The Story of Deep Capture, Part 3

(return to The Story of Deep Capture, Part 2)
But America’s leading financial journalists have been busy. In January 2006, just days after The Wall Street Journal’s glowing profile of David Rocker, Tim Mullaney of BusinessWeek emails Patrick with a list of “Just admit it – you slit your girlfriend’s throat” style questions provided to him by David Rocker. There are plenty of misinformed inquiries into Overstock’s financial condition (and a snide reference to the “non-existent illicit” past of Overstock’s VP of marketing, who is now known never to have been an exotic dancer), but Mullaney dismisses all evidence of illegal short-selling tactics. He asks whether Patrick has “ever sought care or diagnosis for any mental incapacity.”

It is pretty clear this reporter isn’t going to write a balanced story, so Patrick posts answers to Mullaney’s questions on the internet. This is the first time that a CEO has ever done such a thing – and it is about time. Why not, for once, even the playing field? But Mullaney will have none of it. He goes into a mad rage, calling Overstock and telling a receptionist that posting answers to his questions is unacceptable and that Patrick will regret it. He calls the receptionist a “bitch” and employs the c-word. To BusinessWeek’s credit, the magazine’s ombudsman/ethicist interviews the receptionist, pulls Mullaney off the story, and mails a written apology, which now hangs on Patrick’s office wall.

Then the news hits that the SEC is investigating Gradient. Herb and Cramer and all their friends flood the media with stories suggesting that this is a violation of free speech – that Rocker is a hero, a market vigilante who helps journalists uncover bad companies, that Patrick is a nut and short-sellers are good for the market. None of these stories, of course, note that phantom stock is illegal or allude to other short-seller shenanigans.

At the beginning of March, 2006, right after Herb has a nervous breakdown about the conspiracy to get Herb, Patrick gets on CNBC. He tries to tell his side of the story, but he’s shouted down by announcer Becky Quick, who previously worked as Cramer’s producer. She simply won’t let Patrick speak, so with the cameras running, Patrick holds up a handwritten sign.

It says, “TheSanityCheck.com” – the Easter Bunny’s website.

A couple days later, Patrick is back on Christian Financial Radio News – “Prosperity for God’s People” – where he at least is allowed to speak uninterrupted.

* * * * * * * *

Later that week, The Wall Street Journal’s Karen Richardson, author of the glowing profile of David Rocker, is at the bar of the Mandarin Oriental Hotel in New York, nervously picking at a bowl of peanuts and attempting to convince Patrick that she is not, in fact, a “quisling.” Really, she says, she is different from the other reporters, she’d like to write a nice profile, multidimensional, get to know the real Patrick-for the front page, like the piece on Warren Buffett. And, ha ha ha, about Patrick’s battle with Wall Street…she hardly pays attention to it.

This follows two earlier incidents with reporters working for Dave Kansas, formerly of TheStreet.com, then editor of the Journal’s “Money & Investing” section. The first occurred a year earlier when Justin Lahart, formerly of TheStreet.com, did an interview with Patrick, and then claimed that his tape recorder had broken. Patrick posted a blog noting that this was a common strategy – and, indeed, Warren Buffett had just complained about another Wall Street Journal reporter who had written a false story after claiming that his “taping equipment wasn’t working.” Lahart ran his negative story, but it read as if it had been sanitized by a lawyer.

Then, in the Summer of 2005, Jesse Eisinger, formerly of TheStreet.com, and then the “Money & Investing” section’s top columnist, appeared unannounced at a conference where Patrick was speaking. Patrick sent out word that he would agree to be interviewed, but only if Eisinger used a tape recorder. The reporter stated that he did not have a tape recorder. Patrick sent a friend to Radio Shack to buy one. In the interview, the reporter bragged about having the Easter Bunny’s phone and banking records. But he seemed nonplussed about having his conversation committed to tape, and did not write a story.

Patrick knows that Dave Kansas has sent Richardson on this latest mission. He listens patiently while Richardson picks at her peanuts and promises to be fair. Then he says “goodbye” and rushes back to his room to compose an email which is commendable for the fluency of its melancholy prose.

It says: “Someone could write that Byrne is a porcupine molester who snorts coke out of the navels of underage Thai hookers chained to tree stumps, and it would be more balanced than what The Wall Street Journal will write…”

* * * * * * * *

Patrick told Richardson that he would not cooperate with any reporter working in league with Dave Kansas and David Rocker. But Richardson, apparently intent on doing her “nice” profile, was soon calling everybody Patrick has known, including a doctor at a hospital where Patrick was treated for cancer. In yet another brush with a felony by a member of Dave Kansas’s staff, the reporter lied in an effort to gain access to Patrick’s medical records.

A hospital administrator was concerned enough to send Patrick an email.

“Dear Mr. Byrne,” it read, “As you probably know, I called your assistant, Pat, this morning in response to several (7) calls that…our chairman of the Department of Medicine received from Karen Richardson…She said…she has been working with you on this story and has several ways to reach you. She gave me your office number and said your assistant was Pat. She also gave me your cell phone number. The implication being that this was for a story/profile about you that was being done with your consent and cooperation…”

* * * * * * * *

So now Richardson is trying to commit a felony, and the Journal’s Jesses Eisinger, who stole the Easter Bunny’s phone records, has just compared Patrick to “Where’s Waldo,” and Herb is hollering about a conspiracy to get Herb, and Herb’s friend at The New York Times is writing that Patrick is “loony beyond belief,” and Cramer is vandalizing his government subpoena and continuing to bash companies shorted by Rocker, and convicted criminals affiliated with Mr. Pink and other friends-of-Cramer are smearing Patrick on the internet, and Spyro of MI4 Reconnaissance is still executing all sorts of schemes to terrorize the folks at Fairfax Financial, and Eagletech’s CEO has sent an open letter to the SEC about mobsters trying to take down his company, and the son of a Mafia-connected blackjack card counter has just been shown to have sold millions of dollars in phantom stock, and a BusinessWeek reporter working with Rocker has recently called an Overstock receptionist a “c&nt,” and Roddy-Boyd-the-Post has been sticking his head in the garbage as a favor to Gradient Analytics……

And that’s not all. Roddy-Boyd-The-Post has also just called Patrick a liar because Roddy asked how much cash Overstock had, and Patrick told him how much cash Overstock had. (Really, it is that bizarre. Listen to the voice mail.)

