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“The Global Bust-Out Series (Chapter 7): Michael Milken and the “Insider Trading” Network (as of 2013)

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“The Global Bust-Out Series (Chapter 7): Michael Milken and the “Insider Trading” Network (as of 2013)


This is Chapter 7 of a multi-chapter series. On your right is a Table of Contents to all chapters published so far.

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In earlier chapters of this series, we learned about an incredible enterprise known as the Bank of Credit and Commerce International (BCCI), which was operated by oligarchs with ties to the Muslim Brotherhood in partnership with governments that were among the Muslim Brotherhood’s principal state sponsors. We also learned that the BCCI enterprise operated with the consent and protection of Washington even though it not only counted among its partners numerous mobsters and global terrorists, but was also operating what amounted to a transnational organized crime syndicate involved in everything from the trafficking of narcotics and nuclear weapons components to terrorism and the perpetration of destructive financial crime.

In addition, we learned that BCCI counted among its most important business partners some of the leading figures of the American establishment, including Michael Milken, who was, during the 1980s, the most powerful financial operator on Wall Street. As we know, Milken and some of his closest associates, in league with the BCCI enterprise, perpetrated the “bust-outs” of numerous savings and loan banks, thereby contributing to the devastating savings and loan crisis that began in the late 1980s, and which ultimately cost taxpayers more than $2 trillion in bailouts—a portent of bigger and better things to come.

Also involved with these “bust outs” were (see earlier chapters of this series) some of the nation’s leading organized crime figures, such as Carlos Marcello, who was then the top Mafia boss in the city of New Orleans. Meanwhile, we know, BCCI was involved with a global network of brokerages, most of them operated by people with ties to organized crime, and most of them specializing in the “bust outs” of small to medium-sized publicly listed companies. As a judge remarked after BCCI shut its doors in 1991, the BCCI enterprise singlehandedly “shattered the integrity of the global financial system.”

And history did not end in 1991, when BCCI was shut down.

Most of BCCI’s former principals and their partners (“the larger BCCI enterprise”) continued in the years that followed to involve themselves with similar enterprises, the only difference being that the enterprises came to include some new and younger players, while the enterprises innovated new and more destructive financial schemes. Indeed, we will see that people formerly involved with the BCCI enterprise, along with their newly acquired business partners, contributed significantly to the great meltdown of 2008, and are presently threatening to deliver a repeat performance.

This might be one reason why the president of the United States was recently moved to take the unprecedented step of declaring a state of “National Emergency” in response to certain conditions that currently prevail in the American markets. See Chapter 1 of this series for more on the “National Emergency,” but I will remind readers that in the summer of 2011, President Barack Obama, in explaining why he had declared a “National Emergency,” stated that there was a clear “nexus” between transnational organized crime syndicates, the intelligence services of several unnamed countries, and the world’s leading terrorist organizations.

In addition, the president explained that transnational organized crime syndicates (and, we can confirm, others in the “nexus,”) had “penetrated” the “legitimate financial sector” (i.e. Wall Street). Not only that, but the president stated that this was a “National Emergency” because transnational organized crime syndicates with ties to terrorist organizations (presumably with help from the “legitimate” financial sector on Wall Street) were “undermining markets” to such an extent that they now posed a serious and imminent “threat to stability of the global financial system.”

Unfortunately, officials in Washington have yet to prosecute any of the people (e.g. mobsters, terrorist financiers, and miscreants on Wall Street) who account for our present “National Emergency.” Indeed, as was the case in the 1980s, when BCCI and its partners owned many of America’s leading politicians (including multiple U.S. presidents), it presently seems to be the case that Washington has been “deep captured” by a network (or “nexus,” as the president calls it) that includes the world’s leading mobsters, billionaires with ties to terrorist organizations, and the “legitimate” miscreants on Wall Street who do business with mobsters and terrorists.

In addition, officials in Washington have done little to crack down on the sorts destructive financial weapons (e.g. the “bust outs” of major banks and associated schemes, such as manipulative short selling, self-destruct CDO’s, mortgage fraud, death spiral finance, toxic debt, etc.) that nearly destroyed the world in 2008, and which are now, once again, threatening to collapse the global financial system.

Later chapters of this series will discuss in much greater detail the “global bust-out” that accounts for our current predicament, but first it will be useful to review a bit more history so far as it concerns the network of Michael Milken, formerly known as the most powerful man on Wall Street, later known as one of history’s most destructive financial criminals, and presently known (to readers of the major U.S. newspapers and officials in Washington) as one of Wall Street’s all-time greatest heroes and a “prominent” fixture of the American establishment, worthy of our respect and admiration.

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When Michael Milken was indicted in 1989, the major U.S. news organizations reported that he and one of his co-conspirators, Ivan Boesky, were the central figures in a nationwide “insider trading” network. In addition, the major U.S. news organizations reported that Milken was indicted thanks mostly to the fact that Boesky had cooperated with the government, providing the key evidence that allowed prosecutors to expose the “insider trading” network. It was true that Milken and Boesky were involved in “insider trading,” but the reports by the major U.S. news organizations contained some important omissions.

For starters, Milken and his network were involved in much more than “insider trading.” As we know from earlier chapters of his series, Milken and his closest associates, including Boesky, conspired with the BCCI enterprise and some of the nation’s leading organized crime figures to “bust out” (i.e. loot and destroy) many of the nation’s leading savings and loan banks. We also know that Milken was involved with numerous brokerages (some of them linked to the BCCI enterprise) that specialized in perpetrating the “pump and dump” bust-outs of small to medium-sized publicly listed companies.

In addition, a careful reading of Milken’s 99-count indictment (with many of those counts pertaining to his “bust-outs” of savings and loan banks and other companies, though he pled guilty to only seven counts) reveals that Boesky provided little of the information that was used to prosecute Milken. Instead, the government obtained the vast majority of the evidence used against Milken (and Boesky) in a 1989 raid of a major investment and brokerage operation called Princeton Newport, which had been a key component of the Milken network, involved not only in insider trading, but also the full panoply of other schemes that Milken and his network perpetrated during the 1980s. At the time, Princeton Newport was operated by man named Edward O. Thorpe, who was most famous for having worked with the Genovese Mafia family to develop a method for beating the black-jack tables in Las Vegas (Thorpe has never been charged with any crime, and he is presently one of the nation’s most prominent hedge fund managers).

Pulitzer Prize winning author James Stewart similarly reported in “Den of Thieves” (the seminal work on the government’s prosecution of Milken) that Boesky provided little information to the government. According to Stewart, Boesky told the government that he could not testify against Milken because he was afraid of what might happen to him. As Boesky put it, Milken had “friends in Vegas” – an apparent reference to the Mafia. As Stewart also reported, soon after Boesky expressed his fears, one of Milken’s closest associates, John Mulheren, got into his car and headed towards Boesky’s house. Police officers had been watching Mulheren, and knew that he had a gym bag in his car loaded with two handguns, a 12-gauge shotgun, and a .233 caliber Galil assault rifle.

Suspecting that Mulheren planned to murder Boesky, the cops arrested Mulheren and put him in jail, where Mulheren spent most of his time conversing with Anthony “Fat Tony” Salerno, who had been the top boss of the Genovese Mafia family until he was jailed on charges of manslaughter. Mulheren himself was investigated for his alleged role in Milken’s network, so it is possible that Mulheren thought about killing Boesky to keep Boesky from providing the government with information about his own (Mulheren’s) activities. Alternatively, it is possible, as some have reported, that Mulheren was simply on the wrong psychiatric medications and didn’t know what he was doing.

Either way, Mulheren was never charged for his suspected role in Milken’s insider trading (and “bust out”) network, and nor was he charged for trying to kill Boesky. He was quickly released from prison, and he subsequently reconciled with Boesky. Contrary to the message put forth by Milken’s public relations machine (which maintains that Milken despises Boesky, and that Milken was convicted only because Boesky was a dirty rat who provided the government with false information about Milken’s activities), Milken also reconciled with Boesky, and after Milken was released from prison (he served two years of a ten year sentence), he and Boesky began again to do business together.

Meanwhile, Mulheren c0-founded, with a trader named Izzy Englander, a hedge fund called Millennium Management, and though Mulheren died in 2003, Millennium is presently one of the most powerful hedge funds in the nation.

In 2010, the media began reporting that the FBI was once again investigating what the FBI described as a “network” of financial operators who were involved in “insider trading.” According to the FBI, this was, in fact, the biggest “insider trading” investigation in FBI history. This investigation is presently ongoing, and a key focus of the investigation, according to media reports, is the giant hedge fund SAC Capital, which is run by Steve Cohen. Back in the 1980s, Cohen was investigated by the Securities and Exchange Commission (SEC) for allegedly trading on inside information that he received from Milken’s shop at Drexel Burnham Lambert, and back in the 1980s, Cohen and all the others in Milken’s insider trading “network” were, of course, involved in much else (e.g. manipulative short selling, the “bust-outs” of publicly listed companies, etc.) besides insider trading.

Similarly, the “insider trading network” that the FBI is presently investigating has been involved in much else besides insider trading. Previous DeepCapture stories have provided ample evidence that SAC Capital and other hedge funds in its “network” have perpetrated a great deal of manipulative short selling, and they have, along with others, including Michael Milken (who is. to this day a key figure, along with SAC Capital and others, in an “insider trading” network), perpetrated the “bust-outs” of publicly listed companies. Cohen himself has not been charged with any crime, but multiple traders have been indicted for insider trading that they conducted while working for SAC Capital, and the media has reported that prosecutors are hoping to indict Cohen and SAC Capital, though the media continues to report that SAC Capital’s only alleged offense has been to trade on inside information.

Meanwhile, it is clear from SEC filings that SAC Capital and a larger “network” of other hedge funds (many of which employ former SAC Capital traders, and many of which have ties to Milken going back to the 1908s) regularly trade in the same stocks, and many of these hedge funds have not only coordinated their manipulative short selling attacks, but have also come under closer scrutiny during the course of the FBI’s investigation into what the FBI continues to describe as a “network” of financial operators.

One hedge fund in this “network” is Millennium Management, the outfit that was founded by Mulheren and Izzy Englander. The FBI has not publicly implicated Millennium in the “insider trading” network, but Millennium has acknowledged that it is concerned about the greater scrutiny. Indeed, soon after the FBI investigation became big news, Millennium hired an advisory board whose job is to make sure the hedge fund remains in compliance with regulations. Millennium’s advisory board includes former FBI Director Louis Freeh, former SEC enforcement division chief Stanley Sporkin, and former SEC Chairman Harvey Pitt (who has been a leading advocate of reform to address the problem of manipulative short selling).

Hopefully that advisory board will keep Millennium in compliance with the rules, and it will certainly keep Millennium immune from further scrutiny on the part of the FBI and the SEC, but it is clear that Millennium and SAC Capital, along with others in their “network” of hedge funds, have continued to collaborate with Milken, investing in companies that Milken was promoting, and attacking companies that Milken was seeking to undermine or destroy. Some details can be found in my recently published book (title: “The Dendreon Effect: How Felons, Con-men, and Wall Street Insiders Manipulate High-tech Stocks”) which also provides other information about the techniques used by a network of powerful hedge funds (and Michael Milken) to undermine the markets and hurt individual investors.

As we will see in later chapters of this series, this same crowd (i.e. Milken and the “network” that the FBI is now investigating, though so far with no prosecutions of any big fish) contributed to the meltdown of 2008, and continue to pose a threat to the markets today.

For our present purposes, we need to stress that Boesky was right when he said that Milken had “friends in Vegas.” Milken’s best friend in the world, according to Milken, is Steve Wynn, the Las Vegas casino mogul. Meanwhile, Wynn’s friends, according to Scotland Yard, have included the dons of the Genovese Mafia family. Indeed, according to a declassified report written in the late 1980s by Scotland Yard investigators, Wynn had “been operating under the aegis of the Genovese Mafia since he first went to Las Vegas in the 1960s.” Scotland Yard noted that both Wynn and his father had a long standing relationship with Genovese Mafia boss Anthony “Fat Tony” Salerno (the mobster with whom Mulheren spent most of his time convening during his stint in jail).

Wynn, however, denies any relationships with the Mafia, and he has won a defamation lawsuit against a Las Vegas newspaperman who published a book (title: “Running Scared”) that advertised itself as “explaining why a confidential Scotland Yard report calls Wynn a front man for the Genovese crime family.” Wynn also filed a suit against the book’s publisher, Lyle Stuart, who had published other controversial books, such as the “Anarchist Cookbook,” and “Turner Diaries,” which is a fictional account of home-grown rebels overthrowing the “Zionist” government of the United States. In explaining why he had filed a lawsuit against the publisher, Wynn said, “I want to put Lyle Stuart out of business. Every law enforcement agency has always vouched for me that any suggestion of me and organized crime is preposterous. I know one thing: If anybody says any different, they’re a fucking defendant.”

It is true that law enforcement agencies (other than Scotland Yard) have vouched for Wynn. Indeed, former FBI Director Louis Freeh (the same fellow who is employed by Millennium Management) is presently employed by Wynn. Freeh is helping Wynn investigate one of Wynn’s former business partners, a Japanese billionaire named Kazuo Okado. Meanwhile, Wynn has won multiple other defamation lawsuits against people and journalists who have accused him of having ties to the Mafia. For example, Wynn has successfully sued Joe Francis, creator of the “Girls Gone Wild” porn empire. Francis had said that Wynn wanted to “hit me in the back of the head with a shovel and bury me in the desert.” Wynn said that was a “terrible lie,” and that his friend, the Dalai Lama, taught him to be a man of peace and calm.

The takeaway, we must conclude, is that Wynn has no ties to the Mafia. As for Milken’s other closest friends and business partners, however, there can be no doubt that many of them have ties to the Mafia. As we know from earlier chapters of this series, Milken’s closest business partner is Gene Phillips, who was the central figure in the junk bond merry-go-round that Milken operated in the 1980s, and which was a key component of the larger operation to “bust-out” savings and loan banks. Phillips operated (and still does operate) an outfit called Southmark Corporation, which was the largest recipient of Milken junk bond finance in the 1980s. The largest subsidiary of Southmark in the 1980s, meanwhile, was San Jacinto Savings and Loan, which was “busted-out” with help from such Mafia luminaries as Herman Beebe and Carlos Marcello (the top boss of the New Orleans Mafia).

The man whom Gene Phillips appointed as the chief loan officer of San Jacinto Saving and Loan was named Joseph Grosz. Aside from being a banker, Grosz was a leading mobster, affiliated with the Chicago Syndicate, according to prominent journalist Pete Brewton, who is one of the nation’s leading experts on the involvement of organized crime in the savings and loan crisis. Brewton has also reported that San Jacinto’s parent, Southmark, was “used as a mob dumping ground to buy the investments of mobsters,” including not only Herman Beebe and Carlos Marcello, but also organized crime figure Harry Wood, and Morris Shenker, a former lieutenant of Meyer Lansky, then the most powerful mobster in the nation.

In 2000, Phillips was arrested and charged with manipulating stock prices in league with other leading figures in La Cosa Nostra. More specifically, Phillips was arrested as part of Operation Uptick, which was described by FBI spokesmen as the largest Mafia bust in U.S. history. More than 120 people, all with ties to organized crime, were arrested in Operation Uptick, and FBI officials described them as being part of nationwide “network” of stock manipulators, some of whom had committed various other crimes, which included (according to an FBI statement): “controlling and infiltrating broker-dealers…and employing tactics of violence, including threats, extortion, physical intimidation, and the solicitation of murder…”

Some of the 120 people arrested in Operation Uptick were members of Russian organized crime syndicates, while others were, variously, described by the FBI as having ties to each of La Cosa Nostra’s five major families—Genovese, Colombo, Gambino, Bonanno, and Lucchese. Among the 120 defendants, aside from Phillips, were: Robert “Little Robert” Lino, a capo in the Bonanno crime family; Anthony Stropoli, a soldier in the Colombo crime family; Frank “Frankie” Persico, a Colombo Mafia family capo; Sebastian “Sebbie” Rametta, an associate of the Colombo crime family; Robert Gallo, an associate of the Genovese crime family; and John Black, an associate of the Lucchese crime family.

The DOJ charged that Phillips, in league with various members of La Cosa Nostra, had manipulated the stock of one of his companies, an outfit called Transcontinental. Aside from Phillips, the largest shareholder in that company was Michael Milken. Meanwhile, the Dallas Business Journal reported that Phillips “allegedly met with two associates of New York’s legendary Bonanno organized crime family to discuss a plan to bilk a couple of ‘very friendly’ union pension funds through the sale of inflated stock.” However, Phillips was acquitted on all charges. In addition, most of the other people who were arrested as part of Operation Uptick got off with nothing worse than small fines, though this was the biggest Mafia bust in history, according to then FBI director Louis Freeh (who, of course, is now employed by Wynn and Millennium Management).

That same year, 2000, the media reported that an outfit called Sinex Bank was linked to the Bank of New York scandal, which saw the Bank of New York laundering upwards of $10 billion ($3.9 billion of which passed through Sinex Bank) for organized crime syndicates. The syndicate most closely linked to that scandal was the Mogilevich organization, the leader of which was (and is) a Russian (actually Ukranian, but he is a Russian citizen) named Semion Mogilevich, widely known as “the most dangerous mobster in the world.” What the media did not report was that the money laundering involved a network of brokerages that first invested dirty cash into the “bust outs” of publicly listed companies, with the money coming out partially cleaned as short selling profits that were delivered onwards to cooperative banks, including Sinex Bank and the Bank of New York.

Also linked to that money laundering was a brokerage called Sinex Securities, which was a subsidiary of Sinex Bank. Sinex Securities was controlled by Gene Phillips, though it was registered in the name of his son, Brad Phillips (Sinex changed its name to National Alliance Securities when it was linked to the Bank of New York scandal). SEC filings show that Transcontinental (the Phillips outfit whose largest shareholder was Milken, and which was at the center of the Operation Uptick charges) had placed more than 700 thousand of its shares with Sinex as “collateral for borrowings”. That is to say, a chunk of the cash that went through Sinex was delivered, as collateral, to Transcontinental shareholders. However, neither Sinex nor Phillips were charged with any crime related to the Bank of New York scandal.

With the exception of Mogilevich himself, nobody else of any significance was charged with any crime related to the Bank of New York scandal, and Mogilevich (“the most dangerous mobster in the world”) subsequently hired a lobbyist in Washington. Mogilevich’s lobbyist is William Sessions, formerly director of the FBI. The FBI still lists Mogilevich as one of the “Ten Most Wanted” criminals in the world, but there is no evidence that the FBI has ever tried to arrest Mogilevich, and others in the Mogilevich organization continue to this day to operate openly in the United States.

Some of them, we will see, are key figures in the Milken network.

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Back in the 1980s, another of Milken’s closest business associates was Fred Carr, who, like Phillips, was a central figure in the junk bond merry-go-round that was part of the larger scheme (that had help from BCCI) to “bust out” numerous savings and loans banks. Fred Carr used Milken junk bond finance to seize control of Executive Life, and that financial institution (like most of the other savings and loans that Milken’s closest associates took over with Milken junk bond finance) was subsequently looted and demolished (that is, “busted out”).

Prior to taking control of Executive Life, Carr had been a principal with Investors Overseas Service, which had ties to BCCI, and which was, at the time, the biggest Ponzi scheme in history. Investors Overseas had been founded by a financier named Bernard Cornfield, and later involved a criminal named Robert Vesco, who subsequently fled to Cuba and became involved (according to CIA reports) in trafficking drugs with Cuban dictator Fidel Castro. (Castro later claimed that Vesco had been imprisoned in Cuba).

One of Investors Overseas Services’ key “feeders” (that is, one of the people who “fed” the Ponzi much of its money) was Sylvian Ferdman, a Genovese Mafia courier, who routed money into the Investor’s Overseas racket from clients in South America. Another Investors Overseas feeder was John Pullman, whom the U.S. government had named as a close associate of Genovese Mafia boss Anthony “Fat Tony” Salerno. That’s the same “Fat Tony” who was later conversing with Mulheren in prison, and whom the Scotland Yard report linked to Wynn (The Scotland Yard report, however, was false, according to Wynn, and U.S. law enforcement officials have not accused Wynn of having ties to organized crime).

Another key component of Milken’s junk bond merry-go-round in the 1980s was MDC Global, an insurance and savings and loan company that (see Chapter 6 of this series) had been co-founded by a BCCI subsidiary. MDC Global, meanwhile, controlled a brokerage called Blinder Robinson, which specialized in “busting out” small to medium-sized publicly listed companies. MDC Global, of course, was itself “busted out,” and in 1989, Blinder Robinson was indicted, along with its founder, Meyer Blinder.

Blinder Robinson was known as “Blind’em and Rob’em” because it was not only a key player in a nationwide stock manipulation network, but also among the most crooked brokerages in America. Among the miscreants who manipulated stocks in league with Blinder Robinson were (according to various indictments) Thomas Quinn and Arnold Kimmes, both of whom (as we know from earlier chapters) had operated a number of brokerages linked to BCCI. Quinn, recall, was an associate of the Genovese Mafia family, while Kimmes had been identified in a 1973 FBI report as a “major organized crime figure.”

When Kimmes was arrested, he escaped prison by ratting on Meyer Blinder, who did not escape prison (though he was quickly released). In 2000, Richard Walker, then the SEC’s director of enforcement, gave testimony to Congress in which he described Blinder Robinson as being part of a “network” of brokerages — including D.H. Blair, Rooney Pace, FN Wolf, A.R. Baron, and many others – that were tied to organized crime. Most of these brokerages had been financed by Michael Milken and/or his close associates.

The proprietor of Rooney Pace, which was financed directly by Milken, was Randolph Pace, who was later indicted for running a $200 million stock manipulation scheme with a man named Judah Wernick. Many of the other brokerages mentioned in the SEC’s Congressional testimony – including D.H. Blair, A.R. Baron, and FN Wolf — were financed by Zev Wolfson, a Milken business associate who also financed Millennium, the hedge fund co-founded by Boesky’s prospective assassin John Mulheren.

D.H. Blair was particularly close to Milken. It was founded by Morty Davis, and run with help from Davis’s son-in-law, Lindsay Rosenwald, who served as vice chairman. After Milken went to prison in 1991, one of Milken’s top Drexel Burnham employees, Richard Maio, became president of D.H. Blair. In 2000, D.H. Blair was charged on multiple counts of stock manipulation and forced to shut its doors. To describe the full extent of D.H. Blair’s relations with La Cosa Nostra and Russian organized crime, I would have to bore you with a list of names so long that this story would begin to read like a telephone directory. But to give you just a small sampling, I will mention that the people indicted in just one of the hundreds of stock manipulation schemes perpetrated by D.H. Blair included: Frank Coppa, a capo in the Bonanno Mafia family; Edward Garafola, a soldier in the Gambino Mafia family; Daniel Persico, a capo in Colombo Mafia family; and Ernest Montevecchi, a soldier in the Genovese Mafia family.

After Milken got out of prison, he hooked up again with D.H. Blair’s former vice chairman, Lindsay Rosenwald, who is now one of the most powerful hedge fund managers in America, and perhaps the single biggest player in the world of biotech stocks. As described in my book (“The Dendreon Effect”), Milken and Rosenwald have sought to destroy biotech companies that were developing promising medicines while promoting dubious companies (financed by Rosenwald and Milken) whose medicines were killing people.

Many other powerful hedge fund managers operating today got their start in the 1980s working for Milken-financed brokerages with ties to organized crime. SEC filings and other evidence compiled by DeepCapture show with perfect clarity that all of the hedge fund managers in this network regularly trade in unison, investing in (or, more often, attacking) the same companies.

This does not mean that they have necessarily broken any laws, but, again, press reports suggest that some of the biggest players in this “network” are currently the targets a massive FBI investigation said to be targeting a “network” of financial operators suspected of insider trading. As I mentioned, one of them is SAC Capital’s Steve Cohen, who was investigated in the 1980s for trading on inside information that he allegedly received from Milken’s shop at Drexel. Cohen has been described by BusinessWeek magazine as “The Most Powerful Trader on the Street.”

When Cohen was investigated for trading on inside information that he received from Drexel, he was not yet a famous hedge fund manager, but he was among the select traders who effectively ran Gruntal & Company , a Mafia-tied brokerage that received much of its finance from Michael Milken.

There were just a few other traders who had special partnership agreements with Gruntal, and who effectively ran the place. I will name most of them, beginning with Maurice Gross, who handled the accounts of the Gambino Mafia family. Gross later founded his own operation with a Pakistani trader and former BCCI figure named Mohammad Ali Khan, who (according to a case filed by the New York attorney general) alighted with some of the Gambino family’s cash. This was no doubt much to the dismay of Gruntal CEO, Howard Silverman, who had come to depend on the Mafia’s good graces.

As of 2008, Silverman was running one of the nation’s biggest “dark pool” trading platforms, an outfit that enabled his hedge fund clients to conduct trading in total anonymity. It should be a matter of concern that a guy who once ran a brokerage with ties to the Mafia went on to run a major “dark pool”–especially since experts such as the authors of a report (see Chapter 1 of this series for details) commissioned by the Department of Defense say that such platforms could easily be deployed to do serious damage to the markets.

One of the people Silverman brought in to help run his brokerage – another of the select traders with special partnerships at Gruntal – was a fellow named Felix Sater, who was (and is) a Russian mobster and a member of the Mogilevich organization (controlled by Semion Mogilevich, often described as the “most dangerous mobster in the world”). While still at Gruntal, Sater was charged with stabbing a Wall Street trader in the face with the broken stem of a wine glass (actually, it was martini glass, according to a man who witnessed the attack).

While still at Gruntal, Sater and several other former Gruntal traders founded a brokerage called White Rock Partners. Most of White Rock’s employees were former Gruntal employees, and there is no doubt that White Rock’s partners all had ties to organized crime. In 1996, the FBI discovered a locker at a Manhattan Mini-Storage in Soho that belonged to Evgeny Klotsman, a White Rock principal who was formerly among the select traders who had effectively run the Milken-financed Gruntal & Company. The FBI announced that the locker contained guns and documents that linked Klotsman and Sater to a “global market manipulation and money laundering network controlled by Russian organized crime.”

In 1999, White Rock (renamed State Street Capital Partners) was indicted for orchestrating stock manipulation schemes in league with the above-mentioned D.H. Blair and A.R. Baron (financed by Zev Wolfson) and five members of La Costa Nostra, including a Genovese Mafia soldier named Ernest Montevechi, and Danny Persico, a capo in the Colombo Mafia family (and the son of Alphonse “Allie Boy” Persico, the top boss of the Colombo Mafia family). White Rock’s principals, in fact, included some of the top bosses of the Colombo Mafia family, among them not only Danny Persico (who was arrested, along with Gene Phillips, in Operation Uptick), but also a Colombo Mafia capo named Greg Scarpa, to whom we will return.

According to one of Felix’s White Rock partners (and according to The New York Times, which lent credence to the story), Felix escaped indictment (he was named only as an unindicted co-conspirator in the White Rock case) because Felix and his other partner, Evgeny Klotsman , had ties to the Russian intelligence services, and promised the U.S. government that they could work with Russian intelligence to buy Osama bin Laden’s stockpile of Stinger missiles (thereby preventing Al Qaeda from using the missiles to shoot down commercial airlines).

It should not be surprising that Felix Sater, a member of the Mogilevich organization, would have ties to Russian intelligence, and it is equally unsurprising that he would be capable of cutting a deal with Al Qaeda. As the White House national security staff made clear in August 2011, when the president announced that organized crime had “penetrated” the financial system (thereby inspiring the president to officially declare an “Emergency Order”), the Mogilevich organization has close ties to both the Russian intelligence services and to multiple terrorist organizations, including Al Qaeda.

A 1996 classified FBI report (since made public) noted that the Mogilevich organization was involved in everything from major league market manipulation to prostitution, Afghan heroin, and trafficking in nuclear weapons materials. This is why Semion Mogilevich sits high on the FBI’s list of “Ten Most Wanted” criminals. But, of course, Mogilevich has a good lobbyist (i.e. a former director of the FBI, the outfit that publishes that “Most Wanted” list), and few, if any, members of the Mogilevich organization are presently in jail. Many of them are residents of the United States, and we will see that many of them, including Sater, remain active in the U.S. markets.

Multiple reports from law enforcement, the United Nations, non-governmental organizations in Russia, and the mainstream media in London (distinct from the mainstream media in the United States, which has a peculiar reluctance to publish anything interesting) state unequivocally that members of the Mogilevich organization have been selling conventional weapons to Al Qaeda for many years. On at least one occasion, the Mogilevich organization tried to sell highly enriched (nuclear bomb grade) uranium to Al Qaeda. This is a matter of dispute for some “experts”, but European Union officials confirm that it is true, and there is evidence that members of the Mogilevich organization did, at a minimum, claim in meetings with Al Qaeda operatives in Europe that they could obtain the nuclear materials.

Felix, through Russian intelligence, was prepared to cut a deal with Osama bin Laden, but the CIA balked when Klotsman demanded that the U.S. government pay him and Felix $3 million for each Stinger missile. Nonetheless, Felix escaped doing jail time, and some of his other associates say that this is because he and his Russian intelligence associates promised that their relationship with Al Qaeda would eventually be put to use for the U.S. government. However, if American officials believe Felix is helping the U.S. government, they are certainly mistaken. Indeed, it is a bit unsettling that this dangerous criminal is still on the loose. Not only was Felix once charged with stabbing a Wall Street trader in the face with the broken stem of a wine glass (actually, a martini glass), but Felix has also threatened to kill multiple other people. For example, Felix Sater has threatened to kill DeepCapture founder Patrick Byrne.

