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Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 7 of 15)

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Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 7 of 15)



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

Click here to read PART 1

Click here to read PART 2

Click here to read PART 3

Click here to read PART 4

Click here to read PART 5

Click here to read PART 6

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

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

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

* * * * * * * *

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

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

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

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

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

Charles Duncan – JMP Securities

Greeting: “A big congratulations!”

Singing off: “Congrats Again.”

David Miller – Biotech Stock Research

Greeting: “Good evening. Warm congratulations.”

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

Mark Monane – Needham & Company

Greeting: “Good day and congratulations to all.”

Signing off: “Congratulations once again.”

William Ho – Bank of America

Greeting: “Congratulations”

Signing off: “Okay”

Paul Latta – McAdams, Wright & Regan

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

Singing off: “Congratulations again.”

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

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

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

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

And who was this Joel Sendek?

* * * * * * * *

Actual Joel Sendek publicity photo
Actual Joel Sendek publicity photo

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

Bye-bye, Erythropoietin pie.

Drove my growth rate with the pipeline,

But the pipeline went dry.

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

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

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

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

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

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

But ProQuest and Domain are no longer shareholders in Novacea.

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

* * * * * * * *

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

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

And Moscatiello was arrested.

* * * * * * * *

To be continued…Click here for Chapter 8.

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Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 6 of 15)

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Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 6 of 15)



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

Click here to read PART 1

Click here to read PART 2

Click here to read PART 3

Click here to read PART 4

Click here to read PART 5

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

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

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

* * * * * * * *

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

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

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

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

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

The third question is, who is Jonathan Aschoff?

* * * * * * * *

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

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

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

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

What reason did Aschoff have for reaching that conclusion?

* * * * * * * *

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* * * * * * * *

To be continued…Click here for Chapter 7.

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Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 5 of 15)

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Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 5 of 15)



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

Click here to read PART 1

Click here to read PART 2

Click here to read PART 3

Click here to read PART 4

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

* * * * * * * *

To be continued….Click here for Chapter 6

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Strange Occurrences, and a Story about Naked Short Selling


Evidence suggests that Bernard Madoff, the “prominent” Wall Street operator and former chairman of the NASDAQ stock market, had ties to the Russian Mafia, Moscow-based oligarchs, and the Genovese organized crime family.

And, as reported by Deep Capture and Reuters, Madoff did not just orchestrate a $50 billion Ponzi scheme. He was also the principal architect of SEC rules that made it easier for “naked” short sellers to manufacture phantom stock and destroy public companies – a factor in the near total collapse of the American financial system.

* * * * * * * *

I don’t know why, but this seems like a good time to tell you a little about my personal history. Along the way, I’ll mention a murder, two suicides (or “suicides”), a punch in the face, a generous bribe, three Armani suits in bar, and a “prominent” billionaire who might know something about a death threat and a Russian matryoshka doll.

But actually, this story isn’t about me. It’s about Patrick Byrne, the fellow who got me into this mess.

* * * * * * * *

The story, like so many others, begins on August 12, 2005 – the day that Patrick Byrne, the CEO of Overstock.com and future reporter for Deep Capture (a leading investigative news outfit), delivered a famous conference call presentation entitled, “The Miscreants Ball.”

To the 500 Wall Street honchos who listened in to this conference call, Patrick said that a network of miscreants was using a variety of tactics – including naked short selling (phantom stock) – to destroy public companies for profit. He said this scheme had the potential to crash the financial markets, but that the SEC did nothing because the SEC had been compromised – or “captured” – by unsavory operators on Wall Street.

Patrick added that he believed the scheme’s mastermind — “just call him the Sith Lord” — was a “famous criminal from the 1980s.”

In January 2006, I was working as an editor for the Columbia Journalism Review, a well-respected ( if somewhat dowdy) magazine devoted to media criticism. Patrick had claimed that some prominent journalists were “corrupt” and were working with prominent hedge funds to cover up the naked short selling scandal, so I called to discuss.

Patrick picked up the phone and said: “Chasing this story will take you down a rabbit hole with no end.” He said that the story had it all – diabolical billionaires, phantom stock, dishonest journalists, crooked lawyers, black box organizations on Wall Street, and a crime that could very well cause a meltdown of our financial system.

Not only that, Patrick said, but “the Mafia is involved, too.”

