Tag Archive | "fairfax financial"

The stories behind the Rocker and Gradient lawsuit story

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The stories behind the Rocker and Gradient lawsuit story


Today, short-selling hedge fund Rocker Partners paid Overstock.com (NASDAQ:OSTK) $5-million to settle the lawsuit filed against them in August of 2005. Rocker Partners also entirely dropped its own countersuit.

Overstock.com CEO Patrick Byrne is a frequent contributor to DeepCapture.com.

This is a major victory, not only for Patrick and Overstock.com, but for all public companies targeted by bear raiding hedge funds.

But thanks to the unusually skewed reporting surrounding it, chances are you either hadn’t heard about the suit, or were under the impression it was frivolous and certain to fail.

This presentation explains part of the story behind the coverage of the suit, using some innovative methods to explain why what you heard about the suit and its merits likely had little in common with the reality of it.

As promised in the video, researchers are encouraged to find additional links within the Facebook friend lists of the short-selling hedge funds and journalists and bloggers who love them. To make the process easier, I’ve compiled this spreadsheet. If you discover anything interesting, particularly with respect to the hedge funds and reporters linked to other bear raid targets, please write about your findings it in the comment section below.

Also, very shortly I’ll be adding an interactive, dynamic relationship browser to this post, which will make it easy for you to visualize these networks.

Posted in AntiSocialMedia with Judd Bagley, Deep Capture Book, Deep Capture Podcast, Featured Stories, The Deep Capture CampaignComments (326)

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Our Watchdogs and the Financial Scandal of the Century


“Accountability – Integrity – Reliability”

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.

* * * * * * * *

Posted in The Mitchell ReportComments (85)

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Email Exposes Short Seller Plot to Destroy a Public Company


This is Part 3 of an ongoing series.

Read Part 1

Read Part 2

A few years ago, a clique of influential journalists went to extraordinary lengths to cover up the problem of illegal short selling. In the face of indisputable data and evidence, the journalists insisted, over and over, that “naked” short selling (hedge funds manipulating stock prices by flooding the market with phantom stock) rarely occurred. And they said short sellers (who profit from falling stock prices) don’t set out to destroy public companies.

Moreover, if a person were to criticize illegal short selling, the reporters would smear that person’s reputation with a savagery that was almost without parallel in contemporary journalism.

At the time, these journalists were working at major news organizations like The Wall Street Journal, The New York Times, and CNBC, but most shared a common history: they had been founding editors or top employees of TheStreet.com, a financial news website. The few who had not worked for TheStreet.com were close colleagues of TheStreet.com’s owner, Jim Cramer, who is best known as the eccentric host of CNBC’s “Mad Money” program.

Having studied more than 1,000 stories by these journalists, I can assure the reader that nearly every one of them was sourced from a tight network of hedge fund managers, and that a great many of the stories were false or misleading. Moreover, most of the people in this network (including Jim Cramer himself) are tied in important ways to two famous criminals from the 1980s – Ivan Boesky and “junk bond king” Michael Milken.

And though I realize that is hard for some people to absorb this, I will continue to provide evidence that a surprising number of the “prominent investors” in this network have had dealings with associates of organized crime – the Mafia.

* * * * * * * *

Last spring, we published “The Story of Deep Capture,” which sought to explain the origins of the Deep Capture website (mission: “to bypass the ‘captured’ institutions mediating our nation’s discourse”) by way of exposing the machinations of the Cramer clique of journalists and their short selling sources.

One day after we published our story, Cramer had some kind of awakening. Whereas he had previously sought to whitewash short seller crimes, he now suddenly repeated our assertion that illegal short selling was a big problem – the same problem that precipitated the great stock market crash of 1929.

A few months later, abusive short selling was implicated by U.S. Senators, CEOs of major banks, the U.S. Chamber of Commerce, respected academics, prominent law firms, current and past chairmen of the Securities and Exchange Commission, and then-Treasury Secretary Hank Paulson in the near total collapse of our financial system.

Nowadays, Cramer is even more adamant. He says he knows a lot of short sellers. He says that short sellers are destroying public companies. He says they crushed the markets and they’re going to crush America too.

These short sellers, Cramer hollers, are downright “diabolical.”

* * * * * * * *

If you have not done so, please read Deep Capture reporter Patrick Byrne’s primer on naked short selling. Please read “The Story of Deep Capture.”

Think about what Cramer has said.

And then have a look at the following email.

= = = = =Begin Message= = = = =

Message # : 727

Message Sent: 02/22/2006 08:57:48

From: AHELLER3@bloomberg.net|ANDY HELLER|EXIS CAPITAL MANAGEM

To: JONKALIKOW@bloomberg.net|JONATHAN KALIKOW|STANFIELD CAPITAL

Subject: CNBC – FAIRFAX

Reply:

He did this one time before, and the stock went down 3 on the open, then closed up 1. the way to get this thing down is to get them where they eat, like the credit analysts and holders. we’re taking this baby down for the count. ads and I are going to toronto in 2 weeks for a group lunch. J

= = = = =End Message= = = = =

* * * * * * * *

That email was authored by a top employee of Exis Capital, which is an offshoot of SAC Capital — said by some to be the most powerful hedge fund on Wall Street. We can’t be certain who, aside from the email’s author and “ads” (Adam D. Sender, head of Exis), attended that “group lunch.” But from other emails we know that a particular “group” of hedge fund managers did, indeed, intend to take “this baby down for the count.”

