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Blue Kryptonite and naked short selling

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Blue Kryptonite and naked short selling


bizarro-code

The Bizarro World Code

Within minutes of my introduction to the world of short selling hedge funds, I encountered the analogy that remains the best suited to describe the truth to which they subscribe: Bizarro World.

A planet that appears from time to time in the DC Comics universe, Bizarro World is noteworthy for its utter opposition to everything associated with reality on Earth (in fact, another name for Bizarro World is Htrae – “Earth” spelled backwards).

Bizarro World made very infrequent appearances in the DC Comics universe; however what few insights we’ve been able to gain have been telling.

For one, we know that the residents of Bizarro World adhere to a simple moral code: “Us do opposite of all Earthly things! Us hate beauty! Us love ugliness! Is big crime to make anything perfect on Bizarro World!”

bizarrosuperman

Bizarro Superman

For another, consistent with its black-is-white nature, the alpha-superhero of Bizarro World – a Superman-like figure appropriately named ‘Bizarro’ – is in fact a super villain, and one of many.

Fortunately, or possibly unfortunately, the Bizarro World of short selling hedge funds sits side-by-side with our own. Yet, true insights into how it actually operates have been startlingly rare.

Possibly the best behind-the-curtains view came in December of 2006, with Jim Cramer’s infamous admission as to how short selling hedge funds do (and indeed, according to Cramer, “must”) operate, moving the Bizarro World citizenship of that group from theory to undeniable fact.

See for yourself:

Cramer: “You can’t foment. You can’t create yourself an impression that a stock’s down. But you do it anyway because the SEC doesn’t understand it. So that’s the only sense that I would say that it’s illegal.”

Bizarro translation: “Us do opposite of all Earthly things! Us can break law to make money because regulator not understand regulations!”

Cramer: “Look what people can do. I mean that’s a fabulous thing! The great thing about the [stock] market is that is has nothing to do with the actual stocks. Look, over maybe two weeks from now the buyers will come to their senses and realize everything they heard was a lie…”

Bizarro translation: “Us hate beauty! Us pervert capital markets to make them hostile to small, promising businesses and technologies! Us stock market has nothing to do with actual stocks!”

Cramer: “These are all what’s really going on under the market that you don’t see. What’s important when you’re in that hedge fund mode is to not do anything remotely truthful – because the truth is so against your view, that it’s important to create a new truth to develop a fiction.”

Bizarro translation: “Us love ugliness! Us hate truth! Us prefer fiction!”

Cramer: “I think that it’s important for people to recognize the way that the market really works is to have that nexus of ‘hit the brokerage houses with a series of orders that can push it down’, then leak it to the press, and then get it on CNBC (that’s also very important), and then you have kind of a vicious cycle down. It’s a pretty good game.”

Bizarro translation: “Is big crime to make anything perfect on Bizarro World! Us make money by wrecking public companies! And here on Bizarro World, Jim Cramer not even pretend to be friend of small investor! Oh yeah…CNBC official network of Bizarro World!”

(Lest any suppose these clips have been taken out of context, I strongly encourage everybody to download and view the 10 minute conversation in its entirety.)

On Bizarro World, villains are treated like celebrities while the law-abiding are scorned and ostracized. So it should come as no surprise that on CNBC (the official network of Bizarro World), short selling hedge fund managers are called “titans” while those who question them are dismissed with a wink and a smirk.

Of course, this would seem consistent with the seemingly inverted reality that is short selling, where – as opposed to traditional investors who earn profits when they buy low and later sell high – shorts aspire to do the same by first selling high and then buying low.

While on the surface short selling might appear to have been invented on Bizarro World, that’s not true. Shorting is (as has been stated time and again on this blog) a healthy part of a normal market.

What was invented on Bizarro World, however, is shorting’s insidious doppelganger: naked short selling, which is a practice ripped straight from the Bizarro World welcome guide. Unlike legitimate short selling, which requires first borrowing the shares one sells short, naked shorting skips that step, allowing criminals to sell not only something they do not own, but something that does not even exist, except as a tradable electronic ledger entry which they themselves conspire with corrupt brokerages to create.

