In October 2011, Ali Nazerali, a Canadian resident who has operated boiler rooms (though he denies it) and whose business relationships drew the scrutiny of DeepCapture, went to court in British Columbia to obtain an injunction ordering DeepCapture to be vanished.  In an ex parte proceeding (meaning that DeepCapture was not even notified of the proceedings, let alone allowed to present any argument),  the Canadian court issued an injunction against the 1st Amendment to the US Constitution. Immediately and also without notification, US corporations Google, Bing, and GoDaddy complied with this foreign court’s order to disappear all trace of DeepCapture like some recalcitrant Argentinian muckracker.

However, in December, 2011 DeepCapture had its chance to speak in court in Canada. Once it had heard our side, the Court  pulled its injunction, and found that Nazerali’s lawyers had misled the Court.

As famed Stoic philosopher Nicholas Cage put it in Con Air, “On any other day that might seem strange.”

But this is, after all, the world of DeepCapture, where dogs and cats dance together and the fire rain falls. So now, the rest of the story….

Early in 2011 Mark Mitchell began a multipart story exploring the way that various elements of transnational Organized Crime, international terrorist financiers, and foreign intelligence services have entwined, infiltrated the global financial system, and are manipulating and destabilizing it.

Which sounds like a lot to swallow, I know, until one considers that on July 25, 2011, President Obama signed an Executive Order declaring a national emergency on pretty much precisely those grounds:

I, BARACK OBAMA, President of the United States of America, find that the activities of significant transnational criminal organizations, such as those listed in the Annex to this order, have reached such scope and gravity that they threaten the stability of international political and economic systems.  Such organizations are becoming increasingly sophisticated and dangerous to the United States; they are increasingly entrenched in the operations of foreign governments and the international financial system, thereby weakening democratic institutions, degrading the rule of law, and undermining economic markets.  These organizations facilitate and aggravate violent civil conflicts and increasingly facilitate the activities of other dangerous persons.  I therefore determine that significant transnational criminal organizations constitute an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States, and hereby declare a national emergency to deal with that threat.

The US National Security Council immediately followed up with this statement:

“Transnational organized crime (TOC) poses a significant and growing threat to national and international security, with dire implications for public safety, public health, democratic institutions, and economic stability across the globe. Not only are criminal networks expanding, but they also are diversifying their activities, resulting in the convergence of threats that were once distinct and today have explosive and destabilizing effects…. The apparent growing nexus in some states among TOC [Transnational Organized Crime] groups and elements of government—including intelligence services—and high-level business figures represents a significant threat to economic growth and democratic institutions… As they expand, TOC networks may threaten stability and undermine free markets as they build alliances with political leaders, financial institutions, law enforcement, foreign intelligence, and security agencies.”

These statements from the White House and NSC are precisely on point with DeepCapture’s thesis. In fact, the Executive Order goes on to name four criminal networks which figure prominently in DeepCature’s story

We knew DeepCapture’s story would raise eyebrows, but we believed, and still believe, that it is important journalism concerning issues that clearly are of global concern and should be part of the public debate.  And as journalists, we at DeepCapture are quite proud of having been so far ahead of the curve, and so shockingly far ahead of the US mainstream media, which (we contend) are (with rare exception) such lapdogs to corporate America, and especially to the financial interests, that they would never have been able to put this story together even if all the relevant evidence were shoved up its nose (which it was).

Deep Capture believes that it is not incidental that only the British journal The Economist has been able to cover this issue, with such recent stories as:

America’s dodgy financial plumbing: TOO A FAIL COUNT –The sheer number of unsettled trades is rattling regulators

Financial terrorism: THE WAR ON TERABYTES – Policymakers worry about attacks on America’s financial system

NAKED SHORT – SELLING:  A not-so-short story

In September 2011 Altaf Nazerali, who, while not a central character in the story, is mentioned numerous times, contacted us raising concerns that certain statements regarding him were inaccurate. Mark looked back at his  reporting and, in cases where he believed it was warranted, modified the story: While we believe that facts should be reported, we are never above taking another  look at the story to make sure that we are as fair as possible. Good journalism stirs good debate.  And we are responsible journalists.

Mark sought further contact with Nazerali in early September but heard nothing further.

Then without any warning to Deep Capture, Nazerali attempted to silence Deep Capture.

On October 18, 2011, without notice to Deep Capture, Mark, or Deep Capture’s internet hosts, Nazerali filed a  lawsuit in Vancouver, Canada and appeared the same day before a judge seeking an injunction  taking Deep Capture off the internet and seizing its domain name. Only Nazerali and his lawyer were in the courtroom when he asked for this injunction so the judge only heard one side  of the story. Nazerali got his injunction.

Ali Nazerali  delayed serving formal notice of this injunction on Deep Capture and its reporters. The first  mailed service was made about 10 days after the injunction was made. The actual personal  service did not occur for several weeks. Nazerali did not comply with Canadian law and  promptly serve Deep Capture with copies of all of the affidavits and legal submissions he put  before the judge on October 19, 2011 at his one-sided injunction application. That only came to  our attention in late November. All of this had the effect of delaying Deep Capture’s ability to  seek relief from the court.

However, Nazerali’s lawyers immediately sent notice of the Canadian court’s injunction against Deep Capture to Google, Bing, GoDaddy, and other internet companies  demanding that they comply with it, and black out the DeepCapture site.

Amazingly (to me), these US companies complied, and blacked out Deep Capture. GoDaddy took down the site. Google and Bing both erased all of DeepCapture from the caches. In the most literal sense, we disappeared down Orwell’s Memory Hole.

On December 13, 2011 Deep Capture and Mark were able to appear before the British Columbia court . We presented our case through affidavits showing the basis for our  reporting. We presented the judge with the governing Canadian law which places severe  restrictions on pre-trial injunctions, limiting them to rare and special circumstances which do not  apply to Deep Capture.

Ruling from the bench (i.e., immediately), the judge denied Mr. Nazerali’s request that the injunction be  extended beyond December 13, 2011.

In addition, the judge expressly ruled that Ali Nazerali’s lawyers had misled the judge who heard  Nazerali’s earlier argument on October 19, 2011.

At that point Deep Capture was free to return to the internet.

However, Ali Nazerali was not done. He had his lawyer send an e-mail to Rackspace citing to the  original October 19, 2011 injunction order and asking that Rackspace refuse to host Deep  Capture.  He neglected to tell Rackspace that the British Columbia court had already refused to extend the  injunction and that it had ceased to have any force. And he certainly did not tell Rackspace that the British Columbia court had criticized Nazerali’s submissions to the original judge on October  19, 2011, finding that Nazerali’s lawyer had misled the court.

Ali Nazerali wants to keep Deep Capture and its reporting away from the public.  But why would Mr. Nazerali sue Deep Capture, a Utah company, in Canada? We can only  speculate. As Gary Weiss (himself a shill for criminal elements, as has been widely documented within DeepCapture) noted in his blog almost immediately after the original injunction was  issued, Canadian law provides far less protection for free speech than is guaranteed by the  United States Constitution. In fact, Canadian defamation law differs in so many key respects  from United States law that at least one federal court has held that Canadian defamation  judgments are unenforceable against United States citizens.

In fact, one key difference is what is meant by “defamatory.” It is true that the Canadian court  noted that Deep Capture’s reporting regarding Mr. Nazerali was “defamatory.” But, importantly, this does not mean that it was not true or that it was not fair reporting. It does not mean that such  statements may not be published. And it does not mean that Mr. Nazerali is entitled to any  damages. Rather, it simply means that the statements regarding Mr. Nazerali tended to harm his  reputation.

“Carole took the cookies from the cookie jar” is defamatory under the law of British Columbia.  Stating that Carole took the cookies tends to harm her reputation even if she did, in fact, take the cookies. Here Mr. Nazerali has been involved with certain individuals and cultivated certain relationships that may harm his reputation as such connections become known. But this does not mean that such relationships cannot, and should not, be fairly and freely reported.

Importantly, no court has held that Deep Capture’s reporting as to Mr. Nazerali was “actionably  defamatory.” After the Canadian Court was given the chance to read Mark’s affidavit explaining the basis for his reporting, it denied Mr. Nazerali’s request for an extension of the injunction  keeping Deep Capture away from the public on the basis that the claims and defenses should be  heard and determined by a jury at a trial.

Most hilariously, I had an idea that seems to have worked. For years a Cone of Silence had surrounded Deep Capture. Once the supine and obedient mainstream press could no longer speak for me, but had to confront me, in my own words, on this website, they revealed themselves for what they are: Barroom bullies who, once called out, stick their faces back in their beers and pretend not to have heard.  But during the time that DeepCapture was blacked out, the Cone of Silence surrounding Deep Capture was finally lifted. Parties that once made great circumlocutions to avoid mentioning us (lest they let readers evaluate the arguments and evidence for themselves) suddenly were pounding their chests.  So I decided to let DeepCapture stay down for a few weeks, to give them a chance to strut. I am utterly confident that, now that Deep Capture is back online, they will return to muttering into their beers, as has been their practice lo these many years.

