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

Did hedge fund managers David Einhorn and Dan Loeb sabotage the nation’s second largest mortgage lender — and the American economy?

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.

  1. It would be great if there was a lawyer with big enough balls to find a bunch of New Century stockholders who would sue Einhorn, Zona and Lenice Johnson for failure to perform their fudiciary duty. Get all records of discussions with Goldman, and all positions Einhorn had while he was on the NEW board.

    That would be fun.

  2. Outstanding work, Mark. And the financial media continue to insist right along with Wall Street that conspiracies do not exist.

  3. You completely ignore the venal role subprime mortgage machines like New Century played in pumping up the value of US residential real estate to absurd, unsustainable levels. How many bogus mortgages did their agents write (fabricate) at the behest of management? How much profit did they make (and how much did the execs cash in) falsifying mortgage applications, conning unsuitable buyers with promises of never ending asset appreciation/re-financing? They were just as bad if not worse than Countrywide. Their business model was to print as many loans as possible regardless of common sense and legal limits, clip the fees, and pass on the risk through securitizations. It was a massive ponzi machine that ran roughshod till the inflated bubble popped. And they all walked away rich. The duped mortgage holders, the shareholders and unfortunately the US economic totality is still paying the price for their irrepressible greed.

    Funny you don;t cover that side of the story at all. Maybe not funny given that you are paid to write such one-sided attacks by a guy who happens to be the CEO of a public company that like New Century is facing SEC scrutiny/persecution. He might find succor reading about an alleged pattern of injustice in SEC proceedings against corporate accounting fraud. The SEC has it wrong — It’s the hedge funds fault!

    Can’t fault a guy for earning his paycheck. Well played.

  4. Trig-ignoring my amazement that you read the article and this is the best you can come up with. I ask the following:

    “How many bogus mortgages did their agents write (fabricate) at the behest of management?”

    By management behest do you imply the BOD, including Einhorn along with his hand picked cast of charecters?

    “Their business model was to print as many loans as possible regardless of common sense and legal limits, clip the fees, and pass on the risk through securitizations”

    So your premise is the BOD, and Einhorn, had no knowledge of this business model, unaware of the content they innocently pushed to pass this trash on to banks, the rating agencies smacked AAA ratings on them because the coniving agents duped them, then Goldman and others, also unaware of the dirty agents scheme then passed them on to pension plans, all the while they were just fortunate to simulmulateously bet on their demise? Then in a further twist of good fortune, pushed for a questionable accounting change which triggered the implosion.

    “And they all walked away rich.”

    Who? The agents? Most mortgage agents I’ve read about suffered tremendously from the collapse. Seems to me the ones who walked away rich are the ones you seek to absolve.

    “The duped mortgage holders, the shareholders and unfortunately the US economic totality is still paying the price for their irrepressible greed.”

    Ah, so the greedy rich mortgage agents duped the shareholders, not the BOD?

    “Maybe not funny given that you are paid to write such one-sided attacks by a guy who happens to be the CEO of a public company that like New Century is facing SEC scrutiny/persecution.”

    I see, attack the messenger, not the message. Here’s an idea, instead of going to your “attack Patrick Byrne” handbook, refute something from the article. Show that Einhorn didn’t push for the accounting change, dispute the relationships, prove there were not 4 million in fails, show us where the accounting change affected earnings, etc. etc.

    “Can’t fault a guy for earning his paycheck. Well played.”

    I could say the same to you…..minus the well played part.

    1. Sam, I assume you are intentionally missing the point of my comment. Nowhere did I say Einhorn was an innocent party. He may have played a big role turning new century into a criminal subprime machine. But note that mitchell relies on undocumented sources (and sources with likely ulterior motives and axes to grind) each time he tries to convince us that einhorn ran the show there. The fact is new century was already pursuing a reckless path prior to Einhorn becoming a director and/or installing execs and directors of his choosing. The fact also is that dozens of other subprime and alt-a machines (many much larger)followed the exact same modus operandi as new century, and einhorn (and other members of his alleged network) had no involvement with those. It’s absurd to blame the bloating of the mortgage bubble on hedge funds.

      A substantial part of the blame lies with the mortgage machines like new century. Sure, the i banks like goldman induced these machines to pump more and more flimsy mortgages into the system to sell. A number of these machines were actually secretly owned by the big banks.

      Plenty of venal participants share the blame for the mortgage blowup and inevitable meltdown, but it strikes me as kind of kooky that mitchell paints new century as a victim, not a perpetrator. Implicit in his argument is the idea that real estate values were not untenable, and he is entirely in denial about the role the new centurys of the world played bloating the bubble. He is saying if it weren’t for a hedge fund’s conspiracy to cash in on the downfall of new century, real estate values in the US would not have crashed.

      Who can respect such chicanery and what are the motivations? Let’s see, one of the morals of this story is that the SEC is willing to let the thieves escape through the back door while prosecuting innocent company execs for irrelevant accounting misunderstandings. Sounds to me like the kind of bedtime story patty likes to hear.