This, in turn has the effect of artificially increasing the supply of a company’s shares. In other words, on Earth, only companies get to issue stock, whereas on Bizarro World, it’s the naked short sellers that issue shares of a company’s stock, with impunity, sometimes in quantities rivaling the number of legitimate, company-issued shares in circulation (with the expected impact on share price).

Or, should I say, naked short sellers used to be able to do this.

The truth is, since shortly after the onset of the economic crisis naked short sellers themselves helped to spark, naked shorting has become an increasingly difficult crime to commit.

The result?

Despite the fact that we’re in the midst of an epic bear market – when one would normally expect short sellers to thrive – the biggest short selling hedge funds are getting hammered.

Today, Reuters business writer Svea Herbst-Bayliss has a shocking overview of the breadth of the situation, which she begins by comparing to Waterloo – the battle which forever put an end to Napoleon’s aspirations of world domination.

Based on insiders’ insights into forthcoming letters to investors explaining their performance over the first and second quarters of 2009, Herbst-Bayliss predicts that “To anyone considering hedge fund investments in the coming months, the data will illustrate that these managers who cashed in on last year’s financial markets crash now rank as the $1.4 trillion hedge fund industry’s worst performers.”

Specifically, Herbst-Bayliss notes, “In the first six months of 2009 [short selling hedge funds] lost 9.38 percent, compared with the 9.55 percent that other hedge funds gained.”

Most notably, the story quotes Brad Alford, a professional hedge fund advisor and investor, who says, “Every few years short-sellers have their day in the sun. Then things revert to normal where the markets rise and life becomes so difficult for them that many just go out of business,” he added.

In case you missed it, you might want to re-read Alford’s quote to make sure you catch what makes it so telling: that a rising market can be bad for short sellers.

But how can that be, given the recently-ended bull market – possibly the greatest in economic history – saw short selling hedge funds such as SAC Capital, Kynikos Associates and Third Point Capital experience mind-boggling growth, while a month-long rise in what is otherwise shaping up to be one of the greatest bear markets in economic history (when the shorts should be thriving) may prove to be their ultimate doom?

Talk about Bizarro World investing!

The difference, I suspect, is naked short selling: a crutch-like tool that allowed the shorts to defy gravity while the market soared, the effective removal of which has left them atrophied and uncoordinated when forced to fend for themselves in a market where capable, legitimate short sellers should thrive.

Blue vs. Green Kryptonite Click to see full version.

Blue vs. Green Kryptonite: Click to see full image

Or maybe a more apt metaphor is that of Kryptonite, the green version of which makes Superman weak and Bizarro strong, while the blue version has the opposite effect. For a long time, a captured media and SEC equipped short selling hedge funds with a big, fat slab of green Kryptonite, which their own hubris has caused to be replaced by a bit of the Bizarro-toxic blue stuff.

Will July of 2009 be the short sellers’ Waterloo?

Will short selling hedge funds’ greed simply assume another form?

Will the economy recover before it’s too late to matter?

Find out what happens in the next episode of Deep Capture!

Posted in Featured Stories, The Deep Capture CampaignComments (17)

Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 3 of 15)

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Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 3 of 15)



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

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

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

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

They said it was a suicide.

* * * * * * * *

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

* * * * * * * *

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

This information can be found in a book called “The Scorpion and the Frog”.  Also in this book, one of Felix’s partners states that Sater –  given a pseudonym, “Lex Tersa” – is the son of a high level boss in the Russian Mafia. The name of Sater’s father is Mikhail Sater.

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

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

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

And it involved a dispute over naked short selling.

* * * * * * * *

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

That may partly explain Dendreon’s tribulations.

