Folks, today was history in the making. The Deep Capture thesis, which is that miscreant short-sellers have put the American financial system at risk, can no longer be in doubt.

First came the stunning announcement that the SEC has sent subpoenas to 50 hedge fund managers as part of a major investigation into rumor-mongering and illegal short-selling of Bear Stearns and Lehman Brothers. Then came the even more remarkable announcement from SEC Chairman Christopher Cox that he is instituting an “emergency action” requiring traders to pre-borrow stock before shorting all “substantial” financial companies.

Of course, there is a some bitter irony here. Over the years, hundreds of public companies have been grievously wounded by hedge funds who sell phantom stock (ie. stock they have not borrowed), and the SEC has done nothing. Now Wall Street finance companies, including the very investment banks whose prime brokerages facilitated the creation of phantom stock, find themselves victimized by phantom stock, and the government decides it’s time to do – or at least, say – something about it.

We’d be glad to see the big banks suffer their Shakespearean fates if the SEC were to rescue the hundreds of innocent victim companies who have been hollering about the phantom stock problem for years. We’ll see if the SEC extends the emergency action to the rest of the market, as Mr. Cox suggested it might.

Either way, all the talk of an “emergency” suggests that the SEC recognizes just how big the phantom stock problem has become. Obviously, it sees the catastrophe of Bear Stearns as a clear-cut case of short-seller abuse. A well-timed false rumor, presented as fact by CNBC, combined with phantom stock sales, took the bank down. Now, the same people are using the same tactics against Lehman Brothers. Fannie and Freddie are on the brink. And experts say there are 300-plus other publicly traded companies – including 50 finance companies — getting similarly clobbered.

An “emergency,” indeed.

All of which makes certain journalists look like bona fide clowns. For years, a clique of influential reporters—I call them “the Media Mob”–have insisted that short-sellers do no wrong and that phantom stock is not a problem. On Friday, Deep Capture noted that the media’s hedge fund apologists, including Joe Nocera of the New York Times, had shied away from commenting on the collapse of Bear Stearns.

The next day, Joe Nocera of the New York Times commented on the collapse of Bear Stearns. Predictably, he argued that short-sellers had nothing to do with it. He wrote, “it takes some gall for Bear Stearns to blame short sellers for its failure…what Bear Stearns management fails to mention is how much of its capital was tied up in subprime sludge.”

The sludge, Joe, is not the point. As your close friend Jim Cramer has described (behind closed doors, if not on CNBC), “the game” of market manipulation is to find a weakness and amplify it out of all proportion to reality. It is one thing to say that Bear’s balance sheet was weak (I agree, Bear was a piece of crap). It is quite another thing to get a compliant television reporter (in this case, Cramer crony David Faber, on CNBC) to spark a run on the bank by reporting, as if it were fact, the completely false and utterly catastrophic news that Goldman Sachs had cut off Bear Stearns’ credit – and to do that while somebody’s selling millions of shares that do not exist.

As we said last week, the SEC shouldn’t just subpoena the hedge funds: It should subpoena CNBC’s David Faber. He says a hedge fund “friend” gave him that information about Goldman cutting off Bear’s credit. That hedge fund “friend” very likely broke the law. The SEC needs to find out who he is. Journalists have no constitutional right to cover up crimes under the guise of protecting sources.

But short-sellers don’t commit crimes. So says the Media Mob. Why do they say this? The kindest explanation is that Nocera and crowd honestly believe that it is simply too dangerous to criticize shorts because shorts are so absolutely “vital” – the only people able to provide negative information to the markets and the media. This worn notion fails, of course, to make the distinction between law-abiding short-sellers who provide real analysis and crooks who circulate scurrilous lies while churning out phantom stock.

It also contains a stunning admission: that the financial media is incapable of conducting financial research on its own. Journalists consider short-sellers “vital” sources of negative information because journalists do not have the wherewithal to look at a balance sheet and determine for themselves whether something might be wrong. Baffled by all those numbers, the journalists turn to short-sellers (and sometimes even convicted criminals) for help. Which is another way of saying that our financial media is written in large part by financially motivated Wall Street sharks–a real abomination, when you think about it.

But in the case of Nocera, there is something even more sinister at play. To understand Joe Nocera’s positions on short-selling, it is necessary to understand the crowd he runs with. It is a clique of journalists and short-selling hedge funds, most of whom are connected in some way to CNBC’s Jim Cramer.

Some journalists challenge power; this clique of journalists covet it. They desire nothing more than to be players in “the game.” (Some are quite blatant about this; witness Nocera pal Herb Greenberg, who sells “forensic” research to short-sellers while using them as sources in his CNBC reporting).

These journalists defend their short-selling friends at all costs. They routinely pat each other on the back and pimp each others’ books. They quote each other in their stories, and snicker almost out loud as they attack the same public companies, always parroting the same financial analysis, delivered to them by the same small group of dubious hedge fund managers.

This is an old boys and girls network tighter than anything on Capitol Hill – and infinitely more saddening, because the media’s not supposed to be this way. .