Well, Patrick seemed basically sane. I decided to write a story about the basically sane CEO who was fighting the media on an important financial issue while harboring some eccentric notions about the Mafia.

I figured it would take a week.

* * * * * * * *

Months later, my desk was buried under evidence of short seller miscreancy, I had done nothing but investigate this story since the day I first called Patrick, and I had just gone to a topless club to meet a self-professed mobster who told me all about a stockbroker who had peddled phantom shares for the Russian Mafia and the Genovese organized crime family.

The stockbroker had taken a bullet to the head – execution-style. And the mobster said he knew who did it.

* * * * * * * *

By this time, Patrick had long-since amended his “Sith Lord” analogy to say that the short selling schemes probably had multiple masterminds with a shared ideology – “like Al Queda.”

Be that as it may, my investigation now had two areas of focus. The first was the Mafia. The second was a network of crooked journalists, investors, short sellers, and scoundrels – a great many of whom were connected in important ways to two famous criminals or their associates.

The famous criminals were Michael Milken and Ivan Boesky.

In the 1980s, Milken and Boesky were among the most “prominent” investors in America. They were also the main protagonists in what James B. Stewart, a Pulitzer Prize winning reporter for The Wall Street Journal, later called “the greatest criminal conspiracy the financial world has ever known.”

In 1989, Milken was indicted on 98 counts of securities fraud and racketeering. He did some time in prison. Upon his release, he revved up a public relations machine that was as effective as it was ruthless (Milken’s detractors had their reputations torn to shreds).

Nowadays, the press generally refers to Milken as a “prominent philanthropist.” Often, he is hailed as the “junk bond king” – a financial “genius” who “fueled economic growth” and “built great companies” by “revolutionizing” the market for high-yield debt (junk bonds).

Boesky, who helped Milken destroy great companies, was indicted on several counts of securities fraud and stock manipulation. After his release from prison, in the early 1990s, he reportedly went to Moscow to build relationships with the Russian oligarchs who were then looting the former Soviet Union.

After that, nobody heard much from Boesky.

* * * * * * * *

In the spring of 2006, I doubted that Milken or Boesky had committed any wrong-doing since the 1980s. But it was clear that many of the people in their network were up to their same old tricks – destroying public companies for profit.

I did not think that Milken or Boesky worked for the Mafia – that would be crazy. But it was clear that the Mafia was destroying public companies for profit. And it was clear that a surprising number of people in the Milken-Boesky network did have ties to the Mafia.

At any rate, the “prominent investors” in this network seemed to have many schemes.

Sometimes they seized a public company, fattened it with debt, stripped out its assets, pocketed its cash, and then killed the company off. This is what mobsters used to call a “bust-out.” In the old days, it was neighborhood wiseguys taking over local restaurants. In the 1980s, Milken and his crowd introduced the technique to the world of high-finance.

Other times, the “prominent investor” thugs acquired large stakes in a company. Then the thugs suggested to the company that they would go away only if the company were to buy back its shares at a hefty premium. In the 1980s, the Milken crowd referred to this as “greenmail.” Mobsters called it “blackmail” or “protection money.”

In still other cases, the “prominent investors” attacked the companies from the outside, employing tactics – threats, harassment, extortion – that seem straight from the Mafia playbook.

Whatever the specifics of the scheme, it was often the case that “prominent” short sellers who were tied to the “prominent investors” would eventually converged on the target companies and use a variety of equally abusive tactics either to destroy the companies or put them on the defensive.

While I do not have SEC data going back to the 1980s, the data for more recent years shows that most of the companies attacked by this network were also victimized by abusive naked short selling.

That is, somebody sold massive amounts of the companies’ stock and “failed to deliver” it for days, weeks, months – or even years – at a time.

* * * * * * * *

So back in 2006, I had begun to ask a lot of questions.

That’s when I had a strange encounter with three dudes in Armani suits.

The encounter occurred on a Thursday evening in a quiet, neighborhood dive bar, around the corner from my apartment, near Columbia University in New York – a neighborhood that does not often attract men in Armani suits. I was alone, having a beer and reading a book about Wall Street.

The Armani suits entered the bar and sat down next to me.

“Whatcha reading?” one said.

When I told him, he asked: “Anything in there about Ivan Boesky?”

“Yes,” I said, “he’s mentioned”

“Haven’t read it,” the man said.

