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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Innocent executive: “No”

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

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

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

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

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

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

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

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

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

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

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

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John Paulson and the Greatest Pump and Short Fraud Ever

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John Paulson and the Greatest Pump and Short Fraud Ever


By now, everybody knows that the market for collateralized debt obligations was riddled with fraud in the lead-up to the financial crisis. What is less known is the fact that hedge fund managers helped create and inflate the market for these toxic securities specifically so that they could bet against them and profit from the inevitable collapse.

An example of a particularly sordid scheme, orchestrated by hedge fund billionaire John Paulson, was discovered some time ago by David Fiderer, a blogger for the Huffington Post. The information in Fiderer’s blog is rather incriminating, and, of course, the mainstream media is not on the case, so I think it bears repeating.

In a close reading of Wall Street Journal Gregory Zuckerman’s book, “The Greatest Trade Ever”, an otherwise starry-eyed account of Paulson’s bets against the mortgage market, Fiderer discovered this nugget:

“Paulson and [partner Paolo Pellegrini] were eager to find ways to expand their wager against risky mortgages. Accumulating it in the market sometimes proved to be a slow process. So they made appointments with bankers at Bear Stearns, Deutsche Bank (NYSE:DB), Goldman Sachs (NYSE:GS), and other banks to ask if they would create CDOs that Paulson & Co. could essentially bet against.”

As Fiderer explains, Paulson asked the banks to create those CDOs “so that they could be sold to some suckers at close to par. That way, Paulson’s hedge fund could approach some other sucker who would sell an insurance policy, or credit default swap, on the newly minted CDOs. Bear, Deutsche and Goldman knew perfectly well what Paulson’s motivation was. He made no secret of his belief that the CDOs subordinate claims on the mortgage collateral were close to worthless. By the time others have figured out the fatal flaws in these securities which had been ignored by the rating agencies, Paulson could collect up to $5 billion.

“Paulson not only initiated these transactions, he also specified the terms he wanted, identifying which mortgages would be stuffed into the CDOs, and how the CDOs should be structured. Within the overall framework set by Paulson’s team, banks and investors were allowed to do some minor tweaking.”

It is not clear which banks ultimately participated in Paulson’s scam, but Fiderer quotes Bear Stearns trader Scott Eichel as saying that his bank refused. “It didn’t pass the ethics standards;” Eichel said, “it was a reputation issue and it didn’t pass our moral compass. We didn’t think we could sell deals that someone was shorting on the other side.” Bear Stearns’ moral compass was usually pointed towards the darker regions, but perhaps this is why Paulson subsequently became one of the more eager short sellers of Bear Stearns’ stock.

Fiderer continues: “Prior to 2006, there were not many opportunities for naked short selling on subprime securitizations. But in January of that year, investment banks launched a new product, which enabled Paulson to place those bets on a large scale. The ABX index, a sort of Dow Jones Average of subprime mortgage securities, facilitated benchmarking the price of credit default swaps.”

In fact, it was a black box company called the Markit Group that created the ABX index. The banks were minor shareholders in Markit Group and provided data. I have noted in a previous blog that the Markit Group is a dubious outfit to say the least, and there is good reason to suspect that the direction of the ABX index was influenced by hedge fund managers and their allies at the big banks. I do not have evidence that Paulson was one of those hedge funds, but authorities ought to be asking questions.

Fiderer goes on to suggest that bad loans to homeowners were a significant cause of the financial crisis. On this front, I disagree with him. Certainly, some mortgage lenders were unscrupulous, and there was a certain amount of predatory lending, but the conventional wisdom that this is what crashed the economy is simply false.

At the time that the mortgage securities markets began to go south in 2007, defaults on subprime loans had increased only slightly month-to-month, and were in fact considerably lower than in earlier years. In the second quarter of 2007, for example, only 7.7 percent of subprime loans were 30 days past due, slightly up from 6.76 percent in the second quarter of 2006, but considerably lower than the 9.9 percent in the second quarter of 2001.

The problem lied not in the loans themselves, but in the fact that the loans had been packaged (apparently, to a large extent, at the behest of John Paulson and perhaps other bearish billionaires) into fraudulent securities that were traded and probably manipulated by a select number of hedge funds and large banks. In a somewhat similar scheme, hedge funds often pump up the stock of public companies before initiating short selling attacks aimed at demolishing those same companies.

The economy was brought to its knees by a few powerful and eminently dirty players on Wall Street, not by poor people who had the temerity to buy themselves houses.

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The Markit Group: A Black-Box Company that Devastated Markets

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The Markit Group: A Black-Box Company that Devastated Markets


Although much attention has been directed at the contribution made by credit default swaps  to the financial crisis, most discussion has focused on the companies, such as American International Group, that posted big losses because they sold these instruments without sufficient due diligence.