Now that we are back on-line you deserve to know what happened, especially since the facts should cause concern in everybody that appreciates the role a free press and free speech  play in a free nation (and the offending story will be republished, in full, and with a great deal of new information that Nazerali’s legal jousting caused to come our way: thank you, Ali Nazerali).

The US mainstream media apparently find unremarkable the alacrity with which Google, Bing, and GoDaddy would accede to a foreign court’s injunction to black out a US website.  Thus, Deep Capture was forced to tell the rest of this story (which, we maintain, is but a microcosm of the whole story of capture) in order to continue  our investigative journalism within our constitutional rights to freedom of speech and press.

After all, we are the red pill.

“A bust-out is a scheme customarily employed by organized crime to deplete the assets of a legit­imate business, thus forcing it into bankruptcy.” State of New Jersey Commission of Investigation 1988 Report, “Subversion By Organized Crime And Other Unscrupulous Elements of the Check Cashing Industry”

“BUSTOUT: a confidence scheme in which an established business is taken over, a large stock of merchandise is purchased on credit and quickly sold, and the business is then abandoned or bankruptcy is declared.”  – Merriam-Webster Dictionary

Mark Mitchell has continued exploring the financial instability of the last four years, including the crash of 2008 and the Flash Crash of 2010.  His conclusion is that various activities associated with market manipulation (e.g., naked short selling, high frequency trading, derivatives such as Credit Default Swaps and synthetic CDOs, sponsored access, regulatory capture, press manipulation) follow a familiar leverage-and-loot pattern and can be traced to a fairly cohesive network that includes Italian and Russian organized crime, Sunni extremist financiers with ties to Al Qaeda, the Russian FSB, the Albanian Mafia, agents of the Iranian regime, and close associates of Michael Milken.

The result, “The Miscreants’ Global Bust-Out”, is 230 pages long. DeepCapture will be publishing it in approximately 25 installments over the coming weeks.

To continue, click: Chapter One: Was the United States Attacked By Financial Terrorists?

If this and the story which follows concern you, and you wish to help, then:

1) Use the Social Media buttons at the top of the article to help it go viral;

2) Email it to a dozen friends;

3) Go here for additional suggestions: “So You Say You Want a Revolution?“

It’s been a tough few weeks for Barry Minkow, as Patrick Byrne has done a fine job chronicling recently. Minkow’s sudden return from ex-felon to current-felon has come as a surprise to some, but not to the Deep Capture team; for we have, over nearly four years, sought to raise awareness of Minkow’s place in a much broader, criminal stock manipulation ecosystem.

Those who need to get caught up will appreciate the following review, with some additional information thrown in for color.

Following his release from prison for stock manipulation, Minkow created the Fraud Discovery Institute (FDI), which, according to a disclaimer on the FDI website, was originally funded by fees collected in return for “various training sessions as well as public speaking engagements.”

FDI’s ostensibly altruistic motivation persisted until spring of 2007. At that time, verbiage was added to the company disclaimer revealing two additional sources of revenue: “short positions” and “third party payers.” This was Minkow’s subtle disclosure of the fact that he would subsequently be paying the bills by means of the profits derived from trading (in this case, short-selling) ahead of FDI’s attacks on public companies, and that these attacks would be financed by third parties who felt Minkow’s motives, one must presume, were aligned with their own.

This evolution in FDI’s incentive structure – from karmic to economic – was a fateful one for Minkow, as it marks the beginning of his march down a path that by all appearances leads to prison. Given its significance, it will be the primary emphasis of the remainder of this piece.

We now know that the change to FDI’s disclaimer was timed in accordance with its publication of an attack on USANA (NASDAQ:USNA), a publicly traded company in whose stock Minkow had previously purchased hundreds of put options, anticipating they would increase in value as the company’s stock fell (that is, buying a put against a company’s stock is just one way to bet that its price is going to fall).

How Minkow came to target USANA is both instructive and well-documented, thanks to the testimony Minkow gave when deposed in the defamation suit USANA brought in response to the attack (though it’s since been equally well-documented that being under oath is by no means a guarantee Minkow will tell the truth).

According to Minkow, one summer day in 2006, entirely without warning, fellow convicted stock manipulator Sam Antar called to announce that he would be sending Minkow $100,000 – no strings attached. Together with $150,000 sent in the months to follow, Antar handed Minkow $250,000 of the nearly $300,000 used to finance the USANA attack.

This payment is interesting for myriad reasons, two of which follow:

First, Minkow currently finds himself in a familiar role as defendant in a defamation suit borne of one of FDI’s more recent attacks – this time against public company Lennar. A source familiar with the lawsuit tells me that in his deposition in the case, Sam Antar testified that the $250,000 he gave Minkow bought Antar access to Minkow’s operation, and that Antar paid it anticipating that he would eventually create a comparable business based on the FDI model. Strikingly, the source also reveals that Antar went out of his way, under oath, to express hatred toward his then-wife Robin Antar, whose personal bankroll was without doubt the actual source of the funds, assuming they did in fact originate anywhere near Sam.

Second, arguing against the possibility that the money was indeed Antar’s is the fact that public records reveal that within months of Antar’s $250,000 gifts, the State of New York issued a warrant for unpaid taxes against him in the amount of $473.15. That tax debt remains unpaid to this day.

In his subsequent divorce from Robin, Sam was unable to cover the cost of his own attorney, and was forced to beg the former Mrs. Antar to pay for both hers and his. Additionally, Antar’s remaining $60,000 SEC-ordered fine (brought about by his involvement in the Crazy Eddie stock scam) appears to remain unpaid. Finally, a 2008 civil judgment ordering Antar to repay a $200,000 debt to real estate financier Morris Cohen has been actively ignored by Antar.

Point being: the $250,000 Antar gave Minkow both financed the USANA attack and bought Antar access to FDI’s operations. What’s less clear is the origin of the money, given the amount of evidence indicating Antar himself has a net worth well below zero.

According to Minkow, he and Antar first agreed to collaborate on the USANA attack in October of 2006.

Interestingly, that’s the same month in which Gary Weiss, an outspoken defender of illegal, manipulative short selling, went out of his way to introduce Antar to the readers of his blog. The occasion was a comment Antar made on a column penned by Herb Greenberg, yet another defender of illegal short selling and the man who would, just days before FDI’s USANA attack, announce to the world that Minkow and Antar had recently joined him for lunch.

From that day on, the blogs operated by Weiss and Antar operated in close synch with one another and both made effusive praise of Minkow a consistent element in their writing.

FDI’s USANA attack was published in February of 2007 but remained largely unnoticed until March 15, when the Wall Street Journal wrote about it.

One month later, a clear anti-USANA PR offensive was launched by FDI.

Within the space of three days, Gary Weiss again made a special effort to introduce his readers to blogging accountant Tracy Coenen, a recent addition to the FDI team. Together, Antar, Weiss and Coenen carefully coordinated their blog subject matter and cross linking, in order to achieve maximum visibility on search engines, all the while heaping thick praise on Minkow’s efforts.

Two more events coincided with this mid-April PR blitz: class action securities attorney Howard Sirota (operating anonymously) became a frequent and rabidly anti-USANA participant in online discussions of the company’s stock. Sirota, as it turns out, is a close friend of Sam Antar’s and has represented the late Anthony Bruan, who is significant in that he contributed $10,000 toward the financing of FDI’s USANA attack.

Clearly, Antar brought both Sirota and Bruan into the picture — Sirota likely with an eye toward leading a shareholder class action suit against USANA, and Bruan hoping to make a quick few bucks shorting the stock.

When his true identity was publicly revealed by me in June of 2007, Sirota defended his several months’ worth of anonymous attacks on USANA and at the same time revealed that he had also bought put options in the stock, anticipating it would fall in response to Minkow’s actions.

In his deposition in the case, Minkow testified that Sam Antar had similarly either sold shares of USANA short or had invested in speculative put options.
Perhaps most significantly, the middle of April 2007 saw a dramatic and sustained surge in delivery failures of USANA shares, which is generally a result of a concerted effort to illegally depress the price of the stock.

In other words, FDI’s mid-April anti-USANA PR blitz appears to have been timed to coincide with a manipulative trading scheme intended to apply significant, artificial downward pressure on USANA’s share price.

Furthermore, this effort involved Sam Antar, Tracy Coenen, Gary Weiss, Howard Sirota, and of course, Barry Minkow.

In the years that have followed, Weiss, Coenen, Antar and Minkow have grown quite close and effusive in their affection for one another. Coenen, who knows nothing about corporate finance, has even joined Weiss in defending illegal, manipulative short selling and attacking companies victimized by the practice.

Antar, for his part, revealed under oath that he was paid $30,000 by Minkow for his support of FDI’s attack on Lennar (though he promises to pay it all back).

