By now, everybody knows that the market for collateralized debt obligations was riddled with fraud in the lead-up to the financial crisis. What is less known is the fact that hedge fund managers helped create and inflate the market for these toxic securities specifically so that they could bet against them and profit from the inevitable collapse.

An example of a particularly sordid scheme, orchestrated by hedge fund billionaire John Paulson, was discovered some time ago by David Fiderer, a blogger for the Huffington Post. The information in Fiderer’s blog is rather incriminating, and, of course, the mainstream media is not on the case, so I think it bears repeating.

In a close reading of Wall Street Journal Gregory Zuckerman’s book, “The Greatest Trade Ever”, an otherwise starry-eyed account of Paulson’s bets against the mortgage market, Fiderer discovered this nugget:

“Paulson and [partner Paolo Pellegrini] were eager to find ways to expand their wager against risky mortgages. Accumulating it in the market sometimes proved to be a slow process. So they made appointments with bankers at Bear Stearns, Deutsche Bank (NYSE:DB), Goldman Sachs (NYSE:GS), and other banks to ask if they would create CDOs that Paulson & Co. could essentially bet against.”

As Fiderer explains, Paulson asked the banks to create those CDOs “so that they could be sold to some suckers at close to par. That way, Paulson’s hedge fund could approach some other sucker who would sell an insurance policy, or credit default swap, on the newly minted CDOs. Bear, Deutsche and Goldman knew perfectly well what Paulson’s motivation was. He made no secret of his belief that the CDOs subordinate claims on the mortgage collateral were close to worthless. By the time others have figured out the fatal flaws in these securities which had been ignored by the rating agencies, Paulson could collect up to $5 billion.

“Paulson not only initiated these transactions, he also specified the terms he wanted, identifying which mortgages would be stuffed into the CDOs, and how the CDOs should be structured. Within the overall framework set by Paulson’s team, banks and investors were allowed to do some minor tweaking.”

It is not clear which banks ultimately participated in Paulson’s scam, but Fiderer quotes Bear Stearns trader Scott Eichel as saying that his bank refused. “It didn’t pass the ethics standards;” Eichel said, “it was a reputation issue and it didn’t pass our moral compass. We didn’t think we could sell deals that someone was shorting on the other side.” Bear Stearns’ moral compass was usually pointed towards the darker regions, but perhaps this is why Paulson subsequently became one of the more eager short sellers of Bear Stearns’ stock.

Fiderer continues: “Prior to 2006, there were not many opportunities for naked short selling on subprime securitizations. But in January of that year, investment banks launched a new product, which enabled Paulson to place those bets on a large scale. The ABX index, a sort of Dow Jones Average of subprime mortgage securities, facilitated benchmarking the price of credit default swaps.”

In fact, it was a black box company called the Markit Group that created the ABX index. The banks were minor shareholders in Markit Group and provided data. I have noted in a previous blog that the Markit Group is a dubious outfit to say the least, and there is good reason to suspect that the direction of the ABX index was influenced by hedge fund managers and their allies at the big banks. I do not have evidence that Paulson was one of those hedge funds, but authorities ought to be asking questions.

Fiderer goes on to suggest that bad loans to homeowners were a significant cause of the financial crisis. On this front, I disagree with him. Certainly, some mortgage lenders were unscrupulous, and there was a certain amount of predatory lending, but the conventional wisdom that this is what crashed the economy is simply false.

At the time that the mortgage securities markets began to go south in 2007, defaults on subprime loans had increased only slightly month-to-month, and were in fact considerably lower than in earlier years. In the second quarter of 2007, for example, only 7.7 percent of subprime loans were 30 days past due, slightly up from 6.76 percent in the second quarter of 2006, but considerably lower than the 9.9 percent in the second quarter of 2001.

The problem lied not in the loans themselves, but in the fact that the loans had been packaged (apparently, to a large extent, at the behest of John Paulson and perhaps other bearish billionaires) into fraudulent securities that were traded and probably manipulated by a select number of hedge funds and large banks. In a somewhat similar scheme, hedge funds often pump up the stock of public companies before initiating short selling attacks aimed at demolishing those same companies.

The economy was brought to its knees by a few powerful and eminently dirty players on Wall Street, not by poor people who had the temerity to buy themselves houses.

A blog published by the University of North Carolina School of Journalism reported recently that Steve Cohen of hedge fund SAC Capital managed to kill a story by Reuters reporter Matt Goldstein. It seems that Goldstein was going to shed some light on allegations that Cohen engaged in insider trading. Cohen didn’t like that, and got in touch with Goldstein’s superiors.

It remains unclear how Cohen convinced Goldstein’s superiors to shelve their journalistic ethics, but it is not surprising that he succeeded. After all, Cohen is “the most powerful trader on the Street.” He is also part of a network of closely affiliated hedge fund managers that for many years all but dictated much of what was published by the New York financial press.

Three years ago, while working for the Columbia Journalism Review, a magazine affiliated with Columbia University’s school of journalism in New York, I began investigating this network of hedge funds. I worked for many months on this story, and compiled evidence that the hedge fund managers, including Steve Cohen, had developed extremely odd relationships with small number of dishonest journalists.

This evidence gradually convinced me that the hedge funds and journalists not only routinely worked together to disseminate false information about public companies, but also set out to cover up the serious crime of market manipulation via naked short selling.

As I was preparing to publish this story, a hedge fund called Kingsford Capital donated a large sum of money to the Columbia Journalism Review. Indeed, it was made clear to me that my salary would be paid directly from Kingsford’s donation.

I have made this abundantly clear in various stories that I have since written for Deep Capture, but new evidence confirms that Kingsford is tied directly to Steve Cohen’s network of hedge funds and shady journalists – that is, the very network that I was planning to expose in the Columbia Journalism Review when Kingsford announced that it would henceforth be paying my salary.

I left the Columbia Journalism Review soon after Kingsford announced its “donation.” It is possible that my editors would have done the right thing and published my story had I remained. However, I have no doubt that Kingsford Capital’s “donation” stemmed not from some newfound dedication to the field of media criticism, but was intended as a means of acquiring leverage over the Columbia Journalism Review.

Moreover, new information suggests that Kingsford’s financial inducements might have persuaded other journalists to cover up short seller crimes.

This is a scandal of rather significant proportions, so let’s review the evidence, old and new.

• While at Columbia, a key focus of my investigation was a financial research shop called Gradient Analytics. Former Gradient employees had testified under oath that short selling hedge funds – especially Steve Cohen’s SAC Capital and Rocker Partners – wrote and traded ahead of Gradient’s false, negative reports on public companies. Former employees of Gradient also said that journalist Herb Greenberg, then of CNBC and MarketWatch.com, timed his false, negative stories, which were based on Gradient research, so that Rocker could profit from the effect those stories had on stock prices.

• In the course of investigating SAC Capital and Rocker, I was taking a close look at the bear raid on a company called Fairfax Financial (NYSE:FFH). As we have since shown in numerous Deep Capture reports, Rocker, SAC Capital and a few closely affiliated hedge funds – including Jim Chanos’s Kynikos Capital, and Dan Loeb’s Third Point Capital – conspired to destroy Fairfax. As part of this ultimately unsuccessful attack, the hedge funds attempted to cut off Fairfax’s access to credit. They traded ahead of false financial research that had been written with their cooperation. And they hired a thug named Spyro Contogouris to harass and threaten Fairfax executives.

• Emails obtained from discovery in a lawsuit filed by Fairfax Financial (NYSE:FFH) show that Kingsford Capital, the hedge fund that donated money to pay my salary at the Columbia, is directly tied to Steve Cohen, Rocker Partners and the other hedge funds that were attacking Fairfax at the time of my investigation. In one email, from Kingsford manager David Scially to Rocker Partners employee Russell Lyne, the subject line reads: “http://www.spyrocontogouris.com” – a reference to the website of the above-mentioned thug, Spyro Contogouris. The contents of the email is redacted, so it is difficult to know what was discussed, but it is safe to assume that Kingsford and Rocker were communicating about the attack on Fairfax.

• It has also come to my attention that Kingsford Capital at one time employed the above-mentioned thug, Spyro Contogouris. Two weeks after Kingsford agreed to “donate” money to the Columbia Journalism Review, the FBI arrested Contogouris as part of an investigation into this same network of hedge funds.

• Another target of my investigation was TheStreet.com (NASDAQ:TSCM). Although some good journalists work for that publication, a review of hundreds of stories and numerous bear raids made it clear to me that TheStreet.com had been founded partly to serve the financial interests of select short selling hedge funds, including Rocker Partners, which was then TheStreet.com’s largest shareholder (apart from founder Jim Cramer). Over the course of my investigation, I closely examined the journalism of TheStreet.com’s five founding editors. It was clear that these five journalists had routinely disseminated false information that served the interests of their short selling sources, including Rocker Partners and SAC Capital.

• Four of the five founding editors of TheStreet.com were as follows:

1) Jim Cramer, famously of CNBC;

2) David Kansas, then of the Wall Street Journal;

3) Herb Greenberg, the CNBC and MarketWatch reporter mentioned above, said to be conspiring with Rocker and Gradient Analytics;

4) Jon Markman, then running a hedge fund out of the offices of the above mentioned Gradient Analytics. (Markman has since gone on the record saying that hedge funds pay journalists to write false stories.)

• The fifth founding editor of TheStreet.com was Cory Johnson. In 2006, Cory Johnson was a manager of Kingsford Capital, the hedge fund that donated money to pay my salary at the Columbia Journalism Review, right before I was to publish a story exposing the five founding editors of TheStreet.com and the hedge funds in their network. After I published my first Deep Capture story raising questions about Kingsford’s donation to the Columbia Journalism Review, Johnson removed all references to Kingsford from his online profiles at LinkedIn.com and other social networking sights.