According to one of Felix’s White Rock partners (who has written about this in a book called “The Scorpion and the Frog”), Felix also once threatened to kill a short seller named Alain Chalem, who then ran a brokerage called Taluca Pacific in partnerships with DeCalvacante Mafia capo Phil Abramo, who was widely known at the time as “The King of Wall Street.” As we know from earlier chapters of this series, Abramo had formerly been involved with brokerages linked to the BCCI enterprise.

Felix’s partner says that Felix did not ultimately kill Chalem, and we should assume that he did not, but soon after the threat (in late 1999), Chalem was, in fact, murdered, execution-style, in his New Jersey mansion. The FBI has yet to prosecute anyone for the murder, but media reports have suggested that one suspect was Danny Persico, the Colombo Mafia capo who was a partner in Felix’s White Rock Partners. Other media have reported that the FBI believes the murder was related to Chalem’s dealings with Russian organized crime.

In later years, Felix co-founded a real estate and mortgage outfit called Bayrock. As we will see in later chapters, Bayrock played a role in the larger “bust out” of the mortgage markets, but for the purposes of this chapter, I will note that Bayrock’s former CFO, Jody Kriss, has alleged that Bayrock is a massive money laundering operation. In 2009, Kriss filed a lawsuit to this effect, and noted that Felix had once threatened to have him (Kriss) tortured and then murdered.

One of Bayrock’s co-founders was Tevfik Arif. In 2011, Arif was arrested in Turkey after Turkish commandos raided a party that Arif was holding on a yacht that had once belonged to Mustafa Kemal Ataturk, Turkey’s founding president. Arif, a native of Kazakhstan, was arrested along with a small harem of prostitutes and some unnamed government officials from Central Asia. (It is unclear why the commandos raided the yacht; the media has reported that Arif was charged only with illegally hiring prostitutes, a crime that does not usually result in commando raids).

Another Bayrock partner was Tamir Sapir, a billionaire real estate investor whose real estate portfolio was managed by a man named Frederick Contini, whom the government has named as an associate of the Genovese Mafia family. In 2008, Contini entered a secret plea to racketeering. He has also faced charges for stabbing a man in the face with the stem of a broken wine glass. It seems to be the thing to do.

As Tamir Sapir himself has admitted, he spent his formative years running a company that specialized in selling high-tech electronics equipment to KGB operatives in New York. As Sapir has not admitted (though public records show that it is true), Sapir’s partner in his espionage operation was Semyon Kislin, who was (according to the FBI) a “member” of the Russian organized crime syndicate run by Vyacheslav Ivankov, then the top boss of the Russian mafia in the United States. In 2009, Ivankov was assassinated on a Moscow street, but not before admitting that his organized crime syndicate (which had close ties to the Mogilevich organization) had long been employed by the Russian intelligence services.

It is clear that Felix Sater has maintained relationships that he developed while working as a trader for Gruntal & Company. For example, he remains a close associate of SAC Capital’s Steve Cohen, and a man involved with a private investigation of Felix’s Bayrock says that Felix has laundered money for Cohen and other hedge fund managers. (Cohen presumably would deny this, and he has not been charged with any wrongdoing).

Meanwhile, Bayrock has had partnerships with several investment funds, nearly every one of which is controlled either by Milken’s former top employees at Drexel Burnham, or by others among the small band of people who are Milken’s closest associates. One of Bayrock’s partners, for example, is Apollo Real Estate, part of Apollo Management, a private equity fund controlled by Leon Black, who is one of the most powerful investors in America. Leon Black is the son of Eli Black, who was, in the 1970s, the head of United Brands, formerly known as United Fruit, a company that was accused of everything from bribing tin-pot dictators to dealing with La Cosa Nostra and funneling money to Latin American narco-terrorists.

In 1975, Carl Lindner, another of Milken’s closest associates and a key participant in Milken’s junk-bond merry-go-round and “bust out” scheme , used Milken finance to take over United Brands. In the midst of this takeover, Eli Black crashed through a plate glass window on the 44th floor of the Pan Am Building in New York, and fell to his death (the death was reported as a suicide). After this incident, Eli’s son, Leon Black, was named head of mergers and acquisitions at Drexel Burnham, the investment bank effectively controlled by Milken. The two men became friends, and after Milken’s criminal indictments, Black insisted that Drexel defend his friend at all costs. Even after Milken’s indictments resulted in Drexel’s collapse, Black continued to insist that Milken was innocent, and today the two men are close friends, involved together in multiple business ventures (some described in my book). Milken’s son, Lance, is a partner at Apollo, the Leon Black fund.

Another of the most powerful financiers in America (and also among Milken’s closest associates) is Carl Icahn. In the early 1980s, Icahn was the head of the options department at Gruntal & Company (the outfit whose key clients included the Gambino Mafia family, and whose key traders, such as Felix Sater and Evgeny Klotsman, were major Russian organized crime figures). After leaving Gruntal, Icahn started his own investment outfit, funded mostly by Michael Milken and Zev Wolfson (Wolfson being the guy who funded Mulheren and the above-mentioned Mafia-tied brokerages, which were indicted for schemes they perpetrated with La Cosa Nostra and Felix Sater).

As soon as he launched his investment fund, Carl Icahn hired several key employees: Harvey Houtkin, Allen Barry Witz, Gary Siegler, and Alan Umbria. Meanwhile, Umbria, who represented Icahn on the floor of the American Stock Exchange, served as the front-man for the Genovese Mafia in a New York restaurant called Crisci’s, which was featured in the movie “Donnie Brasco”—a movie about an undercover FBI agent who infiltrates the Mob. Umbria was also the Mafia’s front-man in another New York restaurant — The Court of the Three Sisters.

One day in the late 1980s, Umbria’s close business associate walked into The Court of the Three Sisters and found Umbria presiding over a meeting in one of the restaurant’s private rooms. The business associate was asked to leave before he could hear what was discussed at this meeting, but the businessman knows who was in attendance – namely, Alan Umbria, a collection of Genovese Mafia thugs, and Louis Micelli, who was a stock broker until his untimely death in 2005. In addition to being a stock broker, Micelli was a major league narco-trafficker with deep connections to the drug cartels of Colombia, and to a Paraguay cell of Hezbollah, the jihadist outfit that takes its directions from the regime in Iran.

It was the Paraguay cell of Hezbollah that helped Iran blow up a synagogue in Argentina, and for a long time, this cell trafficked in cocaine from bases in Ciudad del Este and other cities in the “tri-border” region where Brazil, Argentina, and Paraguay meet. That region has since come under greater scrutiny, so Hezbollah’s drug kingpins have moved deeper inside Paraguay, but they continue to traffic coke, working with Hezbollah jihadis resident in North America – especially in Toronto, Detroit, New York, and my hometown, Chicago. Hezbollah’s trafficking operation continues to be a partnership with La Cosa Nostra, the Russian mafia, and (yes) some stock brokers, more of whom we will meet later.

* * * * * * * * *

Back to Gruntal & Company, the brokerage that was financed by Milken.

As we know, there were just a few traders who had special partnerships with Gruntal, and who effectively ran the place. In addition, we know, all of these traders had close ties to Milken. One of them, of course, was Steve Cohen, future founder of SAC Capital. Another was the Russian crime figure Evgeny Klotsman. And yet another, of course, was the Russian mobster Felix Sater, who, along with Klotsman, was, in 1996 linked to what the FBI described as a “global market manipulation and money laundering network controlled by Russian organized crime.” Other key figures in that “global market manipulation and money laundering network” were, of course, members of La Cosa Nostra, several of whom were involved, along with Felix, Klotsman and other Gruntal principals, in White Rock Partners.

There were just a few other traders who effectively ran Gruntal, and one of them was Andrew Redleaf, whose wealthy family did a lot of business with Milken’s operation at Drexel. Redleaf got his job at Gruntal on Milken’s recommendation. After leaving Gruntal, Redleaf invested in Sun Country Airlines in partnership with Tom Petters, who was arrested in 2008 and indicted for orchestrating a massive Ponzi scheme in cahoots with Michael Catain, the son of a famous Genovese Mafia enforcer named Jack Catain. Redleaf currently runs a large hedge fund called Whitebox Partners, another of the hedge funds that regularly trade in unison with SAC Capital and others in the network. (Neither Whitebox nor its principals has been charged with any crime).

Another one of the hedge funds in this network is the massive and eminently powerful Cerberus Capital, run by Stephen Feinberg and Ezra Merkin. In the early 1980s, Feinberg was one of Michael Milken’s top employees at Drexel Burnham. In the mid-1980s, Milken asked Feinberg to move to Gruntal & Company to help the others (namely, Russian mafia boss Felix Sater, Evgeny Klotsman, Gambino Mafia broker Maurice Gross, and Steve Cohen, among a few others) oversee Gruntal’s operations, which had become important to Milken’s nationwide network. But aside from the SEC’s investigation of Steve Cohen, regulators did not catch on to Gruntal’s criminality until the mid-1990s, when it was forced to pay the largest fines in SEC history after a series of scandals that saw some of its other managers charged with embezzlement and cooking the books. By then, the traders who really ran the place in the 1980s had moved on to much bigger projects, one of which, we know, was Feinberg’s Cerberus Capital.

In 2006, Mainichi Shimbun, Japan’s most respected business newspaper, reported that Cerberus was tied to the Japanese Yakuza. Feinberg said it wasn’t true and he sued the Japanese newspaper for libel, but there is no doubt that Mafia outfits worldwide are becoming more closely intertwined, and I think we would be justified in asking whether Feinberg came into contact with various Mafia outfits while working for Gruntal & Company (which was effectively controlled by a select number of traders, some of whom were mobsters). Feinberg’s partner in Cerberus, Ezra Merkin, meanwhile, has been charged with civil fraud for his role in the massive “Ponzi” scheme (in fact, it was not just a “Ponzi” scheme, but more on that later) perpetrated by the infamous Bernie Madoff. One of Merkin’s other funds, Ascot Partners, was the second biggest “feeder” to the Madoff criminal operation.

Other big “feeders” to Madoff’s operation were, according to court documents, “made” members of the Mafia. One of them was Ralph Mafrici, who had a joint account with Madoff’s investment fund in the name of Eleanor Cardile, a relative of Madoff’s right hand man, Frank DiPascali. Mafrici was a Genovese Mafia capo who allegedly ordered the assassination of another Mob boss named Albert Anastasia. Since Anastasia was getting his hair cut at the time, the assassination was famously dubbed “The Barber Shop Hit.” In fact, Madoff’s operation had extensive ties to organized crime, as we will see in later chapters, wherein we will also see that Madoff’s brokerage was a key component of the Milken network (and had, in the 1980s been a key component of the larger BCCI enterprise). First, though, let us meet some of the other characters in the “network” that will feature in our later discussion of the 2008 meltdown.

Another of the traders who, in the 1980s, effectively ran Gruntal & Company was Sam Israel, who later became the proprietor of a criminal hedge fund called Bayou. When Israel was indicted in 2008, Bayou was said to be the “biggest Ponzi scheme in history.” Before that, the biggest Ponzi schemes in history had been the Ponzi schemes run by the above-mentioned Fred Carr and Tom Petters. Unfortunately, in December of 2008, Sam Israel’s Ponzi was topped by Bernard Madoff, who turned himself in to the FBI and announced that his “Ponzi” scheme (which absconded with upwards of $65 billion) was bigger.

When it came time for Israel to show up for prison, Israel instead parked his car on a bridge and left a note in the window that said, “Suicide is Painless.” Then he ran away.

After that, Israel had second thoughts and decided to turn himself in. Meanwhile, it emerged that Israel had been in business with Robert Booth Nichols, whom the FBI had identified as a close associate of both the Gambino and Genovese Mafia family and perhaps the key U.S. contact for the Japanese Yakuza. Back in the 1980s, Nichols had been involved with BCCI, and he was tied to a big scandal surrounding a software program called Promis.

The developers of Promis alleged that the software was stolen from them by the U.S. government, which (according to the developers) modified it so that it included a back door feature that would allow the U.S. government to access information on computers that had installed the software. At the time, the media gave considerable credence to this story, and suggested that the U.S. government had sold Promis software to multiple foreign governments. What has not been widely reported is that Mafia-tied Robert Booth Nichols also managed to gain rights to sell Promis software, and Nichols handed those rights to the famous Saudi arms dealer and market manipulator Adnan Khashoggi, who had been a key figure in the larger BCCI enterprise.

As a document obtained by DeepCapture shows, Khashoggi, in turn, licensed the software to Sheikh Khalid bin Mahfouz, then the largest shareholder of BCCI and executive director of the bank. (Recall from earlier chapters of this series that Sheikh Mahfouz was, until his death in 2009, also one of Osama bin Laden’s most important business partners). Mahfouz proceeded to sell this software to major banks around the world, raising the question of whether he used its back-door feature to obtain confidential information from the computer systems of banks that used the software.

The bizarre nature of the business that Nichols and Israel later did together has been reported in an entertaining book called “Octopus: Sam Israel, the Secret Market, and Wall Street’s Wildest Con,” which suggests that Israel was conned by Nichols into believing that he, Israel, could recoup his hedge fund losses by tapping into a “secret market” that was, according to Nichols, controlled by 13 powerful families who also controlled the whole world. The book, of course, casts doubt on the notion that the 13 families actually control a secret market, much less the whole world, and the book reports further that Israel was scammed by Nichols into paying a large sum of money to get his hands on U.S. Treasury notes with a face value worth billions.

The Treasury notes were said to be linked to “Yamashita’s gold,” which was reputed to be gold that had ostensibly been stashed in the Philippines by the Japanese just prior to the end of World War II, and later recovered by a secret U.S. government operation. This, too, seems an unlikely proposition, but there might, in fact, be more to this story than a tale of a hapless hedge fund manager (Sam Israel) who lost millions to a clever con-man (Nichols). Which is not to say that 13 families actually control the world (though, of course, anything is possible), but as court documents obtained by DeepCapture show, Nichols and Israel had, in fact, obtained U.S. Treasury notes valued at $250 billion (as in a quarter-of-a-trillion dollars).

Israel and Nichols told people that their $250 billion in Treasury notes were secured by 2,500 metric tons of gold (serial number SC 3040-20) at the Atlanta Federal Reserve. In fact, physical gold in this quantity was not sitting with the Federal Reserve, but Nichols and Israel said the Atlanta Federal Reserve had issued a serial number in confidence that the gold would be forthcoming, much of it from the Philippines.

More specifically, Nichols and Israel told people that many of their $250 billion in Treasury bonds were secured by “Yamashita gold” that had been located years earlier by then Philippine dictator Ferdinand Marcos, who had moved the gold to a new hiding place in the jungles of Mindanao, an island at the south end of the Philippine archipelago. According to Nichols, Adnan Khashoggi (who was once indicted for laundering money on behalf of Imelda Marcos, then widow of the former dictator) had reported that this gold was now in the possession of the Abu Sayyaf terrorist group on Mindanao, and that his associates were traveling to the Philippines to retrieve the gold.

Nichols later changed the story and said that the $250 billion in U.S. Treasury bonds were related to long-standing U.S. government obligations to the offspring of Chinese nationalist leader Chiang Kai-shek. Specifically, Nichols said the obligations had been confirmed by Tansri Teong, a representative of the Maiwah family, descendents of Chiang Kai-shek who lived in Luxembourg. However, Nichols began telling the Chiang Kai-shek story after Israel was arrested, perhaps to distract investigators from the fact that their scheme revolved primarily around Khashoggi’s assurances concerning the Yamashita gold in the Philippines.

In either case, while Khashoggi had spoken of this gold in the past, many considered the story to be rather implausible. Of course, anything is possible, but it is equally possible that the $250 billion Treasury bonds were a fake. Nonetheless, according to journalist Cheryl Seymour (who first reported parts of this story, though not the information about the gold in the Philippines), bankers around the world were convinced that the Treasury notes were real. And, again, they had a face value of a quarter trillion dollars—which is around 60% of what the U.S. government pays each year in interest on the national debt. It’s also around 60% of the U.S. government’s annual defense expenditures. Moreover, Nichols and Israel circulated the story about this supposed massive obligation just as the U.S. financial system was beginning to weaken.

That is, just as the system was weakening in 2008, Israel and Nichols claimed that they were going to cash in notes that would (if it they were real) effectively bankrupt the U.S. government and fuel panic with regard to any major banks that had liens on Treasury notes. As one banker told Seymour, this “shook the financial foundation around the world.” Other bankers reiterated that statement: Sam Israel’s claim (whether true or false) to have $250 billion in Treasury bonds linked to a stash of gold in the Philippines actually rocked the global financial system (though, of course, there were other activities that did quite a lot more to rock the global financial system).

After Israel was arrested, he and Nichols filed lawsuits against each other. Soon after, in 2009, reports emerged that Nichols had been found dead in Switzerland. People close to Nichols insist that Nichols faked his own death, but the truth remains unknown. It is also unlikely that we will learn whether the U.S. Treasury notes were fake because soon after Nichols and Israel filed their lawsuits, the notes vanished. They had been briefly entered into the public record, but they are not there anymore. There is no doubt, though, that the notes (whether they were counterfeit or not) did exist. And some bankers apparently did take them seriously.

No doubt I will be ridiculed as a conspiracy theorist simply because I have told this true (albeit weird) story, but I have been accused of worse, and I will note that an almost precisely similar story (though with a different set of protagonists) was recently discussed on the floor of the British parliament.

* * * * * * * *

Before he got involved with the bizarre $250 billion Treasury note scheme, and after he left Gruntal & Company, Israel spent time working for one of Michael Steinhardt’s hedge funds. In that capacity, Israel helped Steinhardt corner the market for U.S. Treasuries, posing a threat to economic stability until the government threatened to press criminal charges, convincing Steinhardt to back off.

John Lattanzio, the manager of Steinhardt’s hedge fund, was extremely secretive. There wasn’t much information on him until a court case revealed that Lattanzio once proposed marriage to a Russian hooker and gave her a $289,275 diamond ring. Nothing wrong with that (marriage is a wonderful thing), but the interesting development in this case was that the lovers quarreled, Lattanzio wanted his ring back, and the prospective wife told the judge that Lattanzio had big-time Mafia connections. She also said that Lattanzio “would not hesitate to use [the Mafia] to harm me.” Which is not surprising because the man who launched Lattanzio’s career, Michael Steinhardt, also has big-time Mafia connections.

When it became evident that Steinhardt’s ties to the Mafia might become public, Steinhardt preemptively published a book in which he revealed (as if were no big deal) that his father, Sol “Red” Steinhardt, had done time in Sing-Sing prison because he was, in the words of a Manhattan district attorney, the “biggest Mafia fence in America.” In fact, as noted in earlier chapters of this series, Steinhardt’s father was effectively the chief financial officer for the Genovese Mafia family. In his book, Steinhardt admitted that the first and most important investors in his first hedge fund were: the Genovese Mafia family; Ivan Boesky (Milken’s most famous criminal co-conspirator); and Marc Rich (who then shared office space with Boesky).

In previous chapters of this series, I discussed Marc Rich’s ties to BCCI and the Iranian regime, noting that Steinhardt’s lobbying helped convince President Bill Clinton to pardon Rich from his indictment for illegal trading with Iran. Although Rich was pardoned, he still owes the U.S. government taxes, so he lives in Switzerland, where his palatial home is guarded by a private army of mercenaries.

Rich has done quite a lot of business with companies, such as Highland Capital, that were under the control of Russian organized crime boss Semion Mogilevich, and Rich was linked to the late 1990s scandal that saw Russian organized crime syndicates (most notably the Mogilevich organization) launder more than $10 billion through the Bank of New York. This was the same scandal that involved Sinex, which handled around $3.9 billion of that money, most of it belonging to the Mogilevich organization. Rich was not charged in the Bank of New York affair, and nor were any of the other oligarchs (many of them previously linked to the BCCI enterprise) who were implicated in the Bank of New York affair.

Of course, Steinhardt was also among Milken’s closest associates. Nowadays, Steinhardt runs a big exchange traded fund (ETF) outfit called Wisdom Tree Investments. His partner in that operation is Jonathan Steinberg, son of Saul Steinberg, who was a key player in the junk bond “bust out” scheme that Milken ran in the 1980s. Steinberg used Milken junk bonds to seize Reliance, a giant insurance and financial services firm, which was subsequently looted and destroyed (i.e. “busted out”). Steinberg was not charged with any crime.

As noted in Chapter 6 of this series, a Wall Street Journal story published in 1985 (read it, as it was the last serious investigative report on short-side market manipulation published before the media started describing these miscreants as heroes worthy of our admiration) identified Steinhardt as being part of a “network” of short sellers who regularly attacked public companies using unscrupulous tactics, such as posing as journalists to obtain inside information and conspiring to cut off victim companies’ access to credit.

Among the others identified as being part of that “network” was Jim Chanos, who is now the proprietor of a famous hedge fund called Kynikos Capital, and the head lobbyist for the hedge fund industry. Chanos is also a favorite source for the New York financial media, one reason why the media no longer publishes stories about short-side market manipulation (which does not occur, according to the lobby headed by Chanos). When DeepCapture first started reporting on Chanos’s ties to Michael Milken and associates, Chanos went to lengths to distance himself from Milken, telling journalists that he had identified the fraud at Milken-financed companies.

In an email to some of his associates (the email was obtained by lawyers for the Canadian financial institution called Fairfax Financial, and later obtained by DeepCapture), Chanos outlines the party line, suggesting to the recipients of the email (namely, a long list of Milken-tied hedge fund operators and billionaires, such as Carl Icahn, who owed their careers to Milken) that they communicate the fact that he, Chanos, had been a short seller of companies financed by a “certain junk bond king” (i.e. Milken). But while Chanos, Steinhardt, and others in their “network” were certainly short sellers of Milken-financed companies, their short selling was always beneficial to Milken, and was simply the tail-end of the “bust-out” schemes that I have described, noting that every “bust-out” ends in a wave of short selling.

Indeed, as was revealed in the 1985 Wall Street Journal story, Chanos got his big start by shorting a company called Baldwin United. According to this story, Chanos went so far as to go to Baldwin’s bankers with false information that convinced the bankers to cut off Baldwin’s access to credit. As a result, Baldwin went bankrupt, and Milken got himself named as the advisor to the bankruptcy. According to a well-known and highly respected businessman who was involved in the bankruptcy proceedings, Milken abused his advisory role and ensured that all of Baldwin’s assets were delivered to his cronies at firesale prices. This success brought Chanos to the attention of Michael Steinhardt.

At the time, Chanos (who is now revered by The Journal) was working for a Mafia-tied brokerage called Gilford Securities. In 2000, five Gilford brokers were arrested (along with Phillips) in Operation Uptick, which was, of course, then the biggest Mafia bust in the history of the FBI. Gilford’s brokers were charged with manipulating stocks in league with ten members of La Cosa Nostra and a corrupt New York cop. By then, though, Chanos had left Gilford to start his own hedge fund, receiving his initial finance from Steinhardt (son of the biggest Mafia fence in America) and Steinhardt’s limited partner, Ivan Boesky (Milken’s most famous co-conspirator). Steinhardt’s other limited partner, Marty Peretz, introduced Chanos to Dirk Ziff, another powerful hedge fund manager (Och-Ziff Capital and Ziff Brothers), and for a while Chanos ran his hedge fund out of Ziff’s offices.

While Chanos was launching his hedge fund, future CNBC reporter Jim Cramer (who had once planned to work in partnership with Boesky) was running a hedge fund out of Steinhardt’s offices. Later, Cramer and Chanos were the biggest fundraisers for the political campaign of New York Governor Elliot Spitzer, who had been Cramer’s college roommate. For a time, Spitzer’s favorite hooker, “Ashley Dupree” lived (rent free) at Jim Chanos’s beachside villa. She called him “Uncle Jim.” As Patrick Byrne once said, Ashley should be ashamed of herself for associating with this crowd.

SEC filings make it clear that Chanos regularly trades in league with other hedge funds in the Milken network, and in 2006 they were attacking Fairfax Financial, one of the largest financial institutions in Canada. Fairfax filed a lawsuit against others in his “network,” including SAC Capital, and some of its affiliates, such as Exis Capital and Sigma Capital. (A judge has ruled that SAC Capital should be dropped from the suit, but Sigma and Exis are still in litigation, and Fairfax has appealed the ruling).

Emails obtained by Fairfax’s lawyers make it clear that these hedge funds were using the same tactics (such as trying to cut off the company’s access to credit) that they had been using since the 1980s.In one email, an employee of Exis Capital (a SAC Capital subsidiary) wrote that “the way to get this thing [Fairfax] down is to get them where they eat, like the credit analysts and holders. We’re taking this baby down for the count.” This email was addressed to Jonathan Kalikow, son of Peter Kalikow, who had, in the 1980s, been one of largest investors in Ivan Boesky’s criminal arbitrage fund (or “hedge fund,” as it would now be called).

Kalikow is also a former owner of The New York Post. At the time, the newspapers’ fleet of delivery trucks was controlled by La Cosa Nostra. The operation was run by Bonanno Mafia soldier Richard “Shellack-head” Cantrella. Soon enough, the New York Post delivery fleet began transporting cargos of smuggled weaponry and cocaine, in addition to newspapers. (Kalikow was not charged with any crime, and it is possible he was unaware that his delivery trucks were controlled by the Mob).

At any rate, back in 2006, this network was going to take Fairfax “down for the count.” Fortunately, though, Fairfax was a strong company. Its bankers did not cut off access to credit, and it had the good luck to buy a lot of credit default swaps that massively boosted its profits.

However, two years later, Bear Stearns, Lehman Brothers, and other banks were taken “down for the count.” The public attack on Lehman began in May, 2008 with a speech by David Einhorn, a famous short seller who got his start working for Gary Siegler, one of the first people whom Carl Ichan hired after leaving Gruntal & Company. Einhorn is, for all intents and purposes, Ichan’s boy, and when he gave his Lehman speech, he was standing by Icahn’s side, just as he was standing by Ichan’s side when he initiated previous attacks on public companies.

In his speech and subsequent media tour, Einhorn cited data from a strange firm called The Markit Group to support his exaggerated contention that Lehman had improperly accounted for the value of its property and collateralized debt obligation holdings. See my earlier DeepCapture story, “The Markit Group: A Black Box Company that Devastated Markets,” which notes that this company was founded by a few hedge funds, which the company refuses to identify. It was, in 2008, run by two former Canadian bankers and a developer of Bulgarian property, and seemed to cherry-pick its data, which was provided by a few investment banks that are passive investors in the company.

The Markit Group is wholly without transparency, and yet it essentially dictates perceptions of market prices for collateralized debt obligations and other instruments (including credit default swaps) that are important barometers of health in the banking sector. And during the crisis of 2008, it consistently churned out wildly overstated valuations on credit default swaps, while valuing all collateralized debt obligations based on a sampling of CDOs that included only the worst of the worst (or more specifically, the “synthetic” CDOs that had been designed by short sellers to self-destruct).

The Markit Group’s wildly off-base statistics fueled the panic that helped bring down Bear Stearns, and it was a useful tool for Einhorn, when he initiated his attack on Lehman. That attack was akin to the launch of a new Ipod, with much-hyped speeches and a whirlwind media tour handled by a public relations firm, which presented Einhorn as the boy-wonder fraud-buster who had proved his mettle in an earlier battle with a financial services firm called Allied Capital. (See DeepCapture’s story, “Notes on David Einhorn: The Predator in a Cute T-Shirt,” for a fuller deconstruction of Einhorn’s blatantly dishonest attack on Allied Capital, which was perpetrated in league with Michael Milken and Carl Icahn).

While Einhorn was on his media tour, most of the other hedge funds in his network initiated a short selling attack on Lehman. After Lehman’s collapse, the bank’s creditors filed a lawsuit against the above-mentioned Steve Cohen and Dirk Ziff, alleging that the two hedge fund managers (along with Citadel Investment) helped destroy Lehman with manipulative short selling.

To be continued…Click here to read Chapter 7

Mark Mitchell is a journalist who spent most of his career working as a correspondent for mainstream media publications before joining DeepCapture.com. Mitchell is the author of a recently published book: The Dendreon Effect: How Felons, Con-men, and Wall Street Insiders Manipulate High-tech Stocks, which is available from most major online booksellers.

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The Global Bust-Out Series (Chapter 2): The “Money Weapon” and The Jihad Bigger than Bin Laden

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The Global Bust-Out Series (Chapter 2): The “Money Weapon” and The Jihad Bigger than Bin Laden


This is Chapter 2 of a multi-chapter series. On your right is a Table of Contents to all chapters so far published.

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Al Qaeda’s supporters are “aware of the cracks in the Western financial system as they are aware of the lines in their own hands.”

– Osama bin Laden, in a 2001 interview with a Pakistani Journalist

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In the summer of 2003, customs agents at London’s Heathrow airport inspected the luggage of a man named Abdurrahman Alamoudi and found hidden in a secret compartment of one of his suitcases a total of $350,000 in cash. Mr. Alamoudi failed to adequately explain why he was hauling large stacks of $100 bills in a secret compartment, so there was an investigation. This investigation yielded some interesting facts.

Mr. Alamoudi, a member of a wealthy family in Saudi Arabia, had been a long time resident of the United States, where he was among the most prominent members of the Muslim community. He was also a leader of the Muslim Brotherhood, and an outspoken supporter of Hamas and Hezbollah. In addition, he counted among closest friends and business associates people like Sami al Arian, a leader of Palestinian Islamic Jihad, and Mousa Abu Marzook, political chief of Hamas.

