Too many stinging disappointments, I suppose.

Too many instances of people behaving badly, to be certain.

But as they say, there’s some value in expecting the worst…you’ll never be disappointed.

And so it was with today’s second and concluding session of the SEC’s roundtable on securities lending and short selling: I expected the absolute worst, but in the end was pleasantly surprised to find that it wasn’t quite as bad as I feared.

That’s not the same as proclaiming it a good thing, because it was not. Indeed, I stick by yesterday’s characterization of the event as farce with a pre-determined outcome.

Having said that, I was deeply impressed by two surprises I clearly had not anticipated. And I’ll get to those in a moment.

But first, an overview.

There were two panels. The first examined proposed pre-borrow and hard locate requirements — keys to closing two of the most dangerous remaining loopholes in the US stock settlement system. The second panel examined proposals requiring enhanced disclosure of short selling data — a good idea but ultimately one that would be much less necessary were the proposals discussed in the first panel enacted.

I’ll start with the second panel, which surprised me by coming down overwhelmingly in favor of more transparency in short selling.

Georgetown University Professor James Angel pointed out that greater disclosure would essentially be doing legitimate short sellers a favor, by vindicating them in cases when they are incorrectly accused of manipulation in response to stocks dropping in value.

David Carruthers, of short selling analytics firm Data Explorers, supported greater transparency in short selling where the goal was to “prevent market abuse and prevent the development of a false market, or to prevent situations where market participants take advantage of a vulnerable company.”

Richard Gates, founder of short selling hedge fund TFS Capital, denied that shorting exacerbated the onset of the current financial crisis, but went on to concede that there should be greater disclosure parity on the short and long sides of market activity.

Michael Gitlin of investment manager T. Rowe Price echoed the position of Professor Angel in saying real time reporting of short versus long sales would result in the “demystification of short selling,” adding, “The ongoing debate of what caused an individual security to decline would largely disappear with this added level of transparency.”

As the lone issuer represented on the panel, Jesse Greene, Vice President of Financial Management at IBM, was enthusiastically in favor of a general overhaul of the SEC’s short selling regulatory framework, including public disclosure of short positions, in order to “improve market stability and restore investor confidence.”

Joseph Mecane, Executive VP at NYSE, noted that market fragmentation has made it more difficult to detect manipulation, requiring regulators have access to more short selling data in order to better conduct market surveillance.

In other words, the second panel was a slam dunk in the right direction.

The first and ultimately more meaningful panel, on the other hand, was the Yin to the second panel’s Yang.

Appropriately enough, Managing Director of the Equities Division at Goldman Sachs William Conley kicked things off, lamenting that “both the pre-borrow and hard locate requirement would require significant infrastructure builds on the part of the industry as well as its participants.”

By “infrastructure builds”, Conley is referring to the development of new software able to track down real shares for short sellers to borrow. He seems to have forgotten three things:

1. When there’s money to be made, Goldman Sachs has a rare talent for developing extremely complicated software. Could it be that Conley never met former co-worker Sergey Aleynikov?
2. LocateStock.com, then a bootstrapping startup, developed software that accomplishes precisely the same task Conley regards as so burdensome, on a shoestring budget.
3. If Goldman Sachs has enough cash on hand to spend nearly $12-billion in employee bonuses this year, it can probably set a couple hundred thousand aside to write some crumby software.

As I predicted yesterday, much of the balance of Conley’s mic time was spent echoing the anti-reform talking points currently being circulated on Capitol Hill by his employer’s army of lobbyists — in some cases, verbatim.

William Hodash, Managing Director at DTCC, took us on a trip to his organization’s mindset circa 2005 by pointing out that fails to deliver are not necessarily evidence of naked short selling. With one foot remaining firmly in 2005, another in 2009 and a third in a pile of his own illogic, Hodash then said that the reduction in fails observed before and after the SEC’s implementation of Rule 204 “may be relevant to the discussion of whether naked short selling remains a problem.”

No, you didn’t miss anything. That’s what he said, with all remaining panelists basically pleading some variation of the on his and Conley’s approaches.

With one very prominent exception: Dennis Nixon, Chairman of International BancShares Corporation (IBC).

Looking at the program, I had assumed that IBC’s role on the panel was that of a broker or other market intermediary. Well I was very wrong. IBC was there in the role of an issuer targeted by naked short sellers, and Nixon very poignantly expressed the anguish of someone in his position, after a 45-day long bear raid removed $1.2-billion in IBC shareholder value.

“And I think it was all attributed to this predator-type short selling that goes on in this market today that’s uncontrolled. It’s unbelievable,” Nixon said.

That was the first surprise.

The second surprise came from an even less likely source:Commissioner Elisse Walter.

Mostly silent throughout the previous day’s panels, today Walter made it clear that she’s not buying the excuses offered by industry representatives insisting this problem is too much for them to tackle.

“I’m sort of surprised that the industry hasn’t come up with a solution, particularly as this controversy has continued to swirl and does not go away,” Walter said, adding that by failing to address the issue, the industry is essentially passing the cost of non-compliance on to the SEC’s own Division of Enforcement.

I think she’d make a stronger case had the Enforcement Division brought more than two cases against naked short sellers in its entire history, but that’s a topic for another post.

The bottom line is, this panel was undeniably stacked against any additional meaningful steps to limit illegal naked short selling, but the contributions of Dennis Nixon and Elisse Walter were as welcomed as they were unanticipated.

The entire affair could have been much better, but also could have been much worse.

In the end, we settled on the following:

“Entropy increases” and “The pendulum swings.”

The first sentence is a reference to the Second Law of Thermodynamics.

The second sentence is a reference to the fact that cultural trends will always increase in pervasiveness and acceptance until some limit is broached, at which time opposing forces will be applied that cause society to respond with increasing negativity toward that trend. And, as with an actual pendulum, the higher the upswing, the more forceful the push back will be.

