to turn the fund’s performance on its ear, leading to a 55% loss in just two weeks.” Translation: In the last two weeks Copper River lost over half of its billion dollars, though not through any fault of its own. Instead, counter-party failure, regulators, and those pesky margin calls “conspired” to create “a perfect storm” that lost the half-billion dollars.


  • In case the point was lost that none of this had to do with the quality of Copper River’s investments, Roddy Boyd writes it out. He really does, in those words: “What’s worse for Copper River is that the battering had nothing to do with the quality of its investments.”


  • We are treated to a bit of financial arcana: “On top of that, as Lehman unwound its own internal hedges to the Copper River trades, its trading desks bought shares of these companies, driving up their prices and leading to losses for Copper River.” Translation: Lehman sold puts to Copper River that Lehman then hedged by shorting stock (most likely in abuse of the option market-maker exception), and when Lehman covered those shorts it hurt Copper River, whose investment strategy assumed an environment where shorts rarely need cover (and understandably so). As far as Roddy Boyd is concerned, the possibility that a short might “cover” (that is, “at some point obtain and deliver that which they have sold”) and thereby cause loss to a favored hedge fund has “nothing to do with the quality of its investments.”


  • As though that litany of impositions were not harrowing enough, Roddy chronicles further injustices suffered by Copper River: “That was bad enough, but on September 19, the bottom fell out for the fund. That was when the Securities and Exchange Commission ordered unprecedented restrictions in short sales” (as our nation’s financial system was imploding). And further, “As prices in those stocks shot upwards, Copper River was forced to cover – or buy back – some of its positions at steep losses. “ This is intolerable: how could a hedge fund such as Copper River make money if it has to deliver what it sells?


  • And lastly, this chestnut: “The rising stock prices also led to a series of margin calls (demands for additional cash collateral to be deposited in a margin account) from Goldman Sachs, Copper River’s prime broker.” I’m with Roddy on this one: it’s damn inconsiderate of Goldman Sachs to insist that Copper River have funds to back its play.


But perhaps I am too hard on Roddy. “Out of the crooked timber of humanity no straight thing will ever be made,” said Kant. A gal moves to the big city, gets behind, does things of which she is not proud. Molded are we all of imperfect clay.

But normally, she doesn’t write home about it.

It’s just Roddy’s ill fortune to have to perform these acts in national print.

Posted in Journalists Tried to Be Players But Became Pawns, The Deep Capture CampaignComments (3)

Carol Remond Tells a Joke She Doesn’t Get (DowJones)

Summary – Carol Remond recently wrote a defense of the meltdown of Rocker Partners (a.k.a. Copper River), her argument being, Rocker Partners shut down through no fault of their own, but because starting in September they were not able to break the law anymore.

Before publishing the following critique of Carol Remond’s recent article on Copper River, I contacted Carol for comment. Unlike Joe Nocera and Floyd Norris (both of the New York Times), who have at least had the integrity to defend their work, however haplessly, Carol refused any on-the-record comment on this subject. Thus she joins that tradition of journalistic worthies which includes Bethany McLean, Herb Greenberg, and Roddy Boyd, who refuse to defend their work. They can critique, but not engage, opine, but not defend: the sophomores of intellectual discourse.

Last week DowJones reporter and shill extraordinaire Carol Remond wrote a story, “Hedge Fund Copper River to Liquidate“, about the implosion of her hedge fund patron, Copper River (née Rocker Partners). Following a course charted by no lesser luminary than Roddy Boyd (cf. “Roddy Boyd Works It Likes He’s Paying the Rent“), Carol devotes the article to shameless apologetics that would make a congressman blush. Quelle surprise, Carol.

I am not a bayonette-the-wounded kind of guy (indeed, to investors in Copper River I send my condolences). But buried within Carol’s  article is a critical admission that will be of interest both to readers of DeepCapture.com, and to those investors ill-starred enough to have stayed with Copper River/Rocker Partners through to its ugly and ignominious end. Carol states:

“Copper River held large short positions in some illiquid stocks when the Securities and Exchange Commission tightened the rules governing short selling…. By doing away with an exemption that was the backbone of a trading strategy that allowed funds to short stocks through the options market, the SEC effectively restricted their ability to maintain these positions.”