      BTW you do realize that loeb’s fund was down over 30% in 2008 and Einhorn’s over 20%? You do realize that almost all hedge funds got brutalized by the mortgage and financial industry meltdowns? You do also realize that historically, einhorn is a “long” investor, usually over 75% net long? Who got rich you ask? Sure the agents made some quick dough, but the execs and managment of these mortgage machines made fortunes on their stocks, options, bonuses, side deals etc. Look at Angel Mozillo. Look at the earnings for each of new centurys execs during the years they recklessly bloated the bubble.

      In general, stop being so disingenuous.

      Makes me wonder why he would expose himself to such

      1. Einhorn lost his clients’ money in 2008 shorting Volkswagen.

        Everyone knows that, except you?

        Or are you ‘disingenuous’?

        1. Do yourself a favor Mr Hall and do your own research instead of believing the fabricated, slanted stuff you read on conspiracy sites. I just reread Einhorn’s 2008 annual report. They made 17% on their short positions during Q4 2008 (VOW squeeze happened in October) “even accounting for our loss in Volkswagen”. Do a google search and you will find the annual report for Greenlight.

          So you are 100% wrong. Will you now rethink your opinions, reevaluate your “trusty” sources, do your own factual discovery? I’m not holding my breath …

  5. Mark is one of these rare individuals who is willing to put honor above self.

    George C. Marshall was the same way

    Hopefully, Milken and his cronies will go down soon

  6. OK, so we apparently have the cabal of Mafia and the chosen few running RICO-worthy criminal enterprises.

    When is the FBI, or the wretched SEC, going to get off their bureaucratic arses and do something before the capitalist system is off the tracks and into the ravine for good?

    What does it take?

    Even Harvey Pitt stated that a veritable well-lit ‘runway’ of evidence pointed to the Lehman miscreants.

    Is it time for a ‘star-chamber’ to start dispatching some of these guys to some form of heavenly judgement?

    Will it come to that?

  7. Deep Capture should start a “speculation” section, where Mark and other writers can discuss these miscreants current activities, and how they, the writers, think the current activities will play out

    1. I’m not sure Jim, its funny to me how the same names just keep showing up in these stories…

      “Hawke is cognizant of those criticisms. He said his proactive approach doesn’t necessarily trump tips or informants. The Estonian case, he pointed out, began with a tip from Seattle-area trader and well-known regulatory gadfly Yolanda Holtzee about an unusual spike in trading in a stock.”

      Yolanda Holtzee…huh…where have I heard that name before?

      Oh, that’s where.

      1. Isn’t a gadfly the end result of a maggot?

        Yes, I did notice her (its) name.

        So, possibly, the shorts have their hand on the throttle there (at the SEC) as well in this case too, sadly.

  8. As we reap the results of people like these in real time three words come to my mind.

    Treachery, Treason, Gallows.

  9. I’m still prepared to be astounded and still no clue from Judd. I’m very curious both how he did it and why the second half numbers haven’t been published. My guess is they saw he was right and are trying to do some rejigging.

    1. Bonjour, merci de vous êtes connectée au blog des parents d’élèves de l’école Diderot et désolée pour cette réponse tardive…La fermeture de classe est annoncée compte tenu de la baisse des effectifs prévus pour la rentrée prochaine. Nous avons obtenu un rendez-vous le 16 juin avec l’inspecteur afin de refaire le point sur cette fermeture. Nous vous tiendrons au coritna.Coudralement.

  10. Mark – well done.
    I have been waiting for some one to take a look at Einhorn.
    When I get back, I´ll post a piece I´d been working on about him..

    Meanwhile, in regard to the criticism that New Century was selling inflated stuff..well, of course.
    Many of these companies targeted by NSS aren´t great companies. They´re terrible, or overinflated.. or even downright crooked.

    And the people whom serial killers target are often the derelicts of society too..prostitutes, runaways, abandoned children..
    who won´t be missed. That doesn´t justify serial killing though.

    And the killers usually move on from those easy targets to more mainstream ones.
    So too with NSS, at least, IMHO


  11. Wamu TRUTH


    JPMorgan admits that the FDIC took over a solvent bank in one of the latest court documents…

    I’m enclosing a few more documents filed through the BK court in regards to a declaration of Thomas M. Blake ( ).

    The declaration can be found in 103-4.pdf at
    12. Based on my review to date, there is no indication that the OTS performed a solvency analysis consistent with the test for insolvency specified in the Bankruptcy Code. There is no indication that the OTS assessed the fair sale-able value of the assets of WMB (or WMI). Nor is there an indication that OTS compared the fair sale-able value of the assets of WMB (or WMI) to the total amount of either company’s respective liabilities. There is no indication that the OTS performed a comprehensive cash flow analysis of WMB (or WMI). Instead, the OTS found that “WMB met the well-capitalized standards through the date of receivership.”8 Thus, without a thorough analysis of the assets, liabilities and capital of WMI and WMB, it is not possible to come to a reliable conclusion concerning the financial solvency of either entity, whether on a consolidated or stand-alone basis.