How true both are.

I first encountered the market reform movement near the end of 2005. Over the months that followed, I witnessed the following:

1. An SEC staffer in San Francisco subpoenaed the communications of Jim Cramer, Herb Greenberg, Bethany McLean, Carol Remond and a handful of other “journalists” suspected of colluding with Gradient Analytics and short selling hedge fund Rocker Partners, only to have SEC Chairman Chris Cox personally sabotage the effort. This was followed up almost immediately by the SEC vindictively subpoenaing Patrick Byrne.
2. FOIA requests filed with the SEC intended to give some sense of the scope of the delivery failure problem were regularly denied or spitefully filled with minimal accompanying explanation.
3. Numerous brutal articles were published attacking opponents of naked short selling – Byrne primarily among them – under the bylines of (surprise) Jim Cramer, Herb Greenberg, Bethany McLean, Carol Remond, Joe Nocera, and Roddy Boyd.
4. Audio tape captured by a market reform operative who covertly accessed a panel discussion featuring Herb Greenberg, Joe Nocera and Dan Colarusso (then Roddy Boyd’s editor) hosted by the Society of American Business Editors and Writers. The theme of the discussion was essentially “How do we deal with these lying anti-naked short selling bloggers who are so critical of us?” Among other things, the tape caught Joe Nocera saying (to loud applause) he felt life was too short to bother understanding whether naked shorting is actually a problem, and Dan Colarusso saying he and his newspaper had the capacity to “crush” Patrick Byrne.
5. An all-out PR offensive launched by the Depository Trust & Clearing Corporation (DTCC) attacking opponents of naked short selling.
6. The emergence of Gary Weiss, an ostensibly credible former business journalist and blogger, bursting onto the scene, proclaiming naked short selling beneficial and its opponents crazy.
7. The hijacking and distortion of the Wikipedia article on naked short selling by whom we would soon learn was none other than Gary Weiss. Given journalists’ well-documented over-reliance on Wikipedia, this was undoubtedly a key factor in our difficulty getting them to provide more balanced coverage of the issue.
8. A special session of the Utah Legislature which, catching the banks flat-footed, resulted in passage of a law requiring brokerages with operations in Utah to promptly disclose stock delivery failures. But before it could go into effect, and after the prime brokers managed to rally their armies of lobbyists, the law was handily repealed.
9. Unprecedented growth of companies on the Reg SHO Threshold Securities list, indicating that, contrary to the intended aim of Regulation SHO, naked shorting was becoming increasingly prevalent.

On balance, it was a very dark time for the market reform movement, as every charge was followed by a blistering counter-charge, and every lunge answered by a quick parry. More than once, I recall hearing even the staunchest market reformers openly question the capacity of a rag-tag band of revolutionaries to counter the enormous influence and resources brought to bear by the hedge funds and prime brokers who were getting rich from the practice of manipulative naked short selling, and I couldn’t help but wonder whether I’d picked the wrong battle.

That’s not to say I ever doubted the correctness of the cause – only the correctness of my decision to join a fight that sometimes seemed impossible to win and certain to result in damage to my reputation as it had to Patrick Byrne’s and so many others’.

But in those moments of doubt, I’d remind myself of an eternal truth: the pendulum swings.

In other words, as dark as those days were, there would invariably be restraining forces applied to help slow – and eventually stall and even reverse – the momentum built up by decades of Wall Street villainy and the deep regulatory capture of the institutions intended to counter it.

What we could not have realized – as such perspective only comes with time – is that we (meaning, you, me, and everybody else who’s taken steps to do something about illegal naked short selling) were in fact the very restraining forces so many of us were expecting to arrive, cavalry-like, from some unknown quarter, and that as dark as those days seemed, they appeared quite bright to those who had endured the 1990s and early part of the current decade, when the practice persisted, without restraint, like a drunken orgy.

Of course, the event that finally brought the pendulum to a decisive halt and reversal was the current economic crisis, which saw the term “naked short selling” dragged into the popular lexicon (as determined by Yahoo! listing it as one of its five most popular search terms in September of 2008).

Since then, as the link between naked short selling and the beginning of the crisis itself has been solidly established, valiant members of Congress – most notably Delaware Senator Ted Kaufman – have dragged the issue of naked short selling into the political lexicon, as well.

Where are we today?

1. The SEC recently enacted permanent restrictions on illegal naked short selling, which include greatly enhanced disclosure of delivery failures and shorting activity.
2. Today, the SEC brought its first enforcement cases against illegal naked short selling.
3. Also today, FINRA expelled a member firm for engaging in illegal short selling.
4. Jim Cramer has been deeply and publicly shamed. Herb Greenberg is now a ‘consultant’. Bethany McLean has left business journalism. Dan Colarusso continues looking for steady employment. Roddy Boyd, Carol Remond and Joe Nocera all retain their former positions, but seem to steer clear of anything resembling the issue of naked shorting.
5. The DTCC is mum on the issue as well.
6. Gary Weiss – since abashed and banned from Wikipedia – sinks ever deeper into obscure irrelevance while the Wikipedia article on naked short selling that he once controlled has been liberated and made to read nearly as it should.
7. Substantive legislation with the capacity to end illegal naked short selling and other short-side market abuses once and for all is currently working its way through Congress.
8. As of today, the Reg SHO Threshold Securities list is 23% shorter than it was on the day I met Patrick Byrne (and 90% smaller than it was at its height in July of 2008), and is nearly devoid of the kinds of promising, well-capitalized companies whose inclusion used to be a sure sign of an impending bear raid.

These are all developments that seemed impossible in the dark days of 2006.

But here we are.

Yes, the pendulum is now unambiguously swinging in our direction, but the job is not done. Indeed, we can only be assured of progress to the extent that we each recognize our responsibility to continue pushing.