He was silent for a few minutes. Then he laughed and announced that, by the way, he used to work for Ivan Boesky’s family. He said Boesky “is a real asshole – thinks he has so much money he can do what he wants. Hell, he might have killed people, for all I know…Heh.”

Armani shook his head. Then he said, “Hey, I got to tell you a funny story.”

This turned out to be a long and convoluted tale, the gist being that a fellow had wandered into the ladies underwear department at Saks Fifth Avenue. Apparently, this fellow thought it would be a good idea to peek into a dressing room where a lady was trying on a new pair of panties. But the lady’s husband caught the fellow and the husband happened to be packing some high-caliber weaponry, so he blew the fellow’s brains out, and now there was a big mess in the ladies underwear department.

“The guy was a pervert,” said Armani. “You know what I mean? There are some things you keep your nose out of. I would have killed the guy, too.”

With that, Armani stood up and said he was pleased to have met me.

I asked for his name. He said, “It’s John — John from Saks Fifth Avenue.”

And then he and his friends were out the door. The other two guys hadn’t said a word. None of them had bought drinks or shown any other reason for having entered the bar.

This occurred shortly after I began asking my first serious questions about Boesky. I had just met with a CNBC public relations man and I had told him that I was conducting a full-scale investigation of Boesky, and was interested in knowing more about Boesky’s ties to CNBC reporter Jim Cramer. I had determined that most of the journalists who were deliberately blowing smoke over the naked short selling issue were connected to Cramer. These included four of the five founding editors of TheStreet.com, Cramer’s online financial news publication.

Cramer, a former hedge fund manager, had planned to work out of Boesky’s offices in the 1980s. When Boesky was indicted, Cramer worked instead with Michael Steinhardt, whose biggest initial investors were Boesky, Marc Rich (later charged with tax evasion and illegal trading with Iran), Marty Peretz (co-founder, with Cramer, of TheStreet.com) and the Genovese organized crime family.

Steinhardt’s father, Sol “Red” Steinhardt, spent several years in Sing-Sing prison after he was a convicted by a New York prosecutor who described him as “the biggest Mafia fence in America.”

Also at this time, a central target of my investigation was a hedge fund called SAC Capital, colloquially known as “Sak.” That, of course, is somewhat different from “Saks Fifth Avenue.” It seemed doubtful to me that either Boesky or SAC Capital had sent the Armani-suits to threaten me.

Possibly, I thought, Armani had misrepresented his relationship with Boesky and Saks Fifth Avenue. Perhaps Armani worked for people who were concerned that I had begun investigating that execution-style murder.

Either that, or this was just one of those weird coincidences and there really was a former Boesky employee who’d found work in the brain-splattered ladies underwear department at Saks Fifth Avenue.

* * * * * * * *

My investigation continued and sometime later – on Halloween, 2006 – a guy sat down next to me at a book store. He said he’d seen me with one of my closest relatives (he was specific, but I’d rather not name the relative) and he thought I needed to be more concerned about the safety of this relative.

He said he didn’t mean to be intrusive, but he knew how hard it was to take care of relatives and he just wanted everyone to be safe.

Then another guy sat down at a nearby table, and slammed down a book. On the front cover of this book, in big bold letters, it said: “MAFIA.”

I became paranoid enough to retreat to the back of the book store. I told one of the clerks about the two guys, and I called some colleagues, who offered to send the police.

As soon as I hung up, one of the guys came up to me, smiled, and said he hoped that he hadn’t upset me. Then he left.

I told my friends not to call the police. It was probably just a strange coincidence.

Two years later, as my investigation deepened, I began receiving Internet messages from Sam Antar, a convicted felon who orchestrated the famous fraud at Crazy Eddie, the electronics retailer. In an upcoming story, I will describe Antar’s relationship with Michael Milken. I will also tell you more about the $250,000 in cash that Antar delivered to a Milken-funded entrepreneur who orchestrated a massive fraud with the Genovese organized crime family.

For now, though, I’ll just say that Antar’s messages to me have not been friendly.

In one, he wrote, “Mitchell: Do you remember what happened last Halloween?”

I had spent the previous Halloween interviewing Rotarians in Oklahoma about their Halloween canned food drive. The Halloween before that, I was in a book store where there was either a strange coincidence or a veiled death threat.

I sent Antar an email, asking what he meant. He did not reply.