Patrick posts this voice mail on the internet, and a few hours later, Roddy-Boyd-the-Post calls back and issues an “apology” that is meant in fact to reinforce his earlier assertion. He says, “I want to, ehhhhh, personally and professionally apologize for calling you ehhhhh…FUCKING LIAR.”

This seems in contrast to Roddy’s assertion to me that “the problem with Patrick Byrne is that he’s a boy scout. I mean, he might be right, but why does he have to be such a boy scout. Yeah, ehhhhh, that’s the problem. Byrne’s a boyscout.”

But never mind. At the same time that Roddy-Boyd-the-Post is calling Patrick a “fucking liar,” he is sending email messages to Floyd the Flimflammer saying he needs “dirt” on Take-two Interactive, another company that Rocker has shorted – a company that has also been bashed by Cramer, Herb, and Bethany McLean, all the while appearing on the SEC’s list of companies victimized by phantom stock sellers.

And while all this is happening, Gary Weiss, the creepy former BusinessWeek reporter who has hijacked Wikipedia with a one-time MI5 agent, is orchestrating another one of his smears. In an email to Floyd the Flimflammer, he notes that I am working on this story.

He writes, “this guy [at the Columbia Journalism Review] really has me (and others of us a lot more than me) worried.”

Then Gary emails Floyd asking for some dirt on Susanne Trimbath, the former DTCC employee who has described how the Big Black Box facilitates phantom stock sales.

Just 24 hours after Gary asks for dirt on Susanne Trimbath, the DTCC issues a press release trashing Susanne Trimbath. The Big Black Box admits that Trimbath was a mid-level manager at the DTCC, but tries, in a perfectly mealy-mouthed way, to suggest that she had no knowledge of one of the DTCC’s principal functions – processing short-sales.

Was Gary on the phone with the DTCC, helping its PR goon craft this smear?

Maybe he was just looking for an ATM machine.

* * * * * * * *

There are a few journalists whom we have not yet mentioned.

One is Chris Byron, a columnist for The New York Post. Byron has insisted that phantom stock is not a problem. He has accused Patrick of being a conspiracy theorist. And he has written a column, “Gagging the Market,” in which he argues that Amr Elgindy’s prosecution for bribing FBI officials and manipulating stocks is a threat to the free speech of short-sellers and their media allies.

In April 2006, while the Media Mob is at the height of its anti-Patrick Byrne hysterics, Byron publishes a story alleging that a “CIA front operation continues to funnel agency money into penny stock and micro-cap companies in Wall Street’s murkiest back alleys.”

The only source Byron names in his story is the “tireless complainant,” Tony Ryals.

Tony Ryals lives in a hut in Guatemala. On most mornings, he walks to a nearby internet café and begins writing – sometimes for stretches of more than 24 hours. He has, indeed, become one of the most widely published human beings on the planet. It seems almost impossible to achieve such prolificacy – thousands of long-winded screeds, most of them posted on Indymedia, a collection of websites that publish anything by anybody.

The vast majority of Ryal’s rants concern Patrick Byrne. Depending on his mood, he writes that Patrick is linked to stock frauds, boiler room operations, the death of Vince Foster, Skull & Bones, Osama bin Laden, or the Israeli government.

“To see my latest,” Ryals says in a recent message board post, “You can google ‘israeli prime minister ehud olmert stock fraud orthodox jews gay prostitutes.’”

* * * * * * * *

At the end of April 2006, the Media Mob gathers for the annual conference of the Society of American Business Editors and Writers (SABEW). In response to the accusations leveled by the Easter Bunny and Patrick Byrne, the journalists hold a panel titled “High-Tech McCarthyism?: Dealing with Today’s New Business Journalist Bashers.” The panel is chaired by Herb, Herb’s friend Joe Nocera, and Dan Colarusso, who worked with Herb at TheStreet.com before he became Roddy Boyd’s boss at The New York Post.

dancola.jpgA Deep Capture team member infiltrates this meeting, and gets it all on tape. The journalists are furious that we have this tape, and it is easy to understand their concern. It couldn’t do a much better job of exposing the arrogance and willful obstinacy of the nation’s most “prominent” financial journalists.

Colarusso sets the tone. Referring to Patrick and the Easter Bunny, he says, “The more they attack us, you know, we have barrels of ink and stacks of money, and all the resources in the world at our disposal, legal, and via our media, to crush them…”

Sounds like an objective journalist to me.

Then Herb says, “When it comes to naked shorting, it’s not my issue…It doesn’t relate to what I do, what Joe does, what Carol Remond does, even what Cramer does.”

And Joe Nocera says “naked short selling…makes my eyes glaze over…So I asked Patrick Byrne exactly this question…I said, ‘Well why do you…why are you in this naked shorting fight since it’s not really what you are litigating?’ And he said, ‘Well, it’s like supporting education; it’s a good thing to do.”

At this, there is uproarious laughter from the journalists in the room. It should be said that most of the journalists in the room are Herb’s friends. Dave Kansas, formerly of TheStreet.com, is there. So is Dave Evans, the Bloomberg reporter who, along with Herb and Kansas, worked closely with the online short-seller group led by Amr Elgindy, who is now in prison. So these journalists – these creeps who think it is hilarious that Patrick has embraced what he believes to be a good cause – are by no means typical journalists.

They just happen to be the journalists who control the financial media.

“So,” continues Nocera, The New York Times’ top business columnist, “it’s hard to take [Patrick] seriously on that issue when you hear him say something like that. Having said that, you know, I think it probably would be worth somebody’s time to say, Is there something to naked shorting or not? What is naked shorting? What does it mean? What is the problem here? But, you know, life’s too short. I don’t want to do it.”

At this, the journalists in the room laugh even harder.

* * * * * * * *

A few weeks later, SABEW elects Dave Kansas as its president and Joe Nocera writes a column describing Patrick as a “conspiracy-mongering trash-taking lawsuit-filing chief executive.”