Tracy Coenen testified that she was paid $50,000 by FDI for her work on the same project. Gary Weiss has yet to be asked what he got for his trouble, but in light of the phrase he used in the inaugural post on his own blog – “only a fool writes for free” – we can surmise there was something in it for him, too.

To top it all off, Tracy Coenen got Minkow, Antar and Weiss each to pen an enthusiastically positive review of a book related to accounting fraud she published during this period (and while Minkow’s review remains indelibly printed inside the book, Tracy’s had the good sense to remove that one from her website).

We can also surmise that Minkow was beyond pleased with Weiss’s support for FDI’s efforts, given the fact that Minkow tends to cite a post from Weiss’s blog, verbatim and in toto, when explaining away the lawsuit USANA brought in response to FDI’s attack. (As an aside, that particular post by Weiss ends as follows: “Congratulations, Barry, and keep up the good work.”)

Notably, Minkow has been subjected to substantial criticism by the judge overseeing the Lennar suit – in which Minkow is the primary defendant – for, among other things, the destruction of evidence. This includes email communication from Minkow to Antar and Coenen. Most significantly, these same emails have also been deleted by Antar and Coenen – strongly suggesting a conspiracy by these three not only to defraud, but to cover-up.

Thus far, only Minkow has been held to account for these dark deeds, but the gears of justice grind fine yet slow, and the eventual inclusion of — at the very least — Antar and Coenen seems inevitable.

It’s been a long time coming, but the guys with guns and badges might soon be slapping handcuffs on some of Wall Street’s most destructive miscreants. According to a report posted over the weekend on The Wall Street Journal’s webpage, “Federal authorities are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders and analysts  across the nation…”

The New York Times on Sunday followed up with its own report, quoting Preet Bharara, the United States attorney in Manhattan, who bemoaned “the lengths to which corrupt insiders will go to misuse confidential information for their own personal gain.” As the Times noted, the rhetoric is reminiscent of the 1980s, when the Feds busted the massive stock manipulation and insider trading ring led by the famous financial criminal Michael Milken – and, indeed, it might not be a coincidence that this weekend’s announcement of imminent indictments came exactly 20 years after Milken was sentenced to prison.

The names of some of the hedge funds mentioned in the press as likely DOJ targets – hedge funds like SAC Capital and Ziff Brothers – will be completely familiar to readers of DeepCapture.com. In fact, this website was founded in large part to expose the depredations of precisely this network – a network that has its origins (at least to some extent) in the criminal enterprise that Michael Milken built in the 1980s.

As we have long explained, this network not only regularly trades on inside information, it has pioneered new variations of the practice by, for example, manufacturing information (often false) which they can front-run in the market, employing abusive (and likely illegal) short selling techniques to manipulate the stock of public companies; and “capturing” some of the institutions this nation relies upon to curtail such behavior.

Most notable among these institutions are the financial press (large swaths of which have grown inappropriately close to precisely this network of hedge fund managers), and the SEC, which has not only failed in its regulatory duties, but has often assisted the hedge funds’ schemes by launching misguided (and go-nowhere) investigations of the companies the hedge funds have targeted, and providing the hedge funds with confidential information about those investigations.  All of this has been thoroughly documented within the pages of Deep Capture.

It was more than five years ago that Overstock.com CEO and future Deep Capture founder Patrick Byrne first gave a famous public conference call that he dubbed “The Miscreants Ball”. With more than 500 Wall Street executives and a few journalists listening in, Patrick outlined the existence of a “network” of miscreant hedge funds and “independent” financial analysts that he said was using underhanded methods to trade on privileged information and do serious damage to the financial markets.

In “The Story of Deep Capture”, we sought to explain the origins of the Deep Capture project by telling the tale of our extensive (and at times, arguably over-the-top) investigation of this network of hedge funds – a network that included SAC Capital (whose founder, Steven Cohen, was investigated by the SEC in the 1980s for trading on inside information given to him by Milken’s shop at Drexel, Burnham), Ziff Brothers, and others. This story was (I admit) exceedingly  long – it demanded its readers’ patience – but it provided plenty of detail of how the network operates.

Among the tactics we cited in that story was the use of so-called “independent” experts – experts who had been hired by hedge funds to ferret out inside information about companies targeted by the hedge funds, or to badmouth companies the hedge funds were selling short. It now appears that the Feds have themselves independently discovered how these “expert networks” actually operate and, as a result, some of these “experts” seem to be looking at possible jail time.

Another tactic we detailed at length was the use of supposedly “independent” financial research shops, such as Gradient Analytics, which were, in fact, in the business of publishing spurious reports for the benefit of their hedge fund clients, which would obtain the reports before they were made public and place trades that would profit from the effect that the reports would have on stock prices. Over and over again we noted how the false information in these reports ended up regurgitated in stories written by a small clique of journalists who appeared to have developed exceedingly close relationships to a small circle of hedge funds, and had come to depend on the hedge funds’ bogus analysis to the exclusion of all dissenting views.

The journalists (some of whom worked for The Wall Street Journal and The New York Times, whose editors must have swallowed hard before publishing this weekend’s stories announcing the imminent indictments) had, like the SEC, been “captured” by the hedge fund managers.

Some of these journalists even went to lengths to cover up the hedge funds’ shenanigans, insisting all along that their favorite hedge fund managers were innocent of any crime – indeed, insisting that the hedge fund managers were heroes and the smartest people on Wall Street. (The hedge fund managers were clever, to be sure, but apparently not clever enough to avoid becoming targets of what now appears to be the biggest criminal investigation in the history of Wall Street.).

In January 2009, in a story titled “Hedge Funds Reading Tomorrow’s Headlines Today”, Deep Capture reporter Judd Bagley provided indisputable evidence that SAC Capital, Ziff Brothers, and some of the network’s other major figures, such as James Chanos of Kynikos Associates, received advance copies, and traded ahead of bogus financial research produced by Morgan Keegan, a supposedly “independent” research shop that was, in fact, working for those same hedge funds.

Even after this evidence was posted for all to see, the press continued to use these hedge fund managers as sources, and never once cast doubts as to whether they really were wholesome geniuses who deserved the final say on the health of public companies. Meanwhile, James Chanos, who heads a hedge fund lobby, could be found regularly roaming the halls of the SEC, where he successfully convinced regulators to flinch from enforcing the rules against manipulative trading that he and his associates were skirting.

Some time ago, Deep Capture published another treatise titled “Michael Milken, 60,000 Deaths, and The Story of Dendreon.” In this book-length story (which might, indeed, have been the longest blog post ever published), we provided excruciating detail about the lengths that the Milken network of hedge funds – including SAC Capital – went to obtain (and manufacture) inside information about biotech companies.

We noted in that story that the hedge funds and  Michael Milken apparently even managed to “capture” doctors working for the Food and Drug Administration – prominent doctors who abandoned their duty to the public and served the interest of the most destructive network of financial operators in America. And we explained in that story that the hedge funds did not just trade on inside information, they also deployed their information advantage and abusive short selling to hobble public companies that were developing medicines that could have saved lives.

During the many years that Deep Capture has sought to expose these miscreants, we have struggled with our despair – our belief that the system might be so thoroughly corrupted that justice would never see the light of day.  In our view, the DOJ officials and FBI agents who are now going after this network of hedge funds deserve medals. They are “public servants” in the true meaning of the phrase.

If the indictments are indeed imminent, they are proof that there are some officials who will do what is right for the country in the face of great pressure — pressure from the media, which insisted on defending the hedge funds, and from an immensely powerful hedge fund lobby that had a lot of regulators and politicians on its side.

And make no mistake: the hedge funds that the Feds are targeting are not just “insider traders” – a term that makes it seem as if they are nothing more than outsized versions of Martha Stewart. These hedge funds’ tactics have damaged the integrity of the markets. And they have hobbled – perhaps even destroyed –  countless public companies. They even helped bring about our current economic troubles.

Indeed, it might not be a coincidence that the hedge funds named as likely to be facing indictments – SAC Capital, Citadel, Ziff Brothers, and others in their network – are the same hedge funds that attacked Lehman Brothers and Bear Stearns, the collapse of which contributed mightily to market cataclysm of 2008.

Bear Stearns executives reported seeing the managers of SAC Capital and Ziff Brothers celebrating the demise of that bank at a special breakfast meeting days after its collapse. The creditors of Lehman Brothers are suing some of these same hedge funds — SAC Capital, Och-Ziff (run by Dirk Ziff, also of Ziff Brothers) and Citadel –  because they seem to be the  most likely suspects in the illegal short selling and rumor mongering that helped topple or almost topple, not just Lehman, but multiple other pillars of the American economy.

Yes, make no mistake – these hedge funds are not just small-time insider traders. I do not even think it is a huge stretch to say that some of these hedge funds are a threat to the security of our nation.

As it happens, it is on this subject – the threat that some traders pose to national security – that Deep Capture is now on the verge of publishing an immensely long and detailed piece of research. For now I will refrain from revealing too much of the article’s contents except to alert you that it includes excruciating detail about this Milken network, shocking facts about some traders who are dangerous in every sense of the word, and a tremendous amount of information regarding some singularly ruthless organized crime groups and people tied to the world’s most violent terrorist outfits.