Some people believe that groups like Palestinian Islamic Jihad, Hamas, and the Muslim Brotherhood are focused on faraway lands, but all of these groups (we will see) have ties to Al Qaeda, and all of them are united in their hostility to the United States. Moreover, they pay close attention to the U.S. markets – and they see the economy as key to undermining American power.

When the financial crisis hit in 2008, Hamas leaders reacted with glee and issued an official statement proclaiming that the economic cataclysm marked the “End of the American Empire.” Meanwhile, leaders of the Muslim Brotherhood regularly preach the glory of Al Jihad bi-al-Mal, or the “Financial Jihad.”

A report (see Chapter 1) commissioned by the Defense Department’s Irregular Warfare Support Program suggests that the “Financial Jihad” has two key objectives: 1) building a global financial network that can serve as an alternative to the prevailing financial order dominated by the West; 2) perpetrating destructive financial crimes that can be described as “financial terrorism” because the crimes are, to some extent, politically motivated and meant to undermine the global financial system, which is viewed by leaders of the Financial Jihad as being a product of the West.

Muslim Brotherhood leader Hamud bin Uqla al-Shuaibi implied as much when he stated in 2007 that jihadis must resist the West, but do not necessarily need to do so with violence. He suggested that “Financial Jihad” was a viable alternative to violence and was indeed “more important than self sacrificing [in armed battle].” He did not specify what he meant by “Financial Jihad” but he was certainly not talking about giving to charity. Rather, he said, “Money is a weapon of Jihad.”

Similarly, Muslim Brotherhood spiritual leader Yussuf al Qardawi has spoken of the need for Muslims to deploy  Silah al Naft – i.e. “the weapon of oil” – against the U.S. economy. This was precisely in line with the thinking of Osama bin Laden, who stressed  “the absolute necessity to use the oil weapon.”

In another typical manifesto, Osama bin Laden and his deputy wrote that “it is very important to concentrate on hitting the U.S. economy through all possible means.” In 2007, bin Laden released a video on which he taunted the U.S. for having too much mortgage debt.

Although Osama bin Laden is dead, his words remain important. Indeed, among jihadis, the words of the fallen “martyr” might have more resonance than ever. And the jihad is bigger than bin Laden. It is a global movement that has clearly articulated its goals, and remains intent upon achieving them.

Al Qaeda and many other outfits have repeated over and over that jihadis should wage economic warfare any way they can. They don’t mean knocking down buildings – they mean wiping out the markets. As Al Qaeda operative Monin Khawaja wrote in 2003, “We have to come up with a way that we can drain their economy of all its resources, cripple their industries, and bankrupt their systems…”

Then there is the Muslim Brotherhood document, which is quoted all too frequently, and often to the wrong purposes. It says that Muslims “must understand that their work in America is a kind of Grand Jihad in eliminating and destroying the Western civilization from within and `sabotaging’ its miserable house by the hands of the believers…”

When I say that the document is quoted to the wrong purposes, I am referring to those who point to it as evidence that radical Islamism is taking over America, which it is not. Certainly, we should not be hysterical about Muslims calling America a “miserable house”, which is an accurate description of our current state of affairs. However, it is possible that jihadis are, in fact, “sabotaging” our miserable house from within.

As early as 2003, the Department of Homeland Security warned that Al Qaeda  was interested in infiltrating American financial institutions, and that Al Qaeda operatives possibly had already obtained jobs at American brokerage houses and banks. Said DHS spokesman David Wray: “There is new intelligence that indicates specific interest [on the part of Al Qaeda] in financial services and indirect indication…that led us to believe that threats could come from within as well as without.”

Osama bin Laden, meanwhile, liked to brag (as he did in the statement with which I opened this chapter) that his supporters understand the weaknesses in the American financial system. In another statement, he was even more explicit, saying not only that his supporters knew how to “exploit” the “cracks inside the Western financial system”, but also that the “faults and weaknesses are like a sliding noose strangling the [American economy].”

Which brings us back to Mr. Alamoudi, the fellow caught with $350,000 stuffed in his suitcase. Mr. Alamoudi was a central figure in what FBI investigators used to call the SAAR Network, or sometimes the Safa Group, a complex web of companies, investment funds, banks and charities alleged to have funded a host of jihadist outfits, including Al Qaeda. Shortly after the 9-11 attacks in 2001, the SAAR Network became the principal target of Operation Green Quest, the U.S. government’s effort to shut down the flow of money to terrorists. (Operation Green Quest led to few indictments and was disbanded in 2003, but its findings remain relevant).

One SAAR Network outfit was called the Ficq Council, where Mr. Alamoudi served as a trustee. The founder of the Ficq Council, Taha Jaber Al-Alwani, was named as an “unindicted co-conspirator” in the government’s case against Mr. Alamoudi’s friend, Sami al-Arian, who was himself a central figure in the SAAR Network until he was jailed for his activities as U.S. leader of Palestinian Islamic Jihad. (Sami al-Arian was also suspected of providing support to the 9-11 hijackers, but he was never charged for doing so).

The secretary and board director of the Ficq Council was a man named Sheikh Yusuf Talal DeLorenzo, who is another one of Sami al Arian’s close associates. Sheikh DeLorenzo and Mr. Alamoudi (the fellow with the suitcase full of cash), meanwhile, co-founded a SAAR Network outfit called the Graduate School of Islamic and Social Sciences (GSISS).

Sheikh DeLorenzo himself has not been implicated in the funding of terrorism, and for a time, GSISS had a contract from the U.S. Department of Defense to screen and hire Muslim Army chaplains, some of whom accompanied U.S. troops to Afghanistan. That, however, was before Mr. Alamoudi was caught at Heathrow with $350,000 in cash hidden in a secret compartment of his suitcase. The investigation that ensued revealed that Mr. Alamoudi had received the cash from Libyan dictator Moammar Qaddafi, and that he planned to use it to finance a plot that he had hatched to assassinate then Crown Prince Abdullah of Saudi Arabia. In 2004, the Treasury Department issued a press release stating that Mr. Alamoudi had ties to Al Qaeda and was one of Osama bin Laden’s most important funders.

After it became clear that Mr. Alamoudi (who is now serving a 23-year prison sentence) had ties to Al Qaeda, the U.S. Senate held a hearing to discuss how it came to be that GSISS (the outfit co-founded by Mr. Almoudi and Sheikh DeLorenzo) was hiring chaplains to accompany American troops to Afghanistan. Echoing the words of most everyone else at that hearing, Senator Jon Kyl of Arizona said that it was pretty “remarkable” that  “people who have known connections to terrorism are the only people to approve these chaplains.”

The Defense Department also concluded that it was remarkable, and ultimately concluded that the GSISS had probably been inserting Al Qaeda spies into the U.S. Army. At least one of the chaplains that GSISS hired for the Army was eventually charged and convicted for passing U.S. military secrets to Al Qaeda. Other GSISS clerics were suspected of espionage and merely fired.

Three years later, a lot of people still thought it was “remarkable GSISS (co-founded by Mr. Alamoudi, a key funder of Al Qaeda) had managed to insert spies into the U.S. military. but that didn’t stop GSISS’s other co-founder, Sheikh DeLorenzo (a sophisticated financier) from seeking permission from the Securities and Exchange Commission to set up a trading platform called Al Safi Trust, the ostensible purpose of which was to enable Muslim traders to engage in short selling without violating shariah law.

In 2007, the SEC granted permission, which is pretty “remarkable” because Al Safi Trust creates precisely the sort of “crack” in the financial system that would likely be exploited by people looking to crash the markets.

Traders who engage in legal short selling (as opposed to naked short selling) first borrow stock, then sell it, hoping the price will fall. This is a legitimate practice when it is not meant to intentionally manipulate the markets. The stock that is borrowed and then sold is real stock; it is not phantom stock that artificially increases supply and drives down prices. When Sheikh DeLorenzo set up Al Safi Trust, however, he explained that Muslim traders cannot borrow stock because shariah law prohibits paying interest.

This claim is, to begin with, not entirely true. Shariah law (by a strict reading of the Koran) does not ban interest. It merely warns against “excessive” interest, or usury. Nobody in modern times ever said that Muslims cannot pay interest until the Muslim Brotherhood’s “Financial Jihad” began to take off in the 1970s. This is about politics, not religion. Regardless, the interest problem could have been resolved in any number of ways. For example, Al Safi Trust could have worked out a fee structure whereby the prime broker, rather than the traders themselves, paid the interest on the borrowed stock.

Instead, Al Safi Trust provides an altogether novel service, known as Arboon, the amazing feature of which is that nobody locates or borrows any real stock. The clients of Al Safi Trust can simply sell as much stock as they like even if there is no stock available to sell.

Of course, if there is no stock available, they are not selling actual stock. They are simply hitting the “sell” buttons on their computers, indicating to the markets that stock has been sold, and creating phantom supply that drives down prices. According to Sheikh DeLorenzo, Al Safi Trust’s short sellers enter into an agreement to eventually buy stock so that they can deliver what they have sold.  But an agreement to buy stock  at some indeterminate point in the future is a far cry from having actual stock before selling it.

Presumably, Al Saft Trust’s clients do fulfill their agreements by eventually purchasing stock and delivering it to whomever bought it. But by that time, the phantom stock that was sold would have already done its damage to the markets. With the damage done, Al Safi Trust’s traders can buy shares at lower prices, deliver them, and then unleash another blast of phantom stock, further driving down prices.

In short, Al Safi Trust is nothing more than a cloak for another form of naked short selling, embroidered in Islamic jurisprudence so that regulators will not see through it. Because it is condoned by regulators, there is no evidence that Al Safi Trust itself has broken any laws. However, criminals  (or, for that matter, financial terrorists) looking to inflict damage on the markets now have a service, Al Safi Trust, that would enable them to conduct their mischief without fear that American regulators would pay even the least bit of attention to what they are doing.

I shudder to think who the clients of Al Safi Trust might be, but we should probably consider the possibilities. And towards that end, maybe we should know more about Sheikh DeLorenzo’s background.

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Sheikh DeLorenzo was born in Massachusetts as Anthony DeLorenzo, the son of upper-class parents, and the grandson of Italian immigrants from Sicily. At the age of twenty, he dropped out of Cornell University, and converted to Islam. Soon after, he moved to Pakistan, gradually making his way to Karachi, where he spent several years receiving religious training at Jamiah Ulum Islamia, a maddrassah led by scholars who, like the Taliban, subscribe to the strict Deobandi school of Islam.

According to the International Crisis Group, a well-known non-profit organization that studies war zones and political conflict, the Jamiah Islamia maddrassah has “carried the mantle of Jihadi leadership,” since the days of the Soviet invasion of Afghanistan, and now serves as “the fountainhead of Deobandi militancy countrywide.”

The International Crisis Group notes further that the Jamiah Islamia “boasts close ties with the Taliban” and has played a “major role in helping to establish and sustain” Pakistan’s most violent jihadist outfits, including Harkat ul-Mujahideen, Jaish-e-Mohammed, and Sipah-e-Sahaba. All of these groups have close ties to Al Qaeda, and Jaish-e-Mohammed, along with the intimately affiliated Lashkar-e-Tayiba, have become, for all intents and purposes, Al Qaeda subsidiaries.

As evidence of this, investigators note, as just one example, that Omar Sheikh, a leading member of Jaish-e-Mohammed, wired money to Mohammed Atta, the ring-leader of the Al Qaeda hijackers who carried out the 9-11 attacks. Omar Sheikh was also responsible for kidnapping Wall Street Journal reporter Daniel Pearl, who was subsequently killed, his head sliced off with an ornate, Yemeni knife and held up to be filmed for a jihadi propaganda video. Khalid Sheikh Mohammed, the mastermind of the September 11 attacks, has said that he committed the murder himself.

This was a great tragedy because Daniel Pearl was one of the few journalists to understand the threat to the United States is not just Al Qaeda, but a much larger, complex web of interlinking jihadist groups, shady financiers, agents of rogue states, narcotics smugglers, nuclear weapons traffickers, and Mafia kingpins. We’ll dig into that web in future chapters, but I’ll note now that Jaish-e-Mohammed, one of the outfits spawned by Sheikh DeLorenzo’s madrassah, has been implicated in multiple terrorist plots, including one to fire Stinger missiles at passenger planes in New York.

This is not to suggest that Sheikh DeLorenzo himself is a terrorist.  But there is no question that Sheikh DeLorenzo — who is also known as Usama DeLorenzo, and Usama a-Ali, and Usama Ashraf Ali, and other names – is on familiar terms with jihadist groups. Indeed, in the 1980s, Sheikh DeLorenzo worked as a key advisor to Zia ul-Haq, who was then the leader of Pakistan, and Sheikh DeLorenzo’s job was to help implement the Pakistani government’s most pernicious program — the further development of the country’s network of madrassahs in order to strengthen relationships between the government and jihadist paramilitaries, including many that are now plotting the demise of the West.

As part of Sheikh DeLorenzo’s program, many of these jihadist groups became closely intertwined with Pakistan’s spy agency, Inter-Services Intelligence (ISI). It should be said that the madrassah program also received support from the U.S. government, which was then hoping that the jihadist movement would serve as bulwark against the Soviet Union. But nowadays, of course, the jihadist paramilitaries are enemies of the United States, and their entanglements with the ISI cause endless problems for U.S. government officials who rely on Pakistan as an American ally.

The nexus between the ISI, the jihadis, and also key Mafia figures (such as the Indian Mafia kingpin Dawood Ibrahim, who lives under the protection of the ISI and is a key money man for Al Qaeda, according to multiple U.S. government reports) is a genuine threat to global stability, and to the financial system that underlies the American economy. Ibrahim himself is a serious threat. Aside from being involved in multiple violent terrorist attacks, he is reportedly the biggest trader on the Karachi stock exchange. Forbes Magazine ranks Ibrahim as one of the 50 most powerful people in the world.

The extent to which Sheikh DeLorenzo remains part of the Pakistani nexus is unclear, but his experience in Pakistan might be less worrying than his time in America, where he came to be on close terms not only with Sami al-Arian (a leader of Palestinian Islamic Jihad) and Mr. Alamoudi (his Al Qaeda-tied partner in  GSISS) but many other important jihadis, most of them key figures in the SAAR Network of alleged terrorist financiers. Indeed, though Sheikh DeLorenzo has never been charged with any crime, he held key positions with multiple SAAR Network organizations, and it should be stressed that all these organizations were operated by the Muslim Brotherhood, and all were said (by U.S. law enforcement agencies) to have ties to terrorist organizations (e.g. Hamas, Palestinian Islamic Jihad, Al Qaeda, and others) that were spawned by the Brotherhood.

For example, in addition to his high-level positions with the Ficq Council, Sheikh DeLorenzo was a board member at the International Institute of Islamic Thought (IIIT), another outfit identified by FBI investigators as being part of the SAAR Network. Other top officials of IIIT have been linked directly to Al Qaeda and provided logistical support to at least two of Al Qaeda’s biggest achievements – the 1998 simultaneous attacks on the U.S. embassies in Tanzania and Kenya; and the bombing, in 2000, of the USS Cole, an American destroyer that was parked at the Yemeni port of Aden. One IIIT officer, Tarik Hamdi, hand delivered the satellite phone that Osama bin Laden used to order the assault on the USS Cole. The IIIT was also the largest “donor” to the World and Islam Studies Enterprise, which simply handed the money over to Sami al-Arian’s Palestinian Islamic Jihad and other terrorist groups.

After Sami al Arian’s arrest, the secretary general of the Palestinian Islamic Jihad, Ramadan Shallah (who was once a professor, along with Sami Al-Arian, at the University of South Florida, and is now based in Syria) identified IIIT as the Palestinian Islamic Jihad’s most important source of funding. In 2000, Youseff Bondansky, then director of the House Task Force on Terrorism, published a book reporting that Shallah and other terrorists had attended meetings with Osama bin Laden to plan a “spectacular” terrorist attack inside in the United States. (Again, Sheikh DeLorenzo himself has not been implicated in terrorism, but his relationships with some terrorists might be pertinent).

Sheikh DeLorenzo was also a top executive (and continues to serve as a consultant for) a large SAAR Network investment fund called the Amana Trust, which is interesting on several levels. For one, the Amana Trust was founded by a Muslim Brotherhood figure named Yaqub Mirza, who was the most important U.S.-based operative in the SAAR Network of terrorist financiers. In 2001, U.S. government agents raided the offices of not just Mr. Mirza, but also at least three other Amana Trust officials because they (and Amana Trust) were suspected of funding terrorism. (Neither Mr. Mirza nor any other Amana Trust officials were ever charged with any crime, and nor were most of the other key figures in the SAAR Network who were targeted by Operation Green Quest investigators).

After raiding Mr. Mirza’s offices, U.S. law enforcement officials said that Mr. Mirza was the incorporator or manager of more than a dozen SAAR Network hedge funds, charities, and financial entities, including Mar-Jac Investments, Mena Investments, Sterling Management Group, and Reston Investments. In addition, Mr. Mirza ran the SAAR Network’s centerpiece, an outfit called the SAAR Foundation, which advertised itself as a charity, but was allegedly an important vehicle for laundering money raised in the United States for jihadist groups. (Again, no convictions were forthcoming, and Mr. Mirza is innocent until proven guilty, but I will report the allegations of government investigators, and let readers make up their own minds).

In 1998, the SAAR Foundation reported that it had an astounding $1.8 billion in annual revenue. After the 9-11 attacks, when the authorities began investigating the foundation for alleged ties to jihadist terrorist groups, the foundation (as first reported by terrorism expert Steve Emerson) issued new books that stated that it had zero income. In other words, $1.8 billion simply vanished, and officials suspected (though never proved) that the money ended up in the hands of terrorist outfits. In another instance, the SAAR Foundation transferred $9 million to an off-shore account held in the name of Humana Charitable Trust, an entity that did not exist.

Mr. Mirza has also been named by FBI investigators and terrorism experts as the principal U.S.-based bagman for Yasin al-Qadi, a Saudi billionaire and Muslim Brotherhood leader who was one of a select number of people labeled (in 2001-2002) by the U.S. government as a “Specially Designated Global Terrorist.” Yasin al Qadi ran an “Al Qaeda front” called the Muwafaw Foundation, which was, according to the U.S. Treasury Department, one of Osama bin Laden’s sources of funding.

However, the U.S. government has refused to hand over evidence to prosecutors and Yasin al Qadi has yet to be convicted of any crime. This has been lamented by some investigators, including former FBI special agent Robert Wright, who insists that Yasin al Qadi was “Al Qaeda’s banker” and that the U.S. government has failed to go after him and others in deference to the government of Saudi Arabia. The U.S. Treasury Department no longer refers to Yasin al Qadi as a “Specially Designated Global Terrorist.” Instead, he and thousands of others are referred to as “Specially Designated Nationals” who are suspected of financing terrorism.

In the late 1990s, Yasin al-Qadi was a major investor, along with a man named Sulaiman al-Ali, in a Chicago company called Global Chemical, which was ostensibly involved in warehousing chemicals for the manufacturing of soap. But when Global Chemical was raided in 1997, government experts said that the chemicals were likely for use in manufacturing explosives or even chemical weapons. (Again, Yasin al Qadi was not charged).

The president of Global Chemical was Mohammed Mabrook, who used the alias Mohamed Elhazeri, and who was, in the 1990s, the director of an outfit called Mercy International. One of Mercy’s board members was Mr. Alamoudi (Sheikh DeLorenzo’s GSISS partner), and Mercy International has been linked to 1) the terrorists who carried out the 1998 bombings of two U.S. embassies in Africa); 2) the masterminds of both the 1993 World Trade Center bombing and the September 11 conspiracy; and 3) Osama bin Laden himself.

Meanwhile, Global Chemical co-investor Sulaiman al-Ali incorporated, along with Yasin al-Qadi’s bagman, Mr. Mirza (Sheikh DeLorenzo’s partner in Amana Trust), a company called Sana-Bell Inc. Sana-Bell’s principal purpose, according to government investigators, was to generate and manage money for the U.S. arm of the International Islamic Relief Organization (IIRO). Mr. Alamoudi was one official of the IIRO in the U.S.

Among the principals of the IIRO’s overseas offices was Mohammed al-Zawahiri, the leader of the military wing of Egyptian Islamic Jihad (which has since merged with al Qaeda). Mr. al-Zawahiri is also the brother of Ayman al-Zawahiri, who was Osama bin Laden’s deputy, and is now the new leader of Al Qaeda. Ayman al-Zawahiri trained jihadi paramilitaries in the Balkans under the auspicies of the IIRO.

Given these connections, it should not be surprising to learn that IIRO  has been identified by authorities as an organization that funds terrorism. The United Nations, at one point, officially declared that the IIRO’s branch offices in the Philippines and Indonesia were Al Qaeda subsidiaries. For a long time, the Philippines office was directed by Mohammad Jamal Khalifa, a high-ranking Al Qaeda figure who was Osama bin Laden’s brother in law.

The IIRO, meanwhile, is a subsidiary of the Muslim World League, which Osama bin Laden identified (in a recorded conversation with Al Qaeda lieutenant Jamal Ahmed al-Fadl) as one of his primary sources of funding. The Muslim World League, which was (according to government investigators) also a big backer of Sami al Arian’s Palestinian Islamic Jihad, Hamas and other jihadist outfits, was incorporated in the United States by Yasin al-Qadi’s bagman, Mr. Mirza. (Despite the official accusations, the IIRO and the Muslim World League have not been convicted of any crimes, and remain in operation today).

While Mr. Mirza handled affairs in the U.S., the Muslim World League’s Peshawar office was managed by Wael Jalaidan, one of Al Qaeda’s founding members. The Muslim World League’s vice president in the U.S., Hassan Bahfazallah, was a member, along with Mr. Mirza, of Sana-Bell’s board of directors.

Mr. Bahfazallah, meanwhile, was also the executive director of an outfit in Chicago called Benevolence International, which received considerable support from Yasin al-Qadi. Benevolence’s overseas offices, including its office in Chechnya, were reported by U.S. officials to be “Al Qaeda fronts” directed by top Al Qaeda operatives, and the DOJ accused the Benevolence office in Chicago (including Mr. Bahfazallah) of having contacts with a Chechen organized crime (and terrorism) syndicate that was trying to obtain nuclear bombs for Al Qaeda.

Nuclear bombs are weapons of mass destruction.

Sheikh DeLorenzo’s Al Safi Trust naked short selling platform is a financial weapon of mass destruction.

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I do not know whether Yasin al-Qadi, Mr. Mirza and the other alleged terrorist financiers are clients of Al Safi Trust, but they have been in other lines of business with Sheikh DeLorenzo, and their relationships deserve scrutiny, just as we should scrutinize business relationships between gun dealers and the mentally disturbed. The difference here being that Yasin al Qadi (“Al Qaeda’s banker”) and Mr. Mirza (Yasin al Qadi’s bagman in the United States) are not mentally disturbed. They are sophisticated hedge fund managers with experience in the U.S. market, and they might be of service to the “Financial Jihad.”

Both Sheikh DeLorenzo and Mr. Mirza were also involved with an outfit called Saturna Capital, and tax returns show that Saturna Captital was a funder of the Holy Land Foundation, named by U.S. prosecutors as the principal U.S. front for Hamas. Prosecutors in the Holy Land Foundation trial were the first to unveil the document outlining a “grand jihad in eliminating and destroying Western civilization…”

Sheikh DeLorenzo also helped run (and continues to serve as a consultant to) the Saturna Brokerage, which, like Saturna Capital, was a unit of the Islamic Society of North America (ISNA), a Saudi funded outfit tied to the Muslim Brotherhood.  Amana Trust also operates under the ISNA umbrella, as does the NAIT investment bank and (see chapter 1 of this series) trader Zuhair Karam’s Bridegview Mosque, whose directors help run the operations of all of these financial entities.(The mosque was also a contributor to the Holy Land Foundation, according to those tax returns).

As of 2010, the president of Saturna Brokerage was Monem Abdul Salam, who was formerly a principal at Dickinson & Co., a brokerage that was a unit of the Stotler Group, which received a pile of subpoenas in 1989 as part of Operation Sour Mash and Operation Hedge Clipper – two famous FBI investigations into financial firms suspected of laundering money for narcotics kingpins and organized crime.

Mr. Salam was not directly implicated in those investigations, but there is no doubt that Dickinson was a dubious brokerage. Several of its leading traders left to found MB Trading, which never bothered to register itself with the authorities until it became the first brokerage ever sanctioned by the U.S. government for catering to a customer in Iran in violation of laws that prohibit doing business with state sponsors of terrorism.

As of 2008, the president of ISNA (the outfit that controls NAIT, Saturna, and Amana Trust) was Muzammil Siddiqi, who also served as president of the Ficq Council, where Sheikh DeLorenzo served as secretary and as a director of the board.  Mr. Siddiqi has since been named as an unindicted co-conspirator in the Holy Land Foundation terrorist financing case.

There are many other reasons to be concerned about the brokerages and other financial outfits operating under the ISNA banner, one of which is that ISNA was co-founded by Palestinian Islamic Jihad leader Sami al Arian, who (we know) has been accused of (though never charged for) providing support to the 9-11 hijackers, and was (according to court documents) taking directions from agents of the Iranian regime operating out of the UN headquarters in New York. This is one reason why NAIT, the multi-billion dollar investment outfit, was named as an unindicted co-conspirator in the government’s case against Sami al-Arian.

ISNA, meanwhile, was named as an unindicted co-conspirator in the government’s case against the Holy Land Foundation. According to United Press International, U.S. government investigators also believed that ISNA had transferred money directly to Al Qaeda, but ISNA has not been charged on that account and likely won’t be charged, perhaps in deference to the Saudi government, which is one of ISNA’s big donors and would be embarrassed by any association with Al Qaeda. The best the FBI can do, apparently, is occasionally mention ISNA officials as  “unindicted co-conspirators” in cases related to Al Qaeda.  As one example, former ISNA vice president Siraj Wahhaj was named by the U.S. government as an “unindicted person who may be alleged” to have participated in the 1993 “Day of Terror” plot, hatched by a diverse assortment of jihadis, all with ties to Al Qaeda.

The mastermind of both the “Day of Terror” plot and the 1993 bombing of the World Trade Center was a religious scholar and Muslim Brotherhood cleric named Omar Abdel Rahman, otherwise known as the “Blind Sheikh” – and he is one of the most important people in the world because his words, more than those of any other Islamic clerics, have inspired the actions of Al Qaeda and other leaders of the grand jihad. He was, before his arrest, also a sophisticated financial operator, and he had co-founded several major financial institutions. For example, he was a co-founder (with Mr. Alamoudi, Mr. Mirza, Yasin al Qadi, among others) of an outfit in Geneva called Bank al Taqwa, which established the Milan Cultural Center said (in 2001) by the U.S. Treasury Department to have been “Al Qaeda’s main operating base in Europe for the movement of men, weapons, and money around the world.”

The Blind Sheikh was until his imprisonment the leader of Al-Gama’a al-Islamiyya, an Egyptian terrorist group. It was long assumed that Al-Gama’a al-Islamiyya was a fierce rival of Egyptian Islamic Jihad, led by Ayman al-Zawahiri, who merged his outfit with Al Qaeda (and is now leader of Al Qaeda). To be sure, al-Zawahiri and the Blind Sheikh had their differences when it came to tactics and strategy (especially with regard to Egypt), but they were nonetheless united in their hatred for the United States. Meanwhile, many jihadis (including Mr. Alamoudi, who often gave speeches calling for the Blind Sheikh’s release from prison) are united in their admiration for the Blind Sheikh because his PhD. from Egypt’s prestigious Al Azhar University, the fount of Muslim Brotherhood thought, gives his fatwahs legitimacy.

Moreover, his fatwahs are bolder than those of any cleric, and they have a particular ring to them. “Tear the Americans and Jews to pieces!  And kill them wherever you find them. Ambush them. Take them hostage…Kill these infidels! Until they witness your harshness. Fight them, and God will torture them…”

And so on…

In his most famous fatwah, the Blind Sheikh was the first to call for the use of airplanes as weapons. In this same fatwah (issued from his prison cell after the 1993 attack on the World Trade Center) the Blind Sheikh was also the first prominent jihadi to publicly declare that jihadis the world over should  join forces to attack the American economy.

The lengthy fatwah is worth a read, but one line can give you a general idea. The Blind Sheikh began with the usual command to “tear [the Americans and Jews] to pieces”. He then specified how this could be done: “destroy their economies, burn their corporations, destroy their peace, sink their ships, shoot down their planes and kill them on air, sea, and land.”

At the 1998 press conference where Osama bin Laden announced his declaration of war against the United States, the Al Qaeda leader gave the assembled journalists laminated cards printed with a photo of the Blind Sheikh and a few words of his famous fatwah – namely, the words that I quoted above. Meanwhile, many other polished jihadist financiers in the SAAR Network had advocated for the Blind Sheikh’s release from prison.

That was in the 1990s, and nobody paid much attention. Given what we now know, however, maybe the SEC or somebody should pay attention to jihadist financiers who might, indeed, be working to  “destroy [our] economies” and “burn [our] corporations” – not with fire, but with the weapons of high-finance.

Again, this is not to suggest that Sheikh DeLorenzo or others in this story are guilty by virtue of their relationships, some of which are once removed. The point is not that Sheikh DeLorenzo himself is a terrorist. It is that some terrorists would likely be aware of Sheikh DeLorenzo’s phantom stock machine, also known as Al Safi Trust, and all the financial entities under the ISNA umbrella. But to the extent that the SEC does pay attention to ISNA (or to the former ISNA officials who are alleged accomplices or associates of Al Qaeda and the Blind Sheikh), it is only to give the SEC stamp of approval to ISNA’s financial empire.

