What follows is PART 7 of a 15-PART series. The remaining installments will appear on Deep Capture in the coming days, after which point the story will be published in its entirety.

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

Where we left off, CNBC’s Jim Cramer had declared Dendreon to be a “battleground stock,” and we had learned about the ties that bind certain financial analysts, hedge fund managers and journalists, including Cramer.We had also learned that a great many people in this network are tied to the famous criminal Michael Milken or his close associates.

We had learned further that seven hedge fund managers in this network were among the only people on the planet known to be holding large bets against Dendreon as of March 31, 2007 – which was right at the time when criminals were flooding the market with millions of phantom Dendreon shares; and right after Dendreon had received the fantastic news that an FDA expert advisory panel had endorsed the company’s prostate cancer treatment; and right before Dendreon was to be derailed by some singularly strange occurrences.

I will describe those strange occurrences in due course. I will also describe how those strange occurrences coincide with the “philanthropy” of Michael Milken.  But first let us meet another dubious financial analyst, and then let us begin to understand how Michael Milken himself stood to profit financially from the demise of Dendreon, the only company with a viable new treatment for prostate cancer.

* * * * * * * *

It is easy for executives of public companies to know that they are “battleground” targets of the Milken network because the members of this network have quite distinctive characteristics. Whether they be journalists tied to Cramer, financial analysts, or hedge fund managers, they are unusual among financial professionals in that they take overt pride in their thuggish manner.

They let it be known that the executives are in their sights, and sometimes issue outright threats. They let on that they have inside information, influence, and power – and that unforeseen calamities can happen.  (This may have what economists call a “signaling effect,” dissuading potential investors from purchasing a stock, even if they believe in the fundamentals of the company.)

Often members of this network will join companies’ quarterly conference calls, and take turns firing off insinuating and preposterous questions in staccato fashion, giving the targets of their interrogations no opportunity to formulate reasonable replies.

So it was in March of 2007, when Dendreon held a conference call to discuss the FDA advisory panel’s recent vote in favor of Provenge. Nearly every analyst on the call was cheered by the news that the prostate cancer treatment would reach patients. Most of these analysts were advising clients that Dendreon’s stock would hit at least $20 (compared to the $1.50 target set by the doctor-impersonating financial analyst, Jonathan Aschoff).

Here is a representative sample of analysts who participated in the conference call, along with quotations showing how they greeted Dendreon CEO Mitchell Gold, and how they signed off.

Charles Duncan – JMP Securities

Greeting: “A big congratulations!”

Singing off: “Congrats Again.”

David Miller – Biotech Stock Research

Greeting: “Good evening. Warm congratulations.”

Signing off: “Congratulations to everybody on the team.”

Mark Monane – Needham & Company

Greeting: “Good day and congratulations to all.”

Signing off: “Congratulations once again.”

William Ho – Bank of America

Greeting: “Congratulations”

Signing off: “Okay”

Paul Latta – McAdams, Wright & Regan

Greeting: “Good evening & congratulations, Mitch, a great accomplishment for you and your team.”

Singing off: “Congratulations again.”

But then a financial analyst named Elliot Favus appeared on the conference call. Favus worked for Lazard Capital, and announced that he was sitting in for Joel Sendek, who usually covered Dendreon for Lazard. Favus launched into a series of aggressive questions, suggesting that the FDA advisory panel had been a sham, and that the FDA would not approve Dendreon’s prostate cancer treatment.

Then Joel Sendek, Elliot’s colleague at Lazard, got on the call and initiated a similar interrogation. He kept asking whether the FDA advisory panel had asked the “right question” about the effectiveness of Provenge. When Dendreon’s CEO tried to answer, Sendek interrupted and asked again – Did the panel ask the “right question”?  The baffled answer was, “Yes.”  But Sendek kept asking. Do you think it was the “right question”? Do you think the FDA will have to “change the question”?

This was very strange. The FDA panel asked two questions. Is Provenge safe? And, is there “substantial evidence” of efficacy?  Those are the two questions that advisory panels always ask. Federal regulations require them to ask those questions.

It was hard to tell what Sendek was up to. Change the question? Did Sendek believe that the FDA was somehow going to alter its regulatory standards? Did he have information that the FDA might not approve Provenge – never mind that the agency had followed its advisory panels’ recommendations in 97% of cases, and had never in history rejected a panel-approved drug destined for dying patients?

And who was this Joel Sendek?

* * * * * * * *

Actual Joel Sendek publicity photo

Sendek is an analyst for Lazard research. He is famous on Wall Street for spending his evenings calling Wall Street investors and shareholders, and literally singing songs into their voicemail. Usually, these songs celebrate the demise of some biotech company or medicine. For example, when Sendek decided that an anemia drug called Erythropoietin wasn’t going to make it to market (or to patients suffering from anemia), he gleefully called everyone he knew on Wall Street and began singing (to the tune of American Pie):

Bye-bye, Erythropoietin pie.

Drove my growth rate with the pipeline,

But the pipeline went dry.

I don’t know what song Sendek sings about Dendreon’s prostate cancer medicine, but his reports on Dendreon have been marked by a similarly cheerful pessimism. Same goes for the reports on Dendreon published by Elliot Favus, who, until recently, worked with Sendek at Lazard. In the long two years that followed that conference call in March 2007, Lazard’s reports have consistently predicted (in tones that seemed almost hopeful) that Dendreon’s treatment would fail to reach patients who were dying of prostate cancer.

In April 2009, a few days before a Yahoo! message board poster predicted, almost to the minute, the“BEAR RAID” that shattered Dendreon’s stock price by 65% in 75 seconds, Lazard put out a statement that said that an “investigator in the current Provenge study” had concluded that Dendreon’s treatment did not work. This was terrible news – assuming that the “investigator” was somebody actually participating in the “current Provenge study” or any other scientific study of Dendreon’s treatment.

But it turned out that Lazard had made “a mistake.”

When Dendreon supporters started hollering that there was no such “investigator,” Lazard changed the statement to read that an “expert” had concluded that Provenge does not work. When Lazard was challenged to produce such an expert, it changed the message again. Now the expert wasn’t exactly saying that Dendreon’s prostate cancer treatment does not work. Instead, it was that Provenge was “mentioned cautiously” by this particular “expert,” who remained anonymous.

If you can spot the similarity between this “mistake” and the “mistakes” of CNBC’s Jim Cramer, it will not surprise you to learn that Lazard’s research operation was then run by a guy named Paul Noglows. Prior to joining Lazard, Noglows was the director of research at IRG Research, an outfit owned by Jim Cramer’s financial news and research company, TheStreet.com.

Elliot Favus, the Lazard analyst who teamed up with the singing Sendek to trash Dendreon, later resigned from that job. Then he went to work for Och-Ziff Investment Management, a hedge fund managed by Dirk Ziff.

As you will recall, Ziff was the guy who helped Jim Chanos (host to Ashlee Dupre, hooker of Jim Cramer’s best friend Eliot Spitzer) start his hedge fund empire – an empire that now employs Evan Sturza, the fellow who used to be in the business of publishing research that predicted, with similar glee, the demise of medicines developed by companies that were under attack by Michael Steinhardt (Cramer’s former business partner; mentor to Chanos) and other cronies of Michael Milken and Ivan Boesky.

Ziff’, remember, was also the fellow who improperly received–along with Chanos, Steve Cohen and others in their network, advanced copies of biased financial research published by Morgan Keegan. And, of course, Chanos met Ziff through Michael Steinhardt and Marty Peretz, who was Ziff’s Harvard professor;  a close friend of Boesky; an ardent defender of Milken; a key limited partner, along with Boesky, in Michael Steinhardt’s hedge fund; and the co-founder, along with Cramer, of TheStreet.com.

Study the world of abusive short selling for three years, as I have, and you will see that these relationships matter. You will see how these people work together. And you will see that the most egregious cases of market skulduggery – the serious damage to public companies done by journalists and analysts through these repeated and precisely-crafted “mistakes”; the hired thugs; the threats; the over-the-top gloom (sung gleefully); the sudden bankruptcies, the orchestrated calamities, the endless litany of strange occurrences – an alarming amount of it can be traced to the same cast of beady-eyed, Milken-loving mischief-makers.

* * * * * * * *

As you may have gathered by now, Provenge has yet to be approved by the FDA. Despite evidence that it decreases prostate cancer mortality by 38%, the treatment has yet to be administered to patients, 60,000 of whom have died in the two years since the FDA’s advisory panel voted in Dendreon’s favor.

What strange occurrences have contributed to this outcome? What calamity was awaiting Dendreon as these seven “colorful” hedge fund managers stocked up on put options while naked short sellers flooded the market with at least ten million phantom shares?

Before I answer those questions, we ought to get to know some things about the “philanthropy” of Michael Milken and a firm called ProQuest Investments.

In 1993, Milken founded the Prostate Cancer Foundation, with a stated mission to promote advancements in the treatment of prostate cancer.

In 1998, ProQuest Investments opened for business with the specifically stated mission to invest in companies developing treatments for prostate cancer.

Ostensibly, ProQuest was founded by two men – Jay Moorin and Jeremy Goldberg. But the man who is really behind ProQuest Investments is Michael Milken. Industry reports suggest that Milken is the firm’s rainmaker. It was Milken who delivered  most of ProQuest’s early capital. And it is Milken who brings ProQuest’s deals to the table.

One of those deals was a company called Novacea, now known as Transcept Pharmaceuticals. For a long while, the controlling shareholders in Novacea were ProQuest Investments and a fund called Domain Associates. I believe it is safe to assume that ProQuest and Domain are affiliated, given that the two funds not only invest in the same companies, but actually share the same address.

Industry reports state that Domain was the “mentor” to Proquest, and an investor in the fund. One report states that the two funds “plot strategy” together.  Thus, it would be more accurate to say that the controlling shareholders in Novacea were first, ProQuest Investments, and second, ProQuest Investments (acting through Domain Associates).

But ProQuest and Domain are not like most biotech investment firms, which scout out companies with promising treatments and invest capital in them. Rather, ProQuest and Domain sometimes invest capital in  themselves. For example, Novacea was founded by Eckard Weber, who works as an executive and partner of Domain Associates. One day, there was no such thing as Novacea. The next day ProQuest and Domain had invested in a company called Novacea, which ostensibly had a promising treatment for prostate cancer.

This alone should have set off alarm bells. But for a long while, the media and others believed that Novacea was a serious – indeed, the most serious – competitor to Dendreon. An achievement for Dendreon was considered to be a set-back for Novacea. By the same token, a calamity for Dendreon had the potential to be a major boon to Novacea’s shareholders.

In fact, Dendreon suffered just such a calamity. And this calamity did indeed reap a large fortune for Michael Milken’s ProQuest Investments and Domain Associates.

But ProQuest and Domain are no longer shareholders in Novacea.

That is on account of some strange occurrences that I must describe in more detail.

* * * * * * * *

First, though, it is necessary for us to continue learning more about Michael Milken’s prostate cancer business,  ProQuest Investments, and Michael Milken’s “philanthropic” outfit, the Prostate Cancer Foundation.

As we know, ProQuest Investments was ostensibly founded by two men – Jeremy Goldberg and Jay Moorin.

Prior to becoming the ostensible co-founder of ProQuest (Michael Milken’s investment fund for companies that supposedly have treatments for prostate cancer) Moorin’s most significant achievement had been to serve as CEO of Magainin Pharmaceuticals, a company that later changed its name to Genaera Corporation. In many transactions, the financial advisor to this company was Paramount Capital.

Paramount Capital, as you will recall, is owned by Lindsay Rosenwald, the fellow who used to help his father-in-law (the “king of stock fraud”) run D.H. Blair, which was the dirtiest Mafia-affiliated brokerage on Wall Street – the same brokerage whose president had been Michael Milken’s national sales manager, and whose business model had been to underwrite phony biotech companies, then pump and dump their stocks.

As you will recall, Paramount’s vice president was once a top trader at SAC Capital, the hedge fund run by Milken crony Steve Cohen, who became the “most powerful trader on the Street” largely by maniacally maintaining relationships with his former colleagues. You will also recall that Cohen and Paramount employee Joseph Edelman were among those seven “colorful” hedge fund managers who held large numbers of put options in Dendreon as of March 2007.

At the risk of being repetitive, I will also remind you that Lindsay Rosenwald, the fraud king’s son-in-law, controlled Cougar Biotechnology, a company whose scientific advisory board included four doctors affiliated with Milken’s Prostate Cancer Foundation.

When Dendreon became a “battleground stock,” Dendreon had no more than three “serious” competitors. One was Milken crony Rosenwald’s Cougar Biotechnology. The other was Novacea, controlled by Milken’s ProQuest Investments. The third was a company called Cell Genesys, which I will return to in an upcoming chapter.

Magainin/Genaera, the company that was run by ProQuest’s ostensible founder, Jay Moorin, had lots of big ideas. For example, it claimed to have developed a way to treat foot ulcers with a substance extracted from the African clawed frog. It also claimed to have discovered a treatment for cancer. This treatment was apparently derived from the livers of tropical dogfish sharks.

Indeed, a great many of Magainin/Genaera’s supposed treatments were derived from exotic wildlife. And many of these treatments were heralded in press releases that suggested that regulatory approval was just around the corner.

Sometimes, the company announced that its treatments had already gained approval – albeit in exotic locales. Genaera’s lung cancer vaccine “was approved Jun 12 by the Cuban regulatory authorities…” noted one of Genaera’s optimistic press releases. Presumably, Cubans are now free of lung cancer.

For three decades, these press releases appeared. Many of them sent Magainin/Genaera’s stock into orbit. Then the stock would sink. After that, there would be another press release and the stock would be back in the stratosphere.

But in three decades, Genaera never brought a treatment to market. In fact, it never had a treatment approved by the FDA.

Three full decades. Countless potions and serums derived from all manner of critter and jungle beast. A stupendous salary for the CEO, and fantastic profits for anyone who spent those 30 years riding the volatility of Magainin/Genaera’s stock. But not a single treatment was brought to market.

In June 2009, Genaera announced that it was going out of business.

* * * * * * * *

Jeremy Goldberg, the other ostensible founder of Milken’s ProQuest Investments, was previously best known for his service as the founding CEO of a company called Versicor, which purported to make anti-viral medicines.

Among Versicor’s biggest early investors was Healthcare Ventures, a fund that was founded by two former Johnson & Johnson executives. It seems that a preponderance of Heathcare Venture’s principals previously worked for Luekosite, a biotech firm founded by Marty Peretz, the Boesky and Michael Steinhardt crony who launched TheStreet.com with Jim Cramer.

Another early investor in Versicor was Schroder Venture Management, a unit of the same company that runs Schroder Wertheim, which was the principal clearing firm for Euro-Atlantic, a Mafia-run brokerage that the Feds shut down in the late 1990s.

But Versicor’s most important investor was a biotech company called Sepracor, which markets Lunestra, the sleeping pill. Sepracor’s chairman, Timothy J. Barberich, was also a major investor in Versicor. Barberich served as Versicor’s founding chairman, while Goldberg served as Versico’s founding CEO. This was the Jeremy Goldberg who later founded Milken’s ProQuest Investments.

So Barberich was chair of Sepracor (a company that markets sleeping pills), and founding chairman of Versicor (which has yet to produce any drugs fit for human consumption). Curiously, Barberich also bankrolled Atlantic Casino Cruises, a gambling outfit that was being set up by a businessman named Adam Kidan and an alleged mobster named Anthony Moscatiello.

Moscatiello, who travels in an armor-plated Mercedes, has been pegged by the government as being the top bookkeeper to the Gambino Mafia family. As the story goes, Kidan masterminded Atlantic Casino Cruises. Moscatiello set the company up. And Barberich was the principal financier of the project.

Unfortunately, the project never really got off the ground. Soon after Barberich invested his money, Kidan, the businessman, entered into a deal to buy another casino, SunCruz, from a fellow named Konstantinos “Gus” Boulis. In due course, Boulis accused Kidan of financial improprieties in the deal.

Not long after that, Boulis was shot in the head – execution style.

And Moscatiello was arrested.

* * * * * * * *

To be continued…Check in soon for Chapter 8

If this article concerns you, and you wish to help, then:
1) email it to a dozen friends;
2) go here for additional suggestions: “So You Say You Want a Revolution?“

What follows is PART 6 of a 15-PART series. The remaining installments will appear on Deep Capture in the coming days, after which point the story will be published in its entirety.

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

Where we left off, we had learned that CNBC’s Jim Cramer had declared Dendreon to be a “battleground stock.” And we had learned that Dendreon subsequently came under attack by criminal naked short sellers, right at the time that its promising treatment for prostate cancer had been endorsed by an FDA expert advisory panel, and right before that treatment was to be derailed by some strange occurrences.

While it is impossible to know who was responsible for the illegal naked short selling (the SEC keeps that a big secret), we know that the people who orchestrated those strange occurrences (which I will describe in due course) and at least seven of the ten hedge fund managers who held large numbers of Dendreon put options (bets against the company) are tied to Michael Milken, the famous criminal who is now considered to be a “prominent philanthropist” with a special focus on prostate cancer.

Now we learn a bit more about this network and the attack on Dendreon, a company with a promising treatment for prostate cancer…

* * * * * * * *

When the FDA’s advisory panel voted in favor of Provenge, most Wall Street research analysts were predicting a bright future for Dendreon. But as naked short sellers piled on with ever increasing gusto, hedge fund managers continued to whisper in reporters’ ears. And two Wall Street analysts did more than whisper – they shouted, day after day, that Dendreon’s treatment for prostate cancer was doomed.

One of these analysts is named Jonathan Aschoff, and he works for a financial research outfit called Brean Murray Carret & Co.  The day after the advisory panel vote, in an interview with Reuters, Aschoff made the long-shot prediction that the FDA would not approve Provenge, but would instead ask Dendreon to supply additional data showing that the treatment was safe and effective–a process that could take years. Soon after, Aschoff told other media outlets that the FDA would set a “dangerous double standard” by approving Provenge because the treatment “did not meet its primary goal in two Phase III trials.”

During the first days of April 2007, Aschoff was everywhere, continuously repeating this notion that the FDA would set a “dangerous double standard” by approving Provenge.  On April 9, Aschoff reiterated his “sell” rating for Dendreon, setting a target for the stock at a mere $1.50, which implied that the stock would lose more than 90 percent of its value by the end of the year. Reuters, Associated Press, CNBC and other media dutifully reported Aschoff’s comments as though they shed  light on the merits of Dendreon’s prostate cancer treatment.

Aschoff’s performance raises a few basic questions. The first is, how did a Wall Street analyst know that it would be “dangerous” to approve a medical treatment? It is an odd day, indeed, when the media turns to Wall Street for wisdom on matters of science and health.

The second question is, why was Aschoff so confident that the FDA would not approve Provenge? Given that the FDA had followed its advisory panels’ decisions in 97% of cases, and in 100% of cases involving drugs for dying patients, Aschoff’s prediction seemed rather far out. What did he know that the rest of the world did not know?

The third question is, who is Jonathan Aschoff?

* * * * * * * *

In 2003 – back when journalists still occasionally investigated stories, rather than parroting whatever hedge funds and Wall Street analysts whispered in their ears – The Wall Street Journal won a Pulitzer Prize for a story that nailed Jonathan Aschoff for being a fraud.

According to the Journal, Aschoff often impersonated doctors in order to acquire inside information on the status of drug trials underway at his target companies. A certain Dr. Cunningham, who worked at a cancer center in Dallas, told the Journal that he initially believed that Aschoff was a doctor. But he discovered that he was dealing with a fraud when he mentioned to Aschoff that an experimental treatment had caused some reduction of the “lymphadenopathy.”

“What’s that?” asked Aschoff.  He didn’t have a clue, even though “lymphadenopathy” is a  common medical term. It means, “swollen lymph nodes.”

Nonetheless, some years later, the Associated Press, Reuters, and other media outfits were willing to believe that Aschoff knew enough about medicine to be quoted as a reliable source – a source who had, for some reason, concluded that Dendreon’s treatment for prostate cancer was “dangerous.”

What reason did Aschoff have for reaching that conclusion?

* * * * * * * *

One more question: Which hedge funds were paying Aschoff’s bills?

There is one particular network of hedge fund managers that is known to pay “independent” financial research shops to publish biased or false negative reports on companies that they are selling short.

Former employees of “independent” financial research firm Gradient Analytics have provided sworn affidavits that hedge fund manager David Rocker–once the largest outside shareholder of TheStreet.com; former employee of  Milken-Boesky crony Michael Steinhardt (who is the son of “the biggest Mafia fence in America) and Steve Cohen–now “the most powerful trader on Wall Street;” reportedly once investigated by the SEC for trading on inside information provided to him by Milken’s shop Drexel Burnham–heavily influenced, edited, dictated, and in some cases actually wrote Gradient’s false, negative research about public companies. That means, of course, that Cohen and Rocker had copies of “Gradient’s” research before it was published, which is also highly improper.

And emails acquired by Deep Capture show that Cohen and hedge fund manager Jim Chanos, among others in their network, received and traded ahead of biased reports published by a research outfit called Morgan Keegan. After Deep Capture reporter Judd Bagley broke this story, the SEC began (but will probably never conclude) an investigation into the matter.

Were hedge funds in this network dictating Aschoff’s research, too? I don’t know the answer to that question, but it is worth noting that after the SEC sanctioned Aschoff for impersonating doctors, he went to work for an outfit called Sturza’s Institutional Research, which was owned by a fellow named Evan Sturza.

The SEC has launched (but of course never completed) multiple investigations of Sturza’s companies, which catered to a particular network of short sellers by publishing negative commentary on biotech companies. For example, in 1996, the SEC began (but has never completed) an investigation into whether Sturza conspired with the above-mentioned Michael Steinhardt and a firm called Gilford Securities to take down the stock of a biotech company called Organogenesis.

In the 1980s, Gilford Securities employed Jim Chanos (the above-mentioned fellow who is now under SEC investigation for trading ahead of biased research reports). Chanos manages a few hedge funds, the most famous of which is called Kynikos Associates. He is also the head of the short seller lobby in Washington, and a much favored source of information for the New York financial press.

In 1985 – back when Chanos was still at Gilford; back when journalists did investigations rather than parrot whatever Jim Chanos whispered in their ears – way back then is when The Wall Street Journal published a front page story about a “network” of short sellers said to include Jim Chanos and Michael Steinhardt. The story suggested that this network destroyed public companies for profit and described some of the more egregious tactics – espionage; impersonating journalists to get inside information; conspiring to cut off companies’ access to credit; spreading dubious information – that were employed by Chanos and others in his network.

At the time, Chanos made some effort to publicly distance himself from Michael Milken. And he recently told one reporter that lawyers threatened him in the 1980s because he was selling short companies that had been financed by Milken’s junk bonds. However, the truth is that Chanos’s short selling in the 1980s tended to support Milken’s machinations, and in later years Chanos remained very much a part of the old Milken network.

Chanos got his big break in the 1980s by short selling and ultimately destroying a company called Baldwin United. As part of this effort, Chanos and his colleagues at Gilford Securities went so far as to meet with Baldwin United’s bankers, and (through all manner of horror stories) convinced the bankers to cut off Baldwin’s access to credit. Soon enough, the company went bankrupt, and Michael Milken quickly got himself hired as advisor to the bankruptcy.

According to a well-known businessman who was involved in the bankruptcy proceedings, Milken abused his advisory position, handing out confidential information to his network, which ended up owning much of Baldwin’s assets.

As the story goes, Chanos’s take down of Baldwin impressed Michael Steinhardt (the short-seller whose father was the “biggest Mafia fence in America”) and Steinhardt introduced Chanos to his key limited partners – including Ivan Boesky (later indicted for manipulating stocks with Milken) and Marty Peretz (a Milken and Boesky crony who would later co-found TheStreet.com, along with Boesky crony Jim Cramer and a few hedge funds in this network).

Peretz, an aristocrat who has long been a part-time professor at Harvard, introduced Chanos to one of his former students, Dirk Ziff, who manages a hedge fund called Ziff Brothers Investments. The emails cited above show that Ziff Brothers, like Chanos and Steve Cohen, was receiving advance copies of those Morgan Keegan reports.

Dirk Ziff is part of the network of which I write. Indeed, Chanos launched his first hedge fund out of Dirk Ziff’s offices. This was a few years after Chanos left his position at Gilford Securities, which had a few key clients, one of whom was Michael Steinhardt, son of “the biggest Mafia fence in America.”