Last Tuesday, February 24, 2009, the Congressional Research Service published a 40 page report, “Who Regulates Whom? An Overview of U.S. Financial Supervision” (Mark Jickling, Edward Murphy, CRS, February 24, 2009)  As the title suggests, the report is a primer on the parts of the US financial system, and who regulates which part.  As the Summary section puts it:

“This report provides an overview of current U.S. financial regulation: which agencies are responsible for which institutions and markets, and what kinds of authority they have….This report does not attempt to analyze the strengths and weaknesses of the U.S. regulatory system. Rather, it provides a description of the current system, to aid in the evaluation of reform proposals.” (Page 2)

And in the Introduction:

“A number of studies and reports have already proposed broad changes to the division of supervisory authority among the various federal agencies and in the tools and authorities available to individual regulators. This report provides a basis for evaluating and comparing such proposals by setting out the basic structure of federal financial regulation as it stood at the beginning of the 111th Congress.” (Page 5)

And describe the basic structure of the the financial system, its regulators, and their regulatory principles, it does, thoroughly, in 35 more pages of clear and informative, if not exactly gripping, prose. It covers US banking regulation and federal securities regulation, the regulation of derivative trading and of GSE’s such as Freddie Mac and Fannie Mae, and the non-regulation of foreign exchange and US Treasuries, nonbank lenders, hedge funds and venture capitalists. I confess it answered every question I could think to ask regarding the parts of the US financial system and which office of government regulates each part. I commend Messiers Jickling and Murphy for so thorough and well-organized a review of that subject.

There’s just one thing: it does not mention the Depository Trust and Clearing Corporation. In fact, it does not mention securities settlement.

Does that seem strange?

Consider this: The regulatory structure of the US capital market was set in the Secuties Exchange Act of 1934. It devoted a section (immediately after the section on Directors, Officers, and Principle Shareholders, and the section establishing the need to keep records), to describing the need for a “National System for Clearance and Settlement of Securities Transactions” (Section 17a). Its opening is instructive:

“a. Congressional findings; facilitating establishment of system

“1. The Congress finds that–

“A. The prompt and accurate clearance and settlement of securities transactions, including the transfer of record ownership and the safeguarding of securities and funds related thereto, are necessary for the protection of investors and persons facilitating transactions by and acting on behalf of investors.

“B. Inefficient procedures for clearance and settlement impose unnecessary costs on investors and persons facilitating transactions by and acting on behalf of investors.

“C. New data processing and communications techniques create the opportunity for more efficient, effective, and safe procedures for clearance and settlement.

“D. The linking of all clearance and settlement facilities and the development of uniform standards and procedures for clearance and settlement will reduce unnecessary costs and increase the protection of investors and persons facilitating transactions by and acting on behalf of investors.”

It seems that in 1934 Congress thought having securities transactions clear and settle promptly was pretty important.

Which makes it especially odd that in 2009, in the Congressional Research Service’s admirably thorough report on the parts of the US financial system and the regulators who oversee them, no mention is made of that “”National System for Clearance and Settlement of Securities Transactions”  whose establishment Congress in 1934 found “necessary for the protection of investors.”

I am reminded of an event from early 2005. It was the early days of the Mitzvah. I was having trouble synthesizing the data. It would be more honest of me to say: the data suggested that our settlement system was Swiss Cheese, an enormous derivative risk was building up that no one understood, the same SEC to which I had spent a lifetime looking up in awe and fear was actually lapdog to a tight circle of Wall Street crooks, the savings of America were being looted, and it was all going to end in systemic collapse.  But clearly, I thought, that’s crazy. So I was having trouble forming a hypothesis to fit the data, other than a crazy one.

I decided to find out who regulated the DTCC. Listen to what they had to say. No doubt I’d learn some piece of the puzzle that I was missing, something that would cause the light bulb to go on and me to say, “Oh, that’s where this is coming from. Oh, I see, there’s nothing to worry about after all.”

The problem was, I could not find out who regulated the DTCC. It was not on their website. I couldn’t find any government agency that claimed to regulate the DTCC, or any news story that mentioned the subject of DTCC regulation. A core finding of Congress in 1934, in the foundational document of modern regulation, established that something had to be done, but 71 years later I could find no evidence that it was the job of anyone in the federal government to do it. And that’s odd because usually government agencies fight turf wars over who gets to regulate this or that. But here was a great vital section of the Securities Exchange Act of 1934, authorizing the establishment of a crucial component of the system, yet no one seemed to be doing it.

That can’t be right, I thought. Clearly just another moment of bad craziness.

So I went to see two securities lawyers whom I knew socially. I asked them if they would research something for me, that I would be willing to pay them for their time, and that they did not have to worry about writing anything formal. I just needed from them one simple sentence of the form, “The DTCC is regulated by _____ .” They agreed to produce it.

A week later I went to visit them. For some time they sat hemming and hawing and scratching their heads, until finally they told me: “We can’t seem to find anything that establishes who regulates the DTCC, or even if it is regulated. We found one mention of the subject, in a footnote in a GAO report from a couple years ago. They say they think the SEC regulates the DTCC, but they don’t sound very sure.”

From the looks of it, neither is the Congressional Research Service.

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?“

This black box organization–the Depository Trust and Clearing Corporation (DTCC)–claims to “centralize, standardize and streamline processes that are critical to the safety and soundness of the capital markets.” In other words, if somebody sells a security, the DTCC is supposed to make sure that a real security is cleared, settled, and delivered to its purchaser.

But it does not do that. We have long known that the DTCC enables brokers to routinely fail to deliver the stock that they have sold on behalf of their hedge fund clients. All the while, the DTCC has waged a fierce and grossly misleading public relations campaign aimed at convincing the public that illegal naked short selling (which results in extended failures to deliver) is not a problem.

