“Accountability – Integrity – Reliability”

That’s the motto of the Government Accountability Office, and it almost makes you believe that there really is a functioning watchdog – somebody, aside from us Internet loons, to investigate and report on the incompetence and malfeasance that pervade our public institutions.

Certainly, there were high hopes when the GAO began investigating the Securities and Exchange Commission’s oversight of the Depository Trust and Clearing Corporation (DTCC), a black box Wall Street outfit that is at the center of one of the great financial scandals of our era.

Alas, the GAO has completed its “investigation” and issued a report on its findings. After reading this report, and considering once again that the GAO (“Accountability – Integrity – Reliability”) is the last line of defense against government miscreancy, I have concluded, and am obliged to inform you, that we are, without a shadow of a doubt, totally screwed.

The report begins with an explanation: “An effective clearance and settlement process is vital to the functioning of equities markets. When investors agree to trade an equity security, the purchaser promises to deliver cash to the seller and the seller promises to deliver the security to the purchaser. The process by which the seller receives payment and the buyer, the securities, is known as clearance and settlement.”

In other words, people who sell stock need to deliver real stock. That’s kind of important to the“functioning of equities markets.” If you think it is strange that the GAO ( “Accountability – Integrity – Reliability”) needs to clarify this point, you can begin to understand the scope of a scandal that has helped bring us to the brink of a second Great Depression.

The problem is that many hedge funds and brokers engage in illegal naked short selling – selling stock and other securities that they have not yet borrowed or purchased, and failing to deliver stock within the allotted 3 days. They do this to drive down stock prices and destroy public companies for profit.

Emmy Award-winning journalist Gary Matsumoto reported on the Bloomberg newswire last week that naked short selling is one of Wall Street’s “darkest arts” and contributed to the demise of both Lehman Brothers and Bear Stearns. SEC data shows that an astounding 32.8 million shares of Lehman were sold and not delivered to buyers as of last September 11, days before the company declared bankruptcy.

The collapse of Lehman, of course, triggered the near-total implosion of our financial system.

How could this have been allowed to happen?

One answer lies within that black box – the Depository Trust and Clearing Corporation. The DTCC is a quasi-private, Wall Street owned and operated organization that is charged by Congress and the SEC with ensuring that securities trades are cleared and settled. As is evident from the cases of Lehman, Bear, and hundreds of other companies, however, the DTCC often fails to do its job.

In fact, it enables naked short selling to go unpunished. Rather than track individual trades to ensure that delivery occurs, the DTCC merely calculates a net total of sales and purchases at the end of each day. So we know how many shares of a given company fail to deliver each day, but the DTCC won’t tell us which hedge funds or brokers are responsible.

Meanwhile, the DTCC maintains something called the “Stock Borrow Program,” whereby it purportedly borrows a bundle of shares from cooperating brokers and uses the shares to settle failed trades. These shares are not on deposit with the DTCC, and the DTCC records a trade as “settled” with a mere electronic entry — i.e. by pushing a button on a computer rather than exchanging an actual certificate. So it is unclear that the Stock Borrow Program is actually delivering stock. Moreover, trade volume data suggests that the Stock Borrow Program might be using its bundle over and over again, settling multiple trades with the same “shares,” and generating what is, in effect, massive amounts of counterfeit, or “phantom” stock.

While enabling hedge funds and brokers to engage in their dark art, the DTCC also goes to lengths to deny that illegal naked short selling occurs and to smear the reputations of people who say otherwise. It has orchestrated this vicious public relations campaign in cahoots with a crooked Portfolio magazine reporter named Gary Weiss, who has worked closely with a motley cast of Mafia-connected hedge fund managers and convicted criminals.

There is indisputable evidence showing that Weiss, while posing as a journalist, not only worked inside the DTCC’s offices, but also went so far as to seize total control of the Wikipedia entries on “naked short selling” and “Depository Trust and Clearing Corporation.” Yet, to this day, Weiss flat-out denies that he has ever worked with the DTCC and insists that he has never edited any Wikipedia page, much less the fabulously distorted entries dealing with naked short selling.

That the DTCC facilitates and seeks to cover up naked short selling is not surprising given that it is owned by the very brokerages who profit from catering to hedge funds who commit  the crime. The DTCC’s board of directors has included several market makers – including Peter Madoff, brother of Bernard Madoff, the $50 billion Ponzi schemer with ties to the Mafia — who made a tidy profit from naked short selling.

At any rate, the SEC is responsible for overseeing the DTCC and ensuring that it is doing all it can to enforce delivery of shares and other securities. But the SEC conducts examinations of the DTCC only once every two years, and former SEC officials have admitted to Deep Capture that these visits entail nothing more than “investigators” asking a few courteous questions. Indeed, a number of former SEC officials have told us that the nation’s securities regulator doesn’t even understand what the DTCC does.

Enter the GAO (“Accountability – Integrity – Reliability”). Ostensibly, the GAO was going to determine whether the SEC was properly monitoring the DTCC. However, the GAO’s “investigation” entailed nothing more than visiting the SEC and asking a few courteous questions. In response, the SEC told the GAO that there is nothing to worry about, and the GAO duly issued a report that concluded that the SEC had told the GAO there is nothing to worry about.

Really, that, in essence, is what the report says.

It notes, for example, that the SEC examines the DTCC only once every two years, but offers no opinion as to whether this is sufficient oversight of an organization that processes securities transactions worth $1.4 quadrillion – or 30 times the gross product of the entire planet – every year.

And here’s what the report has to say about the DTCC’s Stock Borrow Program:

“…in response to media criticism and allegations made by certain issuers and     shareholders that NSCC and DTC [units of the DTCC] were facilitating naked short selling through the operation of the Stock Borrow Program, OCIE [a unit of the SEC] also incorporated a review of this program into the scope of its 2005 examination. These critics argued that the Stock Borrow Program exacerbated naked short selling by creating and lending shares that are not actually deposited at the DTC, thereby, flooding the market with shares that do not exist. As part of their review, OCIE examiners tested transactions in securities that were the subject of the above referenced allegations or had high levels of prolonged FTD. The examination did not find any instances where critics’ claims were validated. However, we did not validate OCIE’s findings.” [Emphasis mine]

In other words, the SEC claims to have examined the Stock Borrow Program once – in 2005 — but the GAO (“Accountability – Integrity – Reliability”) has no idea what that examination entailed. The SEC claims to have “tested transactions” in securities that had “high levels of prolonged” failures to deliver, but offered the GAO no credible explanation as to why so many companies have seen millions of their shares go undelivered nearly every day since 2005.

The SEC says it looked into the “critics’ claims” and found them to be without merit. The GAO duly notes this as if what the SEC has to say were the final say in the matter. As to whether the SEC’s own claims might have been without merit, the GAO says only that it “did not validate” the SEC’s findings.

Isn’t the job of the GAO (“Accountability – Integrity – Reliability”) to “validate” – or, as it were, invalidate – the SEC’s findings? It is not exactly an “investigation” to merely ask the SEC what it has to say and then publish a report confirming that that is, in fact, what the SEC had to say.

Last year, more than 70% of all failures to deliver were concentrated on a select 100 companies that short sellers had also targeted in other ways (planting false media stories, issuing false financial research, filing bogus class action lawsuits, harassing and threatening executives, engaging in corporate espionage, circulating false rumors, pulling strings to get dead-end federal investigations launched, etc.), but the SEC told the GAO that the failures to deliver could be mostly the result of “processing delays” or “mechanical errors.”

Billions of undelivered shares – most of them concentrated on 100 known targets of specific short sellers. Many of those shares left undelivered for months at a time. The SEC tells the GAO that this might be due to “mechanical errors.” And what does the GAO (“Accountability – Integrity – Reliability”) do? It transcribes the SEC’s claims, offers no opinion as to whether the SEC might be full of it, and then acknowledges that it is in no position to have such opinions because it “did not validate” anything.

In a written response to the GAO, the SEC noted happily that the GAO (“Accountability – Integrity – Reliability”) “made no recommendations” in its report.

“We appreciate the courtesy you and your staff extended to us during this review,” the SEC told the GAO.

* * * * * * * *

Far better is a report issued last week by the Office of the Inspector General at the Securities and Exchange Commission. Inspector General David Kotz, charged with conducting independent oversight of the SEC, is a heroic figure – an honest man in government. He has consistently lambasted the SEC for corruption and incompetence, and now he has investigated the SEC’s regulation of naked short selling. He found the regulation to be fairly abysmal and offered concrete recommendations for how the commission could reform itself.

The report concludes:

“The OIG received numerous complaints alleging that [SEC] Enforcement failed to take sufficient action regarding naked short selling. Many of these complaints asserted that investors and companies lost billions of dollars because Enforcement has not taken sufficient action against naked short selling practices.”

“Our audit disclosed that despite the tremendous amount of attention the practice of naked short selling has generated in recent years, Enforcement has brought very few enforcement actions based on conduct involving abusive or manipulative naked short selling…during the period of our review we found that few naked short selling complaints were forwarded to Headquarters or Regional Office Enforcement staff for further investigation…”

“Given the heightened public and Commission focus on naked short selling and guidance provided to the public leading them to believe these complaints will be taken seriously and appropriately evaluated, we believe the ECC’s current policies and procedures should be improved to ensure that naked short selling complaints are addressed appropriately.”

As for the SEC’s claims that naked short selling isn’t really a problem, or that failures to deliver could be the result of “mechanical error,” the OIG nicely contrasts this blather with the SEC’s own decision last fall to take “emergency” action against naked short selling (because naked short sellers were contributing to the toppling of the American financial system) and the SEC’s statement that “we have been concerned about ‘naked’ short selling and, in particular, abusive ‘naked’ short selling, for some time.”

In response to the OIG’s rightfully scathing report, the SEC wrote a letter in which it flatly refused to abide by most of the OIG’s recommendations.