The “baby” was Fairfax Financial, a major, publicly listed insurance and financial firm.

The above email (acquired through discovery in Fairfax’s lawsuit against some members of the “group”) makes reference in the first line to journalist Herb Greenberg, who bashed Fairfax on CNBC, apparently causing the stock to go “down 3 on the open.” Other emails in our collection (we’ll publish a couple more of them) suggest that Herb’s reporting involved nothing more than contacting the “group” to find out what he was supposed to say.

* * * * * * * *

Herb took Fairfax “down 3 at the open” in February 2006, right at the time that Herb, a founding editor of TheStreet.com, received a subpoena from the Securities and Exchange Commission. TheStreet.com also got a subpoena. So did Jim Cramer, the owner of TheStreet.com. Short seller David Rocker, a member of the “group” and then the largest outside shareholder of TheStreet.com, got a subpoena too.

At the time, the commission had opened a formal investigation into Gradient Analytics, a financial research firm that stood accused by multiple former employees of manufacturing false “independent” research reports in cahoots with short sellers (namely, the “group”) and letting the short sellers trade ahead of the reports’ publication.

The “group” – which also included “prominent investor” Jim Chanos of Kynikos Associates – had a similar scam going with “independent research” firm Morgan Keegan. Deep Capture reporter Judd Bagley broke that story more than a month ago. Bloomberg News, which seems to be the only major media outfit willing to write critically about these “prominent investors,” picked the story up last week.

The Wall Street Journal published a major, front-page article that exposed the dubious tactics that Jim Chanos and affiliated short sellers used to demolish public companies.

But that article was published more than twenty years ago — in 1985.

Since then, the Journal has not published a single negative story about Chanos and his friends. It has not published a single investigative story about abusive short selling.

When David Kansas, a founding editor of TheStreet.com, was running The Wall Street Journal “Money & Investing” section, that part of the paper served as little more than a mouthpiece for Rocker, Cohen, Chanos and affiliated “prominent investors.”

But last week, even The Wall Street Journal had to acknowledge that Chanos is now the target of an SEC investigation.

* * * * * * * *

When the SEC issued subpoenas in the Gradient investigation, one former Gradient employee provided a sworn affidavit stating that Herb Greenberg held his negative stories so that David Rocker could establish short positions that would make money when Herb’s stories caused stocks to do such things as go “down 3 at the open.”

At the time, Jon Markman, a founding editor of TheStreet.com and later managing editor of MSN Money was running a hedge fund out of Gradient’s back office. Former Gradient employees said that Markman was also trading ahead of Herb’s negative stories and Gradient’s false negative information. If true, this would likely be illegal.

But SEC officials say that the investigation in February 2006 was aimed at bigger prey than just Gradient and a few journalists. The commission was aware that some “prominent investors” were, in the words of our email author, taking companies “down for the count.” Good people at the SEC (the rank and file) hoped to put a stop to this.

But when the subpoenas were issued, Herb, Cramer and others in their media clique went berserk. They said journalists don’t have special relationships with short sellers. They said short sellers don’t destroy companies. Cramer famously vandalized his government subpoena – live on CNBC.

Under this “media” pressure, the SEC chairman announced that it would not enforce the subpoenas. Later, the SEC dropped its investigation altogether.

In an interview with Bloomberg News about the decision not to enforce the subpoenas, SEC attorney Kathleen Bisaccia said this: “To have the chairman publicly slap us in the face for doing our jobs – that really crushed the spirit of a lot of people for a long time.”

Indeed, former SEC officials say that this was a pivotal moment in SEC history. With morale sapped, the commission all but ceased to function.

Certainly, it did not stop the short sellers who would soon begin efforts to take some of Wall Street’s biggest financial institutions “down for the count.”

* * * * * * * *

Herb Greenberg, the journalist who took Fairfax “down 3 at the open,” and who was alleged to have allowed at least one short seller in the “group” to trade ahead of his stories, now runs an “independent” financial research firm that advertises itself as “bridging financial journalism and forensic analysis.”

We believe that Herb receives the bulk of his income from the above-mentioned “group” and affiliated “prominent investors.”

* * * * * * * *

From the above email it is evident that in addition to working with corrupt journalists, the “group” sought to destroy Fairfax Financial by getting “them where they eat.” That is, the hedge funds sought to “take this baby down for the count” by cutting off the company’s access to capital.

Sometimes “prominent investors” will merely dish dirt to a company’s lenders. Other times, the schemes are more complicated, with investors in their network actually financing the company. This gives them access to inside information and (in the case of convertible debentures) to stock that can be lent to affiliated short sellers.