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

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

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

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

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

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

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

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

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

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

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

* * * * * * * *

To be continued…Click here for Chapter 4

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

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Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 2 of 15)

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Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 2 of 15)



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

Click here to read PART 1

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

* * * * * * * *

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

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

Until recently, this behavior flourished owing to a rule called the “options market maker exemption” which is said to have been enacted thanks partly to the pleadings of a “prominent” market maker and investor named Bernard Madoff, who had considerable influence at the SEC. Madoff also obtained an exemption allowing market makers to sell short on a down-tick. The SEC was so grateful for his help in this regard that the commission named the new rule the “Madoff Exemption.” This was before Mr. Madoff became famous for orchestrating a $50 billion Ponzi scheme with help from the Mafia (CNBC’s Charles Gasparino has reported that Madoff might be tied to the Russian Mafia; whistleblower Harry Markopolis stated in Congressional hearings that Madoff appeared to have ties to the Russian Mafia and Latin American drug gangs; and Deep Capture’s own investigations suggest that Madoff did business with multiple people with ties to both Russian and Italian organized crime).

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

* * * * * * * *

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

To understand how completely anomalous these bets were, consider that in the entire universe of 11,500 hedge funds, only ten held large numbers (more than 150,000) of put options in Dendreon at the end of March 2007. Two of those ten funds held relatively few (200,000 each) put options in Dendreon and cashed out soon after the FDA advisory panel meeting. They do not appear to have otherwise been major traders in Dendreon, so I will not mention their names.

One of those ten hedge funds is Apollo Medical Fund Management, which is managed by a man named Brandon Fradd.  Fradd was once accused of burning documents relevant to a civil court case. Fradd was also once the limited partner of a criminal named Reed Slatkin, who was indicted for orchestrating the third largest Ponzi scheme in history. But Slatkin seems to have had minimal involvement in Apollo’s trading, and I have yet to uncover any evidence proving that Apollo is tied to naked short sellers or others in the network that this story intends to document. So let us give Fradd the benefit of the doubt.

Let us focus instead on the remaining seven of the ten hedge funds that held large numbers of put options immediately after the FDA’s advisory panel handed Dendreon its fantastic news, which was right at the time that Dendreon was bombarded by illegal naked short selling (phantom stock), and just before Dendreon was to experience some strange occurrences.

The managers of these seven hedge funds all know each other well. They have all worked with Michael Milken or Milken’s close associates. They include the following:

  1. a fraudster and naked short seller who is believed to have stolen billions of dollars with help from Russian and Italian organized crime;
  2. a trader working for a man who once managed, along with his father-in-law, the dirtiest, Mafia-linked brokerage on Wall Street.
  3. a trader who co-founded his fund with a man who was jailed for plotting to murder Michael Milken’s famous co-conspirator, Ivan Boesky;
  4. a man who became the “most powerful trader on the Street” after working for one of the most notorious, Mafia-linked brokerages on the Street;
  5. an accused naked short seller who was at the center of the greatest scandal in SEC history, and is now under criminal investigation;
  6. a fellow who once owned a fund that was charged in a massive naked short selling fraud and was later mixed up in a Mafia-connected, criminal naked short seller’s scheme to bribe agents of the FBI; and
  7. a Russian “whiz kid” who was the top trader for a man who once worked at a notorious Mafia-linked brokerage—the same brokerage that once employed the criminal naked short seller who bribed those agents of the FBI.

Again, judging from SEC disclosures of put option holdings, these seven colorful traders (plus Fradd, whom I have yet to tie to this network) were the only hedge fund managers on the planet who were placing serious bets against Dendreon after the FDA’s advisory panel voted in support of Provenge.

So let’s get to know more about these seven colorful traders–and then let’s try to surmise whether they knew about the strange events that were about to occur in the Spring of 2007, and whether those strange occurrences had anything to do with a “prominent philanthropist” named Michael Milken.

* * * * * * * *

To be continued….Click here for Chapter 3

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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Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 1 of 15)

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Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 1 of 15)



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

* * * * * * * *

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

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

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

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

* * * * * * * *

To be continued…Click here for Chapter 2.

If this article concerns you, and you wish to help, then:
1) email it to a dozen friends;

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

Posted in Featured Stories, The Mitchell ReportComments (133)

Patrick Byrne on New England Cable News

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Patrick Byrne on New England Cable News


Posted in Featured Stories, The Deep Capture CampaignComments (33)

Naked short selling – redefining systemic risk

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Naked short selling – redefining systemic risk


This is the newest video from Deep Capture Productions, examining the attack on Sedona Corp, and applying the insights gained from it to the broader market — including the possibility that the federal government has recently been spending billions of dollars to take the liability of accumulated failed trades off the books of broker-dealers.