Another line of inquiry has not been pursued, however, though it is of equal, and perhaps greater, significance. That line of inquiry concerns the way in which the prices of credit default swaps effect the perceived value of all forms of debt — corporate bonds, commercial mortgages, home mortgages, and collateralized debt obligations — and as a result, the ability of hedge funds manipulators to use credit default swaps to enhance their bear raids on public companies.

If short sellers can manipulate the price of credit default swaps, they can disrupt those companies whose debt is insured by the credit default swaps whose prices are manipulated.  The game plan runs as follows: find a company that relies on a layer of debt that is both permanent, and which rolls over frequently (most financial firms fit this description). Short sell that company’s stock. Then manipulate the price of the CDS upwards, preferably into a spike, as you spread the news of the skyrocketing CDS price (perhaps with the cooperation of compliant journalists at, say, CNBC).

Because the CDS is, in essence, an insurance policy on the debt of the company, the spiking CDS pricing will cause the company’s lenders to panic and cut off access to credit. As this happens, the company’s stock will nosedive, thereby cutting off access to equity capital. Thus suddenly deprived of credit and equity, the firm collapses, and the hedge fund collects on its short bets.

Moreover, credit default swap prices are the primary inputs for important indices (such as the CMBX and the ABX) measuring the movement of the overall market for commercial and home mortgages.  In the months leading up to the financial crisis of 2008, short sellers pointed to these indices in order to argue  that investment banks – most notably Bear Stearns and Lehman Brothers – had overvalued the mortgage debt and property on their books. Meanwhile, several hedge funds made billions in profits betting that those indexes would drop.

It should therefore be a matter of some concern that credit default swap “prices” and the indexes derived from them are determined almost entirely by a little company with zero transparency and, it appears probable, a high exposure to influence from market manipulators. The company is called Markit Group, and there is every reason to believe that its CDS-driven indices (the CMBX, the ABX, and several others) are inaccurate, while the credit default swap “prices” that they publish  and which rock the market are in fact  nowhere close to the prices at which credit default swaps actually trade.

Last year, the media reported that New York Attorney General Andrew Cuomo had sent subpoenas to Markit Group as part of an investigation into possible manipulation of credit default swap prices by short sellers. This investigation, like Mr. Cuomo’s other investigations into market manipulation, have yielded no prosecutions.

The Department of Justice is reportedly investigating Markit Group for anti-trust violations. This investigation (which is reportedly focused on how Markit Group packages and sells its information) seems to acknowledge that Market Group has near-monopolistic control of information about credit default swap prices. However, if the press reports are correct, the DOJ has not considered the possible appeal of this monopolistic control to market manipulators.

Meanwhile, Henry Hu, the director of the Securities and Exchange Commission’s division of risk, has said that it has been nearly impossible for the SEC to conduct investigations into any matter concerning credit default swaps because the commission does not have access to any data on the trading of CDSs. In itself, this is a shocking admission.  It is all the more shocking when one considers that the necessary data exists and might be in the hands of the Markit Group – a black box company based in London.

A thorough investigation of Markit Group is urgently required.

Here is what we know so far:

  • Markit Group was co-founded by Rony Grushka, Lance Uggla, and Kevin Gould. Prior to founding Markit Group, Mr. Grushka’s main line of business was investing in Bulgarian property developments. He recently resigned from the board of Orchid Developments Group, an Israeli-invested company based in Sophia, Bulgaria. Messrs. Uggla and Gould formerly worked for Toronto-Dominion Bank in Canada.
  • Markit Group’s founders also include four hedge funds. However, Markit Group refuses to disclose the names of those hedge funds. In response to an inquiry, a Markit Group spokesman said it was “corporate policy” to keep the names of the hedge funds secret, but he would not say why Markit Group had such a policy. It seems worth knowing whether those hedge funds have any influence over Markit Group’s published information or indexes, and whether those hedge funds are trading on that information. It would also be worth knowing whether those hedge funds or affiliated hedge funds have engaged in short selling of public companies whose debt and stock prices were profoundly affected by the information that Markit Group published.
  • Goldman Sachs, JP Morgan and several other investment banks also have ownership stakes in Markit Group. The investment banks received their stakes in exchange for providing trading data to Markit Group. It would be worth knowing whether these investment banks engaged in short selling ahead of Markit Group’s published indexes and price quotations.
  • Markit Group is secretive about how it creates its indexes. In early 2008, the Wall Street Journal noted that the CMBX simply “doesn’t make sense” and that Markit Group’s indexes “might be exaggerating the amount of distress” in the home and commercial mortgage markets. In 2008, the average prediction for defaults on commercial mortgages was 2%. The CMBX implied that the default rate could be four times that level.
  • When short seller David Einhorn initiated his famous public attack on Lehman Brothers, one of his central arguments was that the CMBX (the index that was likely “exaggerating the amount of distress”) proved that Lehman had overvalued the commercial mortgages on its books.
  • In March 2008, the Commercial Mortgage Securities Association sent a letter to Markit Group asking it disclose basic information about how the CMBX index is created and its daily trading volume. “The volatility in the CMBX index, caused by short sellers, distorts the true picture of the value of commercial-mortgage-backed securities,” the group said in a statement.
  • Markit Group is equally secretive about how it derives its “prices” for credit default swaps. A spokesman for the company spent close to one hour talking to Deep Capture. He did his job well and sounded like he was trying to be helpful. But he told us as little as possible.
  • However, in the course of this conversation, we did learn that Markit Group’s “prices” are not actual, traded prices. They are mere quotations. The Markit Group has what it calls “contributors” – hedge funds and broker-dealers that provide it with information. Markit Group has a grand total of 22 “contributors.” Deep Capture asked Markit Group’s spokesman for the names of these “contributors.” The spokesman said he would try to find out the names and call back later. He never called back.
  • The 22 “contributors” provide Markit Group with quotations, and these quotations become the Markit Group’s “price.” In other words, the “contributors” can quote any price for a CDS that they choose, regardless of whether anyone is actually willing to buy the CDS at that price. Markit Group looks at these quotations. Then it somehow decides which quotations make the most sense. Then it publishes information that purports to represent the actual market price of that CDS. This process is certainly unscientific. And it is ripe for abuse.
  • Consider, for example, the Markit Group “price” for CDSs insuring the debt of company X.  The Markit Group price strongly suggests that company X is going to default on its debt in the immediate future. Short sellers eagerly point to the Markit Group CDS “price” as evidence that company X is doomed. Panic ensues, and suddenly, company X really is doomed. But the fact is, nobody ever bought a company X CDS at the price quoted by Markit Group. Rather, that panic-inducing “price” was, in effect, pulled out of a hat. Who pulled it out of a hat? That is matter of immense importance. There are two possible scenarios:
  • The first possible scenario is that the 22 “contributors” report their quotations in good faith. They should be sending the actual traded price, not just a quotation, but assume they are just doing what was asked of them. From these quotations, Markit Group somehow decides what the “price” should be. It is possible that this decision is based on some secret formula (which would be worrisome); or it is possible that Markit Group executives sit around a table debating what the price should be and take a shot in the dark (which would be even more worrisome); or it is possible that Markit Group deliberately chooses the most horrifying price possible in order to assist the short sellers who are affiliated with its owners (which would be a matter for the authorities).
  • The second possible scenario is that Markit Group acts in good faith (if not scientifically), but one or more of the 22 “contributors” or their affiliates has an interest in seeing company X fail. If just one of those “contributors” sends in an astronomically high quotation, that could be enough. Markit Group factors the absurd quotation into its posted “price” and it suddenly becomes possible to convince the world that company X is about to default on its debt.  Panic ensues, the firm’s layer of debt dries up, the stock price plunges, and perhaps the “contributor” or its affiliate make a lot of money.
  • As Deep Capture understands it, CDS quotations suggested by the 22 “contributors” also help determine the movement of the CMBX and ABX indexes. The movement of these indexes did serious damage to the American economy in multiple ways. The  indexes prompted write downs at most of the major banks and mortgage companies. They were ammunition for short sellers, like David Einhorn, who claimed that companies had cooked their books by not writing down to the rock bottom prices suggested by the Markit Group indexes. They helped precipitate the decline in prices of mortgage securities, and contributed mightily to the panic that spread across the markets.  A lot of people made a lot of money as result of those indexes moving downward. So, it is rather important to know more about how those indexes are formulated, and if they can be driven by the same people who are making directional bets on their movements.

Conclusion: Ten years ago, there was no such thing as a credit default swap. Six years ago, a very small number of investors traded credit default swaps as hedges against the long-shot possibility of corporate defaults. Nobody looked to credit default swaps as reliable indicators of corporate well-being.

Then, suddenly, there were over $60 trillion in credit default swaps outstanding. That is, over the course of a few years, somebody had made over $60 trillion (many times the gross domestic product) in long shot bets that borrowers would default on their debt. As this derivative risk marbled through the system, the trading in credit default swaps was completely opaque. Nobody knew who bought them, who sold them, or at what price.

But starting in 2001, we knew the “prices” of CDSs. We knew the “prices” because two Canadians, a developer of Bulgarian real estate, and four mysterious hedge funds had founded a small, black-box company in London. That company, the Markit Group, achieved near-monopolistic power to publicize the “prices” through its magic process of aggregating quotation information provided by 22 hedge funds and broker-dealers who could well have been betting on the downstream effects of sudden price changes.

These “prices” were not prices in any meaningful sense of the term.  But, suddenly, these “prices” became perhaps the single most important indicator of corporate well-being. Assuming that those four hedge funds and the 22 “contributors” (or hedge funds affiliated with them) bet against public companies, it seems more than possible that short-sellers got to run the craps table, call the dice, and place bets, all at the same time.

So perhaps it is not surprising that a lot of long-shot rolls paid off quite nicely.