* * * * * * * *

The leaders of the jihad are often portrayed as primitive bumpkins who live in caves and are armed with nothing more dangerous than a few maniacs willing to blow themselves up. This is to ignore the power of the jihadist ideology, which is articulated with great eloquence by countless people who are eminently learned scholars of both Islam and global politics. It is also to ignore the jihad’s fighting capabilities. The jihadis have done much more than dispatch a few terrorists here and there. They have organized and commanded insurgent armies with thousands of soldiers. And these armies have fought, with considerable success, two all-out wars (Afghanistan and Iraq) against the world’s most powerful military.

Perhaps even more important, the notion that jihadis are backward thinkers right out of the seventh century grossly underestimates the jihad’s sophistication as a modern-day global financial operation. And it is not just sophisticated; it is a massive criminal undertaking that has, according the United Nations, laundered more than $1 trillion through the global banking system in the last five years alone.

As one report prepared for the French Directorate of Military Intelligence explains, “the financial network of [Osama] bin Laden, as well as his network of investments, is similar to the network put in place in the 1980s by BCCI [Bank of Credit and Commerce International] for its fraudulent operations, often with the same people…The dominant trait of bin Laden’s operations is that of a terrorist network backed up by a vast financial structure.” [Italics are mine.]

For those who do not know, the Bank of Credit and Commerce International (BCCI) was a massive and complex financial institution, founded by a Pakistani wheeler-dealer named Agha Hasan Abedi in partnership with Sheikh Zayed bin Sultan al-Nahyan, then leader of Abu Dhabi. Among the other key figures in BCCI and its satellites were the Gokal family of Pakistan; Kamal Adham, former head of Saudi intelligence; a close-knit network of Saudi billionaires (some later known to be funders of Al Qaeda); and the ruling family of Dubai, which is (like Abu Dhabi) part of the United Arab Emirates.

In 1991, BCCI was forced to close its doors after New York District Attorney Robert Morgenthau declared that it was the “largest bank fraud in world financial history.” Eventually, prosecutors demonstrated that it had done illegal business with everyone from La Cosa Nostra and Colombian drug cartels to shady arms dealers, terrorist groups, and foreign intelligence agencies. BCCI, as we will see, was also a player, along with “legitimate” U.S. financiers, in the savings and loan “bust-outs” that wrought havoc on the U.S. economy in the late 1980s. Meanwhile, several of BCCI’s affiliates specialized in manipulating the U.S. markets.

We will discuss BCCI at greater length in later chapters of this series, but for now it is enough to know that it is a tenet off both Salafi Islam (the brand of Islam subscribed to by many of the sheikhs involved with both BCCI and the Muslim Brotherhood) and Shiite Islam (subscribed to by a number of BCCI’s key executives) that Muslims should fight their enemies by “plundering their money.” And regardless of  what the motives of BCCI’s founders were in the past, it is clear that most of them are, to this day, major players in the global financial system. They have more than enough firepower to inflict damage on the U.S. markets. And, as the report for French intelligence noted, “directors and cadres of the bank [BCCI] and its affiliates, arms merchants, oil merchants, Saudi investors” have been among the most important financial supporters of America’s Enemy Number One – Al Qaeda.

By way of introducing just a few former BCCI figures who have supported Al Qaeda, I need to relate a story about Benevolence International, the Al Qaeda front that was accused by the U.S.. government of having contacts with people trying to obtain nuclear weapons for Osama bin Laden.

* * * * * * * *

In 2002, U.S. soldiers stationed in Sarajevo raided the local offices of Benevolence International and found a document that referred to the “Golden Chain” – an elite club of twenty Saudi billionaires whom Osama bin Laden had identified as his most important financiers. These financiers not only delivered large sums of money to the prospective nuclear weapons proliferators at Benevolence International, but can correctly be understood to have been among Al Qaeda’s founding fathers.

Some highly regarded authors, such as Steve Coll, who is otherwise reliable, have suggested that the Golden Chain members funded Al Qaeda only in its early years. This is false. Most of them continued to support Al Qaeda after bin Laden declared war against the United States, and there is evidence that at least one of them was funding Al Qaeda as of this writing in 2013.

Regardless of the degree to which they continue to fund Al Qaeda today, it can be safely assumed that the Golden Chain billionaires remain hostile to the United States. It is possible that, for the time being, they no longer financially support violent terrorism against the United States, but there should be no question that they are entirely supportive of the arguably more important “Financial Jihad” and other components of the non-violent “grand jihad in eliminating and destroying Western civilization…”

The Golden Chain document has, meanwhile, received virtually no attention from the media, perhaps because it would seem a bit “crazy” to suggest that the jihad’s most important operatives are not rag-tag fringe fanatics living in caves, but rather the crème de la crème of Saudi society – the people who control much of the world’s oil wealth, the people who own the most powerful manufacturing conglomerates, and the biggest Saudi banks, and the biggest hedge funds, and the biggest stock brokerages, and the Saudi stock exchange itself.

There is something in the wiring of American brains that makes it impossible for even the smartest people in this nation to accept surprising or unpleasant realities. There are a few exceptions, such as Glenn Simpson, who was once The Wall Street Journal’s finest investigative reporter, and who did write about the Golden Chain. But Simpson has left The Journal, and the newspaper has since failed to investigate Saudi ties to terrorism. In fact, it has failed to investigate much of anything at all.

In any event, there is a vast body of additional evidence that most of the people identified as members of the Golden Chain have actively participated in the movement of radical jihad on multiple fronts. And the Golden Chain document has been confirmed to be authentic by, among others, American intelligence officials, multiple FBI agents, Al Qaeda’s most reliable defector Jamal al-Fadl, and the nation’s most learned terrorism experts, including Steve Emerson of the Investigative Project for Terrorism, which possesses the world’s largest non-governmental database of intelligence on Al Qaeda and other jihadist outfits. (Much of the information in this chapter about the “SAAR Network” can be found in various of Emerson’s excellent books).

So we must know more about Al Qaeda’s Golden Chain. For starters, we must understand that these extremely wealthy financiers are bound together by the sorts of relationships that many Americans do not understand. These are not mere business relationships. They are the bonds of brotherhood and blood. They are the bonds of fervor and ancient grievances. They are, moreover, the bonds between people who are united in their disdain for the prevailing order, and whose financial activities have, in many cases, helped subvert that order.

One billionaire member of the Golden Chain, according to the Benevolence International document, was Sheikh Khalid Bin Mahfouz, who had been among the key shareholders of BCCI, and had paid more than $200 million to settle charges for his role in that massive criminal enterprise. Sheikh Mahfouz, who passed away in 2009, had also founded National Commercial Bank, which is the single largest financial institution in the Middle East.

Some of Sheikh Mahfouz’s companies – such as Al Khaleejia, SEDCO, and the Saudi Sudanese Bank – have done business directly with companies that were founded by Osama bin Laden. And it was Sheikh Mahfouz who originally set up the Muwafaq Foundation, the outfit that was managed by Yasin al-Qadi until the U.S. government declared Muwafaq to be an “Al Qaeda front” and labeled Yasin al-Qadi as a “Specially Designated Global Terrorist.”

While he was alive, Sheikh Mahfouz denied any involvement with Al Qaeda, and filed lawsuits against journalists and researchers (including the prominent Rachel Ehrenfeld, now director of the Economic Warfare Institute, and author of an excellent book, “Funding Evil”) who reported his ties to the Muwafaq Foundation, Benevolence International and other Al Qaeda fronts. After the lawsuits, Sheikh Mahfouz’s name rarely appeared in print.  Meanwhile, some American pundits claimed that Saudi billionaires like Sheikh Mahfouz had donated to Al Qaeda only to avoid being attacked, like frightened shop owners paying protection money to the local Mafia thug. These pundits misunderstand the nature of Saudi society, the two most important features of which are Salafi Islam (one of the foundations of the jihadist ideology) and the inviolability of personal relationships.

Sheikh Mahfouz  not only believed in the grand jihad, but his relationship with the bin Laden family went back decades. Osama bin Laden’s father, Mohammed, and Sheikh Mahfouz were best friends, and it was Sheikh Mahfouz who provided the original finance that allowed Mohammed to build Saudi Arabia’s largest construction company. When Sheikh Mahfouz filed lawsuits against the few journalists who sought to expose his ties to Al Qaeda, the families of the victims of the 9-11 attacks filed lawsuits against Sheikh Mahfouz for providing financial support to the people who killed their loved ones.

And I am thinking I might file a lawsuit against Sheikh Mahfouz’s estate seeking damages for all the stress that I have endured as a result of learning that Sheikh Mahfouz and his friends not only were (and, in most cases, still are) among the world’s destructive financial criminals, but also had billions of dollars, some of which ended up in the hands of people like  Mohamed Loay Bayazeed, who tried, according to the FBI, to “obtain uranium for Osama bin Laden for the purpose of developing a nuclear weapon.”

* * * * * * * *

Another member of the Golden Chain was Sheikh Saleh Abdullah Kamel, owner of Dallah Albaraka, a conglomerate involved in banking, stock trading, construction, and jihadist media. In addition, Sheikh Kamel, who is linked to the Muslim Brotherhood and has financed Sami Al-Arian’s Palestinian Islamic Jihad, owns the powerful Saudi al-Baraka Bank, which, according to U.S. government investigators, provided much of Al Qaeda’s financial infrastructure in Sudan during the 1990s. Sheikh Kamel also gave Hamas, the jihadist outfit that controls the Gaza strip, more than $20 million so that Hamas could open a bank of its own.

The new Hamas financial institution, which is called al-Aqsa Bank, quickly formed a joint venture with Citibank. That joint venture was quite lucrative for Citibank, which may have been willing to turn a blind eye to illicit financial transactions. In 2001, the U.S. Treasury Department advised Citibank that it was operating a joint venture with a bank controlled by Hamas, and the U.S. Treasury Department advised Citibank that it might want to disband this joint venture. Citibank, however, ignored the advice. (Neither Sheikh Kamel nor any other Golden Chain billionaire has been charged with any crime related to the financing of terrorism).

U.S. authorities have taken no substantive action against Sheikh Ibrahim Muhammad Afandi, a Golden Chain billionaire who owns some of Saudi Arabia’s most influential businesses, including the Saudi Industrial Services Company, the Great Saudi Development & Investment Company, and the Arabian Company for Development and Investment Limited. Sheikh Afandi also controls BSA Investments, a big private equity fund active in the U.S.

Then there is Abdel Qader Faqeeh, a member of the Golden Chain club and chairman of major corporations and financial institutions, including Bank Al Jazeera and the Savola Group, which recently merged with Azizia Panda to become Saudi Arabia’s 13th largest company. A business partner of Sheikh Faqeeh is Golden Chain member Sheikh Saleh al-Din Abdel Jawad, who is the CEO of the blue chip General Machinery Agencies manufacturing company in Jeddah.

Sheikh Faqeeh also had a joint venture business with the above-mentioned Sheikh Mahfouz. Indeed, each Golden Chain member has some sort of business partnership with each of the other Golden Chain members – one reason why I say that these people need to be viewed as not just a club, but as a family. I will not bore the reader with a long recitation of every financial transaction that ties these jihadist financiers together, but I will mention a few, just to erase any question as to whether the relationships exist.

For example, National Commercial Bank, owned until recently by Sheikh Mahfouz, is a partner in a multi-billion dollar investment outfit called the Middle East Capital Group, which is partly controlled by Sheikh Rahman Hassan Sharbatly – who was another member of Golden Chain club. Sheik Sharbatly is also a partner, with Sheikh Faqeeh, in a unit of Sheikh Faqeeh’s Savola Group. In addition, Sheikh Sharbatly is a board member and major shareholder of Beirut Ryad Bank SAL, Egyptian Gulf Bank, and several other major financial institutions.

Meanwhile, Sheik Sharbatly and Sheikh Mahfouz were both board members of the Saudi Arabian Refinery Company, which refines much of the world’s oil supply. This brings to mind the report that I mentioned at the outset of this story – the one commissioned by the U.S. Defense Department’s Irregular Warfare Support Program.  That report speculates that one component of the possible financial attack on the U.S. economy in 2008 might have been the manipulation of oil prices to excruciating highs in the summer of that year.

That seems like a possibility that is worth considering, especially in light of Osama bin Laden’s proclamations about the “absolute necessity of using the oil weapon.” Another reason to ask whether oil prices might have been manipulated is that the membership of the elite Golden Chain club included Sheikh Abdel Hadir Taher and Sheikh Ahmad Turki Yamani – two former Saudi officials who were among the masterminds of the 1973 oil embargo that crippled the U.S. economy–retaliation for America’s support of  Israel in the 1973 Yom Kippur War.

Sheikh Taher, in addition to being a Golden Chain member and the former governor of the Saudi state oil company Petromin, has also served as director of Saudi European Bank, a big financial institution that is important to the stability of global economic order.  Al Qaeda Golden Chain member Sheikh Yamani is a former Saudi minister of petroleum. He is also a former director of Saudi Aramco, which is the largest oil company in the world.

In addition, Sheikh Yamani presides over Investcorp, an investment firm that he founded. Actually, it’s not just an investment firm; it’s a market-moving behemoth – one of the largest hedge fund and private equity outfits in the world, with more than $50 billion under management. Investcorp has made a deep imprint in the American markets, and has been involved in everything from short selling to the trading of self-destruct CDOs. As for what sort of short selling Investcorp engages in, we need only know that Ivestcorp is a client of Sheikh DeLorenzo’s Al Safi Trust phantom stock machine.

Investcorp was also a pioneer, and continues to be one of the few major players in the world of so-called PIPEs deals, also known as “death spiral” finance. Investcorp has not been implicated in any crime related to its PIPEs deals, and I am not suggesting that Ivestcorp has done anything technically illegal, but PIPEs deals generally are considered to have been a major scourge on the American markets. PIPEs, or “Private Investments in Public Equity” are simply transactions that see the investors buying stock directly from companies rather than on the open markets. But PIPEs investors often end up destroying the company to which they are supposedly serving as benefactors.

Since PIPEs finance dilutes shareholder value, a company that does a PIPEs deal often sees its stock price decline. When this happens, short sellers (often naked short sellers who are colluding with the outfit that provided the PIPEs finance) attack the company, causing its stock price to drop. The more it drops, the greater the number of shares are owed to the PIPEs financier. The greater number  of shares, the greater that drop; and so on. Hence the term,  “death spiral” finance. Once the stock price of a PIPEs victim is mauled, the finance is cut off, and the company goes bankrupt, delivering big profits to the short sellers (i.e. profits that far exceed the cost of providing the PIPEs finance in the first place).

Again, this is not to suggest that Investcorp has necessarily done anything illegal, and we cannot say with certainty that its PIPEs business follows the same modus operandi of most other PIPEs dealers. But the emergence of the PIPEs industry has, without doubt, been a scourge on the markets. As numerous court cases attest, it has destroyed countless companies and countless jobs. Basically, it is a not-insignificant reason why America’s “miserable house” (as that Muslim Brotherhood document called it) is, in fact — miserable.

* * * * * * * * *

Sheikh Sulaiman Abdul Aziz al-Rajhi is not miserable. He’s the patriarch of the wealthiest family in Saudi Arabia, and thus one of the 100 richest people in the world. He is jolly and well. So, naturally, he was also a member of the Golden Chain, the elite club of Al Qaeda’s 20 most important financiers.

Maybe because the twenty members of the Golden Chain club are the most prominent people in Saudi Arabia, the U.S. government does not label them as financiers of the grand jihad.  It does not take steps to shut down their bank accounts or bar them from trading in the U.S. markets. It does not even dare utter their names, perhaps because to do so would embarrass the Saudi government, which is ostensibly a U.S. ally.

When Congress issued its final report on the Al Qaeda attacks on New York and Washington, it contained 28 pages that reportedly detailed Saudi ties to Al Qaeda. But when the report was released to the public, the 28 pages about the Saudis were censored, so ordinary people could not read them. A full 28 pages – with no words; nothing but big blocks of black ink. Thus, it is left to independent jihad experts to sort out many of the connections. Steve Emerson and his Investigative Project on Terrorism have done especially hard work in this regard. Some former top government officials have said that Emerson is better informed about the jihad than the government itself. But Emerson and other people who have done excellent research are largely ignored by the media, which will not report the facts unless they have been stated explicitly by some official spokesman. And the official spokesmen have nothing bad to say about Saudi billionaires, regardless of whether they fund terrorism.

Indeed, Saudi billionaires with ties to terrorism have deployed their wealth to “capture” some elements of Washington. This ”deep capture” has been the state of affairs since at least the 1980s, when Sheikh Mahfouz (the future founder of what the U.S. Treasury Department called an ”Al Qaeda front”) and other BCCI figures began investing in banks and other companies with prominent figures in both the Democratic and Republican parties. When the BCCI scandal broke, it was widely reported that Sheikh Mahfouz and other Saudis (some, such as Kamal Adham, with links to Saudi intelligence) had invested with prominent figures of the American political establishment in order to gain influence over American government policy. But nothing was done about it, and the influence increased exponentially in the years that followed.

Therefore, it is not an exaggeration to say that some elements of Washington have been “captured” by billionaires who are not only destructive financial criminals, and who are not merely casual financiers of terrorism, but who are also regarded as being among the leaders of “The Financial Jihad” and what that famous Muslim Brotherhood document described as the larger “Grand Jihad in eliminating and destroying Western civilization from within…”

At any rate, you won’t read about it in the media, but it is clear that Sheikh al-Rajhi, the wealthiest man in Saudi Arabia (and an honorary member of the American establishment) is an important leader of the grand jihad. Aside from having been an Al Qaeda Golden Chain member, he was the principal force behind the U.S.-based SAAR Network of jihadist entities (many of which were named in that Muslim Brotherhood document as being precisely those entities that were meant to lead the “Grand Jihad in eliminating and destroying Western civilization from within…”). In fact, the SAAR Network was named after Sheikh al-Rajhi himself. The initials, S.A.A.R., stand for Sulaiman Abdul Aziz al-Rajhi.

Most of the other Golden Chain members were also involved with the SAAR Network financiers operating in the United States. For example, Sheikh Afandi and Sheikh Kamel were board members of Sana-Bell, the outfit run by “Specially Designated Global Terrorist” Yasin al Qadi’s bagman, Mr. Mirza (who, as I mentioned, was the central U.S.-based figure in the SAAR Network). Also a board member of Sana-Bell, you will recall, was Mr. Bahfzallah, head of Benevolence International, the outfit that was dealing with people who were shopping for nukes.

Yasin al Qadi’s lawyer, Cherif Sedky also worked for Sheikh Mahfouz. And this same lawyer represented Sheikh Rajhi when the FBI began to ask how it came to be that $1.8 billion dollars from the SAAR Foundation disappeared, most likely into the hands of other jihadis.

Given his important role in the jihad, it is fair to assume that Sheikh al-Rajhi harbors some disdain for not just Western civilization, but also the prevailing economic order. At the same time, Sheikh al-Rajhi is one of the most important players in the global financial order, a person who is perfectly capable of transforming or even undermining it. Indeed, it is fair to say that few men have more sway over “the system” than Sheikh Sulaiman Abdul Aziz Rajhi.

Said to be a whiz with numbers, Sheikh Rajhi directs multiple hedge funds that manage many billions of dollars, several stock brokerages, and the massive Al Rajhi Bank, which is the most venerable of the elite financial institutions that control the Stock Exchange of Saudi Arabia, also known as the Tadawul. A 2013 report issued by a U.S. Senate investigative committee revealed that Al Rajhi Bank was still (as of 2013) dealing with Al Qaeda, and that it was laundering Al Qaeda money through HSBC, the prestigious British bank, but, of course, Al Rajhi has been charged with no crime on that account (HSBC paid a relatively small fine for this and other money laundering infractions).

Sheikh Rajhi’s companies have around $100 billion in cash at their disposal. All told, the financial fire power of the Golden Chain exceeds that of most mid-sized nations.

But, rest assured, jihadis are just bumpkins in caves.

* * * * * * * * *

Despite the death of Osama bin Laden, the jihad’s sophisticated financial operation remains entirely in place. Moreover, it is doubtful that the Securities and Exchange Commission is monitoring the activities of the billionaire financial wizards who were members of Al Qaeda’s Golden Chain. Certainly, it has never prevented any member of the Golden Chain from engaging in financial schemes (such as self-destruct CDOs and “death spiral” finance) that have done damage to the U.S. economy.

Indeed, as we know, the SEC has made it easier for these people to legally manipulate the markets by allowing people such as Sheikh DeLorenzo (who, as a prominent member of the SAAR Network, was certainly on good terms with the Golden Chain) to operate trading platforms, such as Al Safi Trust’s naked short selling operation, that damage the U.S. markets. Meanwhile, Wall Street’s largest brokerage and investment houses stumble over themselves to do business with the Golden Chain, and with other financial behemoths that might not be entirely committed to keeping the U.S. economy in good health.

One such behemoth is the financial empire of Dubai’s ruler, Sheikh Mohammed bin Rashid Al Maktoum — or “Sheikh Mo,” as he is affectionately called in the West.  Sheikh Al Maktoum, whose family members were among the controlling shareholders of BCCI’s criminal enterprise, now operates, among other entities, the Dubai International Finance Center, which houses Sheikh DeLorenzo’s Al Safi Trust (set up in partnership with Sheikh Mo) and countless hedge funds, many of them intertwined with Dubai’s sovereign wealth fund.

The Dubai International Finance Center’s stated mission is to advance shariah compliant finance (such “compliance” being defined by the Muslim Brotherhood), and it has at its disposal more than a trillion dollars. Frank Gaffney, former assistant secretary of defense for international security and one of the nation’s leading experts on the Muslim Brotherhood, correctly insists that shariah compliant financial products “threaten what is left of the integrity of our free market system. Worse yet, they – and the theo-political-legal doctrine, Shariah, from which they spring – pose a real threat to our society and form of government.”

On the surface, it seems that there is nothing wrong with people creating shariah compliant financial products, even if they cater to a radical interpretation of Islam. People have a right to be radical and to create radical financial products. Indeed, it took me a long time to believe that shariah finance posed any threat whatsoever. My instinct was to believe that it was merely an effort to cater to people who are devoutly religious, no more dangerous than Halal beefsteak.

However, it is prudent to consider whether there is more than religion behind the astounding growth of shariah compliant finance in recent years. Indeed, we must understand that the new and radical interpretation of shariah “compliance” is overtly anti-American, and has been developed by leaders of the jihad as a means to challenge the U.S. financial order. This was well-documented in a book called “Understanding Sharia Finance”, by Patrick Sookhdeo, then director of the Institute for the Study of Islam and Christianity.

Paul Bracken, professor of management and political science at Yale University, notes that shariah compliant finance has become a powerful force and raises “the prospect that Wall Street could be knocked out of action [with] strategic implications for the United States and for the entire global system of finance.”

As for Sheikh Al Maktoum, the eminence grise of shariah “compliant” finance, many in Washington consider him to be an important ally of the United States. But it is also true that Sheikh Al Maktoum considers one of his most important allies to be the regime in Iran, which would like to see the United States obliterated. Meanwhile, Sheikh Al Maktoum and his family have been among the biggest supporters of organizations that are carrying out the “Financial Jihad.”

For example, Sheikh Al Maktoum’s family, along with the Muslim Brotherhood, the Golden Chain Saudis, and some factions of the Saudi government are among the biggest contributors to ISNA, an organization whose depredations I have partially described. A charity founded by Sheikh Al Maktoum also donated $50 million to the Council on American Islamic Relations, an ISNA-tied outfit that grew out of the Islamic Association of Palestine, which was the U.S. propaganda arm of Hamas. Numerous CAIR officials have been alleged to have ties to the jihad, which might explain why CAIR has plotted ways to secure the release from prison of the Blind Sheikh.

In Europe, where Sheikh Al Maktoum is received warmly (the BBC recently called him an “enlightened dictator”), Muslim Brotherhood spiritual leader Yousef al-Qaradawi (the cleric who has issued calls for “Financial Jihad”) runs the European Council for Fatwa and Research, which has played a key role in fostering the development of shariah “compliant” finance. That outfit was funded almost entirely by Sheikh Al Maktoum and his family until it was implicated by authorities for having ties to violent jihadists. (Despite their accusations, authorities did not file charges against the organization).

Meanwhile, Dubai, with Sheikh Al Maktoum’s acquiescence, has long served as an important operational hub for some the world’s most notorious organized crime figures, some with direct ties to jihadist groups. For example, Indian mafia kingpin Dawood Ibrahim was, until he moved to Karachi to live under the protection of the Pakistani intelligence service, one of Dubai’s most honored and ostentatious residents, regularly holding lavish parties at his landmark white mansion – parties attended by prominent figures in the world of high finance (some of whom I will introduce in upcoming chapters), and also by members of Dubai’s ruling family.

Mr. Ibrahim had the full protection of Sheikh Al Maktoum until Dubai was pressured by the international community to send him packing. And Mr. Ibrahim was no ordinary mobster. He was, as I mentioned, intimately intertwined with the operations of Al Qaeda and other jihadist groups – the only person in the world to be labeled by the United States government as both a “Global Narcotics Kingpin” and a “Specially Designated Global Terrorist.”

Former ABC News journalist Gretchen Peters, a friend and work colleague of mine when we both lived in Cambodia, has published an excellent book about the nexus between jihadists and the heroin trade. One CIA official whom Peters interviewed for the book noted that  “if you want to know what Osama bin Laden is up to, you have to understand what Dawood Ibrahim is up to.”

Another close friend of Sheikh Al Maktoum was Viktor Bout, a Russian organized crime figure who was, for a long time, flying cargo planes filled with weapons from Dubai to Taliban and Al Qaeda  redoubts in Afghanistan and Pakistan. Viktor Bout, like Dawood Ibrahim, operated with the full support and protection of the Dubai government until Interpol put out an arrest warrant for him. Then he moved to Moscow, where he enjoyed the protection of Russian prime minister Vladimir Putin until he was lured to Thailand and arrested by the FBI.

Viktor Bout was also closely tied to Abu Dhabi’s ruling family, whose leading members (like Dubai’s ruling family) probably first came into contact with the underworld while they were presiding over the criminal operations of BCCI. Some cargo planes that Bout used to smuggle weapons to Afghanistan were registered as belonging to a company called Flying Dolphin, which was owned by Sheikh Mansour Al Nayan, the present ruler of Abu Dhabi.

Then there is the famous story (widely reported by U.S. officials) of why President Bill Clinton failed to kill Osama bin Laden. Soon after Al Qaeda’s 1998 attacks on U.S. embassies in Tanzania and Kenya, the CIA located Osama bin Laden and reported that the Emir of Jihad was hosting some of his closest friends at a party in a remote corner of Afghanistan. The Al Qaeda leader and his friends were spending their days hiking in the mountains and hunting with falcons, then retreating to an Al Qaeda training camp to drink tea and (perhaps) talk of subversive notions.

Figuring that there would not be much time before Osama would vanish again, the U.S. military told President Clinton that this was the ideal moment to blow the Al Qaeda leader to smithereens with a precision-guided Hell-Fire cruise missile. The generals were ready to pull the trigger, but Clinton and his cabinet stopped them. They aborted the mission because Osama bin Laden and his friends were having a party.  And these friends were all from Dubai. In fact, they were among the most prominent members of Dubai’s ruling family.

Sheikh Al Maktoum’s family and the leaders of Al Qaeda had finished hunting and were relaxing in the tents that the Dubai royals had brought with them to Afghanistan – house-sized luxury tents equipped with giant electricity generators, and decorated with fine carpets, and fabrics laced in gold. No doubt, Osama bin Laden regaled the Dubai ruling family with stories of his exploits, and the Dubai ruling family members perhaps responded with praise for their host’s victories against the United States.

At any rate, the CIA watched the satellite images. The generals asked Bill Clinton if they should fire the missile. And Bill Clinton said, “No” — because, of course, Dubai’s royals were American allies. As George Tenent, who was then the director of the CIA, later put it, Clinton could not take this rare opportunity to kill Osama bin Laden because the missile strike “might have wiped out half the royal family of the UAE.”

Put differently, one might say that “half the royal family of [our ally] the UAE” was partying with Osama bin Laden.

That’s some ally.

Well, never mind, say America’s elite – if Sheikh Al Maktoum is supporting jihadis, it is only a matter of political expediency. Perhaps. But, in the end, it doesn’t matter whether the politics are expedient or not. What matters is the end result. And it is probably safe to assume that the Dubai royals who went on hunting expeditions in Afghanistan with Osama bin Laden may be (at least to some extent) sympathetic to the jihad. That is, they have, to a degree, been possessed by a subversive notion – that “the system”, as epitomized by the United States, can be undermined.

But the billionaire sheikhs of the Middle East – whether they be members of ruling families, funders of the SAAR Network, or members of Al Qaeda’s Golden Chain – are not the only potential threats to America’s economic well-being. As I mentioned at the outset of this story, the president’s national security staff has suggested that there is “nexus” between jihadist financiers, organized crime, agents of rogue states, and ”legitimate” financial operators in the United States. This “nexus” has contributed to the great meltdown of 2008, and to the instability of the global financial system that continues to this day.

Before we discuss our present predicament, however, we need to understand more about the nexus. And to do that, we must first go back in history. We must, for starters, further examine the BCCI enterprise. We must, in addition, consider what occurred after BCCI collapsed in 1991.