• Another focus of my investigation at Columbia was a hedge fund manager named Jim Carruthers. Patrick Byrne, in his capacity as CEO of Overstock.com, had recently sued Rocker Partners and given a famous conference call presentation in which he described the shenanigans of Rocker and affiliated hedge funds. During this presentation, Patrick stated that he had been informed that Carruthers had been posing as a private investigator as part of the network’s efforts to smear public companies. An email obtained in the Fairfax discovery, written by an employee of the above-mentioned Third Point Capital, and addressed to the above-mentioned Dan Loeb, states: “Jim Carruthers (ex Eastbourne partner, Scially friend, etc.) would like to come up and meet with you…It would be well worth your time.” In other words, Scially, the Kingsford Capital manager, was on good terms with both Carruthers and Loeb, at the time that Kingsford announced that it would be paying the salary of the journalist (me) who was seeking to expose Carruthers, Loeb, and the rest of their network.

• Deep Capture reporter Judd Bagley has obtained a list of people whom Kingsford Capital manager David Scially invited to be his “friends” on Facebook, the social networking site. Among Scially’s Facebook friends were Rocker Partners’ managing partner, and three of this managing partners’ family members. Several bloggers, such as Gary Weiss (more on him below), have written that Judd’s Facebook list is a Nixonesque “enemies list” dreamed up by Overstock CEO Patrick Byrne, when in fact Byrne was not involved in its creation, most of the people on the list have nothing whatsoever to do with Overstock.com, and it was not “dreamed up”, but merely documents cold facts (bilateral Facebook friendships) that are in fact public. When considered alongside the emails and other evidence, the Facebook revelation is excellent evidence that Scially is close to Rocker Partners – close enough to invite the managing partner and much of his family to be his internet pals. That is big news – a clear motive for Kingsford Capital to begin paying my salary right before I was going to publish strong evidence that Rocker Partners and others in its network were dirty players.

• Scially’s Facebook friends also include the above-mentioned Dan Loeb, accused of conspiring with Rocker Partners in the attack on Fairfax; David Einhorn, a hedge fund manager whom I was investigating because he consistently attacks public companies in cahoots with Loeb and others in the network; and Dan Colarusso, a journalist I was investigating because he had vowed to use “barrels of ink” to “crush” Patrick Byrne, who was famously crusading against naked short sellers and this same network of miscreant hedge fund managers. (Patrick is now a Deep Capture reporter.) This additional Facebook information is clear evidence that Kingsford Capital is part of the network I was investigating when Kingsford Capital “donated” money to the Columbia Journalism Review.

• Another target of my investigation at CJR was a journalist named Gary Weiss. Weiss, a former reporter for BusinessWeek magazine is flat-out corrupt. It is a disgrace to the profession of journalism that he is still working. While at BusinessWeek, he published stories fed to him by Kingsford Capital while deliberately covering up illegal naked short selling by Kingsford’s then business partner. Since then, Weiss has been caught anonymously authoring blogs that spew lies about people he considers to be his enemies. He has been caught anonymously authoring blogs in which he effusively praises himself — Gary Weiss. He has denied that he authored the blogs about himself despite all evidence to the contrary. He was caught shilling for the Depository Trust and Clearing Corp. (an outfit at the center of the naked short selling scandal) while posing as a journalist. He was caught lying about his shilling. He was caught lying and denying when he was caught controlling the Wikipedia entry on naked short selling. He has lied repeatedly in his blogs about Deep Capture reporters Patrick Byrne and Judd Bagley. He has lied about me – for example, stating that I was fired from the Columbia Journalism Review. He has continued to lie and cover up the crime of naked short selling. He has lied and covered up crimes committed by people tied to the Mafia. And the common denominator of all this lying has been to boost the profits of short selling hedge fund managers, such as his pals at Kingsford Capital, which “donated” a lot money to the Columbia Journalism Review shortly before I was going to publish a story exposing Gary Weiss and his hedge fund friends. (For complete evidence of Gary Weiss’s lying, and his ties to Kingsford Capital, please search through Deep Capture’s archives. We have published extensively on the subject).

• Another target of my investigation at CJR was a hedge fund manager named Manuel Asensio, who is tied closely to Gary Weiss. Asensio previously worked for First Hanover, a brokerage tied to the Mafia. He is a self-confessed naked short seller and has been fined for naked short selling infractions. He was also once a business partner of Kingsford Capital. That is to say, Kingsford and Asensio contractually agreed to attack public companies together. I think it’s safe to say that Asensio was close to Kingsford Capital at the time that Kingsford Capital delivered a bundle of money the Columbia Journalism Review.

• Another focus of my investigation at CJR was the appalling bear raid on a collectibles company called Escala (NASDAQ:ESCL). Not only was Escala the victim of massive amounts of illegal naked short selling, but a hedge fund convinced the Spanish government that Escala’s parent company, based in Madrid, was fleecing investors in philatelic collectibles. The Spanish government closed the parent company, Afinsa, but not a single executive of the company has since been prosecuted for any crime. Former clients of Afinsa are now petitioning the Spanish government, claiming that the closure was a gross miscarriage of justice. For the full story, I encourage you to visit a website (www.gregmanning.me) put together by Escala’s former CEO. This website provides evidence that the hedge fund at the center of the bear raid on Escala – the hedge fund behind the Spanish government’s decision to close Afinsa — was none other than Kingsford Capital, which donated a bundle of money to the Columbia Journalism Review while I was busy trying to figure out which hedge fund was at the center of the bear raid on Escala.

• While I was working on my story for the Columbia Journalism Review, a reporter named Justin Hibbard was working on a similar story for BusinessWeek magazine. I have reviewed emails between Hibbard and one of his sources. These emails clearly show that Hibbard had received evidence that various companies had been clobbered by illegal naked short selling. The emails suggest that Hibbard was investigating ties between journalists and naked short sellers, and that he had interviewed the above-mentioned Herb Greenberg. But for some reason, Hibbard’s story was killed. It never appeared in BusinessWeek. Shortly after Hibbard’s story was killed, Hibbard had a new job – working as consultant to Kingsford Capital.

• After I wrote my first story raising questions about Kingsford’s “donation” to the Columbia Journalism Review, Hibbard erased all mention of Kingsford from his profiles on LinkedIn.com and other social networking sites. In a phone interview, Hibbard told me that he “preferred not to discuss” his relationship with Kingsford. When I asked what happened to his BusinessWeek story about naked short selling and corrupt journalists, he said that he had never worked on any such story. When I told him I had evidence to the contrary, he said he might have done some initial research on naked short selling, but he never finished the story. Currently, Hibbard works as a private investigator catering to the needs of short sellers and other “activist” investors. In an interview with an online publication, he said he serves hedge funds by “covertly” observing executives of public companies, taking photos of the executives with a spy camera, staking out offices, using multiple cars to trail the executives, etc. I assume Kingsford Capital is one of his clients.

• My successor at the Columbia Journalism Review is now referred to as the “Kingsford Capital Fellow.” He has written several stories arguing that the above-mentioned Gradient Analytics is innocent, despite massive amounts of evidence to the contrary. He has written that short sellers are swell and good sources for journalists (glossing over the distinction between short selling and abusive short selling, just as a child molester would gloss over the distinction between sex and pedophilia). He has criticized a 60 Minutes television news expose on Gradient and Steve Cohen of SAC Capital. He has criticized Bloomberg News for writing that criminal naked short sellers helped take down Bear Stearns and Lehman Brothers. And he has portrayed the corrupt Gary Weiss as a respectable reporter. I don’t mean to suggest that the “Kingsford Capital Fellow” is dishonest, but I predict he will not write about journalists who have been corrupted by Kingsford Capital’s network of hedge fund managers.

To summarize, a particularly nasty network of hedge fund managers and criminals use underhanded tactics to influence the press. We have a money trail, multiple motives, and plenty of other reasons to believe that this network got to the Columbia Journalism Review, which is the only watchdog there is to keep the press honest.

So it goes. Interesting world, isn’t it?

The Office of the Inspector General of the Securities and Exchange Commission not long ago submitted a semi-annual report to Congress. There are two items in the report of interest to those of us who have argued that the SEC has turned a blind eye towards, or even assisted, unscrupulous hedge funds that make their fortunes destroying public companies for profit.

The first item reads as follow:

“The OIG has opened an investigation into complaints from an investor alleging that the SEC failed to investigate instances of market manipulation and other misconduct in connection with the review, and eventual non-approval, of a developmental drug. The investor also has alleged that the SEC failed to investigate a recent bear raid on the stock of the company that developed the drug, causing a severe plunge in the stock price. The OIG has reviewed several hundred pages of documents, including numerous emails and attachments provided by the complainant. The OIG expects to complete its investigation and issue a report of investigation in the next reporting period.”

I have confirmed that this is a reference to the bear raid on Dendreon, described in considerable detail by Deep Capture.  There is plenty of evidence — including, perhaps, those documents and emails referred to by the OIG — pointing to miscreancy in this case. Indeed, it is one of the more despicable cases of market manipulation on record – and many cancer patients were deprived of potentially life-extending treatment as a result. We look forward to reading the OIG’s report – it should be a doozy.

The second item of interest in the OIG report is this:

“The OIG continued its investigation of an allegation that SEC staff engaged in retaliation against a company after it publicly complained about naked short selling in the company’s stock. During this reporting period, the OIG took the sworn testimony of the staff attorney who worked on the matter and reviewed numerous relevant documents. The OIG has completed its investigative work and plans to issue its report of investigation prior to the end of the next semiannual reporting period.”

It has long been a contention of Deep Capture that the SEC has not just ignored allegations of naked short selling, but has gone after companies that complain about it, often at the behest of the short sellers themselves. This report, too, should be interesting, to say the least.

It wasn’t so long ago that people who did battle against abusive short selling and captured government officials were labeled as conspiracy theorists. Now, thanks to SEC Inspector General David Kotz and a few other honest people in government – people like Senator Ted Kaufman – we might finally see some light shed on some of the shenanigans that have made America look an awful lot like a third world basket case.

Yes, there are hedge funds that do bad things.

Yes, there are government officials who help them.

It’s an ugly reality, and the OIG is to be commended for treating serious allegations as they should be treated – i.e. seriously.

Although much attention has been directed at the contribution made by credit default swaps  to the financial crisis, most discussion has focused on the companies, such as American International Group, that posted big losses because they sold these instruments without sufficient due diligence.