    Here is another document that says as of August 14, 2008:
    “We propose to decapitalize WMBfsb by returning $20 billion of capital to its parent. The $20 billion will include the master note of approximately $7 billion, proceeds from $3.5 billion of Discount Notes and cash generated through additional wholesale deposits and advances from FHLB Seattle. We propose the payment of at least $10 billion by September 30, 2008 and the remaining $10 billion through December 2009.”

    “The net balance sheet of WMBfsb will be approximately $34 billion to $36 billion after Project Fillmore. The leverage ratio will decrease to 25% from 62%. A well-capitalized institution requires an 8% or higher leverage ratio.”

    Read reference page 45 of DOCUMENT 103-1.pdf from here:

    Included, is the form to the OTS requesting a decapitalization of WMBfsb. Pg. 117

    Enclosed is a link to the affidavit of Doreen Logan who is the Controller/ Assistant Treasurer of Wamu who states that there was no liquidity problems;…&btnG=Search

    Remember, WMBfsb was also taken from the holding company and sold to JMorgan/Chase with all of the other assets for only $1.88bil…..

    Please, take some time and read these documents. Here is a link to all documents filed through the BK Court;

    Jamie Dimon planted “moles” in Wamu??? JPMorgan committed corporate fraud???

    Wamu’s claims against JPMorgan/Chase;

    Debtors seek the Rule 2004 examination of the following Knowledgeable Parties: ”

    “The Regulators”
    FDIC – The Federal Deposit Insurance Corporation, in its capacity as receiver for WMB and in its corporate
    OTS – Office of Thrift Supervision
    OCC – Office of the Comptroller of the Currency
    Federal Reserve – Board of Governors of the Federal Reserve System
    Treasury Department – U.S. Department of the Treasury
    SEC – U.S. Securities and Exchange Commission
    Paulson – former U.S. Treasury Secretary Henry M. Paulson, Jr

    “The Rating Agencies”
    Moody’s – Moody’s Investors Service
    S&P – Standard and Poor’s Corporation (“S&P”)

    “The WaMu Suitors”
    Banco Santander – Banco Santander, S.A.
    Toronto-Dominion – Toronto-Dominion Bank
    TD Bank – TD Bank, N.A.
    Wells Fargo – Wells Fargo, N.A.

    “The Banks”
    FHLB-SF – Federal Home Loan Bank-San Francisco
    FHLB- Seattle – Federal Home Loan Bank-Seattle
    Goldman Sachs – The Goldman Sachs Group, Inc.

    “The JPMC Professionals”
    PWC – PricewaterhouseCoopers
    Equale – Equale & Associates
    Holt – Richard F. Holt
    Horne – David Horne, LLC

    Please read this article;

    KTS9 Interviews Kirsten Grind “How Washington Mutual Could Have Survived…”

    Radio Interview by David Ross;

    I’m also enclosing another link that quotes Judge Hughes from a case against the FDIC that was wrapped up on August 24, 2005;

    “The record shows that the swap was the only reason for this suit. It also shows that the FDIC knew that it had no factual or legal basis for its claims, and that its cases here and in Washington were shams.”

    As usual, Judge Hughes is acerbic in his opinion regarding the FDIC’s conduct, noting in particular that FDIC officials “lied about it all under oath” and they “discarded the mantle of the American Republic for the cloak of a secret society of extortionists.”

    “It’s hard to find a word that captures the essence of the FDIC’s bringing this action. Irresponsible is close. Arbitrary, dishonest, exploitative, extortionate, and abusive all fit.”

    Judge Hughes concluded that Hurwitz and Maxxam “will recover their costs because the record reveals corrupt individuals within a corrupt agency with corrupt influences on it, bringing this litigation.”

    The Biggest Banking Heist in World History: Washington Mutual

    Please read this descriptive complaint that was submitted to the SEC from Apex Venture Advisors
    Mike Stathis Managing Principal on October 7, 2008 in regards to the manipulation that occurred;

  12. Einhorn and his modis operandi playing out on another field:


    Posts Tagged ‘david einhorn’
    Wednesday, November 5th, 2008
    By Ray Paulick

    MI Developments, the publicly traded real estate concern that is the largest single shareholder in racetrack operator Magna Entertainment, is under fire again from one of its biggest shareholders, this time for ignoring an offer from technology entrepreneur Halsey Minor to buy the outstanding loans Magna Entertainment has been unable to repay to its parent company.

    Minor made an offer last month to buy Magna Entertainment’s debt obligation and went public Oct. 17 after failing to get a response from the MI Developments board.

    David Einhorn, the president of the Greenlight Capital investment fund that owns 10% of the Class A shares in MI Developments, is demanding that the MI Developments board of directors give serious consideration to Minor’s offer without interference from Frank Stronach, who controls both MI Developments and Magna Entertainment. Einhorn expressed his demands in a letter to the MI Developments board filed with the Securities Exchange Commission on Tuesday. Greenlight has had a longstanding battle with MI Developments and lost an earlier lawsuit against the company alleging shareholders were oppressed by board of director decisions.