You could see this network at work in the case of Gradient Analytics, a research shop that publishes blatantly false information for short-selling hedge fund managers, many of whom are connected to Cramer. For awhile, Jon Markman, a former editor for Cramer’s website, TheStreet.com, was running a dodgy hedge fund out of Gradient’s back offices, while one of Gradient’s managers was accumulating multiple identities and social security numbers to conceal his activities.

At the same time, the Media Mob, including CNBC’s Herb Greenberg, who was Markman’s former co-editor at TheStreet.com, churned out stories containing Gradient’s false information about companies that also happened to be victimized by phantom stock – and still more stories labeling anyone who mentioned the words “phantom stock” or “naked shorting” as “loony” or “seeing UFOs.” A former Gradient employee testified under oath that Herb conspired with Gradient and a hedge fund manager named David Rocker so that Rocker could illegally profit from his stories on CNBC and Marketwatch.com.

When the SEC launched an investigation into Gradient, and issued subpoenas to Jim Cramer and Herb Greenberg, the Media Mob rose up in their defense. Pathetically, the SEC allowed itself to be terrorized by this mob, and closed down its investigation before enforcing the subpoenas. When I began a story about this for the Columbia Journalism Review, the Media Mob turned on me. Joe Nocera called my editor to defend Herb and pressure CJR to kill my investigation. (This was unheard of; working journalists do not make quiet calls to try to have stories killed).

Then Nocera, Herb, and their friend Dan Colarusso, of the New York Post, sat on a famous panel at the Society of Business Editors and Writers. The panel’s stated mission was to defeat “business journalism bashers” – namely, Deep Capture reporter Patrick Byrne and Bob O’Brien, a.k.a. the “Easter Bunny,” a devastatingly effective blogger who had been writing about the media’s failure to cover the problem of phantom stock.

A Deep Capture ally snuck into Nocera’s panel and got it all on tape (see “The Story of Deep Capture” for the recording). Colarusso vowed to “crush” Patrick and the Easter Bunny with “barrels of ink.” Herb said that he wouldn’t write about phantom stock because it’s “not what I do” – even though a majority of the companies he had written about were phantom stock victims. Nocera, meanwhile, said that naked short-selling (phantom stock selling) “makes his eyes glaze over” and he “can’t be bothered” to cover it because “life is too short.”

Maybe so, but before and after that panel, Nocera wrote columns insisting that short-sellers do no wrong and phantom stock is not a problem – even though he had been presented with heaps of data proving otherwise. Nocera’s columns, widely circulated and praised by the Media Mob, contained no data and not a single reference to a credible source. One of his columns quoted, as an expert — Herb. Another column quoted the expert Roddy Boyd, then a reporter for the New York Post.

I know why Nocera quoted Roddy – Roddy’s a card-carrying member of the Media Mob who has worked closely with criminals doing dirty work for Cramer-affiliated short-sellers. (See “The Story of Deep Capture” for more on this.) Still, this was something amazing: the New York Times quoting a New York Post reporter as an expert! You’d think some editor somewhere would have wondered about this. (Roddy Boyd, now with Fortune, is, not incidentally, one of the few reporters still insisting that short-sellers of Bear Stearns and Lehman have done no wrong).

Last month, after we named Nocera in “The Story of Deep Capture,” Nocera wrote a column in which he was critical of Milberg Weiss, the law firm that was caught paying kickbacks to plaintiffs who filed bogus class-action lawsuits against public companies. He wrote, “I’ve long thought that [Milberg] ran a kind of extortion racket, filing class-action lawsuits against companies whose stock had dropped – without a shred of evidence that any wrongdoing had taken place – and then torturing them with legal motions until they settled.”

What Nocera did not mention (though we made it clear in “The Story of Deep Capture,” which Nocera had read) is that Milberg Weiss coordinated its attacks on public companies with short-selling hedge funds, skeezy “independent research” shops (most notably, Gradient Analytics) and Nocera’s media friends.

Indeed, a Gradient timesheet, obtained by Deep Capture, shows that while Gradient was allegedly colluding with Herb Greenberg, its employees were getting paid by the hour to work for Milberg Weiss. .

But Herb is a friend of Nocera, Gradient’s short-selling clients are friends of Herb – and well, you know how it works. These journalists don’t get their friends in trouble. Indeed, check their work – not one of them, in all their years, has ever identified, or even hinted at, a single instance of short-seller wrongdoing.

In his most recent article apologizing for the short-sellers who destroyed Bear Stearns, Nocera refers extensively to one of our favorite hedge fund managers, Jim Chanos, of the aptly named Kynikos (“Cynical,” in Greek) Partners. This is the fellow who provided a rent-free beach mansion to a hooker employed by Elliot Spitzer, who was Jim Cramer’s college roommate. Chanos is also the fellow who helped Bethany McLean of Fortune magazine break the Enron story, which partially explains why his media fans seem to believe he can do no wrong. Everything he says–including his reassurances that phantom stock doesn’t exist–is reported as fact.