In the 1990s, five Gilford Securities traders–Chester Chicosky, Todd M. Nejaime, Lawrence Choiniere, Kevin P. Radigan, and William P. Burke – were arrested as part of Operation Uptick, the biggest Mafia bust in FBI history. Although some of these traders had left Gilford by the time they were indicted, they were charged with crimes allegedly committed while they were still working for Gilford. Specifically, the Gilford traders were charged with accepting bribes from a Mob-run brokerage called DMN Capital, and for helping to manipulate stocks with a cast of characters that included ten Mafia soldiers and a former New York police detective.

I asked H. Robert Holmes, who was Chanos’s boss at Gilford, whether he had any comment on the  Mafia’s infiltration of his firm. He said, “I don’t know what you’re talking about? This is bullshit.” He also said he was completely unaware that any Gilford traders had been arrested for accepting bribes and manipulating stocks with a large cast of Mafia goons and Mafia associates. That is, he claimed to be unaware of an event in his company that had been vigorously publicized by the FBI and the SEC.

By the time of Operation Uptick, of course, Chanos was no longer with Gilford. He was then a “prominent investor” – a member of the world’s most powerful network of financial operators, a network whose members are portrayed by the press as geniuses and heroes, never mind that this is the very network that has been destroying companies since 1980s – the very network that is (as should by now be apparent) comprised of the criminal mastermind Michael Milken and his Mafia-connected cronies.

As a member of this network, Chanos is, of course, on close terms with Jim Cramer, the CNBC personality who once planned to run his hedge fund out of Milken co-conspirator Ivan Boesky’s offices. It was owing to Cramer that Chanos became the largest donor to the political campaigns of New York Governor Eliot Spitzer, who was Cramer’s best friend and former college roommate. When Spitzer was caught with a hooker and forced to resign, it emerged that the hooker, “Ashlee Dupre”, had been living rent-free in Chanos’s beachside villa. Ashlee called Chanos “Uncle Jim.”

I tell you all this only to show the relationships that bind some particularly destructive short sellers and miscreants. It is this network that attacked the big banks last year, helping trigger the collapse of the financial system. And members of this network are the most “prominent” players in the biotech space.

One of those players is Jonathan Aschoff, the doctor-impersonating fraud who was, in the Spring of 2007, making the long-shot prediction that the FDA would not approve Dendreon’s “dangerous” treatment for prostate cancer. As we know, Aschoff previously worked for Sturza’s Institutional Research, run by a fellow who faced multiple SEC investigations (none of which led to any action) for allegedly publishing false information to help short sellers (such as Michael Steinhardt) manipulate stocks.

Under the strain of those investigations, Sturza shut his operation down. Now Sturza helps manage a hedge fund called Ursus. Ursus is owned by Jim Chanos, the Steinhardt protégé who housed the hooker of Cramer’s former college roommate, Eliot Spitzer.

Ursus specializes in shorting biotech stocks. There are Wall Street brokers who say that Ursus was short selling Dendreon while Sturza’s disciple, Jonathan Aschoff, was bashing the company and others in this network were looking to cash in.

But it is difficult to know for sure whether Ursus was selling short. It is difficult to know who was responsible for flooding the market with at least 9 million (and maybe tens of millions of) phantom Dendreon shares. It is difficult to know because the SEC does not require hedge funds to disclose their short positions, and does not release information on who is selling stock and failing to deliver it.

As far as the SEC is concerned, it’s all a big secret.

But we do know that Aschoff was predicting that Dendreon’s stock would sink to $1.50 right after Dendreon received an overwhelmingly positive vote from the FDA’s advisory panel, and right before Dendreon was derailed by some singularly strange occurrences. In addition, we know that at this time only ten hedge funds on the planet held large numbers of Dendreon put options (bets against the company), and that at least seven of those hedge funds can be tied to the famous criminal Michael Milken or his close associates.

Michael Milken, of course, is not just a criminal, but also a “prominent philanthropist” whose Prostate Cancer Foundation has received much acclaim from the world at large. But, as we will see, it was not just those seven hedge funds, but Michael Milken himself, who stood to earn a tidy profit from the strange occurrences that were to derail Dendreon, a company with a promising treatment for prostate cancer.

* * * * * * * *

To be continued…Click here for Chapter 7.

If this article concerns you, and you wish to help, then:
1) email it to a dozen friends;
2) go here for additional suggestions: “So You Say You Want a Revolution?“

What follows is PART 5 of a 15-PART series. The remaining installments will appear on Deep Capture in the coming days, after which point the story will be published in its entirety.

Click here to read PART 1

Click here to read PART 2

Click here to read PART 3

Click here to read PART 4

Where we left off, we had learned that CNBC’s Jim Cramer had declared Dendreon to be a “battleground stock.” We had also learned that Dendreon was later attacked by naked short sellers who illegally flooded the market with phantom stock, right at the time when the FDA’s advisory panel delivered the fantastic news that it had voted in favor of approving Dendreon’s prostate cancer treatment.

We had learned further that at the end of March, 2007 – right after the FDA’s vote, and right before Dendreon was to be derailed by some strange occurrences — only ten hedge funds on the planet held significant numbers of Dendreon put options (bets against the company). At least seven of those hedge funds are quite “colorful.”

We have learned the identities of four of the seven “colorful” hedge funds. Now we hear more from Jim Cramer, and discover the identity of the fifth hedge fund that stood to profit from the demise of Dendreon and its promising treatment for prostate cancer…

* * * * * * * *

“SELL! SELL! SELL!” shouted Jim Cramer on March 28, 2007.

The CNBC “journalist” assured his viewers that the FDA advisory panel would vote that Dendreon’s treatment for prostate cancer was neither safe nor effective (notwithstanding the fact that the FDA had given the treatment “priority review” status because Provenge had shown strong trial results and was destined for critically ill patients).

On the following day, when the FDA advisory panel voted unanimously that Provenge was safe and overwhelmingly that it was effective, Cramer said, once again, that he had made “a mistake.” By way of explanation, Cramer said that he had mixed up Dendreon’s treatment, Provenge, with Provaisic, the fictional drug from the 1993 Hollywood movie “The Fugitive,” in which Harrison Ford plays a doctor trying to expose an evil pharmaceutical company called Devlin MacGreggor.

But Cramer, again drawing upon his vast medical expertise, continued to insist that Provenge remained unlikely to gain FDA approval.

By this time, a number of bloggers and stock market observers had noted that Cramer, a former hedge fund manager, had recently made a video available to a limited number of high-paying subscribers to his financial news website, TheStreet.com. In this video, Cramer advised his viewers – mostly Wall Street operators — to illegally drive down stock prices.

“Maybe you need $10 million capital to knock [a stock] down,” Cramer had said. “It’s a fun game and it’s a lucrative game…By the way, no one else in the world would ever admit that, but I don’t care…Now, you can’t foment…You can’t create yourself an impression that a stock’s down. But you do it anyway because the SEC doesn’t understand it…This is just actually blatantly illegal…But I think it’s really important to foment…You get [the CNBC reporter]…talking about it as if there’s something wrong [with the stock]…Then you would call The Wall Street Journal and get the bozo reporter…if you’re not doing it maybe you shouldn’t be in the game.”

The bloggers and observers who pointed to this video as evidence of Cramer’s skulduggery also noted that Cramer had once planned to run his hedge fund out of the offices of Ivan Boesky, the famous co-conspirator of the criminal stock manipulator Michael Milken. When Boesky was indicted, Cramer instead went to work with Michael Steinhardt, the Boesky-Milken crony and “prominent” hedge fund manager whose father was the “biggest Mafia fence in America” and who was financier for the fugitive billionaire Marc Rich, for whom Steinhardt later arranged a pardon from Bill Clinton.

By 2007, I had (while working as an editor for the Columbia Journalism Review) spent close to a year  studying the work of Cramer and a clique of influential journalists, most of whom had previously worked in high-level positions for Cramer’s website, TheStreet.com. I had discovered that the existence of short-side stock manipulation was denied by these journalists  (including Cramer, when he was communicating to general audiences, as opposed to when he was explaining to select groups of Wall Street operators how to do the thing he was publicly saying does not exist).

The journalists were especially keen to whitewash the crime of naked short selling, and given the threat that this crime posed to so many companies and the very stability of the financial system, it seemed to me that these journalists were engaged in a cover-up of immense proportions.

I had also discovered that these journalists routinely reported negative stories that contained bias, falsehoods, and well-timed “mistakes.” The vast majority of these stories were sourced from one particular network of hedge fund managers and miscreants. Invariably, these stories were about public companies that the hedge fund managers had sold short. And, invariably, these stories were aired right at the time that the target companies were getting bombarded with phantom stock.

Moreover, most of the hedge funds and miscreants in this network seemed, like Jim Cramer, to be connected in important ways to the criminals Michael Milken and Ivan Boesky, or their close associates. One of them was David Rocker.

Last year, Rocker’s hedge fund, Copper River (previously known as Rocker Partners), was shut down. Soon after, Carol Remond, a Dow Jones Newswires journalist who had close ties to Rocker, revealed that Rocker’s most important trading strategy had been to abuse “the Madoff Exemption” allowing market makers to engage in naked short selling (see “Carol Remond Tells a Joke She Doesn’t Get” for details) .

According to Remond, when the SEC closed this loophole, making it more difficult for Rocker Partners/Copper River to work with option market makers to manufacture phantom stock, the hedge fund went out of business. What she left unexplained, however, was that such exploitation was illegal. Therefore, Dow Jones reporter Carol Remond was in fact bemoaning the tragedy that a hedge fund had to close because it was not able to break the law anymore.

Rocker had previously worked as a top trader for Michael Steinhardt, the Boesky and Genovese Mafia crony whose offices had also housed Jim Cramer’s hedge fund. In later years, Rocker became the largest outside shareholder in Cramer’s financial news website, TheStreet.com.

In 2006, staff at the Securities and Exchange Commission suspected that Rocker and other hedge funds in his network were working with an “independent” financial research shop called Gradient Analytics and a select group of journalists to disseminate false information in order to drive down stock prices. The SEC issued subpoenas to Rocker, Gradient, TheStreet.com, Jim Cramer, Herb Greenberg (a founding editor of TheStreet.com who was then working for MarketWatch.com and CNBC), and that Dow Jones reporter, Carol Remond.

In response, Cramer famously vandalized his subpoena on live television. Other journalists (most of them tied to Cramer) went berserk, claiming that Rocker had done no wrong and the SEC’s subpoenas had violated the media’s first amendment right to free speech. Soon after, the SEC said it would not enforce the subpoenas it had issued to journalists. And a year later, the commission dropped its investigation of Gradient and Rocker.

In May of 2006, shortly after the SEC announced that it would not enforce its subpoenas, a recently dismissed SEC attorney named Gary Aguirre wrote an eye-popping letter to the United States Congress in which he stated that he had led an SEC investigation into allegations of rampant naked short selling and insider trading at a hedge fund called Pequot Capital.

Aguirre said that his rank-and-file colleagues at the SEC believed that Pequot’s naked short selling had the potential to “seriously injure the financial markets,” but before he could complete his investigation, Aguirre’s superiors at the SEC, captured by powerful Wall Street interests, had fired him for political reasons.

Since then, a U.S. Congressional Committee has investigated and issued a lengthy report noting that there seemed to be evidence that Pequot was indeed engaged in “stock manipulation” (naked short selling). As for the SEC’s failure to fully investigate Aguirre’s allegations, the Congressional Committee concluded that the “picture is colored with overtones of a possible cover-up.”

The SEC inspector general also issued a report that backed up all of Aguirre’s claims.

Late in 2008, the SEC re-opened its investigation into Pequot Capital. And in May, 2009, Pequot manager Art Samberg shut down the fund, noting that the investigations had made the “situation increasingly untenable for the firm and for me.”

But from what is known publicly, the SEC is only looking into insider trading at Pequot. As for Aguirre’s investigation into Pequot’s alleged naked short selling – the crime that had the potential to “seriously injure the financial markets”—the SEC has said nothing.

Remember, as far as the SEC is concerned, illegal naked short selling is a big secret – “proprietary trading strategies.”

At any rate, it is worth noting that Cramer’s financial news website, TheStreet.com, had several founding partners. One was Cramer. Another was Marty Peretz, a Milken-Boesky crony who was–along with Marc Rich, Boesky, and the Genovese Mafia—a key limited partner of Michael Steinhardt (the hedge fund manager who gave Rocker his start and also incubated Cramer’s hedge fund).

A third founding partner of TheStreet.com was famously alleged to have engaged in rampant illegal naked short selling, just as David Rocker, once the largest outside shareholder of TheStreet.com, was reported (by Dow Jones reporter Carol Remond, unwittingly) to have engaged in rampant illegal naked short selling in cahoots with options market makers.

The name of this third founding partner of Cramer’s website, TheStreet.com, was…Pequot Capital, the hedge fund whose alleged naked short selling and insider trading were the targets of Gary Aguirre’s SEC investigation — the investigation that got quashed, leading to one of the greatest scandals in SEC history.

So it goes almost without saying that Pequot Capital was the fifth of seven “colorful” hedge funds that held large numbers of put options in Dendreon at the end of March, 2007 – right at the time when Cramer was shouting “SELL! SELL! SELL!” and criminal naked short sellers were flooding the market with at least 9 million phantom Dendreon shares.

* * * * * * * *

In addition to Cramer’s rants, there were other indications that Dendreon might be in the sights of some powerful players, and might therefore be in trouble – despite the fact that its treatment for prostate cancer seemed to be on the fast track to FDA approval.

On March 22, 2007, CNBC’s Mike Huckman wrote in a blog that he remembered “sitting at a table at a rare Dendreon analyst meeting a few years ago and someone from a Connecticut hedge fund leaned over and whispered in my ear, ‘It [Provenge] doesn’t work.’” Huckman made no indication of questioning whether the hedge fund might have had a motive for saying that.

There were odd mutterings from other quarters as well. On the day before the FDA’s advisory panel met to vote on Provenge, Matthew Herper of Forbes magazine published an article casting doubts on Dendreon’s prospects. He wrote that “researchers, statisticians and Wall Street analysts are fiercely debating whether there is enough data about [Dendreon’s] radical new treatment.”

In fact, there was no “fierce” debate at all. For most Wall Street analysts, the calculation was rather simple. Given that Dendreon’s trials had shown that Provenge was safe, and given that the treatment was destined for end-stage patients (hence its “priority review” status), the advisory panel was likely to vote in its favor. In 97% of all cases, the FDA had followed the recommendations of its advisory panels. And when FDA advisory panels recommended approval for drugs destined for dying patients, the FDA had accepted its panels’ recommendations 100% of the time.

When the FDA approved treatments, the companies that developed them almost always saw their stock prices go up. So from the perspective of most Wall Street analysts, the future for Dendreon looked bright.

As for those “researchers and statisticians,” most agreed that Provenge was not only safe, but also effective. However, a small number of researchers and statisticians were, along with the hedge funds, whispering in reporters’ ears. They were saying that Provenge doesn’t work.

But there were excellent reasons to doubt the words of the researchers who were critical of Provenge. And, as we will see, the most prominent of them were preparing (with the possible connivance of a criminal “philanthropist” named Michael Milken and seven “colorful” hedge fund managers) to cash in on one of the stranger occurrences in the FDA’s 80 years of existence.

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To be continued….Click here for Chapter 6

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What follows is PART 4 of a 15-PART series. The remaining installments will appear on Deep Capture in the coming days, after which point the story will be published in its entirety.

Click here to read PART 1

Click here to read PART 2

Click here to read PART 3

Where we left off, we had learned that CNBC’s Jim Cramer, who once planned to run a hedge fund out of the offices of Michael Milken’s famous criminal co-conspirator Ivan Boesky, had declared Dendreon to be a “battleground stock.” And we had learned that Dendreon eventually came under a brutal, illegal naked short selling attack, right at the time that an FDA advisory panel voted in favor of the company’s prostate cancer treatment, and right before some strange occurrences were to prevent that treatment from reaching patients.

We had also learned that naked short sales are often “married” to put options (bets against a company), and at the time of the Dendreon attack, in 2007, only ten hedge fund managers on the planet owned large numbers of put options on Dendreon’s stock. Finally we had learned that those imminent strange occurrences (which will be described in due course) might have had something to do with the “philanthropy” of Michael Milken, the famous criminal. Thus, it seemed worth noting that at least seven of those ten hedge fund managers who placed large bets against Dendreon can be tied to Michael Milken or his close associates.

One of the seven hedge funds was the Mafia-connected Bernard Madoff, who orchestrated a $50 billion Ponzi scheme while helping author an SEC loophole that enabled hedge funds to “marry” naked short sales to put options – creating phantom stock “bullets” that could be used to drive down prices. The second of the seven hedge fund managers worked for Lindsay Rosenwald, a Milken crony who once helped manage a Mafia-affiliated brokerage called D.H. Blair.

Now we learn a bit more about D.H. Blair and meet two more of the hedge funds that stood to profit from the demise of Dendreon, a company with a promising treatment for prostate cancer…

* * * * * * * *

D.H. Blair, the Mafia-affiliated brokerage founded by Lindsay Rosenwald’s father-in-law (the so-called “king of stock fraud”) and managed for some time by Rosenwald and Michael Milken’s former national sales manager, received much of its finance from the family of a man named Zev Wolfson. Mr. Wolfson was also closely involved with another Mafia-affiliated brokerage, A.R. Baron.

As you will recall, D.H. Blair and A.R. Baron featured prominently in the prosecution’s case against White Rock Partners, the firm that was co-founded by Felix Sater and Salvatore Lauria. Felix Sater, remember, is the alleged son of a top Russian Mob boss. Lauria previously worked as a trader for Gruntal & Company, a Mafia-affiliated brokerage that was stacked with cronies of Michael Milken.

You will remember that Sater, the fellow alleged to have blood ties to the Russian Mafia, is currently a business partner of Milken crony Leon Black. You will also recall that Sater is allegedly the man who sent a message that the Mafia would murder Deep Capture reporter Patrick Byrne if he continued his crusade against illegal naked short selling. And Sater is the same guy whose naked short selling colleague, Alain Chalem, had his ears and face shredded with bullets.

Wolfson, meanwhile, was involved in another “colorful” brokerage, Pond Equities. In 2006, the SEC filed civil charges accusing Pond Equities of participating in a massive naked short selling fraud.

Aside from funding Mafia-affiliated brokerages, some of which were closely tied to Michael Milken, Wolfson was also the key early investor in funds controlled by a number of Milken’s more “prominent” cronies.  For example, Wolfson was an early benefactor of a “prominent billionaire” named Saul Steinberg.

In the 1980s, Steinberg built a company called Reliance Insurance with generous junk bond financing from Milken. Reliance, in turn, became one of the Milken-aligned financial conglomerates that regularly bought the junk bonds that Milken was selling for his other cronies. In other words, Steinberg was a key player in Milken’s junk bond merry-go-round – one of history’s great Ponzi schemes. Eventually, Steinberg looted and bankrupted Reliance, though he has never been charged with any crime.

Today, Steinberg is a founding partner of Wisdom Tree Investments, which is managed by Steinberg’s son, Jono. Jono is married to CNBC’s Maria Bartiromo, also known as the “Money Honey.” The Money Honey’s father is the former owner of a Brooklyn catering outfit and private club called the Rex Manor. Residents of Brooklyn know the Rex Manor as a popular hang-out for members of the Bonanno organized crime family (a fact that is merely of biographical interest and not meant to imply that Mr. Bartiromo is tied to the Mob).

The other founding partner of Wisdom Tree Investments is Michael Steinhardt, who is one of the nation’s most “prominent” hedge fund managers. As was noted in Chapter 3, Steinhardt’s father, Sol “Red” Steinhardt, worked for the Genovese organized crime family and spent a number of years in Sing-Sing prison after a New York prosecutor pegged him as “the biggest Mafia fence in America.” According to Steinhardt himself, the key limited partners in Steinhardt Jr.’s first hedge fund were the Genovese Mafia and three “prominent investors” – Marty Peretz, Marc Rich, and Ivan Boesky.

Ivan Boesky, we know, was famously indicted in the 1980s for participating in various stock manipulation schemes with Michael Milken. Also convicted for his participation in these schemes was a man named John Mulheren, who had run an arbitrage fund largely financed by Zev Wolfson (the fellow who also financed Saul Steinberg, the Mafia-affiliated brokerages tied to Milken, and other Milken cronies who will be introduced shortly).

Although Mulheren’s conviction for manipulating stocks was ultimately reversed on appeal, there was a time when he believed that Boesky might squeal on him and his friend, Michael Milken. So one day Mulheren loaded his car with weaponry and set out to assassinate Boesky. Fortunately, the police arrested Mulheren before he could commit the murder.

According to a famous book called “Den of Thieves,” written by Pulitzer Prize winning author James Stewart, Mulheren spent most of his time in jail conversing with Anthony “Fat Tony” Salerno, who was then the top boss of the Genovese Mafia family. In addition, Scotland Yard has linked Salerno to Steven Wynn, a Las Vegas casino operator. Wynn’s wife, Elaine, sits on the board of Michael Milken’s Prostate Cancer Foundation. Steven Wynn is Milken’s closest friend, according to Milken.

After he got out of jail, Mulheren co-founded a hedge fund called Millennium Partners, then promptly died of an early heart attack, leaving his co-founder, Izzy Englander, to continue operating the fund. Izzy Englander secured much of his investment capital from not just Zev Wolfson, but also the Belzberg brothers – William, Sam, and Hymie. Executives at an investment firm called the Bache Group, citing U.S. Customs Service reports, once accused the Belzberg’s of having ties to organized crime.

As we know, only ten hedge funds on the planet owned large numbers of Dendreon put options at the end of March 2007, right after Dendreon received the fantastic news that the FDA’s advisory panel had voted that the company’s treatment for prostate cancer should be approved. In other words, after Dendreon received its fantastic news only ten hedge funds were maintaining long-shot bets against Dendreon (long-shot bets that would, in time, prove strangely prescient). At least seven of those hedge funds are quite “colorful” – and all seven are part of the same network.

So far we have discussed two of the seven “colorful” fund managers who stood to profit from the demise of Dendreon. Those two are Bernie Madoff, the $50 billion Ponzi schemer and naked short seller, and Lindsay Rosenwald, formerly a manager of the Wolfson-financed D.H. Blair, which was founded by Rosenwald’s father-in-law (the “king of stock fraud”). Both D.H. Blair and Madoff had ties to organized crime. Both worked intimately with Michael Milken or his closest associates.

So perhaps it is no surprise that the third hedge fund that was betting heavily against Dendreon in March 2007 was Millennium Management, co-founded by John Mulheren–jailhouse confidante of “Fat Tony” Salerno (the Genovese Mafia boss); co-conspirator of Michael Milken; would-be murderer of Ivan Boesky; and recipient, like other Milken cronies and a number of Mafia-affiliated brokerages; of key finance from Zev Wolfson.

Altogether, Millennium owned put options on 800,000 shares of Dendreon at the end of March 2007 – just after the company’s prostate cancer treatment was endorsed by an FDA advisory panel; right at the time that Dendreon came under a blistering illegal naked short selling attack; and just before Dendreon was to experience some strange occurrences.

* * * * * * * *

Let us return to Zev Wolfson. As we know, Wolfson funded D.H. Blair, the Mafia-affiliated brokerage which became the target of a 173 count indictment, saw two vice chairmen please guilty to securities fraud, had a president (Richard Maio) who was once Michael Milken’s national sales manager, and had another vice chairman (the son-in-law of the “king of stock fraud”) who is now one of America’s biggest biotech traders and an adversary of Dendreon.

We also know that Wolfson was the key early investor in funds run by Milken cronies Saul Steinberg (partner of Michael Steinhardt, whose father worked for the Genovese family as the “biggest Mafia fence in America”) and John Mulheren, who spent his jail-time conversing with Genovese boss Anthony “Fat Tony” Salerno, and then co-founded Millennium Management, which later also became an adversary of Dendreon.

In addition, Wolfson was a key early investor in a fund managed by “prominent billionaire” Carl Icahn.

Before he became a “prominent” billionaire, Icahn, remember, founded the options trading department at a firm called Gruntal & Company, which owed its existence to the generous finance that the criminal and future “philanthropist” Michael Milken gave to its parent company, the Home Group. Like Steinberg’s Reliance Insurance, the Home Group was a key player in Milken’s junk bond Ponzi scheme.