He writes, “What is naked short selling? So glad you asked…except for a few fellow-traveling websites, where Mr. Byrne is viewed as a heroic figure, most people who understand the issue or have looked into it think it’s pretty bogus.”

Perhaps life really was too short, and Nocera couldn’t be bothered to look into the issue. That would be the kind assessment – certainly better that the possibility that he is a prostrated scrivener for hedge fund managers who would like the world to think that phantom stock is a non-issue.

Fortunately, there is one journalist who is doing some real reporting. His name is Gary Matsumoto, and he’s one of America’s best investigative reporters, famous for breaking the news that thousands of young American soldiers have been used as unknowing guinea pigs in government medical experiments.

Previously, Matsumoto was with NBC and Fox News, and now, in June 2006, he is working for the Bloomberg business news television network. He meets me at a Thai restaurant on New York’s Upper West Side. By this time, Matsumoto is convinced that Patrick is right – phantom stock is an epic scandal. He thinks for a moment about the difficulties he’s faced in reporting this story. He reckons with the prospect of going up against conventional wisdom and the mainstream financial media’s most powerful journalists.

Then he leans back in his chair, resigned, and says: “Shit.”

“Shit,” he says, “I just want to do the right thing.”

* * * * * * * *

During this week — the week in which Nocera calls Patrick a “conspiracy-mongering, trash-talking lawsuit-filing chief executive” — the law firm Milberg Weiss is indicted for bribing witnesses in phony class action lawsuits against public companies. Remember, according to the DOJ’s indictment, Milberg told its bribed witnesses to buy stocks, knowing that their prices would decline. Many of those stocks were Rocker shorts. Most of them were sold, and never delivered, in massive quantities. And nearly all of them were the subjects of negative media stories, released at around the same time as the phony lawsuits. Nocera’s friend, Herb, has written negatively about almost every Rocker short-his stories always coming out around the same time as the Milberg Weiss lawsuits, the massive phantom stock selling, the release of false information by questionable research shops like Gradient, and the execution of an array of other dirty tricks.

None of Herb’s friends mention the indictment of Milberg Weiss. Instead, they continue to serve the interests of Rocker and associated hedge funds. All of Herb’s stories still come from these people. Cramer is still bashing stocks shorted by them. TheStreet.com is still publishing stories for them, as is The Wall Street Journal “Money & Investing” section, and MSN Money.

And also this week, Carol Remond is busy circulating another rumor about Patrick. She has called former SEC lawyers and several others with information – given to her by people working for her hedge fund friends – that Patrick is using off-shore accounts to secretly sell shares in Overstock. This, like every other rumor Carol has pursued with rabid enthusiasm, is entirely, 100% false.

Roddy-Boyd-the-Post, meanwhile, is working with the criminal Spyro Contogouris, along with a group of hedge fund managers, including Rocker, to take down Fairfax Financial. He leaves a voicemail message with Fairfax, telling its CFO, “You’ve got some explaining to do, pal.” Then he writes a false story accusing the company of accounting shenanigans. A source at the Post tells Deep Capture that the paper decided not to put Roddy’s Fairfax stories on the internet because they would not stand up against foreign libel laws (which are stricter than those in the U.S.).

Soon after Roddy’s stories appear, Contogouris sends more threatening emails to Fairfax employees, and arranges a secret meeting with a former Fairfax CFO, saying he can arrange immunity from government prosecution. (Helpfully, Roddy-Boyd-The-Post later publishes a story claiming that “forensic accountant” Contogouris “was actually working for the Federal Bureau of Investigation”- and that an FBI spokesperson has confirmed this. The FBI announces that this is completely false, which makes sense considering that the FBI will later put Contogouris in jail).

And also this week in June 2006, Gary Weiss has just been exposed as the specially protected, anonymous editor of the Wikipedia entries on “Naked short selling,” “Patrick M. Byrne,” “Overstock.com,” “Depository Trust & Clearing Corporation,” and “Gary Weiss.” But Gary denies having ever touched Wikipedia.

So Judd Bagley publishes additional information proving that multiple Wikipedia accounts are attached to Gary’s IP address. Gary’s online alias responds that if somebody edited Wikipedia using his IP address, it might have been his visiting uncle.Then Judd releases information proving that Gary, hoping to cover up his activities, has begun editing Wikipedia using yet another phony identity (or “sockpuppet,” in Wikipedia parlance).

Gary’s sockpuppet responds to this by saying that the other sockpuppet belongs to his nephew. Gary adds that he had no idea that his nephew shared his interest in naked short selling. Yes, he was really surprised to learn that his nephew edited the Wikipedia entries on naked short selling.

But it wasn’t Gary. Gary never edits Wikipedia.

* * * * * * * *

Something else happens in June 2006: a former SEC investigating attorney named Gary Aguirre writes an 18-page letter to Congress. If the contents of this letter are accurate – as they are later proven to be – this is the biggest scandal in the SEC’s seventy-plus years of operation.

Aguirre writes, “I believe our capital markets face growing risk from lightly or unregulated hedge funds just as our markets did in the 1920s from unregulated pools of money – then called syndicates, trusts or pools. Those unregulated pools were instrumental in delivering the 1929 Crash. …There is growing evidence that today’s pools-hedge funds-have advanced and refined the practice of manipulating and cheating other market participants.”

Aguirre then describes an investigation that he led at the SEC. “The investigation was two-pronged,” he writes. The first prong concerned allegations that the head of a major investment bank provided an illegal inside tip to a large hedge fund. “The second prong of the investigation…market manipulation…involved two classes of suspected violations: wash sales and naked shorts.”

That is, this investigator was investigating phantom stock sales by hedge funds.

He writes, “Some of my colleagues believed [the naked short] prong held a greater potential to severely injure the financial markets.”

Unfortunately, Aguirre continues, this investigation was “stopped in its tracks” because the investment banker in the insider trading prong had “political connections.” In later media stories, it is revealed that the investment banker was John Mack, head of Morgan Stanley. The hedge fund that Aguirre was investigating was called Pequot Capital.

In the summer of 2005, Aguirre’s supervisor wrote that “Gary has an unmatched dedication to this case (often working well beyond normal work hours) and his efforts have uncovered evidence of potential insider trading and possible manipulative trading by the fund and its principals.” On August 21, 2005, the SEC approved Aguirre’s merit-pay increase based on his work on this investigation.