So now, Nocera reports that Chanos believes that, in the case of Bear Stearns, there were no crimes committed by short-sellers. And, according to Nocera, Chanos “knows what he’s talking about. In the last days of Bear Stearns’ death spiral, a top executive called Mr. Chanos, who was not short the stock but had been a client for years. The executive pleaded with him to go on CNBC and tell the world that all was well at Bear Stearns…Mr. Chanos declined the request.”

This is at least partly false. Good sources tell us that Chanos was short Bear Stearns, though he may have already cashed out “in the last days” of the “death spiral.” As for that “top executive” at Bear Stearns, he seemed to be doing his job by asking people to vouch for his company. Surely, he has nothing to hide. Why does Nocera keep him anonymous? Did Nocera check to see if this person even existed? Well, anything’s possible.

In any case, it is entirely misleading to suggest, as Nocera does, that Chanos really believed that Bear Stearns was not a victim of rumor-mongers. In fact, Chanos believed that it was quite possible that hedge funds were circulating false information about Bear Stearns.

We know Chanos suspected as much because he said so at a recent conference of the Securities Industry and Financial Markets Association. Clearly trying to distance himself from this scandal, Chanos said, “I would urge our regulators at home to examine the sources of these [rumors], whether there’s evidence that people are trading on information they know to be false and inducing others to trade on information they know to be false, which is against the law and always has been…”

On CNBC, Jim Cramer is similarly insisting that illegal short-selling should be stopped. This is a far cry from a year ago, when he said the issue is the most “falsely overweighted topic on Wall Street,” and phantom stock selling is something that happens “very rarely.” Today, he said “hundreds” of companies have been affected, adding, preposterously, that he has long been on a “crusade to bring back honest short-selling.” Cramer, like Chanos, seems intent on distancing himself from the scandal that they helped cover up for the past three years.

Message to Media Mob: The rest of you should also start to distance yourself from this scandal. Do it quickly – before somebody exposes the enormous fraud that you have perpetrated on the American public.

For the complete, very long tale of how a clique of journalists helped cover-up a massive crime on Wall Street, see “The Story of Deep Capture.”

Three years ago, Deep Capture reporter and Overstock CEO Patrick Byrne gave a famous conference call that he titled, “The Miscreant’s Ball.” His thesis was simple: Some short-selling hedge funds collude to destroy public companies by spreading misinformation, orchestrating government witch hunts, filing bogus class-action lawsuits, and, most egregiously, selling billions of dollars worth of phantom stock.

In the months that followed “The Miscreants Ball” presentation, a clique of journalists with close ties to short-selling hedge funds and CNBC’s Jim Cramer (himself a former hedge fund manager), set out to sully the reputations of Patrick and everyone else who sought to expose short-seller crimes.

Cramer pal Joe Nocera, who is the New York Times’ top business columnist, wrote that Patrick’s crusade against hedge funds that sell phantom stock was “loony beyond belief.” CNBC contributor and Marketwatch columnist Herb Greenberg, formerly an editor with Cramer’s web publication, TheStreet.com, labeled Patrick the “worst CEO in America” for taking on the shorts (ie., the same shorts who are now paying Herb for “independent” financial research). Fortune magazine’s Bethany McLean, who has yet to write a story that was not sourced from a small group of short-sellers connected to Jim Cramer, suggested in an article titled “Phantom Menace” that Patrick should be fired from Overstock for speaking out against the problem of phantom stock.

At the time, I was the editor of the Columbia Journalism Review’s online critique of business journalism. The attack on Patrick was like nothing I’d seen before, so I decided to write a story about the media’s coverage of short-sellers and phantom stock. When Herb Greenberg and Joe Nocera got word of this, they both called my editor demanding that he kill the story. Cramer sent a public relations goon to delay the story. Then a short-selling hedge fund, Kingsford Capital, appeared in my offices and offered to pay my salary.

My successor at the Columbia Journalism Review is now called “The Kingsford Capital Fellow.” One of Kingsford Capital’s managers was a founding editor of Cramer’s website, TheStreet.com. I do not believe that Kingsford’s interest in the Columbia Journalism Review is philanthropic. And I do not believe that the Columbia Journalism Review, “the nation’s premier media monitor” is capable of objectively monitoring the financial media so long as it’s chief writer on the subject is paid directly by this very controversial, Cramer-connected, short-selling hedge fund.

Perhaps facing similar pressures, or perhaps because they are unwilling to contradict Cramer’s influential Media Mob, or maybe because they’re just plain lazy, other journalists have shied away from covering the problem of illegal short-selling. Instead, reporters have incessantly repeated the party line that “short selling is good for the market. Only bad CEOs complain about short-sellers.”

In March, short-sellers destroyed Bear Stearns by spreading false information and selling millions of phantom shares. And now the shorts are going after another major investment bank. In a week of high drama, hedge funds have been circulating blatantly false and hugely damaging rumors that big institutions are pulling their money out of Lehman Brothers. If March SEC data is any indication, the shorts are also selling millions of dollars worth of phantom Lehman stock.