The SEC did not thank the OIG for its “courtesy.”

* * * * * * * * *

Meanwhile, that other watchdog – the media – continues to ignore the problem of naked short selling. After Gary Matsumoto’s rather earth-rattling Bloomberg report that naked short selling destroyed Bear Stearns and Lehman Brothers – and, by extension, destabilized the entire financial system – there were a total of two mainstream media stories on the subject.

The first was in Portfolio magazine. Actually, this wasn’t really a story. It was one of those question and answer things. And the Q&A was not with some credible expert. Instead, a Portfolio magazine reporter interviewed another Portfolio magazine reporter about the Bloomberg reporter’s story. Even more shocking to those who believe there is hope for balanced media coverage of this issue, the interviewee was none other than… Gary Weiss, the crooked reporter who sidelines as a flak for the DTCC.

Weiss, of course, smeared the messenger, suggesting that Matsumoto was a “conspiracy theorist.” He cited no data or evidence, but repeated the SEC and DTCC nonsense that failures to deliver might be caused by mechanical errors (which just happen to show up overwhelmingly concentrated in those firms targeted by the hedge funds who serve as Gary Weiss’s sources). And he asserted that naked short selling isn’t a problem because the SEC says that naked short selling isn’t a problem (except when the SEC says that naked short selling is an “emergency”).

Read the full interview here. You’ll get a sense of the way Weiss deliberately employs straw man arguments to distort the truth, though as an example of Weiss’s dishonesty, this is rather mild.

* * * * * * * *

The other magazine to report on the Bloomberg bombshell was the Columbia Journalism Review, which is the most prominent watchdog of the watchdogs – an outlet for serious media criticism. As Deep Capture‘s regular readers know, I used to work as an editor for the Columbia Journalism Review. I spent ten months preparing a story for that publication about dishonest journalists (including Gary Weiss) who were deliberately covering up the naked short selling scandal.

In the course of working on this story, I was threatened and, on one occasion, punched in the face. Then, in November 2006, shortly before the story was to be published, a short selling hedge fund that I was investigating announced that it would henceforth be providing the Columbia Journalism Review with the funding that would be used specifically to pay my salary.

The hedge fund that bribed the Columbia Journalism Review is called Kingsford Capital. It has worked closely with criminals, including a thug named Spyro Contogouris. In November 2006, a couple weeks after Kingsford bribed the Columbia Journalism Review, an FBI agent arrested Spyro. This was the same FBI agent who was investigating a cabal of short sellers – SAC Capital, Kynikos Associates, the former Rocker Partners, Third Point Capital, Exis Capital — who were then working with Spyro to attack a company called Fairfax Financial.

Spyro had harassed and threatened Fairfax executives, so he was going to feature prominently in my story. The centerpiece of my story, however, was to be that cabal of short sellers, not only because the Fairfax case was quite shocking, but also because these short sellers and a few others were the primary sources to dishonest journalists (especially MarketWatch reporter Herb Greenberg and CNBC personality Jim Cramer) who were then whitewashing the naked short selling scandal. Moreover, nearly every company known to have been targeted by these short sellers had been victimized by naked short selling, with millions of shares going undelivered, often for months at a time.

Emails in my possession show that Kingsford Capital is closely connected to that cabal of short sellers. Moreover, one of Kingsford’s managers at the time, Cory Johnson, was, along with Herb Greenberg and Jim Cramer (the journalists who were going to feature most prominently in my story) a founding editor of TheStreet.com. (Johnson removed Kingsford from his online resume after I revealed the relationship in “The Story of Deep Capture.”).

For a number of years, Kingsford Capital was partnered with Manuel Asensio, who was one of the most notorious naked short sellers on the Street. Prior to his work with Kingsford, Asensio worked for First Hanover, a Mafia-affiliated brokerage whose owner later became a homeless crack addict.

I was investigating Kingsford and Asensio primarily because they appeared to be among the favorite sources of Gary Weiss, the crooked journalist who was then secretly doubling as a flak for the black box DTCC. Asensio, for example, helped Weiss write “The Mob on Wall Street,” a 1995 BusinessWeek story that was all about the Mafia’s infiltration of Wall Street stock brokerages, but which deliberately omitted reference to Mafia-connected naked short sellers, even though the brokerage that featured most prominently in the story, Hanover Sterling, was at the center of one of the biggest naked short selling fiascos in Wall Street history.

According to someone who knows Weiss well, Asensio was also a source for a Weiss story about the gangland-style murder of two stock brokers, Al Chalem and Meier Lehmann. Chalem was tied to the Mafia and specialized in naked short selling. Multiple sources say that Russian mobsters killed Chalem in a dispute over the naked short selling of stocks that were manipulated by brokerages connected to the Russians and the Genovese organized crime family.

One of these sources – a man who worked closely with Chalem – says that he tried to tell Weiss the true story, but Weiss refused to listen to anybody who would pin the murders on the Russian Mob or accuse Chalem of naked short selling. Instead, Weiss wrote a false story describing Chalem as a “stock promoter” and suggesting that he had been killed by people tied to the Gambino crime family, which was then a fierce rival of the Genovese and the Russians.

On another occasion, the current principals of Kingsford Capital sent Weiss a fax containing false negative information about a company called Hemispherx Biopharma. Another source, who was sitting in Weiss’s office at the time, says that he tried to tell the reporter that Kingsford was working with Asensio, that Asensio might have ties to the Mob, and that Asensio was naked short selling Hemispherx stock. Weiss ignored this information and wrote a negative story about Hemispherx. Hemispherx’s stock promptly plummeted by more than 50%.

Remember, Gary Weiss is the Portfolio magazine reporter who just who just told Portfolio magazine that only “conspiracy theorists” believe that abusive short selling is a problem.

* * * * * * * *

It is too much for me to believe that Kingsford Capital’s managers (along with Gary Weiss and Asensio?) could be influencing the Columbia Journalism Review’s stories, but I do know that the magazine is now an ardent defender of short sellers and has written favorably about several of the dishonest journalists – including Gary Weiss –who were to appear in my story.

And, in its recent piece about Matsumoto’s Bloomberg bombshell, the Columbia Journalism Review cast doubt on the theory that naked short selling wiped out Lehman – never mind those 30 million shares that didn’t get delivered.

The Columbia Journalism Review reporter, who receives a salary thanks to the beneficence of Kingsford Capital, wrote this:

“Now, I don’t have a dog in the naked-shorts fight. I can’t tell you if this is being done illegally on a large-scale and having a real impact on companies. I just don’t know.”

“But one of the first things that comes to mind here is—wouldn’t you expect fails-to-deliver to soar for a company teetering on the brink of bankruptcy under an avalanche of bad news? I’d expect there would be a rush to short a stock like Lehman, which was about to collapse anyway. So, people who usually could expect to borrow shares to short might have found that they couldn’t because everybody else was doing the same thing.”

In other words, people who “could expect to borrow shares,” but “found that they couldn’t” went ahead anyway and sold 30 million shares that did not exist. This was a gross violation of securities regulations that require traders to have “affirmative determination” that a stock can, in fact, be borrowed. Assuming the intent was to manipulate the stock, it is a jailable offense.

It is true that by mid-September of last year, Lehman was on the brink of bankruptcy. Partners backed out of deals and there was a run on the bank. But people got nervous and pulled their money only because hedge funds bombarded Lehman with rumors (which are currently the subjects of a federal investigation) while simultaneously naked shorting the stock to single digits.

In July of 2008, the SEC issued an emergency order designed to prevent just this eventuality. For a few weeks, the order stopped naked short selling of Lehman Brothers and 18 other big financial companies. At this time, Lehman was not on the brink of bankruptcy.

But in early August, the SEC lifted its order and Lehman immediately came under a massive naked short selling attack. On the day the SEC lifted the order, Lehman’s stock was trading at around $20. A few weeks later, the stock was worth around $3 – a fall of 85%.

Only after this precipitous fall did Lehman’s partners begin pulling their money, making bankruptcy inevitable.

But, apparently the Columbia Journalism Review believes that it is perfectly natural for a stock to fall 85%, even though no new information (aside from unsubstantiated rumors) had entered the marketplace. According to the Columbia Journalism Review (which has, no doubt, plowed Kingsford Capital’s money into a thorough investigation of this issue), it is perfectly natural that people who “found they couldn’t” borrow stock nonetheless proceeded to flood the market with 30 million phantom shares.

The truth is, that 30 million share “mechanical error” helped bring this nation to its knees.

That’s one reason why I do have a dog in this fight.

* * * * * * * *

This is Part 3 of an ongoing series.

Read Part 1

Read Part 2

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

* * * * * * * *

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

Think about what Cramer has said.

And then have a look at the following email.

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

Message # : 727

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

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

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

Subject: CNBC – FAIRFAX

Reply:

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

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

* * * * * * * *

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

* * * * * * * *

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

* * * * * * * *

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

They are all “prominent investors.”

To be continued…

* * * * * * * *

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

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

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In 2005, Patrick Byrne, the CEO of Overstock.com and future Deep Capture investigative reporter, began a public crusade against illegal naked short selling (hedge funds and brokers creating phantom stock to manipulate stock prices down). He said, over and over, that the crime was destroying public companies and had the potential to trigger a systemic meltdown of our financial markets.

Soon after, I began to investigate a network of short sellers, journalists, and miscreants. I concluded that many of the people in this network were connected to two famous criminals – “junk bond king” Michael Milken and his associate, Ivan Boesky. I also began taking a close look at the Mafia’s involvement in naked short selling.

In my last installment (click here to read), I described some of the strange occurrences that attended this investigation. Where the story left off, I’d recently been threatened in a bookstore, and then ambushed by three thugs who told me to stay away from this story. My unwitting employer had been bribed by short sellers, Patrick had been told by a U.S. Senator that his life was in danger, and a Russian matryoshka doll had appeared on the desk of an offshore businessman.