In other cases, “prominent investors” will buy the company’s debt, package it into “collateralized debt obligations” (financial weapons of mass destruction that were pioneered by Michael Milken’s team at Drexel Burnham Lambert), and then trade it in such a way as to make it seem as if the company is in trouble.

When the time is right, the “prominent investors” fob off the debt to some witless or compliant pension fund. Then they tell people that they’re no longer financing the company – the company’s been “cut off.”

Meanwhile, the company will be subjected to unbridled “naked” short selling – hedge funds illegally selling stock that they do not actually possess (phantom stock) to manipulate down the share price. (By way of example: when the above email was written, SEC data showed that millions of phantom Fairfax shares had been “failing to deliver” on a daily basis.

What usually happens is that legitimate lenders see the plummeting stock price. They see a supposed “financial partner” yanking credit. They see the negative media. They see the debt trading at disturbing prices. They have short sellers feeding them horrible news about the company.

The legitimate lenders know the news is false. They know the company is credit worthy. But the negativity itself becomes a liability. The falling stock price is a liability. The legitimate lenders get worried. They raise their cost of capital, or cut if off altogether.

And so the “baby” goes “down for the count.”

* * * * * * * *

Fairfax survived this onslaught. Other companies were not so lucky.

Last year, Bear Stearns, Lehman Brothers, and dozens of other companies all went bust in a similar pattern — waves of naked short selling slightly preceding false stories planted in the media and then, suddenly, a financial “partner” cutting off a source of capital.

That is, short sellers got these companies “where they eat.”

Did the short sellers “cause” these companies to collapse? If a sniper shoots at a man who is swimming in a dangerous ocean current, and the man drowns, we cannot say for sure that the sniper “caused” the man’s death. But we can say that shooting at struggling swimmers is a crime.

Which short sellers committed the crimes? Only the SEC and the FBI can tell us for sure.

But we know which “group” attacked Fairfax Financial. We know that this same “group” and affiliated “prominent investors” attacked the big financial companies that collapsed last year. And we know that the people in this “group” are not passive investors.

Rather, when they attack a “baby,” they seek to take it “down for the count.”

Given that the collapse of the financial companies caused an economic catastrophe that will wipe out the jobs and savings accounts of millions of Americans, it seems that the “group” and affiliated “prominent investors” warrant further attention.

* * * * * * * *

One “prominent investor” is Adam Sender, proprietor of Exis Capital, the hedge fund that employs the author of the above email. As you will recall, Exis is an offshoot of SAC Capital, which is managed by Steve Cohen — described by BusinessWeek magazine as “the most powerful trader on the Street.”

As I noted in my previous piece, a former Mafia soldier turned private investigator offered to have one of Sender’s business partners buried in the Nevada desert. Sender claims to have declined this offer, but an FBI recording (hear it again here) suggests that Sender paid more than $200,000 to that former Mafia soldier and that Sender intended to “fix” his business partner and somehow bring about a “doomsday.”

Sender also hired a thug named Spyro Contogouris to harass and threaten executives of Fairfax Financial – part of the “group” effort to take that “baby down for the count.” In upcoming stories, I will publish some of Spyro’s shocking emails. In one, he told an FBI agent that somebody was threatening his life. He claimed that it was lawyers working for Fairfax Financial.

But that claim seems somewhat absurd. Fairfax Financial is a Canadian insurance company run by a mild-mannered immigrant from India named Prem Watsa, who is known as “the Warren Buffett of Canada.”

Given that Spyro wrote his email shortly before he was arrested by the FBI agent, and given that this FBI agent was investigating the “group,” it is possible that Spyro either made up the story to solicit sympathy, or the “group” was threatening Spyro’s life to prevent him from testifying.

Either way, it says something about the state of the American media that this intrigue, involving a major financial firm and some of the nation’s most “prominent investors,” is not front page news.

* * * * * * * *

The recipient of the email promising to take Fairfax “down for the count” was Jonathan Kalikow of Stanfield Capital, a hedge fund specialized in the trading of collateralized debt obligations.

Jonathan is a member of the mighty Kalikow family. The patriarch of this family is “prominent investor” Peter Kalikow, who was one of the largest financial backers of the stock manipulation firm run by Ivan Boesky, the famous criminal from the 1980s.

But Peter Kalikow is perhaps best known as the former owner of The New York Post.

When Kalikow owned the Post, the newspaper’s fleet of delivery trucks was handed over to members of New York’s five organized crime families. With Bonanno Mafia soldier Richard “Shellack-head” Cantarella presiding over the delivery bay, guns and drugs were loaded into the Post’s newspaper trucks and transported throughout the city.

Indeed, the New York Post became one of La Cosa Nostra’s principal smuggling operations.

* * * * * * * *

The other members of the “group” — David Rocker, Steve Cohen of SAC Capital, Jim Chanos of Kynikos Associates, and Dan Loeb of Third Point – have been discussed at length on this website. In upcoming installments, I will tell you more about them and others in their network.

They are all “prominent investors.”