One of the nation’s most important investment banks is down, and another is on the brink. The American financial system wobbles.

And, suddenly, Cramer’s Media Mob is silent. Gone is all of the talk about Patrick Byrne being crazy. Nocera says nothing about the attacks on Lehman and Bear. Bethany McLean recently wrote a favorable review of a book written by David Einhorn, the most prominent short-seller of Bear Stearns and Lehman, but she dares not mention the current market predations.

Herb Greenberg, who used to sing the praises of short-sellers almost weekly, was last heard defending his hedge fund friends in April. CNBC seems to have taken him off that beat. (The network recently dispatched Herb to the San Diego County Fair, where he interviewed a vendor of deep-fried Twinkies).

But Jim Cramer is talking. No doubt to distance himself from the growing scandal, he went on CNBC today and said precisely what Patrick Byrne said three years ago. Noting that short-sellers are colluding to take down Lehman, he said the problem is “the need to be able to get a borrow and see if you can find stock….. no one is even calling to see if they can get a borrow. [In other words, hedge funds are selling stock they don’t have -- phantom stock]. It’s kind of like, well listen, let’s just knock it down. It’s very similar to what Joe Kennedy would have done in 1929 [leading to Black Monday and the Great Depression] which is get a couple of cronies together and let’s take it down…”

Too late, Jim. For three years, you, CNBC, and a clique of journalists very close to you have ignored this crime because your short-selling hedge fund cronies claimed that phantom stock is not a problem. Meanwhile, hundreds of companies have been affected. Billions of dollars of value have been wiped out. And lives have been destroyed.

It is one of the most ignominious episodes in the history of American journalism.

Click here to enter the $75,000 “Crack the Cover-up” contest.

The Society of American Business Editors and Writers, SABEW, is the professional association for journalists who cover business. While most members I have met are normal, straight-thinking people, as a group they have been led around by the nose by a tiny group within SABEW which covers the hedge fund beat. Because those dozen or so reporters are captured, they have more or less engaged in a cover-up on behalf of the hedge funds who are their best sources (and whose names come up again and again wherever companies are manipulated through phantom stock). Because those dozen reporters on the hedge fund beat derided, spun, and downplayed the issue, the other members of SABEW followed suit, if they mentioned the issue of naked shorting at all. Now that those dozen or so reporters are keeping their heads down, the other members of SABEW across the country seem at something of a loss.

This was not unanticipated. It seemed to me that their analysis would run this way:

A) “If people read DeepCapture and see that we have not responded, they will assume it must be correct. Thus we should answer it.”

B) “If we answer DeepCapture we have to mention it. If we mention it, people will go there and read it. If they do, they will see that Byrne has us dead-to-rights. So we better not mention it.”

Perhaps from indecision and risk-aversion, perhaps as a calculated gamble, they have chosen Strategy B over A.

The surreality of this is in their reaction to Deep Capture (or should I say, their non-reaction). For several years I knew that if I changed the part in my hair I’d see a story on it by at least one of Carol Remond, Roddy, Jim Cramer, Joe Nocera, etc. Herb once wrote a blog about how quickly or slowly I replied to his emails. They would dive after any crumb I dropped and race to be the first to distort or lie about it. Now, however, I am not serving crumbs, but have a smörgåsbord laid out for them. I have created a website devoted to these issues, and written dozens of pages on various aspects of it, and Mark Mitchell has published a novella on the issues raised in DeepCapture. Yet the Cone of Silence has descended. They could write articles trying to distort DeepCapture, of course, but to do so they would have to mention it, and they know they cannot suffer the exposure. Hence, the Cone of Silence No mentions are made of my fight, because at this point, mentioning me without mentioning DeepCapture itself would strain what remains of journalistic integrity among this crew. I really cannot see any other explanation that explains their silence on this now, but their indefatigable attention before DeepCapture came into existence.

As I said, this reaction was not unexpected. I judged it their most likely reaction, and planned accordingly. My plan is to raise the heat on them in their frozen state, slowly, until something cracks.

First, I have barely done anything to get DeepCapture attention: it gets about 700 to as high as 4,000 unique visitors per day. That is starting to be an uncomfortable number of people for SABEW to write off, knowing that they are reading these well-documented deconstructions and hearing no reply at all from the Establishment press. Not only does that raise the heat on them now, the smarter ones among them must anticipate that, any day I want, I can start getting 100,000/day to this site.

Some SABEW members may take comfort in this excuse: “If all of this blows up, and Byrne turns out to be right, I can always say that I had not heard about it.” To forestall that line of thinking, Stormy hired a van to go to a SABEW conference in Baltimore. On its side were revolving signs concerning DeepCapture, asking, “Are you a captured journalist?” The driver of the van talked his way into parking on the front steps of the conference for 2.5 days. That is, for 2.5 days, 2,000 business journalists who walked in and out of the SABEW conference were confronted by that van.

That was to turn up the heat on their dilemma another notch.

And now, la pièce de résistance: here is a video that shows the DeepCapture van at SABEW.