Inside this matryoshka doll was a slip of paper marked with the letter “F”…

* * * * * * * *

Soon after receiving the matryoshka doll, the offshore businessman invited Patrick Byrne to a greasy spoon diner in Long Island. Over the previous year, the businessman had provided Patrick with some information about the naked short selling scam, and the hope was that he might have something more to say.

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

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

In a later conversation with a colleague of Patrick’s the businessman said [verbatim]: “These things don’t happen to me anymore. I mean, I’ve been out of that world [the world of Mafia stock manipulation] for a dozen years or more. These…there are defined signals here that lead me to believe that they [the Mafia] have been disturbed. The only way they coulda been disturbed is if they own Rocker or if he is using them for leverage.”

Rocker. That’s David Rocker.

At the time, David Rocker was a “prominent” hedge fund manager specialized in short selling (betting that stock prices will fall). It was also the case that Rocker had spent the last couple decades insinuating to people on Wall Street that he was somehow tied to the Mob.

But Rocker was probably full of it. He didn’t have ties to the Mob. Perhaps he merely believed that his insinuations lent him a certain cachet.

* * * * * * * *

From 1973 to 1981, Rocker was a general partner in a short selling hedge fund managed by Michael Steinhardt, who is one of Wall Street’s most “prominent” investors, regularly hailed by The Wall Street Journal and CNBC as a genius and a font of wisdom.

Some years ago, Steinhardt belatedly acknowledged that he is the son of Sol “Red” Steinhardt, who was once a major player in the Genovese Mafia organization. Steinhardt, Sr. spent several years in Sing-Sing prison after a New York City prosecutor described him as the “biggest Mafia fence in America.”

Incidentally, experts concur that the Genovese Mafia family brought the Russian Mob to America.

* * * * * * * *

The largest investors in Steinhardt Jr.’s first hedge fund were associates of the Genovese Mafia (whose investments came in large sacks of cash), Marty Peretz (future founder, with Jim Cramer, of TheStreet.com), Marc Rich (future fugitive charged with tax evasion and illegal trading with Iran and Libya), and Ivan Boesky (later imprisoned on multiple counts, most of them involving stock manipulation schemes orchestrated with “junk bond king” Michael Milken).

By 1991, Steinhardt owned another hedge fund — JGM Management – with a “prominent investor” named James Marquez. The star employee at JGM was “prominent investor” Samuel Israel III.

A few years later, Israel and Marquez founded the Bayou Group, one of the biggest hedge fund frauds in history. A significant part of the Bayou fraud involved Israel “feeding” his investors’ money into a Ponzi scheme run by Robert Booth Nichols, who has been targeted by authorities as a business associate of the Genovese Mafia family.

When Israel was sentenced to prison last year, he briefly disappeared. His car was found on a bridge. Scrawled in the dust on the hood was a note: “Suicide is Painless.”

Authorities arrested Israel’s girlfriend, whom they suspected of harboring a fugitive. Shortly after, Israel rode a red motor scooter to a Boston police station and turned himself in. Apparently, he was not dead. He had tried to fool us.

Meanwhile, Israel had filed a lawsuit against Nichols, alleging that Nichols had ripped him off. Apparently, Israel (who could not be reached for this article) would like us to believe that he is not tied to Nichols or the Genovese Mafia.

Nonetheless, Israel has a certain cachet. So do Steinhardt and James Marquez.

* * * * * * * *

In the 1990s, Steinhardt founded another hedge fund, Steinhardt Partners. The co-founder and head trader of Steinhardt Partners was a “prominent investor” named John Lattanzio.

The limited public information about Lattanzio concerns a Russian prostitute.

Apparently, Lattanzio proposed marriage to the prostitute and gave her a diamond ring. Alas, the couple separated, and Lattanzio asked for his ring back. After all, it had cost him $289,275.00.

But the prostitute seemed to believe that the ring was payment for services rendered. The dispute ended up in court, where the prostitute testified that Lattanzio had told her that he had ties to the Mafia.

Yes, said the prostitute, Lattanzio (Steinhardt Partners’ co-founder and head trader) had big-time Mafia connections, and he “would not hesitate to use them to harm me.”

From what I know of Russian strumpets, there is at least one area where they cannot be trusted – and that is where it concerns their love life. So perhaps Lattanzio had his heart broken. Perhaps, in the heat of passion, he said some crazy stuff about the Mafia to make himself seem dangerous. If that is the case, I send Mr. Lattanzio my condolences.

Indeed, I would enjoy meeting him. He has a certain cachet.

* * * * * * * *

Rocker left Steinhardt’s hedge fund in 1981 and went to work for an investment management firm called Century Capital Associates.

Information on this firm is limited, but it seems to have been largely owned in the 1980s by the Belzberg brothers — William, Sam and Hymie.

The Belzbergs were among Michael Milken’s closest cronies (family member Mark Belzberg was in fact implicated by the SEC in Milken’s stock manipulation schemes). They were at the inner core of the Milken machine – buying and selling the junk bonds of other Milken cronies. Often, the Belzbergs collaborated with Milken to blackmail, seize, or destroy public companies. .

In the late 1980s, the Belzbergs announced that they were going to take over Crazy Eddie, which was then a famous home electronics retail chain. The Belzbergs joined forces with Crazy Eddie’s founder, Eddie Antar, and the company’s chief financial officer, Sam Antar, in a supposed effort to take the company private.

This is a story for another time, but for now it suffices to say that Crazy Eddie was a massive fraud, the Belzbergs (and Milken) likely knew this already, and when the company was raided by the FBI a few months later, it emerged that Sam Antar had been feeding information to both the FBI and a lawyer, Howard Sirota, who was preparing to sue the company.

The Belzberg’s did not buy Crazy Eddie. Instead, just before the FBI arrived, the company was sold to another investor, Victor Palmieri. Robert A. Marmon, who was hired by Palmieri to run Crazy Eddie, told me that he arrived to find that the company’s top employees – the only people who had had direct access to the Antars – were all burly, armed thugs who claimed to be former employees of the Mossad, Israel’s secret intelligence agency.

It was Marmon’s job to fire the Antars’ corporate goons. “I’ve never been so scared in my life,” he said. “There weren’t any explicit death threats. They just stared you down, so you got the message.”

* * * * * * * *

Sam Antar is a convicted felon, but he never went to prison because he testified against his cousin, Eddie Antar, in return for house arrest. Now he is paid by short sellers with ties to David Rocker and associates of Michael Milken. The assignment to which he devotes the majority of his time is to use the Internet to harass and smear the reputations of Deep Capture founder Patrick Byrne and his colleagues.

At one point, Antar threatened the young children of Deep Capture reporter Judd Bagley, posting their names, ages, and address on the Internet. As I described in my last installment, Antar has made what I can only interpret to be veiled references to two seminal events in my life – the time I was ambushed and punched in the eye by three thugs, and the day that a goon in a bookstore threatened my close relative.

When he is not harassing us, Antar helps Howard Sirota (the attorney who sued Crazy Eddie) file bogus class action lawsuits against companies targeted by short sellers. A recent court case also describes Antar delivering $250,000 in cash to a man named Barry Minkow

In the 1980s, Minkow built a carpet cleaning and insurance restoration company called ZZZZ Best, with the bulk of his finance coming from Michael Milken, and other funds coming from associates of the Genovese organized crime family.

ZZZZ Best was a massive fraud that manufactured false restoration claims – some of them on Las Vegas casinos that had been financed by Michael Milken and investors tied to the Genovese organized crime family.

Minkow spent some time in prison. Now he runs an outfit called the Fraud Discovery Institute out of the Community Bible Church in San Diego, where he is a preacher. The Fraud Discovery Unit is in the business of publishing negative information about public companies targeted by Howard Sirota and short sellers tied to David Rocker, Michael Steinhardt, and associates of Michael Milken.

In one of Sam Antar’s famous Internet messages (he signs them, “Sam Antar, Convicted Felon”), he warned that we at Deep Capture were taking chances by writing about the Mafia connections of Barry Minkow, whom Antar described as his “friend.”

“You have awakened a sleeping giant,” Antar wrote.

* * * * * * * *

In addition to their involvement with Crazy Eddie and David Rocker’s operation, the Belzberg brothers – William, Sam, and Hymie – also tried in the 1980s to take over a investment services concern called the Bache Group. But executives of the Bache Group did not want the Belzbergs to seize their company.

According to the executives, the Belzbergs had ties to the Mafia. The executives went public with their allegations, citing, among other things, a U.S. Customs report that described the Belzbergs cavorting with some Genovese mafiosi in Acapulco.

Fortune magazine reported that these allegations were “unsubstantiated.”

But the Belzbergs have a certain cachet

* * * * * * * *

The Belzbergs were also the largest providers of capital to John Mulheren, a “prominent investor” who was famous in the 1980s for the arbitrage operation that he ran out of Spear Leeds & Kellogg, a broker-dealer and notorious naked short seller that was later merged into Goldman Sachs Execution and Clearing (which currently employs Elliot Faivinov, a Russian man who in 2006 was, for reasons of his own, receiving copies of the phone records of a woman who was then Deep Capture reporter Patrick Byrne’s girlfriend).

The Department of Justice alleged that Mulheren routinely engaged in stock manipulation schemes with Ivan Boesky, targeting companies financed by Milken. In 1987, when Boesky was indicted, and the government began to investigate Milken, Mulheren announced that he was going to murder Boesky.

Depending on the story, Mulheren either forgot to take his psychiatric medication, or he was worried that Boesky was going to squeal. Either way, he was arrested on the way to Boesky’s house. In Mulheren’s car, police found a 9-millimeter pistol, a .357 Magnum, a 12-gauge pistol-grip shotgun, a .233-caliber Israeli Galil assault rifle, and 300 rounds of ammunition.