This is appalling given that even the exchanges’ limited data show that failures to deliver peaked at more than 2 billion shares last summer, just before the SEC issued its temporary “emergency order” protecting 19 financial companies from naked short selling. That is, on most days in June, there were more than 2 billion phantom shares circulating in our markets.

In fact, the problem is much larger than that. Many fails occur “ex-clearing” and in other parts of the system that are not monitored by the exchanges. But we do not know precisely how large the problem is because the DTCC has refused to release complete data.

What is certain, though, is that 70% of those failures to deliver were concentrated on no more than 100 companies – driving down the companies’ share prices, and making it difficult for them to raise the capital they needed to survive. The affected companies included Bear Stearns, Lehman Brothers, Washington Mutual, Merrill Lynch and several dozen other now-defunct financial firms.

And it is not just stock that isn’t getting delivered. Euromoney, the most respected financial publication in Europe, has revealed that there are massive failures to deliver even of U.S. Treasuries. “Failures in U.S. Treasuries were 8.6% of all treasuries outstanding in the first five months of this year, compared with 1.2% in the first five months of 2007,” Euromoney reported last week. “That has ballooned further over the past three months, hitting more than $2 trillion for almost the entire month of October – more than 20% of the daily treasuries trading volume.”

More than $2 trillion worth of phantom Treasuries – that cannot be good for the economy.

Bloomberg Newswires, meanwhile, recently reported that investors are complaining that Goldman Sachs is routinely failing to deliver corporate loans that it sells. According to the complainants, Goldman’s traders are selling debt that they do not own in order to further the destruction, and profit from the short selling, of public companies that are its own clients.

This is not surprising. Goldman is the proud owner of what used to be called Spear, Leeds & Kellogg – a brokerage that was long known as the most egregious perpetrator of naked short selling. Goldman has, of course, joined the DTCC and few miscreant hedge funds in trying to cover up the problem.

A similar outrage is occurring in the market for credit default swaps (bets that borrowers will default on their debt). Hedge funds and brokers are selling (quite often to themselves) virtually unlimited numbers of these swaps, even when they do not correspond to any real underlying debt. These are phantom swaps – and the increased volume creates the perception that target companies are on the verge of collapse, which of course, benefits the hedge funds, which are simultaneously short selling the phantom stock..

The DTCC has the authority to crack down on delivery failures. It has the power to tell us who, exactly, is committing the crimes.

Unfortunately, the government has no power over the DTCC. Officials from the Securities and Exchange Commission, which has limited oversight, admit that they have no clue how the DTCC operates and that they visit the organization only once a year.

So, of course, the DTCC protects the criminals. It protects the criminals because it is owned by the criminals. That is, the DTCC is a quasi-private organization owned by Wall Street brokers – the very same people who serve the hedge funds who seek to profit from the destruction of our economy.

This seems to me like a pretty big scandal.

And yet, aside from the excellent but sporadic reports from Bloomberg and Euromoney, the media continue to act as if there is nothing to see. The financial crisis, we read over and over in The Wall Street Journal, was caused by those bad subprime mortgages—end of story.

This is what we read because too many journalists have only two kinds of sources: hedge fund managers and people who do nothing more than repeat what they hear on CNBC. And CNBC has two kinds of sources – those same hedge fund managers and people who do nothing more than repeat what they read in The Wall Street Journal.

And thus is the conventional wisdom woven from a vicious cycle.

We can only “hope” that the new president’s economic advisers are honest people who know that truth resides in the details – not in the noise, not in a black box, and not in the tacky mansions of Greenwich, Connecticut.

* * * * * * * *

P.S. One encouraging sign is that former Deputy Secretary of Commerce Robert Shapiro has been named to Obama’s transition team. Shapiro is one of the world’s foremost experts on naked short selling and failures to deliver. He has plowed through the data – he knows all the details – and he understands the seriousness of the problem. Maybe he can make the president understand, too.

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?“

Two and a half years ago, Overstock.com CEO Patrick Byrne penned an editorial for The Wall Street Journal, warning that widespread stock manipulation schemes – including abusive naked short selling – were threatening the health of America’s financial markets. But it wasn’t published.

“An editor at The Journal asked me to write it, and I told him he wouldn’t be allowed to publish it,” Byrne says. “He insisted that only he controlled what was printed on the editorial page, so I wrote it. Then, after a few days, he got back to me and said ‘It appears I can’t run this or anything else you write.’”

The Journal never changed its stance. But last week, the editorial finally saw the light of day at Forbes – after Byrne added a few paragraphs explaining that naked shorting had hastened what could turn out to be the biggest financial crisis since The Great Depression. (get the rest here)

Like any responsible journalist, it’s my policy to allow the subjects of my reporting an opportunity to respond when they are cast in a critical light. However, when approached for comment on something I wrote about him one year ago, Boyd made it quite clear that he would rather I not contact him for any reason, ever again.

Based on that exchange, I did not ask Roddy for comment when I recently wrote about what I perceive is his role in DTCC’s January 2006 PR campaign aimed at deflecting criticism of the organization’s role in enabling illegal naked short selling.