The “trading strategy” that was curtailed by the SEC “doing away with an exemption” that existed in the options market  was the illegal strategy of naked shorting via rolling failed  positions through the options market maker exception to Regulation SHO.  Ms. Remond appears not to understand the SEC’s view of this illegal strategy. A fine paper by noted young economist John Welborn fleshed this out over a year ago (“Married Puts, Reverse Conversions and Abuse of the Options Market Maker Exception on the Chicago Stock Exchange”) . In it, he explained the requirement to locate stock, the exception to that requirement which Reg SHO makes for market makers, and the SEC’s view of the misuse of that exception. I will quote from John’s paper at length:

“THE OPTIONS MARKET MAKER EXCEPTION

“An FTD is commonly the result of a naked short sale (or a naked long sale) that does not settle, i.e. the shares sold short (or long) are never delivered to the buyer. In general, naked shorting is illegal. As the SEC’s Chairman Chris Cox said on July 12, 2006, “Selling short without having stock available for delivery, and intentionally failing to deliver stock within the standard three-day settlement period, is market manipulation that is clearly violative of the federal securities laws.”1 There are, however, a few of mechanisms through which naked short sales can be legally executed. One such mechanism is the “options market maker exception.”

“Current SEC rules state that a short seller, acting via a broker-dealer, need only ‘locate’ (as opposed to borrow) the stock prior to a short sale. Regulation SHO requires:

‘…A broker-dealer, prior to effecting a short sale in any equity security, to “locate” securities available for borrowing… Specifically, the rule prohibits a broker-dealer from accepting a short sale order in any equity security from another person, or effecting a short sale order for the broker-dealer’s own account unless the broker-dealer has (1) borrowed the security, or entered into an arrangement to borrow the security, or (2) has reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due. The locate must be made and documented prior to effecting a short sale, regardless of whether the seller’s short position may be closed out by purchasing securities the same day.’2 (Emphasis added.)

“In theory, stock markets are made more efficient by intermediaries who ‘make markets’ in order to smooth price and volume fluctuations.3 A market maker acts as a temporary counterparty that poses as buyer or seller in order to facilitate market liquidity. Ideally, market makers’ positions last minutes or hours; generally, positions are closed out at the end of each day. Large prime brokers make markets in both equities and options. Some broker-dealers, like Goldman Sachs and Merrill Lynch, clear and execute trades for options market makers…

“In the process of making markets, which requires hedging positions, market makers theoretically may need to sell stock they temporarily do not have. For this reason, Regulation SHO allowed market makers, ‘…[an] exception from the uniform “locate” requirement, as Rule 203(b)(2)(iii), for short sales executed by market makers, as defined in Section 3(a)(38) of the Exchange Act, including specialists and options market makers, but only in connection with bonafide market making activities (emphasis added).’4 Note that:

‘Bona-fide market making does not include activity that is related to speculative selling strategies or investment purposes of the broker-dealer and is disproportionate to the usual market making patterns or practices of the broker-dealer in that security. In addition, where a market maker posts continually at or near the best offer, but does not also post at or near the best bid, the market maker’s activities would not generally qualify as bona-fide market making for purposes of the exception. Further, bona-fide market making does not include transactions whereby a market maker enters into an arrangement with another broker-dealer or customer in an attempt to use the market maker’s exception for the purpose of avoiding compliance with Rule 203(b)(1) by the other broker-dealer or customer. 5 (Emphasis added.)’

“1 Christopher Cox, Chairman, SEC, “Opening Statements at the Commission Open Meeting,” July 12, 2006.

“2 SEC, Final Rule: Short Sales, Release No. 34-50103, Rule 203 – “Locate and Delivery Requirements for Short Sales,” July 28, 2004.

“3 Some view the market maker as an anachronism left over from the days when stock traded in 1/8th increments and paper certificates actually changed hands. Now, in the electronic age, stock trades in decimals and paper stock has been separated from the electronic claims of ownership on that stock (a process known as “dematerialization”).

“4 SEC Rule 203.

“5 Ibid, Section 1b, “Exceptions from the Locate Requirement: Bona-fide Market Making.”