As mentioned, Icahn was replaced at Gruntal by Milken crony Ron Aizer, who proceeded to hire as traders two associates of Michael Milken. According to a reliable source, one of those traders was investigated for trading on inside information provided by Milken’s operation at Drexel Burnham Lambert. Both traders are now “prominent” hedge fund managers, and both are important characters in the story of Dendreon, so I will return to them soon.

As also mentioned, Gruntal was caught embezzling millions of dollars. One of its traders was found to be running money for the Gambino Mafia family. And a large number of its traders went on to work for White Rock Partners, the Mafia firm that was indicted for manipulating stocks with help from the Mafia-affiliated D.H. Blair, founded by the father-in-law of Lindsay Rosenwald, who was one of those seven “colorful” hedge fund managers who stood to profit from the demise of Dendreon.

Recall that White Rock also did business with the naked short seller Alain Chalem. Recall also that White Rock’s co-founder Salvatore Lauria has said that he once worried that White Rock’s other co-founder, Felix Sater, might murder Chalem. As we know, Chalem eventually was assassinated in his New Jersey mansion (which does not, of course, prove that Lauria’s fears were correct).

When Icahn left Gruntal, he began a career in “greenmailing” – acquiring large amounts of companies’ stock and threatening to make problems if the companies didn’t buy back the stock at a premium. His greenmailing (a.k.a. blackmailing) exploits were made possible by generous junk bond finance handed to him by Michael Milken. By most accounts, Icahn owes his phenomenal wealth and power to two people – Zev Wolfson (financier to multiple Mafia-affiliated brokerages) and Michael Milken, who is (as should be clear by this point) on close terms with many Mafia-connected investors, and is now considered a “prominent philanthropist.”

Given his association with Milken and Wolfson, it is perhaps predictable that Icahn has relationships with other Mafia-connected goons as well. For example, Icahn once employed a man named Allen Barry Witz, who was later implicated by the U.S. government in a Mafia-run stock manipulation fraud. As it happens, Witz also did business with Alain Chalem, the Mafia-connected naked short seller who was assassinated in New Jersey – his head, face and ears filled with bullets.

According to various reports, Icahn’s former employee, Barry Witz, was one of the last people, other than the killers, to see Chalem alive.

* * * * * * * *

Milken crony Carl Icahn has had multiple brushes with naked short selling. For example, Icahn was the man behind Ladenburg Thalmann, an investment bank that financed many companies through so-called PIPEs – private investments in public equities.

The PIPEs industry is rife with abuse (See Forbes magazine’s story, “Sewer PIPEs,” which describes some of the industry’s ties to the Mafia).  Since PIPEs dilute equity, a company that does a PIPEs deal will typically see its stock fall in value. To capitalize on this, hedge funds affiliated with the PIPEs investor (i.e. with the company’s supposed benefactor) will sometimes illegally naked short the company before and after the PIPEs deal is announced.  Often, this naked short selling sends the stock into a “death spiral,” and the company is put out of business.

In one famous case, Icahn’s Ladenburg Thalmann was hired to broker a PIPEs deal for a small software firm called Sedona Corporation. In this capacity, Ladenburg introduced Sedona to a hedge fund called Rhino Advisors, which in turn brought in a hedge fund called AMRO International. According to prosecutors who later charged Rhino with stock manipulation, as soon as AMRO and Sedona entered into their PIPEs deal, Rhino’s owner Andreas Badian, instructed his traders to naked short Sedona with “unbridled aggression.” Rhino’s other owner, Thomas Badian, is now a fugitive from the law living in Austria.

According to the SEC, Rhino’s naked short selling was conducted in collaboration with Pond Equities (also known as Pond Securities), which was financed by Zev Wolfson, the fellow who also financed all those Milken cronies, including Icahn and the folks at the Mafia-affiliated D.H. Blair.

Most of Rhino’s phantom stock was processed through a giant brokerage called Refco Securities, which was later found to be hiding more than $400 million worth of liabilities in off-balance sheet entities. As Deep Capture reporter Judd Bagley detailed in a recent video (click here to watch), those liabilities were likely related to Refco’s rampant naked short selling.

In a series of stories for The Deal, a financial news magazine, reporter Stacy Mosher determined that Amro International had provided PIPEs financing to over sixty companies, many of them biotech firms. At least 29 of those deals involved Carl Icahn’s Ladenburg Thalmann. Soon after announcing their PIPEs deals, every one of those 29 companies were hit with unbridled naked short selling. Every one of those 29 companies saw their stocks go into “death spirals.” And nearly every one of them quickly went out of business.

Icahn is not the most famous player in the world of PIPEs. That accolade belongs to another of Milken and Wolfson’s charges — Lindsay Rosenwald, one of those seven “colorful” hedge fund managers who stood to profit from the demise of Dendreon.

Rosenwald worked for Ladenberg Thalmann before joining his father-in-law (the “king of stock fraud”) at D.H. Blair, the Mafia-affiliated brokerage whose president was Michael Milken’s former national sales manager. In addition to financing medical companies with no medicines, Rosenwald’s Paramount Capital has done some PIPEs deals with companies that did, indeed, have promising medicines. Many of those companies are now gone — drowned by tsunamis of phantom stock.

* * * * * * * *

As mentioned, Carl Icahn, who would later owe his status as a billionaire to Michael Milken, founded the options department at Gruntal & Company, which owed its existence to Michael Milken.  When Icahn left Gruntal, he was replaced by Milken crony Ron Aizer, who proceeded to hire two traders who are cronies of Michael Milken.

The first trader hired at Gruntal by Aizer was a man named Steve Cohen, who later founded a hedge fund called SAC Capital. Cohen has been described (by BusinessWeek magazine and others) as “the most powerful trader on Wall Street.”

In an upcoming chapter, I’ll name the second trader hired by Aizer. Soon after that trader was hired, Cohen was joined at Gruntal by Stephen Feinberg, who had previously been a top trader for Milken’s operation at Drexel Burnham, and now runs Cerberus Capital Management, which was, until recently, co-owned by J. Ezra Merkin, one of the  most important “feeders” to Bernard Madoff’s Mafia-connected $50 billion Ponzi scheme.

While at Gruntal, Cohen grew closer to Milken, and came to be on especially good terms with one of Milken’s top employees, Bruce Newberg, who was later implicated in Milken’s stock manipulation schemes. A reliable source has told Deep Capture that the SEC once investigated Cohen for allegedly trading on inside information provided to him by Milken’s staff at Drexel, Burnham, Lambert.

Nowadays, Cohen is known for demanding strict loyalty from his co-workers, past and present. Some say that these demands border on paranoia (Cohen’s employees are required to sign non-disclosure agreements swearing them to absolute secrecy – for a lifetime), but many of Cohen’s colleagues have benefited. Cohen’s former employees often move to new hedge funds that are in actuality satellites of Cohen’s powerful trading empire.

Sometimes the hedge funds that are staffed by Cohen’s former employees are initially or wholly financed by Cohen himself. Other times Cohen and the hedge funds staffed by his former employees merely trade in the same stocks. It is fair to assume that, collectively, Cohen, his former employees, and others in his network (traders who are tied to Michael Milken or his close associates) have enough fire power to move share prices.

In the 1990s, Cohen’s SAC Capital sometimes bought stocks that were being promoted by D.H. Blair, the Mafia-affiliated brokerage that figured prominently in the prosecution’s case against White Rock Partners, whose traders were mostly Cohen’s former co-workers at Gruntal. Cohen would hold these D.H. Blair stocks even when they had no revenues and had been delisted from stock exchanges. Generally, these kinds of stocks were held by only two sorts of investors – little old ladies who’d been bamboozled by D.H. Blair, and stock manipulators. But who knows, maybe Cohen did the math and figured they were the next big things.

At any rate, Cohen seems to have had some sort of relationship with the Mafia-affiliated D.H. Blair. But D.H. Blair is gone. In its place, we have Paramount Capital, run by Lindsay Rosenwald, the son-in-law of the “fraud king” who founded D.H. Blair.

One employee of Paramount Capital was Joseph Edelman, who, remember, was simultaneously running one of the seven “colorful” hedge funds that was betting big against Dendreon. Meanwhile, Rosenwald was the controlling shareholder in Cougar Biotechnology, which claimed to have a promising treatment for prostate cancer, though that treatment was (and is) largely untested and years away from recieving FDA approval.

In future chapters, we will begin to ask why Michael Milken’s “philanthropic” outfit, the Prostate Cancer Foundation, went to lengths to promote Milken crony Rosenwald’s untested prostate cancer treatment while seeming to dismiss (and perhaps even seeking to derail) Dendreon, whose treatment had received the overwhelming endorsement of an FDA expert advisory panel and was capable (if it had not been derailed) of saving patients’ lives right away.

Another employee of Rosenwald’s Paramount Capital was a man named David J. Kellman. Mr. Kellman was Paramount Capital’s vice president. Prior to becoming the vice president of Paramount Capital, the hedge fund owned by Lindsay Rosenwald, formerly of the Mafia-connected D.H. Blair, Kellman was a top trader for Steve Cohen’s SAC Capital.

I assume that Steven Cohen has been as diligent about maintaining his relationship with Kellman as he has been with all his former employees (a diligence that some describe as “maniacal”). Presumably Cohen also stays in touch with the folks at Millennium Management, the fund that was co-founded by the fellow who sought to assassinate Ivan Boesky, and later became one of the seven “colorful” hedge funds that owned large numbers of put options in Dendreon.

Over the years, Millennium has employed a number of Cohen’s former traders, including Edmund Debler and Steve Lisi, who ran Millennium’s healthcare trading until 2005, when they set up their own fund, which no doubt served as another satellite of the Cohen empire.

Millennium is a highly secretive fund, so it is difficult to know which of its employees were responsible for its Dendreon trades, but perhaps its current healthcare team, like its previous one, are colleagues of  Mr. Cohen. We do know that Millennium has hired a new vice president. His name is Hanming Rao. And he was previously a top trader for Cohen’s SAC Capital.

Millennium, Paramount, Steve Cohen and others in this network often take similar positions in the same stocks. Many of those stocks have been pummeled by illegal naked short selling.

But I do not know if this has anything to do with Cohen being the fourth of those seven “colorful” hedge fund managers who happened to have the foresight to hold large numbers of put options in Dendreon at the end of March, 2007, right at the time when Dendreon was hit with an unprecedented wave of illegal naked short selling (phantom stock).

Who was responsible for the illegal naked short selling? We don’t know. The SEC keeps that a big secret — “proprietary trading strategies.”

* * * * * * * *

But, to summarize, only ten hedge funds on the planet owned large numbers of Dendreon put options (bets against the company) at the end of March 2007–which was right after the FDA’s advisory panel had endorsed Dendreon’s treatment for prostate cancer; right at the time that the company was hit with waves of illegal naked short selling, and just before a series of strange occurrences (which I will describe in due course) conspired to derail Dendreon’s promising treatment for prostate cancer.

At least seven of those ten hedge fund managers are part of the same “colorful” network.

The first of the seven “colorful” hedge fund managers was Bernard Madoff, who orchestrated a $50 billion Ponzi scheme with considerable help from close associates of the Mafia and Michael Milken while authoring an SEC naked short selling loophole that enabled hedge funds to obtain “married puts” — those phantom stock “bullets” that unscrupulous hedge funds use to drive down prices and destroy public companies.

The second “colorful” hedge fund manager worked for Paramount Capital, owned by Lindsay Rosenwald, the Milken crony who once helped run the Mafia-affiliated D.H. Blair, which was founded by Rosenwald’s father-in-law (the “king of stock fraud”). D.H. Blair’s president was Michael Milken’s former national sales manager. D.H. Blair was also tied by federal prosecutors to the Mafia-run White Rock Capital, whose co-founder and top traders came from Gruntal, a brokerage that had ties to the Mafia and was stacked with Milken cronies, including Steve Cohen. In later years, D.H. Blair seems to have had a trading relationship with Steve Cohen. Then D.H. Blair was indicted on 173 counts of securities fraud, by which point Lindsay Rosenwald had founded Paramount Capital, where one of Steve Cohen’s top traders served as vice president.

The third colorful hedge fund was Millennium Capital, which was co-founded by John Mulheren, who was convicted for manipulating stocks with Michael Milken and once attempted to assassinate Milken’s famous co-conspirator Ivan Boesky. Millennium has employed a number of Steve Cohen’s former top traders, including Hanming Rao, who currently serves as Millenniums’ vice president.

And the fourth of seven “colorful” hedge fund managers who had the foresight to bet big against Dendreon–right when there was every reason to be optimistic about Dendreon, and right before some strange occurrences derailed the company–was Steve Cohen, who (we are told) once faced an SEC investigation into allegations that he traded on inside information provided to him by Michael Milken’s operation at Drexel Burnham Lambert, and is reportedly maniacal about maintaining relationships with former colleagues tied to Michael Milken, and with former employees, such as those who have worked as vice presidents of Paramount Capital and Millennium Management.

Cohen’s lesser known hedge fund, Sigma Capital, held put options on 750,000 shares of Dendreon at the end of March 2007. Another of Cohen’s lesser known hedge funds, JL Advisors, owned 1.3 million shares of Dendreon as of the end of 2006. These shares were dumped sometime before March 31, 2007, contributing to the selling volume that would be created by Paramount Capital employee Joseph Edelman dumping more than 6 million Dendreon shares that he’d recieved by exercising call options  — and by the simultaneous appearance in the marketplace of at least 9 million more phantom shares, the result of rampant naked short selling which the SEC decries as illegal, but refuses to address.

* * * * * * * *

To be continued…Click here for Chapter 5.

If this article concerns you, and you wish to help, then:
1) email it to a dozen friends;
2) go here for additional suggestions: “So You Say You Want a Revolution?“

What follows is PART 3 of a 15-PART series. The remaining installments will appear on Deep Capture in the coming days, after which point the story will be published in its entirety.

Click here to read PART 1
Click here to read PART 2

Where we left off, CNBC’s Jim Cramer had declared Dendreon to be a “battleground stock,” and Dendreon had been attacked by naked short sellers who illegally flooded the market with phantom stock, right at the time when the FDA’s advisory panel delivered the fantastic news that it had voted in favor of approving Dendreon’s prostate cancer treatment.  We had learned that it is impossible to know who was responsible for the phantom stock (the SEC keeps that a big secret), but we do know that, thanks to a loophole that the SEC called “the Madoff Exemption,” phantom stock was often created by “marrying” a market maker’s naked short sales to put options.

We had also learned that in the days after the FDA’s vote, only ten hedge funds on the planet held significant numbers of  Dendreon put options (bets against the company). We had learned that the criminal Michael Milken or his close associates had connections to seven of those hedge funds, and  we had begun to ask whether those seven “colorful” hedge funds knew anything about the strange occurrences that were soon to derail Dendreon, and whether those strange occurrences had anything to do with the “philanthropy” of Michael Milken.

Now we begin to learn the identities of those seven hedge funds…

* * * * * * * *

The first of the seven “colorful” hedge funds that held Dendreon put options (right when Provenge was on the fast track to FDA approval) was Bernard L. Madoff Investment Securities, managed by the Mafia-connected criminal who orchestrated a $50 billion Ponzi scheme while helping the SEC write a naked short selling loophole that came to be known as the “Madoff Exemption.”

According to SEC filings, Madoff owned put options on 180,000 shares of Dendreon as of March 31, 2007, which was two days after the FDA’s advisory panel voted in Dendreon’s favor. That is fewer than the numbers of put options bought by the other six hedge fund managers, but again, the SEC does not require hedge funds to disclose their short selling, so we do not know whether Madoff had a larger short position in Dendreon, along with these puts.

In any case, Madoff’s bet against Dendreon was significant. Given the positive data Dendreon had released and the subsequent vote of the FDA advisory panel, the trading position was not only counterintuitive, it was also (given some strange events which occured shortly thereafter), prescient to a degree one could only describe as “improbable.”  The trade was all the more significant when you consider that only ten traders on the planet owned more than 150,000 Dendreon put options at the time, and at least seven of those traders, including Madoff, are part of a tight-knit network of people who have worked intimately with Michael Milken or his close associates.

It has been widely reported in the media that Madoff’s criminal activity was confined to his fund management business, and that this business did not execute any real trades — that Madoff merely pocketed the money of his investors, all of whom were “victims.” According to the media reports, Madoff’s market making operation was legit.

These claims may well be false. Again, the fact that Madoff was one of only ten people on the planet who owned large numbers of put options in Dendreon suggests a certain degree of foresight (especially when one understands those subsequent strange occurrences, which we will be getting to in due course).  The trade was so counterintuitive, and timed so precisely to coincide with Dendreon’s triumphant news (and the brutal naked short selling attack that accompanied it), that the claim  that Madoff was merely pocketing investors’ money and falsely reporting random trades seems unlikely, given how remarkable this one trade turned out to be.

Madoff had to have meditated on the Dendreon trade. He had to have had information – some reason to record a bet against Dendreon at a time when there was every reason to be optimistic for Dendreon. And if Madoff thought about making this long shot bet against Dendreon enough to report it in his SEC filings, it is likely that he did, in fact, place the bet. That is, he probably purchased those put options. If so, the theory that his Ponzi fund did not execute any trades is false.

A Deep Capture source who has seen some of Madoff’s records says that Madoff’s fund management business was, in fact, executing a great number of trades. According to the source, the fund would place buy orders, and these orders would be filled by Madoff’s market making operation, which would sell  stock to the fund without first borrowing or purchasing it.

In other words, it is probably correct to say that Madoff  stole a lot of his investors’ money, but he seems to have used at least some of that money to generate phantom stock. Why would he do this? There is one obvious explanation: to drive down prices, adding to his short selling profits, and contributing to the profits of his short selling friends.

It is reasonable to speculate that Madoff’s market making operation derived business from executing manipulative naked short sales for unscrupulous hedge funds. After all, remember, the SEC’s so-called “Madoff Exemption” allowed market makers, such as Madoff, to engage in naked short selling. Madoff had a reason for helping write this SEC loophole that bears his name. Perhaps he knew that the loophole would allow him to help high-paying hedge funds create married puts – the phantom stock “bullets” that market makers and hedge funds have used to obliterate stocks.

Consider also that Madoff’s prosecutors note in their case that Madoff funneled at least $250 million from his investment fund to his market making division. I can think of only three reasons for his doing so:

1. the money was used to buy securities — trades that weren’t executed, according to the press; or phantom stock, according to our source;
2. the money came from hedge funds who, far from being victims, were paying off the market maker for helping them generate phantom stock; or
3. the money was used to buy stock that Madoff used to cover some of his open naked short positions.

The authorities have been rather slow to provide details of Madoff’s fraud, but there is other evidence to consider. For example, Madoff’s secretary recently wrote in Vanity Fair magazine that Madoff’s stock loan operations (the division of his brokerage responsible for locating and borrowing shares to be sold short – or, more likely, responsible for  not really locating or borrowing those shares) — was segregated in an area that Madoff called “the cage” – on the 17^th floor of the Lipstick building.

Stock loan operations are integral parts of brokerage businesses. One would normally expect Madoff’s stock loan operations to be housed in his brokerage. But Madoff’s brokerage business was on the 14th floor of the Lipstick building, separate from “the cage” on the 17^th floor, which was home to Madoff’s “Ponzi” fund management business.

Multiple reports (including a recent story in Fortune magazine) state that Madoff was maniacally secretive about the activities on the 17th floor, and kept the employees who worked there strictly isolated from visitors and other employees. This is because the 17th floor was the heart of Madoff’s criminal enterprise. The secretary’s information seems to indicate that this criminal enterprise involved both the fund management business and the stock loan cage (i.e. the division that helped manufacture phantom stock by not actually borrowing shares that were sold short).

As for Madoff’s “victims,” it is clear that some of his investors and “feeders” were to a significant extent participants in his fraud. As Madoff’s chief lieutenant, Frank DiPascali, seems prepared to testify,  Madoff conspired with a few “special” clients to alter the returns that they received on their “investments.”  However much the “special” clients wanted to earn in a given month, Madoff would give it to them.

DiPascali identified one particularly “special” client:  Jeffry Picower, who seems to have  netted around $5 billion from the Madoff scam. Picower gained some renown in the 1980s. At the time, nobody had any idea who he was or where he got his money. He was a big mystery.

Then, one day, it was learned that he was the single largest limited partner in the arbitrage fund run by Ivan Boesky, who was later jailed for being a principal co-conspirator in the stock manipulation frauds of a famous criminal.

That famous criminal is now a “prominent philanthropist,” too.  And his name is Michael Milken.

* * * * * * * *

By most accounts, Madoff had just a few key “feeders”– hedge funds and individuals who raised money to “feed” his  $50 billion Ponzi scheme. For some time, the press suggested that these “feeders” were “victims” of Madoff’s fraud, but in an increasing number of cases, authorities are suggesting otherwise.

A lawsuit filed by the State of Massachusetts against “feeder” fund Fairfield Greenwich makes it clear (by supplying copious transcripts of phone conversations, etc.) that Fairfield had more than an inkling of what was going on in Madoff’s shop. And on June 22, 2009, the Securities and Exchange Commission charged several Madoff “feeders” with securities fraud related to their participation in the Madoff Ponzi. One of those charged was Robert Jaffe, who was also a partner with Madoff in a brokerage called Cohmad Securities. Earlier in his career, Jaffe was found to be running money for the Anguilo brothers, the Boston dons of the Genovese Mafia family.

Madoff’s other key “feeders” have not yet been charged with wrong-doing. Perhaps, they will never be charged. But it is interesting to note that a number of them were close associates of a famous criminal and “prominent philanthropist” named Michael Milken.

One of the most important Madoff “feeders” was Rene Thierry Magon de La Villehuchet, a French aristocrat who worked on deals in the 1980s with Drexel Burnham Lambert, which was the headquarters of Milken’s junk bond and stock manipulation empire. During this time, Monsieur Rene Thierry Magon de La Villehuchet came to know not just Milken, but also Leon Black, who was the head of Drexel’s mergers and acquisitions department.

Most every account of those days suggests that Black was Milken’s closest ally at Drexel. Black argued vehemently that Drexel should not cooperate with Milken’s prosecutors and he defended Milken to the end. Today, there are few people closer to Milken than Leon Black.

After Milken’s crimes bankrupted Drexel, Black joined forces with Monsieur Rene Thierry Magon de La Villehuchet to launch an investment fund called Apollo Management. As you will recall, a certain Apollo Medical was one of the ten hedge funds that owned large numbers of put options in Dendreon. I have not yet been able to determine whether Apollo Management is affiliated with Apollo Medical. Neither Black nor Apollo Medical manager Brandon Fradd returned my phone calls seeking comment.

But we do know that Monsieur Rene Thierry Magon de La Villehuchet provided the initial capital to Leon Black’s Apollo Management. And in its early years, the French aristocrat was Apollo’s biggest fundraiser. Indeed, it is correct to say that in addition to being one of Madoff’s most important “feeders,” Monsieur Rene Thierry Magon de La Villehuchet was Milken crony Leon Black’s single most important business partner.

Unfortunately, in December 2008, soon after the Mafia-connected Madoff turned himself in to the authorities, Monsieur Rene Thierry Magon de La Villehuchet was found in his Madison Avenue office – dead.

They said it was a suicide.

* * * * * * * *

Another of Madoff’s most important “feeders” was J. Ezra Merkin, who managed the Ariel Fund, which seems to have been designed specifically to raise money for Madoff’s fraudulent investment business. In this regard, the New York attorney general has described “Merkin’s deceit, recklessness, and breaches of fiduciary duty…”

While Merkin was “deceitfully” feeding the Madoff Ponzi, he was also a co-owner, along with Steve Feinberg, of Cerberus Capital Management, a fund named after the mythological three-headed dog that guards the gates of Hell.

Previously, Feinberg was a top trader for Michael Milken at Drexel Burnham Lambert. After Drexel, Mr. Feinberg moved (on Milken’s recommendation) to a brokerage called Gruntal & Company.

Gruntal owed its existence to the generous junk bond finance that its parent company, the Home Group, received from Michael Milken. Its options department was founded by Carl Icahn, who later became a “prominent” billionaire owing to the junk bond finance that he received from Michael Milken.

When Icahn left Gruntal, he was replaced by a Milken crony named Ron Aizer, who proceeded, on the recommendation of Milken, to hire two traders.