Recently, Roddy contacted me to take issue with four points I made in that piece:

1. While I reported that Boyd appeared to be running interference for DTCC’s Goldstein when answering – on Goldstein’s behalf – my long-ignored request for comment on Gary Weiss’s apparent use of a DTCC computer, Boyd insists he was merely doing us both a favor by personally conveying to me Goldstein’s comments on the issue.
2. While I suspect Gary Weiss has had an extensive relationship with DTCC, Boyd says DTCC’s Goldstein has personally denied as much to him on multiple occasions.What remains unclear is why, for 18 months, Goldstein has insisted on answering my questions through Roddy Boyd.
3. While I reported that the publication of Roddy’s review of Gary Weiss’s second book appeared to be timed to support the launch of DTCC’s January, 2006 PR initiative targeting critics of naked short selling, Boyd denies this.Indeed, it is reasonable to consider the possibility that instead of Roddy timing the publication of his review of Weiss’s book to coincide with the launch of DTCC’s January 2006 PR initiative, the initiative itself might have instead been timed to coincide with the publication of Roddy’s review. This is a likely explanation, given Weiss’s apparent foreknowledge of the review’s publication date.
4. While I reported that Boyd and Weiss had a relationship that predates Boyd’s review of Weiss’s book, Boyd says he and Weiss didn’t connect until just before January 22, 2006, and that Boyd received the book not from Weiss himself, but from the publisher sometime in early December, 2005.I based my original reporting upon an email exchange between Roddy and Floyd Schneider (read this to learn how I came to posses emails between the two) which leaves no doubt that by at least January 15, 2006, Boyd knew enough about Weiss know he and Schneider were friends, and that Boyd could confidently ask Schneider to dig up negative information about public companies featured in stories Boyd was working on at the time. Boyd insists that knowledge came not from his relationship with Weiss, but from reading Weiss’s book, which does prominently mention Schneider.

Though Roddy and I may not completely agree on our respective interpretations of the facts surrounding this episode, I appreciate his willingness to address them with me on the record.

Finally, I would suggest that anyone entertained by DTCC’s bizarre approach to public relations read this exchange between Stuart Goldstein and Fox Business News host Alexis Glick, to see that I’m far from the only person receiving inadequate responses to reasonable requests for comment made of Stu Goldstein.

The basis for that conclusion is explained here.

This may not seem like a big deal to most, but it turned out to be a huge deal to those of us who had spent a full year enduring Weiss’s attacks without any clear understanding of his motivation.

We knew his aim was to discredit and marginalize high profile opponents of illegal naked short selling. Yet his book, which seemed to be the launch pad of Weiss’s campaign, was quite critical of both hedge fund and prime broker culture: the two obvious sides of the naked shorting equation.

So who was paying Weiss to spend all day, most every day, publishing his attacks via his blog, message boards, and Wikipedia?

Nobody had ever considered the DTCC.

But once we knew Weiss had used a DTCC computer – given the uniquely Fort Knox-like nature of the institution, and the fact that it could not have happened unless Weiss had official access – everything fell into place.

Suddenly, we noticed a very striking set of coincidences, commencing January 22, 2006.

On that date:

1. Roddy Boyd, then business writer at the New York Post, published his review of Weiss’s book Wall Street Versus America (an unheard-of six weeks before the book would be available in print). In his review, Boyd writes:

“The most provocative argument in Weiss’ book is that naked shorting — or short-selling a company’s stock without being able to borrow it first, per long standing rules — is not only a good idea, but a necessary one…This is guaranteed to send Overstock CEO Patrick Byrne and the other disciples of his “stop naked short-selling crusade” — Weiss dismisses the lot of them as the “Baloney Brigade” — into further spasms.”

2. Weiss published the first naked short selling-related post on his week-old blog.
3. Weiss Yahoo! Finance message board IDs lamborghini751, cupandsaucerwithsugar, and baloneysmasher were created and immediately put to use attacking opponents of illegal naked short selling.
4. One day later, DTCC issued the first of what would be eight naked short selling-related media releases over the next seven months. By way of comparison, during the seven months prior to January 23, 2006, DTCC issued zero releases on the topic.

Further examination made it clear that Weiss had an unusual relationship with those DTCC media releases, in that Weiss would promote them via his blog, stock message boards and Wikipedia articles in a rather systematic way, often long before anybody else was even aware of them.

Here’s an example:

• 1/27/2006 at 17:08 DTCC issued a media release
• 1/27/2006 at 23:55 Weiss published a blog item about the DTCC release
• 1/28/2006 at 09:22 Weiss adds DTCC release to Wikipedia article on naked short selling
• 1/28/2006 at 09:49 Weiss promotes DTCC release on Yahoo message board

Taking all these factors together, I’ve concluded that January 22, 2006 represents the beginning of an aggressive public relations campaign by DTCC, aimed at countering a growing perception that the organization is a key enabler of illegal naked short selling. I further conclude that a that time, Gary Weiss was operating in support of that effort and likely remains so today.

I requested a comment of DTCC spokesman Stuart Z. Goldstein – the likely architect of the above-mentioned PR campaign – but received only two strange responses, neither of which addressed my question.

When I persisted in asking Goldstein for comment, his came – and I cannot overstate how shocked I remain by this even today – from reporter Roddy Boyd, then of the New York Post.

It read:

From: Boyd, Roddy
Date: Feb 09 2007 – 1:03pm
Subject:
—–
judd,
I spoke to corp comm at DTCC and they told me, on the record, that weiss is not, nor has he ever, been employed or used by DTCC in any capacity, formally or informally. They categorically reject it and tell me that none of them have any recollection of ever talking to him, meeting with him or having any dealings with him.
categorically rejects it.
thats a big hump for a real reporter to get over.
let me put this politely:
As an investigative reporter, laughably per PB, you really,really are a much better PR person

In case you’ve forgotten, it was Roddy Boyd’s six week premature review of Weiss’s book, published January 22, 2006, that seems to have been the launching point of the DTCC’s PR campaign, described above.

For his part, Weiss called my conclusions of a relationship between him and DTCC a “malicious lie” and “absolute crap.”

At that point, I had a ton of circumstantial evidence pointing to DTCC as Weiss’s patron, and direct proof that Weiss had used a computer on DTCC’s network.

I also had the strangest denial, on the part Stuart Goldstein at DTCC, that I’ve ever seen.

But most importantly, I had the benefit of an extremely low-set hurdle to cross in order to prove that Weiss, Boyd and Goldstein were all engaged in a ridiculous lie.