Given this, readers will understand if I remind them that immediately before Deep Capture published my work on Dendreon, Patrick Byrne posted a short piece, “Coming Attraction: Michael Milken, 60,000 Deaths, and The Story of Dendreon“. In it, he wrote:

Incidentally, I feel it only prudent to mention that, on the remote chance that anything happened to interrupt the serialization of this piece on DeepCapture (say, for example, a power failure), then arrangements have been made for it to receive immediate publication, in full, in a way that would reach 20 million people, instantly.  In addition, the whole package is already in the hands of some politicians who care.  Lastly, over the last couple of years I constructed a Doomsday Machine (and of course, there’s no point in having a Doomsday Machine if you keep it a secret). The reader who gets but a few pages into it will understand why I make this cautionary mention.

We will begin publishing this new story as a series in a few weeks. We apologize to our regular readers for not updating the Deep Capture site regularly during recent months. And we thank our readers for having the patience to wade through our previous stories, and for staying tuned for what will be by far our longest and most comprehensive story to date.

In other words – more bad news on the way.

Moments after first mention of the word “bailout” came the first of many references to the inevitable outcome: moral hazard, which is the term used to describe the direct correlation between the irresponsibility of one’s behavior and the degree to which one is insulated from responsibility for said behavior.

Moral hazard is observed in any decision-making entity – including individuals, corporations and even government regulatory agencies – and in extreme cases helps to explain many of their otherwise inexplicable actions. Indeed, when attempting to understand much of what happens at the Securities and Exchange Commission (SEC), I believe moral hazard is nearly as important a factor as the much more frequently-discussed matter of regulatory capture.

The following case illustrates this quite aptly.

In his most recent report to Congress, David Kotz, Inspector General of the SEC, summarized an internal report prepared by his office in which two unnamed enforcement attorneys were found to have provided information on non-public SEC investigations to an unnamed short-seller and an FBI agent. It’s apparent that the short-seller and FBI agent are the infamous Anthony Elgindy and Jeffrey Royer, respectively. The identities of the two SEC investigators who enabled them, on the other hand, are not clear.

Hoping to learn more, longtime SEC critic Dave Patch requested and received the IG’s full report on the matter (get your copy here!). Months later, the report arrived, though redacted by SEC censors (not affiliated with the IG’s office) to the point of near incomprehensibility. None the less, thanks to a single missed redaction and extensive cross-referencing of facts mentioned in the report, we’ve established the identities of both SEC employees.

They are: Douglas Gordimer and Robert Long, both senior investigators at the SEC’s Fort Worth regional office. Knowing this, it’s possible to fill in almost all of the holes left by SEC censors, and better understand the enabling role that organization played in the Elgindy/Royer scams.

It all began in March of 2000, when Royer, then a special agent with the FBI’s White Collar Crime Unit, contacted Gordimer about Broadband Wireless (BBAN), a public company Royer was investigating. We know from other sources that Royer would later inform Elgindy associate Derrick Cleveland of the subsequent SEC investigation into BBAN, and that both Cleveland and Elgindy illegally (and profitably) used that information to short the company’s stock ahead of the investigation’s disclosure.

The BBAN situation apparently gave Elgindy a really bad idea: to use Royer as a conduit for acquiring negative, confidential information about potential shorting targets, and as a catalyst for launching SEC investigations into companies Elgindy was already shorting.
According to the IG report:

During the course of the BBAN investigation, Royer began to contact Gordimer to “try to get the Commission to investigate” various other companies and individuals based on information that Royer provided to Gordimer. Royer would tell Gordimer that “he had some information about [alleged securities laws violations by public companies] that he wanted to pass along” and would ask “who at the SEC might have an open investigation about the company.” (OIG-512 report p.4)

In response to Royer’s requests, Gordimer acknowledged that he would perform a search in the NRSI database, which he described as “an internal SEC database that shows all the open investigations and closed investigations and filings of different entities,” to determine if the SEC currently had an open investigation for the company or individual. (OIG-512 report p.5)

In addition to providing this information, according to Gordimer if there was an existing investigation of the company or individual about which Royer had inquired, Gordimer would refer Royer to the SEC staff attorney conducting the investigation. If the SEC did not currently have an open investigation of the company or individual about which Royer inquired, Gordimer would take the information from Royer and look into it himself. (OIG-512 report p.5)

Gordimer testified that he knew Royer lacked the proper authorization to request such confidential information, but that he freely provided it anyway.

In September 2000, Royer’s involvement in the FBI’s White Collar Fraud unit ceased as he was transferred to Gallup, NM, tasked with investigating crimes on an area Indian reservation. And yet, Royer’s calls to the SEC continued, and in January 2001, Royer also began calling Robert Long, probing for information on confidential investigations and lobbying to get others started.

During this period, Gordimer and Long also began to deal directly with Elgindy, and both became frequent readers of his website, insidetruth.com.

Later in 2001, Gordimer acknowledged that he became aware of a correlation between the stocks that Royer asked him to investigate and the stocks that Elgindy discussed on insidetruth.com. Despite knowing about this correlation and Elgindy’s background, Gordimer insisted that Royer “wasn’t just fishing” for information by continuing to bring information to him, particularly as some of this information had resulted in the opening of a few “legitimate investigations.” (OIG-512 report p.7)

Royer informed Gordimer in January 2002 that “he was leaving the Bureau to go work for some investigative agency which…was associated [with] Elgindy. Gordimer later learned that Royer had received a job offer from Elgindy directly and that Royer would be working with…the company running Elgindy’s insidetruth.com. (OIG-512 report p.7)

Meanwhile, Royer’s requests for information about investigations into public companies slowed but did not stop, though Gordimer felt it prudent to no longer tell Royer exactly who was handling any active investigations, opting instead to provide the relevant SEC staffer with Royer’s number and instructions to get in touch with him. Either way, the outcome is the same: disclosure of confidential, highly material information to a business partner of known short seller Elgindy, despite past evidence of a correlation between such disclosures and shorting activity by Elgindy.

But wait, there’s more.

Despite the fact that Royer left the FBI altogether, Gordimer contacted Royer about an alleged false press release issued in March 2002. Gordimer said he needed information about the company “quickly” in order to determine whether the SEC should suspend trading of its stock.

The IG’s report summarizes the situation nicely as follows:

Therefore, by disclosing information to Royer about whether certain companies and individuals were under investigation, Gordimer released non-public information to Royer. Royer would then provide this information to Elgindy and his associates, and they would sell short the companies’ stock in order to earn illegal profits…By discussing non-public information with Royer without appropriate agency authorization on numerous occasions, the OIG finds that Gordimer repeatedly violated SEC policy. (OIG-512 report p.9)

Normally, such an overt pronouncement of culpability would equate to an explicit demand for one’s resignation, if not one’s termination. But lacking such authority, Kotz was forced to pass the baton to just about every one of Gordimer’s and Long’s superiors.

In light of the foregoing, these matters are being referred to the Director of Enforcement…the Associate Executive Director for Human Resources, the Associate General Counsel for Litigation and Administrative Practice, and the Ethics Counsel for consideration of disciplinary action against Gordimer and Long. (OIG-512 report p.13)

The outcome?

According to Kotz, “[Gordimer and Long] were issued written counseling memoranda and were required to attend training.” (OIG Semi-annual report, April 2010 p.67)

In other words, neither was held responsible for their deeply irresponsible behavior. And, in such a setting, the principle of moral hazard dictates that behavior will become increasingly irresponsible.

And it’s about to get much worse.

The only reason we know what little we do about the SEC’s culture of irresponsibility is the Freedom of Information Act (FOIA), which imposes much transparency on government by empowering citizens seeking access to official records. It was through FOIA that we were finally able to grasp of the true depth of the illegal naked shorting problem. FOIA also helped to identify the motives behind the illegal firing of SEC investigator Gary Aguirre and the extent of the Commission’s failures in stopping the Madoff and Stanford Ponzi schemes. And not least, FOIA made it possible for Dave Patch to acquire the above-cited internal report detailing the SEC’s role in supporting Anthony Elgindy’s illegal trading racket.

In each of these cases, the SEC was held responsible for its screw-ups only after documentary evidence was revealed – and that was only possible through FOIA requests submitted by the public and news organizations.

Today, Fox Business reports that the SEC is claiming Section 929I of the recently-signed financial reform bill exempts it from complying with FOIA. In other words, the SEC currently finds itself in a regulator’s wonderland: all of the authority and none of the accountability. If ever there was a reason to urgently contact your representative in Congress, this is it. That body must be made aware of the disaster of unintended consequences buried in the legislation they just passed. Please contact yours immediately (you can find their contact information here).

Postscript: to learn more about the Elgindy/Royer case, check out his excellent report from the series American Greed.