To be continued…

* * * * * * * *

Mark Mitchell is a reporter for DeepCapture.com. He previously worked as an editorial page writer for The Wall Street Journal in Europe, a business correspondent for Time magazine in Asia, and as an assistant managing editor responsible for the Columbia Journalism Review’s online critique of business journalism. He holds an MBA from the Kellogg Graduate School of Management at Northwestern University. Email: mitch0033@gmail.com

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A hedge fund suite for Richard Sauer


In a recent interview, SEC whistleblower Gary Aguirre offered his insights into the regulatory failings that allowed the Bernie Madoff scheme to reach such enormous proportions for so long.

Aguirre places particular blame upon the “revolving door” culture that hangs over the SEC’s workforce, with its attendant promise of a lucrative move to the private sector in store for those whose approach to regulation is deemed acceptable to the regulated.

As Aguirre puts it:

The system maintains itself, because those that stay know their turn will come if they play the game. They see a director or associate director move onto a $2 million job with a Wall Street law firm. Then, the departed employee calls back to his former colleagues and says, “you know I really don’t think there is much of a case against so-and-so, I’d like for you to take a look at it.” And the case goes away; the system goes on in perpetuity … [There’s a] culture of ‘don’t rock the boat,’ the industry does not want ‘boy scouts,’ and if you can be effective with the SEC through your contacts, that is a very valuable asset you can bring to the table.

To summarize, Gary Aguirre says that a large part of the SEC’s widely-acknowledged (though not as yet fully comprehended) dysfunction results from the self-reinforcing cycle of:

  1. High level SEC staffers accepting positions with powerful institutional market participants, in order that they might…
  2. Pressure their former associates to take regulatory action beneficial to their employers, and in the process…
  3. Impressing upon former associates the value of regulating selectively – as the former staffer had done – in order to ensure their own eventual move to the private sector.

This revolving door dynamic is at the heart of the high degree of “regulatory capture” observed at the SEC and a central focus of this blog.

But enough of the theory of the SEC’s revolving door…let’s look at it in practice (as Mark Mitchell did in a superb item last month) through the example of Richard Sauer, former assistant director of the SEC’s Division of Enforcement.

First, a little background.

In June of 2003, after 13 years with the Commission – including seven as assistant director – Richard Sauer left the SEC for the law firm of Vinson & Elkins. There, among his clients, Sauer counted Rocker Partners hedge fund.

On October 6, 2006, the New York Times published Bring on the Bears, a rather lengthy opinion-editorial authored by Sauer, which argues, on the surface, that short sellers are as vital to healthy markets as predators are to healthy ecosystems.

Fair enough.

But set in the shadow of that well-worn market truism are some disconcerting clues as to Sauer’s mindset, both present and past.

For one, Sauer is dismissive of the uptick rule (a provision created to prevent bear raids intended to drive a company’s stock down) as an unfair vestige of a by-gone era, calling for its elimination.

For another, Sauer reveals that while at the SEC, he initiated many investigations into public companies based on the tips from short sellers betting on a drop in those companies’ stock prices. Indeed, he says short sellers were his only source for these kinds of investigations.

And for yet another, Sauer defends the relationship short-biased hedge funds have with journalists such as Herb Greenberg, Roddy Boyd, Carol Remond and Bethany McLean, while calling on the SEC to initiate enforcement actions against companies that “attribute their woes to conspiracies by short sellers,” and “retaliate against critics through defamation campaigns and manipulative short squeezes.”

As unsound as his logic is, on one point we can be certain: Sauer is at least telling the truth. A former co-worker confirms that while he and Sauer worked together at the SEC, Sauer had been involved, at least tangentially, in most of the investigations instigated by short-selling hedge fund Rocker Partners.

But the most telling sentence in Sauer’s op-ed piece is the one he didn’t even write, but which appears a the end, as an editor’s note. It reads:

Richard Sauer, a former administrator in the Securities and Exchange Commission’s enforcement division, joined the management at a short-biased hedge fund this week.

Of course, that short-biased hedge fund turned out to be Rocker Partners (which had recently changed its name to Copper River Partners).

In December of 2006 Institutional Investor Magazine published a small story on Sauer’s new gig, noting that “[hedge] funds regularly brought [Sauer] complaints of possible wrongdoing at companies they were betting against.”

When asked whether his job description at Rocker Partners might include getting future SEC investigations launched, Sauer responded, “it remains to be seen.”

In point of fact, thanks to emails produced through discovery in the Fairfax Financial (NYSE:FFH) vs. SAC Capital, et al, lawsuit, we know that there was nothing at all remaining to be seen, for by mid-November of 2006, Sauer had already emailed keyesr@sec.gov (someone he apparently knew well enough to address only as “Rob”), pointing him to one of the anti-Fairfax sites set up by Spyro Contogouris, and attempting to spin Contogouris’ then-recent arrest on embezzlement charges as a Fairfax-motivated act of retribution.