After all, as Goldstein said through Boyd, nobody at DTCC has “any recollection of ever talking to [Gary Weiss], meeting with [Gary Weiss] or having any dealings with [Gary Weiss].”

What follows is the story of how we’ve sailed over that particular hurdle, thanks to some emails from Gary Weiss to paid stock message board basher Floyd Schneider. (Read this to learn how I came to posses these emails).

********

In addition to being the month in which DTCC launched its PR campaign against opponents of naked short selling, January of 2006 is also a significant time in that Mark Mitchell, then assistant managing editor of the Columbia Journalism Review, started work on what would go on to become The Story of Deep Capture.

Back then, as now, Gary Weiss seemed to be about the only non-pseudonymous person willing to go on the record in defense of naked short selling, which naturally made him a frequent point of contact for Mitchell.

Mitchell recalls as many as a dozen conversations with Gary Weiss in the first couple of months working on the story. In several of those conversations, Mitchell remembers Weiss awkwardly seeking to gauge Mitchell’s opinion of any recently-published DTCC media releases.

Among the topics Mitchell discussed with Weiss was Dr. Susan Trimbath, a former DTCC employee turned outspoken critic of that organization’s role in enabling illegal naked short selling. Mitchell recalls being surprised by how much the subject of Trimbath seemed to bother Weiss.

Given that bit of background, consider the following email exchange between Gary Weiss and Floyd Schneider.

It starts on March 13 at 9:41 AM, when Floyd emails Weiss a reference to a speech Dr. Trimbath had given a few months earlier.

To this, Weiss replies:

From: garyrweiss@verizon.net
To: Floyd3491@aol.com
Subject: Re: (no subject)
Date: Mon, 13 Mar 2006 09:49:27 -0500
Received: from unknown (HELO maincomputer) (garyrweiss@verizon.net@151.202.90.90 with login) by smtp101.vzn.mail.dcn.yahoo.com with SMTP; 13 Mar 2006 14:49:22 -0000
—–
Say, what is with this Trimbath? I ask because a particularly dimwitted reporter for Columbia Journalism Review is doing a story on media coverage that is widely expected to lean toward the balonies, and he is relying heavily on her.

Floyd immediately begins to pepper Weiss with every googled reference to Trimbath he can find – all of them quite positive – to which Weiss replies:

From: garyrweiss@verizon.net
To: Floyd3491@aol.com
Subject: Re: (no subject)
Date: Mon, 13 Mar 2006 10:49:12 -0500
Received: from unknown (HELO maincomputer) (garyrweiss@verizon.net@151.202.90.90 with login) by smtp103.vzn.mail.dcn.yahoo.com with SMTP; 13 Mar 2006 15:49:08 -0000
—–
Yeah, all pretty innocuous, which is she is a perfect front woman. I presume she expects to cash in as an expert witness or somesuch for the balonies.

The next day, DTCC issued a media release attacking Trimbath’s expert status and minimizing the importance of the position she held there.

The day after that, Weiss places a standing order with Floyd for any negative information on Dr. Trimbath he can find (searching for this sort of information is how Floyd spends an alarming portion of his days, by the way):

From: garyrweiss@verizon.net
To: Floyd3491@aol.com
Subject: Re: Aha!
Date: Wed, 15 Mar 2006 13:38:35 -0500
Received: from unknown (HELO maincomputer (garyrweiss@verizon.net@151.202.90.90 with login) by smtp101.vzn.mail.dcn.yahoo.com with SMTP; 15 Mar 2006 18:38:29 -0000
—–
Incidentally this Susanne Trimbath is the primary source of info on nekkid shorting for a complete idiot who is wriiting a story for the Col. Journalism Review. If you can think of anything particularly wacky that she has said, let me know.

A few minutes later, Floyd responds with something fairly unremarkable, to which Weiss replies:

From: garyrweiss@verizon.net
To: Floyd3491@aol.com
Subject: Re: Aha!
Date: Wed, 15 Mar 2006 13:47:54 -0500
Received: from unknown (HELO maincomputer) (garyrweiss@verizon.net@151.202.90.90 with login) by smtp103.vzn.mail.dcn.yahoo.com with SMTP; 15 Mar 2006 18:47:49 -0000
—–
You know, the thing that is bad is that this statement below would not be considered extreme by the doofus doing this article for CJR. Several of us are concerned that it is going to be a total baloney-piece. He is a real ham bone.

After Floyd sends still more non-scandalous Trimbath references, Weiss replies:

From: garyrweiss@verizon.net
To: Floyd3491@aol.com
Subject: Re: Aha!
Date: Wed, 15 Mar 2006 14:00:54 -0500
Received: from unknown (HELO maincomputer) (garyrweiss@verizon.net@151.202.90.90 with login) by smtp103.vzn.mail.dcn.yahoo.com with SMTP; 15 Mar 2006 19:00:49 -0000
—–
It has to be something fairly extreme. This guy really has me (and others of us a lot more than me) worried. I’ve drummed into this nitwit’s head about O’Baloney and it all just bounced off his concrete skull.

About an hour later, Floyd sends the prior day’s DTCC media release to Weiss, prompting this reply:

From: garyrweiss@verizon.net
To: Floyd3491@aol.com
Subject: Re: the whole article with link
Date: Wed, 15 Mar 2006 15:09:17 -0500
Received: from unknown (HELO maincomputer) (garyrweiss@verizon.net@151.202.90.90 with login) by smtp103.vzn.mail.dcn.yahoo.com with SMTP; 15 Mar 2006 20:09:12 -0000
—–
Yes I sent this to the bozo at CJR earlier today. The jerk emailed back indicating that he is chewing away at baloney. Very depressing.

In his emails to Floyd, Weiss makes it clear that he’s involved in active consultations with other individuals, who feel deeply concerned about the prospect of Dr. Trimbath’s influence on Mitchell’s story.