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Roddy Boyd and the Bear Stearns Insider

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Roddy Boyd and the Bear Stearns Insider


“Telling the truth is only possible by accident through a special sort of boastfulness…”

- Fyodor Dostoevsky, “The Idiot”

Regular readers of Deep Capture are aware that we have sought to expose certain journalists who seem to serve the interests of a network of market miscreants, many of whom are tied to the famous criminal Michael Milken or his close associates.

One of these journalists is Roddy Boyd, who worked at the New York Post before moving to Fortune magazine. It has come to our attention that Roddy has left Fortune. The magazine did not return a phone call seeking comments on the circumstances behind his departure, but whatever those circumstances might be, it seems fit to honor his departure by publishing an excerpt from a book called “House of Cards.”

In this book, which is written by a Wall Street insider named William Cohan, Roddy is quoted at length, and one particular passage stands out for being quintessentially Roddy. While you are reading the passage, keep in mind that I spent a number of hours talking to Roddy some years ago, and can report that he has a manner of speaking that is similar to what Dostoevsky called “a special sort of boastfulness” –which is to say that Roddy likes to stroke his own back, and in so doing, he often rambles in such a way as to unintentionally admit to his own buffoonery, or to some form of miscreancy on the part of his favorite Wall Street sources.

In this passage, Roddy tells the story of certain communications he had with Tom Marano, Bear Stearns’s (NYSE:BSC) top mortgage trader, on March 6, 2008 – a few days before false rumors began swirling about Bear Stearns’s access to credit. The following week, the false rumors were rampant, and those rumors, along with naked short selling, quickly brought Bear to its knees.

A couple of weeks after the collapse of Bear Stearns, Marano found a new job – with Cerberus Capital Management. As I have detailed elsewhere, Cerberus is run by Steve Feinberg, who was once one of Michael Milken’s top traders at Drexel Burnham. After working for Milken, Feinberg moved to Gruntal & Co., a criminal-infested brokerage, where he worked closely with Steve Cohen, who was once investigated by the SEC for trading on inside information fed to him by Michael Milken’s staff at Drexel.  Cohen now runs SAC Capital, believed to be one of the biggest short sellers of Bear Stearns’s stock.

I am not yet going to state what I think is important about the passage quoted below. But I have other reasons to believe that the facts that Roddy drops in the course of his braggadocio are key to understanding what happened to Bear Stearns. Read the passage yourself, focusing on the facts, not on Roddy’s version of the facts. Consider that Roddy’s conversation with Marano took place on March 6, when there were not yet any rumors in the market, and Bear’s stock was trading above $60. Then, let me know if you spot what’s important.

Here’s the passage:

“…at eleven in the morning on March 6 Marano placed a phone call to Roddy Boyd, then a writer at Fortune. Marano had been a source of Boyd’s for years, when the journalist was covering Wall Street at the New York Post, and had freely offered commentary about his competitors and the markets generally. Boyd had been a trader for eight years before switching careers to journalism, and the two men spoke the same language. ‘I know the mortgage product dead cold,’ Boyd said. Their relationship was a well-defined pas de deux.  ‘It was unusually well defined,’ [Boyd] explained. ‘We knew exactly what we were saying. I could have a very long conversation in two minutes. I protected him always. I never BS’d with him. I never got him in hot water. The corollary was he never BS’d with me, and he would give me good stuff.’

“This time, Marano called Boyd to talk about Bear Stearns, and specifically about his concern that the firms he had traded with for years were suddenly asking him whether Bear had enough cash on hand to execute his trades. ‘He called me at 11:00 A.M. that day and we talked about one or two things,’ Boyd continued. ‘It was weird. He knew it was weird. We did small talk in under ten seconds. I said to him, ‘What’s up?’ He said, ‘What are you hearing about Bear?’ I said, ‘You know what I’m hearing and you know what I’m seeing. He said, ‘I know what you’re hearing and you’re seeing. It’s just baffling.’ Now here I’m playing him a little because I’m hearing things and I’m seeing some things, but he’s not saying much more than I am, so I let him walk and talk. He said to me, ‘Roddy, our guys, our senior guys here, are hearing a really strange thing from custies.’ That’s customers. He said, ‘We were not prepared to hear stuff like this. This is baffling. People are quite literally questioning our solvency, questioning our ability to go on. The shorts are having a lot of fun with us today.’…

“‘He’s thinking two things,’ Boyd continued. ‘One, he’s got to stop this whole line of inquiry right here, right now, because if you have to ask the question, oh my God. Second, he’s thinking about the trajectory of rumor and supposition, and that thesis of smoke versus fire….With a question of their ability to act as a counterparty on the table, that’s unimaginable. I mean, this is Bear Stearns….Now they’re being questioned from the standpoint of fundamental liquidity. He [Marano] said that he believed that these short sellers had been speculating in the credit default swap market and telling counterparties at other firms that they had concerns about Bear Stearns’s liquidity and solvency, and that was driving the cost of spreads wider. What that was doing was making their overnight funding more expensive. That was cutting into their profit margin, and in turn was also starting a sort of cottage industry of rumors about Bear Stearns.’