Pressing the “embed” button will provide you with the code you need to embed this video on other sites. Kindly spread the word.
.

Posted in Deep Capture Podcast, Featured StoriesComments (231)

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The short heard 'round the world



This is the first anniversary of the destruction of Bear Stearns.

For a while there, just after it happened, everybody was talking about the role of short selling, both legal and illegal, in Bear’s rather violent passing.

Since then, the big question has gone from “who the hell set this fire?” to “how did this place devolve into such a firetrap, anyway?” and “how the hell do we get out of this burning building?”

Finding answers to all three questions is vitally important. Yet, I’m a little bothered by the fact that these days, so little attention is being focused on the first.

And so, exactly one year after criminal arsonists set a match to the over-leveraged heap of oily rags that was Bear Stearns, I offer up this video examination of that event, and those that would follow.

While I hope you will all enjoy and help circulate it, I should point out that this video was not primarily made for the frequent readers of DeepCapture.com (as everything in it has already been examined in these pages). Instead, it’s for those who’ve yet to understand why they should be outraged at what’s going on.

In other words, it’s primarily for future readers of DeepCapture.com.

Yet, I need you regulars to take a look, and then help get this out there. Plus, the music is pretty cool, so it’ll be worth your time to watch anyway.

Download:
Windows Media (85 mb).
Ipod compliant .mv4

Posted in Deep Capture PodcastComments (0)

Tags: , , , , ,

The short heard ’round the world



This is the first anniversary of the destruction of Bear Stearns.

For a while there, just after it happened, everybody was talking about the role of short selling, both legal and illegal, in Bear’s rather violent passing.

Since then, the big question has gone from “who the hell set this fire?” to “how did this place devolve into such a firetrap, anyway?” and “how the hell do we get out of this burning building?”

Finding answers to all three questions is vitally important. Yet, I’m a little bothered by the fact that these days, so little attention is being focused on the first.

And so, exactly one year after criminal arsonists set a match to the over-leveraged heap of oily rags that was Bear Stearns, I offer up this video examination of that event, and those that would follow.

While I hope you will all enjoy and help circulate it, I should point out that this video was not primarily made for the frequent readers of DeepCapture.com (as everything in it has already been examined in these pages). Instead, it’s for those who’ve yet to understand why they should be outraged at what’s going on.

In other words, it’s primarily for future readers of DeepCapture.com.

Yet, I need you regulars to take a look, and then help get this out there. Plus, the music is pretty cool, so it’ll be worth your time to watch anyway.

Download:
Windows Media (85 mb).
Ipod compliant .mv4

Posted in Deep Capture PodcastComments (114)

Tags: , , , , , , , , ,

Hedge funds reading tomorrow’s headlines today


Fairfax Financial Holdings (NYSE:FFH) was first listed on the NYSE on December 20, 2002. During its first 15 trading days there, volume averaged well under 180,000 shares.

Then, on January 16, 2003 FFH volume exceeded 500,000 shares on an otherwise uneventful day in the life of a Canadian insurance company.

The next day, January 17, 2003 Morgan Keegan analyst John Gwynn initiated coverage of FFH with a scathing report and rating of “underperform”, making for one of the more eventful days in the lives of Fairfax shareholders, as their investments took heavy losses on extremely high volume.

Because information drives markets, one would expect to see extra activity in the wake of new information, such as that introduced by Gwynn on the 17th.

But what accounts for the unusually high volume observed the day before Gwynn’s report was published?

The answer to that question would come in October of 2008, when Morgan Keegan announced that Gwynn had been terminated for sharing his unpublished research on Fairfax with a small group of short-selling hedge funds.