One thing that occurred soon after BCCI collapsed in 1991, of course, was that BCCI was revealed to be the biggest banking fraud in the history of world finance. More important, that same year, 1991, a Muslim Brotherhood leader named Hasan al Turabi (then also a top official in the government of Sudan) founded an outfit called the Islamist International, appointing Osama bin Laden to serve as chairman. The purpose of the Islamist International was to unite the Muslim Brotherhood, affiliated terrorist organizations, and their state sponsors behind a common mission.

That mission was partly articulated in the famous Muslim Brotherhood document (published that same year, 1991) outlining plans to wage a “Grand Jihad in eliminating and destroying Western civilization from within…” There were also numerous violent terrorist attacks planned at meetings of the Islamist International. However, Osama bin Laden’s most important mission as chairman of the Islamist International was not to plan acts of violent terrorism. His most important mission–”The Financial Jihad”–was to help lead a Muslim Brotherhood initiative to replace the BCCI enterprise with an enterprise that would be similar in every respect except that it would exceed BCCI in scope and destructive power.

Yossef Bondansky, then director of the House Task Force on Terrorism, reported in his seminal 2000 book on Osama bin Laden: “The collapse of the BCCI and the shock waves that were still reverberating throughout the Muslim world could not have come at a worse time. Turabi had always known the importance of a reliable financial system to support and sustain Islamist activities.”  The Islamist International “urgently needed an expert to salvage whatever was possible and rebuild a global financial system [to replace the BCCI enterprise]. By then Osama bin Laden was the most qualified individual in Khartoum to untangle this financial mess. In late summer 1991, Turabi approached bin Laden and asked for help.”

This, of course, raises some questions.

For example: What, exactly, was BCCI, and why was it so important? What, exactly, did Osama bin Laden do after he was appointed to deal with the collapse of BCCI? Precisely what sort of “global financial system” did Osama bin Laden and his associates build from the remains of BCCI, and what is the status of that global financial system today? The director of the House Task Force on Terrorism noted that this financial network—a global financial empire that was built by Osama bin Laden, among others more important than him—eventually extended all the way from Osama bin Laden’s cave in the Hindu Kush to the caverns of Wall Street, but what else do we know about it? And why has this story never appeared in The Wall Street Journal?

In fact, Osama bin Laden played a role in building what is not only one of the greatest financial empires the world has ever known, but also one of the world’s most destructive transnational organized crime (and terrorism) syndicates, so we really ought to ask: precisely what lines of business (aside from terrorism) did this amazing enterprise pursue? What lines of business is it pursuing today? And is this good news for the American economy?

Those are questions that will be answered in later chapters of his series.

To be continued…Click here to read Chapter 3 of this series

Mark Mitchell is a journalist who spent most of his career working as a correspondent for mainstream media publications before joining DeepCapture.com.

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UBS, in Theory, a Conspiracy to Naked Short “Tens of Millions” of Shares

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UBS, in Theory, a Conspiracy to Naked Short “Tens of Millions” of Shares


It wasn’t long ago when they were saying that naked short selling never happened. They said it simply did not exist, that only wild-eyed conspiracy theorists believed in naked short selling. That was before 2008, when the CEOs of some big banks started hollering that naked short selling was causing the stock prices of their banks to nosedive. With the CEOs of the big banks hollering, the SEC, in June, 2008, issued an Emergency Order banning naked short selling (that previously did not exist) in the stocks of 19 big financial institutions (i.e. the financial institutions that were doing the naked short selling—to each other). But the SEC did nothing about the naked short selling of other stocks because, apparently, that naked short selling existed only in the fevered imaginations of people who believed that their savings were being wiped out by little green men.

Then, in August 2008,  the SEC lifted its Emergency Order banning naked short selling of stock in the 19 big financial institutions, and those financial institutions began naked short selling each other again. Their stocks (which had increased in value while the Emergency Order was in place) once again nosedived, and one of them, Lehman Brothers, saw its stock go into a classic death spiral (i.e. a spiral that caused death). Almost immediately after Lehman collapsed, the SEC issued another Emergency Order, this time banning all short selling in financial stocks, and in this new Emergency Order, the SEC stated in plain English that naked short selling can cause stocks to go into death spirals, making it difficult for the targeted companies to raise new capital, and thereby result in bankruptcy. Which, of course, was what had just happened to Lehman, as the SEC knew full well.

Some weeks later, the SEC lifted that Emergency Order and put into effect some new rules governing naked short selling. Ever since, the SEC has maintained that naked short selling rarely occurs, and it certainly has never sanctioned anyone for the naked short selling that (according to the SEC) created an “emergency” in 2008. So once again, the conventional wisdom is that only wild-eyed conspiracy theorists believe that naked short selling occurs, and only UFO abductees with tin foil hats believe that naked short selling occurs in massive volumes, causing damage to the markets.

It has long since been forgotten that CEOs of big banks were, back in 2008, hollering that naked short selling had caused their stock prices to nosedive, and it has long been forgotten that the SEC issued two Emergency Orders in 2008 to save the banks from naked short selling, suggesting in one of those Emergency Orders that naked short selling had contributed to the collapse of Lehman Brothers. And now we know why it has been forgotten. Now we know why the term “naked short selling” has once again been scrubbed entirely from the public discourse in quite Orwellian fashion. It is, of course, because the big banks are still perpetrating (with the full connivance of the SEC, whose data says it isn’t happening) massive volumes of naked short selling. This, anyway, is what we can conclude from a recent FINRA settlement.

FINRA, for those who don’t know, is the Financial Industry Regulatory Authority, which sounds like a government regulatory agency, though it is owned and operated by Wall Street, and its activities as a “Regulatory Authority” amount mostly to leveling small fines for massive crimes perpetrated by Wall Street, thereby relieving the SEC of any need to do its job. If  FINRA has issued a “settlement”  letter to a perpetrator, the issue is “settled” so far as the SEC is concerned, and such was the case when FINRA recently issued a “settlement” letter asking the big investment bank UBS to pay a small fine for violating the rules against naked short selling that the SEC isn’t enforcing.

More precisely, FINRA’s recent “settlement” letter (which you can read here) asked UBS to pay a fine for “not admitting or denying” having “entered tens of millions of proprietary and customer short sale orders without having reasonable grounds to believe that the securities could be borrowed and available for delivery.” When a brokerage sells stock short “without having reasonable grounds to believe that the securities could be borrowed for delivery” that means the brokerage has deliberately engaged in naked short selling (i.e. selling phantom stock that increases supply, driving down prices), and in this case it appears that UBS (between the years 2004 and 2010, according to FINRA) transacted naked short selling to the tune of “tens of millions”(emphasis added) of phantom shares in nobody knows how many companies were affected by this massive deluge.

In fact, UBS might have naked shorted far more than tens of millions of shares, though for some mysterious reason, FINRA reports that it doesn’t actually know how many additional shares were naked shorted. In its settlement letter, FINRA simply reported that aside from the “tens of millions” that were naked shorted, UBS “effected an additional significant but unquantifiable number of short sales without valid locates [i.e. naked short sales] during the Relevant Period.” Unquantifiable? As in too big a number for a calculator to handle? Or is it some smaller but still unpalatable number that FINRA’s ”regulators” dare not speak (or regulate)?

In any event, FINRA did report (or, rather, understate) the obvious fact that the “duration, scope and volume of the trading [i.e. a volume of naked short selling that is ‘unquantifiable’ but significantly more than “tens of millions’ of shares naked shorted] created a potential for harm to the integrity to the market.”

In fact, UBS at least “created a potential” to crash the markets by flagrantly violating the SEC’s supposed naked short selling regulations, and FINRA is asking UBS to pay a small fine (without admitting or denying what it did) so that the SEC can take no action whatsoever. Meanwhile, of course, the captured media continues to pretend that naked short selling (i.e. a criminal conspiracy) exists only in the minds of “conspiracy theorists” (i.e. people in our brave new world who are are crazy because they speak the truth).

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The Global Bust-Out Series (Chapter 1): Was the United States Attacked by “Financial Terrorists”?

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The Global Bust-Out Series (Chapter 1): Was the United States Attacked by “Financial Terrorists”?


Parts of this book-length story were published prior to October 2011, when a man named Ali Nazerali filed a lawsuit against me and DeepCapture and convinced a Canadian court to issue (without any notice to us, and without giving us an opportunity to defend what I had written) an injunction that forced the entire DeepCapture website to be removed from the internet on October 19, 2011.

I could be wrong, but I do not believe anything like this had ever happened before. Never in history had a court outside the United States blacked out (censored) an entire American media website, much less at the behest of one man who did not like what was written in only one of hundreds of articles on many subjects that were  published on that website in the exercise of First Amendment rights.

Fortunately, on December, 13, 2011, the court heard my application opposing a continuation of the injunction and considered my detailed affidavits defending this story. Finding in my favor, and refusing to extend the injunction, the court noted that the October 19 injunction was based on an incorrect legal test for pre-trial injunctions which had been suggested to the judge by lawyers for Mr. Nazerali at the earlier one-sided hearing. 

Applying the correct legal test for injunctions, which my lawyer described in his submissions on December 13, the court ruled that our freedom of speech had to be restored, at least until Mr. Nazerali’s claims were tested at a trial.

Since then, I have taken a few months to investigate further, and we are now publishing an updated version of this book-length story, chapter by chapter.

Even if you had followed DeepCapture prior to the interruption, I encourage you to read this updated version of the story because it goes quite a bit deeper, and contains additional evidence and information that supports my thesis. In addition, I have clarified and refined my argument, because some people had slightly misunderstood it, while others (such as Mr. Nazerali and the former journalist Gary Weiss, who features prominently in this story) had misrepresented what I had written.

* * * * * * * * *

The Miscreants’ Global Bust-Out

Chapter One

Was the United States Attacked by “Financial Terrorists”?

 

I did not think that Zuhair Karam was violent, but I telephoned him because I thought his biography was interesting. For example, it was interesting that soon after making a home in the United States, Zuhair Karam obtained finance to publish a semi-famous work of jihadist propaganda, and soon thereafter, became a proprietary day trader of equities and derivatives at a small, unregistered brokerage in Chicago.

Many of the other people who operated through this brokerage also had interesting biographies. One of them was a trader who had ties to Russian organized crime, and whose business partner was  killed in a brutal gangland-style murder in New Jersey. Also trading through this little unregistered brokerage in Chicago was an account controlled by the top henchmen of a Russian oligarch and members of an organized crime syndicate that has been accused by U.S. officials of having ties to both Al Qaeda and the Russian government’s intelligence services.

In addition there was (to name just one more) a trader whose family members worked for the Revolutionary Guard in Iran. One of this trader’s close relatives (based outside Iran) had employed an undercover Iranian government agent who was implicated in a terrorist attack and who was caught shipping sophisticated weaponry to Hezbollah, the jihadist outfit that takes its directions from the Iranian regime.

Zuhair’s little brokerage, meanwhile, maintained partnerships with a number of other brokerages, all of which were similarly interesting. Some of these brokerages were operated by people who had previously been principals at brokerages controlled by La Cosa Nostra, Russian organized crime syndicates, and (in most cases) both. Some of these brokerages had important ties to a man who is now (according to credible reports from Moscow) running financial crime operations for the Russian intelligence services.

One of these brokerages was a partnership with a Moscow bank that is (according to U.S. officials) controlled by the Russian intelligence services. Another brokerage in the network had ties to a U.S.-based Iranian government company that was (in 2009) not only investigated for transacting manipulative trading, but also accused by the Department of Justice of conducting espionage against the United States and funding Iran’s nuclear weapons program.

Meanwhile, some owners and/or top employees of brokerages in this network included: a fellow who once worked for a man who commands a private army in Lebanon; another guy who had worked for a trader who orchestrated an ill-fated scheme to topple the government of Afghanistan in league with a heroin-smuggling warlord who worked closely with Iran; and an Iranian trader whose family was, in the 1990s, flying cargo planes filled with gem stones from a remote Illinois runway, in partnership with a money launderer who ran an organization that had hosted the leadership of Hezbollah.

Yet another of the brokerages in the network was connected to a Middle Eastern financial institution that has been accused of funding terrorism, and which financed a bank in Sudan that was founded by Osama bin Laden himself. Meanwhile, not just Zuhair Karam, but a number of traders who either controlled brokerages in this network or traded through the brokerages had business relationships with Islamic organizations that have been listed in a famous Muslim Brotherhood document as being organizations designated to lead a “Grand Jihad in eliminating and destroying the Western civilization from within.”

Perhaps just as important, the clients of these brokerages included some of America’s most notoriously destructive financial operators, many of whom themselves have business relationships with organized crime and, perhaps not coincidentally, also have business relationships with financiers of terrorism.

But what is most noteworthy about these brokerages is that they all cleared their trades through an outfit in Texas that was relatively obscure until late 2007, when it suddenly became (by volume) the largest brokerage on the planet. Moreover, data strongly suggests that most of this new volume was short selling targeting critical American companies, including the the nation’s largest financial institutions.

Indeed, the data suggests that this one previously obscure outfit in Texas (an outfit whose principal clientele was the network of brokerages that I have just briefly described, and which this story will describe in far more detail) transacted more short selling targeting major American financial institutions than the combined short selling (targeting financial institutions) transacted by the broker-dealers of Wall Street titans Goldman Sachs, Citigroup, and Merrill Lynch.

Moreover, this barrage of short selling continued and intensified through September, 2008, when the Securities and Exchange Commission was moved to issue an “Emergency Order,” stating that manipulative short selling had likely contributed to the collapse of major financial institutions (e.g. Bear Stearns, Lehman Brothers) and was threatening to undermine the stability of the American financial system.

As for Zuhair Karam – well, I didn’t know enough about him, but I knew a little. For example, I knew that he was born in Lebanon, and had recently spent some time overseas, where he came to be attached to an Islamic cleric named Sadathullah Khan, who tells the media that he is “moderate” – a term that, of course, has different connotations depending on your perspective.

Some people say that Sadathullah Khan is an extremist, partly because he has had ties to an outfit called the Supreme Council of Global Jihad, which espouses violence. Sadathullah Khan, meanwhile, has also worked closely on projects (an Islamic media project, for example) with a cleric named Zakir Naik, who has preached that “Every Muslim should be a terrorist.”

When he talks to the Western press, Zakir Naik says he is not fond of Al Qaeda, but in a video made for his followers, he said, “If Osama bin Laden is fighting the enemies of Islam, I am for him…If he is terrorizing America the terrorist, the biggest terrorist, I am with him.” Imam Naik also served as a mentor to Najibullah Zazi, an Al Qaeda operative who was arrested in 2009 shortly before carrying out a plan to plant explosives in the New York City subway system.

Imam Naik was banned from entering the United Kingdom after he was deemed to be immoderate, but the United States still grants him visas (he hasn’t been charged with involvement with any terrorist plot) and perhaps he will one day return to Chicago, where he once gave what he calls “my most famous speech” at a gathering organized by an outfit that has worked closely with the Bridgeview Mosque, a house of worship in Bridgeview, a middle-class neighborhood on Chicago’s south side.

Zuhair Karam, in addition to his work as a financial operator, has been fairly prominent among the small band of jihadis who congregate at the Bridgeview Mosque, where Zuhair’s relative has helped organize the mosque’s fund raising for groups such as Hamas and Palestinian Islamic Jihad.

The Bridgeview Mosque, it should be said, serves thousands of ordinary people, most of whom probably harbor no politics other than a desire for peace. Many jihadis, meanwhile, are not themselves violent people, and merely support the political ideology of jihad. But there was a time when the Bridgeview Mosque’s imam regularly gave fiery sermons urging jihadi freedom fighters to take up arms.

The sermons were toned down after the FBI began investigating, but it is assumed by some prominent terrorism experts that the Bridgeview Mosque’s top officials (and Zuhair’s family) are members of the Muslim Brotherhood. One reason to believe this is that the mosque is controlled by the Islamic Society of North America (ISNA), which government investigators have identified as being a Muslim Brotherhood front.

The Muslim Brotherhood is a diverse organization, and at least publicly disavows violence. It is probably wise to engage the Brotherhood, rather than vilify and incite it. Nonetheless, it should be understood that the Brotherhood is united in its opposition to the foundational principals of Western civilization and is making efforts to undermine the United States.

It is also true that many Muslim Brotherhood figures in the West (including some officials at ISNA) have been accused of providing material support (including money, personnel, and sometimes weapons) to violent terrorist groups, including Al Qaeda.

The Bridgeview Mosque itself has not been accused of directly supporting Al Qaeda, but there is no question that it has funded other violent jihadist groups. For example, according to the Chicago Tribune and others, the mosque was one of the most important funders of Palestinian Islamic Jihad, an outfit that was spawned by the Muslim Brotherhood and also takes directions from the regime in Iran.

Zuhair Karam and his relatives are close family friends of Sami al-Arian, who was not only a founding director of ISNA, but also a U.S.-based leader of Palestinian Islamic Jihad, indicted in 2003 for funding terrorist attacks in Palestine. As Rachel Ehrenfeld, now director of the Economic Warfare Institute, first reported, FBI investigators suspected (though never proved) that Sami al-Arian provided support to the Al Qaeda hijackers who carried out the 9-11 attacks on the World Trade Center and the Pentagon.

The Bridgeview Mosque and many traders affiliated with brokerages discussed above were also among the principal supporters of the Holy Land Foundation, which was indicted on charges of financing terrorism in 2007 after prosecutors demonstrated that it was a principal U.S. front for Hamas, another Muslim Brotherhood creation that receives support from Iran. The mosque’s directors, and one of Zuhair’s family members, meanwhile, help administer investment funds worth billions of dollars controlled by the North American Islamic Trust, an investment bank (and a unit of ISNA) that has been tied to the Muslim Brotherhood and was named as an unindicted co-conspirator in the government’s case against the Holy Land Foundation.

In addition, some Bridgeview Mosque congregants (a number of them close family friends of Zuhair Karam, and some of them also traders who operated through the same network of brokerages) were involved with a Chicago-based charity called The Benevolence International Foundation, which was actually an Al Qaeda front, founded by Osama bin Laden’s brother-in-law. According to federal prosecutors, Benevolence was “involved in terrorist activities” and had contacts with “persons trying to obtain chemical and nuclear weapons on behalf of Al Qaeda.”

More to the point of this story, Mark Flessner, a former U.S. prosecutor who was at the front lines of the government’s “war on terrorism”, has said that the Bridgeview Mosque was, at least until it came under closer government scrutiny, a “gold mine of information about terrorist finance.”

So, obviously, I wanted to know more about the Bridgeview Mosque, and I wanted to know more about Zuhair’s brokerage and other brokerages in its network. Zuhair, as I mentioned, was far from the only jihadi ideologue attached to these brokerages, though I do not mean to single out jihadis. It was perhaps more important that this network of brokerage had highly significant ties to organized crime syndicates. Some of those syndicates (especially the ones emanating from Russia) had become politicized and were hostile to the United States.

When I called Zuhair for the first time in 2010, our conversation did not go well. Zuhair began by demanding to know how I had come to possess his telephone number. I told him, honestly, that I had found his phone number in the White Pages, but he refused to believe me. When I explained that I had some questions about the little brokerage where he had worked, he insisted that he didn’t know anything about the brokerage, and he said that he did not know anyone else who worked there.

After some additional prodding, Zuhair said, “Look, man, I’m just one of the little guys.” I said, “Yes, I know, but let’s meet anyway, I can tell you more about this investigation.”

Zuhair seemed already to know about some investigation. He said, “Shit, man, I thought this was over.” Which seemed strange to me because the only investigation I knew about was the investigation that I was conducting. But I wanted to be helpful, so I said, “Let’s meet, I can tell you more about it.”

Zuhair paused. He seemed to be figuring it all out. Finally, he said, “You’re not a journalist, that’s for sure, man, tell me who you are…Are you an Arabian?” No, I am not an “Arabian” – that’s what I told Zuhair Karam. I said there’s this investigation, I have information.

I did not have any negative feelings about Zuhair or the Bridgeview Mosque. I told him that I had some sympathy for some of the opinions expressed in the jihadist propaganda that he had produced. (The propaganda was focused on the situation in Palestine).

I had also developed a fascination with Islam, and considered it to be an attractive religion. I told Zuhair this, and I told him I would like to come down to the mosque to meet him. I said I’d also like to meet his father, Haaz Karam, who helped raise money for Islamic Jihad.

Zuhair said, “He’s not my father.” So I said, “Sorry, your relative.” And Zuhair said, “Yeah, so…what is this? Man, the FBI — you say you’re a journalist, why do you know about this investigation? That just isn’t right…the FBI…man, I’m telling you, I’m just one of the little guys…the FBI…the FBI can come, let them come, they know where I live, let them come, let them try – see if I care.”

* * * * * * * *

In his 2010 report to Congress, Admiral Dennis Blair, who was then the U.S. director of national intelligence, outlined one of the biggest threats to America’s economic well-being and national security. He began by noting that transnational organized crime syndicates are closely intertwined with the intelligence services and governments of some countries (such as Russia) that are considered to be adversaries of the United States. He then stated that “the nexus between international criminal organizations and terrorist groups [including, but not limited to Al Qaeda]…presents continuing dangers.”

In the same breath, the national intelligence director warned that transnational organized crime syndicates are “undermining free markets,” and “almost certainly will increase [their] penetration of legitimate financial and commercial markets, threatening U.S. economic interests and raising the risk of significant damage to the global financial system.”

We should understand the implications of what the national intelligence director was saying. He was saying that organized crime syndicates (and, by inference, the jihadist groups and foreign governments that maintain ties to organized crime syndicates) have the capability to disrupt the financial markets and harm the American economy. The only question was: had they already done so?

On August 12, 2011, President Barack Obama answered that question in dramatic fashion. The president reiterated that there was a clear “nexus” between transnational organized crime syndicates, multiple terrorist groups, international drug cartels, and some foreign governments and intelligence services that are hostile to the United States.

The president also reiterated that transnational organized crime syndicates (and, by inference, perhaps others in the “nexus”) had not only “penetrated” the “legitimate” financial industry (i.e. Wall Street), but had already “undermined markets” to such an extent that they now posed an imminent “threat to the stability of the global financial system.”

The president did not just reaffirm this assessment. He declared it to be a “National Emergency.”

The president did not precisely define what he meant by “undermining markets,” but many in the national security community believe that one of the bigger threats “to the stability of the global financial system” is manipulative short selling and what I refer to as the “bust outs” of publicly listed American companies, the wider markets, and the economy itself.

* * * * * * * * *

The term “bust-out” is one that I borrowed from organized crime. In the old days, mobsters would take over, say, the corner bar, load it up with debt, loot the cash, declare bankruptcy, and force the bar out of business. In the modern world of high finance, “bust outs” come in many permutations, but most of them follow the same routine of leverage, loot, and destroy.

Some “bust outs” see traders financing a company (often legitimate companies; in other cases companies that are frauds to begin with) and gaining a degree of control over the company’s stock price. The traders then “pump” the stock for a period of time, but ultimately the company is looted, the stock is “dumped,” and affiliated short sellers attack the company, sending its stock into a death spiral.

In a typical “pump and dump,” the manipulative short selling accompanying the “dump” ensures that the stock hits zero before the company has a chance to raise capital from more legitimate sources, and before shareholders have an opportunity to get out of the stock and cut their losses.

In other cases, individuals or firms will provide a legitimate company with toxic finance (often referred to as “death spiral” finance), which, for reasons explained in this story, immediately causes the company’s stock price to lose value. The financiers and affiliated traders then attack the company with manipulative short selling, sending the stock into a death spiral, and making it impossible for the company to raise new capital from more legitimate sources.

When the company is forced into bankruptcy, the people who provided the finance (often the same people as the short sellers) receive what is left of its assets, and they pocket short selling profits in excess of the cost of the initial toxic finance.

In still other cases, miscreants simply invest in a company’s shares or bonds, and gain a degree of control over the company’s management, either by demanding seats on the board or by exerting influence as major shareholders or creditors. Often the financial operators will then work with corrupt insiders to loot the company or engage in more complex schemes to saddle a company with toxic assets (purchased from the  miscreants themselves or from their associates).

Ultimately, the goal is to loot and weaken the company.

If the company is publicly listed (private companies are also “busted out,” and this final step does not, of course, apply to them), the miscreants or their associates eventually attack the company with manipulative short selling. For complex reasons (to be outlined in this story), owning a company’s bonds (especially convertible bonds, sometimes known as “toxic converts”) makes it easier for the bond owners and their associates to engage in manipulative short selling.

There is also a long history of miscreants not just investing in a company, but taking the company over entirely, and looting its assets. Once sufficiently looted, the company is, as usual, attacked with manipulative short selling. Before the company’s board of directors or regulators have an opportunity to oust the miscreants, the company’s stock goes into a death spiral, making it impossible for the company to raise new capital, and forcing a bankruptcy.

In such cases, the tendency is to say, “Well, it was bad company, so its bankruptcy was inevitable.” But often, the companies are good companies until they are “busted out,” and often even troubled companies would be salvageable if it were not for the rapid death spirals of their stock prices, which do not allow time for restructuring or the ousting of the miscreants who gained control over the company.

There are also plenty of cases in which financial operators do not gain any control over their target company, but merely attack it with a steady barrage of manipulative short selling, meanwhile deploying any number of other tactics (for example, spreading false rumors about the company’s health, and manipulating credit default swap prices, which are an important measures of a company’s well-being) to drive down the company’s stock price.

* * * *  * * * *

Financial operators have, in fact, been “busting out” major American companies since at least the 1980s, when numerous savings and loan banks were “busted out,” fueling what came to be known as the “savings and loan crisis,” which delivered a devastating blow to the financial system. Many of the perpetrators of those “bust-outs” (see, for example, the book “Inside Job,” which is the seminal work on the savings and loan crisis) had ties to organized crime.

Sometimes organized crime syndicates perpetrate “bust outs” for the purposes of laundering money. The dirty cash goes into companies in the form of toxic finance, and comes out clean in the form of short selling profits. In cases where short sales are not “covered” (i.e. in many cases involving manipulative short selling, and in all cases where the target stock hits zero), the short selling profits do not even have to be reported to tax authorities.

Former FBI investigators and experts who study financial crime say that market manipulation and “bust outs” of publicly listed companies is one of the more important money laundering techniques deployed by the world’s leading organized crime syndicates and other miscreants. Indeed, many of history’s biggest “money laundering” scandals were, in fact, market manipulation and “bust out” scandals.

In 1999, for example, a famous scandal saw the Russian government and organized crime syndicates with ties to the Russian intelligence services laundering upwards of $7 billion through the Bank of New York. As later chapters of this story will demonstrate in great detail, this money laundering was (according to a careful reading of indictments, statements of government investigators, and other information) the tail end of a large scale market manipulation (“bust out”) network that destroyed countless U.S. public companies.

Some of the destroyed companies were pure frauds that were “pumped and dumped.” But many of the companies had been going concerns until they were targeted by people who had ties to Russian organized crime, and who gained control over the companies’ stock prices. Once in control, they “pumped” and then “dumped” the stocks while engaging in manipulative short selling that sent the stocks into death spirals.

Today, Russian organized crime continues to “bust out” public companies with a vengeance. While this activity has gone largely unreported by the media, a notable exception is Forbes magazine’s Nathan Vardi, who has written multiple stories (see, for example, his story, “Sewer PIPEs”) that note the extensive involvement of financial operators with ties to Russian organized crime syndicates in one form of “death spiral” finance (so-called “PIPEs”) and the manipulative short selling that usually comes with such finance.

As we will see, there is no question that Russian organized crime syndicates have (as White House national security staffers maintain) ties to the Russian intelligence services. It is, moreover, my contention that when “bust-outs” are perpetrated by organized crime syndicates with ties to the Russian intelligence services, we should consider whether they are motivated, at least to some extent, by politics, and specifically by Russia’s disdain for the United States and the prevailing economic order.

But, of course, Russian organized crime is not the only concern. As we know, the president and his national security staff say that there is a “nexus” between transnational organized crime syndicates (including, but not limited to those emanating from Russia) and other potentially hostile constituencies, including jihadist organizations and foreign governments besides Russia.

Therefore we must ask whether sophisticated financiers with ties to jihadist organizations or hostile foreign governments are among those who have “undermined markets,” thereby inspiring the president to declare a “National Emergency.”

It is not often that a president issues a formal declaration of a “National Emergency,” and it is even less often that a president suggests that he is doing so because transnational organized crime syndicates (and perhaps others in the nexus, including terrorist organizations and hostile foreign governments) have “penetrated” the “legitimate” financial sector (i.e. parts of Wall Street) and are now posing a “threat to the stability of the global financial system.”

One would think that this would be front page news. But, amazingly, the president’s declaration of a “National Emergency” received almost no coverage at all from the major media outlets. One rare exception was the highly respected Economist magazine (based in Britain), which noted the “National Emergency” (and also noted the dearth of U.S. media coverage of the emergency) in a December 2011 article (titled, “Financial Terrorism”) that noted the possibility that the financial system might already have been attacked by hostile entities.

While America’s media and financial regulators seem largely uninterested in this issue, some in the national security community are devoting a lot of attention to it. A 110 page report commissioned by the Department of Defense Irregular Warfare Support Program even goes so far as to state that there is high likelihood that the economic cataclysm of 2008 was significantly worsened by politically motivated “financial terrorists intent on wiping out the American financial system.”

The report (a copy of which can be found at DeepCapture.com) makes reference to the massive volumes of short selling that went through the previously obscure brokerage that I discussed at the outset of this story. While the report for the Department of Defense does not identify the brokerage by name, I will do so in later chapters of this series, and I will also name its client brokerages (i.e. the network that I briefly described above). However, to understand the significance of these brokerages, we must first cover some other ground.