* * * * * * * *

In November 2006, one of the hedge fund managers I was investigating appeared in my office and announced that he had become the primary financial backer of my department at the Columbia Journalism Review. Traditionally, the Columbia Journalism Review (a not-for-profit magazine) had been funded by large philanthropic foundations – not by hedge fund managers who were under investigation by the Columbia Journalism Review.

But now my salary would depend entirely on the beneficence of this hedge fund.

The hedge fund was called Kingsford Capital, and in upcoming stories, I will tell you more about this hedge fund.

I’ll tell you about Kingsford’s ties to naked short sellers.

I will tell you about the large sums of money that were offered to other journalists who had been working the naked short selling story.

I will tell you why it is significant that one of Kingsford Capital’s managers was Cory Johnson – a founding editor, along with Jim Cramer and the other dishonest journalists I was investigating, of TheStreet.com.

I will publish emails that shed light on Kingsford’s relationship with hedge funds that are tied to both SAC Capital and Michael Steinhardt, Cramer’s former office-mate.

In still other stories, I’ll tell you more about Steinhardt and his partners’ ties to the Genovese Mafia, Ivan Boesky, an angry Russian hooker, and a man who wanted the world to believe that he was dead.

I will also tell you about the former Genovese Mafia soldier who told a former manager of SAC Capital that he could make one of the manager’s business associates disappear in the Nevada desert. And I’ll tell you that the man who volunteered to commit this murder had once been hired to put a dead fish and a bullet hole in the car of a journalist who was investigating one of Michael Milken’s closest friends.

I’ll tell you all about it in upcoming stories.

But let me stress that I have no idea who was responsible for the strange things that occurred in 2006. That is to say, I know that Kingsford bribed the Columbia Journalism Review.

But as for the other strange occurrences – all I can say is that they were strange.

* * * * * * * *

Two days after I learned that Kingsford Capital and its cronies would be paying my salary while I finished my exposé on Kingsford Capital and its cronies, I had dinner with an economist who was exploring the naked short selling problem.

On my way home, I stopped in a café around the corner from my apartment. As I was putting on my coat to leave the cafe, a man grabbed me from behind and forcefully escorted me to the sidewalk. Outside, there were two more guys – not big guys, just regular looking fellows. They grabbed me, and the first guy delivered a single powerful punch to my eye.

I was stunned. When I finally held up my fists, the three men laughed and embraced me in a bear hug. Then they virtually carried me to the front stoop of my apartment, which was a block away. It seemed as if they knew that I lived there.

After brushing off my lapel, they said they were very sorry. They said they hoped I wasn’t offended, it wouldn’t happen again, but they were there for my own good – and, please, just “stay away from your Irish Mafia friend.”

Then they were gone. It all happened in about three minutes.

It occurred to me that this might have been just a random act of violence. It also occurred to me that the thugs might have bungled the message – that they had meant to say, “Just stay away from the Mafia and your Irish friend.”

Patrick Byrne (full name: Patrick Michael Xavier Byrne), with whom I was working extensively on the naked short selling story, is Irish. In interviews I had conducted for the story, many people had commented on Patrick’s Irishness. (In some Wall Street circles, it seems to be common for people to refer to others’ ethnicity – “Byrne, he’s an Irish guy, right?” or “The stock loan business, that’s the Italians.”)

In any case, I went to work the next day with a black eye. I said it was “just a bar fight.”

A woman in my office told me she thought it was “really cool” that I had been in a bar fight.

Later, Sam Antar, the convicted felon, posted an Internet message asking whether I “had ever been forcefully escorted out of a public building.”

As this had happened only once, I sent Antar an email asking if he was referring to the thugs who’d ambushed me in a café.

Antar did not answer my question. Instead, he quickly proceeded to write a blog saying that he had just received information that I had been “forcefully escorted out of the Columbia Journalism Review.”

* * * * * * * *

During the fall of 2006, Patrick Byrne had some strange experiences as well.

Somebody broke into Patrick’s home, and soon after, somebody broke into the home of a woman who was Patrick’s girlfriend at the time. Then somebody threw a pair of metal gardening shears through the window of the girlfriend’s restaurant.

Around the same time, Patrick’s then-girlfriend discovered that for some mysterious reason, her phone records were being sent to the home of a Russian man working for Goldman Sachs Execution and Clearing (formerly Spear, Leeds, and Kellogg – in its day, one of the most egregious naked short selling outfits on the Street).