Roddy continued: “‘There’s no need to explain anything between us,’ he [Marano] said.  I said, ‘Are you sure you’re seeing this?’ He said, ‘Look at [the credit default] swaps.’ So I looked them up and then I see the hockey sticks’ –  a sharp spike up in their cost… ‘He said, ‘It’s unbelievable. It all bullshit.’ At that point—he’s very much a corporate guy—but he had left me [with a clear message]. I’m not stupid. Hedge funds and prime brokerage accounts are unusually skittish about questions of financial health, financial solvency, and he said, ‘I’m hearing there’s questions about our financial health.’ At that point, Marano is telling me he knew he was done, because once that question of credibility goes out there, and serious people say it to you enough, you’re done. It’s all that there is to it. It’s all that there is to it. Where do you go to get your reputation back.’ …

“Boyd worked hard [the following night] and over the weekend trying to figure out which bank—said to be European—had decided it would no longer be a counterparty to Bear Stearns in the overnight financing markets. Obviously, this would be a huge negative development for the firm…‘At that point, I’m pulling my fucking hair out—pardon my language—calling everybody,’ [Boyd] said. ‘I’m calling Deutsche Bank, I’m calling UBS, and I’m very aggressive. Get your senior guys on the phone. Get your financing desk on the phone. I don’t want to talk to some stupid flack. I spent eight years on a desk. I’m smarter than all those flacks. They’re all Kool-Aid drinkers. They don’t honestly know a derivative from a bond from a stock. None of them are going to be able to ask their financing desk. They don’t even know enough to call the repo guys on the financing desk. I told them, Get your financing guys or get your credit guys on the phone with me, or you’re going in Fortune. Here’s the New York Post coming out of me. I said, There’s two ways this is going to work: bad or good. This hand is good; this hand is bad. I shake your hand or I punch you. Let me know…I’m talking to the guys in New York, and they’re saying, We swear to Christ we are not the ones to have done that [cut financing]. If Deutsche Bank had done it, I’m thinking, ‘Okay, that’s the story right there.’ The minute a repo line gets pulled, you die, okay? They die a terrible death.’…

Roddy continued that, after the March 6 call with Marano, ‘“I was thinking, I’m going to poke around in this more…but then I was thinking, This is strange. This is like a situation where you can abuse your position as a reporter. When you’re at Fortune, you have to do stuff right. When you’re at the New York Post, you have to be there first and fastest. At Fortune, you write the first draft of history, and you have to get it right and you have to be consistently right. I’m thinking, I don’t really want to screw with this company – I don’t want to spread rumors. I don’t want to become part of the story. I don’t want to hurt people unnecessarily. I’m an aggressive guy and I’ll pick fights with anyone or anything, but there’s a right way of doing my job and there’s a wrong way. I weighed my duty as an employee here versus the right thing to do.”

Do you see what happened here? Feel free to post your opinion in the comments section. Or contact me privately by email at mitch0033@gmail.com.

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Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 10 of 15)

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Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 10 of 15)



What follows is PART 10 of a 15-PART series. The remaining installments will appear on Deep Capture in the coming days, after which point the story will be published in its entirety.

Click here to read PART 1

Click here to read PART 2

Click here to read PART 3

Click here to read PART 4

Click here to read PART 5

Click here to read PART 6

Click here to read PART 7

Click here to read PART 8

Click here to read Part 9

Where we left off, we had learned that on March 29, 2007, an FDA advisory panel had voted overwhelmingly that Dendreon’s promising treatment for prostate cancer should be approved. As a result, most financial analysts and investors were expecting that Dendreon would become a profitable company. However, ten hedge funds (out of a universe of 11,500 hedge funds) held large numbers of Dendreon put options (bets against the company), suggesting they had reason to believe that Dendreon would be derailed. At least seven of those hedge funds can be tied to Michael Milken or his close associates.

We had also learned that Michael Milken himself stood to profit if Dendreon were to experience any unexpected problems receiving FDA approval. This is because Milken was the early financier and principal deal maker for ProQuest Investments, a fund that (along with an affiliate) controlled a company called Novacea, which was one of Dendreon’s competitors in the race to produce a new treatment for prostate cancer. Meanwhile, a Milken crony, Lindsay Rosenwald (who once helped run D.H. Blair, a Mafia-linked brokerage which specialized in pumping and dumping fake biotech companies) controlled Cougar Biotechnology, which was Dendreon’s second competitor in the race to develop a treatment for prostate cancer. In addition, we had learned that Milken’s “philanthropic” outfit, the Prostate Cancer Foundation, had supported Novacea and Cougar, while turning its back on Dendreon.

Finally, we had learned that on April 13, 2007, The Cancer Letter, a newsletter with a record of publishing information leaked from the FDA in the service of select Wall Street hedge funds, published another FDA leak. This leak was a letter written to the FDA from a doctor named Howard Scher, who was a board member and executive of ProQuest Investments and the chairman of the “Therapeutic Consortium” of Milken’s Prostate Cancer Foundation. In that letter (an unprecedented attempt to lobby the FDA after an advisory panel had already voted), Dr. Scher argued vehemently that Dendreon’s treatment should not be approved.