Because Dr. Trimbath addresses illegal naked short selling almost exclusively from the standpoint of the DTCC’s role, it’s very difficult to imagine that, when Weiss refers to “Several of us” and “others of us,” he’s not referencing officials at DTCC.

Armed with these emails as confirmation that Goldstein was not being honest, when he stated, through Roddy Boyd, that he “categorically rejects” the idea that anybody at DTCC has so much as spoken with Gary Weiss, I again asked Goldstein for a comment.

Goldstein refused to answer the question.

A great example of this is his denial of so much as editing Wikipedia, in the face of evidence that not only has he been a very active Wikipedia editor, but that he’s also engaged in an concerted effort to inject misinformation into the Wikipedia articles on naked short selling, prominent opponent of naked short selling Patrick Byrne, and Overstock.com, which is the company Byrne heads as CEO.

To give a little background, here’s what Weiss originally wrote (and later deleted) in his blog in response to my repeated claims that he was the now-infamous Wikipedia editor “Mantanmoreland”.

Bagley didn’t even pretend to have contacted me, not that it would have prevented him from publishing his smears — just as Wikipedia’s denial, and mine, has never prevented him from repeating, again and again, his malicious lie that I have edited Wikipedia.

About that same time, Weiss added this comment to his blog:

I think that it is indicative of Judd’s (and his boss’s) malice — in every sense of the word — that he would publish an outright lie while knowing that it is a lie. Both I and the DTCC have denied the total rubbish that he posted on his website.

Similarly he continues to publish the lie that I am this “Mantanmoreland” long after it was, again, denied by both myself and Jimbo Wales of Wikipedia.

Since ASM is an extension of Overstock.com, operated with the blessing and open and enthusiastic support of its CEO, I think that what you have here goes clearly beyond ethical issues. Of course corporate ethics is clearly never a consideration for Patrick Byrne, in earning the merit badges required to gaint he sought-after title of “America’s worst CEO.”
Gary Weiss | Homepage | 02.09.07 – 11:07 am | #

Before proceeding, let’s make sure everybody agrees that Gary Weiss insists my claim that he has edited Wikipedia is a “malicious lie.”

Everybody clear on that?

Good. Now on to Gary’s email. (Read this to learn how I came to posses email between Gary Weiss and another individual).

On 1/28/2006 at 7:19 PM, Floyd Schneider became aware of the battle that was raging for control of the Wikipedia article on naked short selling, and sent a link to Gary Weiss.

The next morning, Weiss sent the following two replies:

From: garyrweiss@verizon.net
To: Floyd3491@aol.com
Subject: Re: (no subject)
Date: Sun, 29 Jan 2006 11:13:46 -0500
Received: from unknown (HELO maincomputer) (garyrweiss@verizon.net@70.23.85.112 with login) by smtp101.vzn.mail.dcn.yahoo.com with SMTP; 29 Jan 2006 16:13:43 -0000
—————
Note that they’re hijacking that page. However, anyone can unhijack. You just go into edit mode, select all and copy the page when it is in good shape, and save it as a text file. That makes it easier to replace the page when it has been baloneyfied. I may insert a reference to my book at some point…..

From: garyrweiss@verizon.net
To: Floyd3491@aol.com
Subject:
Date: Sun, 29 Jan 2006 11:21:46 -0500
Received: from unknown (HELO maincomputer) (garyrweiss@verizon.net@70.23.85.112 with login) by smtp101.vzn.mail.dcn.yahoo.com with SMTP; 29 Jan 2006 16:21:43 -0000
—————
right now, for example, it is in pretty good shape. In fact….. well, here
is what one simply has to plug in… attached.

You can see the document Weiss attached here.

So, those are the emails.

Here’s what they tell us.

First, we now know that as early as 1/28/2006, Gary Weiss clearly had edited Wikipedia, which is not itself a big deal. Yet, Weiss calls the claim a “malicious lie.”

Indeed, it is Weiss who is lying.

Second, we now know (as if there were any doubt) that Weiss was “Mantanmoreland”. Here’s how:
Note Weiss’s IP address on January 28 and 29, 2006 as reflected by these two emails: 70.23.85.112. Now, look at the Wikipedia edit history of IP address 70.23.85.112.

As you can see, someone using the IP address 70.23.85.112 was eagerly editing the Wikipedia article on naked short selling on January 27 and 28, 2006 and then stops abruptly.

The final act of the editor at IP address 70.23.85.112 was to edit the article to appear precisely how it did in the file Weiss sent Schneider.

Wikipedia editor “Mantanmoreland” is created shortly thereafter and his first act is then to restore the naked shorting article to how it appeared where 70.23.85.112 left off (again, precisely mirroring the content of the attachment Weiss had sent to Schneider).

Weiss sent his second reply to Schneider before any edits were made to that version, noting “right now, for example, it is in pretty good shape.”

From this, we know that Gary Weiss = 70.23.85.112 = Mantanmoreland, and that Weiss’s MANY ongoing denials are among the more deeply disturbing lies I’ve witnessed another human concoct.

While hardly germane, given the gravity of the above, I’d like to make out two additional points (a little running up of the score, if you will).

First, the act of recruiting others to mimic one’s position when editing an article on Wikipedia is known as “meatpuppeting”, and is regarded as a serious offense in that silly culture. This is precisely what Weiss has done here, although there is no evidence that Schneider acted upon Weiss’s request.

Second, for all the times he has lied, Weiss certainly told the truth when he said, “I may insert a reference to my book at some point.”

Beginning one week after the publication of his second book on April 6, 2006, Weiss added (and very jealously guarded) dozens of references to his book, many of which persist to this day.

In February of this year, some felt that question was answered in the form of a minor yet tremendously significant incident from which it could be fairly deduced that Weiss was, on the morning of January 19, 2007, using a computer on the network of the Depository Trust and Clearing Corporation (DTCC).