Another line of inquiry has not been pursued, however, though it is of equal, and perhaps greater, significance. That line of inquiry concerns the way in which the prices of credit default swaps effect the perceived value of all forms of debt — corporate bonds, commercial mortgages, home mortgages, and collateralized debt obligations — and as a result, the ability of hedge funds manipulators to use credit default swaps to enhance their bear raids on public companies.

If short sellers can manipulate the price of credit default swaps, they can disrupt those companies whose debt is insured by the credit default swaps whose prices are manipulated.  The game plan runs as follows: find a company that relies on a layer of debt that is both permanent, and which rolls over frequently (most financial firms fit this description). Short sell that company’s stock. Then manipulate the price of the CDS upwards, preferably into a spike, as you spread the news of the skyrocketing CDS price (perhaps with the cooperation of compliant journalists at, say, CNBC).

Because the CDS is, in essence, an insurance policy on the debt of the company, the spiking CDS pricing will cause the company’s lenders to panic and cut off access to credit. As this happens, the company’s stock will nosedive, thereby cutting off access to equity capital. Thus suddenly deprived of credit and equity, the firm collapses, and the hedge fund collects on its short bets.

Moreover, credit default swap prices are the primary inputs for important indices (such as the CMBX and the ABX) measuring the movement of the overall market for commercial and home mortgages.  In the months leading up to the financial crisis of 2008, short sellers pointed to these indices in order to argue  that investment banks – most notably Bear Stearns and Lehman Brothers – had overvalued the mortgage debt and property on their books. Meanwhile, several hedge funds made billions in profits betting that those indexes would drop.

It should therefore be a matter of some concern that credit default swap “prices” and the indexes derived from them are determined almost entirely by a little company with zero transparency and, it appears probable, a high exposure to influence from market manipulators. The company is called Markit Group, and there is every reason to believe that its CDS-driven indices (the CMBX, the ABX, and several others) are inaccurate, while the credit default swap “prices” that they publish  and which rock the market are in fact  nowhere close to the prices at which credit default swaps actually trade.

Last year, the media reported that New York Attorney General Andrew Cuomo had sent subpoenas to Markit Group as part of an investigation into possible manipulation of credit default swap prices by short sellers. This investigation, like Mr. Cuomo’s other investigations into market manipulation, have yielded no prosecutions.

The Department of Justice is reportedly investigating Markit Group for anti-trust violations. This investigation (which is reportedly focused on how Markit Group packages and sells its information) seems to acknowledge that Market Group has near-monopolistic control of information about credit default swap prices. However, if the press reports are correct, the DOJ has not considered the possible appeal of this monopolistic control to market manipulators.

Meanwhile, Henry Hu, the director of the Securities and Exchange Commission’s division of risk, has said that it has been nearly impossible for the SEC to conduct investigations into any matter concerning credit default swaps because the commission does not have access to any data on the trading of CDSs. In itself, this is a shocking admission.  It is all the more shocking when one considers that the necessary data exists and might be in the hands of the Markit Group – a black box company based in London.

A thorough investigation of Markit Group is urgently required.

Here is what we know so far:

• Markit Group was co-founded by Rony Grushka, Lance Uggla, and Kevin Gould. Prior to founding Markit Group, Mr. Grushka’s main line of business was investing in Bulgarian property developments. He recently resigned from the board of Orchid Developments Group, an Israeli-invested company based in Sophia, Bulgaria. Messrs. Uggla and Gould formerly worked for Toronto-Dominion Bank in Canada.

• Markit Group’s founders also include four hedge funds. However, Markit Group refuses to disclose the names of those hedge funds. In response to an inquiry, a Markit Group spokesman said it was “corporate policy” to keep the names of the hedge funds secret, but he would not say why Markit Group had such a policy. It seems worth knowing whether those hedge funds have any influence over Markit Group’s published information or indexes, and whether those hedge funds are trading on that information. It would also be worth knowing whether those hedge funds or affiliated hedge funds have engaged in short selling of public companies whose debt and stock prices were profoundly affected by the information that Markit Group published.

• Goldman Sachs, JP Morgan and several other investment banks also have ownership stakes in Markit Group. The investment banks received their stakes in exchange for providing trading data to Markit Group. It would be worth knowing whether these investment banks engaged in short selling ahead of Markit Group’s published indexes and price quotations.

• Markit Group is secretive about how it creates its indexes. In early 2008, the Wall Street Journal noted that the CMBX simply “doesn’t make sense” and that Markit Group’s indexes “might be exaggerating the amount of distress” in the home and commercial mortgage markets. In 2008, the average prediction for defaults on commercial mortgages was 2%. The CMBX implied that the default rate could be four times that level.

• When short seller David Einhorn initiated his famous public attack on Lehman Brothers, one of his central arguments was that the CMBX (the index that was likely “exaggerating the amount of distress”) proved that Lehman had overvalued the commercial mortgages on its books.

• In March 2008, the Commercial Mortgage Securities Association sent a letter to Markit Group asking it disclose basic information about how the CMBX index is created and its daily trading volume. “The volatility in the CMBX index, caused by short sellers, distorts the true picture of the value of commercial-mortgage-backed securities,” the group said in a statement.

• Markit Group is equally secretive about how it derives its “prices” for credit default swaps. A spokesman for the company spent close to one hour talking to Deep Capture. He did his job well and sounded like he was trying to be helpful. But he told us as little as possible.

• However, in the course of this conversation, we did learn that Markit Group’s “prices” are not actual, traded prices. They are mere quotations. The Markit Group has what it calls “contributors” – hedge funds and broker-dealers that provide it with information. Markit Group has a grand total of 22 “contributors.” Deep Capture asked Markit Group’s spokesman for the names of these “contributors.” The spokesman said he would try to find out the names and call back later. He never called back.

• The 22 “contributors” provide Markit Group with quotations, and these quotations become the Markit Group’s “price.” In other words, the “contributors” can quote any price for a CDS that they choose, regardless of whether anyone is actually willing to buy the CDS at that price. Markit Group looks at these quotations. Then it somehow decides which quotations make the most sense. Then it publishes information that purports to represent the actual market price of that CDS. This process is certainly unscientific. And it is ripe for abuse.

• Consider, for example, the Markit Group “price” for CDSs insuring the debt of company X.  The Markit Group price strongly suggests that company X is going to default on its debt in the immediate future. Short sellers eagerly point to the Markit Group CDS “price” as evidence that company X is doomed. Panic ensues, and suddenly, company X really is doomed. But the fact is, nobody ever bought a company X CDS at the price quoted by Markit Group. Rather, that panic-inducing “price” was, in effect, pulled out of a hat. Who pulled it out of a hat? That is matter of immense importance. There are two possible scenarios:

• The first possible scenario is that the 22 “contributors” report their quotations in good faith. They should be sending the actual traded price, not just a quotation, but assume they are just doing what was asked of them. From these quotations, Markit Group somehow decides what the “price” should be. It is possible that this decision is based on some secret formula (which would be worrisome); or it is possible that Markit Group executives sit around a table debating what the price should be and take a shot in the dark (which would be even more worrisome); or it is possible that Markit Group deliberately chooses the most horrifying price possible in order to assist the short sellers who are affiliated with its owners (which would be a matter for the authorities).

• The second possible scenario is that Markit Group acts in good faith (if not scientifically), but one or more of the 22 “contributors” or their affiliates has an interest in seeing company X fail. If just one of those “contributors” sends in an astronomically high quotation, that could be enough. Markit Group factors the absurd quotation into its posted “price” and it suddenly becomes possible to convince the world that company X is about to default on its debt.  Panic ensues, the firm’s layer of debt dries up, the stock price plunges, and perhaps the “contributor” or its affiliate make a lot of money.

• As Deep Capture understands it, CDS quotations suggested by the 22 “contributors” also help determine the movement of the CMBX and ABX indexes. The movement of these indexes did serious damage to the American economy in multiple ways. The  indexes prompted write downs at most of the major banks and mortgage companies. They were ammunition for short sellers, like David Einhorn, who claimed that companies had cooked their books by not writing down to the rock bottom prices suggested by the Markit Group indexes. They helped precipitate the decline in prices of mortgage securities, and contributed mightily to the panic that spread across the markets.  A lot of people made a lot of money as result of those indexes moving downward. So, it is rather important to know more about how those indexes are formulated, and if they can be driven by the same people who are making directional bets on their movements.

Conclusion: Ten years ago, there was no such thing as a credit default swap. Six years ago, a very small number of investors traded credit default swaps as hedges against the long-shot possibility of corporate defaults. Nobody looked to credit default swaps as reliable indicators of corporate well-being.

Then, suddenly, there were over $60 trillion in credit default swaps outstanding. That is, over the course of a few years, somebody had made over $60 trillion (many times the gross domestic product) in long shot bets that borrowers would default on their debt. As this derivative risk marbled through the system, the trading in credit default swaps was completely opaque. Nobody knew who bought them, who sold them, or at what price.

But starting in 2001, we knew the “prices” of CDSs. We knew the “prices” because two Canadians, a developer of Bulgarian real estate, and four mysterious hedge funds had founded a small, black-box company in London. That company, the Markit Group, achieved near-monopolistic power to publicize the “prices” through its magic process of aggregating quotation information provided by 22 hedge funds and broker-dealers who could well have been betting on the downstream effects of sudden price changes.

These “prices” were not prices in any meaningful sense of the term.  But, suddenly, these “prices” became perhaps the single most important indicator of corporate well-being. Assuming that those four hedge funds and the 22 “contributors” (or hedge funds affiliated with them) bet against public companies, it seems more than possible that short-sellers got to run the craps table, call the dice, and place bets, all at the same time.

So perhaps it is not surprising that a lot of long-shot rolls paid off quite nicely.

It was perhaps the single most important moment leading to the downfall of Bear Stearns.

On March 13, 2008, reporter David Faber, live on CNBC, said, “I’m told by a hedge fund that I know well…I’m told that [last night] Goldman would not accept the counterparty risk of Bear Stearns.”

Faber and that hedge fund might as well have flown an airplane into the side of Bear Stearns’s headquarters on 47^th Street.  Previously, there had been rumors about Bear Stearns, but this was the first time that anyone had stated as fact that a major bank was refusing to accept Bear Stearns risk. It wasn’t until Faber and that hedge fund unleashed the explosive news — right in the middle of a crucial interview with Bear Stearns CEO Alan Schwartz – that the run on the bank began.