I received an email a while back from Jim Brickman, a crony of short selling hedge fund manager David Einhorn, demanding that I post the Securities and Exchange Commission inspector general’s report on the commission’s investigation of Allied Capital. According to Brickman, the report proves that Einhorn was right about Allied being a massive fraud. Moreover, says Brickman, the report definitively establishes that Einhorn did not seek to drive down Allied’s stock price. The report, which I gladly post below, does nothing of the sort. I will discuss the report in further detail, but first a little history.

Eight years ago, Michael Milken, the famous financial criminal, appeared in the offices of a top Allied Capital executive. “You know,” Milken told the executive, “I already am quite a large shareholder of your stock – but my name will never show up on any list you’ll see.”

This might have been a reference to a practice called “parking stock” (owning stock but “parking” it in the accounts of friends with whom one has made under-the-table arrangements), a practice that figured in the high-count indictment that sent Milken to prison in the 1980s. It appeared to the Allied executive that Milken was fishing for inside information about Allied and threatening an attack. For a variety of reasons, short-side stock manipulators in the Milken network often accumulate large numbers of shares in the companies that they seek to destroy.

Not long after Milken’s strange appearance, David Einhorn was at a hedge fund luncheon, sitting next to Carl Icahn, one of Milken’s closest cronies. Einhorn launched his career working for Gary Siegler, who was formerly a top partner in Icahn’s investment fund, and is certainly part of the Milken network. So, it was not surprising to Allied’s executives when, halfway through the luncheon, Einhorn declared that “Allied Capital is going to zero!”

For the next eight years, Einhorn led a vicious campaign against Allied, loudly and publicly pronouncing that the company was a massive Ponzi scheme and an all-around fraud that could be as big as Enron. Of course, Einhorn’s vituperative remarks had nothing to do with the massive profits that Einhorn stood to earn from short selling Allied’s stock. Rather, Einhorn was just doing his duty as a concerned citizen – or so his slick public relations operation would have us believe.

I will give Einhorn credit. He is a master of spin. In 2008, he published an aptly titled book, “Fooling Some of the People All of the Time”, wherein he provided an ingeniously self-serving portrait of himself as a tenacious hero doing battle against not only the evil Allied Capital, but also powerful Washington insiders, financial journalists, and government regulators – i.e. all the people who reviewed his “evidence” and concluded that Allied was by no means a massive fraud.

Really, Einhorn’s book should be placed in a glass case at the Museum of Contemporary Propaganda, as it is such a work of art. Anyone familiar with the world of abusive short selling will read this book and see that Einhorn engaged in all manner of shenanigans to obtain inside information and drive down Allied’s stock price. But the dark genius of Einhorn’s book is that it manages to portray his malefaction as par for the course – just another day in the life of a noble fraud-buster.

For example, Einhorn admits in his book that he invested in a fund run by a man who had recently served as the chairman of Allied Capital’s board of directors. Could this investment have been a bribe? Was Einhorn seeking inside information about Allied? Certainly not. The investment was purely incidental, Einhorn assures us. And you, dear reader, should be ashamed of yourself for even asking such questions. Indeed, your suspicions make you part of the problem. You are an ignorant thug who wants to “intimidate” Einhorn and other short selling “critics” who selflessly do battle with public corporations.

In his book, Einhorn notes the SEC initiated an investigation into his short selling of Allied Capital. In the course of this rather cursory investigation, an SEC official sought to determine whether Einhorn was colluding with other hedge funds, including William Ackman’s Gotham Partners (now called Pershing Square Capital) and Whitney Tilson’s T2 Partners, to drive down Allied’s stock. The official asked this question:  “Mr. Einhorn, have you ever compensated [short selling hedge fund] Gotham Partners…for providing you with an investment idea?”

Einhorn answered, “Except in-kind, no.” Then Einhorn consulted with his lawyer and changed his mind. He went back to the SEC official and said, “I think the more correct answer to your question is that there’s been no compensation for the ideas.” The moral of this story, according to Einhorn’s book, is that the investigator was a bumbling idiot for asking such a question. And, you, dear reader – don’t even think of asking the same question. If you do, you’re part of the problem. You’re trying to “intimidate” Einhorn.

You see, it is perfectly natural for hedge funds to share ideas. Of course, hedge funds must not be required to report their short positions to the SEC or otherwise disclose their “proprietary trading strategies.” Hedge fund trading is top-secret so far as the public is concerned. But, says Einhorn, when we hedge funds “share ideas,” it’s just us pros talking shop. Really, says Einhorn, you can trust me…and, oh, did I say “payment in-kind”? Oops — slip of the mind.

Is it possible that hedge funds exchange “ideas” because it is profitable for them to do so? Surely not. Is it possible that these “idea” exchanges are nothing more than collusion – hedge funds agreeing to pile on to the same companies to put downward pressure on stock prices? How dare you ask such a question. Allied Capital asked that question. And Allied is very bad, says Einhorn — Allied tried to “intimidate” me!

Really, Einhorn says this all the time – people tried to “intimidate” him. He was hurt. But he’s a hero. He stood up to the critics. And, he assures us in his book, it was perfectly natural for him to collude (sorry, “share ideas”) with not just Tilson and Ackman, but also Eastbourne Capital’s Jim Carruthers. You see, Carruthers is really smart guy who does good research.

What Einhorn does not mention in his book is that Carruthers has sometimes spelled his name with a ‘K’ to disguise his identity while passing himself off as a friendly private investigator in order to deceptively acquire inside information from companies like Allied Capital. But let’s not criticize Carruthers. We don’t want to “intimidate” him. We don’t want to be part of the problem.

And shame on the SEC for having the temerity to investigate Einhorn. In fact, the SEC did nothing but ask Einhorn a few questions. Meanwhile, Einhorn convinced the SEC to launch an investigation of Allied. Then Einhorn all but directed this massive but ultimately misguided investigation for a period of three long years.

As Einhorn admits in his book, his hedge fund partner had a “social” relationship with William Donaldson, then the Chairman of the SEC. That’s how Einhorn got the investigation of Allied started. As the investigation progressed, Einhorn says, SEC officials even asked him to be their “cartographer” – outlining all the ways in which Allied was supposedly a massive Ponzi scheme, and also failing to mark its assets to “fair value” (i.e. the arbitrary value at which Einhorn believed the assets could be sold in a fire sale).

Clearly, Wall Street miscreants like Einhorn had captured the SEC to the point where the Wall Street miscreants were virtually running the place. But in the upside down reality presented by Einhorn’s book, the fact that a few SEC officials doubted the hedge fund manager’s sincerity is proof that the commission had been corrupted, not by Wall Street miscreants, but by corporate executives who wanted to “intimidate” Einhorn.

That’s right, the SEC, following Einhorn’s orders in microscopic detail, conducted an investigation of Allied that was so huge that Allied had to create a “Department of Investigations” to handle all of the commission’s requests for new information. But it was Allied’s executives, not Einhorn, who were peddling influence at the SEC. You don’t believe it? Read Einhorn’s book – agitprop at its best.

As for the media – well, Einhorn is deeply disappointed. Of course, Einhorn heaps praise on journalists such as Jesse Eisenger, then of The Wall Street Journal; Carol Remond of Dow Jones Newswires; and Herb Greenberg, formerly of MarketWatch.com and TheStreet.com. These journalists wrote multiple negative and false stories about Allied Capital, precisely mimicking Einhorn’s allegations that the company was a massive fraud.

As it happens, these are the same journalists that Deep Capture has shown to have had too-cozy, and in some instances, outright corrupt relationships with a select crew of short selling hedge fund managers, including David Einhorn. Indeed, it is fair to say that Einhorn and others in his network had captured some of the biggest names in financial journalism to the point where the hedge fund managers were able to virtually dictate the journalists’ stories.

But Einhorn was disappointed – the media failed him. That is to say, a number of honest journalists looked at Einhorn’s “evidence” and concluded that it was balderdash of the highest order. But, no, these journalists were not honest. They were ignoramuses. They are part of the problem. They should be publicly shamed. One of them even investigated Einhorn. This was an outrage. It was hurtful. It was “intimidation.”

Look, lying and cheating short-sellers are essential watchdogs, they add liquidity to the markets, and they are really very fragile people. Nice people, too. They don’t even care about money. You don’t believe me? Read Einhorn’s book. “I remember Grandpa Ben…,” Einhorn writes on page one, and after that he regales with countless folksy anecdotes and assorted other bullshit that – well, believe me, it brings tears to the eyes.

Einhorn even lets us know that he is going to donate some of the proceeds from his short selling of Allied to needy children. “I have been waiting,” he writes, “but the children should not have to wait.”

As far as I know, the children are still waiting. Although Einhorn has made enormous profits from his short selling of Allied, he has provided no evidence that his contributions to charity have significantly increased. But it is clear that the purpose of his book was not to tell the truth. It was to inoculate himself from public criticism and regulatory scrutiny in preparation for his next big project – the destruction of Lehman Brothers.