It is a common misperception that Boesky’s testimony led to the 98-count indictment of Michael Milken. Considering the scope of business the two criminals did together, Boesky actually provided very little information to the government. He told prosecutors that he was afraid that he might be killed. On several occasions he told prosecutors that he might be killed by Milken’s “friends in Vegas.”

* * * * * * * *

Far more important to the government’s case against Milken was evidence that it obtained when 50 armed troopers stormed the offices of a hedge fund called Princeton-Newport. The founder of this hedge fund, Edward Thorp, once partnered with the Genovese organized crime family to develop a system for cheating Las Vegas casinos. He wrote a seminal book on counting cards in black jack, and soon after, he was a critical – perhaps the most critical – figure in the Milken operation.

The base of Milken’s operation was the high-yield debt department of Drexel Burnham Lambert in Beverly Hills. From there, he underwrote and sold billions upon billions of dollars worth of junk bonds. Hence the moniker, “the junk bond king.”

But most observers believe that Milken derived a greater part of his fortune from a web of private partnerships and personal brokerages that traded, and often manipulated, not just the debt, but also the stock of public companies. Most profitable of all Milken’s businesses were two Chicago-based brokerages – Belvedere Securities and EGM partners – that he co-owned with the Genovese Mafia card-counter Edward Thorp.

In 2006, Thorp’s son, Jeffrey, was charged by the SEC with destroying more than 20 companies in a scheme that involved unbridled naked short selling (millions upon millions of phantom shares sold into the market). Jeffrey Thorp also collaborated closely in short selling schemes with Anthony Elgindy, a notorious phantom stock peddler who is now serving an 11 year prison sentence for stock manipulation, extortion, and bribing FBI agents.

Elgindy, like Thorp’s father, is tied to the Genovese organized crime family.

When Elgindy appeared in court for sentencing, the judge noticed that Elgindy was missing the tip of one finger. Elgindy could not provide a straight answer as to what had happened, but a source close to the Elgindy investigation claims that Elgindy was forced by Russian mobsters to saw off his own finger as a warning not to squeal on his partners in crime.

* * * * * * * *

When delivering the death threat to Patrick Byrne, the offshore businessman mentioned David Rocker, and as we now know, Rocker was a general partner in Michael Steinhardt’s first hedge fund — largely capitalized by the Genovese Mafia and Ivan Boesky. We also know that Rocker later worked for Century Capital, largely owned by the Belzbergs – William, Sam, and Hymie – who might or might not have been cavorting with Genovese mafiosi in Acapulco, but were certainly the largest funders of John Mulheren.

After getting caught on his way to murder Ivan Boesky, Mulheren went to jail, where he spent most of his time in consultation with Anthony “Fat Tony” Salerno, a Genovese Mafia capo who had recently begun a 100 year prison sentence.

Upon his release, Mulheren (whose convictions were later reversed on appeal) went into business with a “prominent investor” named Israel Englander. Soon after that, Mulheren died (apparently of a heart attack), but Englander continued to manage Millennium Partners, a “prominent” short selling hedge fund whose major investors are the Belzbergs – William, Sam, and Hymie.

By this time, David Rocker had left the Belzberg’s Century Capital to start his own hedge fund – Rocker Partners.

* * * * * * * *

Here I must skip ahead more than a decade: In 2004, Deep Capture reporter Patrick Byrne (pursuant to his day job of being CEO of Overstock.com) was on a Lehman Brothers-sponsored road show seeing dozens of hedge funds, attempting to sell a $120 million convertible bond in Overstock. When he sat down in Millennium’s offices, a man entered. His opening words were, “Millennium wants to take the entire $120 million of this offering. Of course, we’ll need a board seat to go with that.”

This would have given the hedge fund access to inside information about Overstock. And it would have given Millennium the ability to sell the company short without borrowing shares in the open market.

This is a common strategy employed by short sellers tied to Michael Milken or his associates. As I will show in future stories, many companies that agree to this arrangement are eventually destroyed or seriously wounded by naked short selling – hedge funds offloading phantom stock.

Overstock board member Gordon Macklin, the former chairman of Hambrecht & Quist, a straight-shooting investment bank, warned Patrick not to do the deal with Millennium.

Millennium, after all, had a certain cachet.

Patrick declined Millennium’s offer, and went ahead with the offering to a number of hedge funds.

A few months after Millennium’s offer to acquire the bonds, affiliated hedge fund managers, including David Rocker, began a short selling attack on Overstock.

* * * * * * * *

One hedge fund closely affiliated with David Rocker is SAC Capital, which is managed by Steven Cohen, and is said to account for more than 3 percent of all the trading on the New York Stock Exchange. BusinessWeek magazine has described Cohen as “The Most Powerful Trader on Wall Street.”

Some years ago, there was an article by Fortune magazine called “The Shabby Side of the Street.” This article did not mention Steve Cohen. It did not mention him because, by this time, Cohen was a “prominent investor.”

But while “The Shabby Side of the Street” does not mention Cohen, it is all about Gruntal & Co., which is where Cohen spent his formative years. Cohen was a proprietary trader for Gruntal in the 1980s and early 1990s – up until the day when he founded SAC Capital.

Gruntal, we can assume, is where Cohen developed his network and learned the tricks that made him the “most powerful trader on Wall Street.”

Fortune magazine interviewed a former Gruntal employee, who described the ambience there: “Gruntal was the Island of the Misfit Toys. But they didn’t care what was going on in our sick, dysfunctional office as long as we were making money. We had no manager, and it’s illegal not to supervise brokers. I remember doing cartwheels down the hall, drinking beer at my desk, smoking pot, having sex in the stairwell. Whatever!”

* * * * * * * *

The Fortune magazine article about Gruntal also failed to mention Michael Milken. It did not mention Milken because Milken was, by then, a “prominent philanthropist.” But Milken had been intimately involved with Gruntal, whose parent company, a financial services and insurance conglomerate called the Home Group, had been central to the Michael Milken empire.

As nearly every account of Michael Milken’s schemes will tell you, Milken worked with a select group of cronies (many of whom controlled large insurance and financial services conglomerates) to operate what amounted to a Ponzi scheme.

The cronies would sell junk bonds through Milken to raise finance. Then the cronies would use much of this finance to buy (from Milken) the junk bonds of other cronies in the group. The cronies and Milken would then trade the junk bonds among themselves, raising their prices incrementally as they passed them on to the next crony (a process known as “daisy-chaining”), before fobbing them off to little old ladies and dimwitted pension fund managers.

Until the scheme collapsed, Milken’s junk-bond merry-go-round generated enormous profits and seemingly unlimited finance for his select cronies. So the cronies could not only buy more junk bonds from Milken, but they could also use their billions to harass, destroy, or initiate hostile takeovers of public companies.

Meanwhile, Milken presided over a nationwide network of private partnerships (such as those he had with the Mafia card-counter Edward Thorp), arbitrage and short selling partnerships (such as Ivan Boesky’s criminal operation), short selling hedge funds (such as Michael Steinhardt’s Mafia-funded outfit), and brokerages that could help put public companies on the defensive.

Home Insurance was a key buyer and issuer of Milken junk bonds. It was the second largest unsecured creditor to Milken’s operation at Drexel. It also owned about $15 million worth of Ivan Boesky’s short selling and arbitrage outfit. Meanwhile, Home’s subsidiary, Gruntal & Co., employed traders who were on quite friendly terms with Milken and others in his network.

* * * * * * * *

Gruntal’s options department was founded by a man named Carl Icahn. After leaving Gruntal, Icahn formed Icahn & Co., receiving most of his finance from Michael Milken, but also a significant chunk of capital from a “prominent investor” named Zen Wolfson.

Since then, Wolfson has been involved with a number of Wall Street brokerages that are tied to the Genovese Mafia. One such brokerage is Pond Securities, which, in 2001, was implicated by the SEC in a massive naked short selling (phantom stock) fraud. Among the victims of Pond Securities were companies that had employed the services of Ladenburg Thalmann, an investment bank largely controlled by Carl Icahn.

In an upcoming story, I will tell you more about Ladenburg Thalmann’s role in the naked short selling scandal. I will tell you more about Pond Securities and its relationship with a man who remains a fugitive in Austria. And I will tell you more about Carl Icahn, who is not only one of the most “prominent investors” in America, but also a man with a certain cachet.

* * * * * * * *

Another employee of Gruntal – a fellow who sat next to Steve Cohen (later known as “the most powerful trader on the Street”) – was Stephen Feinberg, who had moved to Gruntal from Michael Milken’s operation at Drexel Burnham Lambert. Feinberg had been one of Milken’s most favored employees. Most likely, he moved to Gruntal (“the “shabby side of the Street,” as Fortune magazine described it) to reinforce the relationship between Gruntal and Milken’s nation-wide stock manipulation network.

Nowadays, Feinberg runs Cerberus Capital, one of the most powerful private equity firms in America. In an upcoming story, I will tell you how Cerberus loots the companies it seizes.

Its techniques have a certain cachet.

* * * * * * * *

Yet another “prominent investor” who sat on Steve Cohen’s trading floor at Gruntal was Samuel Israel III.

Israel left Gruntal to work for a hedge fund owned by Steinhardt (the son of the “biggest Mafia fence in America”). As you will recall, Israel later wrote “Suicide is Painless” on his car and briefly disappeared after being sentenced for masterminding one of the largest hedge fund frauds in history – a fraud that Israel ran with help from a co-founder of Steinhardt’s hedge fund and another fellow connected to the Genovese Mafia.

Also on Steve Cohen’s trading floor at Gruntal was Maurice A. Gross, whose biggest client was Thomas Gambino, a prominent member of the Gambino Mafia family. This was in the days when the Gambinos and the Genovese still collaborated on Wall Street.

Gross later left Gruntal, and in 1997, he and a Pakistani fellow named Mohammad Ali Khan tried to steal the Gambinos’ money.