But when it came time to issue subpoenas, the supervisor told Aguirre to lay off because Mack’s attorneys had “juice.” When Aguirre pressed the issue, he was shut out of meetings where the case was discussed by high-level SEC officials and lawyers for the accused. Then, just two weeks after receiving his merit pay increase, Aguirre was fired.

Meanwhile, one of Aguirre’s supervisors, Paul Berger, then the SEC’s associate director of enforcement, was expressing interest in getting a new job – at Debevoise & Plimpton, the law firm that was representing John Mack. This is not at all unusual. SEC staff regularly seek jobs with the very people whom they are supposed to be investigating.

After a lengthy inquiry, the U.S. Senate Judiciary Committee has ruled that everything in Aguirre’s letter was true. It says that Pequot was selling phantom stock and that it is “deeply troubled” by the SEC’s failure to properly investigate Aguirre’s allegations.

“At worst” the Senate Committee says, “the picture is colored with overtones of a possible cover-up.”

* * * * * * * *

The Aguirre scandal leads to the resignations, in August 2007, of the SEC’s inspector general, its chief economist, and two of its five commissioners.So it is interesting to review the Media Mob’s initial response to Aguirre.

On June 28, 2006, the Senate held hearings on hedge funds at which Aguirre was the star witness. In a hallway outside the hearings, a group of journalists gathered to plot ways to smear Aguirre and also fight critics of David Rocker and other short-sellers.

Roddy-Boyd-The-Post was there, his baggy pants failing to conceal the entirety of his ass.

Mop-haired Jesse Eisinger, the Journal’s Easter Bunny hunter, also participated in this conversation, as did Bill Alpert, the Barron’s magazine reporter and friend-of-Herb who had written that he wished he could have a government subpoena for “publicity.”

Nearby, Karen Hinton, Gradient Analytics public relations consultant, was working her Blackberry, updating Gradient’s Donn Vickery on the proceedings.

That morning, Dave Kansas’ Wall Street Journal “Money & Investing” section had already published a front page interview that was flattering to John Mack, the Morgan Stanley CEO at the center of the Aguirre scandal. “`Old Macky’s Back’ at Morgan,” it read. “In an interview Monday… Mr. Mack reviewed highlights of the past year, offering thoughts along the way on his nickname “Mack the Knife,” and why he once rented a shark suit to sing a karaoke version of the song.”

The Dave Kansas “Money & Investing” section asked Mack the hardball question, “What do you consider your biggest accomplishment?” But there was not one question about Gary Aguirre, phantom stock, or the SEC’s stymied investigation into Mack and Pequot Capital.

That afternoon, Eisinger went on CNBC to slag Aguirre and defend short-sellers. A few days later, Bill Alpert wrote in Barron’s that “the cloud that’s fallen over [Pequot] seems to contain little substance.”

Meanwhile, Gary Weiss, wrote on his blog that Aguirre’s allegations were “flimsy.”

By contrast, Gretchen Morgenson of The New York Times took Aguirre’s allegations seriously. Long before the Senate concluded that Aguirre had exposed the biggest scandal in SEC history, Morgenson published multiple stories demonstrating Aguirre’s credibility.

As Morgenson prepared these stories, the Media Mob attempted to destroy her. Roddy-Boyd-the-Post called me at the Columbia Journalism Review. He said, “ehhhhh,” he had a hot tip for me. Yeah, there was a guy on Wall Street – he had some good dirt. This guy on Wall Street could tell me that Gretchen Morgenson fabricated the story that won her a Pulitzer Prize a few years ago. And maybe, if I wanted to take a break from this short-seller story, Roddy could, “ehhhhh,” you know, hook me up with this guy. It could make my career – a big story proving that Pulitzer-prize winning Morgenson is a fraud.

Nice try, Roddy.

* * * * * * * *

On September 15, 2006, the SEC holds a roundtable to discuss phantom stock and Regulation SHO, the law that is supposed to prevent it. Given the Gary Aguirre scandal, one might expect the SEC to give closer scrutiny to this issue. And maybe a few reporters would come to ask the tough questions.

Instead, the panelists all present the party line that short-selling is good for the market, that the law is working, that phantom stock is only a small problem – never mind that list of 300-plus victim companies.

There is one journalist at this event. His name is Floyd Norris, and he’s an old friend of Herb and the chief financial correspondent for The New York Times. Floyd has been an ardent critic of Patrick and those who decry phantom stock. (One wonders how Floyd and Nocera interact with Morgenson in the Times newsroom.)

Today Floyd is in the back of the room, looking bloated and pale, like a green grape. He seems to have ignored every word said by the panelists. But now his jowls are quivering as he snarls into the phone. Is he phoning in a story-perhaps an account of the SEC’s refusal to prosecute a massive financial crime?

No, Floyd is confirming a prescription.

Meanwhile, James Brigagliano, director of the SEC’s division of trading and markets, is standing on the side of the proceedings, laughing. “Gee,” he says to a colleague. “I thought the anti-naked short-selling bozos like Dave Patch would be here.”

“Oh we were there,” Patch later writes on his blog, “You just didn’t see us.”

* * * * * * * *

Patch also notes that while the SEC was calling him a bozo, billions of dollars worth of phantom stock was floating around the system. He gives the example of Escala, a company that auctions postage stamps and other collectibles. In May, Kingsford Capital and the criminal Spyro Contogouris of MI4 Reconnaissance convinced the Spanish constabulary to raid the offices of Afinsa, a Madrid-based company that owns a majority stake in Escala. Spyro and Kingsford (which, remember, I was investigating when its manager offered a large sum of money to the Columbia Journalism Review) accuses Afinsa of operating a pyramid scheme because it sells stamps as investments. A journalist working with Kingsford has also circulated rumors that the collectibles company is smuggling cocaine through the port of Cartagena.

By now, the reader should be able to assess the validity of these rumors.

Either way, at the moment that Brigagliano called Patch a “bozo,” 3.5 million phantom shares of Escala had been sold into the market, but had not been delivered to their presumed owners.