In light of what we’ve just learned, let’s revisit Gary Aguirre’s theory of regulatory capture at the SEC:

  1. Former Associate Director of Enforcement Richard Sauer accepts a position with Copper River Partners, a short-biased hedge fund known to be heavily shorting Fairfax Financial.
  2. Sauer pressures former SEC colleague Robert Keyes to take regulatory action likely to negatively impact the share price of Fairfax.
  3. Keyes is impressed by the need to regulate selectively – as Sauer had most likely done while at the SEC – in order to ensure his own eventual move to the private sector.

And the cycle continues.

Of Aguirre’s three requirements, we can state with certainty that in the case of Richard Sauer, the first two are satisfied. It is my opinion that the third requirement has been, as well.

What all this means is not that Richard Sauer is a bad person, for I don’t know a thing about his character. What I do know is that he has spent most of his professional career enabling bad people, first from within a fatally flawed regulatory agency, and later from without.

Mr. Sauer, if you’re reading this, given your recent unemployment following Copper River’s collapse, I sincerely hope you’ll hold out for a job that breaks the cycle of regulatory capture and actually makes the world a better place in the process.

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

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Spyro Contogouris and the gentle art of hedge fund persuasion


Among the disturbing facts contained in the recently unsealed documents obtained via discovery in the Fairfax Financial (NYSE:FFH) vs. SAC Capital, et al, lawsuit are the lengths to which short-selling hedge funds go to attack the leadership of the companies they’ve designated for destruction.

In the case of Fairfax, when the work of corrupt Morgan Keegan stock analyst John Gwynn and thestreet.com columnist Peter Eavis failed to get the job done, a “real” expert was called in; namely: Spyro Contogouris of MI4 Reconnaissance.

Contogouris and MI4 employee Max Bernstein were hired by Exis Capital Management, among the smaller of the half-dozen hedge funds comprising the “Enterprise” targeting Fairfax, in early 2005. Their primary mission was to gain access to material non-public information from sources in and around Fairfax. Their secondary mission seems to have been harassment of Fairfax executives, both public and private.

This effort got off to an impressive start, in the form of a 30-page document anonymously sent by Bernstein to Rev. Barry Parker, head of the Toronto church attended by Fairfax CEO Prem Watsa. The gist of Bernstein’s package was as follows: Prem Watsa bears a striking resemblance to a convicted swindler named Marty Frankel, and even if Watsa is not Frankel, Rev. Parker should beware and call Watsa to repentance for Fairfax Financial’s accounting.

In December of 2005, Contogouris and Bernstein created premwatsa.com, an attack site. In one exchange of instant messages, the two discuss how to use posts planted on stock message boards to build traffic to the site, and blithely speculate as to how Watsa and other Fairfax officers will react upon discovering it.

Meanwhile, Contogouris created a document, since discredited, dubbed “Fairfax Fraud Facts”, which he circulated broadly among journalists and analysts. This document sparked substantial negative coverage of Fairfax.

It was possibly in this context that, in an undated instant messenger exchange, Andrew Heller, manager of Exis Capital, told Bernstein: “tell spyro, bloomberg was taken care of, and he will receive payment.”

I contacted Heller, seeking context to clarify this potentially significant tidbit, but he refused to comment, citing the ongoing nature of the Fairfax lawsuit. The only thing of any substance Heller would say was that his hedge fund remains “up net 15% on the year.”

Congratulations, Mr. Heller.

MI4’s effort to secure inside information ramped up significantly in May of 2006.

On the 29th of that month, MI4 created the following “Intelligence Profile” on an officer of Fairfax (whose name is redacted):

On May 31st, Contogouris, posing as a reporter, gained access to the back offices of that Advent Group, a Fairfax subsidiary in London, trolling for potential insiders to act as sources.

The next day, Contogouris personally delivered a package to Advent Group CFO Trevor Ambridge, asking that Ambridge provide inside information or risk criminal prosecution.

From his emails, one gets the impression that this is the sort of thing Contogouris quite relishes. However, presently things would take a rough turn for the self-styled corporate spy.

The first blow came six weeks later, when Fairfax named Contogouris in the lawsuit that led to the document production that led to this post.

The second, more severe blow came in November of 2006, when Contogouris was arrested by the FBI, charged (and subsequently indicted) with engaging in an unrelated multi-million-dollar real estate fraud.

While this came as a surprise to many, seasoned observers might have predicted something negative was about to happen to Contogouris when, in late September of 2006, apropos of nothing, Rocker Partners order-taker and former New York Post business writer Roddy Boyd, wrote FBI’S SECRET SOURCE, claiming:

“An FBI spokeswoman confirmed to The Post that Spyro Contogouris, who analyzes companies’ balance sheets, was deputized by the FBI in June to approach Fairfax’s former chief financial officer, Trevor Ambridge, as part of an investigation into the insurance company’s accounting and stock trading.”

It’s worth noting that none of the other writers following up on Boyd’s story — myself included — managed to get FBI confirmation of the supposed “deputy” status bestowed upon Contogouris.