The first trader hired by Aizer was, according to a reliable source, investigated by the SEC for trading on inside information that he received from Milken’s operation at Drexel Burnham Lambert. This trader is now a “prominent” billionaire and the manager of a well-known hedge fund. The second trader hired by Aizer is now also a “prominent” hedge fund manager, though he is not quite a billionaire. Both of these traders play important roles in the story of Dendreon. Carl Icahn, the founder of Gruntal’s options department, has a cameo role, too.

So I will return to all three – the two former Gruntal traders and Icahn – in upcoming chapters.

* * * * * * * *

I know people who used to work at Gruntal. They are honest people who have gone beyond the call of duty to contribute to Deep Capture’s reporting. They also confirm that Gruntal’s New York operation (as opposed to some of its offices in other states) was among the more disreputable brokerages in America. As Fortune magazine once put it, Gruntal was firmly situated on the “shabby side of the Street.”

Gruntal’s senior vice president, Maurice B. Gross, was found to be running money for Thomas Gambino, a capo in the Gambino Mafia family. Another New York Gruntal trader, Samuel Israel III, later launched his own hedge fund, and in 2008, it emerged that this hedge fund was the largest Ponzi scheme in history. Israel was charged on multiple counts of fraud, and briefly faked his own suicide before handing himself over to the authorities.

Soon after, the Mafia-connected Bernard Madoff admitted to running a $50 billion Ponzi scheme, so Israel’s Ponzi scheme was no longer the largest in history. It was the second largest. The third largest Ponzi scheme, remember, was orchestrated by Reed Slatkin, the criminal who was a limited partner in Apollo Management, which was one of those ten hedge funds that owned large numbers of put options in Dendreon.

It has been reported that Israel ran his Ponzi scheme with help from “feeders” who had ties to the Genovese Mafia family. So it is perhaps noteworthy that after he left Gruntal, and before he started his own criminal operation, Israel worked for JGM Management, a hedge fund owned by “prominent” investor Michael Steinhardt. As Steinhardt belatedly admitted a few years ago, his father, Sol “Red” Steinhardt, once worked for the Genovese Mafia family. Steinhardt Sr. spent a number of years in Sing-Sing prison after a New York state prosecutor pegged him as the “biggest Mafia fence in America.”

* * * * * * * *

The key limited partners in Steinhardt Jr.’s first hedge fund, Steinhardt Partners, were the Genovese Mafia family, Ivan Boesky, Marc Rich, and Marty Peretz.

Ivan Boesky, was, of course, the famous co-conspirator in many of Michael Milken’s stock manipulation schemes. As noted, Boesky’s biggest investor and limited partner was Jeffry Picower, the mysterious “special” client of the Mafia-connected Bernard Madoff — who authored one of the SEC’s naked short selling loopholes, orchestrated the largest Ponzi scheme in history, and held 180,000 put options in Dendreon.

Steinhardt’s other key limited partner, Marc Rich, was eventually indicted for tax evasion and trading with Iran and Libya. He fled to Switzerland, where he has ever since lived as a fugitive from U.S. law. Rich later received a pardon from Bill Clinton for some of his crimes, but he remains in Switzerland, from where he now runs a securities and commodities trading empire.

According to the Vanity Fair article written by Bernard Madoff’s secretary, Rich was one of the last people with whom Madoff met before handing himself over to the FBI. Given that Rich avoids travel to the U.S. for fear of certain arrest (for those crimes  not covered by Bill Clinton’s generous pardon), it would appear that Madoff, in the days immediately preceding turning himself over to U.S. law enforcement, made time to visit Rich in Europe. Apparently, before going away for what he likely knew would be the rest of his life, Bernie Madoff had something vitally important to discuss with Rich.

Steinhardt’s third key limited partner, Marty Peretz, was later a co-founder, along with CNBC’s Jim Cramer and a certain hedge fund (which I will soon name), of TheStreet.com, a financial news website. Cramer, a former hedge fund manager, once planned to run his business out of the offices of Milken co-conspirator Ivan Boesky. When Boesky was indicted, Cramer instead ran his hedge fund out of the offices of Michael Steinhardt.

A lot of names have been thrown at the reader. But stick with me, for I think you will come to see that these relationships matter. And I think you will come to agree that most of these people –Bernard Madoff, those two Gruntal traders (whom I will soon name), Jim Cramer, Michael Steinhardt, Carl Icahn, Marty Peretz, that hedge fund manager who co-founded TheStreet.com, Michael Milken, and some folks who are tied to the Mafia – deserve prominent mention in the story of Dendreon.

* * * * * * * *

So, again, as far as we can ascertain from public records, there were ten hedge fund managers on the planet who were betting heavily against Dendreon as of March 31, 2007, shortly after the FDA advisory panel put Provenge on the fast track to approval, and during the time that Dendreon was under an unprecedented, illegal naked short selling attack, and right before Dendreon would be derailed by some strange occurrences. Seven of those ten hedge fund managers are quite “colorful,” all are part of the same network, and one of them was Bernard Madoff.

The second of the seven “colorful” hedge fund managers was…as a prelude to introducing the second “colorful” hedge fund manager, it helps to understand some things about a man named Felix Sater, who is alleged (by a former business partner and other reports) to be affiliated with the world’s most murderous organized crime outfit – the Russian Mafia.

In the early 1990s, Sater (who has since changed the spelling of his name to Satter) was charged with aggravated assault after he stabbed a fellow broker in the face with the broken stem of a wine glass. Soon after, he founded, along with a man named Salvatore Lauria, a brokerage called White Rock Partners.

Lauria had previously worked as a trader for Gruntal & Company, the brokerage that owed its existence to generous junk bond financing from Michael Milken – the same brokerage whose options department was founded by Milken crony Carl Icahn, later replaced by Milken crony Ron Aizer, who quickly hired two Milken cronies, both of whom, we will see, figure prominently in the story of Dendreon.

In the mid-1990s, several of Gruntal’s top managers were accused of embezzling millions of dollars. The managers were indicted and Gruntal agreed to pay $6.5 million in fines – one of the stiffest penalties that had ever been levied by the Securities and Exchange Commission. Around this time, many of Gruntal’s traders moved to White Rock Partners, the firm run by Salvatore Lauria and Felix Sater. According to Lauria, former Gruntal employees accounted for much of White Rock’s staff, and became White Rock’s top-earning traders.

This information can be found in a book called “The Scorpion and the Frog,” which was co-authored by Salvatore Lauria himself. Also in this book, Lauria states that Sater – to whom Lauria gives a pseudonym, “Lex Tersa” – is the son of a high level boss in the Russian Mafia. The name of Sater’s father is Mikhail Sater.

Lauria also writes about the time when he believed that Felix Sater might murder a man named Alain Chalem, who was the boss of Toluca Pacific, a Mafia-controlled brokerage that was then one of the most notorious naked short selling outfits on the Street. Toluca and White Rock and previously worked together, but Sater was angry that Chalem had begun to sell short a stock that Sater was trying to pump.

Fortunately, says Lauria, Sater didn’t end up killing Chalem.

But not long after, several men arrived at Chalem’s New Jersey mansion. The men told Chalem to kneel down on the floor. Then the men fired several rounds of bullets – one bullet into Chalem’s chest, one bullet into Chalem’s forehead, one into Chalem’s face, and a number of bullets into each of Chalem’s ears. According to a man who was with Chalem just hours before his death, the murder was the work of the Russian Mafia.

And it involved a dispute over naked short selling.

* * * * * * * *

In the late 1990s, the FBI launched Operation Uptick, which resulted in the arrest of more than 120 Wall Street stock manipulators linked to organized crime – the biggest Mafia bust in FBI history. That effort led to other operations and many more cases that collectively came to be known at the FBI as the “Mob on Wall Street” campaign. In one such case, prosecutors charged that Felix Sater’s White Rock Partners was tied to Russian mobsters and the Italian Mafia and had engaged in multiple stock manipulation schemes.

According to the prosecution’s case (in which Sater was named as an “unindicted co-conspirator”), the Mafia thugs who worked with White Rock included Frank Coppa, who was a capo in the Bonanno Mafia family; Edward Garafola, a soldier in the Gambino Mafia family; and Ernest Montevecchi, a soldier for the Genovese Mafia family. The prosecutors described White Rock as employing threats of physical violence and other forms of thuggery.

Nowadays, Sater is the behind-the-scenes owner of the Bayrock Group, a real estate development company. Among his 11 partners in this venture are a number of  investment fund managers who are tied to Michael Milken. Most notable of Sater’s business partners is Apollo Real Estate Advisors, which is run by Leon Black.

As you will recall, Black was Milken’s closest ally at Drexel Burnham Lambert, and started Apollo Management with considerable help from Monsieur Rene Thierry Magon de La Villehuchet, who was one of the most important “feeders” to the Ponzi scheme run by the Mafia-connected Bernard Madoff (who authored the SEC’s naked short selling loophole and owned 180,000 put options in Dendreon).

In 2005, Deep Capture reporter Patrick Byrne began a crusade against the crime of naked short selling. A few months later, while working as an editor for the Columbia Journalism Review, I began work on a story about the naked short selling scandal, and started asking a lot of questions about the ties that bind various hedge funds to Michael Milken and his famous co-conspirator, Ivan Boesky.

In the fall of 2006, I received several threats and was once ambushed by three men, punched out, deposited on my doorstep, and told to stay away from Patrick Byrne. Soon after, Deep Capture reporter Patrick Byrne met with an off-shore businessman who had once worked in the world of Mafia-controlled brokerages, but had since reformed himself and begun to help with our investigation.

This businessman told Patrick that he had received a message. And the message was that the Russian Mafia was going to murder Patrick, and possibly those close to him, if Patrick did not end his crusade against naked short selling.

According to the off-shore businessman, this threat was conveyed by Felix Sater – alleged son of a top Russian Mob boss; former co-owner of the Mafia-infested White Rock Partners; and business partner of Michael Milken’s closest crony, Leon Black.

* * * * * * * *

In their case against Felix Sater’s White Rock Partners, prosecutors noted that the firm not only employed threats and had ties to the Mafia, but also manipulated stocks in close cooperation with other Mafia-affiliated brokerages. According to the prosecutors, White Rock was tied directly to two specific Mafia-affiliated brokerages – A.R. Baron and D.H. Blair.

Again, I apologize for throwing so many names at the reader, but it is worth remembering this name: D.H. Blair.

D.H. Blair was perhaps the dirtiest operator on Wall Street. In various indictments and investigations, the SEC and the U.S. Attorney’s Office in Manhattan determined that D.H. Blair was at the center of a network of Mafia-affiliated brokerages that included not only Felix Sater’s White Rock Partners, but also Toluca Pacific (the brokerage run by the naked short seller who had bullets shot into both of his ears) and notorious Mafia outfits such as A.S. Goldmen, J.W. Barclay, F.N. Wolf, Stratton Oakmont, Parliament Hill Capital, J.T. Moran, and R.H. Damon.

The founder of D.H. Blair was a man named J. Morton Davis. In his heyday, Davis was known as a “prominent” investor and the “king of penny stocks.” He has yet to be convicted of a crime. But given the subsequent revelations about his firm, it is not surprising that some people now call him the “king of stock fraud.” D.H. Blair was eventually indicted on 173 counts of securities fraud.

Until 1995, the president of D.H. Blair was a man named Richard A. Maio. Prior to joining the Mafia-affiliated D.H. Blair, Maio was a top employee of Michael Milken, the famous criminal and future “philanthropist.” Maio’s deputy at D.H. Blair, Eric Siber, was also a former employee of Milken. At various times both Maio and Siber had been national sales managers for Milken’s operation at Drexel Burnham Lambert.

In 1998, as the FBI was closing in, D.H. Blair went out of business. In 2000, not only was the firm itself indicted on 173 counts, but some of its top executives pled guilty to additional counts of securities fraud. These included two D.H. Blair vice chairmen — Alan Stahler and Kalman Renov — both of whom were sons-in-law of Davis, the founder.

But by then, the Milken boys had scooted. Another top executive of D.H. Blair also avoided prosecution. His name was Lindsay Rosenwald.

Rosenwald was the third son-in-law of D.H. Blair’s founder, J. Morton Davis – the so-called “king of stock fraud.”

Rosenwald was also the third vice chairman and director of finance of D.H. Blair – that is, the third vice chairman of the dirtiest Mafia-affiliated brokerage on Wall Street.

And in March 2007, Rosenwald was the second of those seven “colorful” fund managers who were positioned to profit from the demise of Dendreon, a little company with a promising treatment for prostate cancer.

* * * * * * * *

Lindsay Rosenwald may be the son-in-law of “the king of stock fraud.” And he was once the vice chairman of D.H. Blair, a firm affiliated with the Mafia – a firm that was run by two former top lieutenants of Michael Milken before it found itself at the center of one of the biggest Mafia investigations in the history of the FBI and on the business end of a 173-count federal indictment.

But never mind — Mr. Rosenwald is now a “prominent investor.” In fact, he is not just a “prominent investor”— he is one of America’s biggest biotech investors, if not the biggest biotech investor.

D.H. Blair was known for investing in biotech companies, pumping their stocks, and then short selling them out of existence. Many of those companies were frauds that were nowhere close to producing any medicines.

Rosenwald is more sophisticated. He invests in companies that have real scientists experimenting with real drugs. But in an overwhelming number of cases, these companies prove to have nothing to bring to market. The companies churn out lots of press releases heralding medical breakthroughs, and their stock prices soar. But ultimately they announce that, in fact, their experiments have failed. By the time the bad news hits, Rosenwald will typically have sold all of his stock.

While Rosenwald promotes medical companies that are nowhere near delivering real medicines, hedge funds affiliated with Rosenwald sometimes bet heavily against competing companies that do have medicines. The hope seems to be that the demise of competing companies with promising treatments will increase the market value of Rosenwald’s not-so-promising companies.

That may partly explain Dendreon’s tribulations.

With the exception of big pharma, there are only a few biotech firms that have received significant publicity for developing treatments for prostate cancer. One of these companies, Cougar Biotechnology, was, until last month, controlled by this Lindsay Rosenwald, who aside from running D.H. Blair in cahoots with people tied to the Mafia and Milken’s former national sales managers, is also a close friend of Milken himself. While Rosenwald was in control, Cougar Biotechnology’s scientific advisory board also included four individuals affiliated with Milken’s Prostate Cancer Foundation – Dr. Eric Small, Dr. Michael Carducci, Dr. Philip Kantoff, and Dr. Howard Scher.

Cougar’s prostate cancer treatment was and is in the early stages of development. It is nowhere close to receiving FDA approval. I believe that the scientists and doctors whom Cougar hired to conduct trials into its treatment are earnest about their work. But judging from Rosenwald’s record, it is possible that Cougar’s business model was not to bring a treatment to market – but rather to exaggerate the importance of data obtained in trials, pump the stock, then sell before the trials proved that the drug did not work.

This plan would benefit from forming a scientific advisory board comprised, with help from Milken’s “philanthropy,” of illustrious medical scientists who might not understand how the stock market game is played.

In any case, Cougar has been promoted (by Milken’s Prostate Cancer Foundation and Cougar) as having a treatment that is a preferred alternative to Dendreon’s. Any Dendreon achievement would negatively affect Cougar’s stock price. Which might explain why a Rosenwald-affiliated hedge fund mauled Dendreon in the days before and after the FDA’s advisory panel voted that Dendreon’s promising treatment should be administered to patients.

As of the end of March, 2007, a hedge fund called Perceptive Advisors held more than 600,000 put options in Dendreon. Perceptive Advisors is run by a man named Joseph Edelman. As of 2008, Edelman was still identifying himself (when donating to political campaigns, for example) as an employee of Paramount Capital, which was founded by Rosenwald. To summarize: Lindsay Rosenwald founded Paramount Capital, which had an employee named Joseph Edelman, who was simultaneously managing Perceptive Advisors, so we can reasonably surmise that Perceptive Advisors is an adjunct of  the Rosenwald biotech trading empire.

SEC filings show that at the end of March, 2007, Perceptive Advisors held not just puts, but he also held call options on a whopping 6.2 million shares of  Dendreon. Call options are usually a bet that a stock will increase in value. But don’t let this fool you.

According to brokers familiar with his strategy, Edelman worked like this: He bought massive numbers of call options at rock-bottom strike prices. When Dendreon’s stock began to soar in value, Edelman exercised the calls, at which point his broker had to sell him an equally massive number of shares at the rock bottom price. These Edelman would quickly dump, flooding the market with massive selling volume and putting downward pressure on the stock. Meanwhile, according to the brokers, Edelman sold short massive amounts of Dendreon’s stock, profiting from all the selling volume.

I called Edelman and asked him if he was short selling Dendreon while flooding the market with stock from his call options. He did not deny that he was short selling the company, but he hung up on me before I could ask any more questions.

In any case, the strategy I describe above is technically legal. It’s legal so long as Edelman was not colluding with other hedge fund managers, all of whom happened to be generating massive selling volume at precisely the same time. And it’s legal as long as he was not engaged in naked short selling, or, equivalently, conspiring with a market maker to create married puts to synthesize those phantom stock “bullets” that unscrupulous hedge funds spray into the market to drive down stock prices.

As to whether Edelman was in fact either directly naked short selling, or indirectly generating phantom stock by colluding with his option market maker, the brokers are staying mum. The SEC is unlikely to say much either.

As far as the SEC is concerned, remember, illegal naked short selling is a big secret – a “proprietary trading strategy.”

* * * * * * * *

To be continued…Click here for Chapter 4

If this article concerns you, and you wish to help, then:
1) email it to a dozen friends;
2) go here for additional suggestions: “So You Say You Want a Revolution?“

What follows is PART 2 of a 15-PART series. The remaining installments will appear on Deep Capture over several weeks, after which point the story will be published in its entirety. It is a story about the travails of just one small company, but it describes market machinations that have affected hundreds of other companies, and it contains a larger message for anyone concerned about the “deep capture” of our nation’s media and regulatory bodies.

Click here to read PART 1

Where we left off, CNBC’s Jim Cramer had trashed Dendreon while declaring it to be a “battleground stock.” This seemed to foretell a series of brutal attacks that involved  illegal naked short selling and other familiar weapons of the “battleground.” As we will see, these attacks have helped prevent Dendreon’s prostate cancer treatment from reaching patients. As we will also see, most of Dendreon’s known detractors–including hedge funds betting against the company’s stock and Cramer himself–have ties to the famous criminal Michael Milken or his close associates. Meanwhile, there are serious questions to be asked about the precise nature of Milken’s “philanthropy” — specifically his Prostate Cancer Foundation…

* * * * * * * *

In January 2007, some 15 months after CNBC’s Jim Cramer announced that the FDA had rejected Provenge (even though the agency had not yet reviewed Provenge), the FDA assigned “priority review status” to Dendreon’s application to have the drug approved. Such status is typically granted to drugs whose trials suggest that they can significantly improve the safety or effectiveness of treating a serious or life-threatening disease. Some weeks after receiving “priority review status,” Dendreon announced that an FDA advisory panel would meet on March 29 to vote on whether its treatment for prostate cancer should be approved.

FDA advisory panels are made up of doctors and scientists who are employed on a one-time basis to review a new drug. Their decisions are not binding, but in 97 percent of all cases, the FDA follows the advisory panel’s recommendations. Given that Dendreon’s data results had been strong enough to cause the FDA to fast-track things by granting “priority review status,” it was widely expected that the advisory panel would vote in favor of Provenge, and that the drug would get FDA approval soon after. This was very good news.

Normally, this would be a time for short sellers to close out their trades. Companies receiving priority status (moving them down the road to FDA approval) generally see their stocks soar in value, and typically the prices stay at peak levels, at least until the companies present plans for how they are going to bring their drugs to market.

But in the middle of that March, there was a strange occurrence: short selling in Dendreon began to increase at an unprecedented rate. Illegal naked short selling increased as well.

SEC data shows that on March 16, 2007, over 1 million Dendreon shares “failed to deliver” – because they were sold short by people who did not possess any shares. That is, these naked short sellers took investors’ money but delivered…nothing.

The numbers rose steadily, so by March 28, the day before the advisory panel vote, more than 9 million phantom shares were circulating in the market. And consider that the SEC data might understate “failures to deliver” by factors of ten or more. So by that point the market may actually have been flooded with about 90 million phantom shares – in a company that had only 100 million shares outstanding.

On the night of March 28, 2007, Cramer commented on Dendreon again. He did not mention the phantom stock  (in May, 2008, he began a “crusade” against naked short selling, but he started this “crusade” just one day after he was exposed by Deep Capture as a central player in a media cover-up of the naked short selling scandal). Instead, Cramer offered the long-shot prediction that the FDA advisory panel would not approve Provenge. He advised Dendreon’s shareholders to “SELL, SELL, SELL!!!”

This was the “battleground.” And Dendreon was under attack.

* * * * * * * *

The next day—March 29, 2007–the FDA’s advisory panel decided overwhelmingly in Dendreon’s favor. Every one of the 17 scientists and doctors on the panel voted that Provenge was safe, and 13 of the 17 panelists voted that there was substantial evidence that the treatment effectively lengthened the lives of prostate cancer patients.

As you will recall, the FDA had followed the recommendations of advisory panels in 97 percent of all cases. So at this point it seemed extremely likely that Provenge was on the fast track to approval. Most experts expected that Dendreon could begin delivering its treatment to prostate cancer patients within six months. The company’s stock price, which the short sellers had depressed to $4 before the panel vote, now soared.

By April 13, Dendreon was worth around $20 a share.

But the short sellers did not relent. The more the stock rose in value, the more they piled on, flooding the market with still more phantom stock. On the day after the advisory panel meeting, at least 9 million phantom shares were sold, according to the SEC’s unforgivably incomplete data. During the following two weeks, between 9 and 10 million shares were “failing to deliver” on any given day. And on one day, April 13, overall short interest in Dendreon rose to 32 million shares – from just 8 million shares a few hours before.

By any reckoning, this was sheer insanity. Given Dendreon’s prospects for FDA approval, it seemed like the short sellers were flushing money down the toilet. Some observers racked it up to psychology – the short sellers had grown emotionally tied to their positions, and simply could not give them up.

But I offer several other possible hypotheses, which are all mutually compatible. The first is that the short sellers believed that they could generate enough phantom shares to drive the stock price back down, despite Dendreon’s fantastic news. The second is that the short sellers were aware that there was about to be released a wave of lopsided negative financial research and media reports (including more from Cramer) that they expected would crack the stock.

And the third explanation is that the short sellers who made this long-shot bet perhaps knew something that the rest of the world did not. They perhaps knew that some strange occurrences were imminent, and that these strange occurrences would diminish Dendreon’s prospects. And given the especially sharp increase in short selling on the morning of April 13, they might have expected that the strange occurrences would begin on that particular day.

Alas, something strange would indeed occur later on April 13, 2007. And after that, there was another strange occurrence – then still more strange occurrences, one after the other until it seemed that Dendreon and its treatment for prostate cancer would no longer exist.

I will describe these strange occurrences, but first we must understand a bit more about a network of smooth market operators and a “prominent philanthropist” named Michael Milken.

* * * * * * * *

As mentioned, we do not know who was responsible for the illegal naked short selling of Dendreon. The SEC keeps that a secret.

But while the SEC is of no help, most any Wall Street broker can describe several “proprietary” strategies that are popular with unscrupulous hedge funds.

One such strategy is known as a “married put.” Normally, a hedge fund buys from a market maker a certain number of put options—the right to sell a stock at a specified price at a specified date. If on that date the stock has lost value to the point it is below that specified price, the buyer of the put option (the hedge fund) makes money, and the seller (the market maker) loses money. To hedge the risk that he might lose money, the market maker, at the same moment that he sells the put option,  also short sells the stock. This is perfectly legal.

But some market markers conspire with hedge funds to drive the stock price down. Instead of merely shorting the shares into the market, the market maker naked short sells the shares, and, importantly, sells those phantom shares to the same hedge fund that bought the puts. As a result, the hedge fund manager winds up with the puts and a matching number of shares (actually phantom shares that are never delivered to him, but about which he never complains, or forces delivery, as that would create upward pressure on the stock, the precise opposite of what he wants).  Because the puts and the phantom shares are equal in number and arrive together at the hedge fund, they are known as “married puts”.

Once in possession of the phantom shares, the hedge fund manager proceeds to fire them into the marketplace. But he is able to say that he never naked shorted because all he has done is sold the shares that he bought (wink wink) from the market maker.

Either way, the effect is to flood the marketplace with phantom stock. The hedge fund makes money. And the market maker is rewarded with more business selling married puts.