    The demands from Einhorn come two weeks after a similar letter was written to the MI Developments board by a managing member of the Farallon Capital Management investment fund, threatening legal action and alleging breach of fiduciary responsibility.

    Einhorn’s letter accuses the MI Developments board and CEO Dennis Mills of making “false and misleading” promises and says that ignoring Minor’s offer was a “clear violation of the board’s fiduciary duty and duty of care to its shareholders.”

    The letter says MI Developments board members “continue to abandon ship,” and accuses Stronach of stacking the board with “cronies” and “childhood friends.”

    “The MID board has a long history of ignoring our letters, and those of other large MID shareholders,” Einhorn writes. “The MID board can not continue to stick its head in the sand and ignore the wishes of an overwhelming majority of the MID shareholders.
    “Since ignoring the Minor Offer is clearly a violation of the MID board’s duties, we expect, and demand as shareholders of MID, that the MID board immediately take up serious consideration of the Minor Offer without Mr. Stronach’s interference. Any transaction in which MID can be rid of its unlimited and never-ending exposure to MEC must be taken seriously. We minority shareholders rely on you to protect our interests from Mr. Stronach’s uneconomic and self-serving support of MEC and remind you that you will be held accountable if you fail to fulfill your fiduciary duty to the MID shareholders.”

    Click here to read the Einhorn letter.


  13. Who gets this cockroach (einhorn) onto these boards??!!??!!

    Magna Entertainment files reorganization plan

    Resize Print E-mail

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    Who’s Blogging» Links to this article
    The Associated Press
    Thursday, February 18, 2010; 9:04 PM

    DOVER, Del. — Horse-track owner Magna Entertainment Corp. filed a reorganization plan in Delaware bankruptcy court on Thursday after reaching a settlement with unsecured creditors who accused its parent company of sham financial transactions.

    According to a filing by MEC on Thursday, its committee of unsecured creditors agreed to drop a lawsuit claiming that Ontario-based MI Developments, and its chairman, Frank Stronach, propped up Magna with equity infusions disguised as secured loans to ensure that Stronach retained control of MEC assets.

    The lawsuit claimed that Magna fraudulently transferred more than $125 million in loan payments to a subsidiary of MID in the two years leading up to Magna’s Chapter 11 filing. It sought to recharacterize MID’s loan claims as equity interests and to subordinate them to other claims.

    In exchange for the lawsuit being dropped, MID will pay $75 million to holders of allowed general unsecured claims against MEC and its debtor affiliates, except the Maryland Jockey Club. Any distributions to creditors of the Maryland Jockey Club would come from the sale of jockey club assets, which include Laurel Park and Pimlico race tracks.

    Other terms of the plan call for MID to receive the first $20 million in proceeds from the sale of the Maryland Jockey Club or its assets, and half of any amount above that after certain claims are satisfied.

    MID also would receive the first $20 million in proceeds from the sale of Thistledown race track in Ohio, and any proceeds above $20 million from the sale of Lone Star Park in Texas.

    In addition to a share of those sale proceeds, ownership of other MEC assets, including Santa Anita Park and Golden Gate Fields in California, and Gulfstream Park in Florida, would be transferred to MID.

    In its disclosure statement, which will be the subject of a March 23 hearing, MEC defended the settlement.

    “The settlement resolves an extremely complex litigation regarding difficult claims, and a potential dispute over asset valuations, by providing equal recoveries to all general unsecured claimants,” MEC attorneys wrote.

    A hearing was scheduled Friday on the state of Maryland’s assertion that it has a right of first refusal in any sale of Maryland Jockey Club assets. The state has fought to ensure that any purchaser of the Maryland assets be required to keep the Preakness race, the second race in horse racing’s Triple Crown, at Pimlico, in Maryland.

    Magna, the largest horse-track owner in the United States, filed for bankruptcy protection in March, saying it was unable to obtain new financing while supporting its existing debt.


  14. I thought M. Milken was banned from trading stocks? Also, IMHO former head of FDA and best friends with the milkman needs to be investigated by the SEC,FBI and DOJ! He was in and still is in the milkman’s back pocket!

  15. FBI Investigating Pa. School Webcam Spying Allegations,2933,587034,00.html?test=latestnews

    The district has suspended the practice amid the lawsuit and the accompanying uproar from students, the community and privacy advocates. District officials hired outside counsel to review the past webcam activations and advise the district on related issues, Young said.

    Remote-activation software can be used to capture keystrokes, send commands over the Internet or turn computers into listening devices by turning on built-in microphones. People often use it for legitimate purposes — to access computers from remote locations, for example. But hackers can use it to steal passwords and spouses to track the whereabouts of partners or lovers.

    The Pennsylvania case shows how even well-intentioned plans can go awry if officials fail to understand the technology and its potential consequences, privacy experts said. Compromising images from inside a student’s bedroom could fall into the hands of rogue school staff or otherwise be spread across the Internet, they said.
    “What about the (potential) abuse of power from higher ups, trying to find out more information about the head of the PTA?” wondered Ari Schwartz, vice president at the Center for Democracy and Technology. “If you don’t think about the privacy and security consequences of using this kind of technology, you run into problems.”