Meanwhile, a Toronto brokerage called Research Capital had just sent a letter to the SEC complaining that it had, despite 42 separate attempts, failed to gain delivery of a large number of Overstock shares that it had purchased months previously.

The “bozos” rightly suspect that Research Capital has purchased phantom stock.

* * * * * * * *

A week later, I’m at a party on a large balcony overlooking the Manhattan skyline. Spotlights criss-cross the black night; the perimeter is patrolled by giant men with shaved heads and earpieces in their ears. Everywhere there are beautiful women, Armani suits, and the accents of Staten Island.

Attending this party are the most powerful players in the so called “stock loan” business. These are the brokers responsible for borrowing (or failing to borrow) the stock that traders sell in order to create short positions. It is a close-knit community of mostly Italian Americans who have controlled this corner of the market for decades. The Russians are moving into the hedge fund and brokerage business, but the Italians still control stock loan.

The Johnny Walker is flowing, and the guys from Staten Island talk openly.

“Yeah there’s naked shorting. It happens all the time,” says one. “Who’s going to stop it? You?”

This party, though, is a grand opening for a company that is betting that the days of naked short selling are coming to an end. The company specializes in locating and borrowing real stock for traders who want to go straight – who don’t want to break the law by selling phantom shares. Everybody is here because the owner of this new company is a friend – one of the family. But there’s some anger. The owner has sided with Patrick Byrne because he will profit if Patrick’s crusade against illegal naked shorting is successful, but his friends, who are still selling stock that doesn’t exist, stand to lose money in equal measure.

On the balcony, I hear this comment: “What’s he doing with that guy Byrne?…What do you think? Is it over for us?”

And later: “Hey, Lou, I sent you an email!”

And Lou says: “What are ya doin’ sending emails? You can get indicted for emails….”

* * * * * * * *

But as of September, 2006, short-sellers are still getting a free ride. Certainly, the SEC’s investigation into Gradient is not going well. As we know, the lead investigator in the case – the man who issued subpoenas to Herb, Cramer and Carol Remond – was brought back to Washington and reprimanded. In June, another investigator on the case was hired away by Kroll, the private-eye outfit with close ties to Cramer’s friend, David Einhorn. Disgust and low-morale has crippled the SEC’s San Francisco office, where the investigation was hatched.

On October 6, 2006, The New York Times publishes an op-ed that sings the praises of short-sellers. Echoing the party line of our favorite financial journalists, the author of this op-ed, Richard Sauer, writes that the “first line of defense” against corporate frauds “has not been the S.E.C., which acts slowly when it acts at all, but rather the much disdained short seller. By putting their money where their mouths are, short sellers are the only market participants with an incentive to deflate bubbles and inject pessimistic information into the market.”

Richard Sauer is a former administrator in the SEC’s enforcement division. And during his tenure he did not act at all “slowly.” To the contrary, he was quick to launch many investigations – into companies shorted by David Rocker. Indeed, he seems to have spent most of his career sniffing down trails laid by Rocker and affiliated hedge funds.Unsurprisingly, many of Sauer’s investigations at the SEC led nowhere.

The bio at the bottom of Sauer’s op-ed notes that just “this week,” he has “joined the management of a short-biased hedge fund…” Days later the “bozo” pajamahadeen discover and reveal that the “short biased hedge fund” is the one run by – you guessed it — David Rocker.

The SEC is full of employees waiting for high-paying hedge fund jobs. This might explain its reticence to prosecute hedge funds for selling phantom stock. It might also explain why, a few months before Sauer joined Rocker Partners, the SEC backed off its investigation of Rocker’s minions at Gradient Analytics, and opened an investigation into — you guessed it — Overstock.com.

Rocker, of course, instigated this investigation. Patrick says he “welcomes” it. Indeed, he goes on the radio and says that he is ready to meet the SEC in any court in the land – and put the SEC on trial.The miscreants say this is another example of Patrick being “Whacky Patty.”

Others say that Patrick has exposed the “deep capture” of America’s regulatory bodies.

* * * * * * * *

One day in the Fall of 2006, Senator Orrin Hatch called Patrick to his home. He does that sometimes – they take walks together, discuss politics and the state of the nation. But this time, the senator wanted to talk about something else.

When Patrick entered the building, the senator pulled him into a corner of the lobby. “I am going to tell you something,” he said. “But I cannot tell you more than this. You are up against some really nasty, vicious people. They will not hesitate to kill you.

The senator took a deep breath and continued. “I want you to do something for me. I want you, the next chance you get, to go on TV or radio and say the following. Say that if anything happens to you, Orrin Hatch says that he’s never going to rest until the United States government has gotten the people who did it. Now I’m not kidding, Patrick, I want you to do that tomorrow if you can.”

The senator repeated this several times. And he made Patrick repeat it back to him.

* * * * * * * *

A couple of days later, Mike Wilkins from Kingsford Capital appeared in my office. This was one of the hedge funds at the center of the scandal that I was investigating – a hedge fund that Wilkins managed along with Herb’s friend, Cory Johnson, who was a founding editor of TheStreet.com — a hedge fund whose principals had collaborated with Manuel Asensio and the creepy former BusinessWeek journalist, Gary Weiss, to malign companies that were the victims of phantom stock selling — a hedge fund that was now attacking the same small stamp company as Spyro Contogouris, the proprietor of MI4 Reconnaissance also known as “Martin Gardner,” “P. Fate,” and “Dick Tracy.”

This was early November 2006, a couple weeks before Spyro went to jail for ripping off a Greek shipping magnate.

The Columbia Journalism Review was in serious financial trouble. Wilkins of Kingsford Capital offered to make that trouble go away.

I can only assume that he intended to make this story go away, too.

* * * * * * * *

The editors of the Columbia Journalism Review are honest people who did, after all, let me work on this story for nine months. I resigned from my job days after Kingsford appeared in my office, before I could raise a fuss, so the editors were perhaps unaware that this hedge fund was engaged in a cover-up.

That said, Kingsford must be pleased with my successor – who is now called “The Kingsford Capital Fellow.” CJR’s “Kingsford Capital Fellow” has been remarkably favorable towards short-selling hedge funds and their friends. He has written an article sympathetic to Jim Cramer and recently, he slammed the CBS News program, 60 Minutes, for running a story pointing out that Gradient Analytics is a tool of market-manipulating hedge funds.