Not everyone in SABEW can be as dopey as, for example, Roddy Boyd sounds. Within SABEW there must be some who understand how this intensifies their dilemma. Simply put, if the claims of DeepCapture prove to be right, then books will someday be written about this scandal. Those books are going to have to deal with the clear evidence that the members of the Society of American Business Editors and Writers were told about naked short selling. The research was done for them, and the data was provided to them. In fact, they had their nose rubbed in it. I can assure you from examining our IP logs that the major news organizations are reading DeepCapture. Yet they refuse to report on it.

To understand the significance of that, imagine if it turned out that for years before Enron imploded, Enron’s malfeasance had been fully understood for years by a group of journalists, but none had reported on it. The profession would be seen as having taken part in a cover-up. Similarly, in this case, the journalists on the hedge fund beat will be seen as having taken part in a cover-up, and allowed to do so by the completely incurious fellowship of SABEW.

Thus, not reporting on this scandal is a dicey decision for members of SABEW to take. A group of journalists refuse to report on a crime, even after it has become widely acknowledged by regulators, legislators, and economists. If they maintain the Cone of Silence, they are making a bet-the-ranch decision that the crime never becomes a widely-understood scandal. Yet if they report on it, they know that the public will begin reading DeepCapture, and will begin making their own evaluation about the work of these shill journalists.

I’m content to let our work here on DeepCapture stand on its own against Cramer, Nocera, Bethany, Herb, Roddy, and Carol. It appears they are not, for they have suddenly acquired laryngitis about me and my “wacky” theories. I do not envy the decision they are their SABEW colleagues face. There must be some among SABEW who understand that saying nothing about DeepCapture, while once the risk-averse bet, now carries with it a higher degree of risk than saying something. We are getting closer to checkmate.

That said, three final moves will bring the coup de grace. Stay tuned.

Herb Green goes into a flop-sweat over his SEC subpoena.

On December 2, 2003, I appeared on Kudlow & Cramer for the first time. Larry Kudlow and Jim Cramer both seemed like fine, reasonable guys, and they asked intelligent questions. This interview was a condensed version of what it is like to walk into a hedge fund for the first time and explain one’s business.

Deep Capture podcast series episode 1 [ 21:55 ] Play Now | Play in Popup

In this episode, I demonstrate the existence of illegal short side stock market manipulation, and point to recent events as evidence that those responsible for this form of fraud will shortly taste some long-delayed justice.

Market Reform proponent Patrick Byrne also offers commentary.

Subscribe to the Deep Capture podcast via our RSS feed!

Theme music composed by Derek K. Miller: a musical genius, a great guy, and a soon-to-be (I pray) cancer survivor.

Take a trip with me, back to early 2006.

On January 7, Jordan Goldstein, general counsel of TheStreet.com, pronounced that company co-founder Jim Cramer had never sold a single share of TSCM stock.

Exactly one month later, Jim Cramer announces, via the adoption of a rule 10b5-1 plan, his intention to exercise 150,000 stock options over the course of one year.

In the announcement, the plan’s purpose is expressed as being:

“…designed to avoid any real or perceived conflict of interest in connection with the trading of company securities. The program is established at a time when the executive does not have material inside information.

“…It is Mr. Cramer’s intention to provide an orderly liquidation of these options through this plan, which provides for the sale of approximately 12,500 shares on a monthly basis.”

Such an orderly liquidation, as outlined in the plan, would have looked like the chart to the right (click to enlarge).

In reality, the record reflects a very different selling pattern by Mr. Cramer; one which looks like the chart to the left (click to enlarge).

You’ll note that 112,500 (exactly 75%) of the options expected to be exercised in an orderly manner over the course of 12 months were actually exercised within two weeks.

What could account for such a deviation from Cramer’s 10b5-1 plan?

A little historical context might add some clarity.

What was not mentioned in the 10b5-1 plan was the fact that just days beforehand, Jim Cramer had received a subpoena by the SEC…something that might be considered by some to be material inside information.

That subpoena would not be disclosed by Cramer until February 27, by which time 100,000 options had already been exercised. Adding this information to Cramer’s TSCM selling chart would tend to raise serious questions relating to insider trading on Cramer’s part, and the low regard Cramer would appear to have for his company’s investors.

NOTE: Thanks to Evren Karpak and another un-named supporter of market reform for their time in handling key portions of the research on this topic.

I feel the same strange admiration for Michael Steinhardt as one would for an old mobster sitting in a Tucson retirement home playing canasta. Steinhardt slipped through minefields that destroyed others, and for that alone he should be beyond cheap shots now. However, without telling Steinhardt’s story there is no way for me to make the connections that I wish to make, so I will relate the Steinhardt Tale, in four acts, with none of the shots being cheap ones.

Some years ago, I asked a Wall Street old-timer to summarize how Michael Steinhardt would be remembered. The old-timer was unusually pensive. A faraway look came into his eyes as he seemed to recall how the Street had once been, and how it had changed.

At last he replied, “Steinhardt? That’s when the bad guys came to town.”