  16. Yolanda Holtzee … boy that’s a name I have not heard for quite some time. Brings back memories. None good. That’s one crazy chickadee.

  17. Hi Mark,

    I asked Herb Greenberg in March of 2007 why he wasn’t writing anything on New Century.

    At the time, Greenberg was writing one article after another on NovaStar. I found it peculiar that he wasn’t covering New Century, and asked him if his relationship with David Einhorn was preventing him from doing a story. You can read the exchange between us at:

    Both you and Judd are doing a terrific job!

    1. â€#2;8&30¦.A formidable share, I simply given this onto a colleague who was doing a bit of analysis on this. And he actually purchased me breakfast as a result of I discovered it for him.. smile. So let me reword that: Thnx for the treat! Nonetheless yeah Thnkx f…

  18. The more I read about this the more I want to throw up. But I also quite upset that Buffett invested in Goldman Sach’s. Why would he choose to be associated with crooks like Goldman Sach’s?

  19. —– Original Message —–
    From: marv eatinger
    To: [email protected]
    Sent: Tuesday, February 09, 2010 5:36 PM
    Subject: DANIEL M. HAWKE

    Business and Financial News – The New York Times
    By JENNY ANDERSON and ZACHERY KOUWE 15 minutes ago. From left, Ken Lench, Daniel M. Hawke, Cheryl Scarboro, Robert Khuzami … – Similar




    Marv Eatinger

  20. Judd: Thanks again! I am typing this from the public library because my computer is controlled by an external source and I guess that is just part of the territory. The last time my computer updated for the above “Posted on 18 February 2010 by Mark Mitchell” it showed 25 responses.

  21. This was sickening to read. I worked at New Century and lived through all of this. When I think of how many of us have still not recovered from the “business dealings” of others….. stop blaming those of us that worked hard every day in the trenches to deliver quality product…..well anyway, as I said it’s sickening to read this. It brought back a lot of memories, of conversations, speculation and more importantly, made me miss some exceptional people that I worked with and for, including the 45 people that I managed.
    Thank you to the author of this article and to the research that was done to compile this piece.

    1. I too worked at New Century at the time and still have not recovered and this article shows some of what I heard was the problem back then. Einhorn had decide to rape and pillage his way through New Century and the whole country has paid the price. I am proud of the work I did at New Century and I never made one loan that I thought was a bad loan…I did this because I believed in the company and wanted to be around forever. I would gladly go back to work for them and miss the great people that I worked for and with.

  22. The trouble with bullshit articles like this is that it rewrites history and ignores the lessons that the history should have taught us.

    Suddenly, New Century Financial didn’t go bust because it was making a significant amount of no-doc, low-doc loans. Nope the huge amount of New Century loans where the borrower never made a payment, never happened.

    It was Einhorn’s fault.

    New Century went bust because its securitized loan pools had significant defaults. When that happens to a finance company that doesn’t make deposits, you can’t fund further loans and the doors have to close. Further, New Century was a REIT and by law had to pay out 80% of its income as a dividend, a point Mitchell convieniently misses.

    The fact is that had all of the companies that Mitchell claims were destroied by a hedge fund cabal actually listened to the short sellers critcicims their ultimate fate would have been avoided.

    Allied Capital owned equity and debt in several businesses. When the debt defaulted they refused to mark down the equity. By definition when the debt of a company falls in value and becomes riskier the equity becomes riskier and must be marked down even more.

    They turned a blind eye when Einhorn uncovered massive fraud at a unit that made SBA loans. Loans that taxpayers had to foot the bill for after they went sour by the way.

    Had they listened to Einhorn they could have stopped the fraud in its tracks and faced the real problems they had in their investment portfolio. Instead they hired a public relations specialist to trash Einhorn and steal his phone records. Meanwhile they continually sold stock to the public and paid a massive dividend. Today because of these decisions Allied no longer pays a dividend at all and sells for $4.00 a share.

    MBIA was warned repeatedly by shortsellers that they were insuring riskier and riskier debt. They were further warned that their blind insurance of CDOs would result in massive claims that they didn’t have the statutory capital to pay. Had they listened they could have just gotten back to the boring business of insuring municipal bonds. But instead they attacked the short-sellers, while cheerfully paying out dividends and buying back stock. Today MBIA sits at $5.00 a share, hoping that they can somehow ward off the massive claims that the short-sellers warned about.

    Einhorn publicly warned Lehman Brothers that its marks on its assets weren’t accurate. Even Warren Buffett agreed with this assessment. Lehman brushed off these concerns and subsequently didn’t raise as much capital as it should have. It even turned down the chance to sell preferred stock to Warren Buffett, who’s reputation would have helped raise even more capital. Subsequently, Lehman found that it couldn’t fill its capital hole and was forced to declare bankruptcy.

    You see, blaming the short-sellers may feel good in the short-term but ultimately it causes you to miss the real lessons that should have been learned. Excessive risk taking may lead to some very good profits in the short-term but will ultiimately have concequences.

    Just blaiming hedge funds doesn’t change this.