* * * * * * * *

The report for the Department of Defense states with good reason that the weapons most likely to be used by financial terrorists are so-called “naked” short selling and other forms of short-side market manipulation.

Before I continue, let me stress that short selling is a perfectly legitimate practice. It involves traders borrowing shares and then selling them, hoping the price will drop so that they can repurchase the shares at a discount, return them to the lender, and pocket the difference.

In “naked” short sales, however, traders do not borrow or purchase stock before they sell it. They simply sell what they do not have – phantom stock. You probably can  imagine how easy it is for miscreants to suppress the price of a security if they are able to swamp a market with artificial supply.

Of course, by definition, if people are selling a phony supply of a security, then they cannot be delivering what they are selling. Regulators and Wall Street folks call this “failure to deliver.”

There are, in fact, a variety of methods that can be deployed to create “failures to deliver.” There are technical differences among the methods, but all share this one basic idea: generate “failures to deliver” that act as phony supply to drive down a security’s price. Because “naked short selling” is the most famous of these methods, and because the differences among it and the other methods are generally so technical as to interest only experts, I intend to refer to this whole class of methods as “naked short selling”, or even more generally, “market manipulation.”

As the report commissioned by the Defense Department correctly points out, foreign governments, terrorist groups, or organized crime syndicates wishing to manipulate the markets would not have to do the dirty work themselves. They would need only to invest in one among the multitude of American hedge funds  that have ties to organized crime and have demonstrated that they are willing to deploy financial weapons of mass destruction for profit.

Under one scenario described in the Defense Department report, “a terror group could direct investments to a feeder hedge fund. The feeder fund would locate a Cayman Islands based hedge fund on their behalf that was predisposed to sell short financial shares. With sufficient new money, the hedge fund would expand its short selling activity (naked and traditional) and trade through dark pools or with sponsored access. At the same time, the same terror group might invest heavily in [credit default swaps] of the targeted short sales…”

Experts painted similar scenarios in testimony before a September 2010 informal meeting of the House Committee on Homeland Security. These experts were unanimous in their opinion that a hostile foreign entity could crash the U.S. financial markets. And to do so, it would most likely engage in manipulative trading through one of several brokerages that offer platforms – such as dark pools or so-called “sponsored access” – that enable miscreant financial operators to trade in anonymity.

Partly because such trading platforms exist, and for several other reasons (see Patrick Byrne’s DeepCapture story, “A Peace Sign to Wall Street”), SEC data reflects only a fraction of the naked short selling that occurs in the markets. But even the SEC’s partial data show that an average of 2 billion shares “failed to deliver” nearly every day in the months and weeks leading up to the 2008 market meltdown.  Those shares, as I have explained, “failed to deliver” because they were phantom shares – artificial volume that drove down stock prices.

The SEC’s incomplete data also shows that more than 13 million shares of Bear Stearns sold short during the week before that bank’s demise in March 2008 failed to deliver. Soon after Bear Stearns collapsed, the CEOs of Morgan Stanley, Merrill Lynch, Lehman Brothers, and other major financial institutions began complaining to the SEC that naked short sellers had caused the demise of Bear Stearns and were now targeting their own banks.

We need to take seriously the complaints of the Wall Street CEOs because they were intimately familiar with the crime of naked short selling. Many of their own brokerages had engaged in it. When people are raising hell about a crime that has previously lined their pockets, it is reasonable to assume that they know what they are talking about.

Moreover, the Wall Street CEOs continued to demand that the SEC take action against the market manipulators even after their high-paying hedge fund clients (some of whom might themselves have been naked short sellers, others of whom were merely inclined to object to stronger regulation of any sort) asked the CEOs to stop their campaign.

When the CEOs continued to complain about the naked short selling, many of their big hedge fund clients began to pull their business in protest. It goes without saying that Wall Street CEOs do not sacrifice large chunks of their profits to speak out against crimes that do not exist.

On July 15, 2008, the SEC responded to the Wall Street CEOs by issuing an “Emergency Order” that temporarily protected 19 of the nation’s largest financial institutions (the biggest banks plus Fannie Mae and Freddie Mac) from naked short selling. The stock prices of these financial institutions immediately soared in value, and it looked like a major crisis had perhaps been averted.

Amazingly, though, the SEC lifted its “Emergency Order” just weeks later, on August 12. The next day, the naked short sellers resumed their attacks. The SEC’s own data (which, again, incompletely reflects the full magnitude of the problem) shows failures to deliver rising steadily from August 12 onwards, and these failures to deliver correspond directly to the downward spiral of stock prices.

According to the SEC’s partial data, Lehman Brothers saw an astounding 30 million of its shares fail to deliver during the week before the bank collapsed on September 15, 2008.

And make no mistake: Lehman might well have survived if it were not for the naked short selling and other attacks (such as the seemingly deliberate insertion of damaging false rumors into the marketplace, and the apparent manipulation of credit default swaps) that hammered its stock price.

Three days after Lehman’s collapse, on September 18, the SEC issued another Emergency Order, this one banning all short selling. In that Emergency Order, the SEC (without mentioning any banks by name) stated clearly that manipulative short selling was contributing to the collapse or near collapse of multiple banks, and thereby threatening to collapse the entire financial system.

In the weeks before Lehman’s collapse, the bank had plenty of liquidity to remain a going concern, and it had deals in the pipeline that would have enabled it to raise capital. But the free fall of Lehman’s stock price and (I will show) other maneuverings by short sellers derailed those deals, and panicked clients pulled their cash. Only then was Lehman forced to declare bankruptcy.

Lehman was not a healthy bank, to be sure. And there is no doubt that it was weakened with help of corrupt insiders who leveraged and looted. But that leverage and looting was only one part of a larger “bust out” that saw miscreants selling to the corrupt insiders toxic assets (which I will describe in a moment), while others attacked the bank with manipulative short selling.

If it were not for that manipulative short selling, the stock would not have gone into a death spiral, and there might have been time to restructure and oust the corrupt insiders. Lehman was a venerable bank that had survived plenty of bouts of ill health and worse economic downturns. But it had never faced an assault on its stock price like the one that it saw in the lead-up to September 18, 2008.

And nearly every other major bank, regardless of its health, faced precisely similar fates during the gory month of September, 2008. All seemed doomed to collapse until the SEC issued its September 18 “Emergency Order” banning all forms of short selling, legal or otherwise.

There was no reason to ban legal short selling (a crackdown on illegal naked shorts would have been enough), but the Emergency Order gave the markets some breathing room while the Treasury Department prepared the massive (and now notorious) bailouts that signified that the government would not allow any more banks to collapse, no matter what sort of attacks might be directed at them.

As the authors of the report for the Defense Department’s irregular warfare unit conclude, there is no question that short-side market manipulators contributed to the collapse or near-collapse of many of America’s largest financial institutions in 2008. The report states further that “the [short selling] attacks on [America’s biggest banks] were so brazen that it is difficult to imagine that they were uncoordinated.”

* * * * * * * * *

It wasn’t just the banks that were attacked. The SEC’s partial data shows that there was also massive naked short selling of exchange traded funds, or ETFs. These are publicly listed funds that are often highly leveraged and typically trade a basket of multiple stocks across a given industry. When market manipulators attack an ETF, they inflict damage on the entire industry that the fund indexes  – and the high leverage magnifies the impact.

Meanwhile, there is strong evidence that the markets for U.S. government debt have also come under attack. The first naked short selling assault on U.S. Treasuries was launched in September 2001, at the time of Al Qaeda’s attacks on the World Trade Center and the Pentagon. Prior to the 9-11 tragedy, a daily average of $1.5 billion worth of U.S. government bonds failed to deliver. During the week immediately after 9-11, the daily failures to deliver were an astounding average of $1.5 trillion.

This was new and unusual market manipulation on a Herculean scale, but it was even worse during the months leading up to and following the 2008 crisis, when an average of $2.5 trillion worth of U.S. Treasuries failed to deliver every day. The authors of the report for the Defense Department speculate that financial terrorists, having precipitated the financial crisis, might have intended to attack the government bond markets in an attempt to bankrupt the national treasury.

Unfortunately, the government has done little to address the problem. Despite having issued its 2008 “Emergency Order” stating that manipulative short selling had contributed to the demise of major banks and now threatened to collapse the financial system, the SEC has yet to prosecute even one manipulative short seller involved in those attacks. That is, the SEC has yet to prosecute even one of the people who (according to the SEC) nearly obliterated the global financial system in 2008.

Meanwhile, after the president declared a “National Emergency” in 2011, he never said another word about it. The government has yet to prosecute any of the “legitimate” Wall Street outfits that have (according to the president) been “penetrated” by transnational organized crime syndicates. Nor has the government arrested any members of transnational organized crime syndicates that have (according to the president) “undermined markets” to such an extent that they now pose an imminent “threat to the stability of the global financial system.”

* * * * * * * *

The media fails to give sufficient attention to these problems, insisting instead on reinforcing the narrative that the financial crisis was in essence caused by “reckless” lending to home buyers who could not pay back their mortgages. It is correct that the financial crisis of 2008 had its proximate cause in the collapse of the mortgage and property markets a year earlier, but that is only the surface of the story.

The Financial Crisis Inquiry Commission (FCIC) made clear in its January 2011 report to Congress that the principal cause of the mortgage and property disaster was the freakish collapse in 2007 of the market for collateralized debt obligations (CDOs), which are packages of mortgages that trade like securities.

As the FCIC also made clear, the collapse of the CDO market was by no means inevitable. Nor did it have much to do with “predatory” lending or the quality of most subprime mortgages.  Rather, the problem was that more than half of the CDOs issued in 2006 and 2007 were so-called “synthetic” CDOs, every single one of which was deliberately designed to self-destruct.

That is, just a few firms that specialized in marketing “synthetic” CDOs worked with a select number of bankers and short sellers to hand-pick a relatively small number of mortgages that seemed certain to default. The miscreants then packaged bets against those relatively few toxic mortgages into so many self-destruct CDOs that they came to account for (I must repeat) more than half of the overall market.

It is not quite correct to say that this was phantom supply similar to what is generated by naked short selling. But there is no question that the “synthetic” CDOs created a market that was, alas, “synthetic.” It was a market overwhelmed by a supply of instruments that purported to contain representative samplings of an underlying asset (subprime mortgages) that a reasonable person might expect to have some value, but which actually contained (as only the short sellers knew) assets that were worth zero.

In other words, a small number of miscreants effectively flooded the market with massive volumes of synthetic toxicity.

As these miscreants surely knew, the self-destruct CDOs would, indeed, self-destruct, and thereby wipe out the overall market for CDOs, causing property values to crash. And when that happened, the banks that had leveraged themselves to the hilt to buy CDOs and overvalued property would  be weakened. They would not be so weak that they had to die. But their weakness would create negative sentiment that could be turned into a panic if miscreants were to circulate exaggerated rumors about the banks’ problems and unleash waves of naked short selling that would send stock prices into death spirals.

In short, the report commissioned by the Department of Defense Irregular Warfare unit was correct to note that the financial crisis that nearly destroyed the nation went “far beyond normal expectations…” The authors of this report were also right to note that all of the events that precipitated the financial cataclysm raise “serious questions about whether this was a purposeful attack and if so, by whom, and why?”

By whom? And why?  Over the coming weeks, DeepCapture will be publishing the remaining chapters of this book-length story, which is the product of a years-long investigation into the underworld of market manipulation and the vulnerability of the U.S. economy to malicious attacks. To that first question – by whom? – we do not have all the answers, but we have quite a few. That is, our investigation has led us down many paths, but they all seem to circle back to a distinct network of individuals and financial firms.

This social and business network did not singlehandedly wreck the economy, but we will see that financial operators in this network were responsible for much of the mortgage fraud that occurred in the lead-up to the crisis, while others in the network created (with fraudulent mortgages) most of the self-destruct CDOs that crashed the CDO market in 2007.

People in this network also sold toxic assets to corrupt insiders at the leveraged big banks. These toxic assets included not just CDOs, but also (we will see) a number wildly overvalued properties whose prices were certain to collapse, and all the more so after the CDOs self-destructed. Once poisoned by the toxic assets, the banks were vulnerable to the short selling attacks that came in 2008. And the social and business network described by this story includes many of the world’s most notorious short sellers and market manipulators.

Moreover, this social and business network nicely illustrates the “nexus” described by the president and his national security staff on August 12, 2011, when the president stated that the “legitimate” financial sector (i.e. parts of Wall Street) had been “penetrated” by transnational organized crime syndicates with ties to terrorist organizations and hostile foreign governments. As we know, the president suggested that this “nexus” had “undermined markets” and now posed a “threat to the stability of the global financial system.”

In other words, the social and business network (or “nexus”) described in this story is comprised mostly of “legitimate” American financial operators. However, to the extent they are actually “legitimate” deserves scrutiny given the extent to which they have “undermined markets,” and given that many of them have done business with others in a “nexus” that includes transnational organized crime syndicates, agents of hostile foreign governments, and sophisticated financiers with ties to the global movement of radical jihad.

Before I continue, though, let me define what I mean by “network.” It is not the case that all of the people in this network know each other, and it is certainly not the case that all or any of its constituencies (i.e., terrorist financiers, transnational organized crime syndicates, agents of rogue states, and “legitimate” American financial operators, among others) gathered in some secret meeting hall to hatch one grand conspiracy to wipe out the global financial system. Some of the relationships I will describe in this story are, in fact, once or twice removed.

However, it is the case that a number of “legitimate” firms and individuals in this network have engaged in activities (sometimes in tandem with organized criminals, terrorist financiers, and/or agents of hostile foreign governments) that have done damage to the markets. I also feel that it is fair (indeed a matter of some urgency) to describe the larger “social network” and the relationships between the people who inhabit this network.

Nobody, of course, is guilty by virtue of his relationships alone. That a “legitimate” financial operator (whether he be from the United States, Canada, Saudi Arabia, or wherever) has done business with, say, a Russian organized crime boss or a Saudi billionaire who has funded Al Qaeda, does not mean that the “legitimate” financial operator supports terrorism or would knowingly participate in a politically motivated act of financial terrorism against the United States.

Nonetheless, there is strong reason to believe that the report for the Department of Defense Irregular Warfare Support Program was right: the United States was attacked by financial operators with ties terrorist organizations and rogue states. There is also clear reason to believe that “legitimate” American financial operators and transnational organized crime syndicates have attacked the markets. In addition, there is reason to believe that some relationships between these various constituencies are not altogether irrelevant, and might, indeed, account for the magnitude of the damage done to the financial system.

The evidence is not 100 percent conclusive, but the facts are suggestive. At a minimum, they point to a scenario for how things might have played out in 2008–a scenario that needs to be taken seriously because it does show that the United States is, without doubt, vulnerable to future attack. Indeed, there is every reason to believe that such an attack is inevitable.

When the attack comes, I hope that this story will have provided at least a few good answers to that first question:  ”By whom?”

As to the Defense Department report’s second question – why? – I have no definitive answers. And ultimately, the question might be irrelevant. The damage to the economy is the same whether it has been done in the name of profit or jihad; in the name of terror, geopolitics, another billion bucks, or nothing more than the fun of the game. The financial operators who will be described in this story come in many stripes, but their various activities pose a collective threat to American prosperity and national security.

In Chapter 2, I introduce some information about prominent Saudi billionaires alleged to have financed Al Qaeda, and one fellow who ran an Islamic organization accused of inserting Al Qaeda spies into the U.S. military, and who subsequently set up a financial weapon of mass destruction that has, without doubt, done damage to the American markets.

To be continued…Click here to read Chapter 2 of this series

* * * * * * * **

*Zuhair Karam is an alias.

* * * * * * * *

Mark Mitchell is a journalist who spent most of his career working as a correspondent for mainstream media publications before joining DeepCapture.com.

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Notes on David Einhorn: The Predator in a Cute T-Shirt

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Notes on David Einhorn: The Predator in a Cute T-Shirt


I received an email a while back from Jim Brickman, a crony of short selling hedge fund manager David Einhorn, demanding that I post the Securities and Exchange Commission inspector general’s report on the commission’s investigation of Allied Capital. According to Brickman, the report proves that Einhorn was right about Allied being a massive fraud. Moreover, says Brickman, the report definitively establishes that Einhorn did not seek to drive down Allied’s stock price. The report, which I gladly post below, does nothing of the sort. I will discuss the report in further detail, but first a little history.

Eight years ago, Michael Milken, the famous financial criminal, appeared in the offices of a top Allied Capital executive. “You know,” Milken told the executive, “I already am quite a large shareholder of your stock – but my name will never show up on any list you’ll see.”

This might have been a reference to a practice called “parking stock” (owning stock but “parking” it in the accounts of friends with whom one has made under-the-table arrangements), a practice that figured in the high-count indictment that sent Milken to prison in the 1980s. It appeared to the Allied executive that Milken was fishing for inside information about Allied and threatening an attack. For a variety of reasons, short-side stock manipulators in the Milken network often accumulate large numbers of shares in the companies that they seek to destroy.

Not long after Milken’s strange appearance, David Einhorn was at a hedge fund luncheon, sitting next to Carl Icahn, one of Milken’s closest cronies. Einhorn launched his career working for Gary Siegler, who was formerly a top partner in Icahn’s investment fund, and is certainly part of the Milken network. So, it was not surprising to Allied’s executives when, halfway through the luncheon, Einhorn declared that “Allied Capital is going to zero!”

For the next eight years, Einhorn led a vicious campaign against Allied, loudly and publicly pronouncing that the company was a massive Ponzi scheme and an all-around fraud that could be as big as Enron. Of course, Einhorn’s vituperative remarks had nothing to do with the massive profits that Einhorn stood to earn from short selling Allied’s stock. Rather, Einhorn was just doing his duty as a concerned citizen – or so his slick public relations operation would have us believe.

I will give Einhorn credit. He is a master of spin. In 2008, he published an aptly titled book, “Fooling Some of the People All of the Time”, wherein he provided an ingeniously self-serving portrait of himself as a tenacious hero doing battle against not only the evil Allied Capital, but also powerful Washington insiders, financial journalists, and government regulators – i.e. all the people who reviewed his “evidence” and concluded that Allied was by no means a massive fraud.

Really, Einhorn’s book should be placed in a glass case at the Museum of Contemporary Propaganda, as it is such a work of art. Anyone familiar with the world of abusive short selling will read this book and see that Einhorn engaged in all manner of shenanigans to obtain inside information and drive down Allied’s stock price. But the dark genius of Einhorn’s book is that it manages to portray his malefaction as par for the course – just another day in the life of a noble fraud-buster.

For example, Einhorn admits in his book that he invested in a fund run by a man who had recently served as the chairman of Allied Capital’s board of directors. Could this investment have been a bribe? Was Einhorn seeking inside information about Allied? Certainly not. The investment was purely incidental, Einhorn assures us. And you, dear reader, should be ashamed of yourself for even asking such questions. Indeed, your suspicions make you part of the problem. You are an ignorant thug who wants to “intimidate” Einhorn and other short selling “critics” who selflessly do battle with public corporations.

In his book, Einhorn notes the SEC initiated an investigation into his short selling of Allied Capital. In the course of this rather cursory investigation, an SEC official sought to determine whether Einhorn was colluding with other hedge funds, including William Ackman’s Gotham Partners (now called Pershing Square Capital) and Whitney Tilson’s T2 Partners, to drive down Allied’s stock. The official asked this question:  “Mr. Einhorn, have you ever compensated [short selling hedge fund] Gotham Partners…for providing you with an investment idea?”

Einhorn answered, “Except in-kind, no.” Then Einhorn consulted with his lawyer and changed his mind. He went back to the SEC official and said, “I think the more correct answer to your question is that there’s been no compensation for the ideas.” The moral of this story, according to Einhorn’s book, is that the investigator was a bumbling idiot for asking such a question. And, you, dear reader – don’t even think of asking the same question. If you do, you’re part of the problem. You’re trying to “intimidate” Einhorn.

You see, it is perfectly natural for hedge funds to share ideas. Of course, hedge funds must not be required to report their short positions to the SEC or otherwise disclose their “proprietary trading strategies.” Hedge fund trading is top-secret so far as the public is concerned. But, says Einhorn, when we hedge funds “share ideas,” it’s just us pros talking shop. Really, says Einhorn, you can trust me…and, oh, did I say “payment in-kind”? Oops — slip of the mind.

Is it possible that hedge funds exchange “ideas” because it is profitable for them to do so? Surely not. Is it possible that these “idea” exchanges are nothing more than collusion – hedge funds agreeing to pile on to the same companies to put downward pressure on stock prices? How dare you ask such a question. Allied Capital asked that question. And Allied is very bad, says Einhorn — Allied tried to “intimidate” me!

Really, Einhorn says this all the time – people tried to “intimidate” him. He was hurt. But he’s a hero. He stood up to the critics. And, he assures us in his book, it was perfectly natural for him to collude (sorry, “share ideas”) with not just Tilson and Ackman, but also Eastbourne Capital’s Jim Carruthers. You see, Carruthers is really smart guy who does good research.

What Einhorn does not mention in his book is that Carruthers has sometimes spelled his name with a ‘K’ to disguise his identity while passing himself off as a friendly private investigator in order to deceptively acquire inside information from companies like Allied Capital. But let’s not criticize Carruthers. We don’t want to “intimidate” him. We don’t want to be part of the problem.

And shame on the SEC for having the temerity to investigate Einhorn. In fact, the SEC did nothing but ask Einhorn a few questions. Meanwhile, Einhorn convinced the SEC to launch an investigation of Allied. Then Einhorn all but directed this massive but ultimately misguided investigation for a period of three long years.

As Einhorn admits in his book, his hedge fund partner had a “social” relationship with William Donaldson, then the Chairman of the SEC. That’s how Einhorn got the investigation of Allied started. As the investigation progressed, Einhorn says, SEC officials even asked him to be their “cartographer” – outlining all the ways in which Allied was supposedly a massive Ponzi scheme, and also failing to mark its assets to “fair value” (i.e. the arbitrary value at which Einhorn believed the assets could be sold in a fire sale).

Clearly, Wall Street miscreants like Einhorn had captured the SEC to the point where the Wall Street miscreants were virtually running the place. But in the upside down reality presented by Einhorn’s book, the fact that a few SEC officials doubted the hedge fund manager’s sincerity is proof that the commission had been corrupted, not by Wall Street miscreants, but by corporate executives who wanted to “intimidate” Einhorn.

That’s right, the SEC, following Einhorn’s orders in microscopic detail, conducted an investigation of Allied that was so huge that Allied had to create a “Department of Investigations” to handle all of the commission’s requests for new information. But it was Allied’s executives, not Einhorn, who were peddling influence at the SEC. You don’t believe it? Read Einhorn’s book – agitprop at its best.

As for the media – well, Einhorn is deeply disappointed. Of course, Einhorn heaps praise on journalists such as Jesse Eisenger, then of The Wall Street Journal; Carol Remond of Dow Jones Newswires; and Herb Greenberg, formerly of MarketWatch.com and TheStreet.com. These journalists wrote multiple negative and false stories about Allied Capital, precisely mimicking Einhorn’s allegations that the company was a massive fraud.

As it happens, these are the same journalists that Deep Capture has shown to have had too-cozy, and in some instances, outright corrupt relationships with a select crew of short selling hedge fund managers, including David Einhorn. Indeed, it is fair to say that Einhorn and others in his network had captured some of the biggest names in financial journalism to the point where the hedge fund managers were able to virtually dictate the journalists’ stories.

But Einhorn was disappointed – the media failed him. That is to say, a number of honest journalists looked at Einhorn’s “evidence” and concluded that it was balderdash of the highest order. But, no, these journalists were not honest. They were ignoramuses. They are part of the problem. They should be publicly shamed. One of them even investigated Einhorn. This was an outrage. It was hurtful. It was “intimidation.”

Look, lying and cheating short-sellers are essential watchdogs, they add liquidity to the markets, and they are really very fragile people. Nice people, too. They don’t even care about money. You don’t believe me? Read Einhorn’s book. “I remember Grandpa Ben…,” Einhorn writes on page one, and after that he regales with countless folksy anecdotes and assorted other bullshit that – well, believe me, it brings tears to the eyes.

Einhorn even lets us know that he is going to donate some of the proceeds from his short selling of Allied to needy children. “I have been waiting,” he writes, “but the children should not have to wait.”

As far as I know, the children are still waiting. Although Einhorn has made enormous profits from his short selling of Allied, he has provided no evidence that his contributions to charity have significantly increased. But it is clear that the purpose of his book was not to tell the truth. It was to inoculate himself from public criticism and regulatory scrutiny in preparation for his next big project – the destruction of Lehman Brothers.

In May 2008, soon after releasing his book on Allied Capital, Einhorn’s launched his attack on Lehman in a speech that he gave at an event that was ostensibly held for the purposes of – what else? – raising money for needy children. Einhorn began this speech by discussing his supposedly philanthropic fight with Allied. He then  proceeded to give a grossly exaggerated account of Lehman’s problems, suggesting that Lehman was a massive fraud for precisely the same reasons that Allied was a massive fraud – namely, that it had failed to mark down its real estate assets to “fair value,” with “fair value” defined not by any reasonable metric, but by Einhorn himself.

Lest there still be any doubt that Einhorn really was a crusading crime-fighter, rather than a profit-seeking hedge fund manager, he hired an expensive lobbying outfit called the Gordon Group to orchestrate an astounding public relations campaign. The Gordon Group, whose key clients seem to be Einhorn and Einhorn’s network of hedge fund managers (including the above mentioned William Ackman and Whitney Tilson) is staffed by real professionals. Their Einhorn campaign was marked by the sort of hype that normally accompanies the launch of a new teen-idol band.

But it wasn’t just hype. It was also a particularly greasy sort of deception – imagine a pimp marketing a cheap 42nd Street hooker. Really, she’s not in it for the money. She’ a virginal college undergrad who loves her teddy bear.

Well, the media swooned for the cuddly Einhorn. This was the same media that Einhorn had accused of bungling idiocy, but never mind that – now he had glowing profiles in many of the top news publications, and a three-hour appearance on CNBC.  Half-way through his CNBC debut, Einhorn put on a cute t-shirt painted by his young kids — just to show that he was a regular guy and a lover of children, as opposed to a marauding hedge fund manager seeking to obliterate one of America’s largest investment banks.

In all his media interviews, Einhorn reminded journalists that Allied Capital had “intimidated” him. He said he had stood up to the bullies and proven that Allied was a massive fraud. Then he smoothly transitioned into a discussion of Lehman Brothers, suggesting to the journalists that Lehman was just like Allied, a massive fraud. He said Lehman was trying to “intimidate” him, but he would fight on in the name of truth and justice. The journalists swallowed this nonsense without an ounce of skepticism.

I do not mean to suggest that Lehman Brothers was a clean bank. Clearly, it engaged in some shady accounting, including its now notorious Repo 105 transactions. Its brokerage probably catered to criminal market manipulators. But while Lehman was a deeply troubled bank, it is also true that it was subjected to a wave of false rumors, each one accompanied by illegal naked short selling. With all the manipulation that accompanied the attack on Lehman, it was difficult to know what the truth about the company really was.

In the midst of the attack on Lehman, Adam Starr, the manager of hedge fund Gulfside Partners, was moved to write a letter to Lehman’s CFO, stating, “I have never witnessed more disruptive behavior than that displayed over the past year by David Einhorn.” In a recent interview with Reuters, Starr said that Lehman had clearly had serious problems, but that was besides the point. The point, Starr said, was that Einhorn was up to no good – “manipulating the market and running a high publicity business is just not appropriate behavior and disruptive to free and open markets.”

As for Einhorn being “right” about Lehman, it is important to note that the court-appointed examiner’s report on the Lehman bankruptcy does not support Einhorn’s principal claim – that Lehman’s executives fraudulently and massively overvalued the bank’s commercial real estate assets. “With respect to commercial real estate,” says the report, “the Examiner finds insufficient evidence to conclude that Lehman’s valuations of its Commercial portfolio were unreasonable as of the second and third quarters of 2008.”

Lehman’s valuations might have been high, but Einhorn’s shrill exaggerations and insinuations of fraud were clearly designed to induce panic. And sure enough, panic ensued. With potential business partners wondering whether Lehman was, in fact, massively overstating the value of its commercial real estate, the bank was unable to raise new capital.

To protect itself, Lehman sought to spin off the real estate assets, but by that time it had come under a brutal and criminal naked short selling attack, with more than 30 million of its shares failing to deliver. The plummeting stock price and continuing false rumors in the marketplace derailed Lehman’s other efforts to protect itself and triggered a run on the bank that ended with Lehman’s demise.

In short, Lehman was a bad bank. Regulators should have forced it to reform. Instead, they and the media allowed short selling “vigilantes” like Einhorn to manufacture a much bleaker reality and bring a major investment bank to its knees. It is quite possible that if it weren’t for Einhorn and other dissembling investor “activists”, Lehman would have survived, and the financial system would have had a much softer landing.

Lehman has subpoenaed records from Einhorn and his close colleague, Steve Cohen of SAC Capital,  in hopes of determining the extent to which the hedge fund managers had a hand in its demise. Perhaps those subpoenas will give us a clearer picture of what really went down, but meanwhile we can expect Einhorn’s PR machine stay “on message” – constantly repeating that Einhorn was “right” about Lehman, just as Einhorn was “right” about Allied Capital.

Which brings us to the inspector general’s report on the SEC’s investigation of Allied. Given that Einhorn, his minion Jim Brickman, and the rest of his PR machine are waving this report with glee, and no doubt preparing to use it as cover for Einhorn’s next attack on a public company, it is important that we subject the contents of the report to close scrutiny.