Prelude

The central character of Mario Puzo’s The Godfather was “Vito Corleone” (played in the movie by Marlon Brando). Don Corleone was modeled after real-life Mob boss Vito Genovese, who headed the Genovese Crime Family. Other figures from this family include Charles “Lucky” Luciano, Frank Costello, Bugsy Siegel, Meyer Lansky (“Hyman Roth” in Godfather II), and Vincent “Jimmy Blue Eyes” Alo.

The Genovese Crime Family had a fence named Sol Frank “Red” Steinhardt, who was arrested in 1958 on charges of buying and selling stolen jewelry. The prosecutor at Red Steinhardt’s trial, Frank Hogan, described Red Steinhardt as “the biggest Mafia fence in America.” Red was sentenced to 5-10 years on each of two charges of fencing, and served several years at Sing Sing, a prison just north of New York City.

While in prison, Red Steinhardt put his son Michael through the University of Pennsylvania’s Wharton School of Business. When Michael Steinhardt finished Wharton in 1967 he started an early hedge fund, “Steinhardt, Fine, Berkowitz & Co.” As Michael later revealed in his book, cash from Steinhardt’s father and his “associates” funded his hedge fund. Thus, it was a conduit by which Mob cash passed into Wall Street (one former prosecutor shared with me an elegant phrase a Mafia suspect used under interrogation: “Yeah, in da 70′s weeze went from concrete to Wall Street”).

Michael Steinhardt Act I

Steinhardt’s first act was notable in three ways:

a) In the early 1970′s Steinhardt was a close financial associate of an international oil trader and general bon vivant named Marc Rich.

b) From his start in the early 1970′s, Steinhardt’s reputation was that of a hater, an in-your-face profanity-laced screamer of unprecedented proportions. Nothing I have ever seen from Hollywood captures the way I have seen it occur in reality on Wall Street, yet in that environment, Steinhardt’s verbal brutality towards others, including towards his subordinates, became the stuff of legend. For example, there is a story that may be true, or it may be apocryphal, but whichever it is, it is widely repeated around Wall Street: in the early 1990′s Steinhardt had a partner, Peter Toczek of the New York and Foreign Securities Corporation, who handled Steinhardt’s overnight trading. They were considered close (I even heard that Peter and Michael were “godfather” to each other’s children, but cannot verify that). As the story goes, Peter was paid a bonus that was smaller than he (Peter) expected, and he confronted Steinhardt over it. Steinhardt screamed at Toczek so abusively that all conversation in the office ceased, then continued berating and humiliating Toczek so badly that Toczek was reduced to tears. Toczek left for the day, went home, and keeled over, dead. Steinhardt showed no regret. (Whenever I hear this I think of the Eddie Murphy/Dan Akroyd movie Trading Places, where an essentially similar event transpires between Mortimer and Randolph Duke). Be this incident true or not (and in fairness to Steinhardt, Toczek is said to have topped out at 300 pounds), what is undeniable is that from the early 1970′s on Steinhardt was well-known for being absolutely brutal in his interactions with others.

c) The other technique Steinhardt pioneered in the 1970′s was an extremely aggressive trading style centering upon, “The Edge.” What “The Edge” means is “information asymmetry.” One person who worked at a major brokerage covering Steinhardt described to me their first encounter, decades ago: “We came out with a downgrade on a stock, I think it was GM. Minutes later I got a call from Steinhardt. ‘You fucking asshole,’ he said. ‘Why didn’t I know about this thirty minutes ago?’” (In other words, Steinhardt was demanding to know why he had not been tipped off to the coming downgrade.) “I told him, ‘Come on Mr. Steinhardt. You know that would be illegal. You know I can’t do that.’ Steinhardt told me, ‘You dumb fucking kid, you know the way the game is played. You look at how much vig I pay your firm each month and you tell me that.’” (Another Wall Street money manager who worked in these circles tells me, “Steinhardt always liked to get what he called, ‘fancy information.’ You know, analysts’ upgrades and downgrades, before the market got them. Steinhardt would tell them, “You want my business? You gotta get me some fancy information. That’s how you win my business.” )

Together, the screaming and “the edge” explain Steinhardt’s success: bullying people to get them to cough up “fancy information” minutes before the rest of the market has it (which makes it “fancy” no more), placing gigantic bets on that information, making tiny percentages from each, and rewarding providers of information with trading commissions while starving those who don’t play ball. That, anyway, is how Steinhardt is remembered (compare this with, say, Warren Buffett, whose “edge” is that he removed himself to Omaha to stay away from such Wall Street chatter, and who instead relies on business acumen and economic insight).

In fairness to Steinhardt, I do not mean to suggest that he was alone in seeking “The Edge”. He may have sought it more aggressively than those who came before him, but his methods pale in comparison with those of certain current money managers who will themselves be the subjects of later pieces.