I asked Goldman Sachs about this. I was told that the bank had investigated thoroughly and found no reason to believe that the Russian man, Elliot Faivinov, had obtained the phone records. (For anyone interested, the phone company can confirm that he did receive the phone records.)

At any rate, I have since learned that Goldman Sachs became a large donor to the Columbia Journalism Review sometime not long after Kingsford Capital announced that it would be paying my salary. Wall Street has never been so devoted to the dowdy world of media criticism.

As if all of this were not enough, one day in the fall of 2006, U.S. Senator Orrin Hatch invited Patrick to his home. As soon as Patrick entered the lobby of the apartment building, the Senator pulled him aside and said that he had credible information that Patrick’s life was in danger.

“You are up against some really nasty, vicious people,” the Senator said, “They will not hesitate to kill you.”

* * * * * * * *

Patrick kept on fighting.

As for me, I’d been investigating the Mafia, there’d been an execution-style murder, now there were these strange incidents, which might have been nothing, but getting beat up kind of freaked me out, and now I was staying up all night, squinting at my computer through my punched-in eye (which was black and blue, full of puss and swollen shut), trying to finish a story about a scandal involving the people who would now be directly paying my salary.

And so, maybe it isn’t all that surprising what happened next, which is that I snapped.

I couldn’t work anymore. I checked-out.

In the middle of November, a week or so after getting the Kingsford news, but still on perfectly good terms with my editors, I quit my job, and walked out the door.

Within a few days, I had shut down my New York apartment, and was on a plane to Chicago, where I planned to take some time off.

I had told my editor that I thought I might be killed. But I never specified, and I didn’t make an issue of the Kingsford Capital bribe until later. So I am hopeful that the good people at the Columbia Journalism Review never really knew that they were taking tainted money.

That said, my questions about this have gone unanswered.

* * * * * * * *

A few weeks later, Patrick accepted an invitation to meet an offshore investor in a greasy spoon diner in Long Island. They had never met, but over the previous year the man had fed Patrick bits and pieces of information about the workings of the phantom stock scam. The hope was that the man might have something more to say in person.

But that day at the diner, all he had was a message.

“I’ll make this quick,” the businessman said, with two other witnesses present. “I have a message for you from Russia. The message is, ‘We are about to kill you. We are about to kill you.’ Patrick, they are going to kill you. If you do not stop this crusade, they will kill you. Normally they’d have already hurt someone close to you as a warning, but you’re so weird, they don’t know how you’d react.”

In a later phone conversation with an associate of Patrick’s the man described how he received this message. He said he returned home one night and his wife told him there was a package on his desk. “And there was a beautiful little box, and inside was a matryoshka.”

Matryoshkas are those lacquered Russian dolls – the kind with multiple dolls of decreasing size inside of them.

“And I opened up the last matryoshka,” said the man, “and inside is an `F’ with a cross on it — which is from Felix…”

* * * * * * * *

A year later, I was working for a charitable service organization. Patrick called me to catch up. Pretty quickly, he was suggesting to me that I quit my job and return to the naked short selling story.

I thought about shopping the story around to magazines, but I never did. There was no way that the story could be told in a few magazine pages.

Moreover, the story represented the joint efforts of myself, Patrick, reporter Judd Bagley and many independent, volunteer researchers. This was an unprecedented collaboration, and it occurred to me that if this collaboration were to continue — as Deep Capture, the website — it could put the major news organizations to shame.

So I wrote the story – our story, filled with hard facts about a scandal.

The story that I wrote was not a magazine story. It was not a news story. It was 69 pages long, and it was “The Story of Deep Capture.”

But that was only half the story. There is much more.

For example, you do not yet know the name of the famous billionaire who might be able to tell us more about Felix, his matryoshka doll, the Russian Mafia, and the Genovese organized crime family.

* * * * * * * *

To be continued….

* * * * * * * *

Mark Mitchell is a reporter for DeepCapture.com. He has previously held writing and editing positions with the Wall Street Journal editorial page, Time Magazine in Asia, the Far Eastern Economic Review, and the Columbia Journalism Review. Email: mitch0033@gmail.com

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 Steinhardt – “When the Bad Guys Came to Town”


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.

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Michael Steinhardt – "When the Bad Guys Came to Town"


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.

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