Incidentally, the fee charged for such puts do not follow any normal option model pricing (in fact, the exchanges search for married puts by looking for options that are mispriced in relation to Black-Scholes, the standard formula that prices options). That is because their pricing is not really a function of any math or statistics, but is a function of the willingness of the hedge fund to pay the option market maker to help him break the rules against naked short selling. And that willingness is a function of how difficult it is for the hedge fund to use other loopholes to break those rules.

In the slang of Wall Street, these married puts are known as “bullets.” Through their maneuverings, the option market maker and hedge fund manager synthesize a naked short position that puts “bullets” into the hands of the hedge fund. The hedge fund fires those “bullets” at the stock to make it collapse, timing the last “bullet” to fire as the hedge fund’s put option expires profitably. If the option position nears expiration and looks like it will expire at a loss (“out of the money”), the hedge fund manager goes back to the option market maker, and together they reload by synthesizing more “bullets.”

Until recently, this behavior flourished owing to the “Madoff Exemption” – a rule that the SEC named after a “prominent” market maker and investor named Bernard Madoff. Mr. Madoff had considerable influence at the SEC, and helped the commission write the rule that carried his name. This was before Mr. Madoff became famous for orchestrating a $50 billion Ponzi scheme with help from the Mafia (CNBC’s Charles Gasparino has reported that Madoff might be tied to the Russian Mafia; whistleblower Harry Markopolis stated in Congressional hearings that Madoff appeared to have ties to the Russian Mafia and Latin American drug gangs; and Deep Capture’s own investigations suggest that Madoff did business with multiple people with ties to both Russian and Italian organized crime).

The “Madoff Exemption” permitted market makers (e.g. Madoff) to sell stock that they did not possess,  so long as they were doing so temporarily to “maintain liquidity.” Abusing that exemption in order to facilitate naked short selling in cahoots with hedge funds looking to drive down stock prices was blatantly illegal, but the SEC looked the other way, even as market makers failed to deliver shares for weeks, months, and even years at a time. If anyone raised a fuss, the hedge funds would say that the phantom shares didn’t originate with them, the SEC would say that stock manipulation is hard to prove, and the market makers would say that they weren’t breaking any rules.

After all, they had a “Madoff Exemption.”

* * * * * * * *

At any rate, in March 2007, with Dendreon seemingly on the fast track to FDA approval, most traders were rushing to buy the company’s shares. A specific set of hedge funds, however, purchased large numbers of put options in Dendreon. Without a subpoena, we cannot say for sure whether the put options they bought were married to naked short sales, but simply from their put activity it is clear that these hedge funds were placing quite large bets against Dendreon, and they maintained these positions even after the FDA advisory panel voted in favor of Provenge on March 29.

What follows is part 1 of a 15-part series. The remaining installments will appear on Deep Capture over the next several weeks, after which point the story will be published in its entirety. It is a story about the travails of just one small company, but it describes market machinations that have affected hundreds of other companies, and it contains a larger message for anyone concerned about the “deep capture” of our nation’s media and regulatory bodies.

This story, like too many others, begins with Jim Cramer, the CNBC personality, making “a mistake.”

On September 26, 2005, Cramer  announced to his television audience the sad news (punctuated by funny sound effects – a clown horn, a crashing airplane) that Provenge, an experimental treatment for prostate cancer, had flopped. Thousands of end-stage patients had been pinning their hopes on Provenge, but according to Cramer the treatment had just been rejected by the Food & Drug Administration. It would never go to market.

This seemed odd, because Dendreon (NASDAQ: DNDN), the company developing Provenge, had not yet submitted an application for FDA approval. As everybody in the biotech investment community knew, Dendreon had, in fact, only recently completed Phase 3 clinical trials and probably would not face scrutiny from an FDA advisory panel for at least another year.

As for the likelihood that the advisory panel would eventually vote in favor of Provenge, the odds looked quite good. The Phase 3 trials had demonstrated that Provenge significantly increased patient survival with only minimal side-effects, such as a few days of mild fever. Moreover, Provenge was an altogether different sort of treatment – one that fought tumors by boosting patients’ immune systems rather than subjecting them to the ravages of chemotherapy.

Provenge was not a magical elixir of life, but Dendreon was doing more than just developing a new technology. It was pioneering a treatment that could revolutionize the way that doctors fight prostate cancer. By some conservative estimates, the market for Provenge alone could reach more than $2 billion a year. If the treatment could be applied to other cancers, the market would be even larger.

The morning after Cramer declared Dendreon and Provenge to be dead in the water, Mark Haines, the anchor of  CNBC’s “Squawk Box” program, apologized for Cramer’s “mistake.” That afternoon, at an important UBS investor conference, Dendreon presented still more promising data. This would normally have given a significant boost to the company’s stock price, but the value of Dendreon’s shares stayed flat for the day, and then began a gradual decline.

This had partly to do with Cramer. The next evening, on his “Mad Money” program, the journalist (or entertainer, or self-confessed criminal, or… whatever Cramer is) acknowledged that the FDA had not yet rejected Provenge, but drawing upon his medical expertise, Cramer maintained that Provenge was not effective. In characteristically level-headed fashion,  he announced that Dendreon shareholders were drunken, carousing, gambling Falstaffs who “might as well take their money to Vegas.”

Dendreon, Cramer added (rather ominously), was  a “battleground stock.”

What Cramer meant by “battleground ” has since become all too apparent. For the past four years, Dendreon has been one of the most manipulated stocks on NASDAQ. During some periods the volume of trading in the shares of this little company has exceeded the trading in America’s largest corporations – a good sign that hedge funds have been churning the stock to move the market.

And with every burst of good news, the company has faced waves upon waves of naked short selling – hedge funds illegally selling millions of shares that do not exist to flood the market and drive down the stock price. Along with the phantom stock, people seeking to diminish Dendreon have deployed false financial research , biased media, bogus class action lawsuits, Internet bashers, dubious science, and other familiar weapons of the “battleground.”

The denouement of this stock market “battle” occurred recently, on April 28, 2009, when Dendreon was to present all-important results at the American Urological Association’s annual meeting in Chicago. Some days prior, Dendreon’s CEO, Mitch Gold, had announced that the results of an Independent Monitoring Committee study were “unambiguous in nature…a clear hit” for Provenge.

If a CEO uses language like that and does not produce the data to back it up, he is guaranteed a visit from the Securities and Exchange Commission. Unless the CEO or his allies have juice with the SEC, the commission will usually charge the CEO with making false statements to pump his stock.  Gold was unlikely to take that risk, so it was clear to most people that the meeting in Chicago was going to be a triumph for Dendreon.

And it indeed it was.  The data presented that day showed that Provenge lowers the risk of prostate cancer death by 22.5 percent, with little or no toxicity. With a few notable exceptions (some of whom are to appear as prominent characters in this story), nearly every medical professional on the planet now concurred that Provenge was a blockbuster drug – one that should receive FDA approval and make Dendreon a highly profitable company.

But the hedge funds weren’t finished. In the days following Gold’s announcement, short sellers piled on with a vengeance, returning Dendreon to the leagues of the world’s most heavily traded stocks. The firm once again found itself on the SEC’s “Reg Sho” list of  companies whose stock was “failing to deliver” in excessive quantities –a sign of illegal naked short selling.

On CNBC, meanwhile, Cramer had hammered Dendreon. On April 6, 2009,  amidst ear-rattling sound effects –dogs fighting, and (inexplicably) a baby crying — Cramer had said “I don’t like Dendreon.”  He had shouted that Provenge had no chance of getting FDA approval and Dendreon shareholders should “SELL! SELL! SELL!”

Then, on April 28, at 10:01  am central time — just hours before Dendreon’s triumph in Chicago – an anonymous message board author on Yahoo! Finance posted this message: “HIGH PROBABILITY OF MASSIVE BEAR RAID…DNDN [Dendreon] could easily drop 50% on a massive bear raid…its coming today@12:30 pm central.”

Just minutes before 12:30 pm central, Dendreon’s stock price began to fall. It didn’t just fall–it nosedived from $24 to under $8 … in 75 seconds.  That’s correct, during a period of 75 seconds, more than 4,000 trades were placed, totaling 3 million shares, or about 50% of Dendreon’s (spectacularly high) average daily volume. Given that the message board poster knew what was coming more than two hours beforehand, and predicted the timing almost precisely, it is a safe bet that this was a coordinated, illegal naked short selling attack. And just in case you still didn’t get this – it caused Dendreon’s share price to lose more than 65% of its value – in just 75 seconds flat.

“My desk was floored,” one trader wrote on a message board. “We all just stood up swearing, headsets and other assorted desk items being thrown at monitors…I haven’t heard that much swearing in years…”

It was, say others, one of the strangest occurrences in Wall Street history.

In fact Dendreon had witnessed even stranger occurrences – brutal naked short selling attacks occurring simultaneously with antics that simply have no precedence in the world of medicine. As will be described presently, these strange occurrences very nearly destroyed Dendreon in 2007.  These strange occurrences have also prevented patients from having access to Dendreon’s treatment – a treatment that, as will become clear, should have reached the market some time ago.

And from the day of that first strange occurrence in September 2005, when Cramer predicted that Dendreon would become a “battleground” stock, to the latest strange occurrence in April 2009, when Dendreon’s stock nosedived by 65% in 75 seconds, more than 60,000 men in the United States died of prostate cancer.

So we must ask: Who did this? Who stood to profit from Dendreon’s demise? Were the extremely odd delays in getting Provenge to market purely accidental? Or, were the remarkable trading patterns and volatility accompanying those delays in fact an expression of stock manipulation, and if so, who were the manipulators?  Since we know that Dendreon experienced naked short selling, and naked short selling is a crime, who are the criminals?  And when much of the medical community rallied around Provenge last month, which manipulators crashed the stock to single digits – possibly to make the company ripe for a hostile takeover by the very people who once sought to destroy it?

It is one of the peculiarities of the Securities and Exchange Commission that while it is ever-eager to hassle CEOs of small companies, it goes to considerable lengths to protect billionaire hedge fund managers. The SEC has publicly stated that naked short selling is a crime. It has said that it has evidence that illegal naked short selling occurs on a large scale and does serious damage to public companies. But it almost never says which hedge funds are responsible. It never says who is flooding the market with  phantom stock.

As far as the SEC is concerned, it’s all a big secret. As the commission states on its website, the naked short selling statistics “of individual firms and customers is proprietary information and may reflect firms’ trading strategies.” It seems not to matter to the SEC that those “proprietary” trading strategies are illegal.

Meanwhile, the SEC does not require hedge funds to disclose even their legal short positions. As a result, it is impossible for any journalist to present photo-perfect portraits of attacks on companies like Dendreon.

But brokers and other sources can tell us who some of the short sellers are. And by analyzing public information (such as data that hints at various hedge funds’ options strategies) we can make educated guesses as to who has the most to gain from a company’s decline. We can also come to understand the relationships that bind certain hedge fund managers and miscreants, and ask whether these people might have been acting in concert.

If the relationships are few in number, or separated by six degrees, we must abandon the project – a spatter of dots on the wall is not a work of art. But if the dots are plentiful, precise, and show a recognizable pattern, then we have something valuable – a sort of pointillist painting of market behavior.

In the case of Dendreon, we have such a painting. And when we look at this painting, with its dozens of data points, we can see quite clearly the familiar smirk of Michael Milken, the famous “junk bond king” and criminal stock manipulator.

During the times when Dendreon has been most evidently a “battleground stock,” nearly every hedge fund known to have placed large bets against Dendreon and a significant number of Dendreon’s detractors — esteemed medical professionals, financial research analysts, government officials, and Jim Cramer himself – have been tied to Milken or his close associates.

Most of the hedge fund managers who appear in this story are part of a tight network that has been in operation – exchanging information, attacking the same stocks, employing the same tactics – for upwards of twenty years. This is the same network that attacked the major financial institutions in 2008, possibly contributing to the collapse of the American financial system. And though I recognize that some people find this hard to absorb, I will present further evidence that a good number of the people in this network have ties to organized crime – the Mafia.

As for Milken, he was released from prison in 1993, at which point he went to considerable lengths to rebrand himself as a “prominent philanthropist.” One of the “philanthropic” outfits that he founded is the Prostate Cancer Foundation, and for this he has received widespread applause from the media, government officials, and the business elite. Because Milken has effectively bathed himself in the glow of his “philanthropy” (and because his public relations machine is so indisputably clever), many people find themselves saying that Milken’s financial crimes were but misdemeanors – the slight over-exuberance of a “market innovator.”

But the Dendreon story raises serious questions about the nature of Milken’s “philanthropy” – and about a society that venerates and even seeks guidance and favor from the most destructive financial criminal the world has ever known.

To be continued…Click here for Chapter 2.

If this article concerns you, and you wish to help, then:
1) email it to a dozen friends;
2) go here for additional suggestions: “So You Say You Want a Revolution?“

Normally we encourage people to quote any DeepCapture piece in full anywhere on the Internet. This time, however, I would appreciate it if people would show Mark Mitchell a little courtesy by not quoting his piece in full. Fair Use, and all that. If you like what you read, try to drive others to DeepCapture to read it. Mark has gone way down the rabbit hole, and I think it only fair to thank him by showing him this respect.

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.

And lastly, to the supporters of Dendreon, including the Care to Live organization, I say: Much honor to you. This piece is much like The Story of Deep Capture, only even better, as it concerns not the travails of some guy in Utah who sells toasters, but those of people trying to cure cancer. It is, you will see, uber-complicated: I hope you print it out, take your time, and enjoy it (if that is possible with so infuriating a tale). It is, I think, the investigative journalism for which you have been waiting, of which our MSM is, by all appearances, no longer capable.

Regards to all,

Patrick M. Byrne

You can get there by clicking here, or via the link at the top of every page on the blog.

At this point, the only live category is one requesting input on how to best structure the rest of the forum, meaning, which categories and subcategories will best accommodate the broadest range of discussion with the greatest amount of focus at the same time. Based on what we see in that thread, we’ll create the basis of a more permanent structure in the next day or so.

In order to minimize forum spammers, you will be required to register on the forum page in order to post. Reading forum posts, on the other hand, is open to everybody.

As the forum grows, we will also be designating administrators. More on that later.

Finally, I hope the forum option will make it easier for folks to keep their comments on the regular blog section more strictly related to the topic at hand.

Now, go have fun!

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The Senator said: “We gotta have people feel that they’re getting a fair share and the market’s on the level…Clearly, every indication is that things went on in terms of short selling – both in Bear Stearns and Lehman Brothers, but in others – where abusive short selling drove the price down and legitimate people in the market got mauled.”

That is to say: rampant naked short selling (hedge funds illegally selling phantom stock to destroy public companies for profit) helped trigger the greatest financial disaster since the Great Depression.

This is a scandal of some magnitude. That is why members of Congress on both sides of the aisle have demanded that the Securities and Exchange Commission take action. But aside from Cramer, the media remains silent. And the SEC is hopeless.

Today the SEC held a special meeting to discuss short selling, and it was a whitewash. The focus was on reinstating the uptick rule, which is precisely where the short sellers wanted the focus to be. No talk of taking the necessary steps to wipe out illegal naked short selling.
Instead, the SEC recommended “caution” in cracking down on the criminals and suggested that new short selling rules (enacted in the midst of last September’s meltdown) are “working.” The new rules are basically the same as the old rules. Whereas previously short sellers were required  to deliver shares within three days, now short sellers are really required to deliver the stock within three days.

This new regime, like the old regime, has several shortcomings. The first is that hedge funds can continue to sell unlimited amounts of phantom shares within the three-day window. During these three days, the stock price naturally tanks, at which point the hedge funds buy the cheapened stock and cover their “short sales” (which are really fake long sales, for no stock was ever borrowed) at a profit. The hedge funds repeat this process over and over, every three days, until the stock is in the single digits and the company’s lenders panic, cutting off credit.

The second shortcoming of the new regime is that hedge funds and their brokers are not, in fact, delivering stock within three days. The SEC’s list of companies whose stock was failing to deliver in excessive quantities shortened considerably after September, but that is partly because the short sellers had finished the job – the market was already destroyed.  As the market recovered from its low in March, the abusive short selling resumed, and the number of companies on the list increased from 55 to around 75 companies today.

Given that nearly every one of those companies are targeted by hedge fund managers who are using a variety of other tricks (spreading false information, scheming to cut off  companies’ access to credit, etc.) it is clear that the failures to deliver are not mere mechanical errors, but the result of strategic, illegal naked short selling. That is, at least 75 companies are getting raped every day and we remain witness to the bizarre spectacle of the sheriff publishing the list of victims while keeping the names of the perpetrators a secret.

Moreover, there are good reasons to suspect that the vast majority of naked short selling occurs in corners of the market (ex-clearing, desk trades; off-shore, etc.) that do not register in the SEC’s published data. The market has recovered some in recent weeks, but it seems just a matter of time before the shorts unleash another round of carnage.

There is only one way to prevent this from happening: force hedge funds and brokers to purchase or borrow stock before selling it. This seems simple enough, yet today’s meeting at the SEC suggests that officials remain captured by the hedge fund lobby, which used to insist that naked short selling never occurred, but now says that the very functioning of free markets depends on the SEC allowing naked short selling to occur.

To support this argument, the short sellers continue to haul out the same few professors who purport to show that naked short selling enhances “market liquidity.” In every case, the reports published by these professors have contained multitudes of cherry-picked statistics and calculations so erroneous that we are left to assume that the professors either slept through seventh grade math or realized at some later stage in life that there is benefit to be derived from spewing balderdash in service to Wall Street’s most powerful billionaires.

As Senator Kaufman put it last night, the short sellers and their professors argue “out of both sides of their mouth…they’re willing to throw any mud against the wall and see if it sticks.” The Senator added that he believes SEC commissioners buy this “market liquidity” nonsense – even as the Senate, the House, the American Chamber of Commerce, the leaders of the nation’s biggest banks, and all of the major stock exchanges have called for an end to naked short selling – simply because the commissioners previously denied the problem existed and now they “don’t want to admit they made a mistake.”

Perhaps the same can be said of some of the nation’s most “prominent” journalists, who churned out countless stories arguing that naked short selling does not occur (only “conspiracy theorists” see phantom stock, the journalists said), but who have been oddly silent on the issue ever since phantom stock helped bring about the near total evisceration of our financial system.

Cramer crusades against naked short selling, but he began doing so only after Deep Capture  implicated him in a cover-up of the scandal. Never mind—I’m glad to have his support, forgiveness for past sins, etc. etc.  But the rest of CNBC, a network over which Cramer wields considerable influence, utters not a word about naked short selling. Better to leave the reporting on the world’s most damaging financial crime to a “reporter” who says “Boohyah!” while pushing buttons that make clownish sound effects.

To allow one of CNBC’s more reputable journalists to report the facts would be to give the facts credence. And to do that would be to admit that CNBC royally screwed up by failing to report the story in the first place.

Same goes for The Wall Street Journal. I know there are reporters at the Journal who understand this issue and its  importance. But how to report on it now? This is the newspaper that described Deep Capture reporter Patrick Byrne’s theories about naked short selling as a cross between “Where’s Waldo and the DaVinci Code.” This is a newspaper that not only vehemently denied that naked short selling was a problem, but published worshipful profiles of the short sellers most likely to have been committing the crime.

How can this newspaper now publish a story – a real investigative story that would show definitively that naked short selling is a very serious problem? The answer is, it’s hard to do without looking mighty stupid.

But The Journal needs to swallow its pride. There is too much at stake.

And what about that other newspaper of record – The New York Times?  How about that paper’s top business columnist, Joe Nocera?  He once told an audience of his media colleagues that “life’s too short” to investigate naked short selling. But he nonetheless found time to write countless articles denying that naked short selling is a problem and covering up other crimes committed by his short selling friends. What can Joe possibly say  now? He could say, “Sorry.” But big time columnists don’t do that.

For reasons I cannot quite fathom, the rest of The New York Times staff  remains silent, too. The only exception is the ever-befuddled Floyd Norris, who wrote a column last week stating that the new regulations seemed to have solved the naked short selling problem. That was different from his earlier contentions that there was no problem to be solved, but the latest column contained much of the familiar goofy-headed logic.

My favorite was Mr. Norris’s assurance that we don’t have to worry about naked short selling because if naked short sellers drive a stock low enough, somebody will step in to buy the company. I doubt most readers need this to be explained, but just in case, I’ll clarify  – it is illegal for naked short sellers to drive a company’s stock price down to single digits so that it can be taken over by some corporate raider. It was illegal and cataclysmic that short sellers aired false rumors about Bear Stearns while selling 13 million phantom shares in the company – never mind that somebody stepped in and bought Bear Stearns after it had been mutilated.

Good grief…I know this is complicated, but one expects more from our top financial journalists. Alas, maybe it’s time to give up on the financial press. Maybe it’s time we call Oprah…Oprah could do better…

Yes, Oprah will understand.

“About a year ago I attended a meeting of the P.E.N. Club, the occasion being the tercentenary of Milton’s Aeropagitica — a pamphlet, it may be remembered, in defense of freedom of the press. Milton’s famous phrase about the sin of ‘killing’ a book was printed on the leaflets advertising the meeting which had been circulated beforehand.

“There were four speakers on the platform. One of them delivered a speech which did deal with the freedom of the press, but only in relation to India; another said, hesitantly, and in very general terms, that liberty was a good thing; a third delivered an attack on the laws relating to obscenity in literature. The fourth devoted most of his speech to a defense of the Russian purges. Of the speeches from the body of the hall, some reverted to the question of obscenity and the laws that deal with it, others were simply eulogies of Soviet Russia… political liberty was not mentioned… Significantly, no speaker quoted from the pamphlet which was ostensibly being commemorated…

“There was nothing particularly surprising in this. In our age, the idea of intellectual liberty is under attack from two directions. On the one side are its theoretical enemies, the apologists of totalitarianism, and on the other its immediate, practical enemies, monopoly and bureaucracy. Any writer or journalist who wants to retain his integrity finds himself thwarted by the general drift of society rather than by active persecution. The sort of things that are working against him are the concentration of the press in the hands of a few rich men, the grip of monopoly on radio and the films…Everything in our age conspires to turn the writer, and every other kind of artist as well, into a minor official, working on themes handed down from above and never telling what seems to him the whole of the truth… In the past, at any rate throughout the Protestant centuries, the idea of rebellion and the idea of intellectual integrity were mixed up. A heretic — political, moral, religious, or aesthetic — was one who refused to outrage his own conscience. His outlook was summed up in the words of the Revivalist hymn:

Dare to be a Daniel
Dare to stand alone
Dare to have a purpose firm
Dare to make it known

“To bring this hymn up to date one would have to add a “Don’t” at the beginning of each line.”

Orwell’s disappointment in the meek conformity of the writers of his day mirrors DeepCapture’s in the business journalists of our own. A close reading of much of what has passed for business journalism in recent years reminds one of nothing so much as Soviet-era artists dutifully churning out dozens of murals of square-jawed workers striding boldly into the future, or hack reporters extolling the virtues of this or that ball-bearing plant, perhaps criticizing the occasional apparatchik who has fallen from favor with the masters, but entirely incapable of independent thought which questions the system itself, a system in whose benefits those reporters derive modest share.

As will be remembered by anyone who experienced that totalitarian era first-hand (as I did, living in mainland China for 12 months in 1983-1984), this ideological correctness generally expresses itself in a eagerness to confront with pronouncements, coupled with an incapacity to engage in even the mildest form of real debate.  I will illustrate this point by publishing an exchange I had some months back with the SABEW Pooh-Bahs, after I had submitted my application to SABEW wearing my DeepCapture.com (”2008 Weblogs Award for Best Business Blog”) journalist’s hat.

———————————————————————————————-

From: Dare, Donna D. [mailto:DareD@missouri.edu]
Sent: Saturday, January 24, 2009 11:49 AM
To: Patrick Byrne
Subject: Regarding Your Application for SABEW Membership

January 24, 2009

Patrick Byrne, Journalist

Deepcapture, LLC

I regret to inform you that your application for membership in the Society of American Business Editors and Writers Inc. has been denied.

The Membership Committee could not ascertain that your primary career responsibilities fit the criteria for membership.  You may submit evidence to support your application, such as story clippings or audio- or videotape.