This raises two important questions:  Which hedge fund told Faber that Goldman wasn’t accepting Bear’s counterparty risk? And, was the news true?

The answer to the second question is a definitive “No.” We know this because some hours later, Faber reported that, actually, “Goldman did say alright, now we will accept Bear as a counterparty.”  Oops. Of course, at this point it was too late – clients were fleeing Bear Stearns in mass, panicked by the news that Goldman might or might not have accepted Bear Stearns as a counterparty. The run on the bank had started, and Faber’s retraction did nothing to stop it.

To answer the first question, it is necessary to understand that short selling hedge funds often “foment” the markets by spreading incendiary information about the companies they are attacking. In a video sold to hedge fund managers and other high paying subscribers, CNBC’s Jim Cramer, a close associate of David Faber, once encouraged hedge fund managers to “foment.” He said, “Now you can’t foment. That’s a violation of…But you do it anyway because the SEC doesn’t understand it…This is actually blatantly illegal…But I think it’s really important to foment.”

It is also necessary to understand that one particular network of hedge funds has, for several years, have accomplished much of their “fomenting” by placing false or hysterical stories with a specific group of dishonest journalists. After the hedge funds have demolished a company’s stock price, they turn to those same journalists to cover up their misdeeds and present skewed versions of what happened to the company.

One of these journalists is Jim Cramer. Another is David Faber. A third is Roddy Boyd, formerly of Fortune magazine.  Roddy is particularly humorous because he unwittingly tends to reveal the miscreancy of his hedge fund sources. By reading between the lines of his stories and turning a keen ear to his public boasting, we can often discover nuggets of truth. So it is that Roddy has revealed the likely identity of the hedge fund that crashed that airplane into the side of Bear Stearns.

In a story published on March 28, 2008, Roddy repeated the assertion that Goldman had refused to serve as a counterparty to Bear Stearns. He noted that Goldman had stated this refusal in an email that Goldman sent on March 11, 2008. And in support of this assertion, Roddy quoted Kyle Bass, the manager of a Dallas-based hedge fund called Hayman Capital. “I was astounded when I got the [Goldman] e-mail…” Bass said to Roddy. “Goldman told Wall Street that they were done with Bear, that there was [effectively] too much risk. That was the end for them.”

Kyle Bass is known to be a close friend of David Faber. The two men worked together on “House of Cards,” Faber’s CNBC special documentary on the collapse of Bear Stearns. It appears quite likely that it was Bass’s hedge fund, Hayman Capital, that fed Faber the death-knell news that Goldman had refused to serve as a counterparty. And to convince Faber that Goldman had cut Bear off, it is likely that Hayman alluded to the same supposed “email”  from Goldman to Hayman that was later cited by Roddy Boyd.

Beyond these suppositions, the story gets a bit murky. Depending on whom you ask, there was either no such email, or there was an email, but it was an utterly routine email that merely stated that Goldman could not immediately process counterparty requests, but would do so in short order. While Roddy gives absolute credence to Bass’s claim that “Goldman told Wall Street that it was done with Bear Stearns,” he also states, in parenthesis, that Goldman denied that it had refused to accept Bear’s counterparty risk, which is another way of saying that Bass’s claim was an exaggeration to say the least.

In hopes of getting to the bottom of this, I called Hayman Capital. Hayman’s lawyer, Chris Kirkpatrick, told me that neither Bass nor anyone else at the hedge fund would comment on the matter. Apparently, Hayman only speaks to Roddy Boyd, David Faber and a few other journalists known to be tools of short selling hedge funds. Certainly, Hayman would not provide me with a copy of the famous email.

The most I could get out of Kirkpatrick was a vague statement that “what has been reported in the media is not accurate.” I do not know if he meant that Roddy’s story was inaccurate – that Bass, in fact, no longer claims that “Goldman told Wall Street that it was done with Bear Stearns.”  I do not know if he meant that it was inaccurate to suggest that Bass had received an email that said as much.

What I do know is this: at the time that Faber and his hedge fund source (probably Hayman) delivered that deadly blow to Bear Stearns, Goldman Sachs was accepting Bear Stearns counterparty risk. That is an absolute fact.

So here’s the kindest scenario:  Goldman at one point sent out some kind of email. It is possible that Goldman is lying (it does that sometimes), and this email did, in fact, state that Goldman would not serve as a counterparty to Bear Stearns. Or it is possible that the email stated no such thing. Either way, by the time of Faber’s report Goldman was accepting Bear as a  counterparty so the email was no longer relevant.

Although the email was no longer relevant, Hayman Capital was either confused or super-excited by said email, and in its tizzy, Hayman couldn’t control itself – it just had to call David Faber with the shocking news right before Faber was to conduct a life-or-death interview with Bear Stearns CEO Alan Schwartz. But that’s all it was – an innocent tizzy. Hayman certainly did not mean to spread inflammatory information about Bear Stearns.

The other scenario is that a cabal of hedge funds, including Hayman capital, orchestrated a “conspiracy” to destroy Bear Stearns for profit. That is the scenario that Bear Stearns’ former CEO, Jimmy Cayne, laid out for Fortune magazine. When a Fortune reporter (not Roddy Boyd) quoted Cayne’s “conspiracy” remark, Hayman Capital’s lawyer, Kirkpatrick, wrote a letter to Fortune in which he stated that “Cayne’s rant” was a “feeble attempt to deflect blame…”

Hayman’s lawyer added that Hayman “did not have any positions in Bear Stearns’ securities at the time of its failure…In short, Hayman did not stand to profit from [Bear Stearns’s] failure.”

Because our markets are defined by their opacity there is no way to confirm whether Hayman had any “positions in Bear Stearns’ securities” or any other kind of bet against Bear Stearns. The SEC does not require hedge funds to report their short sales, their credit default swap positions, or any of the myriad other derivatives by which a hedge fund might profit from the demise of an investment bank.

But given that Hayman reportedly was betting big  iagainst subprime mortgage derivatives, and given that the value of such derivatives plummeted as the result of the Bear Stearns fiasco, it is a bit disingenuous for Hayman to suggest that it “did not stand to profit” from Bear’s failure.

Moreover, Hayman failed to mention that one of its most important investors was Dan Loeb, manager of a hedge fund called Third Point Capital. As Deep Capture has detailed elsewhere, Loeb is very much a part of that network of short sellers that has habitually disseminated false information through a clique of dubious journalists, including David Faber and Roddy Boyd.

Most of these hedge fund managers, including Loeb, are connected in some way to the famous criminal Michael Milken or his close associates. (Loeb worked side-by-side with many of Milken’s former traders at Jefferies & Co., and got his first big break by obtaining preferential access to certificates of beneficial interest that had been issued by Milken’s bankrupt operation at Drexel Burnham Lambert). And members of this network, including Loeb, were by far the biggest short sellers of Bear Stearns stock.

Most of these hedge funds invest in smaller hedge funds with the expectation that the smaller hedge funds will somehow participate in their attacks on public companies. I do not know what preconditions came with Loeb’s investment in Hayman, but I think it’s fair to say that Hayman is an honorary member of the network.

As a measure of the lengths to which this network goes to spew false information, consider that Loeb once contracted with an outfit called Magic Consulting – owned by convicted stock manipulator Michelle McDonough (formerly Michelle Sarian). Emails obtained by Deep Capture show that McDonough’s job was to coordinate a stable of internet stock message board posters and journalists who bashed stocks shorted by Loeb and his friends. McDonough was herself a fairly prolific message board basher, prior to going to prison.

One of the internet message board bashers in McDonough’s stable was Floyd Schneider, a former employee of a Mafia-connected short seller named Anthony Elgindy, who is currently serving an 11-year sentence for short selling crimes. One of the journalists in McDonough’s stable was the above-mentioned Roddy Boyd.

In one email to Schneider, Roddy refers to McDonough as “our mutual best friend.”

So we might question Roddy’s version of the Goldman email story. We might question Roddy’s relationship with Hayman Capital. We might question Hayman Capital’s relationship with Loeb and his network of “fomenting” short sellers. And we might also question whether these short sellers deliberately set out to destroy Bear Stearns.

Actually, it is not we who must question. It is the SEC. But as Jim Cramer said, the SEC “doesn’t understand.”

“Telling the truth is only possible by accident through a special sort of boastfulness…”

- Fyodor Dostoevsky, “The Idiot”

Regular readers of Deep Capture are aware that we have sought to expose certain journalists who seem to serve the interests of a network of market miscreants, many of whom are tied to the famous criminal Michael Milken or his close associates.

One of these journalists is Roddy Boyd, who worked at the New York Post before moving to Fortune magazine. It has come to our attention that Roddy has left Fortune. The magazine did not return a phone call seeking comments on the circumstances behind his departure, but whatever those circumstances might be, it seems fit to honor his departure by publishing an excerpt from a book called “House of Cards.”

In this book, which is written by a Wall Street insider named William Cohan, Roddy is quoted at length, and one particular passage stands out for being quintessentially Roddy. While you are reading the passage, keep in mind that I spent a number of hours talking to Roddy some years ago, and can report that he has a manner of speaking that is similar to what Dostoevsky called “a special sort of boastfulness” –which is to say that Roddy likes to stroke his own back, and in so doing, he often rambles in such a way as to unintentionally admit to his own buffoonery, or to some form of miscreancy on the part of his favorite Wall Street sources.

In this passage, Roddy tells the story of certain communications he had with Tom Marano, Bear Stearns’s (NYSE:BSC) top mortgage trader, on March 6, 2008 – a few days before false rumors began swirling about Bear Stearns’s access to credit. The following week, the false rumors were rampant, and those rumors, along with naked short selling, quickly brought Bear to its knees.