One of Dr. Scher’s principal arguments against Dendreon was that the FDA advisory panel had improperly “changed the question” regarding the efficacy of Dendreon’s treatment. As we saw in Chapter 9, that claim was false, and Dr. Scher’s other arguments were specious.

But Dendreon’s enemies continued to whisper in reporters’ ears about this issue of “the question,” and the unprecedented lobbying of the FDA continued.

Now we meet another conflicted doctor and the sixth of those seven hedge funds that bet big against Dendreon right before the lobbying began….

* * * * * * * *

On April 20, three weeks after the advisory panel vote, and one week after Dr. Scher’s missive appeared in The Cancer Letter, Forbes journalist Matthew Herper published a story arguing that there was a good chance the FDA would not approve Dendreon’s cancer treatment outright. “If the agency wants to ask Dendreon for more data, it certainly has some outs,” Herper wrote. “The FDA changed the wording of the question…”

Three days later, Dr. Maha Hussain, one of the panel doctors who had quickly voted “No” on the bogus question, wrote a letter to the FDA arguing that Dendreon’s treatment should not be approved. This letter, like Dr. Scher’s, was addressed to FDA commissioners and was presumably confidential. And this letter, like Dr. Sher’s, found its way to The Cancer Letter, which posted it for all to see just three days after it was written.

Dr. Hussain’s arguments were precisely the same as those employed by Dr. Scher and the whispering folks on Wall Street. “The recommendations for approval…are based on data that can only be characterized as best as ‘suggestive’ of possible benefit,” she wrote. “From the scientific and procedural aspects, in general, it would seem that at the end of the day what should determine a positive verdict in any therapeutic trial is the strength of the evidence as critically reviewed by an Advisory Committee…with clear guidance on the question posed to the committee within the framework of the regulatory guidelines and requirements of the FDA for approval.” [Italics mine]

That is, Dr. Hussain—like Dr. Scher, the singing Sendek, and whoever was feeding the journalist Matthew Herper–was suggesting that the FDA panel had voted on the “wrong question.”

Meanwhile, Jonathan Aschoff, the physician-impersonating financial analyst who’d set a target for Dendreon’s stock price to reach a mere $1.50, was telling journalists that the FDA panel would not have voted to approve Dendreon’s treatment if it weren’t for the “substantial” rewording of “the question.” On April 25, Aschoff issued another damaging report, this one asserting, once again, that the FDA would ignore its panel because the panel had voted on the “wrong  question.”

By this time Dendreon supporters were busily circulating transcripts showing that the FDA panelists had, in fact, voted on the legal question. The supporters had also discovered Dr. Scher’s ties to Novacea, Cougar Biotechnology, Proquest, and Michael Milken, and began explaining to all and sundry that ProQuest and Novacea would cash in if Dendreon were not approved. Moreover, the supporters had revealed that Dr. Hussain, the second letter writer, had also done work for the Milken-invested Novacea, and was a member of the “Therapeutic Consortium” of Milken’s Prostate Cancer Foundation.

On April 26, Matthew Herper of Forbes published another article – this one repeating the arguments in Dr. Hussain’s letter. Herper, who had been told about Scher’s conflicts of interest, had apparently decided to investigate. This investigation seemed to have involved nothing more than asking Dr. Scher if he had any conflicts of interest. In his April 26 article, Herper  reported that Scher’s spokesman said “that Scher had nothing to do with his letter leaking [and appearing in The Cancer Letter], and that he knew of no family members who would benefit financially either way if Provenge were approved.”

To reinforce Scher’s credibility, and to make Dendreon’s supporters look silly, Herper added that the supporters had alleged that “Scher’s wife works for a hedge fund that might be short Dendreon…This is not true. She works in human resources for a nursing home company that could not conceivably benefit materially from any news about Dendreon.”

Aside from ignoring Scher’s ties to Milken’s ProQuest Investments, which would profit handsomely if Dendreon were not approved, Herper misconstrued the information about Scher’s wife. The truth was, Dendreon’s supporters had revealed that Scher’s wife had a cousin, Barry Lafer, who was a hedge fund manager. Phone records legally obtained by Deep Capture show that Scher called Lafer, at his office, on April 23, while Herper’s article was in the works.

But the main point of Herper’s article was that “all this debate” (i.e. the Wall Street whispering and the conjectures of two conflicted doctors) made “Dendreon an even riskier stock than other biotechs.” Herper added that according to unnamed “others,” Dendreon’s “studies do not rise to the level usually required for approval.”

Besides being false, this was another way of suggesting that the FDA panelists, all experts in their field, voted in favor of Dendreon because they had misunderstood the standards for approval. They had been asked the “wrong question.”

On April 29, Bloomberg News reported that Dendreon’s shares were being sold at “a record pace” as investors “bet the company’s experimental prostate-cancer drug will fail to win approval from U.S. regulators.”