Thus, Carol is explicitly stating, no doubt unwittingly, that the “backbone of a trading strategy” employed by David Rocker and Rocker Partners/Copper River was, in fact, abuse of an exception which the SEC had specifically deemed out-of-bounds.

Sloppy work, Carol: recommend you send for new instructions.

If this article concerns you, and you wish to help, then:

1) email it to a dozen friends;

2) go here for additional suggestions: “So You Say You Want a Revolution?

Posted in Journalists Tried to Be Players But Became Pawns, The Deep Capture CampaignComments (19)

Carol Remond Tells a Joke She Doesn't Get (DowJones)

Summary – Carol Remond recently wrote a defense of the meltdown of Rocker Partners (a.k.a. Copper River), her argument being, Rocker Partners shut down through no fault of their own, but because starting in September they were not able to break the law anymore.

Before publishing the following critique of Carol Remond’s recent article on Copper River, I contacted Carol for comment. Unlike Joe Nocera and Floyd Norris (both of the New York Times), who have at least had the integrity to defend their work, however haplessly, Carol refused any on-the-record comment on this subject. Thus she joins that tradition of journalistic worthies which includes Bethany McLean, Herb Greenberg, and Roddy Boyd, who refuse to defend their work. They can critique, but not engage, opine, but not defend: the sophomores of intellectual discourse.

Last week DowJones reporter and shill extraordinaire Carol Remond wrote a story, “Hedge Fund Copper River to Liquidate“, about the implosion of her hedge fund patron, Copper River (née Rocker Partners). Following a course charted by no lesser luminary than Roddy Boyd (cf. “Roddy Boyd Works It Likes He’s Paying the Rent“), Carol devotes the article to shameless apologetics that would make a congressman blush. Quelle surprise, Carol.

I am not a bayonette-the-wounded kind of guy (indeed, to investors in Copper River I send my condolences). But buried within Carol’s  article is a critical admission that will be of interest both to readers of DeepCapture.com, and to those investors ill-starred enough to have stayed with Copper River/Rocker Partners through to its ugly and ignominious end. Carol states:

“Copper River held large short positions in some illiquid stocks when the Securities and Exchange Commission tightened the rules governing short selling…. By doing away with an exemption that was the backbone of a trading strategy that allowed funds to short stocks through the options market, the SEC effectively restricted their ability to maintain these positions.”

The “trading strategy” that was curtailed by the SEC “doing away with an exemption” that existed in the options market  was the illegal strategy of naked shorting via rolling failed  positions through the options market maker exception to Regulation SHO.  Ms. Remond appears not to understand the SEC’s view of this illegal strategy. A fine paper by noted young economist John Welborn fleshed this out over a year ago (“Married Puts, Reverse Conversions and Abuse of the Options Market Maker Exception on the Chicago Stock Exchange”) . In it, he explained the requirement to locate stock, the exception to that requirement which Reg SHO makes for market makers, and the SEC’s view of the misuse of that exception. I will quote from John’s paper at length:

“THE OPTIONS MARKET MAKER EXCEPTION

“An FTD is commonly the result of a naked short sale (or a naked long sale) that does not settle, i.e. the shares sold short (or long) are never delivered to the buyer. In general, naked shorting is illegal. As the SEC’s Chairman Chris Cox said on July 12, 2006, “Selling short without having stock available for delivery, and intentionally failing to deliver stock within the standard three-day settlement period, is market manipulation that is clearly violative of the federal securities laws.”1 There are, however, a few of mechanisms through which naked short sales can be legally executed. One such mechanism is the “options market maker exception.”

“Current SEC rules state that a short seller, acting via a broker-dealer, need only ‘locate’ (as opposed to borrow) the stock prior to a short sale. Regulation SHO requires:

‘…A broker-dealer, prior to effecting a short sale in any equity security, to “locate” securities available for borrowing… Specifically, the rule prohibits a broker-dealer from accepting a short sale order in any equity security from another person, or effecting a short sale order for the broker-dealer’s own account unless the broker-dealer has (1) borrowed the security, or entered into an arrangement to borrow the security, or (2) has reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date delivery is due. The locate must be made and documented prior to effecting a short sale, regardless of whether the seller’s short position may be closed out by purchasing securities the same day.’2 (Emphasis added.)