Steinhardt Act II

Steinhardt’s second act also contained three scenes.

a) In the early 1980′s Steinhardt’s buddy Marc Rich turned out to be a traitor who was secretly doing oil business with Libya and Iran in violation of a number of US laws. This was a felony, as were the tax evasion schemes by which he hid his profits (Time: “The Marc Rich Case: A Primer“). Marc Rich the Traitor fled the United States with his associate “Pinky” Green for Zug, Switzerland, where he would become the most notorious fugitive financier since Nixon’s friend Robert Vesco (Slate: “Know Your Fugitive Financiers“). His present net worth is estimated at $1.2 billion (it is also uncertain as to whether he is or is not a US citizen, as for years he has neither paid US taxes nor renounced his citizenship).

b) Steinhardt morphed his hedge fund into a solo act: “Steinhardt Partners.” He also morphed politically: originally a Goldwater Republican, in the 1980′s Steinhardt played a leading role in the development of the new “Democrat Leadership Council,” and became its chairman in 1985. The DLC is the centrist Democrat group out of which Bill Clinton emerged onto the national stage. This brought him into close proximity with Marty Peretz, who parlayed his skill in marrying a Singer Sewing Machine heiress into becoming publisher of The New Republic (which I believe he has since sold, though he retains editorial control).

c) Another notable thing Michael Steinhardt did, at least according to the SEC and US Department of Justice, was in April and May, 1991 collude with another hedge fund, “Caxton”, to organize a scheme to manipulate the market in US Tresury Securities, a scheme which netted him tens of millions of dollars (Forbes put the number at $600 million). As a FOB (Friend of Bill) he is said to have been irked when President Clinton would not intervene on his behalf with the Department of Justice. However, Steinhardt’s pique may have been mollified when, in December, 1994, the DOJ settled the case for a $70 million fine and a lifetime promise to keep such crooked schemes out of the United States Treasury market (permanent consent decrees are a way of saying, “I may not have done it but I promise not to do again that thing I didn’t do”: when I see them, I think of the financial equivalent of Hannibal Lecter in a straight-jacket and mask, someone who can never be trusted around civilized peoples’ money).

Interestingly, accounts of this episode that I find in the press rarely fail to mention the tens (if not hundreds) of millions that Steinhardt made from the act. It appears to me that Steinhardt’s sense of shame is more developed than his sense of guilt, and hence, by making sure that the story is told in such a way that he appears to have had the last laugh on the DOJ, Steinhardt’s sense of shame is appeased. No sense of guilt, of course, can be invoked in such people (i.e., “sociopaths”).

Steinhardt Act III

After skating through his SEC and DOJ issues, Michael Steinhardt got busy reinventing himself as a friend to all mankind and general Great American. His first act as a Great American was to approach then-President Bill Clinton seeking a pardon for his good friend Marc Rich the Traitor (the billionaire who made his fortune doing deals with Iran and Libya while they were taking Americans hostage and killing GI’s in Berlin nightclubs).  Steinhardt’s December 7, 2000 letter to Bill Clinton seeking a presidential pardon for Marc Rich the Traitor is remarkable to me in numerous ways. I respectfully suggest you read it here because I am going to spend some time on it, as I think it reveals a great deal about Great American Michael Steinhardt.

Steinhardt’s letter opens, “Dear Mr. President, I think you may remember me…” Given that Steinhardt was Chairman of both the DLC and Progressive Policy Institute, which were Bill Clinton’s left and right skates through the Democratic Party in his rise to power, such coyness is scarcely credible.

“I became involved in the political world in the mid 80′s primarily because of my interest in ‘ideas’…” It is interesting to me that he put the word “ideas” in quotes. Whether they were intended as scare-quotes, or as some subtle nudge in a code known only to them, I do not know.

“Invariably, life is filled with conflictual judgments and none of us escapes unscathed,” opines Steinhardt before coming, in the second sentence of the second paragraph, to his request: “I am writing this letter, Mr. President, to appeal to you on behalf of my friend, Mr. Marc Rich, who, I think, has been punished enough.” At the risk of being schoolmarmish, I draw attention to the numerous infelicities of grammar and style, and note how odd it seems to find them in a letter to a sitting US president from a well-educated Wall Street tycoon. I hazard a guess that this was composed in some haste and not reviewed by a lawyer (who generally write competently). Again, this fact is mildly interesting.

At the crux of Steinhardt’s letter, where we would expect to find a semblance of argument, we find instead this odd collection of statements:

“While there remains controversy as to the facts surrounding Marc Rich’s indictment in the early 1980′s, there’s no doubt he was a successful person both, before and after, (sic) that horrific experience.” The “controversy” about Rich is that after breaking US law by trading with Iran and Libya he became a fugitive hiding out in Zug, Switzerland rather than face legal consequences for his actions. Steinhardt leaves unstated why a person’s “success” should generally make him a good candidate for a pardon. It is also interesting because in the case of Marc Rich, “success” meant “making money breaking US laws by doing business with nations which were kidnapping and killing Americans.” Steinhardt’s statement is also interesting in that it recasts Marc Rich’s actions from traitorous felonies into “a horrific experience” for Marc Rich (“playing the victim” scarcely describes this). Lastly, again I note the childish grammatical errors.