The report concludes that “serious and credible allegations against Allied were not initially [my emphasis] investigated” by the SEC, but contrary to Einhorn’s ridiculous claims that nobody listened to him, the inspector general notes that the SEC did ultimately conduct “a lengthy examination of Allied as a result of Einhorn’s allegations…”

SEC officials met with Einhorn on multiple occasions to review his allegations. They also scoured through millions of Allied emails and the cart-loads of other documents that Allied supplied every time Einhorn came to the SEC with a new set of accusations.

Having conducted this gargantuan investigation, the SEC concluded that most of Einhorn’s allegations were bogus. Allied was fined for having mildly inadequate accounting methods that might have overvalued some of the company’s assets, but the SEC determined that Allied certainly was not the “massive fraud” that Einhorn claimed it to be.

In addition, Allied was not, as Einhorn claimed, a massive Ponzi scheme. Einhorn had made the smarmy suggestion that Allied was a Ponzi because it supposedly raised money from the markets to pay its dividends. An SEC official told the inspector general that this claim was patently false – it was perfectly obvious that Allied legitimately paid dividends out of earnings.

The inspector general’s report notes that one SEC official claimed to have gotten “push back” when she tried to dig deeper into the Ponzi scheme allegation. But nowhere in the report does the inspector general conclude that any such Ponzi scheme existed. Clearly, Einhorn is no Harry Markopolos. Markopolos uncovered a $50 billion fraud (that of Bernie Madoff). Einhorn blew the whistle on a crime that didn’t exist. Yet, Einhorn’s slithering PR effort never ceases to amaze – somehow he has managed to attach himself to Markopolos, and even wangled a deal to write the introduction to Markopolos’s blockbuster book.

The inspector general seems to believe that the investigation of Allied could have been more thorough in some respects. For example, SEC officials didn’t visit Allied’s offices, and one SEC official was a bit too quick to believe that Allied was innocent just because former SEC officials worked for the company. But, again, the inspector general does not state that the SEC was wrong to conclude that Allied was innocent of any major crime.

The inspector general’s most damaging conclusions about Allied concern the company’s efforts to lobby the SEC. Apparently, some Allied lobbyists secured an unusual meeting with SEC officials and managed to convince these officials that Allied deserved a lighter fine. It also appears that a former SEC official went to work as an Allied lobbyist and might have gotten his hands on Einhorn’s phone records.

The inspector general is right to suggest that Allied’s lobbyists crossed the line. It is not kosher for a public company to pry into a private citizen’s phone records. But given that Einhorn had all-but moved his offices into SEC headquarters, and given that Einhorn had his own private investigators going to unknown lengths to dig up “dirt” on Allied (he admits in his book that he hired Kroll, a private investigative agency that owes its existence to Michael Milken, who was its first big client), Allied can hardly be blamed for taking steps to defend itself.

In any case, the inspector general’s report is more an indictment of the SEC than of Allied’s lobbyists. The overall picture that emerges is one of a government agency split into two factions, one populated by friends of Allied’s lobbyists, the other populated by officials who were basically taking orders from hedge fund managers like David Einhorn. It seems that nobody at the SEC was capable of conducting an investigation without having his or her hand held by some self-interested party. But it is clear from this case and many others like it that the hedge fund faction won the day.

The inspector general states in his report that it was Allied’s lobbyists who convinced the SEC to investigate Einhorn. The report concludes that the SEC initiated this investigation “without any specific evidence of wrongdoing.” That might be so, but officials do not generally obtain “specific evidence” unless they seriously look for it. And it is clear from the contents of the inspector general’s report that the SEC’s investigation of Einhorn was an unmitigated joke, even though officials had good reason to suspect that Allied’s stock was being manipulated.

The report notes, for example, that the SEC subpoenaed Einhorn’s client list in response to Allied’s complaints and discovered that Einhorn had a certain “celebrity client”, whom the inspector general does not name. Could this “celebrity client” have been Michael Milken? We cannot know for certain, but it seems like a good guess, given that the discovery of this “celebrity client” followed Allied’s complaint to the SEC, and given that Allied had complained that Einhorn might be colluding (sorry, “sharing ideas”) with one specific celebrity – Michael Milken.

In any case, it appears from the inspector general’s report that the SEC did nothing to determine how Milken, who is banned from the securities industry, became “quite a large” shareholder of Allied’s stock. Nor did the SEC seek to determine what Milken was doing that day in Allied’s offices.

Meanwhile, some SEC officials seemed to believe that Einhorn was colluding with other hedge fund managers to drive down Allied’s stock. To see whether the hedge fund managers called each other and then placed their trades at precisely the same time, the SEC subpoenaed Einhorn’s phone records. But according to the inspector general’s report, Einhorn did not bother to comply with this subpoena. He never handed over the phone records, and nobody at the SEC seemed to notice or care. Which is funny, because Einhorn states in his book that he did hand over his phone records. Indeed, he goes to great lengths to describe how hurt he felt about this. The SEC was “intimidating” him.

Perhaps because it was weary of “intimidating” hedge fund managers, the SEC also apparently did nothing to investigate illegal naked short selling of Allied’s stock. From the moment that Einhorn declared that Allied was “going to zero”, and for many months afterwards, Allied’s stock “failed to deliver” in massive quantities – a sure sign of criminal naked short selling. We do not know that Einhorn, others in the Milken network, or their brokers were committing this crime. Maybe it was someone else. Either way, it was not beyond the pale for Allied to ask the SEC to investigate. Or maybe it was. After all, the SEC wouldn’t want to “intimidate” criminals.

It is also notable that literally minutes after Einhorn declared that Allied was “going to zero”, the corrupt law firm Milberg Weiss filed a class action lawsuit against Allied that almost precisely mimicked Einhorn’s allegations. Indeed, Milberg filed a class action lawsuit against nearly every company attacked by short sellers in the Milken network.

A couple of years ago, Milberg’s top partners went to jail after prosecutors determined that the partners routinely bribed the plaintiffs in such lawsuits and knew in advance that some event would collapse the stock prices of the companies named in the lawsuits. Einhorn claims that the timing and contents of Milberg’s lawsuit were coincidences. We’ll never know the truth because the SEC doesn’t want to “intimidate” short sellers and corrupt law firms.

There were other “coincidences”. For example, supposedly “independent” financial research shops, such as Off Wall Street Research and Farmhouse Equity Research, published reports that closely paralleled Einhorn’s negative analysis of Allied Capital. The Motley Fool reported in 2007 that Einhorn’s confederate Jim Brickman helped Farmhouse write its research on Allied, and received a copy of at least one of these research reports one week prior to its publication.

Brickman, who is a bit of a mystery character (he refused to provide me with any information about his background), told the Motley Fool that he and Einhorn didn’t see the advance copies of the reports because of “travel constraints.” Allied complained to the SEC that the research shops were helping Einhorn manipulate its stock price and illegally trade ahead of their research. Einhorn said Allied was trying to “intimidate” the research shops. Who was right? It was all so confusing. The deep thinkers at the SEC picked their noses and tried to figure it all out. Then they went to lunch.

The inspector general has been on a mission to expose ineptitude at the SEC, and for this he deserves praise and gratitude. However, given the facts, I think his report on the investigation of Allied Capital was a bit too kind to David Einhorn. The inspector general notes that his office “conducted a comprehensive investigation of the allegations in Einhorn’s book.” But the report offers no solid verdict as to the accuracy of those allegations, and fails to acknowledge the extent to which the SEC had been manipulated by Einhorn and affiliated Wall Street hedge funds.

It should be noted that not only the SEC, but also the Department of Justice, the Small Business Administration, federal courts, attorneys general, and other government bodies investigated Einhorn’s allegations against Allied. All of these investigations yielded the same conclusion: Einhorn’s allegations were, for the most part, eminently ridiculous.

The only criminal fraud discovered by any of these investigators was committed by executives of Business Loan Express, a subsidiary that represented a tiny fraction of Allied’s overall portfolio. The BLX executives were apparently handing out Allied’s money to unqualified borrowers who were their cronies. In other words, Allied was the victim of this fraud. That anyone at the SEC still gives credence to David Einhorn is, therefore, rather odd.

But this story has a happy ending. Last October, Allied Capital was purchased by Ares Capital Corporation, a company that was founded by Anthony Ressler and John Kissick – both partners in the private equity firm Apollo Management. The head of Apollo is none other than Leon Black, who is Michael Milken’s closest business crony. That could be a coincidence. Or it could be that Einhorn’s attack on Allied was meant from the beginning to drive down Allied’s stock price to the point where it would be ripe for a takeover by Milken’s pals.

In any case, Einhorn mysteriously ended his “crusade” agains Allied as soon as Allied was purchased by his friends. So, for the time being at least, we don’t have to listen to his blather. And we promise – never again will we “intimidate” Einhorn. Really, no more “intimidation” — not from us. Mr. Einhorn, you are noble man. You did it for the children. You did not deserve to be “intimidated.” And, Mr. Einhorn, one more thing — boo!

Oops, did it again.

* * * * * * * *

Click here to read the inspector general’s report

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Europe Comes to Terms With Market Manipulation; the SEC and the American Media Bury Heads in the Sand

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Europe Comes to Terms With Market Manipulation; the SEC and the American Media Bury Heads in the Sand


Well, the current state of the global financial markets is certainly interesting. I mean, you have to be a bit sick in the head, but if you think about it the right way, it really is “interesting” — sort of like, oo-wee, look, the girl in the cute leotard is falling off the tightrope, there’s no net, and she’s going to go “splat” when she hits that pavement. How interesting! And check it out, the circus animals have gone berserk — the tigers are tearing the trainer into bloody shreds, the elephants are stampeding, the tent might very well collapse, maybe we’re doomed, and look at those clowns – they’re still smiling. How deliciously interesting!

Actually, I take it back — it is not in the least bit interesting. It is terrifying. Despite early attempts by the smiling clowns of the nation’s media and regulatory apparatus to portray the dramatic market collapse of May 6 as mere happenstance, it is now clear that this unprecedented event was no “fat finger” accident. It was not a “black swan” that appeared out of nowhere. And more than likely, it was not some anomalous but innocent trade that triggered a run-of-the-mill panic. What it was, exactly, nobody seems able to say – and that is what makes it all the more scary.

But we can venture some educated guesses, and my best guess is that this was an orchestrated attack on the stock market – an attack that shaved 1,000 points off the Dow Jones industrial average in a few minutes, and caused some stocks worth nearly $50 to drop to a penny in matter of seconds. I have been trying hard, but I simply cannot imagine any natural confluence of events that would cause this. I can, however, think of a number of criminal market manipulators who have caused similar, though less dramatic, events in the past. And I know that these manipulators would get a kick out of triggering a full-blown market cataclysm. They wouldn’t just get a thrill — they would also make a boatload of money.

At any rate, this much is clear: our financial system is seriously broken and the nation is vulnerable. If the May 6 “anomaly” was not an attack, there is every reason to believe that something worse can happen. It can happen because the Securities and Exchange Commission has done nothing to prevent it from happening. Despite overwhelming evidence that market manipulators contributed to the financial turmoil of 2008, not a single criminal has been apprehended. And not only does the SEC let the miscreants run loose, but it also stubbornly refuses to close gaping loopholes that enable market manipulation to occur.

To its immense peril, much of America seems disinclined to discuss market manipulation. I don’t know if it is indolence, incuriosity, or simple complacency, but the discourse in this country stands in stark contrast to the one taking place in Europe, where politicians and the mass media have declared unequivocally that the markets are under attack, with consequences that could be quite dire, to say the least.

According to BaFin, the German financial regulator, “massive” illegal short selling attacks have led to excessive price movements that “could endanger the stability of the entire financial system.” After beholding the drama in the American markets on May 6, and seeing its own market tumble precipitously, the German government finally took on the manipulators, banning naked short selling of stock in its largest financial institutions and restricting the trading of naked credit default swaps, which are often deployed in manipulative attacks.

Not all of the discourse in Europe has been helpful, however. German Chancellor Angela Merkel declared that “speculators are our enemies,” confusing law-abiding traders who passively speculate on price movements with criminal manipulators who actively seek to inflict harm on the markets. Chancellor Merkel only made things worse when she said that this is a “battle of the politicians against the markets” – a proclamation that reinforced the notion that Europe’s politicians harbor a disdain for the free market system. Our enemies are criminals, not market freedoms.

The European response has also been characterized by a certain degree of ineptitude. Germany had already banned naked short selling in 2008, and foolishly lifted the ban last January. Having given the market bullies the green light to attack, Germany’s politicians now appear like the playground dweebs, panicky and weak, hurling nothing more than small stones. It is presumed that the naked short selling and other manipulation will simply move to exchanges in London, where officialdom seems less inclined to fight. But Germany’s ban on naked short selling — though too little, too late — is perfectly sensible.

Which makes the American media coverage all the more inexplicable. The Wall Street Journal, which has for many years seemed incapable of even uttering the words “market manipulation”, reported that the German ban on naked short selling “sparked uneasiness” and actually caused markets to fall further. Sparked uneasiness? Only criminals could possibly be “uneasy” about a policy designed to prevent a crime. Perhaps some “uneasy” criminals are members of the hedge fund lobby, whose talking points tend to find their way into stories published by The Wall Street Journal.

As for the notion that a ban on naked short selling would cause markets to lose value – well, we’ve heard something similar before. It was back in 2008, when the SEC issued an emergency order banning naked short selling of stock in 19 big financial companies, only to have the hedge fund lobby (and The Wall Street Journal) holler that preventing crime would “reduce liquidity” and put downward pressure on markets.

This, of course, is precisely the opposite of what happened. While the emergency order was in place, the stock market surged. Then, on August 12, 2008, the SEC, for reasons that cannot be fathomed, lifted its emergency ban, allowing the manipulation to resume. The stock market duly tanked, and continued to spiral downwards until September, when market manipulators wiped out a large swathe of the American financial system.

It is not just me saying this. Respected economists, famous hedge fund managers, former government officials, and current U.S. Senators such as Ted Kaufman of Delaware have all studied the events of 2008, and the consensus is that illegal naked short selling and other forms of short-side manipulation contributed to the demise of Bear Stearns, Lehman Brothers, Washington Mutual, and countless smaller companies. In the months leading up to September 2008, criminal naked short sellers flooded the market with more than $8 billion worth of phantom stock every day.

As further evidence that The Wall Street Journal just doesn’t get it, consider that the newspaper reported this week that “under naked short selling, investors can sell securities before they have borrowed them. The practice is already banned in the U.S…” This, unfortunately, is patently false. Although the SEC took some half-hearted steps to prevent naked short selling in the aftermath of the 2008 carnage, it did not ban naked short selling outright — traders are still permitted to sell shares before they have borrowed them.

The SEC’s current rules state only that traders have to deliver stock within three days, or in some cases, six days after they have sold it. This means that market manipulators can flood the market with phantom stock for three to six days, inflicting serious damage on prices. When it comes time to deliver the stock they have sold, the manipulators buy stock (at the newly damaged price) on the open market and hand it over. Then they do it all over again – flooding the market with phantom stock for another three to six days.

In nearly every case, such naked short selling is designed to manipulate prices, which is blatantly illegal. But the SEC turns a blind eye to the manipulation so long as the manipulators deliver stock before the three or six-day deadline. In fact, the SEC often turns a blind eye even when the manipulators don’t deliver the stock. Every day, more than 100 million shares go undelivered before the anointed deadline, and that is in just one part of the system monitored by the Depository Trust and Clearing Corporation. Far more phantom stock is processed ex-clearing, and in other shadowy regions of the financial system.

The SEC would do well to investigate these shadowy regions in its attempt to identify the roots of the “freak accident” that took place on May 6. But, alas, the officials of that agency have been too busy picking buggers out of their noses. Ok, not just buggers – they also wrote a 100-plus page report on their investigation into the “market events” of May 6, and this report is filled with all sorts of statistics and enough head-in-the-clouds hypothesizing to bring a smile to the face of any university economist (or SEC report-writer) looking for a job at a market manipulating hedge fund.

What the report does not contain is the names of any culprits, or any evidence that the SEC is trying to identify specific culprits. The report does not even contain a plausible explanation for what happened. If the SEC were charged with writing a report on the causes of the New Orleans flood, it would provide a hundred pages telling us how many cubic meters of water there were, how many molecules of oxygen and hydrogen the water contained, and plenty of assurances that water is usually good for the health, but it would forget to mention hurricane Katrina and the broken levy.

Bottom line: the SEC’s report was designed to make it seem like the bureaucrats have been busy investigating, when in fact they have been counting beans and picking buggers out of their noses. Meanwhile, the madness of the market circus continues, and we look up at that teetering tent with great trepidation.

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Goldman’s gold has lost its luster

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Goldman’s gold has lost its luster


The most clichéd, yet satisfying, moment in any movie comes when the brutally bullying antagonist discovers he’s lost that which had empowered his abusive nature. Wait…I take that back. Seeing that fear in the bad guy’s eyes is the second most satisfying movie moment, the first being the inevitable administration of long-overdue justice that follows.

Though evidence has mounted for a while, today it became official: Goldman Sachs (NYSE:GS) is now on its own, as the guardian angel/demon that once enabled the firm’s assault on our capital markets has clearly severed that relationship. At least that’s the conclusion I draw from the news that Goldman was censured and fined by NYSE and the SEC for specific faults in “execution and clearing” (another way of saying “naked short selling”).

What changed? After all, Goldman is still rich, right?

Well…sort of. Goldman may be flush with cash, but with pressure mounting on politicians to reject any of it in the form of campaign contributions, suddenly that cash doesn’t spend nearly as well as it used to.  At the same time, it’s probably safe to assume Goldman’s allure as a future client has been severely degraded in the eyes of private sector career-minded regulators.

In other words, Goldman’s gold has lost its luster, and with it, the firm’s political ‘juice’. I can only imagine the look on their faces when Goldman brass first realized why their calls were not being returned: their power was gone. And folks with badges were knocking on the door.

Goldman’s role as a facilitator of illegal, short-side market manipulation will never come to symbolize its villainy in the mind of the public the way knowingly selling its clients garbage CDOs on behalf of John Paulson will. But that’s what makes this latest development even more significant: it suggests a sort of “piling on” mentality that was inconceivable just one month ago (keep in mind this is the company that, evidence suggests, successfully lobbied to have even legitimate short selling banned once the practice began to impact its share price). This, in turn, may be an inadvertent signal from regulatory “insiders” that Goldman’s prospects of emerging intact from this storm are slim.

Do not mistake the tone of this post for contentment, for this particular action doesn’t come close to addressing what I suspect is the true breadth and depth of Goldman’s role in short-side market manipulations. Indeed, the bulk of this particular complaint focuses on a few infractions observed over a few weeks in late 2008. Goldman, for its part, attributes the problem to an inconsequential bookkeeping error. If that’s true, a half-million dollar fine for an accounting mistake makes Goldman’s plight seem even more dire.

In the end, what’s most significant about this complaint is the insight it provides into how the system works when inappropriate influence ceases to be a factor in the regulatory process (something we’ve grown accustomed to not seeing): investigators investigate, infractions are cited, penalties applied, juice ignored.

I’m not convinced it’s within human nature to develop a financial markets regulatory paradigm able to consistently achieve this ideal (though I’m certain we can do better than what we’ve got). The alternative is to focus on the other side of the equation by limiting the capacity of any market participant to become so influential the rules cease to apply.

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Manipulating Gold and Silver: A Criminal Naked Short Position that Could Wreck the Economy

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Manipulating Gold and Silver: A Criminal Naked Short Position that Could Wreck the Economy


Everyone from U.S. Senators to prominent hedge fund managers say that criminal naked short sellers had a hand in the financial collapse of 2008, but the regulators aren’t listening. Not a single criminal has been prosecuted. Indeed, the regulators continue to allow the miscreants to manipulate the markets — not just the stock markets, but also the markets for corporate bonds, derivatives, U.S. Treasuries, and all manner of commodities – even when the regulators are provided with indisputable evidence of a massive crime in progress. They could easily fix the flaws in the settlement system that allow much of the manipulation to occur, but they refrain from doing so either because they are too captured by the miscreants or too cowed by the possible consequences of throwing the lights on what may be an enormous confidence game.

So I am inclined to say that it is hopeless. Everyone loves an optimist – but, yes, it is hopeless. We are like the audience in one of those cheesy horror flicks – yell and scream all you like, but the dumb blonde is still going to walk into that room and get hacked to pieces. Except that it is not a movie. It is real. And it’s not just the dumb blonde who is going to get slaughtered. It is all of us. It is our economy. It is our standard of living. It is our financial system – the lifeblood of the nation.

The latest case of regulatory indolence was recently exposed by Andrew Maguire, a successful metals trader and whistleblower who went to the Commodity Futures Trading Commission with data that strongly suggested that a small number of criminal short sellers had rigged the markets for silver and gold. Maguire not only provided the regulators with a Dummies’ guide to how the manipulation generally worked, but also warned them of a specific crime – a dramatic take-down of the gold and silver markets – that he said would occur at an exact time on a specific date in the near future. That is, Maguire told the regulators that a massive crime was about to happen, and the crime happened precisely as he predicted it would.

With Maguire’s warning, the regulators were able to watch a crime unfold, right before their eyes, in real time. Then the regulators thanked Maguire by saying, in essence, “you’re a nuisance, go away.” This is not just appalling, but scary, because the criminal activity that Maguire exposed is much bigger than the Madoff Ponzi scheme, and more likely to result in serious damage to the American economy. Indeed, there is a strong case to be made that our national security is at stake. As Maguire stated in a recent interview with King World radio, the manipulators have likely created a massive naked short position that can easily be exploited by foreign entities who might see financial or even political gain in eviscerating the dollar.

Maguire’s email exchange with the CFTC is remarkable reading. In one email he writes:

“Thought it may be helpful to your investigation if I gave you the heads up for a manipulative event scheduled for Friday, 5th Feb. The non-farm payrolls number will be announced at 8:30 ET. There will be one of two scenarios occurring, and both will result in silver (and gold) being taken down with a wave of short selling designed to take out obvious support levels and trip stops below. While I will no doubt be able to profit from this upcoming trade, it is an example of just how easy it is to manipulate a market if a concentrated position is allowed by a very small group of traders…I sent you a slide of a couple of past examples of just how this will play out.

“Scenario 1. The news is bad (employment is worse). This will have a bullish effect on gold and silver as the U.S. dollar weakens and the precious metals draw bids, spiking them higher. This will be sold into within a very short time (1-5 mins) with thousands of new short contracts being added, overcoming any new bids and spiking the precious metals down hard, targeting key technical support levels.

“Scenario 2. The news is good (employment is better than expected). This will result in a massive short position being instigated almost immediately with no move up. This will not initially be liquidation of long positions but will result in stops being triggered, again targeting key support levels.

“Both scenarios will spell an attempt by the two main short holders to illegally drive the market down and reap very large profits.”

It would be hard to get more specific than that. As Maguire says in the same email: “The question I would expect you might ask is: Who is behind the sudden selling and is it the entity/entities holding a concentrated position? How is it possible for me to know what will occur days before it will happen? Only if a market is manipulated could this possibly occur.”

The CFTC had previously had the courtesy to call Maguire and listen to his concerns, but by the time Maguire sent the message laying out the crime, the CFTC had stopped returning his emails. The regulator showed no real interest, and let the crime happen. After the crime occurred, Maguire wrote another email:

“A final email to confirm that the silver manipulation was a great success and played out EXACTLY to plan as predicted. How would this be possible if the silver market was not in the full control of the parties we discussed in our phone interview?…I hope you took note of how and who added the short sales (I certainly have a copy)…Surely some discussions should have taken place between the parties by now. Obviously they feel they can act with impunity…”

After that, Maguire sent several more emails detailing manipulation of the gold and silver markets. He received no replies. So he wrote a final email, providing still more evidence in support of his case and stating: “I have honored my commitment to assist you and keep any information we discuss private, however if you are going to ignore my information I will deem that commitment to have expired.”

To that email, a CFTC official finally replied: “I have received and reviewed your email communications. Thank you so very much for your observations.” That was it. Thanks a lot and goodbye. No follow up questions. No acknowledgement that a crime had occurred. No apparent interest whatsoever.

Maguire was understandably peeved. As he said in his radio interview, “I kept a live commentary going on that entire scenario. How they were going to flush it down below 15, how it then went down below 15, and how then they were putting big block offers hitting all the bids to stop it getting back through the technical level of 15 so as not to trigger covering by the shorts and inviting longs to get long again. To me, you don’t get any better than that, how could anyone predict that unless they knew what was going to happen, not just saying it’s going to move in one direction, but it’s going to move in one direction then another direction – all in a matter of minutes.”

Not long after the massive crime took place, the CFTC held a public hearing on manipulation of the metals markets. Maguire was specifically barred from participating. He told King World radio that he believed one CFTC official, Bart Chilton, wanted him to attend the hearing, but Chilton is a lone “Elliot Ness” crime fighter working in an agency that is dominated by the feckless and the corrupt. “There are a lot of people at CFTC wanting to look the other way,” Maguire said.

However, the hearing (a partial transcript and video of which can be found at the excellent financial blog Zero Hedge) did yield an interesting piece of information. In the course of answering an unrelated question, Jeffrey Christian, a former Goldman Sachs staffer who is now the head of a metals trading firm called CPM Group, stated that “precious metals…trade in the multiples of a hundred times the underlying physical…” (the italics belong to me and a lot of other people whose eyes popped out of their heads when they heard this).

What Christian was saying is that every ounce of gold or silver is being sold 100 times. This would not be problematic if we were speaking of some dusty market in Central Asia with rows of traders’ stalls wherein some commodity (such as gold, silver, radios or Kalashnikovs) were being sold and resold in rapid-fire succession: there, our sensibilities about scarcity, value, and price discovery would actually grip reality. Here, however, we are talking of markets where the distinction between reality and representation has become as blurry as the last round of a game of musical chairs, enabling some sellers to offload  paper IOUs promising eventual delivery of silver and gold – promises that would be impossible to keep if some small segment of the buyers were to demand delivery of the real thing.

This is quite similar to the naked short selling of stocks, where traders sell stock that does not exist, but enter IOUs in their computers, and then “fail to deliver” what they have promised. It is hard to distinguish this from fraud (notwithstanding the Efficient Market Hypothesis of financial theory, which maintains, essentially, that it shouldn’t matter).  Christian, the fellow who inadvertently revealed the massive naked short positions in gold and silver, said that he didn’t see this as a problem because “there are any number of mechanisms for cash settlement,” and “almost all of these short positions are in fact hedges…”

This is slightly absurd. Later in his testimony, Christian himself said that it was “exactly right” to say that the hedges are nothing more than hedges of “paper on paper” – a particular sort of merry-go-around where one IOU is settled by another IOU, with these IOUs outnumbering real gold and silver by multiples of a hundred times.

As for the notion that cash settlement solves the problem, Maguire noted in his radio interview that cash settlement “is the very definition of default. If somebody wants to buy gold and silver and instead they’re given cash, that is a default.” In addition, “there are people who will not want cash – Chinese, Vietnamese, Russians – people looking for the metal, they will want to take it, and that will cause a default on the Comex [the metals exchange] because the Comex will be drained…that was the word that was used by several people making testimony [at the CFTC meeting], that the Comex would be drained…”

Maguire added: “What’s going to happen, if you’re an Asian trader, or a non-Western trader, who has no loyalty, or doesn’t care about homeland security or anything else, who says, now wait a minute, if I can establish in my mind that there is 100 ounces of paper gold, paper silver for example, for each ounce of real silver, than I have a naked short situation here that I can squeeze and they can go on the spot market which is basically a foreign exchange transaction, short dollar, long silver to any amount they want – billions, trillions — whatever they want, and they can take this market, squeeze this market, and blow it up…”

In other words, the problem isn’t just that criminal naked short sellers manipulate the metals market downwards. It is that they have created a condition where a foreign entity can merely demand delivery of real metal to induce a massive “squeeze” that sends the price of metals skyrocketing, putting huge downward pressure on the dollar. Meanwhile, says Maguire, with prices rising, “for 100 customers who show up there is only one guy who is going to get his gold or silver and there’s 99 who will be disappointed, so without any new money coming into the market, just asking for that gold and silver will create a default.”

“There are no prisoners taken in this kind of environment,” Maguire added. “All they need to establish is that it is naked, and by the admission of [former Goldman staffer] Christian at the meeting…we have a definition of physical actually being paper…They get that in their heads and its locked, it’s a done deal, then we don’t have to wait…there is a profit to be made here, and there is nothing [anybody] can do about it because it’s a foreign exchange transaction, and there are no limits on a foreign exchange transaction, and obviously foreign exchange transactions are coming to light, there [is talk] of manipulation…”

Indeed, Maguire says that he has received phone calls from wealthy individuals in Asia looking for the go ahead to exploit the naked short position. “The only question they have in their mind is can we establish that this is a naked short position, that’s the only thing they had to clarify, it’s become clear, it is now clear [that the naked short position is massive], and no doubt they do their own due diligence, but basically [the naked short position] has been admitted at the only metals meeting [the CFTC hearing] that we’ve ever had…”

Maguire says that the naked short selling scam is in the trillions of dollars, making it by far the biggest financial fraud in history. He calls it “financial terrorism” and accuses the naked short sellers of “treason” for putting national security at risk. It might be hard to believe that foreign entities are plotting to crush the U.S. economy, and perhaps they are not, but there is no doubt that loopholes in the clearing and settlement system – not just for metals, but also stocks, bonds, Treasuries, and derivatives – could quite easily be exploited by any foreign entity desiring to do harm to the U.S. economy. The only dispute is whether such a desire exists.