Thanks to email messages and trading data recently obtained through discovery in the Fairfax Financial vs. SAC Capital, et al, lawsuit, we know that hedge funds Kynikos Associates, Third Point Capital, and SAC Capital all traded ahead of this material, non-public information. According to legal briefs filed by Fairfax Financial, Rocker Partners (later Copper River Partners) did as well (Rocker Partners denies this, while fighting manfully to prevent disclosing the trading records that would establish the truth, one way or the other).

Trading on material, non-public information, dear readers, is illegal.

In attempting to unravel how all this came about, one hedge fund name appears over and over: Kynikos Associates, run by James Chanos, who also serves as Chairman of the Coalition of Private Investment Companies, the hedge fund industry’s Washington DC lobbying organ.

It started on December 11, 2002 when Kynikos employee Mark Heiman alerted Chanos that he had just learned from an analyst at Ziff Brothers Investments that a Morgan Keegan analyst was about to publish a negative report on Fairfax.

From: Mark Heiman
Sent: December 11, 2002 11:06 PM
To: James Chanos; Douglas Millett
Subject: Fairfax
I just got off the phone with ZBI’s insurance analyst, Michael Ting. He just talked to a new insurance analyst at Morgan Keegan, and apparently that analyst is about to initiate FFRX at “Underperform,” with the thesis being that they are extremely under-reserved into the $3-$5 BN area. Also, there may be an article in Forbes or Fortune soon that will be similarly critical.
Ting said he thought that analyst was one of the best P&C analysts he has talked to, and wanted to give us the heads-up, as well as hear how we’re coming at it.

The next day, Kynikos employee Matt Cantrell apparently contacted Gwynn, as he sent Ting several documents relating to Fairfax subsidiaries, with the comment, “John Gwynn believes these might be of interest to you.”

Four days later, Heiman spoke to Gwynn personally, having a conversation which he summarized in the following report to Chanos:

From: Mark Heiman
Sent: December 16, 2002 4:46 PM
To: James Chanos; Douglas Millett; Charles Hobbs
Subject: Fairfax
Just spoke to John Gwinn at Morgan Keegan, and he was more critical of FFRX than I’ve ever heard a sell side analyst. It looks like his criticisms of from the top to the bottom–everything from underwriting to accounting to dishonesty. He gave me his basics, as he is somewhat restricted because he hasn’t officially launched. It will be interesting to see how much of this the people who run the research department there will let him publish!

On December 18, 2002, Chanos forwarded Heiman’s email to Jeff Perry, then an analyst at SAC Capital.

The day after Fairfax began trading on the NYSE, Gwynn’s revelations became much more explicit as he shared with Kynikos employee Heiman portions of his forthcoming report on Fairfax.

From: Mark Heiman
Sent: December 21, 2002 6:03 PM
To: James Chanos; Douglas Millett; Charles Hobbs
Subject: Fairfax
Last night John Gwinn at Morgan Keegan faxed over to me an outline detailing the issues at FFH, basically those he will be publishing on. He has been a huge help and even offered to talk to me from his home today. We can look at these and talk to him next week–I just wanted to come in today and take a look at what he sent to get a head start on what he sent.

In the days to follow, Gwynn and SAC Capital Portfolio Manager Forrest Fontana held a face to face meeting where they discussed Fairfax.

Fontana followed up on that meeting via email to Gwynn:

From: Forrest Fontana
Sent: January 06, 2003 8:57 AM
To: John Gwynn
Subject: RE: hope you had a nice holiday!
you available to touch-base on Fairfax sometime this week?

Followed by Gwynn’s prompt and eager reply:

From: John Gwynn
Sent: January 06, 2003 9:01 AM
To: Forrest Fontana
Subject: RE: hope you had a nice holiday!
Name the time.

Fontana proposed a conversation the following day and requested a spreadsheet summarizing Gwynn’s analysis on Fairfax, which Gwynn promised to send.

On January 13, 2003 Fontana sent his boss, Steven A. Cohen himself, a summary of his planned activities for the week, which included:

Tuesday 1/14: Morgan Keegan expected to launch on Fairfax with sell rating – we will be covering into this.

As it turns out, Gwynn’s report was published on the 17th of January, not the 14th as Fontana expected. Still, it’s clear that SAC Capital was formally planning to trade ahead of the information received by Gwynn.