Fortunately, Elliot Spitzer intervened. At the time, Spitzer was New York’s attorney general. Throughout his political career, Spitzer received by far the greatest percentage of his campaign funding from short sellers (such as Jim Chanos, who provided a rent-free beach house to the hooker who later forced Spitzer to resign as governor) who are closely tied to Steve Cohen and SAC Capital.

Spitzer forced the former Gruntal broker to give the Gambinos their money back. There is no evidence, however, that Spitzer was concerned that New York’s second largest organized crime family was running money through a brokerage owned by cronies of Michael Milken and Ivan Boesky.

In 1996, Gruntal was charged with embezzling millions of dollars. By then, Steve Cohen had left to begin his career as the “most powerful trader on the Street.”

* * * * * * * *

So in 2006, I was investigating Steve Cohen’s SAC Capital, David Rocker, Michael Steinhardt and their network of miscreants. I was also investigating “prominent” journalists (at The Wall Street Journal, The New York Times, CNBC and other major news organizations) who had unusual relationships with this network and who were going to extraordinary lengths to cover up the naked short selling (phantom stock) scandal.

That’s when three guys in Armani suits saddled up to me in a quiet bar. As you will recall from my last installment, one of the Armanis introduced himself to me as a former Boesky employee, and told me a story about a fellow who got his brains blown out after “peeking” into the ladies underwear department at Saks Fifth Avenue.

Steve Cohen’s SAC Capital is known colloquially as “Sak.” I do not know for certain that Armani was telling me I shouldn’t be “peeking” at Cohen’s dirty underwear. It was a strange encounter, to say the least.

But if you doubt that journalists sometimes receive such threats, consider the case of Los Angeles Times reporter Anita Busch. One day after work, Busch found, in the front seat of her car, a dead fish and a rose. In the windshield of her car, there was bullet hole and a note that said, simply, “Stop!”

Later, the LA Times reporter was nearly killed when two men in a black Mercedes tried to run her over.

All of this was the handiwork of Anthony Pellicano, a former soldier in the Genovese Mafia organization who had found employment as a hired-thug and private investigator. Most of Pellicano’s clients had been Hollywood actors like Steven Seagal (who has been reported by some news organizations to have ties to the Mob, though I have not confirmed those reports) and various billionaires, a significant number of whom had ties to Michael Milken.

When Pellicano put the dead fish and the bullet hole in the reporter’s car, he was working for Michael Ovitz, the Hollywood mogul. Busch and the LA Times were investigating the business dealings of Ovitz, and Ovitz apparently hired the former Genovese Mafia soldier to stop the story in its tracks.

Ovitz, as you may know, is one of Michael Milken’s closest friends. They were high school classmates. In later years, Milken and Ovitz did a lot of business together.

While Pellicano was threatening an L.A. Times reporter, he was also employed by Adam Sender, who runs a hedge fund called Exis Capital. Sender is a former employee of Steve Cohen at SAC Capital. Steve Cohen — the “most powerful trader on the Street” — provided Sender with most of his start-up capital. Exis and Sender are considered by most everyone on Wall Street to be essentially subsidiaries of SAC (a.k.a. “Sak”).

Apparently, Sender had some kind of dispute with a business partner, so he called Pellicano, the former Genovese Mafia soldier. In a conversation that was recorded by the FBI, Sender said to Pellicano: “You have 100% free reign to do whatever you feel will make this cocksucker as unhappy as possible…I’d like to make the fucking asshole as uncomfortable as possible…I’m going to continue the lawsuit until doomsday… when the time is right I’m going to fix him.”

You can listen to the full conversation here.

In a later conversation, Pellicano allegedly offered to have Sender’s business partner disappear. The former Genovese soldier said he’d make his move while the business partner was driving to Los Angeles from Las Vegas. He’d force the business partner off the road. Then Pellicano would kill the business partner and bury him in the Nevada desert. Nobody would know a thing.

In court, Sender testified that he turned down Pellicano’s murder-for-hire offer. But Pellicano was convicted for multiple crimes – such as offering to have a man buried in the Nevada desert and putting a dead fish, a rose, and bullet hole in the car of a journalist investigating Michael Milken’s best friend from high school.

* * * * * * * *

I do not know whether any merit can be given to the offshore businessman’s speculation that Rocker might be “owned” by the Mafia. I do not know whether Rocker had anything to do with the message that the Russian Mafia was going to kill Patrick Byrne.

I do know, however, that in a later phone conversation, the offshore businessman explained how the death threat had been conveyed to him. He said he returned home one night and his wife told him there was a package on his desk. “And there was a beautiful little box, and inside was a matryoshka.”

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

The businessman said he contacted Felix. And Felix said, “tell [Patrick]….we’re going to fucking take it private.”

* * * * * * * *

In 1998, Felix – that’s Felix Sater – forgot to pay the rent on a locker at the Manhattan Mini Storage in Soho. As a result, police found inside this locker two pistols, a shotgun, and a gym bag stuffed with documents outlining various money laundering and stock manipulation schemes orchestrated by Felix Sater and his partners.

Felix is a Russian immigrant said by authorities to have ties to both the Russian Mafia and the Genovese organized crime family.

In 1991, Felix stabbed a stock broker in the face with a broken stem of a wine glass.

* * * * * * * *

After reviewing the contents of Felix’s locker, the FBI launched a sweeping investigation that culminated, in the summer of 2000, with the bureau’s famous “Operation Uptick” – sometimes referred to as the “Mob on Wall Street” operation. More than 100 stock brokers and investors allegedly tied to the Mafia were arrested – the biggest securities bust in FBI history.

Among those arrested in the “Mob on Wall Street” operation were a number of people tied to Michael Milken or his closest cronies. One of them was Gene Phillips.

In the 1980s, Phillips ran a company called Southmark, which was at the center of the Milken Ponzi. Southmark was, in fact, the single largest real estate conglomerate ever financed by Milken. But it didn’t just buy real estate. In only one of many transactions, Milken delivered over $400 million in junk bond finance to Phillips, and Phillips used every penny of that finance to buy (from Milken) the junk bonds of other Milken cronies.

The “Mob on Wall Street” case alleged that Phillips engaged in stock manipulation schemes with a coterie of miscreants who were tied to the Genovese organized crime family. Ultimately, Phillips was acquitted.

But even before he was arrested, Phillips had a certain cachet.

* * * * * * * *

Felix Sater (the man who allegedly sent the matryoshka doll) was ultimately named as an “unindicted co-conspirator” in a Mafia-run stock fraud. One of his friends co-authored a book, “The Scorpion and the Frog,” which suggests that Sater (whom the author of the book gives a pseudonym, “Lex Tersa”) cut a deal allowing him to avoid prosecution if he helped the CIA set up a phony arms deal with Osama Bin Laden. Anything is possible, I suppose.

At any rate, Sater is now the (silent) proprietor of the Bayrock Group, a real estate investment company. The Bayrock Group has eleven partners. All are of interest, but let’s focus on two of them.

One is The Sapir Organization, which is an organization run by a Russian immigrant named Tamir Sapir. A lawyer for The Sapir Organization said the organization would answer no questions because the organization is “very, very private.” So information about Sapir’s background is spotty.

Sapir has stated publicly that he once owned a home electronics store that catered to Russian KGB officials living in New York. The name of the store remains a mystery. All Sapir has said is that he was “the Crazy Eddie of Russia” – a playful reference to Sam Antar’s electronics company (i.e., the massive fraud that the Antars were going to take private with those Milken cronies, the Belzbergs – Walter, Sam, and Hymie).

After electronics, Sapir began trading oil. Then he struck it big in real estate. Now, he is believed to be a billionaire.

He might also be a Russian Mafia boss. Journalists have danced around this issue. Sapir himself has stated to The New York Times that “I am not Mob.” But he once had Genovese Mafia associates running his real estate empire. So if Sapir is not a Russian Mafia boss, he is at least a Russian boss of Mafia employees.

By way of example: The man who formerly ran The Sapir Organization’s real estate portfolio is named Frederick J. Contini. In addition to being associated with the Genovese Mafia clan, Contini once entered a secret plea to racketeering.

Also, Contini once stabbed a man in the face with the broken stem of a wine glass.

He said it was just a bar fight.

This was some months after Felix Sater stabbed a man in the face with the broken stem of a wine glass.

Felix said it was just a bar fight, too.

* * * * * * * *

The second important partner of Felix Sater’s Bayrock Group is Apollo Real Estate Advisors, which is part of the empire controlled by a famous billionaire – Leon Black.

If Michael Milken were to name the ten people who are closest to him, Leon Black would surely be one of them. The two men have known each other since at least 1975, when “prominent investor” Carl Lindner, who was one of Milken’s key junk bond cronies, was acquiring shares in United Brands, formerly known as United Fruit, a company that has been accused of everything from bribing heads of state to funneling money to Latin American drug gangs.

Lindner eventually gained control over the company, but not before Eli Black — United Brands’ CEO and the father of Leon Black — crashed through a thick plate-glass window on the 44^th floor of the Pan Am building, and plunged to his death.

They said Black broke through the plate glass window with his briefcase.

They said it was suicide.

* * * * * * * *

Some years after his father crashed through the window, Leon Black was heading up mergers and acquisitions at Drexel Burnham Lambert, home base of Milken’s junk bond operation. Black was Milken’s most ardent ally at Drexel. After Milken was indicted, Black rallied to Milken’s defense. It was Black, more than anyone, who prevented Drexel from firing Milken. And Black has remained obstinately loyal to the criminal Milken ever since.

After Milken went to prison, Black founded the Apollo Group, an investment partnership that received most of its initial funding from a French aristocrat named Rene Thierry Magon de La Villehuchet.

Among Black’s first moves as an independent “prominent investor” was to launch a takeover bid for Executive Life, a bankrupt insurance and financial services conglomerate.