“It would not be possible to recreate the circumstances surrounding a highly complicated series of facts occurring over a long period in the early 1980′s.” That much is correct. It’s what happens when one flees the country for two decades. Why the difficulties created by this additional felony should count in Marc Rich’s favor, as opposed to counting against him, Steinhardt leaves unstated.

“For Marc Rich, whose personal life has already been burdened by the profound constraints imposed by the circumstances of this case punishment (sic), have been in some ways severe. He could not properly mourn his daughter. He could not live with his children or grandchildren. He has suffered more than most. As in his (sic) mid 60′s, there would be nothing more important to him than to return to the United States of America and to live in peace.” Steinhardt’s letter, which is a compilation of intellectual gibberish, reaches a crescendo in this description of the hardships that Marc Rich the Traitor has endured. Marc Rich made a fortune committing numerous felonies, fled the country with his fortune, and has lived as a fugitive ever since: this has imposed a hardship on Rich and his fortune because his family remained in the country he betrayed, but now he wants to return to that country with his fortune without facing legal consequences for his acts, and therefore he should be allowed to do so. As an old professor of mine used to say, “I understand everything but the ‘therefore’.”

“I have known Marc Rich for more than twenty-five years. I assure you that Marc Rich’s moral and ethical standards amply justify your consideration of his pardon, so that in his remaining years he could fulfill his highest aspirations (sic), which will make all of us, as Americans, proud.” What can we learn from this bizarre claim? We learn that Marc Rich the Traitor, indicted felon and fugitive financier, has “moral and ethical standards” to which Michael Steinhardt looks up: I suspect that much is true. We also learn that Marc Rich has aspirations to return to this country, and he should be allowed to do so because…. he has aspirations to do so. Why the aspirations of billionaire fugitive felon traitors should be accommodated is something Steinhardt considers so obvious as to need no defense.

As far as I can see, Steinhardt’s sole argument in this letter is that Marc Rich should be accommodated because he is “successful.” And we should be proud of successful men and their aspirations because we – are — Americans. And we should be proud of that, too, dammit. Unless we get a good deal on some Libyan Light Crude.

This lack of argument notwithstanding, on his last morning in the White House, Bill Clinton pardoned Marc Rich. Bill was unusually close-mouthed about his reasons, saying only that he had become “impressed” with the case for pardoning Marc Rich. How that “case” was presented (or on what size check) is something that Clinton archivists refused to release to the press just last week, seven years after the events in question. Marc Rich’s attractive socialite wife Denise Rich also played a role in convincing Bill Clinton of the merits of this case, though precisely how she posed her “case” remains similarly unknown.

Another interesting event from Michael Steinhardt’s third act is that he got involved in the creation of an elite private school in New York City, the plans for which were scrapped from fear it might tolerate miscegenation (that is, the creation of mixed ethnicity couples). I am not writing of some half-educated redneck preacher’s college, I am writing about a proposed elite private school in Manhattan. I tend to be a “whatever makes you happy” kind of guy, but there are lines for me, and they exist this side of philanthropy that takes as a paramount concern the possible co-mingling of races.

Michael Steinhardt, Act IV

How is Michael Steinhardt currently regarded? A man who got his start with and became a conduit for Mafia cash on Wall Street? A man whose personal brutality became the stuff of Wall Street lore (e.g., dressing down a longtime partner to the point of cardiac arrest)? A man who joined that personal brutality to a system of high fees paid to knowledgeable insiders to develop “the edge” with which he could rob “the dumb money” not privy to that information? A man who made tens if not hundreds of millions of dollars tampering with the market for United States Treasury securities, then bought his way out of trouble with a $70 million payment and a lifetime promise to wear the financial equivalent of a Hannibal Lecter mask around the US Government’s money? A man who was financier to a fugitive felon trading with our nation’s enemies, then obtained a presidential pardon for that traitorous crony? A man who lets his philanthropy be constrained by bigotry?

Thanks to the wonders of a PR agency known as, “the New York press corps,” the man is now considered a deep-thinking financial statesman, philanthropist, and yes, Great American.

Dénouement

Steinhardt Partner’s head trader was Karen Backfisch, also known as “The Trading Goddess,” who has often been described as “Steinhardt’s protégé.”

Jim Cramer, the television personality, publicly emphasizes his career at Goldman Sachs followed by his time spent running his own hedge fund. In truth, however, as soon as he left Goldman Sachs, Jim Cramer spent 1-2 years ensconced in Steinhardt’s offices at the Burroughs Building in Manhattan. Cramer housed in Steinhardt Partners and his office was three doors down from Michael Steinhardt’s.

Karen Backfisch met Jim Cramer there in Steinhardt’s offices, and they married. As will be discussed shortly, Jim has publicly acknowledged that what he knows about trading he gleaned from Karen Backfisch, which knowledge she had gained as Steinhardt’s head trader.

Before Karen Backfisch, Steinhardt had another protégé, in the early 1970′s, fresh out of Harvard’s MBA program. His name is “David Rocker,” and I will have something to say about him soon as well.

And so ends the tale of when the bad guys came to Wall Street.