    Einhorn warned that Lehman was

    1. Now that a report from the SECs office of the inspector general has exonerated Einhorn with respect to Allied Capital and shown that his concerns about the valuation of Allied’s investments were 100% correct I would expect Mr. Mitchell to print a retraction and appologize to Mr. Einhorn.


      1. greenday are you aware of current events concerning your master?

        March 3, 2010, 4:44 p.m. EST · Recommend (1) · Post:
        Sovereign-crisis trades yield swift regulatory backlash
        DOJ asks Soros, other big hedge-fund firms, for euro-trading records, emails
        By Alistair Barr & Simon Kennedy, MarketWatch
        SAN FRANCISCO (MarketWatch) — Trades used to bet on or hedge against sovereign-debt risks have triggered a swift backlash from regulators in the wake of a 9% swoon by the euro in recent months.

        The U.S. Justice Department recently asked hedge-fund firms Soros Fund Management, Paulson & Co., SAC Capital Advisors and Greenlight Capital to preserve documents related to trading in the euro, according to a person familiar with the situation….
        full article @

        Department of Justice investigates hedge funds
        Bloomberg clip

        U.S. Said to Tell Hedge Funds to Save Euro Records (Update3)
        By Katherine Burton and David Scheer
        March 3 (Bloomberg) — The U.S. is asking hedge funds not to destroy trading records on euro bets, according to a person with knowledge of the requests, as Europe and the U.S. step up scrutiny of the funds’ role in the Greek debt crisis….

  23. Good points Greenday but the SEC exonerating Einhorn shouldn’t fill anyone with confidence.

    These are the same incompetent buffoons who ignored Madoff for 10 years. We should have all the confidence in the world in the SEC as their employees take high-paying jobs at firms that use their expertise to skirt SEC regulations.

    Case in point Linda Thomsen who missed Ponzi scheme-Madoff, left Gary Aguirre twisting slowly in the wind, and then took a cushy job at Davis Polk advising hedge fund clients about the SEC.
    Not to mention the recent CMKX Diamond lawsuit for $3.7 trillion against 4 SEC commissioners, the biggest lawsuit in world history.

    See below:

    A. CLIFTON HODGES, State Bar No. 046803

    4 East Holly Street
    Suite 202
    CA 91103
    Tel: (626) 564-9797
    Fax: (626) 564-9111

    Attorneys for Plaintiffs





    CHRISTOPHER COX, an individual; MARY L. SCHAPIRO, an individual; CYNTHIA A. GLASSMAN,
    an individual; PAUL S. ATKINS, an individual; ROEL C. CAMPOS, an individual; ANNETTE L. NAZARETH, an individual; TROY A. PAREDES, an individual; LUIS A. AGUILAR, an individual; ELISSE B. WALTER, an individual; KATHLEEN L. CASEY, an individual;

    and DOES 1 through 10, inclusive,

    Defendants. Case No.: CV10-00031-JVS (MLGx)



    COME NOW Plaintiffs DAVID ANDERSON, LT. COL.; NELSON L. REYNOLDS, LT. COL.; SHEILA MORRIS; PATRICK CLUNEY; ROBERT HOLLENEGG; ALLAN TREFFRY; and REECE HAMILTON, individually and on behalf of all others similarly situated, who, for causes of action herein allege:


    1. This action for declaratory judgment and for damages for violations of the Plaintiffs’ civil rights under Bivens v. Six Unknown Agents of the F.B.I., 403 U.S. 388 (1971), against Commissioners of the Securities and Exchange Commission, arises out of actions and failures to act occurring over the period from January 1, 2006 to date by Defendants CHRISTOPHER COX, an individual; MARY L. SCHAPIRO, an individual; CYNTHIA A. GLASSMAN, an individual; PAUL S. ATKINS, an individual; ROEL C. CAMPOS, an individual; ANNETTE L. NAZARETH, an individual; TROY A. PAREDES, an individual; LUIS A. AGUILAR, an individual; ELISSE B. WALTER, an individual; KATHLEEN L. CASEY, an individual; and other government agents whose names are not now known to the Plaintiffs.

    2. These Defendants, acting in the course and scope of their employment by the United States of America as duly authorized Commissioners of the Securities and Exchange Commission, a federal agency, through their acts and omissions knowingly, consciously, wrongly, without compensation and without due process of law have effected a taking of property from each of the named Plaintiffs and all who are similarly situated.


    3. This action for declaratory relief and damages is predicated on the provisions of the Constitution and Statutes of the United States, the legal and equitable jurisdiction of this Court, the principles of common law, and this Court’s concurrent and pendant jurisdiction.

    4. This Court has jurisdiction over the Plaintiffs’ claims under Article III of the United States Constitution and the Fifth Amendment thereto. This Court has jurisdiction over Plaintiffs’ property rights under the foregoing citations and, in addition, pursuant to Title 28 U.S.C., Section 1331 and the case law precedent of Bivens v. Six Unknown Agents of the F.B.I., 403 U.S. 388 (1971).