Then, on May 4, there was yet another letter.  This one was from a University of Washington biostatistician named Dr. Thomas Fleming. It is perhaps noteworthy that Fleming had done work for Gerson Lehrman, an outfit that is owned by former hedge fund managers.

Gerson Lehrman has a remarkable business model which can best be described as “institutionalized bribery.” Clients, mostly hedge funds, hire Gerson to put doctors and other experts on the payroll. In exchange for the payments, the doctors agree to provide hedge funds with “insight” (some say they provide inside information) about clinical trials of drugs that are marketed by public companies. The doctors also agree to talk to reporters (and perhaps also to the FDA) about these drugs. In at least one case it has been clearly established that these hired sources lied (which could well explain, of course, why they were hired).

Like the letters from Dr. Scher and Dr. Hussain, within days of its creation Dr. Fleming’s missive miraculously ended up in the hands of The Cancer Letter, which eagerly published it.

“Reportedly Scher felt motivated to write the letter after being kept awake the night following the [advisory panel],” wrote Dr. Fleming. “I also was kept awake the night following the panel.”

In addition to knowing about Dr. Scher’s sleeping habits, Dr. Fleming shared Dr. Scher’s concern that approving Dendron’s treatment might derail Asentar, the drug that was being developed by Milken’s Novacea. How “could one defend internal consistency at FDA if [Provenge] were to be approved before the [Asentar] trial?” Fleming asked.

By this time, Dendreon’s supporters (a rambunctious bunch) were screaming and howling about the dishonesty of those who had suggested that the advisory panel had been asked the “wrong question.” So the party line changed a bit. Now it was that the panelists who had voted in Dendreon’s favor must have been somehow confused. Dendreon trials did not “provide ‘substantial evidence of efficacy’, Dr. Fleming wrote. “Rather at best, these trials provide plausibility of efficacy…”

I’ll leave it to the reader to parse the difference between “plausibility” and “substantial evidence.” But clearly, this letter was yet another strange occurrence.

Four days later – May 8, 2007 — the FDA told Dendreon that it was rejecting the company’s application for Provenge, a paradigm-shattering vaccine for those terminally ill with prostate cancer.

* * * * * * * *

The SEC’s partial data shows that more than 12 million Dendreon shares “failed to deliver” on May 10, 2007.  Traders are given three days to produce stock before their trades are registered as “failures to deliver,” so it is clear that hedge funds had sold the 12 million shares of phantom stock on May 7 — the day before the FDA made its decision. This suggests that somebody was aware of this imminent decision. We don’t know who engaged in that naked short selling because, as far as the SEC is concerned, it’s a big secret.

But we do know that a mere 10 hedge funds held large numbers of put options (a bet that the stock price would fall) as of March 31, a few days after the advisory panel’s nearly unanimous vote in Dendreon’s favor. Obviously, these were hedge funds with remarkable foresight concerning a long-shot event (the FDA’s decision to go against the overwhelming recommendation of its advisory panel to approve a drug for terminally ill cancer patients). Seven of those hedge funds belong to a mischievous Wall Street network that is known for its foresight – and for attacking companies that, coincidentally, are victims of illegal naked short selling.

Five of these hedge funds I have already named. All have ties to Michael Milken or his close associates. Some have ties to the Mafia. They are: Bernard L. Madoff Investment Securities, Perceptive Advisors, Millennium Capital, Steve Cohen’s Sigma Capital, and Pequot Capital.

In preparation for naming the sixth, we need to hearken back to September 2001, when two airplanes crashed into the twin towers of the World Trade Center, one crashed into the Pentagon, and a fourth dove into a field in Pennsylvania. On the day before that attack, a short seller named Anthony Elgindy called his broker and ordered him to liquidate one of his accounts, giving the explanation that a big event was about to occur. Mr. Elgindy said that on the following day (that is, on September 11, 2001) the market was going to  lose two-thirds of its value.

After the 9-11 attacks, that broker notified the FBI of Elgindy’s eerie prediction, and the FBI launched an investigation. In the course of this investigation, the government learned  that Elgindy had sold massive amounts of phantom stock, and that he routinely blackmailed and threatened companies that he was selling short. The government also learned that Elgindy had ties to terrorist outfits in the Middle East, and for a time prosecutors argued in court that Elgindy had advance knowledge of the 9-11 disaster.

Ultimately, though, Elgindy was convicted and sentenced to 11 years in prison for the more demonstrable crimes of stock manipulation and paying bribes to two FBI officials who fed him information from the FBI’s National Crime Information System (one of those FBI agents actually kept Elgindy informed of the progress of the investigation into Elgindy’s connection to the 9-11 attacks). In June, 2009, it was learned that the SEC’s inspector general had begun investigating SEC officials who are also alleged to have collaborated with Elgindy, either by providing inside information on commission investigations, or launching destructive, dead-end investigations of companies that Elgindy was selling short.