Maguire and Adrian Douglas of GATA, an organization that lobbies against manipulation of the metals market, took their concerns to the mainstream media and had a number interviews scheduled. However, every one of those interviews were suddenly cancelled. This is not surprising. The mainstream media has consistently shied away from stories about illegal naked short selling and market manipulation, partly because the media outlets are captured by the powers that be on Wall Street, and partly because investigative journalism is now viewed as an anachronism – a time-consuming effort that might have been suited to Woodward and Bernstein back in the 70s, but not to the downsized news rooms tasked with churning out tepid and meaningless “he said, she said” mimeographs for a population of readers who (so it is said) want their “news” fast, and don’t care a whit for in-depth reporting.

Meanwhile, just as the stock manipulators have engaged in a coordinated effort – deploying threats, ruthless smear campaigns, and slick lobbying – to keep their crimes out of the spotlight, so too will the gold and silver manipulators. Adrian Douglas of GATA notes that at the precise moment that his GATA colleague Bill Murphy began to speak at the CFTC meeting, the video camera recording the event experienced “technical problems” – problems that were fixed at the precise moment when Murphy stopped talking. Douglas concedes that this might have been a coincidence, but when this sort of thing happens often enough, a little healthy paranoia is probably a good thing. That said, everyone loves an optimist, so I’ll say the camera really went kaput.

But…ack…another coincidence: The day after Maguire gave his radio interview, he was the victim of a hit and run collision. Somebody sped out of a side alley at top speed, smashed into Maguire’s car, and then tried to escape. A high-speed chase ensued, and the perpetrator was caught by police. The British press has reported that this might have been an assassination attempt, or a threat, but as yet there has been no word from the police. Maguire was injured, but not seriously. Let’s be optimistic, and say this was an accident – assassinations and threats only happen in the movies.

But…ack…another coincidence: Shortly before somebody crashed into Maguire’s car, the CFTC caught on fire. This fire happened to be located in the one small basement room where gold and silver trading data and other pertinent documents were kept. The CFTC claims that its investigation of metals manipulation, for what it was, did not burn.  So maybe it was just an accident. Maybe some eager CFTC regulators were down there smoking cigarettes. Maybe it was stress. Maybe they’ll keep investigating. Maybe they’ll bust the criminals.

Maybe, just maybe…yes, everyone loves an optimist, so let me make this clear – the horror show that is our regulatory system is going to have a happy ending. There will be no massacre. The financial system will be just fine…really…maybe… or maybe not.

* * * * * * * *

Update: Another coincidence: GATA reported recently that there has been an attack on the King World website — the website that contains the radio interview of Maguire and his emails to the CFTC. This was an apparent attempt to shut down the website and prevent the scandal from being exposed further. The Internet company that hosts the King World website reported to King World the following: Your hosting account is the target of a distributed denial of service attack…Computers were attacking your account.”

Steps were taken to protect the website, which is once again up and running.

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How “Activist Investors” David Einhorn and Dan Loeb Brought Their Special Talents to Bear On New Century Financial

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How “Activist Investors” David Einhorn and Dan Loeb Brought Their Special Talents to Bear On New Century Financial


You don’t hear much about it, but the March 2007 bankruptcy of a company called New Century Financial was arguably one of the most important events leading up to the financial crisis that nearly caused a second Great Depression.

It was the demise of New Century, then the nation’s second largest mortgage lender, that triggered the collapse of the market for collateralized debt obligations. And it was the collapse in the value of collateralized debt obligations (a majority of which contained New Century mortgages) that hobbled a number of big financial firms. Once hobbled, the likes of Bear Stearns and Lehman Brothers were ripe targets for unscrupulous hedge fund managers who amplified their problems by spreading exaggerated rumors while bombarding them with illegal naked short selling.

So we must ask: Why did New Century Financial go bankrupt? Did the company die of natural causes, or did miscreants orchestrate its destruction? And if miscreants destroyed New Century, did they do so planning to profit from the broader economic calamities that were certain to result from its collapse?

I do not yet have definitive answers to these questions. But interviews with sources close to New Century and a review of documents, including the oddly biased 500-page New Century bankruptcy report, make it clear that at least two hedge fund managers — David Einhorn of Greenlight Capital and Dan Loeb of Third Point Capital — played a significant role in creating the conditions that made New Century vulnerable to catastrophe. And they did so while building massive short positions in Bear Stearns, Lehman Brothers, MBIA and other companies that were likely to be seriously damaged if New Century were to go bankrupt.

Einhorn was a major investor in New Century and took a seat on the company’s board in early 2006. He has gone to lengths to suggest that he lost a lot of money from his investment. But given that his activities on the board were so contrary to New Century’s best interests, and given that he was otherwise so heavily invested in the collapse of the mortgage markets, it is reasonable to ask if he was  in fact short selling New Century’s stock, or buying credit default swaps that would pay out in the event of the company’s bankruptcy.

Moreover, some banks, most notably Goldman Sachs, created and sold collateralized debt obligations containing New Century mortgages while simultaneously betting that the CDOs would plummet in value. Multiple media stories (such as this one in “Investment News”) have speculated that Goldman Sachs actually designed these CDOs in such a way that they would be certain to implode, delivering large profits to Goldman and preferred hedge fund clients. Those CDO could not have been created without Einhorn and his allies inside New Century delivering the mortgages that went into them. And there is no doubt that Goldman Sachs delivered the knock-out punch that put New Century out of business, ensuring that the CDOs would, in fact, implode. This constellation of facts may be coincidental, of course. Or not. This essay lays them out, and leaves it to the reader to decide.

New Century’s problems began in December 2005, when board member Richard Zona drafted a letter in which he threatened to resign if senior executives did not agree to sell a greater percentage of the mortgage loans on its books to various banks, such as Goldman Sachs. In his letter, Zona explicitly stated that he was making this demand in league with David Einhorn and Dan Loeb.

Unfortunately, according to the bankruptcy report, New Century’s executives never saw that letter. Zona stashed the draft letter on his computer and instead submitted a letter making a similar demand, but omitting all mention of Einhorn and Loeb. In all likelihood, Zona changed his letter because he knew that New Century’s executives had good reason to doubt whether Einhorn and Loeb, who had recently reported large shareholdings in New Century, were acting in the company’s best interests.

As Deep Capture has thoroughly documented, Einhorn and Loeb are part of a network of hedge fund managers and criminals who use a variety of dubious tactics to destroy, seize, and/or loot public companies for profit. It is not unusual for money managers in this network to appear as long investors in the companies they are attacking, and sometimes they seek to obtain a seat on a target company’s board in order to be better placed to run the company into the ground for their own private profit.

Essentially everyone  in this network – including Einhorn and Loeb — are connected in important ways to Michael Milken, the infamous criminal who specialized in loading companies with debt, looting them, and then profiting still more from their inevitable bankruptcies.

Einhorn spent his early career working for Gary Siegler, who was formerly the top partner in the investment firm run by Carl Icahn, a corporate raider and ne’er-do-well who owes his fortune to the junk bond finance that he received from Michael Milken in the 1980s. Icahn has various other seamy connections, and has employed people with ties to the Mafia (see “The Story of Dendreon” for details).

Prior to his attacks on Lehman Brothers and Bear Stearns, Einhorn was best known for his eminently dishonest attempt to demolish a financial company called Allied Capital. The attack on Allied began in 2002 at a hedge fund luncheon. Halfway through that luncheon, Einhorn stood up and declared that “Allied Capital is going to zero!” Sitting next to Einhorn at that luncheon was Carl Icahn.

Some weeks before the luncheon, Michael Milken had appeared in the offices of a top Allied Capital executive. “You know,” Milken told the executive, “I already am quite a large shareholder of your stock – but my name will never show up on any list you’ll see.” This may have been a reference to a practice called “parking stock” (owning stock but “parking” it in the accounts of friends with whom one has made under-the-table arrangements), a practice that figured in the high-count indictment that sent Milken to prison in the 1980s. Milken appeared to the Allied executives to be threatening Allied and fishing for information, paving the way for Einhorn’s more public vitriol.

The Allied story is outside the remit of this article, but it is enough to know that Einhorn proceeded to accuse the company of massive fraud and of failing to account for its loans at “fair value”. With some minor exceptions, none of Einhorn’s allegations of fraud were ever proven to have merit. And it was clear from the get-go that Einhorn’s notion of “fair value” had nothing to do with “fair” (as in “what the market was paying”). Rather, “fair value” was an arbitrary metric that could be taken to mean whatever Einhorn said the value of the loans should be. This is important because Einhorn’s outlandish “fair value” calculations featured prominently in his attacks on Lehman Brothers and Bear Stearns. In addition, as we will see, arbitrary and over-the-top “fair value” assumptions about mortgage loans featured in the bankruptcy of New Century.

As for Loeb, he is a long-time Einhorn accomplice who worked side-by-side with many of Milken’s former traders at Jeffries & Co. He got his first big break by obtaining preferential access to certificates of beneficiary interest that had been issued by Milken’s bankrupt operation at Drexel, Burnham, Lambert. Loeb seems to take a certain pride in his bad boy image, and has distinguished himself in all manner of chicanery, such as hiring a cast of convicted criminals and scofflaws to spread false information about public companies on the Internet. (Please search Deep Capture’s archives; we have compiled substantial evidence implicating Loeb in various misdeeds).

Given their backgrounds, there was every reason to doubt the merits of the demand that Einhorn and Loeb had articulated through New Century board member Richard Zona. Indeed, the majority of New Century’s top managers (the company had three CEOs at the time) were opposed to the Einhorn-Loeb demand to sell off all of New Century’s mortgage loans, and for good reason. Selling off all the loans would make the company entirely dependent on the banks, such as Goldman Sachs, that bought the loans. If, for some reason, the banks were to demand that New Century buy back its loans, the company would go bankrupt.

Shortly before Zona submitted his letter demanding that New Century sell off its loans, one of the company’s co-founders, Patrick Flanagan, said by sources to be an ally of Einhorn and Loeb, left the company. After a brief time, Flanagan went to work for hedge fund Cerberus Capital. Cerberus Capital was run by Ezra Merkin, famous for being one of the biggest feeders to the Bernard Madoff fraud, and Stephen Feinberg, who was formerly a top employee of Michael Milken. Cerberus is also the proud owner of an Austrian bank called Bawag, which was at the center of a scandal that wiped out Refco, once one of the most abusive naked short selling outfits on Wall Street. (Refco’s former CEO, Phillip Bennett, and executive Santo Maggio have been convicted and are serving prison sentences, while one of its naked short selling clients, Thomas Badian, is still living in Austria as a fugitive from US law)..

Sources tell Deep Capture that Cerberus made massive profits from the demise of New Century, and if so, it is likely that Flanagan had a hand in this. It is perhaps also no coincidence that Cerberus now also employs Thomas Marano, the former head of mortgage trading at Bear Stearns, and Brendan Garvey, the former head of mortgage trading at Lehman Brothers. Marano and Garvey helped sink their companies by buying New Century’s repackaged loans from Goldman Sachs and a few other banks.

While still at Bear Stearns, Marano seemed almost eager to see the bank collapse. At one point he called Roddy Boyd, a reporter with close connections to the Einhorn-Milken nexus of hedge funds, to leak an  account of  Bear Stearns’ problems, though as we have documented, that leak seems to have been exagerrated when Marano made it.  One has to wonder why he was leaking about his employer, and also wonder at the coincidence of the fact that he was doing this while preparing to go to work for a large hedge fund that was betting against that employer.

After Flanagan left New Century, Zona organized a highly unusual “off site” board meeting. The directors at this meeting (which excluded all opposing viewpoints) decided to implement a radical change to New Century’s management structure. Among other changes, CEOs Ed Gotchall and Bob Cole were removed from their posts, and the company was put under the sole leadership of the third CEO, Brad Morrice.

Einhorn and Loeb orchestrated this change. Sources say the two hedge fund managers had considerable input at the “off site” board meeting even though Einhorn was not yet a director. And Zona stated in the initial draft of his letter (the one that stated that he was making his demands in alliance with Einhorn and Loeb) that Gotschall was “immature and disruptive,” while Cole was “not fully engaged” – because they opposed the demand to sell off the loans.

In Morrice, Einhorn and Loeb had a CEO whom they could work with. Prior to entering the mortgage business, Morrice had been the founding partner, along with Richard Purtrich, of law firm King, Purtrich & Morrice. In 2008, Purtrich was sentenced to prison for funneling illegal kickback payments from a crooked law firm called Milberg Weiss. Milberg’s top partners, Bill Lerach and Melvyn Weiss, were also indicted in the scheme.

According to the DOJ, the kickbacks were paid to plaintiffs who filed bogus class action lawsuits against public companies “anticipating that their stock prices would decline.” Deep Capture has published extensive evidence showing that Milberg prepared those bogus lawsuits in cahoots with hedge funds in David Einhorn’s network. The hedge funds, of course, profited from short selling the targeted companies, and it is indeed likely that the bribed plaintiffs were  “anticipating that the stock prices would decline” because they knew that the hedge funds were going to attack the companies via illegal naked short selling and other tactics.

So it is fair to say that Morrice (whose former partner was funneling kickbacks to plaintiffs who were conspiring  with Einhorn’s hedge fund network to attack public companies) was intimately familiar with the tactics of Einhorn’s hedge fund network.

In any case, soon after Morrice took the helm at New Century, he quickly set about meeting Einhorn’s demand to sell off New Century’s mortgage loans. Whole loan sales comprised less than 70% of New Century’s secondary market transactions in 2005. By September of 2006, whole loan sales comprised a full 95% of New Century’s mortgage lending. As a result, whereas in all of 2005, New Century had sold a mere $256 million worth of loans at a discount, during the first nine months of 2006, New Century sold $916 million worth of loans at a discount.

Much of the income from those loan sales was not used to build New Century’s liquidity. Rather, at Einhorn’s suggestion, it was used to buy back stock and pay out massive dividends to shareholders like Einhorn. At the end of 2005, New Century was paying $1.65 a share in dividends. In January 2007, two months before New Century’s bankruptcy, the company was paying dividends of $1.90 a share. If we accept the proposition that Einhorn might have profited from New Century’s collapse, it is clear that he planned first to profit from his long position. This is similar to a classic “pump and dump” scam, except that the strategy is to pump and destroy.

In March 2006, with the support of Morrice and Zona, Einhorn obtained a seat on New Century’s board of directors. At this point, according to one member of senior management, the “activist investors” on the board did become extremely “active,” agitating for more loan sales while pushing for changes in  New Century’s accounting. Many of these changes were based on the premise that New Century was not accurately recording the “fair value” of  loans that it had to repurchase from Goldman Sachs and other buyers.

Meanwhile, Einhorn convinced the board to create a finance committee and presented himself as the man to run it. According to the bankruptcy report, this committee met “unusually often,” and according to sources, its principal activity was to handle New Century’s relationships with Goldman Sachs and the 13 other banks that were buying New Century’s mortgage loans. In June 2006, at Einhorn’s behest, New Century hired a woman named Lenice Johnson to serve as chief credit officer, responsible for managing those same relationships.

As we shall see, two of those relationships – especially the one with Goldman Sachs – would later  mysteriously deteriorate, leading to New Century’s demise. And soon after New Century went bankrupt, Johnson went to work at the above-mentioned Cerberus Capital (the Milken-crony hedge fund).  You may remember that Cerberus Capital was mentioned above because  Thomas Marano the head of Bear Stearns’ mortgage trading desk, sunk Bear Stearns by buying Goldman-packaged new Century debt, then leaked information about Bear Stearns’ financial condition to New York Post reporter Roddy Boyd (Boyd is Deep Capture All Star; his dishonesty has been fodder for many of our stories), a few weeks before joining the hedge fund – Cerberus Capital — that was betting against Bear Stearns. In sum, then: Cerberus Capital bet that New Century would face a credit crunch and bet against Bear Stearns for buying New Century’s debt, then hired the New Century chief credit officer and the head of the Bear Sterns desk that was making the bad bets.

As Einhorn and Morrice eagerly sold off all of New Century’s loans, other board members became alarmed. In August 2006, board member Fred Forster wrote a letter to Einhorn stating: “Whatever we do, we need to be very comfortable that less capital/liquidity does not in any material way threaten the very existence or viability of New Century.”

It needs to be stressed that at this point New Century was seemingly in good health. Defaults on its mortgages had increased only slightly, and in the third quarter of 2006, the company recorded a profit of more than $200 million. The problem was that nearly 100 percent of the mortgages it wrote were now being sold to Goldman Sachs and 13 other banks. With no mortgages on its books, the company depended entirely on the banks for income. If just one of those banks were to pull the plug, the company would go bankrupt. And as we know, one of those banks, Goldman Sachs, was placing large short bets on CDO’s containing New Century mortgages, meaning that Goldman had a motivation to see New Century fail. In other words, New Century climbed into Goldman’s life support chamber while Goldman kept its hand on the plug and bought insurance that would pay out in the event of New Century’s death.

Of course, as we know, Goldman was also selling CDOs that had been stuffed with New Century’s subprime mortgages. No doubt, Einhorn and his allies at New Century aided the proliferation of these CDOs by selling Goldman ever-larger numbers of subprime mortgages. Again, the problem was not that the subprime mortgages had high default rates. The mortgages were always expected to have high default rates. That’s why they were called “subprime.” The problem was that Goldman (perhaps with encouragement from their key client Einhorn) was selling the subprime mortgages in essentially fraudulent CDOs that disguised the subprime mortgages as AAA rated debt.

It was just a matter of time before the markets would discover the true nature of these CDOs. That, no doubt, is one reason why Goldman was simultaneously shorting them. All the better for Goldman if New Century were to collapse before the CDO scam was discovered. According to a McClatchy news report, when New Century did collapse, Goldman was prepared with shell companies in the Cayman Islands through which it could offload the last of its New Century debt to unwitting foreign investors.

Supposing that miscreants did want New Century to go bankrupt, all that was required was some precipitating event – an event that would allow one of the 14 banks (say, Goldman Sachs) to force New Century to repurchase its mortgage loans under the terms of its contractual repurchase agreement.

As it happened, the foundations for that precipitating event were laid in November 2006, when New Century demoted its chief financial officer, Patti Dodge, and hired a man named Taj Bindra to take her place. As Morrice, the New Century CEO, told the bankruptcy examiner, Zona and Einhorn “had expressed doubts about Dodge’s capabilities and competence to be the company’s CFO,” and sources tell Deep Capture that Bindra was hired at Einhorn’s behest.

Prior to joining New Century, Bindra had been the vice president of mortgage banking at Washington Mutual. A lawsuit filed by a consortium of respected insurance companies that were investors in Washington Mutual alleges that JP Morgan conspired with “investors” (read: “short sellers”) to drive down Washington Mutual’s share price and manufacture falsehoods about its financial health so that JP Morgan could take the company over at a substantial discount. As part of this scheme, the lawsuit alleges, JP Morgan “deceptively gained access to Washington Mutual’s confidential financial records through the use of ‘plants’ and ‘moles’ engaged in corporate espionage.” The lawsuit alleges that one of the “moles” was … Taj Bindra. It is this same Taj Bindra who then went on to bigger things as CFO of New Century Financial.

Whether or not you believe that Bindra was part of a conspiracy to take down Washington Mutual, it is clear that his actions as CFO of New Century Financial were strange. Understanding why, however, requires delving into a bit of accounting arcara.

According to one source, Bindra had been CFO for “no more than two days” before he began asking questions about New Century’s accounting for mortgage loans that the company had so far repurchased from Goldman Sachs and the 13 other buyers. Specifically, Bindra asked why New Century did not include so-called “income severity” (i.e. a mark down of the value of repurchased loans to reflect their actual resale value) in its reserve calculation.

Normally, one wants reserves in any financial company to properly estimate the risks of certain events, and their potential costs. However, Bindra’s  question was somewhat esoteric (especially for  a CFO who had only been at New Century for two days) because it referred specifically to an obscure change in New Century’s accounting that had been made in the second quarter of 2006. That change was as follows: instead of recording the mark-down in its reserves, it recorded it in “loans held for sale.”  This does not mean that New Century had stopped including income severity in its calculations, but rather, had  moved it to another (and equally or more visible) part of its balance sheet.  The books continued to balance (that’s why they call it a “balance sheet”) and, accounting experts tell Deep Capture, the change had absolutely no effect on New Century’s  bottom line, nor was it any less transparent. Multiple New Century executives explained this to Bindra. In addition, KPMG, New Century’s accountants, confirmed to Bindra that the change did not affect earnings.

But Bindra persisted. And, according to the bankruptcy report, “such inquiries by Bindra led in relatively short order to the discovery of material accounting errors.”  Those “material accounting errors” were none other than the obscure change in accounting for income severity – i.e. the change that had no effect on New Century’s earnings. By remarkable coincidence, just as Bindra discovered this supposed “error” in December 2006 (which was long before the “error” was mentioned in any other public forum), the Center for Financial Research and Analysis, an outfit known to cater to short sellers, published a report that alluded to this very same “error.”

When Bindra took this supposed “error” to the board, there was much confusion among most of the directors. But Einhorn and Zona insisted adamantly that New Century would have to restate its earnings. This was strange not only because the change in how the company recorded income severity had no material effect on earnings, but also because Einhorn had eagerly signed off on the change in the first place. In fact, the change had been  one of the board’s first initiatives after Einhorn took over the finance committee. Given this, it certainly appears possible that Einhorn  initiated the accounting change so that his hand-picked CFO would have some “irregularity” to point to a few months later.

In any case, on February 7, 2007, New Century announced that it had violated accounting rules and would have to restate earnings for the previous year. Oddly, New Century never indicated by how much it would have to restate earnings. It simply said that it would restate. Given that the “violation” discovered by Bindra had no effect on earnings, it makes sense that the company would not provide a figure. That is to say, the figure could not be provided because, as far as anyone at New Century knew at the time, the figure was zero.  But this “restatement” announcement was nonetheless catastrophic for New Century, and the beginning of the end for the stability of the American financial system.

It was catastrophic because Goldman Sachs and the 13 other banks that were buying New Century’s mortgage loans had small print in their contracts that allowed them to cut off finance and force New Century to buy back its loans if New Century were to restate earnings. Indeed, a restatement was one of the only events that would allow the banks to force New Century to repurchase all of its loans.

Still, nobody actually expected any bank to act on this small print.  Presumably it would be mutually assured destruction, with New Century going bankrupt and the banks losing a fortune in the market for CDOs. Several weeks after the earnings restatement, Citigroup made a large investment in New Century, obviously reckoning that the fundamentals of the company were just fine.

But as we know, Goldman Sachs was impervious to mutually assured destruction because it had been short selling the CDOs all along. And sure enough, on March 7, 2007, Goldman, acting on that small print in its contract, sent a non-public letter demanding that New Century repurchase every single one of its Goldman-financed loans. The next day, IXIS Real Estate Capital, then a subsidiary of the French bank Natixis, sent New Century a similar letter. David Einhorn had recently become a major investor in Natixis and had been threatening to topple its management, but that is no doubt another coincidence.

Certainly not a coincidence is the fact that a massive illegal naked short selling attack on New Century began just before Goldman Sachs sent its letter. SEC data shows that there were “failures to deliver” of more than 4 million New Century shares on March 8, 2007. Since failures to deliver occur three days after the selling date, those 4 million phantom shares must have been sold by March 6, one day before Goldman sent the letter. It appears that somebody knew what Goldman had in store for New Century.

An independent company that tracks the trading of hedge funds reports that the biggest traders in New Century stock at this time were SAC Capital, run by Steve Cohen, who was once investigated for trading on inside information provided by Michael Milken’s shop at Drexel Burnham, and none other than Dan Loeb, who was Einhorn’s early ally in the ultimately successful effort to force New Century to sell off all its loans. We do not know for certain that those trades were short sales because the SEC does not require hedge funds to report their short positions (on the grounds that it might reveal their “proprietary trading strategies” which  are, in some cases, flagrantly illegal), but it would be unlike Cohen and Loeb to invest in a company that was about to be wrecked by Goldman Sachs.

In the days after Goldman and IXIS cut off credit, New Century’s remaining bankers panicked. With Goldman pulling out and naked short sellers on the rampage, it was clear that New Century’s days were numbered. The other bankers pulled the plug and within a matter of weeks, New Century, a company that had reported a strong profit a few months before, declared bankruptcy. The news of the bankruptcy immediately crashed the CDO market (the market actually began to sink around the time Goldman sent New Century its letter, but it went completely under on the news of the bankruptcy). This set off shockwaves that ultimately collapsed the American economy. Meanwhile, of course, Goldman made a handsome profit, having bet that all this was going to happen – that is, it bet that the instruments with which it was flooding the US financfial system would turn toxic.

As we also know, Einhorn also earned a tidy sum — from his short sales of MBIA, which insured the CDOs, and later from his short selling of Bear Stearns and Lehman Brothers, which had bought the CDOs. Did Einhorn or others in his network profit more directly from the collapse and naked short selling of New Century? That is for the SEC to decide.

But, of course, the SEC is unlikely to look into this. Instead, it has charged New Century’s former CFO, Patti Dodge, and two other New Century executives for violating accounting rules.

Yet to this date, no reputable independent body has provided evidence that the change in accounting that Bindra “discovered” in December 2006 actually affected earnings. And it is that change that prompted the disastrous announcement two months later that New Century was going to restate. KPMG, New Century’s accounting firm, was never consulted about the “restatement” and was fired before it had a chance to object. The decision to announce this restatement (and to not specify by how much the restatement would affect earnings) seems to have been made entirely by Bindra, the CFO, and one of Bindra’s minions, with the encouragement of David Einhorn and his ally Richard Zona.

In prosecuting Dodge and her colleagues for accounting violations, the SEC seems to have taken its cues from the bankruptcy examiners’ report, which goes to lengths to paint Dodge and other New Century executives (namely, those who were not allied with David Einhorn) as criminals. But strangely, while the bankruptcy examiner insists that there were all manner of misdeeds, it nonetheless admits that it is possible that no actual accounting rules were violated.

Indeed, the bankruptcy report is convoluted  beyond belief, and to this eye, biased beyond explanation. The examiner who authored this report stated that he “found no persuasive evidence” that New Century had deliberately inflated its repurchase reserve calculation. He notes that the all-important income severity component was indeed recorded in “loans held for sale” (and therefore had no effect on earnings). But he nonetheless suggests that earnings were inflated, noting that the “elimination of Inventory Severity in the LOCOM valuation account increased earnings by approximately 23.4 million” in the second quarter.

This is a actually a neat trick. The examiner is not stating here that income severity wasn’t recorded accurately. He is saying that it wasn’t recorded in the “LOCOM valuation” – i.e. at “fair value.” As I have mentioned, notions of “fair value” are often arbitrary. Indeed, from the report itself, it would appear that the examiner  pulled that $23.4 million figure out of thin air. The tactic seems to be to point to a change in accounting (one that had no effect on earnings) and suggest that this change did inflate earnings by alluding to something altogether unrelated – i.e. random assumptions about fair value.

That is, the argument (which, incidentally, is the same argument that was heard from Einhorn at New Century board meetings) seems to go like this:

Einhorn/bankruptcy examiner: “New Century changed its accounting. It didn’t book income severity in repurchase reserves. Therefore, New Century inflated earnings.”

Innocent executive: “But we did record income severity, in ‘loans held for sale.’ Earnings aren’t affected by the change.”

Einhorn/bankruptcy examiner: “New Century changed its accounting. Therefore, New Century must have inflated earnings.”

Innocent executive: “But Einhorn signed off on the change. In fact, it was his idea. And, again, it had no effect on earnings.”

Einhorn/bankruptcy examiner: “Well, there was a change. That must mean something is wrong.”

Innocent executive: “No”

Einhorn/bankruptcy examiner: “Look, the problem is that income severity wasn’t recorded at ‘fair value.’”

Innocent executive: “What is ‘fair value’?”

Einhorn/bankruptcy examiner: “Here’s a number. I found it in my underpants.”

Innocent executive: “That’s completely arbitrary. We have a formula for marking to market that has served us for years.”

Einhorn/bankruptcy examiner: “No, we should use the number from my underpants. To prove my point, I will note that New Century changed its accounting.

Innocent executive: “Changing the accounting had no effect on the calculation of the expense!”

Einhorn/bankruptcy examiner: “Right, but you changed the accounting.”

Innocent executive: “I give up. This may wreck the American economy, but I give up.”

Aside from the income severity issue, the bankruptcy examiner provides a litany of other accounting violations that might have been committed by New Century even though the examiner says it found no evidence that any were broken. None of these supposed misdeeds had anything to do with the restatement announcement that enabled Goldman to torpedo New Century, and most of the alleged violations concern supposed miscalculations of “fair value.” Time after time, the examiner opines as to what the fair value of various loans should be, but not once does he explain where in the world he is getting his numbers. If anyone were to ask where he got his numbers, his answer would no doubt be: “They changed the accounting.”

This sort of shifty eyed, misdirecting gobbledygook defines David Einhorn’s style, so it is perhaps no surprise that the bankruptcy examiner seems to think that Einhorn is the one New Century insider who is actually a terrific fellow (though he is the one who instigated the accounting change that the bankrupcy examiner thinks is so evil).

The examiner, by the way, is named Michael Missal. Prior to becoming a bankruptcy examiner, Michael Missel was a defense lawyer for the above-mentioned, infamous Michael Milken. But that is probably another coincidence.

Posted in Featured Stories, The Deep Capture Campaign, The Mitchell ReportComments (58)

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