A couple of weeks after the collapse of Bear Stearns, Marano found a new job – with Cerberus Capital Management. As I have detailed elsewhere, Cerberus is run by Steve Feinberg, who was once one of Michael Milken’s top traders at Drexel Burnham. After working for Milken, Feinberg moved to Gruntal & Co., a criminal-infested brokerage, where he worked closely with Steve Cohen, who was once investigated by the SEC for trading on inside information fed to him by Michael Milken’s staff at Drexel.  Cohen now runs SAC Capital, believed to be one of the biggest short sellers of Bear Stearns’s stock.

I am not yet going to state what I think is important about the passage quoted below. But I have other reasons to believe that the facts that Roddy drops in the course of his braggadocio are key to understanding what happened to Bear Stearns. Read the passage yourself, focusing on the facts, not on Roddy’s version of the facts. Consider that Roddy’s conversation with Marano took place on March 6, when there were not yet any rumors in the market, and Bear’s stock was trading above $60. Then, let me know if you spot what’s important.

Here’s the passage:

“…at eleven in the morning on March 6 Marano placed a phone call to Roddy Boyd, then a writer at Fortune. Marano had been a source of Boyd’s for years, when the journalist was covering Wall Street at the New York Post, and had freely offered commentary about his competitors and the markets generally. Boyd had been a trader for eight years before switching careers to journalism, and the two men spoke the same language. ‘I know the mortgage product dead cold,’ Boyd said. Their relationship was a well-defined pas de deux.  ‘It was unusually well defined,’ [Boyd] explained. ‘We knew exactly what we were saying. I could have a very long conversation in two minutes. I protected him always. I never BS’d with him. I never got him in hot water. The corollary was he never BS’d with me, and he would give me good stuff.’

“This time, Marano called Boyd to talk about Bear Stearns, and specifically about his concern that the firms he had traded with for years were suddenly asking him whether Bear had enough cash on hand to execute his trades. ‘He called me at 11:00 A.M. that day and we talked about one or two things,’ Boyd continued. ‘It was weird. He knew it was weird. We did small talk in under ten seconds. I said to him, ‘What’s up?’ He said, ‘What are you hearing about Bear?’ I said, ‘You know what I’m hearing and you know what I’m seeing. He said, ‘I know what you’re hearing and you’re seeing. It’s just baffling.’ Now here I’m playing him a little because I’m hearing things and I’m seeing some things, but he’s not saying much more than I am, so I let him walk and talk. He said to me, ‘Roddy, our guys, our senior guys here, are hearing a really strange thing from custies.’ That’s customers. He said, ‘We were not prepared to hear stuff like this. This is baffling. People are quite literally questioning our solvency, questioning our ability to go on. The shorts are having a lot of fun with us today.’…

“‘He’s thinking two things,’ Boyd continued. ‘One, he’s got to stop this whole line of inquiry right here, right now, because if you have to ask the question, oh my God. Second, he’s thinking about the trajectory of rumor and supposition, and that thesis of smoke versus fire….With a question of their ability to act as a counterparty on the table, that’s unimaginable. I mean, this is Bear Stearns….Now they’re being questioned from the standpoint of fundamental liquidity. He [Marano] said that he believed that these short sellers had been speculating in the credit default swap market and telling counterparties at other firms that they had concerns about Bear Stearns’s liquidity and solvency, and that was driving the cost of spreads wider. What that was doing was making their overnight funding more expensive. That was cutting into their profit margin, and in turn was also starting a sort of cottage industry of rumors about Bear Stearns.’

Roddy continued: “‘There’s no need to explain anything between us,’ he [Marano] said.  I said, ‘Are you sure you’re seeing this?’ He said, ‘Look at [the credit default] swaps.’ So I looked them up and then I see the hockey sticks’ –  a sharp spike up in their cost… ‘He said, ‘It’s unbelievable. It all bullshit.’ At that point—he’s very much a corporate guy—but he had left me [with a clear message]. I’m not stupid. Hedge funds and prime brokerage accounts are unusually skittish about questions of financial health, financial solvency, and he said, ‘I’m hearing there’s questions about our financial health.’ At that point, Marano is telling me he knew he was done, because once that question of credibility goes out there, and serious people say it to you enough, you’re done. It’s all that there is to it. It’s all that there is to it. Where do you go to get your reputation back.’ …

“Boyd worked hard [the following night] and over the weekend trying to figure out which bank—said to be European—had decided it would no longer be a counterparty to Bear Stearns in the overnight financing markets. Obviously, this would be a huge negative development for the firm…‘At that point, I’m pulling my fucking hair out—pardon my language—calling everybody,’ [Boyd] said. ‘I’m calling Deutsche Bank, I’m calling UBS, and I’m very aggressive. Get your senior guys on the phone. Get your financing desk on the phone. I don’t want to talk to some stupid flack. I spent eight years on a desk. I’m smarter than all those flacks. They’re all Kool-Aid drinkers. They don’t honestly know a derivative from a bond from a stock. None of them are going to be able to ask their financing desk. They don’t even know enough to call the repo guys on the financing desk. I told them, Get your financing guys or get your credit guys on the phone with me, or you’re going in Fortune. Here’s the New York Post coming out of me. I said, There’s two ways this is going to work: bad or good. This hand is good; this hand is bad. I shake your hand or I punch you. Let me know…I’m talking to the guys in New York, and they’re saying, We swear to Christ we are not the ones to have done that [cut financing]. If Deutsche Bank had done it, I’m thinking, ‘Okay, that’s the story right there.’ The minute a repo line gets pulled, you die, okay? They die a terrible death.’…

Roddy continued that, after the March 6 call with Marano, ‘“I was thinking, I’m going to poke around in this more…but then I was thinking, This is strange. This is like a situation where you can abuse your position as a reporter. When you’re at Fortune, you have to do stuff right. When you’re at the New York Post, you have to be there first and fastest. At Fortune, you write the first draft of history, and you have to get it right and you have to be consistently right. I’m thinking, I don’t really want to screw with this company – I don’t want to spread rumors. I don’t want to become part of the story. I don’t want to hurt people unnecessarily. I’m an aggressive guy and I’ll pick fights with anyone or anything, but there’s a right way of doing my job and there’s a wrong way. I weighed my duty as an employee here versus the right thing to do.”

Do you see what happened here? Feel free to post your opinion in the comments section. Or contact me privately by email at mitch0033@gmail.com.

As should be clear from the contents of Deep Capture, the world of illegal naked short selling is a weird one, populated by sociopathic billionaires, slick lobbyists, famous felons, bent regulators, crooked law firms, corporate spies, message board maniacs, sinister banks, shifty private investigators, mendacious professors, professional dissemblers, propagandists, grifters, thugs, liars, and the Mafia.

Things become all the more weird when you consider that regulators and law enforcement do almost nothing to stop naked short selling, even though a growing number of prominent people – everyone from U.S. Senators to George Soros – insist that criminal naked short sellers helped take down Bear Stearns, Lehman Brothers, and the American financial system. Then there’s the weird fact that anybody who tries to shed light on this weird state of affairs is quickly subjected to smear campaigns that are…weird.

Anyway, message to Matt Taibbi: Welcome to our world.

Taibbi, as many people know, is the star reporter who published a major expose about naked short selling in the most recent issue of Rolling Stone magazine. In addition, he has published a few blogs providing more evidence to support his claim that illegal naked short selling is a big deal and it’s pretty “hilarious,” as he puts it, that the government hasn’t prosecuted the people who might have helped crash the financial system.

In one of his blogs (which you can read here), Taibbi posts a video that seems to show a day trader conducting a short sale of stock in an unnamed big bank through a brokerage called Penson Financial. The SEC says that short sellers have to have “reasonable grounds” that they can locate actual stock to deliver to their buyers. As Taibbi rightly points out, this is a “very  funny piece of regulatory policy – asking greedy ass financial companies to determine what to them is a ‘reasonable’ effort to follow the rules. “

At any rate, if you believe what you see in Taibbi’s video, Penson Financial gave that day trader a phony “locate” on quite a few of the unnamed big bank’s shares. In fact, the video seems to show Penson Financial confirming that it had “located” many billions of the unnamed big bank’s shares – altogether, five times as many shares as were then in circulation. In other words, it seems that if this trader had had the inclination and the funds, Penson would have accepted a massive naked short sale, helping the trader flood the market with billions upon billions of shares that simply did not exist.

This is rather important, because Deep Capture has reviewed evidence showing that little Penson Financial and one other relatively unknown firm were by far the biggest traders in financial stocks in the first nine months of last year, handling more than 80 percent of volume. To repeat, Penson Financial, a little firm in Dallas, Texas, and one other relatively small firm handled by far the biggest volume of trading in the stock of all those big banks that collapsed last year, leading to the worst financial crisis since the Great Depression. When it came to clearing trades in financial stocks, Penson was bigger than Goldman, bigger than Merrill, bigger than every major brokerage on Wall Street.

We do not know for certain that the trading through Penson was naked short selling. We know only that naked short selling accounted for much of the overall trading last fall in companies like Lehman Brothers. And we know that a preponderance of the overall trading went through Penson. Perhaps Penson carefully weeded out the naked short sellers, in which case it handled almost all of the trading in financial stocks except for naked short selling. But if Taibbi’s video is any indication, Penson was certainly willing to locate stock that did not exist.

If I have anything to add to Taibbi’s terrific reporting, it is this: Penson Financial’s vice president in charge of stock clearing (that is, the head of the division that appears to have located stock that did not exist) is a man named Christopher Sandel. From 1985 to 1995, Sandel was a top executive at Adler Coleman, best known for being the clearing firm to the Genovese Mafia family.

Adler Coleman famously went bust when its top customer, the Genovese-controlled brokerage Hanover Sterling, self-imploded in one of the greatest naked short selling scandals of all time. Several traders tied to the Gambino crime family were charged with naked short selling companies that were underwritten by Hanover. That the Genovese Mafia brokers at Hanover were not charged in this case seems odd, because the most likely scenario is that the Genovese underwrote hapless companies, pumped their stock prices, and then called in the Gambinos to vaporize the companies, with everybody profiting on the way down.

Anyway, when some of America’s biggest financial companies collapsed under a barrage of short selling last fall, an enormous chunk of that trading was being cleared by a fellow who used to work for a company that seemed to specialize in clearing trades for the Mafia. Should this concern us? Might the Mafia have played some role in the collapse of the financial system? If I were more heavily armed, I would venture an opinion.