The Kingsford Capital fellow, Dean Starkman, argues that since Biovail, the company highlighted in the 60 Minutes segment, has since been sued by the SEC, this proves that “Gradient was right.”Meanwhile, says the Kingsford Capital Fellow, short-sellers are “a vital counterpoint to the Wall Street hype machine” and helpful sources to financial journalists.

This is standard party line. If a target company is ill, the short-sellers are “right” – vital, even. Never mind if the short-sellers are all the while publishing false research, churning out phantom stock, working with the Mob, spreading malicious rumors, hiring criminals, bribing doctors, using false identities, colluding with journalists to front-run false media stories, giving kick-backs to witnesses in bogus legal cases – and now, funneling large amounts of cash to the one publication that was going to suggest that some of this might be illegal.

* * * * * * * *

A few weeks after I left CJR, a pair of metal garment shears were thrown through the window of a restaurant owned by a woman who is very close to Patrick. Earlier, somebody broke in to the restaurant, messed things up a bit, and stole nothing. It seemed as if somebody had been monitoring the restaurant’s phone and heard that the alarm would be left off that night.

Around the same time, Patrick’s lady friend learned that copies of her cell phone bill were being sent to an address that was not hers. A Deep Capture investigator checked out that address and discovered that it belonged to a Russian man named Semyon Faivinov. Further investigation revealed that the man’s son, Elliot Faivinov, worked as a vice president for Goldman Sachs Execution and Clearing (formerly Spear, Leeds & Kellogg).

A few months later, the New York Stock Exchange and the SEC implicated Goldman Sachs Execution and Clearing in a massive phantom stock scheme (Goldman paid a $2 million fine). Previously, Spear, Leeds, & Kellogg had been accused of catering to known phantom stock sellers, including Kingsford Capital collaborator Manuel Asensio.

I called Faivinov and asked him why he had the phone records of Patrick’s lady friend. He said, “That wasn’t me…I’m not the right person to ask about that.”

When Patrick called him (with me on the line), Faivinov said “I am aware of who you [Patrick] are,” but denied having the phone bills. Goldman subsequently did its own investigation. One of its PR men told me that Goldman had concluded that Faivinov did nothing wrong and “has no idea who Patrick Byrne is.”A few days later, the PR man changed course and said that Goldman was going to “explore this matter further.”

* * * * * * * *

In January, 2007, Patrick accepted an invitation to meet an offshore investor in a greasy spoon diner in Long Island. They had never met, but over the previous year the man had fed Patrick bits and pieces of information about the workings of the phantom stock scam, and the hope was that he might have something more to say in person.

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

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

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

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

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

That’s Felix Sater, a Russian immigrant described in a federal complaint as an “unindicted co-conspirator” in a money laundering and stock fraud ring involving organized crime figures from four Mafia families. The New York Times has reported that Sater was once also “embroiled in a plan to buy anti-aircraft missiles on the black market … in either Russia or Afghanistan….” Apparently, Sater offered to buy the missiles from Osama Bin Laden in exchange for amnesty in his Mafia fraud case.

Also, according to the Times, Sater once “grabbed a large margarita glass, smashed it on the bar and plunged the stem into the right side of [a] broker’s face. The man suffered nerve damage and required 110 stitches to close the laceration on his face.”

Sater seems to have been involved in the feud that raged between the Gambino and Genovese crime families in the mid-to-late 1990s. A soldier in the Gambino family once tried to extort money from Sater, and Sater got a Genovese soldier to intervene on his behalf. This is the same feud that embroiled Carol Remond’s source, Pacific International, and the two stock promoters who were murdered in 1999. It is the same feud that possibly inspired a cast of criminals, some linked to the Genovese (and by extension, the Russians) to develop relationships with that peculiar BusinessWeek reporter, Gary Weiss, who wrote stories pinning various crimes on the Gambinos.

Gary Weiss, a demonstrable liar and creep whose only job for the past two years has been to author a blog devoted to badmouthing Patrick Byrne and denying that phantom stock is a problem – a former BusinessWeek reporter whom Judd Bagley has shown to have posted on the Internet from within the Black-Box DTCC, a reporter who is a close friend of known crooks, and who controls several phantom stock-related Wikipedia entries with the support of a one-time British intelligence agent who calls herself SlimVirgin – this unconscionably bizarre character has defended Felix Sater on his blog. He wrote, “Sater has every right to turn his life around, as apparently he has done. Good for him.”

In January 2007, Sater was turning his life around by putting a note in a Russian matryoshka doll. Apparently, Sater had discovered that the man in the greasy-spoon diner had been in contact with Patrick. So Sater sent a message in a doll. Then he delivered a verbal message. “He said, tell [Patrick] if he doesn’t….we’re going to fucking take it private,” the man from the diner says. “You know, they’re not going to mess about with this.”

“These things don’t happen anymore to me,” the man continues. “I mean, I’ve been out of that world for a dozen years or more. These….there are defined signals here that lead me to believe they [the Mob] have been disturbed. The only way they coulda been disturbed is if they own Rocker or if he is using them for leverage.”

* * * * * * * *

The month that followed was perhaps the lowest point in Patrick’s life. Overstock’s operations had been going through a rough patch for a year. As Patrick put it, “In five years we grew from $2 million to $800 million on a shoestring, and in 2006 the shoestring broke.” Patrick struggled to fix the company, but intrigues swirled around him, and he now had armed security details following those close to him. One of Overstock’s board members, meanwhile, had just left the company after trying to get Patrick fired over Patrick’s crusade against Wall Street. Two other board members – including, even, Patrick’s father – had already resigned, citing similar reasons.

All this hassle and grief – and for what? It seemed like Patrick’s crusade wasn’t making much progress.

Indeed, it suffered one of its worst blows in February, 2007, when the Utah legislature voted to repeal a law making it illegal to sell phantom stock in Utah-based companies. This had been an effort to bypass the SEC, which was doing nothing to enforce federal laws.