Criteria for membership in SABEW (as stated in the organization’s bylaws) is as follows:

Membership in the Society shall be restricted to persons for whom a significant part of their occupation involves writing, reporting, editing or overseeing business, financial or economic news for newspapers, magazines, newsletters, journals, books, press or syndicate services, radio or television, online publications, or other media approved by the board and to teachers and students of business journalism or business media subjects at recognized colleges or universities or other organizations approved by the Society’s Board of Governors.  Members may retain full membership status, after being assigned to another news position at news organizations, even if the new position is not directly involved in business news.

If, in the future, you meet the criteria, we would be happy to reconsider your application for membership in SABEW.

If you wish to appeal this decision, please contact the SABEW office at sabew@missouri.edu.

SABEW did not process (and has destroyed) your credit card information submitted with the membership application on 1-18-09.

Thank you for your interest in SABEW.

Sincerely,

Donna Dare

SABEW Membership Coordinator

Ph:  573-882-7862

Email: dared@missouri.edu

www.sabew.org

———————————————————————————————-

From: Patrick Byrne [mailto:PByrne@overstock.com]
Sent: Saturday, January 24, 2009 8:00 PM
To: SABEW; Dare, Donna D.
Subject: RE: Regarding Your Application for SABEW Membership

Donna Dare

SABEW Membership Coordinator

Dear Ms. Dare (& SABEW Membership Appellate Court),

I thank you for the courtesy of your response denying my application for membership in SABEW. Respectfully, however, and per your letter, I am writing to appeal this decision on the grounds that the reason you gave in your letter is not, in fact, supported by the bylaws from which you have quoted. The inconsistency can be seen in these two points:

*    In denying my application you wrote, “The Membership Committee could not ascertain that your primary career responsibilities fit the criteria for membership.”

* The paragraph from your organization’s bylaws you have cited in support of this position reads: “Membership in the Society shall be restricted to persons for whom a significant part of their occupation involves writing, reporting, editing or overseeing business, financial or economic news for newspapers, magazines, newsletters, journals, books, press or syndicate services, radio or television, online publications, or other media approved by the board and to teachers and students of business journalism or business media subjects at recognized colleges or universities or other organizations approved by the Society’s Board of Governors.  Members may retain full membership status, after being assigned to another news position at news organizations, even if the new position is not directly involved in business news.”

As one can plainly see, in denying my application your membership committee has referred to “primary career responsibilities” as the standard. This position is not supported by the bylaws you have cited, which instead state that membership will be restricted “to persons for whom a significant part of their occupation involves…” These are clearly two quite different standards.

You have also written, “You may submit evidence to support your application, such as story clippings or audio- or videotape.” Towards that end, I submit the following:

1.      “The Darkside of the Looking Glass” – This online lecture and PowerPoint explanation of settlement failures in our equity system has been downloaded well over 1 million times, including over ten thousand times from IP’s associated with news organizations, and over 30,000 times from IP’s associated with the federal government.

2.      “Deep Capture: The Movie” – This presentation, performed in October, 2007 in front of 800 hedge funds and members of the press, has been viewed over 50,000 times.

3.      The website I founded, DeepCapture.com , has recently received the 2008 Weblog Award for the #1 Business Blog on the Internet (this is, in fact, the largest blog poll in existence).

4.      My individual writings are organized there as, “Deep Capture: The Explanation”, to which your committee may refer.

5.      Here you will find a selection of over two dozen appearances I have made on CNBC, Bloomberg, and Fox Business.  Some of these relate to my corporate duties, but many of these appearances make little to no reference to those duties, and instead seek my opinions on matters of business and economics.

6.      As you are perhaps not aware, my investigation and exposure of deep systemic problems in our nation’s stock settlement system became the subject of a Bloomberg Special Report that was itself nominated for an Emmy, Long Form Investigative Journalism.

In sum, it is clearly correct to say that “a significant part of [my] occupation involves writing, reporting, editing or overseeing business, financial or economic news for … newsletters, … radio or television, online publications…” For this reason, I respectfully challenge the membership committee’s decision and reasoning, as elaborated upon above.

Of course, I am not blind to the possibility that the content of my reporting (much of which is critical of other members of SABEW) is what discomfits the members of the Membership Committee. However, I have reviewed the bylaws of your organization and find no evidence of an ideological standard which applicants must meet. Please inform me if I am in error on this point.

Until then, I remain,

Your humble servant,

Patrick M. Byrne, PhD

Journalist, DeepCapture.com

———————————————————————————————-

From: Kevin Noblet [mailto:kevin_noblet@hotmail.com]
Sent: Monday, January 26, 2009 9:01 AM
To: Patrick Byrne
Cc: Donna Dare
Subject: RE: Regarding Your Application for SABEW Membership

Patrick:

Donna forwarded your message to me. In SABEW’s view, not all business blogs qualify as news publications just as all writing and editing doesn’t qualify as journalism. From its standpoint your activities and those of DeepCapture seem closer to corporate public relations, and SABEW isn’t open to PR professionals _ or of course to retail business executives.

I hope this makes the decision clearer.

Donna also had forwarded me Judson Bagley’s message and I responded to him along similar lines.

Regards,

Kevin Noblet

Secretary and Membership Committee Deputy Chair
SABEW

From: Patrick Byrne
Sent: Monday, January 26, 2009 4:36 PM
To: knoblet@pobox.com
Cc: Donna Dare
Subject: RE: Regarding Your Application for SABEW Membership

Kevin,

Respectfully, could you explain how DeepCapture is “corporate public relations”? We are performing analyses on data that no one else has obtained; these analyses are requested by national news organizations and numerous congressional reps, senators, and various other federal bodies; our  analyses of flaws in the nation’s settlement system have become fodder for numerous congressional demands of the SEC; our publication of secretly-recorded tapes of journalists planning a cover-up, and our unearthing of emails documenting the relationships among hedge funds and journalists, are apparently of strong interest to many others in this profession (judging from the volume of traffic we get from news organizations).  Clearly, the vast majority of DeepCapture’s activities have precisely 0 to do with my corporate day job as a “retail business executive.”

Is this truly the fig leaf behind which your organization is going to hide? Why not write into the bylaws a rule which demands ideological purity? It would save all this back-and-forth at least.

Regards,

Patrick

———————————————————————————————-

Then, as no answer was forthcoming (or ever came), I then sent this:

———————————————————————————————-

From: Patrick Byrne
Sent: Wednesday, January 28, 2009 1:23 PM
To: ‘knoblet@pobox.com’
Cc: ‘Donna Dare’
Subject: RE: Regarding Your Application for SABEW Membership

Dear Kevin,

Here is some more of that “corporate public relations” you don’t want to miss. This one is from Mark Mitchell.

Strange Occurrences, and a Story about Naked Short Selling

Regards,

Patrick

———————————————————————————————-

Now the truth is, I did not really have a burning desire to join SABEW. To steal a page from Groucho Marx, I wouldn’t want to join any club that would have SABEW members as members.  That said, I thought it would be interesting to find out if a profession which professes a commitment to toleration and pluralism would display the same commitment it asks of society, or would it respond, as SABEW ultimately did, like apparatchiks threatened by the possibility of criticism? I confess that my interest was pretty negligible, so confident was I in the likely result, but I did think it a box worth checking off.

As I mentioned, this past week the SABEW conference in Denver went on without me. Something occurred there, apparently unscripted, which reminds me of the aftermath of Jim Cramer’s appearance on Jon Stewart’s The Daily Show. In any earlier age Cramer’s exposure there would have meant his disappearance from public life and, possibly, the tarnishing of his network beyond recovery, but ours is an age in which shame and accountability are wholly absent (as P. J. O’Rourke wrote, “If you say a modern celebrity is an adulterer, a pervert and a drug addict, all it means is that you’ve read his autobiography.”) Since that night, Cramer has publicly spun his appearance along the lines of, They say we could have done more to see this coming, and in the future we’ll try harder, apparently banking on the fact that many people did not see, or will not remember, what really happened: Jon Stewart dismembered Cramer not for “not trying hard enough”, but instead, for taking part in crimes such as stock manipulation, and for relying upon shill journalists in his schemes to cheat the public. Those are two quite different things, and in any sane world, Cramer would not be permitted to rewrite history so effortlessly.

By press accounts, this past week’s SABEW Denver conference saw the apparatchiks employing the same kabuki dance, the same confessions and self-criticisms directed to the wrong issues. On April 27, this Reuters story appeared (”Did the Watchdog Forget to Bark?” ) describing the scene:

“The opening panel at the Society of American Business Editors and Writers annual meet in Denver addressed an interesting question: Did 9,000 business journalists blow it when it came to ringing the alarm bells on the financial meltdown?

The five SABEW panelists — The New York Times’ business editor Larry Ingrassia, Columbia Journalism Review critic and former Wall Street Journal reporter Dean Starkman, personal finance columnist Jane Bryant Quinn, Emmy-winning former ABC News investigative reporter Allan Dodds Frank and Greg Miller, a professor at the University of Michigan — agreed that the financial press could have done more. Newspapers, wire services, magazines and television stations could have been more aggressive…”

On that same day The Colorado Independent (”A Center for Independent Media”) wrote, “Business Reporters Confess News Sins While the US Economy Collapsed“.

“In a windowless room at the Westin Hotel in downtown Denver, leading business journalists and editors explained how the media “blew it” in covering the economic meltdown. They admitted, on one hand, to falling under the sway of free-market ideology and celebrating risk-taking financial leaders and, on the other, to missing the complex story of the rupturing system by only reporting it in parts and to almost no effect for the past decade.

Although not planned as confession, the discussion, which kicked off the annual conference of the Society of American Business Editors and Writers (SABEW), quickly descended into an unburdening, with the panelists taking turns voicing their own explanations and excuses for the failure. Former Wall Street Journal managing editor and current ProPublica.org chief Paul Steiger moderated the impromptu journalistic penitence.

‘We drank the Kool-Aid,’ said Jane Bryant Quinn, personal finance columnist for Bloomberg and Newsweek. ‘We believed that free markets were the best kind [of markets].’ She said it had become ‘unfashionable’ over the last three decades to write about regulation, so they didn’t.”

Apparently, as far as SABEW’s membership is concerned, the events of recent months reflect only a lack of being suitably “aggressive”, of not “hav[ing] done more”, and, as always, of having been taken in by “free-market ideology.” Those are the issues over which SABEW members now wring their hands, it being apparently unthinkable (just as it is with Jim Cramer) that some of their membership deeply transgressed all notions of journalistic ethics by growing so close to favored hedge fund sources that they became shills (e.g., Bethany McLean), and when their sources committed crimes, those journalists threw the credibility of their publications into denying, downplaying, masking, and apologizing for that crime (and now, on the basis of little evidence and no investigation, prematurely declare it resolved, as Floyd Norris did yesterday).

In Capitalism, Socialism, and Democracy, Joseph Schumpeter wrote, “Capitalism stands its trial before judges who have the sentence of death in their pockets. They are going to pass it, whatever defense they may hear.” Schumpeter neglected to mention that to this same jury, the possibility that the enforcement of regulation has been compromised due to the subversion of the mechanisms of enforcement, from the exchanges to the regulators to the politicians to, most disturbingly, the intellectual class itself (in particular, those who count themselves members of SABEW), is a possibility which that jury finds unthinkable, quite literally, and in the purest Orwellian sense.

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

1) email it to a dozen friends;

2) write SABEW’s Donna Dare and Kevin Noblet (DareD@missouri.edu and knoblet@pobox.com) asking them to make explicit the ideological policies to which SABEW demands its members conform (and please post as a copy of your email to them in the comment section below);

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

(draft only)

“In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout…They were hoping that everybody else would make sacrifices and they would have to make none…Some demanded twice the return that other lenders were getting.”

Bloomberg has the full story.

This is a very good sign that the Executive Branch is aware of the high cost of unregulated greed.

Dendreon (DNDN) is “a biotechnology company, engages in the discovery, development, and commercialization of therapeutics to enhance cancer treatment options for patients. The company’s product portfolio includes active cellular immunotherapy, monoclonal antibody, and small molecule product candidates to treat various cancers.” For the last few years its operations have burned through $66 million to $80 million per year (a not-unusual pattern for pharmaceutical firms researching and developing cures for diseases like cancer).  As it stands, its balance sheet looks like it could support perhaps one more such year without additional capital raising. However, given the $5 share price at which Dendreon has been hovering, such additional capital raising would dilute the owners about 20%, assuming that it is possible in the current environment.

It turns out that the collapse of DNDN from over $20 to that $5 price was accompanied by massive levels of naked shorting. At one point, 18 million shares were unsettled (about 20% of the ownership of the company). It cannot be repeated too often: That is just the data coming from one crack in the system, the CNS bucket at the DTCC, and does not include any fails accumulating at the brokerages, or diverted by pre-netting, or masked by the Stock Borrow Program, or swept into the ex-clearing system, or stemming from offshore failures. So it is the tip of the iceberg (and perhaps, the tip of the tip of the iceberg).

As is so often the case, manipulations in Dendreon stock coincided with all that we have come to expect: surprise rejection of its drug Provenge by the FDA, endless bashing from the likes of the Media Mob and Jim Cramer the Self-Confessed Crook, and other strange incidents soon to be explored by my Deep Capture colleague, journalist Mark Mitchell.

Click image to enlarge

Of late, this story has taken a happy turn. On April 14 Dendreon released prelimary results of their prostate cancer vaccine trials (details of which will be disclosed at this coming week’s American Urological Association’s (AUA) Annual Meeting in Chicago) showing that Provenge works. It prolongs the lives of men with advanced stage prostate cancer.  Its stock promptly quadrupled, which will make getting financing easy (Investors Business Daily, “Prostate Cancer Drugs Get Street’s Attention“).

I will assume that most readers agree that it is a good thing that Dendreon managed to survive long enough to see this day, and that it would have been a bad thing if illegal stock manipulation had suppressed Dendreon’s stock until they ran out of cash and could raise no more (as they say in intro logic classes: “If not, work the proof out on your own”). Which makes this serve, of course, as answer to the challenge that opened this essay.

Given that, one may then ask of those journalists who defend the right of hedge funds to destroy firms they wish to destroy, that is to say, of DowJones’ Carol Remond and Karen Richardson, of Fortune Magazine’s Roddy Boyd and Bethany McLean (now at Vanity Fair), of New York Times’ Floyd Norris and Joe Nocera, of Herb Greenberg hiding behind vapid emails and Dave Kansas hiding under his desk, of NY Post/Portfolio Magazine’s Dan “Crusher” Colarusso and CNBC’s Jim Cramer the Crook: Do you get it now? Do you understand why illegal stock manipulation is wrong, and can impose costs on society it was your duty as journalists to explore? You purveyors of reportorial Velveeta, you lazy and captured, half-educated and dim-witted, snarky, insufferable, conformist and indolent pseudo-intellectual lickspittles, do you get it now? You are sell-out journalists who grovelled to your sources, missed the story of your careers, and in the eyes of an increasing fraction of the public, rank just below pedophile priests.

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

1) email it to a dozen friends;

2) email The Story of Deep Capture to a dozen friends;

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

And you’re invited to join. Dare to get to know your fellow market reformers!

The Deep Capture team is very pleased to present the new and vastly improved deepcapture.com.

Please take a moment to orient yourself to the new design and features, each implemented in response to your requests for a site that is easier to navigate and use.

Among the more interesting additions is a “featured story” window, where the latest posts will get more prominent placement. You’ll also see a “tag cloud” behind the tab marked “Tags” in the right sidebar. This will allow you to read posts organized thematically.

There’s also an archive section, with posts organized chronologically.

In addition, the email notification should be working more reliably now, and you’ll also have the option of subscribing to RSS feeds corresponding to individual authors (be it myself, Patrick Byrne or Mark Mitchell).

As far as improvements on the horizon are concerned, very soon we’ll be adding a forum section, where you, the users, can create discussion threads on whatever topics you choose.

We’ll also shortly be adding a fascinating, interactive “timeline” feature, which will permit us to visually document and organize all noteworthy events in the history of illegal naked short selling.

We’re also preparing to implement a dynamic “relationship web”, which will make it easy (and entertaining) to explore the ties that bind the people and organizations that are ultimately the focus of our investigative efforts.

Thank you all for your continued support!

Deep Capture is not just a few journalists investigating the biggest financial scandal of our era. It is part of a much larger effort – a movement that is supported by countless people.

It is the former high-level banker who makes sure his senator reads our articles. It is the man in Boston who volunteers his time to help us research connections between market manipulators and organized crime. It is the PhD who works in the humanities, but has nonetheless produced dozens of erudite reports on the intricate mechanics of stock delivery failures.

It is the tough businessman who has filled his garage with boxes containing evidence of short seller miscreancy. It is the Wall Street insiders who have given us tips and valuable information. It is statisticians, economists, and investigators who have toiled long hours — identifying trading patterns that suggest that illegal naked short selling is a much bigger problem than we had previously believed.

It is the bloggers and former stock brokers who warned the world about abusive short selling long before Deep Capture was founded. It is the many people—unorganized and unpaid–who go on Internet message boards to do battle with organized bashers who are paid by hedge funds to whitewash the naked short selling scandal.

It is former government officials, academics, and business people who are lobbying for reform. It is the hundreds of people who have sent us letters of support, and the thousands of people who have contacted the media, the SEC, and members of Congress.

It is a great many more people–millions of people, we reckon–who have come to recognize that abusive short selling was perhaps the most important factor in the near total collapse of our financial system…millions of people who are telling other people that this nonsense must be stopped or things will get much, much worse.

To all of these people, we say, “Thank you — and welcome to the Deep Capture team.”

And to the man in the photo, we say, “You are awesome.”

The photo was taken at one of the “tea parties” held across the nation last week.  We did not know this man until a few weeks ago. But he has years of relevant experience and firsthand knowledge of the markets. We did not ask him to lug that sign around all day. He took it upon himself to help us get the word out.

That so many others are doing the same is a testament not to Deep Capture, but to the deadly seriousness of the crimes that we seek to expose.

* * * * * * * *

For recently retired SEC Enforcement Director Linda Thomsen, however, I’ll make an exception. (As Mr. Buffett says, “There are times when a man has to rise above his principles.”)

The first story I would like to tell about this Enforcement Director concerns an investigation that the SEC’s San Francisco office was conducting a few years into collusion among short-sellers and crooked journalists who shilled for them using ammunition provided by “research shops” which were fed their material by those same hedge funds, in a kind of “serpent-eating-its-tail” of financial hooliganism. It was a hard scheme to miss: any company shorted by Stevie Cohen (SAC), David Einhorn (Greenlight), Dan Loeb (Third Point), David Rocker, or a handful of others, could count on coming under the “where-there’s-smoke-there’s-fire” journalistic scrutiny of such worthies as Jim Cramer and Dave Kansas, Gary “Scaramouche” Weiss, Bethany “Long, Slow Thing” McLean and Roddy Boyd (both of Fortune Magazine), Carol Remond and Karen Richardson (both of DowJones), Floyd Norris and Joe Nocera, (both of the New York Times), and Herb Greenberg (MarketWatch), that “smoke” often being supplied by research shops of which those same hedge funds were clients. Invariably they’d be naked shorted as well, and show up on the Reg SHO Threshold List, and anyone noticing this constellation of facts occurring over and over with complete regularity could be counted on to be declared “wacky” by these same journalists.

I learned about this investigation because I was invited to a meeting by the SEC investigators conducting it. I’m pretty sure that “invitation” came in the form of a federal subpoena, but I am not completely clear on that, having over the last few years received enough such paperwork to wallpaper my bedroom. In any case, I arrived at the appointed hour, and was sworn in. My deposition was conducted by a man named “Mark” and overseen by his boss, Tracy, both of whose last names I see no reason to reveal. They both were the kind of federal employees that make one swell with pride: They displayed neither favor nor enmity, but simply, white collar professionalism such as has largely been lost in Corporate America. They were prompt, prepared, and business-like, and, without being rude, challenged me fairly aggressively while revealing to me as little as they could.

That said, try as they did, it was impossible for them to be as blank to me as they wished. After all, if someone asks, “What do you know about the possibility that Colonel  Mustard killed his victim in the library with a rope?”, then it is resonable to infor that the utterer suspects that Colonel Mustard may have indeed killed someone in the library with a rope. In this fashion, I became reasonably confident that while the New York financial press was bleating about how wacky I must be to notice patterns that many sane observers had noticed, those same patterns had been noticed by others better placed to do something about them than I. (Incidentally, normally I would be loathe to reveal the contents of such a deposition, but given that this is all moot now, yet tied to today’s news, and the bad guys are using FOIA requests to get this stuff anyway, it seems like the right thing to do.)

Somewhere around this time, Jim Cramer and others of the journalists mentioned above  received their own subpoenas. All hell broke loose, because they made it break loose (see for example “Herb Greenberg, The Worst Business Journalist in America, on the Conspiracy“). Of course, in a world where editors still had integrity, it would have been considered somewhat unseamly to have journalists reporting on an investigation of which they, themselves, had become the targets (I’m not sure why I mention that: I suppose it seems like it should be germane or something). But as a result, that investigation was promptly shit-canned. There’s no other way to describe it: the investigators were summoned to Washington, publicly crapped upon from a great height by SEC Chairman Chris Cox, the Enforcement Director who signed those subpoenas stood by idly while this happened to her staff, and we returned to our regularly scheduled programming of Muzak and bromide business reporting interrupted occasionally by B-list actors pitching Grandmother-Safe financial products and narcissistic hustlers promising that this time they really wanted to make you money, Mad Money!

Interestingly, not all the press backed up their brethren: editorials by Loren Steffy of the Houston Chronicle spring to mind in this regard. But by and large, the profession of business journalism stood mute while the reporting on a federal investigation was dominated by folks who were themselves the targets of that investigation.

The second story I would like to tell about this SEC Enforcement Director concerns some comments she made in 2008 in a keynote address before the United States Chamber of Commerce. In a pattern that observers of this issue have seen before, when asked about naked short selling, the Enforcement Director avoided the question by simply talking about the virtues of short selling, an issue which is not in contention. This pattern of avoiding the subject of naked short selling has been used time and time again by apologists for the practice (imagine someone being asked about sexual harassment, and answering with a response about the virtues of sex). Unfortunately for the Enforcement Director, her interlocutor, who was standing in the front row, directly in front of her podium, using a microphone that broadcast his voice loudly to the whole room (and you will see in a moment why that is relevant) pressed her on the distinction in a way that we would never see happen in any of the captured business media such as CNBC, New York Times, or Fortune.  The Enforcement Director’s subsequent answer (she blamed the victim companies and excused the crime) is instructive because it confirmed, as though further confirmation were necessary, that there are in fact two and only two plays in the apologists’ playbook: first, conflate naked short selling with short selling and discuss the benefits of short selling; second, blame the victim companies and excuse the crime.

3:00 p.m. – 3:30 p.m.
Regulatory Keynote Address: A View from the Division of Enforcement: Perspectives and Priorities
Linda C. Thomsen, Director of the Division of Enforcement, U.S. Securities and Exchange Commission
Introduced and moderated by: Michael J. Ryan, Senior Vice President and Executive Director, Center for Capital Markets Competitiveness

AUDIENCE MEMBER: “You spent a lot of time talking about insider trading and penny stock fraud, but you failed to mention an issue that’s of great concern to the Chamber, and that is naked short selling and the unsettled trades that can result from that. How can the Commission claim that it is serious about enforcement when millions of trades fail to settle every day and companies remain on Reg SHO Threshold Lists for years and years? And, second part of the question, why is the new rule 10b-21 necessary when, as Commissioner Casey pointed out, it makes illegal activity that is already illegal?;

SEC ENFORCEMENT DIRECTOR: “Um… I didn’t hear all of it, unfortunately, but as to the issue of short selling, we recognize that short selling is -”

AUDIENCE MEMBER: “My question was not about short selling. We all know that short selling is legal, and a necessary and efficient part of the market process. I’m talking about naked short selling-the selling of shares one does not have in inventory and probably has no intention of locating or borrowing.”

SEC ENFORCEMENT DIRECTOR: “As to naked short selling, and more generally market manipulation generally (sic), it is an area we are focused on. We have seen fewer cases in that arena because, often times, this is not necessarily with respect to naked shorts, but shorting or market manipulation more generally, because often the components of something that might look to be manipulative are all legal trades as you point out. So it’s a hard case to bring, which is not to say that it isn’t something that we don’t investigate, because we do. So I .. hear and understand the frustration of many on the subject of short selling generally. When we hear complaints about short selling-and, frankly, it is both short and naked short, it is a combination of both-we routinely hear from companies who’ve come in, who worry that they’re being shorted in an illegal way. We routinely take all that information in and look into it. And often times, as I think many defense counsel would be happy to tell you, when we dig in, what we find is that some of the information that has caused people to be shorting is actually true as to the company, and we may very well be confronted with two issues, one on the company and its disclosure side as well as on the trading side. But they’re very difficult cases, which is not to say that we aren’t focused on them and interested in them and indeed this new focus that we have on some smaller companies and smaller issuers will wrap some of those concerns into their focus as well.”