Now, of course, there is a concerted effort to portray Taibbi as a sucker, and his video as a fake. One blogger who has suggested as much is Gary Weiss, a former BusinessWeek reporter. As we have documented elsewhere on Deep Capture, Gary Weiss is a corrupt pseudo-journalist whose sources have included naked short sellers with ties to the Mob. Among Gary’s favorite sources were John Fiero (fined $1 million in Hanover Sterling scandal), Anthony Elgindy (currently serving an 11 year prison sentence for short selling crimes and alleged to have had his finger sawed off by Russian mafiosi who were concerned that he would become a government informer), and Manuel Asensio (who once worked for a Mafia-controlled brokerage called First Hanover).

Weiss has reported extensively on the Mafia’s infiltration of Wall Street, but he has, for years, insisted that only conspiracy theorists believe naked short selling is problem. He wrote a great deal about Hanover Sterling, but not once did he mention that naked short selling was central to that case. In his book, “The Mob on Wall Street,” Weiss told the story of a Genovese Mafia broker, and mentioned that this Mafia broker claimed to clear his trades through none other than…Penson Financial.

But, of course, Gary insisted that the Mafia broker must have been lying, because Penson is a “legitimate firm.”

Meanwhile, a blog called ClusterStock has also suggested that Taibbi’s video is a “hoax.” Taibbi has written a fine rebuttal to that claim (which you can read here), so I have nothing to add, except that ClusterStock was founded by Henry Blodget, who was famously charged with securities fraud in 2002, and by the former co-owners of DoubleClick, a company that was once defrauded by the Colombo Mafia family. DoubleClick was never charged with any crimes, as it was, alas, the victim.  Such is the sad fate of many firms that  have business dealings with the Mafia (of course, this fate may be avoided by adhering to a simple dictum: “Avoid having dealings with the Mafia”).

I tell you this not because I think there is some kind of conspiracy, but  merely because I am fascinated by the always colorful biographies of people who attack those who seek to expose the crime of naked short selling. Blodget is, by all accounts, a reformed criminal, and I’m sure the other people at ClusterStock  are law-abiding people. Gary Weiss would be perfectly innocent, too — except that he’s an out-and-out fraud.

Recently, Deep Capture reporter Judd Bagley revealed that Weiss was the anonymous author of a blog on the popular website Daily Kos. This blog, of course, denied that naked short selling is a crime, while smearing those who said otherwise. To support its smears, the blog, written by the anonymous Gary Weiss, referred readers to another blog, written by none other than Gary Weiss.  Indeed, Gary Weiss has had a great many phony on-line aliases, and all of these Gary Weiss aliases proclaim that Gary Weiss is right and great.

In a variation of this on-line chicanery, ClusterStock’s writers littered the comments section of Taibbi’s blog with allegations that his video was a “hoax.” To support these allegations, the ClusterStock writers provided links to another blog…ClusterStock. Presumably, Gary Weiss will also provide links to ClusterStock. Oh wait, he already did that.

Meanwhile, Penson Financial, has written a letter to the SEC, suggesting that Taibbi’s video was (what else?)…”a hoax.”  In the letter, Penson Financial, which was fined in 2006 for naked short selling, promises that it does not engage in naked short selling.

The SEC no doubt believes this.

Matt Taibbi has published a story in Rolling Stone magazine that nobody should miss. It’s not yet available on-line, so you’ll have to pick it up at the newsstands, but here’s a quick summary.

Taibbi writes:

“On Tuesday, March 11^th, 2008, somebody – nobody knows who – made one of the craziest bets Wall Street has ever seen. The mystery figure spent $1.7 million on a series of options, gambling that shares in the venerable investment bank Bear Stearns would lose more than half of their value in nine days or less. It was madness – “like buying 1.7 million lottery tickets,” according to one financial analyst.”

Bear’s stock would have to drop by more than half in a matter of days for the mystery figure to make a profit. And that is what happened.

As Taibbi explains, “the very next day, March 12, Bear went into a free fall…Whoever bought those options on March 11^th woke up on the morning of March 17^th having made 159 times his money, or roughly $270 million. This trader was either the luckiest guy in the world, the smartest son of a bitch ever or…Or what?”

Taibbi speculates (as has Deep Capture) that these options might have been purchased by somebody who was abusing the options market maker exemption to engage in illegal naked short selling. And Taibbi goes beyond speculation to state, as an obvious fact, that illegal naked short selling helped bring Bear Stearns to its knees.

Presumably operating under that assumption, the SEC issued more than 50 subpoenas to Wall Street firms in the wake of Bear’s collapse, but “it has yet to indentify the mysterious trader who somehow seemed to know in advance that one of the five largest investment banks in America was going to completely tank in matter of days.”

Taibbi continues: “The SEC’s halfhearted oversight didn’t go unnoticed by the market. Six months after Bear was eaten by predators, virtually the same scenario repeated itself in the case of Lehman Brothers – another top-five investment bank that in September 2008 was vaporized in an obvious case of [naked short sellers engaging in] market manipulation. From there, the financial crisis was on, and the global economy went into full-blow crater mode.”

Taibbi notes that there were many other factors that made the economy weak. But he says that naked short selling is what pushed Bear and Lehman over the edge. If it weren’t for naked short selling – a massive “counterfeiting scheme,” in Taibbi’s words — those banks would likely have survived, and we might have avoided an all-out financial catastrophe.

This cannot be stressed enough. Criminals deliberately destroyed two of America’s biggest investment banks, precipitating the greatest financial cataclysm since the Great Depression. And the government has done absolutely nothing to bring those criminals to justice. In fact, as Taibbi makes clear in his story and on his blog, the most likely culprits are feted by top government officials in closed door meetings.

I’d call this the biggest financial and political scandal in the history of this country.

Certainly, it is, as Taibbi writes, “one of the most blatant cases of stock manipulation in Wall Street history.” Certainly, it is, as Taibbi writes, “the two biggest murders in Wall Street history.” And, certainly, it is odd that this very big story has appeared in Rolling Stone, but has yet to be covered by a single mainstream news publication.

The Wall Street Journal, The New York Times, Fortune, BusinessWeek – they have all known about naked short selling since Deep Capture reporter Patrick Byrne began hollering about it in 2005. But none of them write about it. Instead, we find a competent financial journalist, and the only major story about one the greatest financial crimes of all time, published in a slightly alternative magazine about music.

I worry for the Republic.

* * * * * * * *

Earlier this week,  the Wall Street Journal published what should have been a fairly explosive story implicating Goldman Sachs and its favored hedge fund clients in yet more market miscreancy. Predictably, though, this story did not have what journalists call “legs.” No other mainstream media outlets picked it up. There was no outrage. And there is, of course, no indication that anyone in the government plans to do anything about it.

So allow me to do my small part by reprinting the relevant passage:

“Goldman Sachs Group Inc. research analyst Marc Irizarry’s published rating on mutual-fund manager Janus Capital Group Inc. was a lackluster ‘neutral’ in early April 2008. But at an internal meeting that month, the analyst told dozens of Goldman’s traders the stock was likely to head higher, company documents show.

“The next day, research-department employees at Goldman called about 50 favored clients of the big securities firm with the same tip, including hedge-fund companies Citadel Investment Group and SAC Capital Advisors, the documents indicate. Readers of Mr. Irizarry’s research didn’t find out he was bullish until his written report was issued six days later, after Janus shares had jumped 5.8%.”

The story goes on to suggest that this is standard operating procedure at Goldman. Every week, Goldman analysts exchange stock tips with each other at a gathering the firm calls the “trading huddle.” After the huddle, the tips are conveyed to as few as six, and no more than 60 preferred clients – presumably all high paying hedge funds, such as the above-mentioned SAC Capital.

The Journal quotes Goldman spokesman Edward Canaday as saying that the tips are nothing more than “market color” and are “always consistent with the fundamental analysis” in published reports. As for the retail investors who might benefit from this “market color,” they are out of luck.  Goldman’s spokesman says, “We are not in the business of serving thousands of retail customers.”

No, of course, Goldman is not in the business of serving retail customers. Goldman is in the business of serving SAC Capital, which is known to pay more and higher commissions than any firm on Wall Street (a model pioneered by Michael Steinhardt). And, apparently, one of Goldman’s services is to give SAC Capital advance notice of the contents of its research reports, so that SAC Capital can trade on that inside information, effectively transferring money from the accounts of average investors into the bank account of Steve Cohen, whom BusinessWeek magazine has called “the most powerful trader on Wall Street.”

For those who do not know, Steve Cohen is the proprietor of SAC Capital. He spent his formative years as the top trader for Gruntal & Company, a brokerage that stood firmly on “The Shabby Side of the Street” – as Fortune magazine described it. Gruntal was staffed largely by criminals, some with ties to the Mafia. In the 1990s, Gruntal’s management was implicated in what was then the biggest case of embezzlement in the history of Wall Street.

During his time at Gruntal, Cohen was investigated by the SEC for trading on inside information provided to him by Michael Milken, the most famous – and most destructive – financial criminal the world has ever known. Today, Cohen maintains close business relationships with Milken’s cronies and with former Gruntal managers, such as Howard Silverman, who somehow avoided prosecution, and now operates a “dark pool” platform that allows Cohen to process trades without public scrutiny.

Cohen is no doubt a mathematical whiz (after all, he’s a hedge fund manager). But, with some effort, I have cracked his trading strategy. I’m sure this strategy has some algorithmic expression, but for the sake of simplicity, let us just call it, “cheating.”

First, it was trading on inside information from Michael Milken. Then, a few years ago, it emerged in sworn affidavits that SAC was authoring, and trading ahead of, the so-called “independent” financial research published by an outfit called Gradient Analytics. The SEC’s staff launched an official investigation of Gradient, and began to probe its relationship with Cohen, but ultimately SEC leadership intervened, and the matter was dropped.

This tends to happen — the SEC’s leadership intervenes when its staffers step on the toes of powerful hedge fund managers.