In fact, the United States Senate Judiciary Committee found Boyd’s claim sufficiently strange to specifically ask FBI Director Robert Mueller about it, three weeks after Contogouris was arrested. Mueller’s response (see pages 70 and 71) was simple:

“The FBI does not “deputize” members of the general public.”

So what was motivating Boyd and Contogouris?

For Boyd’s part, that’s simple: as is revealed in documents unsealed in the Fairfax case reveal, (documents which I will be examining here shortly), Roddy writes what certain short-selling hedge funds tell him to write.

As for Contogouris, I suspect that, aware of the trouble looming on the real estate front, he made contact with the FBI as a “confidential informant” (something you or I could do at any time) seeking to ingratiate himself with that agency, possibly earning what he expected would be some form of immunity from other prosecution in the process. Then, fearing that despite these efforts his arrest was imminent, Contogouris used his hedge fund contacts to plant the story with Boyd, hoping the feds would be too embarrassed to nab someone they apparently trusted enough to “deputize”.

Four months after his arrest, the story of Spyro Contogouris and Fairfax was examined at length by another high profile business writer, who practically tied herself in a knot attempting to distance Contogouris from Fairfax’s attackers while simultaneously lending credibility to his work.

The author of that piece was none other than Bethany McLean.

To quote my friend Patrick Byrne: “If only there were a pattern.”

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?

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Rocker Partners and Bethany McLean: the smarmiest guys in the room


In a recent item, I concluded — based on my analysis of an email exchange between former Fortune reporter Bethany McLean and Copper River Partners (formerly known as Rocker Partners) hedge fund manager Marc Cohodes — that McLean wrote a highly critical article about Fairfax Financial Holdings (NYSE:FFH) with the expectation that her work would cause FFH stock to drop precipitously in value.

By way of review, the evidence shows that Marc Cohodes of Rocker Partners hedge fund first approached Bethany McLean about Fairfax on December 7, 2006. Bethany then met with Rocker Partners employee (and former SEC attorney) Richard Sauer 11 days later, and presumably began work on what would become her March 6, 2007 article The inside story of a Wall Street battle royal shortly thereafter.

The evidence further demonstrates that when, by March 21, 2007, FFH stock price had gone up 45 points instead of down as expected, both McLean and Cohodes were unhappy.

Why would this be?

Anybody familiar with the ongoing conversation held on this blog knows the answer, but not wanting to take for granted that all readers here are either sufficiently seasoned or in agreement, I offer the following, which was, like the above-referenced email exchange, gleaned from the many documents gained through discovery in the Fairfax Financial vs. SAC Capital, et al, lawsuit; specifically, from records of Rocker’s evolving short position in Fairfax stock during the months before and after the publication of McLean’s article.

Beginning on January 4, 2007: ten trading days after McLean met with Richard Sauer, Rocker Partners shorted $2.4-million in Fairfax stock.

In February, Rocker added just over $100,000 to their Fairfax short.

Then, on March 1, 2007, three trading days before McLean’s article, Rocker added another $1.5-million to their position.

All told, Rocker was betting at least $4-million that the price of Fairfax stock would drop.

But unfortunately for Rocker, that’s not what happened.

Indeed, Fairfax stock rose a healthy 20% between March 6th and 22nd, when Rocker’s Marc Cohodes emailed McLean, wondering why Fairfax wasn’t dropping as a result of her story, as expected.

Apparently satisfied that circumstances were unlikely to improve, that very day Rocker began covering its short position…97,000 shares worth, to be exact. By the end of May, Rocker’s entire Fairfax short position was closed out, at a substantial loss.

Of course that’s all interesting, but as always, there’s more.

An analysis of the failed trades in Fairfax stock recorded and disclosed by the SEC for that period proves instructive.

Most notable is the sharp decline in FFH failures to deliver observed at the end of May, 2007. In fact, with the exception of a transient spike on June 8, fails are essentially reduced to zero at precisely the same time Rocker Partners closes out its FFH short position.

Given such a deep commitment to cheating, I find it surprising Rocker Partners never managed to be a more successful hedge fund.

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

1) email it to a dozen friends;

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Introducing John Hempton: the Plunderer from Down Under


While an examination of the recently-unsealed products of discovery in the Fairfax Financial (NYSE:FFH) vs. SAC Capital, el al, lawsuit reveals the extensive involvement of most all the usual players — both in the world of hedge funds and business journalism — one name, mostly unknown to those outside Fairfax circles, appears quite prominently: John Hempton of Sydney, Australia.

Hempton, it appears, conceived of and initially orchestrated the entire Fairfax fiasco. At the time, he was a senior analyst at Australia’s Platinum Asset Management hedge fund. Last year he left Platinum to join Global Value Investors, though on May 15 of this year, Hempton started a blog and began calling himself semi-retired; leading me to presume that some time in early May, Hempton and GIV parted ways.

Though possibly mere coincidence, Herb Greenberg abandoned his MarketWatch gig on May 1, 2008 while Bethany McLean announced her departure from Fortune three days later. Greenberg and McLean, as it turns out, both play notable roles in the apparent Hempton-inspired conspiracy.