As you may have gathered, that SEC Enforcement Director was Linda Thomsen.

That would be the same Linda Thomsen who, for the entire 14 year duration of her service in the Enforcement Division of the SEC (the last four as Director), missed the $67-billion-and-counting walking Ponzi scheme/human brown stain known as Bernie Madoff, though concerned citizen Harry Markopolis not only did the work for the Enforcement Division, he all but spray-painted his findings on the lovely Italian marble of the SEC’s posh new DC headquarters.

That would also be the Linda Thomsen who, regarding Mr. Markopolis, acquitted herself so handily in this now-famous exchange with New York Democratic Congressman Gary Ackerman.

That would be the same Linda Thomsen against whom the SEC’s Office of the Inspector General recommended disciplanary action for her role in hanging out to dry SEC Senior Investigator Gary Aguirre, due to his impertinence in trying to subpoena Morgan Stanley CEO John Mack simply because a trail of clues in “the most important insider trading case in 30 years” led directly to him.  Aguirre had failed to regonize that the law of the land does not apply to Mr. Mack because he has too much “juice“, as Aguirre’s boss Robert Hanson put it while shutting down the investigation. According to a subsequent report of the United State Senate Judiciary Comittee, by “juice” Hanson meant, “meaning they could directly contact the Director or an Associate Director of Enforcement. That Director was, again, Linda Thomsen, and the Associate Director was Paul Berger, who was, at the time of these events, negotiating for a job with Mr. Mack’s law firm, Debevoise Plimpton, a job which Mr. Berger ultimately took. That report by the US Senate Judiciary Committee summarized the culture of Enforcement Division under Director Linda Thomsen:

“Staff Attorney Gary Aguirre said that his supervisor warned him that it would be difficult to obtain approval for a subpoena of John Mack due to his ‘very powerful political connections.’ Aguirre’s claim is corroborated by internal SEC emails, including one from his supervisor, Robert Hanson. Hanson also told Aguirre that Mack’s counsel would have ‘juice,’ meaning they could directly contact the Director or an Associate Director of Enforcement.

“SEC management delayed Mack’s testimony for over a year, until days after the statute of limitations expired. After Aguirre complained about his supervisor’s reference to Mack’s ‘political clout,’ SEC management offered conflicting and shifting explanations.

“The SEC fired Gary Aguirre after he reported his supervisor’s comments about Mack’s ‘political connections,’ despite positive performance reviews and a merit pay raise.

“After being contacted by a friend in early September 2005, Associate Director Paul Berger authorized the friend to mention his interest in a job with Debevoise & Plimpton. Although that was the same firm that contacted the SEC for information about John Mack’s exposure in the Pequot investigation, Berger did not immediately recuse himself from the Pequot probe. Berger ultimately left the SEC to join Debevoise & Plimpton. When initially questioned, Berger’s answers concerning his employment search were less than forthcoming.

“The SEC’s Office of Inspector General failed to conduct a serious, credible investigation of Aguirre’s claims.”

That would be the same Enforcement Director to whom the SEC’s new Inspector General was obliquely referring, in page after page, for 55 pages, in a report explaining how three well-organized  6th graders could have handled the nation’s naked shorting complaints better than did the SEC Director Linda Thomsen’s Enforcement Division.

That Linda Thomsen is the same one whose resumption of employment with white-shoe law firm Davis Polk & Wardwell (I say “resumption” because Ms. Thomsen worked at Davis Polk until she joined the SEC in 1995) was announced today in this gem (”SEC Enforcement Chief Joins Davis Polk“) from the Blog of Legal Times (”Law and Lobbying in the Nation’s Capital”).

The announcement reads, with no detectable irony:

Linda Thomsen, who headed the SEC’s enforcement division until February, is starting as a partner in the firm’s white-collar defense and government investigations and enforcement practices in June. She will be joining former SEC commissioner Annette Nazareth, who started at Davis Polk last year, and Robert Colby, who joined the D.C. office this year after serving as deputy director of the SEC’s trading and markets division…

Thomsen practiced in Davis Polk’s New York office before joining the SEC in 1995. She started at the commission as assistant chief litigation counsel and went on to become head of enforcement in 2005. After leaving the SEC earlier this year, Thomsen says, “I had no preconceived ideas about where I was going to go, or what I was going to do.” – Translation: “I swear, it never occurred to me to go work for the law firm defending wealthy clients against whom I was overseeing cases until weeks ago.”

At the firm, Thomsen will advise clients on internal investigations and defend them against SEC probes. – Comment: Probes such as those ones she was overseeing weeks ago.

After serving at the agency for 14 years, Thomsen says she understands the kind of questions clients should be asking themselves to stay out of trouble with the commission. “I think I know and can see the kind of issues that get people into trouble, and the kinds of processes that cause them to, perhaps, ignore warning signs,” says Thomsen. - Comment: Yes, I am sure Ms. Thomsen is one of the world’s most recognized experts on the subject of processes that cause people to ignore warning signs.

Thomsen headed the enforcement division as it came under fire for failing to catch Bernard Madoff’s Ponzi scheme, as well as problems that contributed to the meltdown on Wall Street. In response to critics, Thomsen vehemently defends her former division. “I think the professionalism in the division of enforcement is really unparalleled,” she says. ‘If you look at the totality of the enforcement efforts…it’s really a record that I know I’m proud of.”

Considering the world-historic implosion of the US capital market occurring to vamp-til-ready accompaniment of Ms. Thomsen’s blind-piano-player-in-the-cathouse Enforcement Division,  I’m at something of a loss for words with which to comment upon Ms. Thomsen’s “pride”.

But it is nice she landed on her feet.

Readers of Deep Capture may have noticed that, while I may not be on the best of terms with some federal institutions (e.g., the SEC), I have sought to be respectful to individuals serving the public in whatever capacity, and especially, to those institutions which appear to me to be part of the solution and not part of the problem. For example, recently I wrote of the Congressional Research Service, “The CRS is one of the most respected institutions in Washington, DC, and its output is universally considered non-partisan, objective, and thorough” (”It Only Hurts When I Laugh“). And in June of 2008, in an essay (”So You Say You Want a Revolution?“) now linked to dozens of times through this site, I wrote of the GAO:

Another place you can turn is the United States Government Accountability Office. The GAO is probably the most respectable group in DC (setting aside the military). When Congress needs a non-partisan, no-bullshit answer to any question, they turn to the GAO. Write Chuck Young at youngc1@gao.gov and let him know about your interest in naked short selling and the general issues raised in DeepCapture.com.

Notwithstanding such general warm sentiments Deep Capture feels towards the GAO, a recent GAO publication (”Securities and Exchange Commission: Oversight of U.S. Equities Market Clearing Agencies“) disappointed my Deep Capture colleague, Mark Mitchell, enough for him to write a fairly scathing analysis of it (”Our Watchdogs and the Financial Scandal of the Century“).

Today the GAO’s Orice Williams (”Director, Financial Markets and Community Investment, US GAO”) has responded to Mark Mitchell’s story, to the great credit of the GAO and Ms. Williams herself. Because one can fairly read her intent to be one of public response (Ms. Williams has, in fact, posted this in the comments on Mark’s story), out of courtesy to Ms. Williams and respect for her organization I am reproducing her response here, in full, so that it not be lost among the comments of others.

———- Forwarded message ———-
From: Orice M Williams
Date: Wed, Apr 8, 2009 at 4:12 PM
Subject: Mr. Mitchell,
To: mitch0033@gmail.com

Mr. Mitchell,

On March 26, 2009, GAO issued a correspondence entitled Securities and Exchange Commission: Oversight of U.S. Equities Market Clearing Agencies. It was an interim product of an ongoing study on Regulation SHO and not, as mistakenly stated in the article, a report on the findings of an “investigation.” The March 2009 correspondence was issued as an interim product to provide Congress and the public with a descriptive overview of how U.S. clearing agencies settle and clear equities securities trades and how SEC oversees the clearing and settlement systems of these agencies through its examination process. Therefore, the information provided was descriptive and not intended to evaluate SEC’s oversight of clearing agencies or to provide detailed information on examination findings. Further, as is the case with all GAO reports, the March 2009 correspondence provided an introduction that explained why GAO did this work. In this case, as noted in the letter, GAO did this work because of the importance of an effective clearance and settlement process. This is our standard reporting format and is neither strange nor uncommon. GAO’s final report on Regulation SHO and SEC’s efforts to address failures to deliver and naked short selling will be issued in May 2009.

I have posted this information as a response to your article. However, I also wanted to bring it to your attention.

Regards,
Orice

Orice M. Williams
Director
Financial Markets and Community Investment
US GAO

If I know Mark, he may have something to write in reply. In the meantime, however, the publication of this GAO letter is required, I believe, by those very principles of journalistic integrity which Deep Capture was established to illustrate and defend.

And to Ms. Williams I say: Much respect indeed.

Not because the content itself contains inappropriate language, but because of the language it will very likely evoke upon watching it.

This is the final three minutes of today’s Bloomberg-TV hosted debate between former SEC Commissioner Roel Campos and infamous short seller Manuel Asensio.

What this represents, more than anything, is confirmation of the long-suspected belief that naked short sellers inhabit an alternate moral universe, complete with an alternate version of reality.

There might be no other explanation for what transpires in this debate, which includes such gems as the following by Asensio:

“There should be no reason to borrow stock. One should be able to sell stock at will, regardless of whether the people that are manipulating the stock up are willing to lend it to short sellers…There is absolutely no economic reason why America should cause and force short sellers to borrow stock.”

You’ve been warned…

(you can view the full debate here)

As a post-script, it’s worth pointing out that, by way of ascribing motives to otherwise incomprehensible actions, Gary Weiss spent much of his career at Business Week fawning over and taking orders from Asensio. Here are some examples.

That’s the motto of the Government Accountability Office, and it almost makes you believe that there really is a functioning watchdog – somebody, aside from us Internet loons, to investigate and report on the incompetence and malfeasance that pervade our public institutions.

Certainly, there were high hopes when the GAO began investigating the Securities and Exchange Commission’s oversight of the Depository Trust and Clearing Corporation (DTCC), a black box Wall Street outfit that is at the center of one of the great financial scandals of our era.

Alas, the GAO has completed its “investigation” and issued a report on its findings. After reading this report, and considering once again that the GAO (“Accountability – Integrity – Reliability”) is the last line of defense against government miscreancy, I have concluded, and am obliged to inform you, that we are, without a shadow of a doubt, totally screwed.

The report begins with an explanation: “An effective clearance and settlement process is vital to the functioning of equities markets. When investors agree to trade an equity security, the purchaser promises to deliver cash to the seller and the seller promises to deliver the security to the purchaser. The process by which the seller receives payment and the buyer, the securities, is known as clearance and settlement.”

In other words, people who sell stock need to deliver real stock. That’s kind of important to the“functioning of equities markets.” If you think it is strange that the GAO ( “Accountability – Integrity – Reliability”) needs to clarify this point, you can begin to understand the scope of a scandal that has helped bring us to the brink of a second Great Depression.

The problem is that many hedge funds and brokers engage in illegal naked short selling – selling stock and other securities that they have not yet borrowed or purchased, and failing to deliver stock within the allotted 3 days. They do this to drive down stock prices and destroy public companies for profit.

Emmy Award-winning journalist Gary Matsumoto reported on the Bloomberg newswire last week that naked short selling is one of Wall Street’s “darkest arts” and contributed to the demise of both Lehman Brothers and Bear Stearns. SEC data shows that an astounding 32.8 million shares of Lehman were sold and not delivered to buyers as of last September 11, days before the company declared bankruptcy.

The collapse of Lehman, of course, triggered the near-total implosion of our financial system.

How could this have been allowed to happen?

One answer lies within that black box – the Depository Trust and Clearing Corporation. The DTCC is a quasi-private, Wall Street owned and operated organization that is charged by Congress and the SEC with ensuring that securities trades are cleared and settled. As is evident from the cases of Lehman, Bear, and hundreds of other companies, however, the DTCC often fails to do its job.

In fact, it enables naked short selling to go unpunished. Rather than track individual trades to ensure that delivery occurs, the DTCC merely calculates a net total of sales and purchases at the end of each day. So we know how many shares of a given company fail to deliver each day, but the DTCC won’t tell us which hedge funds or brokers are responsible.

Meanwhile, the DTCC maintains something called the “Stock Borrow Program,” whereby it purportedly borrows a bundle of shares from cooperating brokers and uses the shares to settle failed trades. These shares are not on deposit with the DTCC, and the DTCC records a trade as “settled” with a mere electronic entry — i.e. by pushing a button on a computer rather than exchanging an actual certificate. So it is unclear that the Stock Borrow Program is actually delivering stock. Moreover, trade volume data suggests that the Stock Borrow Program might be using its bundle over and over again, settling multiple trades with the same “shares,” and generating what is, in effect, massive amounts of counterfeit, or “phantom” stock.

While enabling hedge funds and brokers to engage in their dark art, the DTCC also goes to lengths to deny that illegal naked short selling occurs and to smear the reputations of people who say otherwise. It has orchestrated this vicious public relations campaign in cahoots with a crooked Portfolio magazine reporter named Gary Weiss, who has worked closely with a motley cast of Mafia-connected hedge fund managers and convicted criminals.

There is indisputable evidence showing that Weiss, while posing as a journalist, not only worked inside the DTCC’s offices, but also went so far as to seize total control of the Wikipedia entries on “naked short selling” and “Depository Trust and Clearing Corporation.” Yet, to this day, Weiss flat-out denies that he has ever worked with the DTCC and insists that he has never edited any Wikipedia page, much less the fabulously distorted entries dealing with naked short selling.

That the DTCC facilitates and seeks to cover up naked short selling is not surprising given that it is owned by the very brokerages who profit from catering to hedge funds who commit  the crime. The DTCC’s board of directors has included several market makers – including Peter Madoff, brother of Bernard Madoff, the $50 billion Ponzi schemer with ties to the Mafia — who made a tidy profit from naked short selling.

At any rate, the SEC is responsible for overseeing the DTCC and ensuring that it is doing all it can to enforce delivery of shares and other securities. But the SEC conducts examinations of the DTCC only once every two years, and former SEC officials have admitted to Deep Capture that these visits entail nothing more than “investigators” asking a few courteous questions. Indeed, a number of former SEC officials have told us that the nation’s securities regulator doesn’t even understand what the DTCC does.

Enter the GAO (“Accountability – Integrity – Reliability”). Ostensibly, the GAO was going to determine whether the SEC was properly monitoring the DTCC. However, the GAO’s “investigation” entailed nothing more than visiting the SEC and asking a few courteous questions. In response, the SEC told the GAO that there is nothing to worry about, and the GAO duly issued a report that concluded that the SEC had told the GAO there is nothing to worry about.

Really, that, in essence, is what the report says.

It notes, for example, that the SEC examines the DTCC only once every two years, but offers no opinion as to whether this is sufficient oversight of an organization that processes securities transactions worth $1.4 quadrillion – or 30 times the gross product of the entire planet – every year.

And here’s what the report has to say about the DTCC’s Stock Borrow Program:

“…in response to media criticism and allegations made by certain issuers and     shareholders that NSCC and DTC [units of the DTCC] were facilitating naked short selling through the operation of the Stock Borrow Program, OCIE [a unit of the SEC] also incorporated a review of this program into the scope of its 2005 examination. These critics argued that the Stock Borrow Program exacerbated naked short selling by creating and lending shares that are not actually deposited at the DTC, thereby, flooding the market with shares that do not exist. As part of their review, OCIE examiners tested transactions in securities that were the subject of the above referenced allegations or had high levels of prolonged FTD. The examination did not find any instances where critics’ claims were validated. However, we did not validate OCIE’s findings.” [Emphasis mine]

In other words, the SEC claims to have examined the Stock Borrow Program once – in 2005 — but the GAO (“Accountability – Integrity – Reliability”) has no idea what that examination entailed. The SEC claims to have “tested transactions” in securities that had “high levels of prolonged” failures to deliver, but offered the GAO no credible explanation as to why so many companies have seen millions of their shares go undelivered nearly every day since 2005.

The SEC says it looked into the “critics’ claims” and found them to be without merit. The GAO duly notes this as if what the SEC has to say were the final say in the matter. As to whether the SEC’s own claims might have been without merit, the GAO says only that it “did not validate” the SEC’s findings.

Isn’t the job of the GAO (“Accountability – Integrity – Reliability”) to “validate” – or, as it were, invalidate – the SEC’s findings? It is not exactly an “investigation” to merely ask the SEC what it has to say and then publish a report confirming that that is, in fact, what the SEC had to say.

Last year, more than 70% of all failures to deliver were concentrated on a select 100 companies that short sellers had also targeted in other ways (planting false media stories, issuing false financial research, filing bogus class action lawsuits, harassing and threatening executives, engaging in corporate espionage, circulating false rumors, pulling strings to get dead-end federal investigations launched, etc.), but the SEC told the GAO that the failures to deliver could be mostly the result of “processing delays” or “mechanical errors.”

Billions of undelivered shares – most of them concentrated on 100 known targets of specific short sellers. Many of those shares left undelivered for months at a time. The SEC tells the GAO that this might be due to “mechanical errors.” And what does the GAO (“Accountability – Integrity – Reliability”) do? It transcribes the SEC’s claims, offers no opinion as to whether the SEC might be full of it, and then acknowledges that it is in no position to have such opinions because it “did not validate” anything.

In a written response to the GAO, the SEC noted happily that the GAO (“Accountability – Integrity – Reliability”) “made no recommendations” in its report.

“We appreciate the courtesy you and your staff extended to us during this review,” the SEC told the GAO.

* * * * * * * *

Far better is a report issued last week by the Office of the Inspector General at the Securities and Exchange Commission. Inspector General David Kotz, charged with conducting independent oversight of the SEC, is a heroic figure – an honest man in government. He has consistently lambasted the SEC for corruption and incompetence, and now he has investigated the SEC’s regulation of naked short selling. He found the regulation to be fairly abysmal and offered concrete recommendations for how the commission could reform itself.

The report concludes:

“The OIG received numerous complaints alleging that [SEC] Enforcement failed to take sufficient action regarding naked short selling. Many of these complaints asserted that investors and companies lost billions of dollars because Enforcement has not taken sufficient action against naked short selling practices.”

“Our audit disclosed that despite the tremendous amount of attention the practice of naked short selling has generated in recent years, Enforcement has brought very few enforcement actions based on conduct involving abusive or manipulative naked short selling…during the period of our review we found that few naked short selling complaints were forwarded to Headquarters or Regional Office Enforcement staff for further investigation…”

“Given the heightened public and Commission focus on naked short selling and guidance provided to the public leading them to believe these complaints will be taken seriously and appropriately evaluated, we believe the ECC’s current policies and procedures should be improved to ensure that naked short selling complaints are addressed appropriately.”

As for the SEC’s claims that naked short selling isn’t really a problem, or that failures to deliver could be the result of “mechanical error,” the OIG nicely contrasts this blather with the SEC’s own decision last fall to take “emergency” action against naked short selling (because naked short sellers were contributing to the toppling of the American financial system) and the SEC’s statement that “we have been concerned about ‘naked’ short selling and, in particular, abusive ‘naked’ short selling, for some time.”

In response to the OIG’s rightfully scathing report, the SEC wrote a letter in which it flatly refused to abide by most of the OIG’s recommendations.

The SEC did not thank the OIG for its “courtesy.”

* * * * * * * * *

Meanwhile, that other watchdog – the media – continues to ignore the problem of naked short selling. After Gary Matsumoto’s rather earth-rattling Bloomberg report that naked short selling destroyed Bear Stearns and Lehman Brothers – and, by extension, destabilized the entire financial system – there were a total of two mainstream media stories on the subject.

The first was in Portfolio magazine. Actually, this wasn’t really a story. It was one of those question and answer things. And the Q&A was not with some credible expert. Instead, a Portfolio magazine reporter interviewed another Portfolio magazine reporter about the Bloomberg reporter’s story. Even more shocking to those who believe there is hope for balanced media coverage of this issue, the interviewee was none other than… Gary Weiss, the crooked reporter who sidelines as a flak for the DTCC.

Weiss, of course, smeared the messenger, suggesting that Matsumoto was a “conspiracy theorist.” He cited no data or evidence, but repeated the SEC and DTCC nonsense that failures to deliver might be caused by mechanical errors (which just happen to show up overwhelmingly concentrated in those firms targeted by the hedge funds who serve as Gary Weiss’s sources). And he asserted that naked short selling isn’t a problem because the SEC says that naked short selling isn’t a problem (except when the SEC says that naked short selling is an “emergency”).

Read the full interview here. You’ll get a sense of the way Weiss deliberately employs straw man arguments to distort the truth, though as an example of Weiss’s dishonesty, this is rather mild.

* * * * * * * *

The other magazine to report on the Bloomberg bombshell was the Columbia Journalism Review, which is the most prominent watchdog of the watchdogs – an outlet for serious media criticism. As Deep Capture’s regular readers know, I used to work as an editor for the Columbia Journalism Review. I spent ten months preparing a story for that publication about dishonest journalists (including Gary Weiss) who were deliberately covering up the naked short selling scandal.

In the course of working on this story, I was threatened and, on one occasion, punched in the face. Then, in November 2006, shortly before the story was to be published, a short selling hedge fund that I was investigating announced that it would henceforth be providing the Columbia Journalism Review with the funding that would be used specifically to pay my salary.

The hedge fund that bribed the Columbia Journalism Review is called Kingsford Capital. It has worked closely with criminals, including a thug named Spyro Contogouris. In November 2006, a couple weeks after Kingsford bribed the Columbia Journalism Review, an FBI agent arrested Spyro. This was the same FBI agent who was investigating a cabal of short sellers – SAC Capital, Kynikos Associates, the former Rocker Partners, Third Point Capital, Exis Capital — who were then working with Spyro to attack a company called Fairfax Financial.

Spyro had harassed and threatened Fairfax executives, so he was going to feature prominently in my story. The centerpiece of my story, however, was to be that cabal of short sellers, not only because the Fairfax case was quite shocking, but also because these short sellers and a few others were the primary sources to dishonest journalists (especially MarketWatch reporter Herb Greenberg and CNBC personality Jim Cramer) who were then whitewashing the naked short selling scandal. Moreover, nearly every company known to have been targeted by these short sellers had been victimized by naked short selling, with millions of shares going undelivered, often for months at a time.

Emails in my possession show that Kingsford Capital is closely connected to that cabal of short sellers. Moreover, one of Kingsford’s managers at the time, Cory Johnson, was, along with Herb Greenberg and Jim Cramer (the journalists who were going to feature most prominently in my story) a founding editor of TheStreet.com. (Johnson removed Kingsford from his online resume after I revealed the relationship in “The Story of Deep Capture.”).

For a number of years, Kingsford Capital was partnered with Manuel Asensio, who was one of the most notorious naked short sellers on the Street. Prior to his work with Kingsford, Asensio worked for First Hanover, a Mafia-affiliated brokerage whose owner later became a homeless crack addict.

I was investigating Kingsford and Asensio primarily because they appeared to be among the favorite sources of Gary Weiss, the crooked journalist who was then secretly doubling as a flak for the black box DTCC. Asensio, for example, helped Weiss write “The Mob on Wall Street,” a 1995 BusinessWeek story that was all about the Mafia’s infiltration of Wall Street stock brokerages, but which deliberately omitted reference to Mafia-connected naked short sellers, even though the brokerage that featured most prominently in the story, Hanover Sterling, was at the center of one of the biggest naked short selling fiascos in Wall Street history.

According to someone who knows Weiss well, Asensio was also a source for a Weiss story about the gangland-style murder of two stock brokers, Al Chalem and Meier Lehmann. Chalem was tied to the Mafia and specialized in naked short selling. Multiple sources say that Russian mobsters killed Chalem in a dispute over the naked short selling of stocks that were manipulated by brokerages connected to the Russians and the Genovese organized crime family.