Last December, Deep Capture reporter Judd Bagley broke the news that SAC Capital and Kynikos Associates received advanced copies of reports published by Morgan Keegan, another “independent” financial research shop. It is clear that SAC Capital and Kynikos traded ahead of these reports, which is trading on material, non-public information. The SEC is supposedly investigating Kynikos, but don’t expect any resolution to that case, or any action against Steve Cohen, who is, after all, “the most powerful trader on Wall Street.”

If it seems that nobody much cares that Goldman has been providing such tips to SAC Capital and others, some of the blame must go to the Wall Street Journal, which is a “respectable” publication with a reputation for “balance,” and therefore refrains from saying much of anything at all. The Journal’s story about Goldman could have been the sort of investigative blockbuster that would spur the government to action, but it is so politely worded and so “balanced” that it is possible to read the thing and think that Goldman did nothing wrong.

The Journal reports that “Canaday [the Goldman spokesman] says that analysts are told that any comment at a meeting that could result in a change in a rating, earnings estimate or stock-price target ‘must be published and disseminated broadly to all clients.’ He adds, however, that it is rare that tips arising from the meetings reach that threshold. He says ratings changes after the meets also are rare.”

Elsewhere in the story, the Journal provides two vivid examples that show Canady’s statement to be blatantly false, and yet nowhere does the Journal state (even politely) that Canady spends his days issuing mealy-mouthed platitudes to cover up Goldman’s improprieties. And nowhere is it noted that Goldman’s spokesmen regularly describe the bank’s critics as “conspiracy theorists” or people “who just don’t understand how the markets work,” the implicit threat being that any journalist who asks too many questions will be made to look foolish.

The Journal story states that Goldman provided a “tip” to SAC Capital. It states that this “tip” was articulated in published research report six days later, after the stock had gained more than 5%. But not once does the story state the obvious: that SAC Capital was given advance notice of the contents of Goldman research – a clear violation of law. And, of course, nowhere in the story are we reminded that this is serial behavior. Nowhere are we given any reason to be particularly pissed off.

So what we have is a significant addition to a long list of atrocities, in a story that will, unfortunately, be forgotten.

What follows is PART 15 of a 15-PART series. Soon, we will publish the full 15-part story as a single document.

Click here to read PART 1

Click here to read PART 2

Click here to read PART 3

Click here to read PART 4

Click here to read PART 5

Click here to read PART 6

Click here to read PART 7

Click here to read PART 8

Click here to read PART 9

Click here to read PART 10

Click here to read PART 11

Click here to read PART 12

Click here to read PART 13

Click here to read PART 14

Where we left off, we had learned that on March 29, 2007, an FDA advisory panel had overwhelmingly voted to approve Provenge, a prostate cancer vaccine developed by Dendreon.  As a result, most financial analysts and investors believed that Dendreon had a promising future. However, ten hedge funds (out of a universe of 11,500 hedge funds) held large numbers of Dendreon put options (bets against the company), suggesting they expected that Dendreon would be derailed. At least seven of those hedge funds can be tied to Michael Milken or his close associates.

We had also learned that Milken himself stood to profit if Dendreon were to experience  problems receiving FDA approval. This is because Milken was the early financier and principal deal maker for ProQuest Investments, a fund that (along with an affiliate) controlled a company called Novacea, which was one of Dendreon’s competitors in the race to produce a new treatment for prostate cancer. Meanwhile, Lindsay Rosenwald (a Milken crony who once helped run a Mafia-linked brokerage called D.H. Blair, which specialized in pumping and dumping fake biotech companies) controlled Cougar Biotechnology, which was Dendreon’s second competitor in the race to develop a treatment for prostate cancer. And hedge funds affiliated with Milken or his close associates were heavily invested in Cell Genesys, which was Dendreon’s third competitor.

We had learned further that Milken’s “philanthropic” outfit, the Prostate Cancer Foundation supported Novacea, Cougar and Cell Genesys. The Prostate Cancer Foundation’s support for these companies preceded announcements that they had signed massive deals with large pharmaceutical companies. In the cases of Novacea and Cell Genesys, those deals were soon cancelled on the news that their treatments were ineffective, and the companies’ investors quickly dumped their stock. This fact, combined with other evidence, suggests that the Prostate Cancer Foundation was supporting what amounted to sophisticated “pump and dump” schemes.

Meanwhile, the Prostate Cancer Foundation snubbed its nose at Dendreon. And in April, 2007, Dr. Howard Scher, who was an executive and director of Milken’s investment fund, ProQuest, and the chairman of the Prostate Cancer Foundation’s “Therapeutic Consortium”, spearheaded an unprecedented lobbying effort to convince the FDA to reject Dendreon’s treatment – the first time in history that the FDA had gone against an advisory panel’s recommendation to approve a drug for terminally ill patients. This lobbying effort had the support of government officials who have ties to Michael Milken.

In the days before and after the lobbying effort, Dendreon was trashed by a few captured journalists – most notably, CNBC’s Jim Cramer — and was also subjected to a blistering attack by naked short sellers who illegally flooded the market with millions of phantom shares to help drive down the company’s stock price. This criminal naked short selling continued intermittently for much of the next two years, while the SEC did nothing, and while other events conspired to hobble Dendreon, a company that had completed multiple clinical trials that strongly indicated that its product, Provenge, was capable of lengthening the lives of tens of thousands of men with prostate cancer.

Amazingly, the SEC will not reveal the names of the naked short sellers. As it says on its website, to release information about (illegal) naked short selling would be to reveal the (criminal) hedge funds’ “proprietary trading strategies.”

* * * * * * * *

When Dendreon’s FDA application was derailed simultaneously with a naked short selling attack that flooded the market with tens of millions of phantom shares, Dendreon’s supporters went berserk. They sent the government hundreds of letters complaining about the naked short selling and the apparent machinations of Michael Milken’s associates. After that, all but one of the ten hedge fund managers ceased to own “put options” in Dendreon.

However, the naked short selling continued pretty much unabated for two years. And in April 2009, Dendreon was once again on the SEC’s “Reg  Sho” list of companies whose stock was “failing to deliver” in excessive quantities.  Dendreon stayed on that list even after the company’s CEO announced that results of an Independent Monitoring Committee study of 500 patients were “unambiguous in nature…a clear hit” for Provenge.

After the CEO’s announcement, Dendreon’s stock, which had been as low as $4 weeks earlier, rose to the mid-20s. Then, on April 28, 2009, just hours before Dendreon was to present this “unambiguous” data to an all-important meeting of the American Urological Association, the now legendary Yahoo! message board post appeared, warning of  a “BEAR RAID” that was to occur at precisely 12:30pm Central time. Right on cue, Dendreon’s stock tanked 65% in matter of 75 seconds (to $7), within minutes of the moment predicted by that message.

Within hours after that amazing crash, Nasdaq announced that it had investigated the matter and decided to let the trades stand. This was quite remarkable, given that it would have been impossible for the exchange to determine the identity of that message board poster and sort through the trading data in such a short period of time. It is all the more remarkable considering that this “BEAR RAID” was most likely the work of naked short selling criminals.

At any rate, it is likely that short sellers, recognizing that it was now going to be more difficult to prevent Dendreon from getting FDA approval, used the opportunity of that sharp price drop to cover their short positions. Some short sellers might also have used the opportunity to buy shares, hoping to cash in on the bonanza that was to follow. After the “BEAR RAID,” Dendreon’s stock price quickly rose above $27.

The night after the “BEAR  RAID”, CNBC’s Jim Cramer (who has begun a “crusade” against the crime of naked short selling in an effort to distance himself from his previous efforts to cover up the crime of naked short selling) said “I’m not qualified to talk about Dendreon.” This was just two weeks after Cramer had screamed that Dendreon had no chance of receiving FDA approval. Now, he was no longer commenting on Dendreon’s chances, but he noted,  “I am a big believer in taking profits when I see a short squeeze. So I am going to recommend taking profits.”

Some people clearly did take profits. After Cramer’s comment, the stock started to fall, and by May 8, it was at $19. Then the buying started again. Quite possibly, some of the hedge funds that had been short selling Dendreon used the dip to $19 to purchase still more Dendreon shares. After May 8, the stock rose back up to around $25, which is approximately where it remains today. When SEC filings for this period are in, it will be interesting to see which hedge funds bought shares.

But it will remain impossible to know who the criminal short sellers were. As far as the SEC is concerned, that is a big secret –  “proprietary trading strategies.”

* * * * * * * *

After Dendreon reported its data to the American Urological Association –data that showed almost precisely what the data showed two years earlier (that is, that Provenge was safe, and that it lengthened survival times while greatly improving the quality of life for end-stage prostate cancer patients who would otherwise be subjected to the misery of chemotherapy) — Milken’s Prostate Cancer Foundation, which had long shunned Dendreon while Milken’s allies maneuvered to derail it, finally concluded that it was time to say something positive about Provenge.

“The PCF is delighted to see evidence of increased patient survival from Provenge,” the Milken “philanthropic” foundation said in a press release. “We share the analysis of Dr. Philip Kantoff, a leader in the PCF Clinical Therapy Consortium…and a principal investigator of the Provenge Phase III clinical study. The results validate 16 years of modern research to harness a patient’s own immune system to fight their prostate cancer and prolong their lives…”

The Prostate Cancer Foundation continued: “The PCF first provided funding to Dr. Eric Small…to support clinical research around measuring immune responses in patients treated with Provenge…”

In other words, Milken’s “philanthropy” hadn’t spent two years ignoring, and in some cases trying to quash Dendreon’s treatment. In fact, the Prostate Cancer Foundation had supported Dendreon all along!

This is nonsense. What the Prostate Cancer Foundation did not mention is that Dr. Philip Kantoff, the physician mentioned in the press release, was on the advisory board of Cougar Biotechnology, the company that Milken’s “philanthropic” foundation was promoting as a better alternative to Dendreon.  Moreover, Dr. Kantoff was one of the few physicians to publicly cast doubts on Provenge. He was never able to say that Provenge did not work, but when talking to the press at the time of the FDA advisory panel meeting in 2007, he was dismissive, or at least confused.