“In theory, stock markets are made more efficient by intermediaries who ‘make markets’ in order to smooth price and volume fluctuations.3 A market maker acts as a temporary counterparty that poses as buyer or seller in order to facilitate market liquidity. Ideally, market makers’ positions last minutes or hours; generally, positions are closed out at the end of each day. Large prime brokers make markets in both equities and options. Some broker-dealers, like Goldman Sachs and Merrill Lynch, clear and execute trades for options market makers…

“In the process of making markets, which requires hedging positions, market makers theoretically may need to sell stock they temporarily do not have. For this reason, Regulation SHO allowed market makers, ‘…[an] exception from the uniform “locate” requirement, as Rule 203(b)(2)(iii), for short sales executed by market makers, as defined in Section 3(a)(38) of the Exchange Act, including specialists and options market makers, but only in connection with bonafide market making activities (emphasis added).’4 Note that:

‘Bona-fide market making does not include activity that is related to speculative selling strategies or investment purposes of the broker-dealer and is disproportionate to the usual market making patterns or practices of the broker-dealer in that security. In addition, where a market maker posts continually at or near the best offer, but does not also post at or near the best bid, the market maker’s activities would not generally qualify as bona-fide market making for purposes of the exception. Further, bona-fide market making does not include transactions whereby a market maker enters into an arrangement with another broker-dealer or customer in an attempt to use the market maker’s exception for the purpose of avoiding compliance with Rule 203(b)(1) by the other broker-dealer or customer. 5 (Emphasis added.)’

“1 Christopher Cox, Chairman, SEC, “Opening Statements at the Commission Open Meeting,” July 12, 2006.

“2 SEC, Final Rule: Short Sales, Release No. 34-50103, Rule 203 – “Locate and Delivery Requirements for Short Sales,” July 28, 2004.

“3 Some view the market maker as an anachronism left over from the days when stock traded in 1/8th increments and paper certificates actually changed hands. Now, in the electronic age, stock trades in decimals and paper stock has been separated from the electronic claims of ownership on that stock (a process known as “dematerialization”).

“4 SEC Rule 203.

“5 Ibid, Section 1b, “Exceptions from the Locate Requirement: Bona-fide Market Making.”

Thus, Carol is explicitly stating, no doubt unwittingly, that the “backbone of a trading strategy” employed by David Rocker and Rocker Partners/Copper River was, in fact, abuse of an exception which the SEC had specifically deemed out-of-bounds.

Sloppy work, Carol: recommend you send for new instructions.

If this article concerns you, and you wish to help, then:

1) email it to a dozen friends;

2) go here for additional suggestions: “So You Say You Want a Revolution?

Posted in Journalists Tried to Be Players But Became Pawns, The Deep Capture CampaignComments Off on Carol Remond Tells a Joke She Doesn't Get (DowJones)

Bethany McLean: your benefit of the doubt is hereby revoked

There’s no sense denying it: reporters depend on sources, and in the mind  of most business journalists, a connected hedge fund manager will always prove a more valuable source than even the CEO of a public company.

Hence, as I’ve reminded my fellow market reformers time and time again, it is not necessarily a sign of corruption that some business journalists — Bethany McLean included — regularly toe the hedge fund line.

However, as I’ve very recently learned — at least in the case of Bethany McLean — I was wrong.

What changed my mind?

Christmas.

Rather, the early Christmas that arrived for me in the form of about 1,000 pages of discovery just unsealed in the Fairfax Financial (NYSE:FFH) vs. SAC Capital, et al, lawsuit, in which Fairfax claims a conspiracy (or “Enterprise” as it is termed in the suit) involving multiple short-selling hedge funds, financial analysts and business journalists intent on destroying the company for monetary gain.

Included in this mass of documents are hundreds of emails and instant message transcripts between hedge fund managers, their operatives and such “journalists” as Bethany McLean, Herb Greenberg, and Roddy Boyd.

Almost without exception, each of these is immensely useful in understanding how these folks all relate to each other. But among them all, the most revealing — to say nothing of damning — are those between Bethany McLean, then of Fortune, and the upstanding folks at hedge fund Copper River Management.