In May 2008, soon after releasing his book on Allied Capital, Einhorn’s launched his attack on Lehman in a speech that he gave at an event that was ostensibly held for the purposes of – what else? – raising money for needy children. Einhorn began this speech by discussing his supposedly philanthropic fight with Allied. He then  proceeded to give a grossly exaggerated account of Lehman’s problems, suggesting that Lehman was a massive fraud for precisely the same reasons that Allied was a massive fraud – namely, that it had failed to mark down its real estate assets to “fair value,” with “fair value” defined not by any reasonable metric, but by Einhorn himself.

Lest there still be any doubt that Einhorn really was a crusading crime-fighter, rather than a profit-seeking hedge fund manager, he hired an expensive lobbying outfit called the Gordon Group to orchestrate an astounding public relations campaign. The Gordon Group, whose key clients seem to be Einhorn and Einhorn’s network of hedge fund managers (including the above mentioned William Ackman and Whitney Tilson) is staffed by real professionals. Their Einhorn campaign was marked by the sort of hype that normally accompanies the launch of a new teen-idol band.

But it wasn’t just hype. It was also a particularly greasy sort of deception – imagine a pimp marketing a cheap 42nd Street hooker. Really, she’s not in it for the money. She’ a virginal college undergrad who loves her teddy bear.

Well, the media swooned for the cuddly Einhorn. This was the same media that Einhorn had accused of bungling idiocy, but never mind that – now he had glowing profiles in many of the top news publications, and a three-hour appearance on CNBC.  Half-way through his CNBC debut, Einhorn put on a cute t-shirt painted by his young kids — just to show that he was a regular guy and a lover of children, as opposed to a marauding hedge fund manager seeking to obliterate one of America’s largest investment banks.

In all his media interviews, Einhorn reminded journalists that Allied Capital had “intimidated” him. He said he had stood up to the bullies and proven that Allied was a massive fraud. Then he smoothly transitioned into a discussion of Lehman Brothers, suggesting to the journalists that Lehman was just like Allied, a massive fraud. He said Lehman was trying to “intimidate” him, but he would fight on in the name of truth and justice. The journalists swallowed this nonsense without an ounce of skepticism.

I do not mean to suggest that Lehman Brothers was a clean bank. Clearly, it engaged in some shady accounting, including its now notorious Repo 105 transactions. Its brokerage probably catered to criminal market manipulators. But while Lehman was a deeply troubled bank, it is also true that it was subjected to a wave of false rumors, each one accompanied by illegal naked short selling. With all the manipulation that accompanied the attack on Lehman, it was difficult to know what the truth about the company really was.

In the midst of the attack on Lehman, Adam Starr, the manager of hedge fund Gulfside Partners, was moved to write a letter to Lehman’s CFO, stating, “I have never witnessed more disruptive behavior than that displayed over the past year by David Einhorn.” In a recent interview with Reuters, Starr said that Lehman had clearly had serious problems, but that was besides the point. The point, Starr said, was that Einhorn was up to no good – “manipulating the market and running a high publicity business is just not appropriate behavior and disruptive to free and open markets.”

As for Einhorn being “right” about Lehman, it is important to note that the court-appointed examiner’s report on the Lehman bankruptcy does not support Einhorn’s principal claim – that Lehman’s executives fraudulently and massively overvalued the bank’s commercial real estate assets. “With respect to commercial real estate,” says the report, “the Examiner finds insufficient evidence to conclude that Lehman’s valuations of its Commercial portfolio were unreasonable as of the second and third quarters of 2008.”

Lehman’s valuations might have been high, but Einhorn’s shrill exaggerations and insinuations of fraud were clearly designed to induce panic. And sure enough, panic ensued. With potential business partners wondering whether Lehman was, in fact, massively overstating the value of its commercial real estate, the bank was unable to raise new capital.

To protect itself, Lehman sought to spin off the real estate assets, but by that time it had come under a brutal and criminal naked short selling attack, with more than 30 million of its shares failing to deliver. The plummeting stock price and continuing false rumors in the marketplace derailed Lehman’s other efforts to protect itself and triggered a run on the bank that ended with Lehman’s demise.

In short, Lehman was a bad bank. Regulators should have forced it to reform. Instead, they and the media allowed short selling “vigilantes” like Einhorn to manufacture a much bleaker reality and bring a major investment bank to its knees. It is quite possible that if it weren’t for Einhorn and other dissembling investor “activists”, Lehman would have survived, and the financial system would have had a much softer landing.

Lehman has subpoenaed records from Einhorn and his close colleague, Steve Cohen of SAC Capital,  in hopes of determining the extent to which the hedge fund managers had a hand in its demise. Perhaps those subpoenas will give us a clearer picture of what really went down, but meanwhile we can expect Einhorn’s PR machine stay “on message” – constantly repeating that Einhorn was “right” about Lehman, just as Einhorn was “right” about Allied Capital.

Which brings us to the inspector general’s report on the SEC’s investigation of Allied. Given that Einhorn, his minion Jim Brickman, and the rest of his PR machine are waving this report with glee, and no doubt preparing to use it as cover for Einhorn’s next attack on a public company, it is important that we subject the contents of the report to close scrutiny.

The report concludes that “serious and credible allegations against Allied were not initially [my emphasis] investigated” by the SEC, but contrary to Einhorn’s ridiculous claims that nobody listened to him, the inspector general notes that the SEC did ultimately conduct “a lengthy examination of Allied as a result of Einhorn’s allegations…”

SEC officials met with Einhorn on multiple occasions to review his allegations. They also scoured through millions of Allied emails and the cart-loads of other documents that Allied supplied every time Einhorn came to the SEC with a new set of accusations.

Having conducted this gargantuan investigation, the SEC concluded that most of Einhorn’s allegations were bogus. Allied was fined for having mildly inadequate accounting methods that might have overvalued some of the company’s assets, but the SEC determined that Allied certainly was not the “massive fraud” that Einhorn claimed it to be.

In addition, Allied was not, as Einhorn claimed, a massive Ponzi scheme. Einhorn had made the smarmy suggestion that Allied was a Ponzi because it supposedly raised money from the markets to pay its dividends. An SEC official told the inspector general that this claim was patently false – it was perfectly obvious that Allied legitimately paid dividends out of earnings.

The inspector general’s report notes that one SEC official claimed to have gotten “push back” when she tried to dig deeper into the Ponzi scheme allegation. But nowhere in the report does the inspector general conclude that any such Ponzi scheme existed. Clearly, Einhorn is no Harry Markopolos. Markopolos uncovered a $50 billion fraud (that of Bernie Madoff). Einhorn blew the whistle on a crime that didn’t exist. Yet, Einhorn’s slithering PR effort never ceases to amaze – somehow he has managed to attach himself to Markopolos, and even wangled a deal to write the introduction to Markopolos’s blockbuster book.

The inspector general seems to believe that the investigation of Allied could have been more thorough in some respects. For example, SEC officials didn’t visit Allied’s offices, and one SEC official was a bit too quick to believe that Allied was innocent just because former SEC officials worked for the company. But, again, the inspector general does not state that the SEC was wrong to conclude that Allied was innocent of any major crime.

The inspector general’s most damaging conclusions about Allied concern the company’s efforts to lobby the SEC. Apparently, some Allied lobbyists secured an unusual meeting with SEC officials and managed to convince these officials that Allied deserved a lighter fine. It also appears that a former SEC official went to work as an Allied lobbyist and might have gotten his hands on Einhorn’s phone records.

The inspector general is right to suggest that Allied’s lobbyists crossed the line. It is not kosher for a public company to pry into a private citizen’s phone records. But given that Einhorn had all-but moved his offices into SEC headquarters, and given that Einhorn had his own private investigators going to unknown lengths to dig up “dirt” on Allied (he admits in his book that he hired Kroll, a private investigative agency that owes its existence to Michael Milken, who was its first big client), Allied can hardly be blamed for taking steps to defend itself.

In any case, the inspector general’s report is more an indictment of the SEC than of Allied’s lobbyists. The overall picture that emerges is one of a government agency split into two factions, one populated by friends of Allied’s lobbyists, the other populated by officials who were basically taking orders from hedge fund managers like David Einhorn. It seems that nobody at the SEC was capable of conducting an investigation without having his or her hand held by some self-interested party. But it is clear from this case and many others like it that the hedge fund faction won the day.

The inspector general states in his report that it was Allied’s lobbyists who convinced the SEC to investigate Einhorn. The report concludes that the SEC initiated this investigation “without any specific evidence of wrongdoing.” That might be so, but officials do not generally obtain “specific evidence” unless they seriously look for it. And it is clear from the contents of the inspector general’s report that the SEC’s investigation of Einhorn was an unmitigated joke, even though officials had good reason to suspect that Allied’s stock was being manipulated.

The report notes, for example, that the SEC subpoenaed Einhorn’s client list in response to Allied’s complaints and discovered that Einhorn had a certain “celebrity client”, whom the inspector general does not name. Could this “celebrity client” have been Michael Milken? We cannot know for certain, but it seems like a good guess, given that the discovery of this “celebrity client” followed Allied’s complaint to the SEC, and given that Allied had complained that Einhorn might be colluding (sorry, “sharing ideas”) with one specific celebrity – Michael Milken.