Trading records produced by Kynikos and Third Point all tell the same story: heavy short selling in anticipation of Gwynn’s report, and highly profitable short covering in the days that followed.

What did John Gwynn get out of all this? That’s unclear, though upon his firing, Morgan Keegan went to great lengths to say that Gwynn’s opinions were his own and not influenced by the hedge funds that profited from advance knowledge of them.

The next question is: did Morgan Keegan get anything out of this arrangement?

The answer is yes: On December 21, 2002, the day after Kynikos received Gwynn’s unpublished analysis, Kynikos money manager Douglas Millett declared his intention to begin sending business to Morgan Keegan.

Apparently, that’s how big hedge funds like Kynikos operate, which makes Kynikos President James Chanos the logical person to represent his peers before Congress as that body considers long-overdue reforms.

Addendum: today (January 9, 2009) I received a letter from the attorney of Rocker/Copper River Partners protesting my suggestion that the firm was among those trading ahead of the Morgan Keegan report on Fairfax referenced above. In short, Rocker says the analysis was released on January 16, 2003 and their short position established the following day. The story has been slightly edited to reflect their position. I am currently examining the specifics of Rocker’s objections — though find that difficult given Rocker’s attorneys have taken steps to keep sealed what they insist is exculpatory evidence — and will return to this issue shortly.

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?

Posted in The Deep Capture CampaignComments (49)

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Hedge funds reading tomorrow's headlines today


Fairfax Financial Holdings (NYSE:FFH) was first listed on the NYSE on December 20, 2002. During its first 15 trading days there, volume averaged well under 180,000 shares.

Then, on January 16, 2003 FFH volume exceeded 500,000 shares on an otherwise uneventful day in the life of a Canadian insurance company.

The next day, January 17, 2003 Morgan Keegan analyst John Gwynn initiated coverage of FFH with a scathing report and rating of “underperform”, making for one of the more eventful days in the lives of Fairfax shareholders, as their investments took heavy losses on extremely high volume.

Because information drives markets, one would expect to see extra activity in the wake of new information, such as that introduced by Gwynn on the 17th.

But what accounts for the unusually high volume observed the day before Gwynn’s report was published?

The answer to that question would come in October of 2008, when Morgan Keegan announced that Gwynn had been terminated for sharing his unpublished research on Fairfax with a small group of short-selling hedge funds.

Thanks to email messages and trading data recently obtained through discovery in the Fairfax Financial vs. SAC Capital, et al, lawsuit, we know that hedge funds Kynikos Associates, Third Point Capital, and SAC Capital all traded ahead of this material, non-public information. According to legal briefs filed by Fairfax Financial, Rocker Partners (later Copper River Partners) did as well (Rocker Partners denies this, while fighting manfully to prevent disclosing the trading records that would establish the truth, one way or the other).

Trading on material, non-public information, dear readers, is illegal.

In attempting to unravel how all this came about, one hedge fund name appears over and over: Kynikos Associates, run by James Chanos, who also serves as Chairman of the Coalition of Private Investment Companies, the hedge fund industry’s Washington DC lobbying organ.

It started on December 11, 2002 when Kynikos employee Mark Heiman alerted Chanos that he had just learned from an analyst at Ziff Brothers Investments that a Morgan Keegan analyst was about to publish a negative report on Fairfax.

From: Mark Heiman
Sent: December 11, 2002 11:06 PM
To: James Chanos; Douglas Millett
Subject: Fairfax
I just got off the phone with ZBI’s insurance analyst, Michael Ting. He just talked to a new insurance analyst at Morgan Keegan, and apparently that analyst is about to initiate FFRX at “Underperform,” with the thesis being that they are extremely under-reserved into the $3-$5 BN area. Also, there may be an article in Forbes or Fortune soon that will be similarly critical.
Ting said he thought that analyst was one of the best P&C analysts he has talked to, and wanted to give us the heads-up, as well as hear how we’re coming at it.