The previous May, the Utah law had been passed almost unanimously – and in the face of considerable pressure. At one point, Utah State Senator Curt Bramble received a call from Morgan Stanley’s general counsel, who yelled into the phone with such vengeful fury that Bramble slammed the phone on his desk and left the room. The state governor, meanwhile, was holed up in his mansion, taking similar abuse from the SEC’s general counsel and a cast of seething lawyers representing the securities industry.

For a while, Bramble and the governor vowed not to cave in to the pressure. But that was before state legislators were treated to the most elaborate lobbying campaign ever to hit Salt Lake City. First, the governor agreed to delay implementation of the law for a year, to see whether the SEC would begin enforcing its own laws against selling phantom stock.Then, suddenly, Bramble, who’d been the law’s most fervent supporter, jumped ranks. In February, he led the state legislature in overturning it in a late-night action that bypassed all the normal committee processes.

The Securities Industry and Financial Markets Association had hired a lobbyist specialized in greasing the machine for the local real estate industry. Bramble is a tax accountant with a small accounting firm. In the months leading up to February 2007, when the Utah legislature made one of its most dramatic reversals ever, Bramble’s firm received a considerable amount of new business from the local real estate industry.

That lobbyist did a really good job.

* * * * * * * *

A lot of people bowed out of the fight, but Patrick did not relent. In answer to the threat from the Russians, Patrick asked for a week “to think about things.”

During the week, the man from the diner called to ask one of Patrick’s colleagues, “Is it going to take Byrne having a gun in his mouth before he backs down?”

At the end of the week, Patrick received a phone call: “The Russians want to know your answer.” Patrick said he needed just another few days to think.

Two days later, he filed a $3.5 billion lawsuit against the entire brokerage industry, which he accused of helping hedge funds sell phantom stock.

Patrick received one last email from the Russians’ intermediary: “Nice raise. LOL.”

Meanwhile, he continued to hammer Herb, Cramer, Eisinger, Nocera and the other journalists who refused to acknowledge phantom stock and short-seller crimes. He got his message out any way he could – rallying the pajamahadeen, meeting U.S. senators, posting missives on stock message boards.

He was sustained by the knowledge that he had some supporters. There were the Easter Bunny and the other oddballs. But there were also some mainstream journalists. Liz Moyer of Forbes magazine had written a number of stories highlighting the plight of companies victimized by phantom stock. Charles Gasparino, a CNBC anchor, had called Patrick a “hero” for bringing this issue to the forefront. (For that, it is said that Gasparino drew a lot of flak from the powers-that-be at CNBC).

There had also been some victories. Like that time that Patrick called Senator Richard Shelby (R – Alabama) a “gangster.” It was in October 2006, and Shelby, the chairman of the Senate banking committee, was spending a lot of time on television defending hedge funds accused of selling phantom stock. When the Senate held hearings on hedge funds, Shelby stacked the panel with friends of David Rocker.

So Patrick went on a radio program and called Shelby a “gangster.”

Shelby invited Patrick to meet him on Capitol Hill. Patrick made the trip. He waited in an ornate conference room for an hour. Then Shelby entered. The Senator referred to himself in the third person: “The Chairman of this Committee believes that you are trespassing on matters that are under his jurisdiction.” Then he just sat there and stared Patrick down. It was as if…well, it was as if Shelby were a gangster.

So Patrick said good bye, and went on another radio program. This time he called United States Senator Shelby “an ignorant cracker.”

That was fun.

So Patrick had these memories to sustain him.

* * * * * * * *

Then, in March 2007, Patrick got a break. Gary Matsumoto of Bloomberg Television did “the right thing.” He ran his expose on naked short selling.

The half-hour piece was a year in the making, and the DTCC’s lawyers bombarded Bloomberg with threats aimed at killing it. For a while, it seemed as if the documentary might not happen at all. Then for many months it was on-again off-again. But at the end of January, 2007, at cocktail party in Washington, D.C., Patrick was introduced to Michael Bloomberg, the mayor of New York and founder of the Bloomberg news service. When Patrick suggested that Bloomberg look into the documentary, the mayor stiffened, pulled out an index card, and wrote down the details.

A week later, the documentary was again given the green light. The General Counsel of the DTCC was threatening the General Counsel of Bloomberg until just a few hours before it ran.

So it happened – the first major news story about the phantom stock problem. And, really – the documentary says pretty much all you need to know. It has been nominated for an Emmy for Long Form Investigative Journalism. Watch it here.

The same month, Dave Kansas, formerly of TheStreet.com, left the Journal’s Money & Investing Section. Jesse Eisinger, formerly of TheStreet.com, also left the Journal. Perhaps as a result, in June 2007, the “Money & Investing” section was able to publish a tepid story, “Blame the `Stock Vault’” about phantom stock and the DTCC.

“There is no dispute that illegal naked shorting happens,” the Journal reported.

A month later, the American Stock Exchange levied a big fine on a trader named Scott Arenstein and his brother, Brian, for selling massive levels of phantom stock in several companies – including Overstock.

So even Carol Remond had to admit that phantom stock exists. But she did her best to soften the news.

“Turns out that one guy did, in fact, illegally trade shares in [Overstock],” Carol wrote on the Dow Jones newswire. “[But the] improper trading doesn’t come close to amount to [sic] the massive conspiracy alleged by Overstock.”

* * * * * * * *

The other journalists — Herb, Nocera, Floyd Norris, Gary Weiss, Roddy Boyd, Bethany McLean, Barron’s magazine – continue to ignore phantom stock while toadying to miscreant hedge funds and their criminal associates.

In March 2007, right at the time of the Bloomberg expose, Nocera writes that “most people on Wall Street, or most regulators, for that matter, don’t believe that there is much naked short selling going on.”

Gary Weiss, with characteristic understatement, writes on his blog that Nocera’s article is “a seminal piece that will be cited by market scholars for years to come.” Meanwhile, Nocera is nominated for a Pulitzer prize for columns including “Campaign of Menace,” in which he ridicules Patrick for his stance on naked short selling.

And in the year that follows, these journalists grow only more energized, viciously attacking anybody who even mentions the words “naked short selling” or “phantom stock.” For example, in January 2008, Citigroup analyst Heather Hunt writes in a report that she believes that naked short selling might be depressing the stock price of MBIA, the company that Spitzer investigated and Bethany McLean maligned with help from William Ackman. Floyd Norris, the green grape at The New York Times, writes a column dismissing Hunt. Gary Weiss smears Hunt, too, writing that “all the naked shorting conspiracy theories and scare-mongering, promulgated by Byrne…and a motley assortment of internet crackpots-and now a Citigroup analyst-are sheer hooey.”