    5. Venue is proper in this Court under Title 28 U.S.C., Section 1391(e)(1)/(2). Defendants are all past or current Commissioners of the Securities and Exchange Commission and therefore agents of the United States Government, and a substantial part of the property, and the acts related to such property subject to Plaintiffs’ claims, occurred or was situated in this Central District of California at all times relevant.


    6. Plaintiff DAVID ANDERSON, LT. COL., U.S. Air Force pilot, resides in the State of Missouri, owns more than 280,000,000 shares of stock in CMKM Diamonds, Inc., and at all times relevant to the allegations set forth herein, was a citizen of the United States.

    7. Plaintiff NELSON L. REYNOLDS, LT. COL., U.S. Air Force pilot, resides in the State of Texas, owns more than 15,000,000 shares of stock in CMKM Diamonds, Inc., and at all times relevant to the allegations set forth herein, was a citizen of the United States.

    8. Plaintiff SHEILA MORRIS, a company owner/CEO resides in the State of North Carolina, owns
    more than 400,000,000 shares of stock in CMKM Diamonds, Inc., and at all times relevant to the allegations set forth herein, was a citizen of the United States.

    9. Plaintiff PATRICK CLUNEY, a retired professional athlete resides in the State of Florida, owns more than 680,000,000 shares of stock in CMKM Diamonds, Inc., and at all times relevant to the allegations set forth herein, was a citizen of the United States.

    10. Plaintiff ROBERT HOLLENEGG resides in the State of North Carolina, owns more than 85,000,000 shares of stock in CMKM Diamonds, Inc., and at all times relevant to the allegations set forth herein, was a citizen of the United States.

    11. Plaintiff ALLAN TREFFRY, a licensed State of California Attorney, resides in the County of Los Angeles, State of California, owns more than One Billion shares of stock in CMKM Diamonds, Inc., and at all times relevant to the allegations set forth herein, was a citizen of the United States.

    12. Plaintiff REECE HAMILTON, a business owner/partner resides in the County of Los Angeles, State of California, owns more than One Billion shares of stock in CMKM Diamonds, Inc., and at all times relevant to the allegations set forth herein, was a citizen of the United States.

    13. Defendants CHRISTOPHER COX, Chairman 2005-2009, MARY L. SCHAPIRO, Chairman 2009-2010, CYNTHIA A. GLASSMAN Commissioner 2002-2006, PAUL S. ATKINS, Commissioner 2002-2008, ROEL C. CAMPOS, Commissioner 2002-2007, ANNETTE L. NAZARETH, Commissioner 2005-2008, TROY A. PAREDES, Commissioner 2008-2010, LUIS A. AGUILAR Commissioner 2008-2010, ELISSE B. WALTER Commissioner 2008-2010 and KATHLEEN L. CASEY, Commissioner 2008-2010: are and, at all referenced times mentioned herein were, acting as individuals and as Commissioners of the Securities and Exchange Commission, an agency of the UNITED STATES OF AMERICA, and acting within the course and scope of their employment. These Defendants are the real parties in interest in the claims set forth herein.

    14. Other employees and servants of the Securities and Exchange Commission are also liable for damages under the causes of action set out in this Complaint. However, the names of these employees and servants are not now known to Plaintiffs, who thereby names them herein as DOES 1 through 10. When the names of these employees and servants become known, Plaintiffs reserve the right to amend this Complaint to add the names of these DOE Defendants.


    15. In November and December, 2002, CYBER MARK INTERNATIONAL INC., a public company domiciled in Nevada, reverse-merged with Casavant Mineral Claims, which then held mineral claims to more than 600,000 acres within Saskatchewan, Canada, increased authorized capital from 500,000,000 to 10,000,000,000 common shares, cancelled all preferred shares, and changed its name to CASAVANT MINING KIMBERLITE INTERNATIONAL, INC. (CMKI); as of February 3, 2003, 7,241,653,404 shares were issued and outstanding.

    16. During the succeeding months CMKI declared a 2 for 1 stock split and filed with the Securities and Exchange Commission: Form 15 exemption claim, July, 2003; Certificate of Amendment to Articles of Incorporation changing its name to CMKM DIAMONDS, INC. (CMKM), February 5, 2004; Certificate of Amendment to Articles of Incorporation raising its authorized capital to 500,000,000,000 common shares @ $0.001 par value, March 1, 2004; Certificate of Amendment to Articles of Incorporation correcting the par value of common shares as of December 26, 2002 to $0.0001 par value, July 13, 2004; Certificate of Amendment to Articles of Incorporation raising its authorized capital to 800,000,000,000 common shares @ $0.0001 par value, July 13, 2004.

    17. During the summer and fall of 2004: New York Attorney Roger Glenn was retained by the company; the number of acres upon which CMKM held claims increased to over 1.2 Million acres; claims development activity was pursued by the company; and a shareholders appreciation party was planned to be celebrated in Las Vegas, Nevada to thank the shareholders, to give them an opportunity to meet company personnel, and to announce an agreed upon merger with another public company, U.S. CANADIAN MINERALS INC. On the eve of the party celebration, the Securities and Exchange Commission placed an order on CMKM preventing any public disclosure of anticipated mergers or other development information.