The next day, Kynikos employee Matt Cantrell apparently contacted Gwynn, as he sent Ting several documents relating to Fairfax subsidiaries, with the comment, “John Gwynn believes these might be of interest to you.”

Four days later, Heiman spoke to Gwynn personally, having a conversation which he summarized in the following report to Chanos:

From: Mark Heiman
Sent: December 16, 2002 4:46 PM
To: James Chanos; Douglas Millett; Charles Hobbs
Subject: Fairfax
Just spoke to John Gwinn at Morgan Keegan, and he was more critical of FFRX than I’ve ever heard a sell side analyst. It looks like his criticisms of from the top to the bottom–everything from underwriting to accounting to dishonesty. He gave me his basics, as he is somewhat restricted because he hasn’t officially launched. It will be interesting to see how much of this the people who run the research department there will let him publish!

On December 18, 2002, Chanos forwarded Heiman’s email to Jeff Perry, then an analyst at SAC Capital.

The day after Fairfax began trading on the NYSE, Gwynn’s revelations became much more explicit as he shared with Kynikos employee Heiman portions of his forthcoming report on Fairfax.

From: Mark Heiman
Sent: December 21, 2002 6:03 PM
To: James Chanos; Douglas Millett; Charles Hobbs
Subject: Fairfax
Last night John Gwinn at Morgan Keegan faxed over to me an outline detailing the issues at FFH, basically those he will be publishing on. He has been a huge help and even offered to talk to me from his home today. We can look at these and talk to him next week–I just wanted to come in today and take a look at what he sent to get a head start on what he sent.

In the days to follow, Gwynn and SAC Capital Portfolio Manager Forrest Fontana held a face to face meeting where they discussed Fairfax.

Fontana followed up on that meeting via email to Gwynn:

From: Forrest Fontana
Sent: January 06, 2003 8:57 AM
To: John Gwynn
Subject: RE: hope you had a nice holiday!
you available to touch-base on Fairfax sometime this week?

Followed by Gwynn’s prompt and eager reply:

From: John Gwynn
Sent: January 06, 2003 9:01 AM
To: Forrest Fontana
Subject: RE: hope you had a nice holiday!
Name the time.

Fontana proposed a conversation the following day and requested a spreadsheet summarizing Gwynn’s analysis on Fairfax, which Gwynn promised to send.

On January 13, 2003 Fontana sent his boss, Steven A. Cohen himself, a summary of his planned activities for the week, which included:

Tuesday 1/14: Morgan Keegan expected to launch on Fairfax with sell rating – we will be covering into this.

As it turns out, Gwynn’s report was published on the 17th of January, not the 14th as Fontana expected. Still, it’s clear that SAC Capital was formally planning to trade ahead of the information received by Gwynn.

Trading records produced by Kynikos and Third Point all tell the same story: heavy short selling in anticipation of Gwynn’s report, and highly profitable short covering in the days that followed.

What did John Gwynn get out of all this? That’s unclear, though upon his firing, Morgan Keegan went to great lengths to say that Gwynn’s opinions were his own and not influenced by the hedge funds that profited from advance knowledge of them.

The next question is: did Morgan Keegan get anything out of this arrangement?

The answer is yes: On December 21, 2002, the day after Kynikos received Gwynn’s unpublished analysis, Kynikos money manager Douglas Millett declared his intention to begin sending business to Morgan Keegan.

Apparently, that’s how big hedge funds like Kynikos operate, which makes Kynikos President James Chanos the logical person to represent his peers before Congress as that body considers long-overdue reforms.

Addendum: today (January 9, 2009) I received a letter from the attorney of Rocker/Copper River Partners protesting my suggestion that the firm was among those trading ahead of the Morgan Keegan report on Fairfax referenced above. In short, Rocker says the analysis was released on January 16, 2003 and their short position established the following day. The story has been slightly edited to reflect their position. I am currently examining the specifics of Rocker’s objections — though find that difficult given Rocker’s attorneys have taken steps to keep sealed what they insist is exculpatory evidence — and will return to this issue shortly.

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?

Posted in The Deep Capture CampaignComments Off on Hedge funds reading tomorrow's headlines today

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