A reading of Hempton’s early efforts to win converts to his thesis that Fairfax was a ticking time bomb waiting to implode suggests his conclusions were based on what he viewed as sound principles; he really was convinced, and composed multiple, lengthy missives outlining his reasoning. I suspect Hempton’s mistake was then convincing some of the worst people on Wall Street, whose methods fill the pages of this blog, and whose influence probably turned his project from a speculative to a criminal enterprise, dragging Hempton down with it.

That’s not to say that any of this absolves Hempton of blame.

For one, a 2002 email sent to Rocker Partners employee Monty Montgomery makes it clear that Hempton is prominent stock message board poster Brolgaboy (and brolgaboy1 on Yahoo Finance).

I asked Hempton to comment on or clarify this email, but he refused.

That may be because he knows that, thanks to the Yahoo Dissembler Sorting Algorithm bug, it’s possible to know with certainty that in addition to brolgaboy1, Hempton is also Yahoo posters jamiewoodford1, scudzy_short, zipperdydoodah, and (my favorite) mr_byrnes_sith_lord.

Between them, these accounts have many hundreds of posts on Yahoo Finance, to say nothing of the hundreds more posted to several other boards.

Here’s where I really begin to lose patience with John Hempton.

On August 15, 2005, Hempton created and began posting taunting messages under the name mr_byrnes_sith_lord. This was three days after DeepCapture.com contributor and Overstock.com CEO Patrick Byrne announced a lawsuit against Gradient Analytics and Rocker Partners hedge fund for conspiring to get rich by destroying his company. At that time, Byrne further announced that he had evidence of a central figure — whom Byrne metaphorically compared to the shadowy “Sith Lord” of the Star Wars series — coordinating these attacks in ways nobody had previously considered possible.

Also on August 15, 2005, Hempton created the Sith Lord blog, which he further used, over the space of two months, to deride Byrne for claiming that short-selling hedge funds might operate in a coordinated way to destroy public companies.

In case you’ve missed it, the extreme irony here is that at least initially, in the case of the attack on Fairfax Financial, Hempton himself filled a version of the very role he attacked Byrne for daring to claim exists.

More than just irony, this, my friends, is a perfect example hubris as defined by the ancient Greeks: an act of extreme pride and arrogance that humiliates the victim, and ultimately the perpetrator as well.

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

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Bethany McLean: your benefit of the doubt is hereby revoked


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

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

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

What changed my mind?

Christmas.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

415-350-88**

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

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

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

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

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

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

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

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

1) email it to a dozen friends;

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

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Fairfax and just the facts, Ma'am.


In July of 2006, Fairfax Financial Holdings (NYSE: FFH) filed a lawsuit alleging stock manipulation on the parts of several hedge funds, contract hedge fund operatives, and John Gwynn, an analyst with stock brokerage Morgan Keegan & Co.

The complaint is very enlightening and detailed in its claims, which can be broadly summarized as follows: certain hedge funds, which stood to profit by scuttling Fairfax’s stock price, illegally conspired and acted to do as much.

More specifically, the complaint says:

As a result of [S.A.C. Capital]’s frequent communications with Morgan Keegan and Gwynn, S.A.C. learns when Gwynn intends to issue reports and what they will say and, indeed, frequently directs Gwynn on when to issue reports and what to say. (p.14)

Also like S .A.C., Exis is a significant client of Morgan Keegan and has substantial influence over Gwynn, with whom Exis also collaborates closely. (p.15)

…[convicted hedge fund operative Spyro Contogouris] orchestrat[ed] negative analyst coverage — particularly through Gwynn… (p.18)

Gwynn collaborated with certain hedge funds, including Enterprise member Trinity Capital, in developing extreme criticisms of Fairfax to support both short-term and long-term shorting strategies dubbed “the Fairfax Project.” Gwynn communicated these developed criticisms and his intention to release a highly negative report containing those criticisms in a series of road show presentations to major hedge funds including, among others S.A.C., Lone Pine, Kynikos, Highfields, Greenlight Capital, and Perry Capital . The hedge funds participating in this discussions understood at their conclusion that Gwynn intended to initiate coverage of Fairfax with an extremely critical report, they understood and contributed to the substance of the criticisms to be included in the report, and they understood that the report’s release would be timed to provide them an opportunity to establish their short positions. These critical Morgan Keegan clients also understood that once they had established a short position in Fairfax, Gwynn would continue to support that position with negative reports until they covered. This understanding was critical because the Fairfax Project contemplated short-term and longer term components, the latter of which involved enormous potential exposure to the Enterprise if the stock price increased substantially. (p.20)

The S.A.C. Defendants, Exis Defendants, Lone Pine Defendants, Rocker Defendants, Third Point Defendants and Trinity Defendants…frequently had communications and coordinated with [John Gwynn] and caused [Gwynn] to disseminate [his] reports to numerous clients, investors, journalists, and media outlets… (p.62)

Reading the complaint in full, it’s clear that Gwynn’s actions played a pivotal role in the execution of the defendant hedge funds’ manipulation efforts.