In any case, it appears from the inspector general’s report that the SEC did nothing to determine how Milken, who is banned from the securities industry, became “quite a large” shareholder of Allied’s stock. Nor did the SEC seek to determine what Milken was doing that day in Allied’s offices.

Meanwhile, some SEC officials seemed to believe that Einhorn was colluding with other hedge fund managers to drive down Allied’s stock. To see whether the hedge fund managers called each other and then placed their trades at precisely the same time, the SEC subpoenaed Einhorn’s phone records. But according to the inspector general’s report, Einhorn did not bother to comply with this subpoena. He never handed over the phone records, and nobody at the SEC seemed to notice or care. Which is funny, because Einhorn states in his book that he did hand over his phone records. Indeed, he goes to great lengths to describe how hurt he felt about this. The SEC was “intimidating” him.

Perhaps because it was weary of “intimidating” hedge fund managers, the SEC also apparently did nothing to investigate illegal naked short selling of Allied’s stock. From the moment that Einhorn declared that Allied was “going to zero”, and for many months afterwards, Allied’s stock “failed to deliver” in massive quantities – a sure sign of criminal naked short selling. We do not know that Einhorn, others in the Milken network, or their brokers were committing this crime. Maybe it was someone else. Either way, it was not beyond the pale for Allied to ask the SEC to investigate. Or maybe it was. After all, the SEC wouldn’t want to “intimidate” criminals.

It is also notable that literally minutes after Einhorn declared that Allied was “going to zero”, the corrupt law firm Milberg Weiss filed a class action lawsuit against Allied that almost precisely mimicked Einhorn’s allegations. Indeed, Milberg filed a class action lawsuit against nearly every company attacked by short sellers in the Milken network.

A couple of years ago, Milberg’s top partners went to jail after prosecutors determined that the partners routinely bribed the plaintiffs in such lawsuits and knew in advance that some event would collapse the stock prices of the companies named in the lawsuits. Einhorn claims that the timing and contents of Milberg’s lawsuit were coincidences. We’ll never know the truth because the SEC doesn’t want to “intimidate” short sellers and corrupt law firms.

There were other “coincidences”. For example, supposedly “independent” financial research shops, such as Off Wall Street Research and Farmhouse Equity Research, published reports that closely paralleled Einhorn’s negative analysis of Allied Capital. The Motley Fool reported in 2007 that Einhorn’s confederate Jim Brickman helped Farmhouse write its research on Allied, and received a copy of at least one of these research reports one week prior to its publication.

Brickman, who is a bit of a mystery character (he refused to provide me with any information about his background), told the Motley Fool that he and Einhorn didn’t see the advance copies of the reports because of “travel constraints.” Allied complained to the SEC that the research shops were helping Einhorn manipulate its stock price and illegally trade ahead of their research. Einhorn said Allied was trying to “intimidate” the research shops. Who was right? It was all so confusing. The deep thinkers at the SEC picked their noses and tried to figure it all out. Then they went to lunch.

The inspector general has been on a mission to expose ineptitude at the SEC, and for this he deserves praise and gratitude. However, given the facts, I think his report on the investigation of Allied Capital was a bit too kind to David Einhorn. The inspector general notes that his office “conducted a comprehensive investigation of the allegations in Einhorn’s book.” But the report offers no solid verdict as to the accuracy of those allegations, and fails to acknowledge the extent to which the SEC had been manipulated by Einhorn and affiliated Wall Street hedge funds.

It should be noted that not only the SEC, but also the Department of Justice, the Small Business Administration, federal courts, attorneys general, and other government bodies investigated Einhorn’s allegations against Allied. All of these investigations yielded the same conclusion: Einhorn’s allegations were, for the most part, eminently ridiculous.

The only criminal fraud discovered by any of these investigators was committed by executives of Business Loan Express, a subsidiary that represented a tiny fraction of Allied’s overall portfolio. The BLX executives were apparently handing out Allied’s money to unqualified borrowers who were their cronies. In other words, Allied was the victim of this fraud. That anyone at the SEC still gives credence to David Einhorn is, therefore, rather odd.

But this story has a happy ending. Last October, Allied Capital was purchased by Ares Capital Corporation, a company that was founded by Anthony Ressler and John Kissick – both partners in the private equity firm Apollo Management. The head of Apollo is none other than Leon Black, who is Michael Milken’s closest business crony. That could be a coincidence. Or it could be that Einhorn’s attack on Allied was meant from the beginning to drive down Allied’s stock price to the point where it would be ripe for a takeover by Milken’s pals.

In any case, Einhorn mysteriously ended his “crusade” agains Allied as soon as Allied was purchased by his friends. So, for the time being at least, we don’t have to listen to his blather. And we promise – never again will we “intimidate” Einhorn. Really, no more “intimidation” — not from us. Mr. Einhorn, you are noble man. You did it for the children. You did not deserve to be “intimidated.” And, Mr. Einhorn, one more thing — boo!

Oops, did it again.

* * * * * * * *

Click here to read the inspector general’s report

Well, the current state of the global financial markets is certainly interesting. I mean, you have to be a bit sick in the head, but if you think about it the right way, it really is “interesting” — sort of like, oo-wee, look, the girl in the cute leotard is falling off the tightrope, there’s no net, and she’s going to go “splat” when she hits that pavement. How interesting! And check it out, the circus animals have gone berserk — the tigers are tearing the trainer into bloody shreds, the elephants are stampeding, the tent might very well collapse, maybe we’re doomed, and look at those clowns – they’re still smiling. How deliciously interesting!

Actually, I take it back — it is not in the least bit interesting. It is terrifying. Despite early attempts by the smiling clowns of the nation’s media and regulatory apparatus to portray the dramatic market collapse of May 6 as mere happenstance, it is now clear that this unprecedented event was no “fat finger” accident. It was not a “black swan” that appeared out of nowhere. And more than likely, it was not some anomalous but innocent trade that triggered a run-of-the-mill panic. What it was, exactly, nobody seems able to say – and that is what makes it all the more scary.

But we can venture some educated guesses, and my best guess is that this was an orchestrated attack on the stock market – an attack that shaved 1,000 points off the Dow Jones industrial average in a few minutes, and caused some stocks worth nearly $50 to drop to a penny in matter of seconds. I have been trying hard, but I simply cannot imagine any natural confluence of events that would cause this. I can, however, think of a number of criminal market manipulators who have caused similar, though less dramatic, events in the past. And I know that these manipulators would get a kick out of triggering a full-blown market cataclysm. They wouldn’t just get a thrill — they would also make a boatload of money.

At any rate, this much is clear: our financial system is seriously broken and the nation is vulnerable. If the May 6 “anomaly” was not an attack, there is every reason to believe that something worse can happen. It can happen because the Securities and Exchange Commission has done nothing to prevent it from happening. Despite overwhelming evidence that market manipulators contributed to the financial turmoil of 2008, not a single criminal has been apprehended. And not only does the SEC let the miscreants run loose, but it also stubbornly refuses to close gaping loopholes that enable market manipulation to occur.

To its immense peril, much of America seems disinclined to discuss market manipulation. I don’t know if it is indolence, incuriosity, or simple complacency, but the discourse in this country stands in stark contrast to the one taking place in Europe, where politicians and the mass media have declared unequivocally that the markets are under attack, with consequences that could be quite dire, to say the least.

According to BaFin, the German financial regulator, “massive” illegal short selling attacks have led to excessive price movements that “could endanger the stability of the entire financial system.” After beholding the drama in the American markets on May 6, and seeing its own market tumble precipitously, the German government finally took on the manipulators, banning naked short selling of stock in its largest financial institutions and restricting the trading of naked credit default swaps, which are often deployed in manipulative attacks.

Not all of the discourse in Europe has been helpful, however. German Chancellor Angela Merkel declared that “speculators are our enemies,” confusing law-abiding traders who passively speculate on price movements with criminal manipulators who actively seek to inflict harm on the markets. Chancellor Merkel only made things worse when she said that this is a “battle of the politicians against the markets” – a proclamation that reinforced the notion that Europe’s politicians harbor a disdain for the free market system. Our enemies are criminals, not market freedoms.

The European response has also been characterized by a certain degree of ineptitude. Germany had already banned naked short selling in 2008, and foolishly lifted the ban last January. Having given the market bullies the green light to attack, Germany’s politicians now appear like the playground dweebs, panicky and weak, hurling nothing more than small stones. It is presumed that the naked short selling and other manipulation will simply move to exchanges in London, where officialdom seems less inclined to fight. But Germany’s ban on naked short selling — though too little, too late — is perfectly sensible.