Elgindy, like Bernard Madoff  (the Dendreon short and Ponzi schemer who helped write the SEC’s rules on naked short selling), is believed to have ties to organized crime. He once worked for a now-defunct Mafia-connected brokerage called Blinder Robinson (known on the Street as Blind’em, Rob-em), and a source close to the Elgindy investigation has told Deep Capture that, shortly before Elgindy appeared for sentencing, Russian mobsters forced Elgindy to saw off the tip of one of his own fingers as a reminder not to squeal on other members of his network.

There is evidence – including transcripts of Elgindy’s private Internet message board – that shows that Elgindy routinely attacked public companies in collaboration with certain hedge fund managers. A significant number of these hedge fund managers were part of the Milken network.

One of them was Jeffery Thorp, whose father once worked with the Genovese organized crime family to develop a method for cheating Las Vegas casinos. The government’s investigation of Elgindy eventually led to Thorp, who was charged in 2006 with providing fraudulent “death spiral” PIPEs financing to 22 companies. The SEC’s case, one of the rare instances in which the commission has identified a naked short seller by name, makes it clear that Thorp sold massive amounts of phantom stock, ultimately destroying the 22 companies that had received his fraudulent PIPEs.

Recall that similar “death spiral” PIPEs were arranged by Carl Icahn’s Ladenburg Thalmann, ending in the phantom stock ruination of more than 20 companies. Icahn is the “prominent” investor who owes his status as a billionaire to Michael Milken and the Mafia-connected Zev Wolfson. Icahn is also the “prominent” investor who, along with Ziff Brothers and Steve Cohen, called ImClone immediately before The Cancer Letter published the “leaked” news of an FDA decision.  Icahn is also the “prominent” investor whose former employee was the last man to see Alain Chalem (a Mafia-connected naked short seller) before Chalem’s head was riddled with bullets by Russian mobsters.

Do you still not believe that this network has ties to the Mob? Consider that Thorp’s father, in addition to working for the Genovese organized crime family, was the single most important player in the stock manipulation network that Milken operated in the 1980s.

The father, Edward Thorp, ran a hedge fund called Princeton-Newport. The FBI eventually raided that operation, hauling away phone recordings and documents. Thorp was not ultimately charged, but the evidence that the FBI retrieved that day featured prominently in the prosecution’s 98-count indictment of Milken. Indeed, people who worked on the case say that the Princeton Newport evidence was far more important to the prosecution than the testimony of Milken’s more famous co-conspirator, Ivan Boesky.

Do you still not believe that people in this network employ precisely the same ruthless tactics? Consider that when the FBI investigated Elgindy, it also stumbled upon a hedge fund called Gryphon Partners. One of Gryphon’s portfolio managers, Jonathan Daws, was eventually charged with participating in various short selling schemes hatched by Elgindy and his bribed FBI agent. In pleading guilty, Daws said, “others at Gryphon made trades in some of the relevant stocks, independent of me, and not at my direction.” Daws was convicted.  No charges were immediately filed against Gryphon.

However, in 2006, the SEC sued Gryphon for providing fraudulent “death spiral” PIPEs financing to 35 companies. Like Thorp and the hedge funds introduced by Carl Icahn’s Ladenburg Thalmann, Gryphon provided its PIPEs financing knowing that it would cause stock prices to fall. The hedge fund then hammered the companies with naked short selling, sending their stocks into “death spirals.” Most of the 35 companies were destroyed.

So, at this point in the story, we have identified more than 70 companies that have been vaporized by “prominent” investors, all part of the same network.

At any rate, Gryphon Partners, the Elgindy-connected, PIPEs-financing, 35 company-destroying SEC-sued death spiral finance house, was founded by G. Stacy Smith and Reid S. Walker, two “prominent” investors who have since gone on to greater things. They now run a hedge fund called WS Ventures.

And WS Ventures is the sixth of our seven “colorful” hedge funds that had the foresight to own large numbers of put options in Dendreon at the end of March 2007, just after the seemingly fantastic news that the advisory panel had voted overwhelmingly in Dendreon’s favor, and during the period when Dendreon was awash in illegal naked short sales, and just before the disastrous news that the FDA had rejected the advice of its own advisory panel.

A few months later, Dendreon, on the verge of collapse and desperate for money to support its sabotaged prostate cancer treatment, went ahead and signed a deal to receive its first “death spiral” PIPEs finance.

* * * * * * * *

To be continued….Click here for Chapter 11.

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

1) email it to a dozen friends;

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

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

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



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

* * * * * * * *

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

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

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

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

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

* * * * * * * *

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

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

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

* * * * * * * *

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

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

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

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

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

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

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

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

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

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

* * * * * * * *

To be continued…Click here for Chapter 2.

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

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Our Watchdogs and the Financial Scandal of the Century


“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.

* * * * * * * *

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Email Exposes Short Seller Plot to Destroy a Public Company


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

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Bernard Madoff, the Mafia, and the Friends of Michael Milken


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 44th 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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