The basis of that deduction is explained in detail here.

Given the enormous value of the financial assets over which the DTCC is steward, and the high level of security that must necessarily mediate access to the organization’s premises, much less data networks, one can immediately rule out any scenario in which Weiss might have been using that computer in anything other than a sanctioned capacity.

Over four days, DTCC Spokesman Stuart Goldstein ignored two emailed requests for comment on this situation. When he finally did respond to a third request received by a staffer over the phone, it was in the form of a blank email. A quick request to re-send the missing content was denied, and five repeat requests over the space of one week were ignored.

Then, in one of the strangest turns of events observed in this saga to date, on February 9, 2007, Goldstein’s reply was delivered, unprompted, by New York Post reporter Roddy Boyd.

From: Boyd, Roddy

Date: Feb 09 2007 – 1:03pm

Subject:

judd,

I spoke to corp comm at DTCC and they told me, on the record, that weiss is not, nor has he ever, been employed or used by DTCC in any capacity, formally or informally. They categorically reject it and tell me that none of them have any recollection of ever talking to him, meeting with him or having any dealings with him.

categorically rejects it.

thats a big hump for a real reporter to get over.

let me put this politely:

As an investigative reporter, laughably per PB, you really, really are a much better PR person.

Lest its meaning be lost on anybody, please carefully re-read and reflect on the sweeping significance of Mr. Boyd’s second sentence:

They categorically reject it and tell me that none of them have any recollection of ever talking to [Gary Weiss], meeting with him or having any dealings with him.

Now, please carefully read and consider the meaning of the following:

In recent weeks, a confidential source has delivered to AntiSocialMedia.net multiple emails, all pre-dating Mr. Boyd’s DTCC proxy denials, in which Gary Weiss refers to active consultations between himself and unnamed DTCC officials on a specific media-related matter.

These emails make no reference to the basis (whether paid or otherwise) of the relationship, but given the extreme lengths to which DTCC leadership has gone to deny so much as a conversation with Weiss, this development is suggestive of what can only be interpreted as unmitigated deception at the highest levels within that organization.

In February, Weiss called claims of a relationship between himself and the DTCC “absolute crap.”

Wishing to rule out the possibility that Roddy Boyd delivered anything but an accurate reflection of the DTCC’s position, earlier this week Stuart Goldstein was asked to affirm the accuracy of Boyd’s statement, as well as to comment on the existence of unspecified evidence that Gary R. Weiss has or has had a professional relationship with the DTCC.

Goldstein’s pithy reply consisted of three words:

From: Stuart Goldstein

date: May 23, 2007 3:01 PM

Subject: Re: Request for comment

Send your evidence.

Because the nature of the evidence does nothing to change the facts at hand, and in order to honor commitments of confidentiality made to sources, Goldstein’s request was not honored.

An additional request for comment has been ignored by Goldstein.

Given the length to which Goldstein has gone to obscure the truth in this matter, and the length to which Weiss regularly goes to specifically malign critics of the DTCC’s defense of illegal and abusive stock trade settlement failures, a disturbing picture of that organization’s policy of defamatory, surrogate-driven, scorched-earth public relations is beginning to emerge.

Update: 5/31/2007

An alert reader brings to our attention an earlier incident appearing to confirm Goldstein’s lax regard for truth when confronted with questions relating to the DTCC’s role in empowering illegal market manipulation by crooked stock lenders.

The following originally appeared here on May 11, 2004.

FinancialWire received a confidential email between a reporter and Stuart Z. Goldstein, Managing Director of Corporate Communications for the Depository Trust and Clearing Corp. in which Goldstein was represented as denying that a lawsuit filed by Nanopierce Technologies exists.

The chief spokesperson for the DTCC, whose board of directors represent a who’s who of financial entities, including Lehman Brothers, Citigroup / Solomon Smith Barney’s Corporate Investment Bank, and Morgan Stanley, was quoted as stating that the “lawsuit” did not exist and was simply “charges being leveled by internet crackpots.”

FinancialWire sent Goldstein a scanned copy of the actual court filing, which occurred April 29 at 12:15 p.m., and asked Goldstein if he or the DTCC still denied its existence or had any comments. No response was received.

It would be strange, but not unreasonable, had Goldstein himself not yet heard of the lawsuit when asked. But if that were the case, the proper response would be to explain as much. Instead, Goldstein was dismissive and insulting: the general embodiment of his employer.

But beyond Goldstein’s obviously striking social shortcomings, these are the mannerisms of an organization with something dark to hide, but utterly lacking in accountability.

What is that dark thing?

We know that it includes records of billions upon billions of dollars of failed stock trades (the one thing the DTCC is tasked with completing successfully). Some allege that beyond the records, there is also proof that elements within the DTCC are profiting wildly from this fraud.

Given what I’ve seen, I’m inclined to believe it’s true.

Convincing the reader of this can be accomplished through intellectual argument, which I will provide in due course in this section.

For now, however, I would like to proceed by first offering links to mainstream journalism that describes how this practice can achieve its evil effects. I am arguing, I know, the economic equivalent of saying, “Martians walk among us,” and I have learned that it is easier to do so if the reader first sees that other capable, serious, mainstream publications have glimpsed the Martians too, before I try to expose their plot. So first, please consult these sources:

• This article from Bloomberg Magazine.
• This Bloomberg Special Report (nominated for an Emmy for long-form investigative journalism)
• This Wall Street Journal article from summer, 2007 .
• This article from Time Magazine, September 2008.

Next will come a series of case studies about various well-known firms that have been affected by failures-to-deliver in their stocks (”failures to deliver” being, as the reader knows by now, the residue of naked short selling).
For the last part of this chapter, I will explain why it has taken so long for the finance guys to understand this problem.