The emails appear below in blue, with my comments in black.

From: Marc Cohodes
Sent: Thursday, December 7, 2006 3:21:12 PM
To: Bethany McLean
Subject: ffh

FFH is the Canadian Enron and it could even be worse…We are sending you stufff.. I suggest since [Copper River employee and former SEC attorney Richard] Sauer is on the East Coast (for now) that you 2 meet, and soon… there is an “enterprise” here and he can lay it out clear as day.

It bears noting that, according to filings in the Fairfax suit, the various participants in the attack on Fairfax stock referred to their effort collectively as “the Enterprise”. Whether or not this is what Cohodes was alluding to when using the term — which might not otherwise belong within quote marks in this context — is not clear, but certainly suggestive.

From: Bethany McLean
Sent: Thursday, December 7, 2006 3:48:43 PM
To: Marc Cohodes
Subject: Re: ffh

Makes sense. Send me whatever you can think of – the more documents the better!

Without Cohodes offering a bit of proof to back his Enron/Fairfax comparison, McLean finds it “makes sense” and commits to move ahead.

From: Marc Cohodes
Sent: Thursday, December 7, 2006 3:51:37 PM
To: Bethany McLean
Subject: Re: ffh

don’t you worry…where do you want the stuff fed-exed to… I would set up a time for Sauer to come and see ya.. His code name is “Lavaman”…

Cohodes then forwards this exchange to employee  Rick Sauer, who schedules a meeting between himself and an unusually eager McLean, set for one week thence.

The outcome of that process was McLean’s scathing March 6, 2007 Fortune piece: The inside story of a Wall Street battle royal.

How can I be certain that this particular story was the direct result of the Cohodes’s efforts? The answer to that question is where the situation becomes particularly disturbing…sufficient to leave me feeling physically ill, and prepared to officially add Bethany McLean to the short but distinguished list of truly captured and corrupt journalists.

From: Marc Cohodes
Sent: Wednesday, March 21, 2007 9:51 AM
To: Bethany McLean
Subject: ffh

you hear anything there??? the stock is up 45 points since your piece and I dont understand it…

Of note: on March 5, 2007 FFH closed at $190.09, and on March 21, 2007, FFH closed at $234.53, a difference of $44.43.

From: Bethany McLean
Sent: Wednesday, March 21, 2007 11:51:57 AM
To: Marc Cohodes
Subject: Re: ffh

I’m getting the same question from other people. No, I don’t have a clue. I’m worried they’ve gotten the SEC or the Southern District to take them seriously – the Spyro [Contogouris] stuff makes you realize anything is possible – and they’re leaking the news to shareholders ahead of time. What do you think?

A day later, Cohodes icily responds with nothing more than his cell phone number.

From: Marc Cohodes
Sent: Thursday, March 22, 2007 5:12 PM
To: Bethany McLean
Subject: Re: ffh

415-350-88**

Based on McLean’s reply, we can presume she followed Cohodes’s tacit demand, and that the conversation was less than pleasant.

From: Bethany McLean
Sent: Thursday, March 22, 2007 6:12:48 PM
To: Marc Cohodes
Subject: Re: ffh

Sorry to be a little bad-tempered. This FFH story almost killed me, so I hate hearing that it was pointless. Maybe it’ll be a long, slow thing..

I suspect the emails you’ve just read are the real reason Bethany McLean made a sudden departure from the world of business journalism earlier this year.

As for me, it’s been nearly 24 hours since I first encountered this exchange, and yet I still cannot read it without feeling like I’ve just taken a blow to the solar plexus.

Seeing proof that both a hedge fund manager and an ostensibly reputable business writer viewed the sacred institution of journalism as a means of wrecking a company, and that they both also felt disappointment when their efforts proved insufficient, with the “journalist” finding solace in the prospect that the company’s eventual destruction might simply be a “long, slow thing” literally leaves me breathless.

Stay tuned for still more of the explosive revelations found within the reams and reams of discovery in this case.

If this article concerns you, and you wish to help, then:

1) email it to a dozen friends;

2) go here for additional suggestions: “So You Say You Want a Revolution?

Posted in Journalists Tried to Be Players But Became Pawns, The Deep Capture CampaignComments (56)

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