Herb, who has recently written about a lunch he had with the crooks Sam Antar and Barry Minkow, also jumps on Hunt. In his column, Herb thanks Whitney Tilson (the Cramer friend who is shorting MBIA with Ackman, and who recently paid $10,000 to the criminal Barry Minkow) for notifying him that Heather Hunt had committed the atrocity of mentioning “naked short selling.”

“Earth to Heather,” Herb writes. “Watch out for UFOs.”

* * * * * * * *

Days later, something very remarkable happens. For years, the SEC has insisted, along with a crew of quisling journalists, that phantom stock isn’t much of a problem. Commissioner Annette Nazareth famously declared that the only people who care about phantom stock are CEOs of failing companies. The SEC’s director of markets and trading referred to Dave Patch and his blogging cohorts as “bozos.”

But something remarkable happens. On March 4, 2008, Christopher Cox, Chairman of the SEC, gives a talk at an open meeting of SEC officials. During this talk, for the first time, he lays it all out – the precise dimensions of the phantom stock problem.

He says, “today’s elaborate system of electronic net settlement [read: DTCC] has enabled a particularly pernicious form of fraud called naked short selling… Illegal naked short selling is an especially serious threat to smaller public companies, whose relatively thin market capitalizations can be more easily manipulated. And in the same way, it threatens the savings and investments of many retail investors in these smaller companies. There are many legitimate reasons that a trade might fail to settle, but the extreme abuses that are reflected in securities being chronically listed on Reg SHO’s Threshold Security List for months and years at a time is ample evidence that there is also fraud in the market that needs to be arrested. Periodically there are reports that following a legitimate purchase of 100% of the outstanding shares of a microcap company, millions of phantom shares continue to be traded by naked short sellers…”

That, folks, is precisely what the Easter Bunny and Patrick Byrne and all the other “bozos” and “crackpots” and UFO-ducking freaks have been saying all along.

* * * * * * * *

Less than a week later, short sellers come close to toppling the American financial system. They do this by taking down Bear Stearns, the country’s fifth largest investment bank.

On March 10, 2008, Bear’s chief executive, Alan Schwartz, says that the firm’s “balance sheet, liquidity and capital remain strong.” But a small group of hedge funds circulate rumors that Bear Stearns is in crisis. At the same time, they pull their money out of the bank in order to create a crisis.

Days later the stock is plummeting and money is exiting the bank at such an accelerated rate that it appears that it might have to declare bankruptcy – which would send shockwaves through the entire financial system.To prevent this, the Federal Reserve, for the first time since the Great Depression, invokes a law allowing it to lend money to banks. JP Morgan, a rival bank, steps in to swallow Bear Stearns’ mangled remains.

Perhaps to distance himself from the scandal, Jim Cramer goes on CNBC to decry the antics of short-sellers. He says, “a bunch of hedge funds come in to do a gang tackle…is that capitalism? I don’t regard that as capitalism. I regard it as the destruction of capitalism”

The SEC, meanwhile, launches an investigation into hedge funds who may have coordinated the attack on Bear Stearns. SEC Chairman Christopher Cox tells Congress (just a couple of days after the Inspector General’s meeting with “bozo” Dave Patch) that he is “very aggressively” pursuing “the market manipulation and the kinds of illegal naked short selling that have been very publicly alleged in this case.”

In other words, the chairman of the SEC tells the Senate that it is investigating the possibility that phantom stock contributed to the demise of Bear Stearns and the near collapse of the US financial system.

But this does not deter short-sellers from launching a similar attack on Lehman Brothers, an investment bank that is even larger than Bear Stearns. Richard Fuld, Lehman’s chairman, tells lawyers and the SEC that he has information proving that hedge funds orchestrated the demise of Bear Stearns – and that they have similar intentions for his bank.

And so, on April 2, 2008, Herb is on CNBC, along with CNBC reporter Charles Gasparino, who has called Patrick a “hero,” and Dennis Kneale, the managing editor of Forbes magazine, one of the few news organizations to report accurately on the phantom stock problem.This is two weeks before Herb announces that he is leaving journalism to found an “independent” financial research shop that will cater to short-sellers.

Herb is live on CNBC. His arms are flapping and his eyes are popping. Herb is doing all he can to defend the short-sellers. He is saying that Bear Stearns and Lehman got what they deserved – only bad companies blame short-sellers.

But it is clear that Gasparino and Kneale might finally have had enough of Herb.

Kneale says, “Herb, you know short-sellers better than almost anyone here, you know their secret handshakes, you go to their club meetings…”

And Gasparino says, “If you look at the way Bear Stearns imploded…it didn’t go down in a couple of months, it went down in a week. And if you look at what happened, it’s clients, which were hedge funds – these are the people that…trade with the firm. They precipitously started pulling cash whilewhile they were going short…”

Herb bounces in his seat: “But, but, but…”

“Herb let me finish,” says Gasparino. “That was a precipitous demise…and let me say one other thing, it could be completely legal, short-sellers are good for the market in many cases, but this was a run on the bank…and would you concede–on the Monday before the whole thing blew up, Bear Stearns wasn’t illiquid at that point?”

“Did the short sellers cause there to be crisis of confidence issue?” Herb asks, incredulously.

“Yes they did,” says Gasparino. “They did”

“How do you know!?” Herb shouts. “How do you know!? How do you know!!?”

“I’m going to tell you,” says Gasparino.

“How do you know!? How do you know!!”.

“I’m going to tell you.”

“How do you know!!?”

“I’m going to tell you. I’m going to tell you. I’m going to tell you. I’m going to tell you….”

* * * * * * * *

THE END

At least, we wish that were the end.

But the SEC has yet to actually prosecute a hedge fund for illegal short-selling.

Hedge funds continue to use dirty tricks to take down public companies.

They might have brought our financial system to the brink of collapse.

And Charlie Gasparino was cut off before he could tell Herb how he knows.

* * * * * * * *

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