The Black group won the bid after a fierce battle with a group of competing bidders, led by Jack Byrne, who was then the chairman of Fireman’s Fund, a major insurance company.

Later, though, it emerged that Black’s takeover of Executive Life had been illegal because he had secretly been fronting for certain French investors, including Monsieur Rene Thierry de La Villehuchet. Some of the French investors had illegally parked stock with Black to hide their involvement (“parking stock” being one of the favorite techniques of the Milken-Boesky-Thorp crew, and a recurrent theme in the 98-count indictment that sent Milken to jail).

There were indictments (though, somehow, not of Black or Monsieur Rene Thierry de La Villehuchet). After the indictments, Jack Byrne, recognizing that he’d been cheated out of a deal, sued Black and won an $80 million dollar judgment, some $30 million of which was ultimately paid to Jack Byrne’s company.

Jack Byrne, of course, is the father of Patrick Byrne, who a few years later received a vicious death threat, allegedly by way of a Russian matryoshka doll delivered by Leon Black’s Mafia business partner Felix Sater.

* * * * * * * *

None of which is to suggest that Black or Michael Milken had anything to do with the matryoshka doll or the death threat. Milken is now a “prominent philanthropist,” and Black is a “prominent investor.” But if anybody sees Mr. Black, please ask him if he thinks his Mafia friends could help us get to the bottom of this.

(Neither Black nor Felix nor Milken return my calls).

* * * * * * * *

Executive Life, the company that Black’s group illegally purchased, was in bankruptcy because it had been transformed into a Ponzi scheme by Fred Carr, who is widely regarded to have been Michael Milken’s single most important junk bond crony.

Milken delivered billions of dollars in junk bond finance to Carr, and Carr used much of his Milken finance to buy (from Milken) junk bonds that had been issued by Gene Phillips, the Belzbergs, Carl Lindner, and few others in Milken’s close circle of cronies.

Prior to destroying Executive Life, Carr was tied to a mutual fund company called Investors Overseas Services. Carr was a “feeder” (somebody who raised money) for Investors Overseas Services, and at one point he announced that he was a major shareholder in the company and planned to take it over.

Another “feeder” to Investor Overseas Services (OIS) was John Pullman, a reputed associate of the Genovese organized crime family. At one point, Canadian police taped a conversation in which Anthony “Fat Tony” Salerno (the fellow whom John Mulheren befriended in prison after failing to assassinate Ivan Boesky) suggested that Pullman owed him money.

There was also Sylvain Ferdman. He couriered cash to IOS from clients in South America. Ferdman testified before a grand jury in New York that he had also been a courier for the Genovese organized crime family.

* * * * * * * *

No story about Michael Milken is complete without reference to a “prominent investor” named Meshulum Riklis. By most every account, Riklis was Milken’s first big client and his most important mentor – the man who taught Milken the art of junk bond Ponzis and stock manipulation.

Riklis, who was also known as the husband of Hollywood starlet Pia Zadora, began working with Milken not long after Riklis bought Schenley Distributors, a distillery, in a deal that was clouded by accusations of pay-offs to organized crime. Schenley retained as its major distributors one Joseph Fusco, reputed to be a former member of Al Capone’s gang in Chicago, and Joseph Linsey, a colleague of the Genovese family mobster Meyer Lansky (who worked closely with Michael Steinhardt’s father).

Riklis’s next move was to buy the Riviera casino in Las Vegas. Reportedly, he was hand-picked for this deal by the sellers, a group of Mafia-affiliated characters led by Morris Shenker, who was the personal attorney, close confidant, and business partner of Jimmy Hoffa, the Mafia-connected president of the Teamsters.

One day, Hoffa had a meeting scheduled with Anthony “Tony Jack” Giacalone and Anthony “Tony Pro” Provenzano, two capos of the Genovese organized crime family. Hoffa disappeared on the way to the meeting and was never seen again.

By then, though, the Teamsters had become one of Milken’s most important customers –dependable buyers of junk bonds that Milken issued for select cronies – Riklis, Carr, Gene Phillips, Carl Lindner (who was acquiring United Brands when Leon Black’s father fell through a thick plate glass window), and just a few others.

* * * * * * * *

Through Riklis and the Teamsters, Milken built a solid clientele of Las Vegas casino operators, such as Carl Icahn, and related enterprises (such as the Genovese-financed ZZZZ Best carpet cleaning outfit).

One of Milken’s biggest clients was Steve Wynn, a “prominent investor” who received lots of Milken finance to open casinos and buy (from Milken) junk bonds issued by other Milken cronies – Lindner, Riklis, Gene Phillips, Icahn, and a just a few others (all of whom had a certain cachet – more on the others in upcoming stories).

Wynn is now widely credited with transforming Las Vegas into the kind of place where you can go with the kids.

Meanwhile, Milken describes Wynn as one of his closest friends.

In 1983, which is right around the time that Milken and Wynn began doing business together, the Criminal Investigation Department of London’s Scotland Yard produced a report stating that “the strong inference which can be drawn from the new intelligence is that Stephen Wynn…has been operating under the aegis of the Genovese [Mafia] family since he first went to Las Vegas in the 1960s…”

Scotland Yard determined that there was an especially strong relationship between Wynn’s father, Mike, and Genovese mobster Anthony “Fat Tony” Salerno. Around this time, the FBI caught “Fat Tony” on tape, in a conversation that suggested that the mobster had ties to the younger Wynn as well. Among other things, “Fat Tony” told his colleagues that they should try to get the younger Wynn to reign back his activities in Las Vegas. Wynn had become too conspicuous.

This was before “Fat Tony” entered into jail-cell consultations with John Mulheren, the Milken crony who had sought to murder Ivan Boesky. It was after “Fat Tony” was caught on tape describing his relationship with the “feeder” who worked with Milken crony Fred Carr on the Investors Overseas Services.

Wynn vigorously denies any connection to “Fat Tony” and the Mafia.

By the way, “Fat Tony” wore a fedora and usually had big Cuban cigar in his mouth. These people really do exist.

They have a certain cachet.

* * * * * * * *

Meshulum Riklis also denies having any connection to the Mafia.

But he does not deny that he at one point tried to buy Investors Overseas Services. This was right about the time that Milken-crony Fred Carr began buying up shares in IOS. It was also right about the time that Investors Overseas Services was found to be the biggest Ponzi fraud in history.

Soon after, Investors Overseas Services was handed over to a “prominent investor” named Robert Vesco, who looted it dry, and fled to Cuba.

* * * * * * * *

Investors Overseas Services was the biggest Ponzi scheme in history until last month, when Bernard Madoff’s Mafia-affiliated operation was revealed to be the new all-time biggest Ponzi scheme.

Investors Overseas Services was a straight-forward swindle. Bernard Madoff’s $50 billion Ponzi was more complicated, involving not just his fund management business, but also his brokerages.

Madoff’s brokerages engaged in naked short selling (offloading stock that had not been borrowed or purchased—phantom stock), likely on behalf of miscreant hedge funds looking to drive down prices. In fact, Madoff successfully lobbied the SEC to enact a rule that allowed market makers such as himself to engage in naked short selling. At the SEC, this rule was called “The Madoff Exception.”

Moreover, a source who has seen some of Madoff’s trading records says that Madoff filled buy orders for stock by naked short selling the stock to his customers’ accounts. So, perversely, significant buying volume through Madoff’s brokerages in a firm’s stock would generate yet more phantom shares, putting downward pressure on the price of that stock.

All of this naked short selling created massive liabilities (probably accounted for as “stock sold, and not yet delivered”). Those liabilities, plus the money that Madoff simply pocketed instead of buying or borrowing real stock, surely accounted for a large chunk of that $50 billion figure.

Last summer, naked short selling (phantom stock) burst into public view as an integral factor in the implosion of the U.S. financial system. In November 2008, former SEC Chairman Harvey Pitt, echoing the words of many other experts and officials, said, “Naked short selling is what’s causing a lot of the problems in the market.”

In other words, Madoff’s operation was not just the largest known swindle in history. It was also a phantom stock machine. And that makes it but one participant in a much bigger scandal — a crime that might have brought us to the brink of a second Great Depression.

* * * * * * * *

At any rate, historic achievements tend to have overlapping protagonists. So it was no surprise to learn that one of Madoff’s most important “feeders” was Fairfield Greenwich Group, part-owned by a “prominent investor” named Philip Taub. Philip’s father, Said Taub, a “prominent investor” from Europe, had been an important “feeder,” along with Michael Milken’s cronies and other people affiliated with the Genovese Mafia, for the Investors Overseas Services Ponzi.

Another Madoff “feeder” (and a partner with Madoff in a brokerage called Cohmad) was a “prominent investor” named Robert Jaffe. Previously, while working for E.F. Hutton, Jaffe ran money for the Anguilo brothers, the Boston dons of the Genovese organized crime family.

There was also Sonja Kohn, who was a “prominent” member of the Wall Street investment community before moving to Austria to set up Bank Medici, the primary purpose of which seems to have been to find Russian oligarchs and mafiosi (often one and the same) to participate in Madoff’s schemes.

According to The New York Times, Kohn has disappeared. She apparently told people that she feared that somebody would have her killed.

* * * * * * * *

And, finally, there is the sad story of the French aristocrat Monsieur Rene Thierry Magon de La Villehuchet.

As you will recall, this aristocrat almost single-handedly funded Leon Black’s Apollo Group. And you will remember that this aristocrat also played a key role in Black’s bid for Executive Life – a bid that turned out to be illegal, resulting in Black losing an $80 million lawsuit to the father of Deep Capture reporter Patrick Byrne.

In later years, this French aristocrat remained one of Leon Black’s most important business associates. He was a loyal friend – a committed member of the Michael Milken network – even after Black’s Mafia business partner Felix Sater threatened to murder Patrick Byrne (This according to the courier of that threat, who quoted Felix as saying, “we’re going to fucking take it private” if Patrick continued his crusade against illegal naked short selling.).