“I didn’t think [Provenge] had a snowball’s chance in hell of working,” Dr. Kantoff told Forbes magazine’s Matthew Herper, the journalist who went to lengths to argue against FDA approval. “I’m still skeptical, but I think there’s something going on here.” Kantoff suggested that Provenge could be a “slam dunk,” but maybe the trial size was too small. Left unmentioned was the fact the FDA had regularly approved treatments for dying patients when relatively small trials had shown such stunning results.

As for Dr. Small, he too was on the advisory board of Cougar Biotechnology. The Prostate Cancer Foundation did indeed give him funding to measure immune responses in patients treated with Provenge, but it is not at all clear that Milken’s “philanthropic” outfit was keen to see Dr. Small’s study yield positive results. When the study did yield positive results, Dr. Scher, the chairman of the Prostate Cancer Foundation’s Therapeutic Consortium (referred to in the above press release as the “Clinical Therapy Consortium”), spun them as negative results.

In his letter to the FDA (the one that quickly and mysteriously ended up in the hands of The Cancer Letter), Dr. Scher quoted Dr. Small as saying the following: “In summary, this study suggests that while sipuleucel-T fell short of demonstrating a statistically significant difference in TTP, it may provide a survival advantage to asymptomatic [prostate cancer] patients.” Dr. Small had not written the word “may” in italics. That was Dr. Scher’s improvisation, part of his effort to convince the world that absolute “proof” of efficacy was needed for FDA approval.

As both Dr. Small and Dr. Scher knew, the “gold standard” for physicians, and the federally mandated standard for drug approval, is “survival” — “substantial evidence” that a treatment may help patients live longer. Perhaps Dr. Small felt constrained in challenging Dr. Scher’s misuse of his study. Perhaps he also felt uncomfortable about joining Dr. Scher, who was, after all, the powerful chairman of Milken’s Therapeutic Consortium, at the meeting of the FDA advisory panel that voted on Provenge in March 2007.

Dr. Small was supposed to speak on behalf of Provenge at that panel. Perhaps this concerned the folks at the Prostate Cancer Foundation. Either way, Dr. Small was a no-show at the panel that day.

He apologized – something about a hitch in his travel plans.

* * * * * * * *

In May 2009, while Milken’s Prostate Cancer Foundation was rewriting history, Milken’s hedge fund crony, Steve Cohen, who was one of those seven hedge fund managers who had bet big against Dendreon after the advisory panel meeting in 2007, reached out to Care-to-Live, the grass-roots organization that had done so much to highlight the connections among Milken’s “philanthropy,” Milken’s investments, and Dendreon’s travails

On May 19, one of Care-to-Live’s founders received an email from an employee of CR Intrinsic Investors, which is one of Steve Cohen’s hedge funds.  “I’m an investor in biotechnology and pharmaceutical companies and I’m interested in understanding the patients perspective on Provenge and any other therapies in development…,” the email began. “Would you or someone from Care-to-Live be available speak with me…? I have spoken to a number of academic thought leaders, but I’d like to better understand what the patients want…”

And by the way, “I’m happy to provide compensation for time spent speaking with me if that is of interest.”

Milken-affiliated hedge funds already have analysts and journalists regurgitating their party line on command. They also have doctors on the payroll. Might as well put the troublemakers on the payroll, too.

* * * * * * * *

Or perhaps Cohen is genuinely thinking about investing in Dendreon. Perhaps he already has. The intentions of this network remain a matter of some speculation.

Much of this speculation focuses on Dmitry Balyasny, the Russian “whiz kid.” As recently as March of this year, when they filed their last SEC documents, Balyasny’s hedge funds – Balyasny Asset Management, BAM and Visium – held around 3 million put options in Dendreon. Simultaneously, these hedge funds owned an almost equal number of call options. It is possible that Balyasny and his associate, Jacob Gottleib, were implementing a split-strike pricing strategy – selling out of the money calls and buying out of the money puts. The effect is to create a large synthetic short position.

But SEC documents show that during much of the past two years, Balyasny’s funds also owned large numbers of Dendreon shares. These could have been shares that they bought to cover short positions. Or it could be that they owned shares to gather proxy votes and put pressure on Dendreon’s management to act in ways that might not be  good for the company.

Whatever the case, Dendreon’s latest Schedule 14-A, filed on April 30, showed that Balyasny (previously one of the seven hedge funds with large  bets against Dendreon) had become Dendreon’s largest shareholder, with a 9.8% stake in the company. The second largest shareholder was Capital Ventures International, the unit of Susquehanna that did the PIPEs deal with Dendreon. Visium Capital owned 5.5% of Dendreon. Meanwhile, Joseph Edelman, the hedge fund manager who was employed in 2007 by Lindsay Rosenwald, formerly of the Mafia-connected D.H. Blair, has bought at least 2 million Dendreon shares.

In addition to those purchases, many of the Milken network hedge funds that bought Dendreon’s convertible bonds now have the capability to convert, so  they, too, might soon count themselves among Dendreon’s largest shareholders. Altogether, this network may already control (or have the ability to convert into control of) as much as 30% of the company.

If Balyasny had acquired more than 10% of the company, he would have been subjected to reporting requirements designed to identify hostile takeover attempts. Given that he acquired just under 10%, and given that he nowhere declares his co-ownership of Visium, which adds 5.5% to his stake, it is possible that Balyasny and others in his network have considered seizing control of the company by stealth.

Incidentally, this is similar to the modus operandi of the Milken network in the 1980s. As most every book on Milken recounts, affiliated investors (some combination of Milken, Ivan Boesky, Carl Icahn, Princeton-Newport, John Mulheren,  and others) would each buy, say, 4.9% or 9.8% of a company without declaring themselves to be affiliated investors. In some cases, Milken would “park” stock (e.g. Princeton would secretly buy stock on Milken’s behalf) in order to conceal that he had any ownership at all.

By secretly holding large blocks of shares, the network was able to acquire controlling stakes while bypassing regulatory requirements to declare such positions. Besides putting them in a position to manipulate prices, Milken and friends then put pressure on companies’ managements by quietly letting it be known that they had, as a group, a controlling number of proxy votes.

If Milken’s friends come to control Dendreon, Milken’s “philanthropic” foundation will no doubt continue to articulate its new position of being “delighted” that the data shows that Dendreon’s treatment is safe and effective (which is the same thing the data showed two years and 60,000 American deaths ago). And if the Milken network takes over Dendreon, perhaps Michael Milken will, in the name of “philanthropy,” convince his government minions to grant approval to Provenge, so that it can be administered to the patients who so desperately need it.

But that should not cause us to ignore the ordeal that Dendreon has endured during these past few years. And we should demand an end to a status quo which lets Wall Street miscreants, cheats, and manipulators (and not free markets) decide which companies survive unmolested, and which will be crippled or killed off entirely.

But it is not surprising that criminals see fit to maim public companies.

Consider that it is impossible to buy life insurance on another person’s life. The legal principle has developed that one can only insure something in which one has “an insurable interest.” But imagine that this were not the case. Imagine if it were possible for people to buy insurance on other people’s lives. One can see that there might evolve a type of criminal who would buy life insurance on the lives of others, and then arrange for those people to die.

One can even imagine that, as society wised up to this practice of buying life insurance and then manipulating outcomes, such criminals would evolve new tactics towards the same end. For example, the criminals might target newborn babies in hospitals, because babies are vulnerable, and it would be difficult for anyone to know for certain whether they were dying naturally, or as a result of criminals manipulating outcomes.

One could even imagine that the most sophisticated of these criminals would come to target newborn babies who were already sick, because manipulating their medical outcomes in order to cause their deaths would leave the slightest statistical footprint possible.

In our society one cannot buy life insurance on another person, but one can buy “life insurance” on a company: that is, one can make a bet that a company will fail, and collect on that bet when the company dies. It is the contention of Deep Capture that there are criminals who take out life insurance policies against companies, and then manipulate their outcomes so as to collect on those policies.

And just as we can understand the logic of criminals focusing on newborn babies, so too can we understand why the financial criminals have learned to focus on small, early-stage public companies. And to extend the morbid metaphor one last step: just as the criminals might focus on newborns who are already sick, because their outcomes are already in the most doubt (making the criminal manipulations hardest to spot), so too have the financial criminals learned to focus not just on early-stage public companies, but on early stage public companies working in the field of biotechnology.

That is because in biotechnology the difficulties in valuing a company are at their greatest. There is often little to no revenue.  The idea behind the company may be nothing more than the theory of a scientist. No one knows whether it will work. If it works, no one knows how long it will take to prove that it works. And even if it can be proven to work, no one knows how long it will take to clear all the legal and regulatory hurdles it will face. Such companies are favored targets for manipulators because it is easy to manipulate the truth when no one knows the truth, and whatever truth there is lies behind so many veils.

In the case of Dendreon , the truth was hard to miss. It was more than a company with a blockbuster treatment. It was the first company in decades to develop a medicine that could truly revolutionize the way that doctors treat cancer. The company had gathered its data, and the data was conclusive (to a 95% confidence level): Provenge was safe and effective. A panel of experts assembled by the FDA had declared that the treatment should be approved.

So when naked short sellers attacked, and the treatment was derailed, it was obvious that there had been foul play. Hundreds of concerned citizens took it upon themselves to investigate, and document, the footprints of the miscreants. As a result we have been able to present a highly discernible, if admittedly imperfect, picture of their trail.

But we must ask: How many other small biotech companies have been victimized in less obvious ways? How many companies were like the babies in our morbid metaphor — snuffed out before they could demonstrate their potential; killed by criminal naked short sellers and their captured accomplices (journalists, regulators, doctors) who successfully pled innocence, saying the companies died because they were sick or weak? And how many of those murdered companies, weak or not, had medicines that could eventually have improved health and saved lives?

Our morbid metaphor, you see, is not entirely metaphor. Real people have died.

In answer to the question of how many people have died, we know only from the data that abusive and illegal short selling has affected many hundreds of small biotech companies with all manner of medicines. We know that the vast majority of those companies are now gone, and that some number of them, if left to the rigours of the market, but not to the whims of criminal short sellers, would have one day delivered their medicines to patients.

But, of course, we do not know who the criminal short sellers are. According to the Securities and Exchange Commission, that is a big secret – “proprietary trading strategies.”

THE END