So clear, in fact, it may have contributed to Gwynn’s decision, six months later, to terminate coverage of Fairfax Financial (a fact bemoaned by Herb Greenberg, not surprisingly one of Gwynn’s biggest fans).

As expected, the suit’s many named defendants responded to the complaint with indignant denials and, in the case of John Gwynn, a countersuit filed in November of 2007, accusing Fairfax of making him “a scapegoat” for the company’s “financial, legal and accounting problems.”

Today, ten months after Gwynn’s countersuit was filed, a spokesman for Morgan Keegan told Bloomberg that Gwynn has been fired “for violation of a firm policy relating to his apparent advance disclosure of his pending research coverage of Fairfax Financial Holdings.”

In other words, Fairfax was correct about what Gwynn was doing.

Given that fact, what are the chances Fairfax was not also correct about who benefited from Gwynn’s corruption: mega hedge funds such as S.A.C. Capital, Third Point Partners, Greenlight Capital, Rocker Partners, et al?

And, supposing that aspect is true, there would appear to be quite a bit of coordination between short-selling hedge funds and shady stock research outfits.

And that sounds suspiciously like the claim Deep Capture reporter Patrick Byrne has been making, ad nauseum, for over three years.

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Fairfax and just the facts, Ma’am.


In July of 2006, Fairfax Financial Holdings (NYSE: FFH) filed a lawsuit alleging stock manipulation on the parts of several hedge funds, contract hedge fund operatives, and John Gwynn, an analyst with stock brokerage Morgan Keegan & Co.

The complaint is very enlightening and detailed in its claims, which can be broadly summarized as follows: certain hedge funds, which stood to profit by scuttling Fairfax’s stock price, illegally conspired and acted to do as much.

More specifically, the complaint says:

As a result of [S.A.C. Capital]’s frequent communications with Morgan Keegan and Gwynn, S.A.C. learns when Gwynn intends to issue reports and what they will say and, indeed, frequently directs Gwynn on when to issue reports and what to say. (p.14)

Also like S .A.C., Exis is a significant client of Morgan Keegan and has substantial influence over Gwynn, with whom Exis also collaborates closely. (p.15)

…[convicted hedge fund operative Spyro Contogouris] orchestrat[ed] negative analyst coverage — particularly through Gwynn… (p.18)

Gwynn collaborated with certain hedge funds, including Enterprise member Trinity Capital, in developing extreme criticisms of Fairfax to support both short-term and long-term shorting strategies dubbed “the Fairfax Project.” Gwynn communicated these developed criticisms and his intention to release a highly negative report containing those criticisms in a series of road show presentations to major hedge funds including, among others S.A.C., Lone Pine, Kynikos, Highfields, Greenlight Capital, and Perry Capital . The hedge funds participating in this discussions understood at their conclusion that Gwynn intended to initiate coverage of Fairfax with an extremely critical report, they understood and contributed to the substance of the criticisms to be included in the report, and they understood that the report’s release would be timed to provide them an opportunity to establish their short positions. These critical Morgan Keegan clients also understood that once they had established a short position in Fairfax, Gwynn would continue to support that position with negative reports until they covered. This understanding was critical because the Fairfax Project contemplated short-term and longer term components, the latter of which involved enormous potential exposure to the Enterprise if the stock price increased substantially. (p.20)

The S.A.C. Defendants, Exis Defendants, Lone Pine Defendants, Rocker Defendants, Third Point Defendants and Trinity Defendants…frequently had communications and coordinated with [John Gwynn] and caused [Gwynn] to disseminate [his] reports to numerous clients, investors, journalists, and media outlets… (p.62)

Reading the complaint in full, it’s clear that Gwynn’s actions played a pivotal role in the execution of the defendant hedge funds’ manipulation efforts.

So clear, in fact, it may have contributed to Gwynn’s decision, six months later, to terminate coverage of Fairfax Financial (a fact bemoaned by Herb Greenberg, not surprisingly one of Gwynn’s biggest fans).

As expected, the suit’s many named defendants responded to the complaint with indignant denials and, in the case of John Gwynn, a countersuit filed in November of 2007, accusing Fairfax of making him “a scapegoat” for the company’s “financial, legal and accounting problems.”

Today, ten months after Gwynn’s countersuit was filed, a spokesman for Morgan Keegan told Bloomberg that Gwynn has been fired “for violation of a firm policy relating to his apparent advance disclosure of his pending research coverage of Fairfax Financial Holdings.”

In other words, Fairfax was correct about what Gwynn was doing.

Given that fact, what are the chances Fairfax was not also correct about who benefited from Gwynn’s corruption: mega hedge funds such as S.A.C. Capital, Third Point Partners, Greenlight Capital, Rocker Partners, et al?

And, supposing that aspect is true, there would appear to be quite a bit of coordination between short-selling hedge funds and shady stock research outfits.

And that sounds suspiciously like the claim Deep Capture reporter Patrick Byrne has been making, ad nauseum, for over three years.

Posted in AntiSocialMedia with Judd BagleyComments (5)

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