All of which makes it interesting to know that this French aristocrat also raised billions of dollars for the greatest Ponzi scheme the world has ever known – a Ponzi scheme that entailed illegal naked short selling that probably helped topple the American financial system.

That’s right, Monsieur Rene Thierry Magon de La Villehuchet not only provided most of the initial funding to Milken-crony Leon Black’s Apollo Group. He was also one of the most devoted “feeders” to the Bernard Madoff $50 billion phantom stock Mafia swindle.

And one day last month, police entered a luxurious office in a New York skyscraper. On the desk, there were pills (what kind of pills has not yet been revealed). On the floor, there was a box cutter. There was no note.

But there he was — Monsieur Rene Thierry Magon de La Villehuchet.

He was dead.

They said it was suicide.

* * * * * * * *

To be continued….

* * * * * * * *

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

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

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

* * * * * * * *

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

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

* * * * * * * *

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

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

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

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

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

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

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

I figured it would take a week.

* * * * * * * *

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

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

* * * * * * * *

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

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

The famous criminals were Michael Milken and Ivan Boesky.

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

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

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

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

After that, nobody heard much from Boesky.

* * * * * * * *

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

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

“Whatcha reading?” one said.

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

“Yes,” I said, “he’s mentioned”

“Haven’t read it,” the man said.

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

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

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

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

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

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

* * * * * * * *

Patrick kept on fighting.

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

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

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

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

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

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

That said, my questions about this have gone unanswered.

* * * * * * * *

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

* * * * * * * *

To be continued….

* * * * * * * *

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

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

1) email it to a dozen friends;

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

Journalists who write about short selling hedge funds fall into three categories.

The first category is comprised of a very small number of journalists who have deliberately whitewashed the dubious activities of their short selling sources. These journalists–such as Herb Greenberg (whose stories for MarketWatch.com invariably served the interests of the same short sellers who are now paying Herb’s salary), and former BusinessWeek reporter Gary Weiss (who works with a cast of convicted criminals and flimflammers to smear the reputations of people who are critical of short selling crimes)–are, at some level, corrupt.

The second, larger category is comprised of journalists who gorge on the junk food fed to them by the hedge fund lobby, subsequently farting out the predictable fog – “short sellers are vital to the markets;” “short sellers are vital media sources;” “short sellers were right about company X because company X is now bankrupt.” To which you say, yeah, but some of those short sellers commit crimes that destroy companies – and the journalists say, yeah, that might be, but it’s hard to prove a crime, deadlines loom, and sloth has its appeal, so “fart, fart, fart.”

The third category is comprised of the small but growing number of journalists who have actually spent some time chewing on the data and the evidence – and are now digesting this nourishing roughage into something a bit more solid – something like stories that show that short selling shenanigans just might have contributed to the near total collapse of the American financial system.

As evidence that the latter sort of journalists do, indeed, exist, consider that no less than five Wall Street Journal reporters spent several weeks working together on an investigative story about how short selling might have helped fuel the panic that nearly took down Morgan Stanley in September.

The result, published yesterday, revealed that:

• Hedge fund managers Dan Loeb and Israel Englander pulled their money out of Morgan after taking large short positions in the company. Jim Chanos, head of the short seller lobby, also yanked his money, though he claims not to have been short Morgan. (The unstated suggestion is that the shorts might have worked together – simultaneously pulling their billions in order to create the illusion of a run on the bank.)

• At the same time that the hedge funds were yanking their money and taking big short positions, somebody bombarded the market with false rumors about Morgan losing access to credit. New York Attorney General Andrew Cuomo and the Securities and Exchange Commission are looking into whether short sellers were responsible for these rumors.

• While the false rumors circulated, the price of Morgan Stanley credit default swaps soared. The New York AG and the SEC are examining “whether traders bought swaps at high prices to spark fear about Morgan’s stability in order to profit on other trading positions [short sales], and whether trading involved bogus price quotes and sham trades.”

• This “pattern of trading, which previously had battered securities firms Bear Stearns Cos. and Lehman, now is dogging Citigroup, whose stock fell 60% last week to a 16-year low.” (The unstated suggestion, contrary to what the Journal used to tell us all the time, is that it is not just “bad management” that causes stock prices to lose half their value in a few days.)

The Journal might have done one better by noting that Loeb, Englander, and Chanos are part of a tight clique of hedge fund managers who tend to attack the same companies.

The Journal might also have pointed out that when these hedge fund managers attack, they often “share ideas” (ie., spout the same false information and distorted analysis about their victim companies, sometimes anonymously on Internet message boards).

And it would have been worth noting that the companies targeted by these hedge fund managers are invariably victimized by naked short selling. That is, whenever these particular hedge funds are swarming, somebody is selling a lot of stock that they do not possess, and therefore failing to deliver the stock on time.

The SEC’s “failure to deliver” data for September will become public in a couple of weeks. If the data shows, as I suspect it will, that Morgan Stanley was targeted by illegal naked short selling, then maybe The Wall Street Journal will do a follow-up report.

Before that, The Journal’s reporters could take a look at the data through June, which shows quite clearly that in addition to the “pattern of trading” cited in yesterday’s story, Bear Stearns was buried under waves of naked short selling, beginning in January. On the day that CNBC’s David Faber reported the false news (fed to him by a hedge fund “I have known for twenty years”) that Goldman Sachs had cut off Bear’s access to credit, more than a million shares of Bear Stearns were sold naked, failing to be delivered within the allotted three days. Most of those shares – and another 10 million Bear Stearns shares sold short in March – have, to this day, never been delivered.

Then there is the data that shows that, market wide, “failures to deliver” doubled between 2007 and 2008, and peaked at 2 billion shares at the end of June – just before the SEC issued its July 15 “emergency order” protecting 19 big financial institutions from naked short selling.

While the “emergency order” was in place, stock prices increased dramatically. Within weeks after the “emergency order” was lifted, a number of those 19 protected companies – including Lehman Brothers, Merrill Lynch, Morgan Stanley, Citigroup, Fannie Mae, and Freddie Mac – saw their stocks plunge to crisis levels, and were then vaporized, nationalized, or bailed out.

The data through June shows that nearly all of those companies had been hit with massive levels of naked short selling, with between one million and 12 million shares failing to deliver in multiple spurts of several days. Washington Mutual, IndyMac, and a few dozen other now-defunct financial companies were clobbered with even higher levels of fails — day after day for weeks on end. Many non-financial companies have been hit even harder.

In fact, the available data understates the problem. There could be ten, 100, or many more times as many failures to deliver, but we cannot know for sure because that black-box Wall Street outfit called the Depository Trust and Clearing Corporation refuses to release more complete data. It also refuses to reveal which criminal hedge funds are engaged in naked short selling.

Meanwhile, the DTTC vehemently denies that naked short selling is a problem and attacks journalists, critics, and former DTTC employees who say otherwise – all part of a disinformation campaign orchestrated with help from the corrupt former BusinessWeek reporter Gary Weiss and his criminal accomplices, some of whom are paid by Dan Loeb, the hedge fund manager who features in yesterday’s Journal story.

Gary has gone so far as to hijack Wikipedia in cahoots with a Wikipedia administrator and former MI6 agent named Linda Mack. Anybody is supposed to be able to edit the online encyclopedia, but until recently only Gary and Linda Mack could touch the entry on “naked short selling” (which of course said there is no such crime). Gary flat out denies working with the DTCC and says that if somebody saw him go into the DTTC’s office, it was to “use an ATM machine.” He also continues to flat-out deny that he has ever edited Wikipedia, even though he has been exposed by The Register, a respected British publication.

After The Wall Street Journal figures out why the DTTC is protecting criminals, it could investigate why the SEC has never prosecuted a hedge fund for naked short selling, and why the Wall Street cronies who run the commission quashed at least two major investigations into suspected short selling crimes.

One of those investigations (targeting research firm Gradient Analytics, but meant to be the beginning of larger inquiry into the activities of Gradient’s short selling clients, was shut down under pressure from the aforementioned corrupt journalists, several of whom (Herb Greenberg, Jim Cramer, and Carol Remond of Dow Jones Newswires) had received government subpoenas because of their unusually close ties to Gradient and the aforementioned clique of short sellers.

Another investigation (into suspected naked short selling that SEC whistleblower Gary Aguirre described in a letter to the U.S. Congress as having the potential to “seriously injure the financial markets”) was shut down under pressure from Morgan Stanley CEO John Mack, who apparently had “juice” at the SEC. (For details see the U.S. Senate’s 700 page report on the matter. When the Senate refers to “market manipulation,” it is describing naked short selling.)

In yesterday’s story, The Journal notes that “sales of credit-default swaps were a profit gold mine for Wall Street. But, ironically, during those tumultuous few days in mid-September, the swaps market turned on Morgan Stanley like a financial Frankenstein.”

The Journal should have noted that naked short selling, too, was a gold mine for Morgan Stanley, and that given Mack’s role in shutting down the SEC investigation, it is kind of ironic that the Morgan CEO later found himself complaining to the SEC that short sellers had illegally manipulated his stock to single digits. Indeed, this was a stunning admission that a crime long denied by Wall Street does, in fact, occur.

The Journal could also investigate why the aforementioned corrupt journalists smeared Gary Aguirre, circulating the story (completely false, according to the U.S. Senate and the SEC inspector general, and all available evidence) that the SEC whistleblower had been fired for poor performance. There is also the question as to why these journalists, most of whom have yet to publish a story that was not sourced from the aforementioned clique of hedge funds, went to such lengths to smear other critics of naked short selling – everybody from Deep Capture reporter Patrick Byrne to the blogger who calls himself the Easter Bunny. .