One of these sources – a man who worked closely with Chalem – says that he tried to tell Weiss the true story, but Weiss refused to listen to anybody who would pin the murders on the Russian Mob or accuse Chalem of naked short selling. Instead, Weiss wrote a false story describing Chalem as a “stock promoter” and suggesting that he had been killed by people tied to the Gambino crime family, which was then a fierce rival of the Genovese and the Russians.

On another occasion, the current principals of Kingsford Capital sent Weiss a fax containing false negative information about a company called Hemispherx Biopharma. Another source, who was sitting in Weiss’s office at the time, says that he tried to tell the reporter that Kingsford was working with Asensio, that Asensio might have ties to the Mob, and that Asensio was naked short selling Hemispherx stock. Weiss ignored this information and wrote a negative story about Hemispherx. Hemispherx’s stock promptly plummeted by more than 50%.

Remember, Gary Weiss is the Portfolio magazine reporter who just who just told Portfolio magazine that only “conspiracy theorists” believe that abusive short selling is a problem.

* * * * * * * *

It is too much for me to believe that Kingsford Capital’s managers (along with Gary Weiss and Asensio?) could be influencing the Columbia Journalism Review’s stories, but I do know that the magazine is now an ardent defender of short sellers and has written favorably about several of the dishonest journalists – including Gary Weiss –who were to appear in my story.

And, in its recent piece about Matsumoto’s Bloomberg bombshell, the Columbia Journalism Review cast doubt on the theory that naked short selling wiped out Lehman – never mind those 30 million shares that didn’t get delivered.

The Columbia Journalism Review reporter, who receives a salary thanks to the beneficence of Kingsford Capital, wrote this:

“Now, I don’t have a dog in the naked-shorts fight. I can’t tell you if this is being done illegally on a large-scale and having a real impact on companies. I just don’t know.”

“But one of the first things that comes to mind here is—wouldn’t you expect fails-to-deliver to soar for a company teetering on the brink of bankruptcy under an avalanche of bad news? I’d expect there would be a rush to short a stock like Lehman, which was about to collapse anyway. So, people who usually could expect to borrow shares to short might have found that they couldn’t because everybody else was doing the same thing.”

In other words, people who “could expect to borrow shares,” but “found that they couldn’t” went ahead anyway and sold 30 million shares that did not exist. This was a gross violation of securities regulations that require traders to have “affirmative determination” that a stock can, in fact, be borrowed. Assuming the intent was to manipulate the stock, it is a jailable offense.

It is true that by mid-September of last year, Lehman was on the brink of bankruptcy. Partners backed out of deals and there was a run on the bank. But people got nervous and pulled their money only because hedge funds bombarded Lehman with rumors (which are currently the subjects of a federal investigation) while simultaneously naked shorting the stock to single digits.

In July of 2008, the SEC issued an emergency order designed to prevent just this eventuality. For a few weeks, the order stopped naked short selling of Lehman Brothers and 18 other big financial companies. At this time, Lehman was not on the brink of bankruptcy.

But in early August, the SEC lifted its order and Lehman immediately came under a massive naked short selling attack. On the day the SEC lifted the order, Lehman’s stock was trading at around $20. A few weeks later, the stock was worth around $3 – a fall of 85%.

Only after this precipitous fall did Lehman’s partners begin pulling their money, making bankruptcy inevitable.

But, apparently the Columbia Journalism Review believes that it is perfectly natural for a stock to fall 85%, even though no new information (aside from unsubstantiated rumors) had entered the marketplace. According to the Columbia Journalism Review (which has, no doubt, plowed Kingsford Capital’s money into a thorough investigation of this issue), it is perfectly natural that people who “found they couldn’t” borrow stock nonetheless proceeded to flood the market with 30 million phantom shares.

The truth is, that 30 million share “mechanical error” helped bring this nation to its knees.

That’s one reason why I do have a dog in this fight.

* * * * * * * *

=========================================================
(Click graph to enlarge)

Akahele, if you’re curious, is a Hawaiian word meaning “slow” or “deliberate”, in contrast with wiki, the Hawaiian word for “fast” (and the origin of the “wiki” in Wikipedia).

The following is my most recent contribution to Akahele, and is an examination of the Wikipedia/Gary Weiss saga, with a new twist.

My direct involvement notwithstanding, I feel it’s both fair and accurate to say that the events surrounding the Gary Weiss/Mantanmoreland affair were among the strangest and most polarizing in Wikipedia’s history.

For those lucky enough to have no idea what I’m referring to, here’s the highest of high-level summations (much more in-depth explanations can be found here and here):

Gary Weiss

Former business journalist Gary Weiss used multiple sockpuppet accounts to ingratiate himself with Wikipedia’s inner circle and – thanks primarily to the relationships he established there – gain control of, most notably, the article describing an illegal form of stock market manipulation known as naked short selling.

Weiss then proceeded to dramatically alter the content of this and related articles in order to minimize the perceived negative impact of naked short selling while marginalizing critics of the practice, myself included.

There’s strong evidence suggesting Weiss was paid to do this by the very organization many fault as the primary enabler, not to mention a financial beneficiary of, illegal naked short selling.

I suspect most would agree with my assessment that among the darkest moments in the more than two-year drama between Weiss’s arrival and eventual forced departure were those in which Wikipedia co-founder Jimbo Wales injected himself into the controversy – always seemingly uninvited – and always with the effect of derailing whatever progress might have been made toward bringing about Weiss’s removal.

Among these, the most incomprehensible episode occurred at the crescendo of what is widely regarded the largest and most thorough sockpuppeting investigation in the history of Wikipedia, in which dozens of volunteers dedicated hundreds of hours amassing a body of evidence overwhelmingly implicating Weiss in a deeply disturbing deception.

It was at that time that Wales posted an unprovoked indictment of the process under the heading ‘I have personally seen no persuasive evidence’, resulting in Weiss getting another pass. This, despite Wales having told others, privately, that he knew Weiss was guilty; and many more, publicly, that I was a liar for making the same claim.

What follows is my best explanation for Jimbo’s odd behavior.

But first, I need to explain a little more about the nature of short selling, both legal and illegal.

Legal short selling involves selling borrowed shares with the expectation of buying them back and returning them to their owner at a later date and a lower price, allowing the short seller to pocket the difference.

Naked short sellers, on the other hand, sell shares short without borrowing them first, thereby creating the equivalent of counterfeit shares. This has the effect of artificially swelling the supply of stock, which has a markedly depressive influence on price, making the naked short seller rich, while inflicting immense harm upon legitimate shareholders and the companies in which they’ve invested.

There have been, in theory, rules intended to prevent naked short sales from occurring, or at least, from enduring longer than 13 trading days. Unfortunately, the people behind the practice are quite smart, and the monetary incentive to violate the law quite large.

In other words, they’ve found a path around the rules.

And that path runs right through the heart of Chicago’s financial district.

As it turns out, there is a law, known as the “options market maker exemption”, which permits certain brokerages, specifically those registered as ‘options market makers’, to engage in a highly-controlled form of naked short selling in the course of bona fide options market making – comparable to the permission police officers have to exceed the speed limit under certain extreme circumstances when it’s in everybody’s best interest that they do so.

Naked short sellers have discovered that they can essentially “rent” the options market maker exemption from certain corrupt options market makers, producing massive amounts of counterfeit shares in the process.

It’s as though a corrupt cop rented his police cruiser to a random citizen so he or she could drive it around at 120 mph for a day, without being held responsible for any of the damage they might cause.

Of course, it’s silly to think that either the citizen or the cop could get away this, but in the financial world, such overt violations of the law regularly take place on a grand scale. And though the reason is not immediately clear, research proves that this abuse of the options market maker exemption nearly always takes place on the Chicago Stock Exchange.

Why Chicago?

My guess is that it’s a cultural thing: the same way you’d never even think of bribing a cop who pulled you over in San Diego, while doing the same just 30 miles south in Tijuana is not a big deal.

What does this have to do with Jimbo Wales?

Well it turns out that both he and former Wikimedia Foundation trustee Michael Davis used to work at Chicago Options Associates, where Wales was a research director and Davis was CEO.

To be clear, while it existed, Chicago Options Associates traded options and futures on the Chicago Mercantile Exchange, and was not an options market maker. But because I suspect the Chicago phenomenon is a cultural one, and given the near certainty that Wales counts many equities options market making traders as his friends, I’m not sure it really matters: his professional background is deeply rooted in the same dark corner of the financial world that facilitates the same form of stock fraud Gary Weiss worked so hard to defend on Wikipedia.

Which I suspect explains why Jimbo Wales worked so hard to defend Gary Weiss.

Is Jimbo Wales above influencing Wikipedia content based on his personal relationships?

Rachel Marsden would probably say that no, he is not.

I recently asked Jimbo whether anybody with ties to options market making on the Chicago Stock Exchange sought to influence his decisions in this respect, and was not entirely surprised when Jimbo insisted that they did not.

However I was surprised when Jimbo followed with “it is still to this day completely unproven that the claims you’ve made about Mantanmoreland being Gary Weiss are true.”

Once I’d picked myself up off the floor, I decided to take Jimbo up on his invitation to finally show him the first bit of proof linking Gary Weiss to Mantanmoreland, despite the fact that doing so felt like proving to a skeptic that the moon is not composed of dairy products.

What I ultimately sent Wales were:

Click to enlarge.

1. A scatter graph (seen at right) showing Mantanmoreland’s Wikipedia editing pattern over several months, including a 12 hour time shift limited to the period in which Gary Weiss was known to be visiting India.
2. Email from Gary Weiss (if you want to know how I came to possess Weiss’s private email, read this) in which he told a friend that he intended to edit a specific Wikipedia article to include a reference to a book he wrote.
3. A link showing that Mantanmoreland did in fact edit that very article to include a reference to that very book.

I also made it clear that should these bits of evidence fail to convince him, I’m ready to send much, much more.

Maybe Jimbo was convinced and he decided there was no reason to respond further.

Maybe the evidence simply left him speechless.

Or maybe owning up to his reckless actions in this case would prove unpopular with his friends back in Chicago.

All I know is that once the evidence was sent as requested, the conversation went cold.

Whatever the case, the legacy of Gary Weiss’s campaign of misinformation endures on Wikipedia to this day, due in large part to the apartheid-like probationary status imposed upon the naked short selling article after Wales condemned the inquest into Weiss’s activities as having produced no persuasive evidence.

All the while, Wikipedia remains the first option offered those searching the web for information about naked shorting, and its role in the current financial crisis.

Weiss may have created this problem, but Jimbo Wales — whatever his motivation — has allowed it to persist. The time has come for Wales himself to step in, help find a real solution, and acknowledge the damage this dark episode has caused real people in the process.

- Morpheus to Neo, The Matrix

It is the mission of DeepCapture to show you, dear reader, that the financial world you inhabit, a world vouched-for in dulcet Midwestern tones by actor-spokesmen you recognize and trust, a world inhabited by honest brokers looking after your money, brokers who interact through self-regulating exchanges overseen by diligent regulators, themselves overseen by elected politicians looking out for their constituents, themselves challenged by an adversarial free press maintaining a critical posture towards it all, is in fact a “world that has been pulled over your eyes, to blind you from the truth.” It doesn’t exist: it is a socially constructed reality designed to keep you complacent as you feed your savings to the machine. 

And I can prove it. For that matter, so can you, right now, from your computer. To explain how, I must continue with reference to The Matrix.

There is a point in the movie where Neo and his comrades are walking up a staircase. Neo glimpses a black cat that disappears then reappears:

In this essay I will explain a glitch that is available for you to verify right now, from your computer. I do not know how long it will remain after I write this, but it has existed for many months, and cannot be fixed without causing other problems for those seeking to keep you deluded. I will take you through three steps, and then you will be able to test this theory from your computer, and see a glitch that should not exist.

*****

STEP #1 OF 3: UNDERSTAND WIKIPEDIA

Wikipedia is a social media encyclopedia. That is to say, it is the work of thousands of people collaborating across the Internet to write millions of articles on every subject one would expect to find in an encyclopedia, and many more. People are free to edit other peoples’ words, adding their own knowledge to the sum. The constitutional principles of Wikipedia demand that such edits and additions be written from a “Neutral Point of View”. Every article is backed up by a discussion page, where the people who are working on that article can meet and work out their differences in an atmosphere where good faith is assumed. Ultimately, differences which are not so resolved are put to community vote. In sum, Wikipedia is socially constructed reality.

Wikipedia has drawn its detractors (myself among them) across many fronts. One thing that both supporters and detractors agree on, however, is the remarkable speed with which Wikipedia is updated to reflect the world around us. When any significant event happens, the appropriate page is updated within minutes, or even within seconds, by someone. Be it a public statement of a treasury official, the passing of a celebrity, or a car bomb going off on a street in Beirut, the appropriate Wikipedia pages are updated before the story has finished scrolling across the wire.

*****

STEP #2 OF 3: SCROLL THOUGH THE HEADLINES OF (OR READ) THESE 21 ARTICLES (a-u) CONCERNING NAKED SHORT SELLING AND THE GLOBAL FINANCIAL IMPLOSION

a) July 12, 2006 Speech by SEC Chairman: Opening Statements at the Commission Open Meeting by Chairman Christopher Cox

Second Item – Proposed Amendments to Regulation SHO

The next item on our agenda is the serious problem of abusive naked short sales, which can be used as a tool to drive down a company’s stock price to the detriment of all of its investors. The Commission is particularly concerned about persistent failures to deliver in the market for some securities that may be due to loopholes in the Commission’s Regulation SHO, adopted just two years ago.

At the Commission’s request, the Division of Market Regulation has prepared proposed changes in Rule 203 under Regulation SHO to cut down on failures to deliver.

The need for Regulation SHO grew out of long-standing and growing problems with failures to deliver stock by the end of the standard three day settlement period for trades, some of which were symptoms of abusive “naked” short selling. Selling short without having stock available for delivery, and intentionally failing to deliver stock within the standard three-day settlement period, is market manipulation that is clearly violative of the federal securities laws…

A grandfather provision, however, gave an exception from Rule 203(b)’s mandatory close out provision for any fail to deliver positions established before a security became a threshold security. And another provision of Rule 203(b) – the options market maker provision – provides an exception for any fail to deliver positions in a threshold security if they result from short sales by an options market maker, for the purpose of establishing or maintaining a hedge on options positions created before the underlying security became a threshold security.

We are particularly concerned about the potential negative effect that substantial and persistent fails to deliver may be having on the market in some securities. Specifically, these fails to deliver can deprive shareholders of the benefits of ownership – voting, lending, and dividends from issuers. Moreover, they can be indicative of abusive naked short selling, which could be used as a tool to drive down a company’s stock price. They may also undermine the confidence of investors who may believe that the fails to deliver are evidence of manipulative naked short selling in the stock. In turn, issuers may be harmed, as investors may be reluctant to commit capital to a stock that they believe is subject to abusive naked short selling.

To address these concerns, the Division of Market Regulation is recommending proposals to amend Regulation SHO. The recommended proposals are based on examinations conducted by the Commission’s staff and the SROs since Regulation SHO became effective in January 2005. While preliminary data indicates that Regulation SHO appears to be significantly reducing fails to deliver without disruption to the markets, there continues to be a number of threshold securities with substantial and persistent fail-to-deliver positions that are not being closed-out under existing delivery and settlement guidelines. It appears these persistent fails are primarily attributable to the grandfather and options market maker exceptions to the delivery requirements of Regulation SHO.

The proposals being recommended today would eliminate the grandfather provision, and narrow the options market maker exception. The proposals would include a limited one-time phase-in period following the effective date of the amendment. The proposals also include a technical amendment that would update the market decline limitation referenced in the rule. In combination, these proposals are intended to eliminate the persistent fails to deliver that are attributable to loopholes in Regulation SHO as originally adopted…

*****

b) March 4, 2008 – Reuters: “SEC proposes tougher “naked” short selling rules“

WASHINGTON, March 4 (Reuters) – The U.S. Securities and Exchange Commission on Tuesday proposed tougher rules to curb so-called “naked” short-selling abuses and prevent market price manipulation.

SEC Chairman Christopher Cox said regulation SHO, an existing rule partly aimed at short selling abuses, “needs teeth.”

Short sellers borrow shares they consider overvalued and sell them. If the price drops, they repurchase the shares, return them and pocket the difference. In a naked short sale, the investor sells stock that has not yet been borrowed.

The three-member SEC voted unanimously to propose the rule, which targets sellers who intentionally deceive broker-dealers or purchasers about their ability to meet delivery deadlines.

Sellers sometimes deliberately fail to deliver securities as part of a scheme to manipulate the stock price.

*****

c) March 5, 2008 – Wall Street Journal: “SEC Proposes Teeth for Short-Selling Rules“  by Judy Burns

WASHINGTON — Securities regulators voted 3-0 to propose a rule intended to crack down on lingering abuses involving so-called naked short sales and failures to deliver shares that have been used in such sales.

The proposal is part of a continuing attack by the Securities and Exchange Commission on short-sales abuses, an effort begun four years ago with the adoption of rules known as Regulation SHO.

Separately, the SEC voted to propose changes that could speed the introduction of exchange-traded funds, without review by federal regulators. (Please see related article.)

Short selling involves sales of borrowed shares, producing profits when prices decline, allowing the short seller to replace borrowed shares at a lower price.

In contrast, “naked” short sellers don’t borrow shares before engaging in short selling, and they may have no intention of borrowing them.

Regulation SHO sought to curb such practices by requiring short sellers to locate shares for borrowing before engaging in short sales, but it did not include any new mechanism to enforce the requirement.

Under the proposal, the SEC would create an antifraud rule targeting those who knowingly deceive brokers about having located securities before engaging in short sales, and who fail to deliver the securities by the delivery date.

SEC Chairman Christopher Cox said the proposal would bring needed teeth to Regulation SHO and address concerns about short-selling abuses, particularly in the market for small-cap stocks. “Reg SHO can’t be effective without enforcement,” Mr. Cox said.

Even with the regulation in place, the SEC received hundreds of complaints last year about alleged abuses involving short sales. While most trades settle within three days, as required, the SEC estimates about 1% of shares that change hands daily, or about $1 billion, are subject to delivery failures.

The SEC’s move last year to close off a “grandfather” exception to Regulation SHO, has done little to reduce longstanding delivery failures, according to preliminary data analyzed by SEC staff.

The SEC has yet to announce its plans for a separate pending proposal to scale back or eliminate an exemption for options market-makers.

Brokers who engage in short selling for customers would not face any new obligations under the proposed antifraud rule, and the SEC said it wouldn’t apply to market makers engaging in market-making activities.

Although the SEC already has authority to sue illegal short sellers, SEC officials said a new rule explicitly targeted to naked short sales might affect behavior. SEC Commissioners Paul Atkins and Kathleen Casey expressed support for the crackdown on abusive sales but said they want to be sure it doesn’t result in unintended consequences, such as driving legitimate short sales offshore.

*****

d) July 15, 2008 – Bloomberg: “SEC to Limit Short Sales of Fannie, Freddie, Brokers” By Jesse Westbrook and David Scheer

The U.S. Securities and Exchange Commission will limit the ability of traders to bet on a drop in shares of brokerage firms, Freddie Mac and Fannie Mae as part of a crackdown on stock manipulation, the agency’s chairman said.

Christopher Cox told the Senate Banking Committee that the agency will require traders to hold shares of the two mortgage buyers and the brokerages before they execute a short sale. The emergency order, to be in effect for 30 days, will bar the practice called naked short selling, in which traders avoid the financial cost of borrowing shares when betting they’ll fall.

Cox said the SEC will draft rules “to address the same issues across the entire market.”

Hedge-fund manager William Ackman, who oversees $6 billion at Pershing Square Capital Management, is among those betting that shares of Fannie Mae and Freddie Mac will fall. There’s no indication he is engaging in naked short selling, in which traders never borrow shares from their broker or deliver the stock to buyers.

The SEC has been reluctant to curb short selling “because it would require a major retooling of the plumbing of Wall Street,” said James Angel, a finance professor at Georgetown University studying short sales. “It’s only when the big Wall Street firms are threatened that the SEC does something about it.”

Trading Abuses

The SEC is investigating whether trading abuses contributed to the collapse of Bear Stearns Cos. in March and the 78 percent drop in the market value of larger rival Lehman Brothers Holdings Inc. this year. Fannie Mae and Freddie Mac have each lost about 80 percent of their value amid speculation the mortgage-market crisis may push the firms into insolvency.

Short-sellers, who borrow shares betting that they’ll decline, are spreading rumors about Lehman in an organized attempt to depress the stock, according to Richard Bove, bank analyst at Ladenburg Thalmann & Co. in Lutz, Florida.

“As with Bear Stearns, Lehman has been targeted by the fear-trade,” said Fox-Pitt Kelton Cochran Caronia Waller analyst David Trone in a report yesterday. Lehman should go private so it can avoid the attacks by short-sellers, he said.

Freddie Mac, down as much as 34 percent today before Cox’s comments, erased some of the decline and fell $1.49, or 21 percent, to $5.62 at 2:34 p.m. in New York Stock Exchange composite trading. Fannie Mae shares rebounded from a 30 percent drop and were down 18 percent.

Opposition

“I don’t think the government should ban short-selling in anything as long as it’s fully disclosed, as long as there’s no manipulation,” MFS Investment Management Chairman Robert Pozen said in an interview with Bloomberg News yesterday. “Don’t we want the market to work here?”

John Nester, an SEC spokesman, said the emergency order will “require any person effecting a short sale in the listed securities to borrow the securities before the short sale is effected and deliver the securities on settlement date.”

In traditional short selling, traders borrow stock through a broker and hope to profit by selling shares high and later buying them back at lower prices to repay the loan.

Naked short selling isn’t necessarily illegal, unless authorities can prove fraud, such as a scheme to manipulate stock prices.

*****

e) July 18, 2008 – Op-ed for the Investor’s Business Daily: “Public Statement by SEC Chairman Christopher Cox ‘Naked Short Selling Is One Problem a Slumping Market Shouldn’t Have‘”

The demise of IndyMac, coming on the heels of Bear Stearns’ desperate sale to JPMorgan Chase, is a sure sign of the fragility of today’s markets. What’s needed now, more than ever, is reliable information for investors and confidence that trading can be conducted without the illegal influence of manipulation.

Because financial institutions depend on confidence, they are uniquely vulnerable in the current climate. A “run on the bank” can take hold quickly, and can be fatal. But stampedes are not always rational.

When an irrational panic is fueled by a sense of urgency, false rumors that must be acted on immediately and the fear that everyone else may get out first, market integrity is threatened. It is the job of market cops to provide a measure of confidence that financial information about public companies is accurate and reliable — and when it is not, to punish those responsible.

Who profits from intentionally false information in the marketplace? Those who are in on the scam and positioned to benefit from the predictable response of others who believe the fraudulent information to be true.

The classic “pump and dump” scheme, in which a stock is inflated through false information and then dumped on unsuspecting investors when the perpetrators flee, is one example of how this works. “Distort and short” is the same thing in reverse.

Naked short selling can turbocharge these “distort and short” schemes. In a naked short, the usual process of short selling is circumvented, because the seller doesn’t actually borrow the stock and simply fails to deliver it. For this reason, naked shorting can occur even when actual shares aren’t available in the market. It allows manipulators to force prices down without regard to supply and demand.

Next week, the SEC will implement an emergency order designed to prevent naked short selling in the financial firms that the Federal Reserve Board has designated as eligible for access to its liquidity facilities.

Because these are large firms with substantial public float, honest short sellers can readily locate shares to make good on their short positions. Continued legitimate short selling in these issues will act, as it is supposed to, as a way for market participants to invest in the downside and to hedge other positions.

At the same time, eliminating the prospect of naked short selling will help assure investors that it is safe for them to participate, and that the current declining market is not the product of unseen manipulators and “distort and short” artists.

Our emergency order is not a response to unbridled naked short selling in financial issues — so far, that has not occurred — but rather it is intended as a preventative step to help restore market confidence at a time when it is sorely needed.

Many people think naked short selling is already illegal, but that isn’t true. Shares are normally delivered to the buyers within three days of the trade. But in most stocks, including those covered by our emergency order, that three-day period can be extended indefinitely.

Even without these extensions, and even when a short seller locates shares that can be borrowed, there can be problems because the short seller is not currently required to actually borrow those shares until settlement.

As a result, securities lenders can tell multiple short sellers they can borrow the same shares of stock — a sure recipe for a failure to deliver. Once the commission’s order takes effect, this possibility will no longer exist.

The SEC is committed to maintaining orderly securities markets. The abusive practice of na