Which makes the American media coverage all the more inexplicable. The Wall Street Journal, which has for many years seemed incapable of even uttering the words “market manipulation”, reported that the German ban on naked short selling “sparked uneasiness” and actually caused markets to fall further. Sparked uneasiness? Only criminals could possibly be “uneasy” about a policy designed to prevent a crime. Perhaps some “uneasy” criminals are members of the hedge fund lobby, whose talking points tend to find their way into stories published by The Wall Street Journal.

As for the notion that a ban on naked short selling would cause markets to lose value – well, we’ve heard something similar before. It was back in 2008, when the SEC issued an emergency order banning naked short selling of stock in 19 big financial companies, only to have the hedge fund lobby (and The Wall Street Journal) holler that preventing crime would “reduce liquidity” and put downward pressure on markets.

This, of course, is precisely the opposite of what happened. While the emergency order was in place, the stock market surged. Then, on August 12, 2008, the SEC, for reasons that cannot be fathomed, lifted its emergency ban, allowing the manipulation to resume. The stock market duly tanked, and continued to spiral downwards until September, when market manipulators wiped out a large swathe of the American financial system.

It is not just me saying this. Respected economists, famous hedge fund managers, former government officials, and current U.S. Senators such as Ted Kaufman of Delaware have all studied the events of 2008, and the consensus is that illegal naked short selling and other forms of short-side manipulation contributed to the demise of Bear Stearns, Lehman Brothers, Washington Mutual, and countless smaller companies. In the months leading up to September 2008, criminal naked short sellers flooded the market with more than $8 billion worth of phantom stock every day.

As further evidence that The Wall Street Journal just doesn’t get it, consider that the newspaper reported this week that “under naked short selling, investors can sell securities before they have borrowed them. The practice is already banned in the U.S…” This, unfortunately, is patently false. Although the SEC took some half-hearted steps to prevent naked short selling in the aftermath of the 2008 carnage, it did not ban naked short selling outright — traders are still permitted to sell shares before they have borrowed them.

The SEC’s current rules state only that traders have to deliver stock within three days, or in some cases, six days after they have sold it. This means that market manipulators can flood the market with phantom stock for three to six days, inflicting serious damage on prices. When it comes time to deliver the stock they have sold, the manipulators buy stock (at the newly damaged price) on the open market and hand it over. Then they do it all over again – flooding the market with phantom stock for another three to six days.

In nearly every case, such naked short selling is designed to manipulate prices, which is blatantly illegal. But the SEC turns a blind eye to the manipulation so long as the manipulators deliver stock before the three or six-day deadline. In fact, the SEC often turns a blind eye even when the manipulators don’t deliver the stock. Every day, more than 100 million shares go undelivered before the anointed deadline, and that is in just one part of the system monitored by the Depository Trust and Clearing Corporation. Far more phantom stock is processed ex-clearing, and in other shadowy regions of the financial system.

The SEC would do well to investigate these shadowy regions in its attempt to identify the roots of the “freak accident” that took place on May 6. But, alas, the officials of that agency have been too busy picking buggers out of their noses. Ok, not just buggers – they also wrote a 100-plus page report on their investigation into the “market events” of May 6, and this report is filled with all sorts of statistics and enough head-in-the-clouds hypothesizing to bring a smile to the face of any university economist (or SEC report-writer) looking for a job at a market manipulating hedge fund.

What the report does not contain is the names of any culprits, or any evidence that the SEC is trying to identify specific culprits. The report does not even contain a plausible explanation for what happened. If the SEC were charged with writing a report on the causes of the New Orleans flood, it would provide a hundred pages telling us how many cubic meters of water there were, how many molecules of oxygen and hydrogen the water contained, and plenty of assurances that water is usually good for the health, but it would forget to mention hurricane Katrina and the broken levy.

Bottom line: the SEC’s report was designed to make it seem like the bureaucrats have been busy investigating, when in fact they have been counting beans and picking buggers out of their noses. Meanwhile, the madness of the market circus continues, and we look up at that teetering tent with great trepidation.

One of the great episodes of The Simpsons follows Homer as he comes to realize that not all Springfield citizens are treated equally.

The difference, Homer eventually discovers, is membership in a secret society known as the Stonecutters. Once on the inside, Homer is delighted to find his new affiliation subjects him to an enviable set of alternate rules.

Obviously, this is parody, but it succeeds because it’s based on a truth to which we can all relate: the belief that status bestows disproportionate advantage upon a privileged few – up to and including license to engage in illegal behavior.

Homer and the Stonecutters immediately came to mind upon learning that, from 2005 through 2009, Deutsche Bank (NYSE:DB) selectively disabled a system intended to block customers’ short sale orders when placed without valid locates, while the Fidelity-affiliated National Financial Securities (NFS) achieved the same end by creating an entirely separate system for certain customers disinterested in compliance with the rules governing how the rest of us can trade.

Shorting shares that have neither been borrowed nor, at a minimum, located for eventual borrowing, is an illegal and manipulative practice and the essence of naked short selling; and yet, Deutsche Bank and NFS decided certain customers were entitled to do it.

Back in 2006, small-time hedge fund manager Jeff Matthews announced he doubted naked shorting was possible because he didn’t know how to do it. In reality, the thing Matthews didn’t know (possibly to his credit) was the secret knock used to gain entrance to the mega-hedge fund speakeasy, where the real debauchery goes on.

Why should Matthews and others be excluded?

The better question is: why should anybody be included? I suspect the clients allowed to violate the law in this way also happened to be the ones paying Deutsche Bank and NFS the most in commissions. But this isn’t like a hotel claiming it’s full while holding a suite in reserve for someone more important than you, or NBA refs not calling traveling on the players everybody’s really paying to watch. Instead, when these two banks enabled such manipulative trading, they were silently transferring wealth from the masses into the accounts of the privileged few.

This is true of both long buyers and short sellers, for the longs saw their investments devalued by the naked shorting of stocks in their portfolios, while the shorts were forced to pay high premiums for hard-to-borrow stocks even as others were exempted from such inconvenient market forces as supply and demand. This happened across the market, but those who should be particularly bothered are the many Deutsche Bank and NFS account holders whose brokerages acted contrary to their best interests.

In fact, they ought to sue, in my opinion, to say nothing of what the Department of Justice ought to be doing about it.

Exactly how much did these years of market manipulation extract from investors? That’s impossible to know, however what I can say without doubt that it exceeds the combined $925,000 fine imposed by FINRA.

The most clichéd, yet satisfying, moment in any movie comes when the brutally bullying antagonist discovers he’s lost that which had empowered his abusive nature. Wait…I take that back. Seeing that fear in the bad guy’s eyes is the second most satisfying movie moment, the first being the inevitable administration of long-overdue justice that follows.

Though evidence has mounted for a while, today it became official: Goldman Sachs (NYSE:GS) is now on its own, as the guardian angel/demon that once enabled the firm’s assault on our capital markets has clearly severed that relationship. At least that’s the conclusion I draw from the news that Goldman was censured and fined by NYSE and the SEC for specific faults in “execution and clearing” (another way of saying “naked short selling”).

What changed? After all, Goldman is still rich, right?

Well…sort of. Goldman may be flush with cash, but with pressure mounting on politicians to reject any of it in the form of campaign contributions, suddenly that cash doesn’t spend nearly as well as it used to.  At the same time, it’s probably safe to assume Goldman’s allure as a future client has been severely degraded in the eyes of private sector career-minded regulators.

In other words, Goldman’s gold has lost its luster, and with it, the firm’s political ‘juice’. I can only imagine the look on their faces when Goldman brass first realized why their calls were not being returned: their power was gone. And folks with badges were knocking on the door.

Goldman’s role as a facilitator of illegal, short-side market manipulation will never come to symbolize its villainy in the mind of the public the way knowingly selling its clients garbage CDOs on behalf of John Paulson will. But that’s what makes this latest development even more significant: it suggests a sort of “piling on” mentality that was inconceivable just one month ago (keep in mind this is the company that, evidence suggests, successfully lobbied to have even legitimate short selling banned once the practice began to impact its share price). This, in turn, may be an inadvertent signal from regulatory “insiders” that Goldman’s prospects of emerging intact from this storm are slim.

Do not mistake the tone of this post for contentment, for this particular action doesn’t come close to addressing what I suspect is the true breadth and depth of Goldman’s role in short-side market manipulations. Indeed, the bulk of this particular complaint focuses on a few infractions observed over a few weeks in late 2008. Goldman, for its part, attributes the problem to an inconsequential bookkeeping error. If that’s true, a half-million dollar fine for an accounting mistake makes Goldman’s plight seem even more dire.

In the end, what’s most significant about this complaint is the insight it provides into how the system works when inappropriate influence ceases to be a factor in the regulatory process (something we’ve grown accustomed to not seeing): investigators investigate, infractions are cited, penalties applied, juice ignored.

I’m not convinced it’s within human nature to develop a financial markets regulatory paradigm able to consistently achieve this ideal (though I’m certain we can do better than what we’ve got). The alternative is to focus on the other side of the equation by limiting the capacity of any market participant to become so influential the rules cease to apply.