The Journal might also be interested to know that one of those short selling hedge funds, Kingsford Capital (managed by corrupt journalist Herb Greenberg’s former co-editor at TheStreet.com) announced that it would begin paying my salary at the Columbia Journalism Review (where I was then an editor), just before CJR was going to publish a story about naked short sellers (including Kingsford Capital) and captured journalists (including Herb). Indeed, three of the four journalists who have begun work on major stories about naked short selling have ended up shelving or watering down their stories, not long before receiving funding or salaries from this same clique of hedge funds (more on this in a coming dispatch).

Perhaps a shifty hedge fund will offer jobs to the Journal’s hard-working reporters, too. Either that, or they will get smeared as “conspiracy theorists” or “knuckleheads who don’t understand markets and were fired from their previous jobs.” Maybe the hard-working reporters will give up.

Or maybe they’ll keep chewing on the facts and publish a story about how captured regulators, corrupt journalists, a colorful cast of convicted criminals, the black box DTTC, and the aforementioned clique of hedge funds all sought to cover-up a crime that is now implicated in the greatest market cataclysm since 1929.

Now, that would be some good shit.

* * * * * * * *

Tipsters, crusaders, and thinkers — feel free to contact me at mitch0033@gmail.com. Same goes for journalists wishing to obtain data and evidence — free of charge, of course.

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

1) email it to a dozen friends;

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

“Morgan Stanley shares have been under extraordinary pressure as of late, for no apparent fundamental reason, as we estimate liquidity, the balance sheet, and long-term earnings, prospects are sound.”

- Fox-Pitt analyst David Trone in a research note, today

Here we go again. A giant bank has some weaknesses, but it is, in all respects, a going concern — except that short sellers are peddling rumors and phantom stock, so the share price is plummeting. With the share price in peril, the rating agencies (perhaps over vigilant after taking so much criticism from short sellers and the media) put the bank’s debt ratings on review for a downgrade.

Meanwhile, short sellers corner the market for the bank’s credit default swaps, and point to the value of the CDS as evidence that the bank is doomed. They feed the media with analyses and bogus indexes that mark the bank’s assets to nothing. They spread the news that the bank’s counterparties and trading partners could bail.

The clients and partners stay with the bank. Up until now they have no reason not to.

But then, there’s more naked short selling, the hedge funds flooding the market with stock they do not possess – phantom stock. Maybe the hedge funds send a fax to CNBC with one last rumor. Over the course of a day or two, the stock price is slashed in half.

Then, suddenly, the stock is in the single digits.

As a result of the low stock price – not as result of the balance sheet – the bank’s partners and clients freak out. This time, they really do pull their money.

End of bank.

And if there are one or two more like this — end of story. The financial system will be fried.

We’ve seen precisely the same scenario with Bear Stearns, Lehman, Merrill Lynch, Washington Mutual, and IndyMac. A variant of this scenario took down AIG, Fannie Mae, Freddie Mac, and perhaps 200 other companies before them.

Morgan Stanley could be gone by next week.

We have new data for September that shows that there was plenty of short selling of Morgan Stanley (and other companies) even during the SEC’s ban on short selling, which ended Wednesday at midnight. Some hedge funds ignored the ban, and the SEC did nothing.

Worse, in place of the ban, the SEC has offered only tepid new rules (cheered by the short seller lobby) that do little to prevent the sale of phantom stock. Under these rules, short sellers do not have to borrow real stock before they sell it. They merely have to “locate” the stock. The SEC doesn’t say how it’s supposed to know whether a short seller has actually located real stock as opposed to telling his broker, “yeah, I located it, it’s in your mother’s wig” (which is pretty much how these conversations go).

Furthermore, the SEC gives hedge funds three days to deliver the stock they sell. This would be fine if they were required to possess real stock before selling. But since they are not, a hedge fund can offload a large block of phantom stock and let it eat away at the financial system for at least three days.

Sometimes, the hedge funds settle the trade with another block of phantom stock, transferred to them by a friendly broker. But even if they fail to deliver the stock, the SEC stipulates no serious penalties. Meanwhile, it shows no inclination to actually prosecute anyone for the jailable crime of short-side market manipulation.

I’m willing to bet anybody a sizeable amount of money that when the SEC releases its “failures to deliver” numbers for October, they will suggest unbridled illegal naked short selling of Morgan Stanley during this past week, even on days when the ban on all short selling was in place. The data will show that naked short selling rose to unprecedented levels just before somebody floated Wednesday’s false rumor that Morgan Stanley was going to lose its $9 billion deal with Mitsubishi.

And the data will show that after the ban was lifted, the law-breaking shorts went nuclear – with failures to deliver of well over a million shares every day. Ultimately, many millions of Morgan Stanley’s shares will be sold and never delivered, just as hedge funds have yet to deliver more than 10 million shares of Bear Stearns that they sold during that bank’s final days last March.

As I write this, Morgan’s stock price is in the single digits, trading around 7 bucks, down an astounding 70% in the 36 hours since the short selling ban was lifted. A death spiral like that does not happen naturally. Because of the short-battered stock price – and only the stock price (again, this has nothing to do with the balance sheet) — Moody’s today put Morgan’s long-term debt ratings on review for a downgrade.

I suspect another 15% off the stock price, and one more well-placed rumor, will do the trick. There will be a run on the bank. Morgan will be gone. And the global financial fire will blaze still hotter.

It is beyond surreal that our most prestigious financial media continue to allow this to happen. It is beyond comprehension that journalists – in possession of the evidence, and presumably in possession of their faculties – continue to spout the line, originally formulated by short-sellers and now woven into conventional wisdom – that this crisis is only about bad mortgages and bad managers and bad balance sheets.

One can argue that, in the long run, the world is better off without half of Wall Street – without its ponzi schemes and paper profits, the sickening salaries and arrogance. Certainly, anyone with a Shakespearean state of mind will appreciate the fates of Morgan Stanley, Lehman, and Bear – all of which eagerly pimped their dodgy prime brokerage services to the very short sellers who destroyed them.

But it does not require Shakespearean nuance to see that this crisis is not just about scandalous banks. It is about criminals destroying banks that are tawdry, yes, but possessing of some virtue, and capable, if left unmolested, of carrying on and contributing to society – perhaps even staving off a global calamity.

Moreover, these same criminals are destroying many other companies, most of which are run by honest people who labor far from the insalubrious alleyways of southern Manhattan. The SEC maintains a list of companies whose stock has failed to deliver in excessive quantities. As I explained in an earlier dispatch, many victims of naked short selling (including some of the big banks) do not appear on that list. But surely it is a scandal that more than 300 companies, many of them financial firms that have nothing to do with Wall Street, do appear on the list.

Surely, it is an even bigger scandal that around 100 of those companies have appeared on the list chronically, day after day, for months on end, and though the sheriff posts the names of these rape victims on its wall, it has yet to prosecute a single rapist. The SEC tells us that a billion shares remain undelivered on any given day — and yet it doesn’t bother to find out which hedge funds sold the phantom stock.

It might be too late, but if Washington and the financial media really want to save the world, they ought to start by demanding that hedge funds borrow real stock before they sell it. And what the heck: Maybe some newspaper could offer the radical suggestion that the SEC should tell hedge funds that they can either go to jail or close out all unsettled trades – today.

If one hedge fund manager were to get cuffed, all the others with outstanding “failures to deliver” might scramble to buy real stock so they can settle. The markets might soar. The innocent victims might get some relief. And the delinquents on Wall Street would get some time to clean up their acts.

Meanwhile, would anyone care to guess which company the naked short sellers will take down after Morgan Stanley?

And would anyone like to share a bunker with canned goods and weapons?

* * * * * * * *

If you’d like to place that bet on the Morgan Stanley data (I’ll give 2:1 odds that it will show short sellers offloading massive amounts of phantom stock , with more than a million “failures to deliver” every day) feel free to contact me. Mitch0033@gmail.com.

* * * * * * * *

In a few hours, the SEC will lift its ban on short-selling of 900 stocks. That is well and good, except that it appears that hedge funds will also be permitted to resume abusive naked short selling – offloading stock that they do not possess in order to dilute supply and drive down prices.

Given that naked short selling precipitated the collapse of Lehman Brothers, which triggered global panic, it seems fair to say that the resumption of naked short selling could precipitate the collapse of another big bank, which will fuel still more panic, and then we will really be screwed.

Say what you will about Lehman’s balance sheet, that company was not going out of business until its stock price hit rock bottom, making it impossible to raise capital, and triggering a run on the bank. The stock price hit rock bottom because it was bombarded by naked short selling and false rumors.

Some financial media have been cheering the imminent lifting of the short-selling ban. According to these journalists, the ban did not prevent the stock market turmoil of the last couple weeks. Therefore, lifting the ban should not make things worse and short-selling is good for the markets and blah blah blah.

The media never cease to astound on this issue. The fact that markets have been bad does not mean they wouldn’t have been a whole lot worse without the ban. And if short-selling is good for markets, this is fully besides the point. The point is that naked short selling is most definitely not good for the markets, and, as of tomorrow, that very not-good-for-the-markets activity is going to be allowed to resume with the full acquiescence of the SEC and the financial media.

Look, on September 16, Morgan Stanley was trading around $26. On September 17, it hit a low of $11. The stock was slashed in half in less than a day. That tends to happen when a company is under a full-scale attack by naked short sellers.

On the day after Morgan Stanley was slashed in half, the SEC banned short selling. It is fair to say that if the SEC had not acted, Morgan Stanley would not be with us today.

After the SEC banned short selling, hedge funds stopped circulating false rumors about the companies they had been attacking. Today, in anticipation of the short selling ban coming to an end, hedge funds began circulating false rumors about Morgan Stanley – the most damaging being that Mitsubishi had pulled out of an agreement to inject $9 billion of capital into the bank.

What happens tomorrow when those rumor-mongering hedge funds resume naked short selling?

As one prominent economist said, forebodingly, “We will see.”