    18. In early 2005, CMKM announced the addition of Robert A. Maheu to the Board of Directors who shortly thereafter became the co-chairman of the Board; CMKM announced a new “corporate strategy plan to dramatically and comprehensively transform” the company for generation of consistent, long-term growth and profitability for the shareholders; CMKM filed an amended Form 15 on February 17, 2005 reinstating the company to a public reporting status; and on March 3, 2005 was notified by the Securities and Exchange Commission of a temporary suspension of trading of the company’s stock (Pink Sheets-CMKX) based upon, inter alia, concerns over the “adequacy” of publicly available information.

    19. On March 16, 2005 the Securities and Exchange Commission instituted a public administrative proceeding pursuant to Section 12 (j) of the Securities Exchange Act of 1934 against CMKM to determine whether the company was required to file periodic reports under Section 12(g) and whether CMKM failed to comply with Section 13(a), and rules there-under, by failing to so file. CMKM responded on April 11, 2005 admitting that CMKM had a duty to file public reports and alleging various grounds of mistake, malpractice and other affirmative defenses to the factual allegations.

    20. From March 17, 2005 through April 29, 2005 CMKM traded publicly in the US under the trading symbol “CMKX,” a total of 551,756,751,833 shares, an average share volume of more than 17 billion shares per day, reaching a maximum on April 21, 2005 of 94,654,588,201 shares. These figures do not include foreign trades nor trades made on an ex-clearing basis such as those disclosed by Jefferies & Company , Inc. on May 6, 2005: between March 25, 2004 and September 21, 2004 Jefferies traded 111,780,681,204 shares of CMKX stock on an ex-clearing basis.

    21. On May 10, 2005 the Section 12 (j) administrative proceeding was conducted in a United States Central District of California courtroom; the Administrative Law Judge, Honorable Brenda P. Murray entered her decision on July 12, 2005 finding the facts to be as alleged by the Securities and Exchange Commission. CMKM then filed a Petition for Review which was granted, and a briefing schedule set.

    22. On October 20, 2005: Robert A. Maheu resigned as a member and co-chairman of the CMKM Board of Directors; Urban Casavant agreed to remain as the sole officer and Director of CMKM until the affairs of CMKM were wound up to ensure all shares and other assets of CMKM were properly distributed to its stockholders; CMKM entered into an agreement with Entourage Mining Ltd. pursuant to which CMKM assigned its 50% interest in United Carina Resources Corp. to Entourage for 15,000,000 shares of stock, sold its 36% interest in Nevada Minerals, Inc. claims to Entourage for 5,000,000 shares of stock, and made a joint agreement with 101047025 Saskatchewan Inc. and Entourage whereby certain claims were transferred and CMKM became entitled to receive 30,000,000 shares of stock; CMKM’s other agreements with United Carina Resources Corp. and Nevada Minerals Inc. were terminated.

    23. On October 21, 2005 CMKM approved formation of a Task Force consisting of Robert A.
    Maheu, Donald J. Stoecklein and Bill Frizzell for the purpose of assisting CMKM and Mr. Maheu, as “designated Trustee, to conduct an orderly and verifiable pro rata liquidating distribution of any Entourage Mining Ltd. shares…and any other available assets of CMKM;” the SEC Petition for Review was withdrawn by CMKM on October 21, 2005 and a Securities and Exchange Commission Order de-registering CMKM subsequently was formally entered on October 28, 2005. CMKM had 703,518,875,000 shares of common stock issued and outstanding on that date.

    24. On November 4, 2005 CMKM established a web site ( for the purpose, inter alia, of advising all shareholders to request physical share certificates evidencing their ownership interest in CMKM as one means of establishing that they were bona fide shareholders of the company. The company intended at that time to wind up its affairs and distribute the 50 million shares of Entourage Mining Ltd. stock and any other assets, including previously unpaid dividends, to the bona fide shareholders. The web site set forth procedures to be followed and established a means of registering all bona fide shareholder certificates prior to December 31, 2005; certificates evidencing 43,309,298,585, shares had been registered at that time.

    25. A frequently asked question (FAQ) page was added to the web site on the evening of November 4, 2005 and in response to a question about the degree of naked shorting of CMKM stock, the Task Force indicated that “Credible information indicates the number of naked short shares is potentially as high as 2 Trillion shares”.

    26. The Task Force issued a press release on January 19, 2006 discussing a reduction in total shares of Entourage Mining Ltd. stock to be distributed to CMKM shareholders from 50 Million shares to 45 Million shares as a result of a reduction in mining claims involved.

    The Task Force also discussed issues involving difficulties obtaining physical share certificates being experienced by shareholders; accordingly the deadline date for registration of shares was extended to March 15, 2006.

    The Task Force was provided a new “cert list” by First Global Stock Transfer showing certs issued “and active” on January 13, 2006; ADP Services also provided information to the Task Force. This data reflected a sample of 25,021 certificates representing 350,000,000,000 plus shares of stock and a total of more than 67,000 additional certificates to be counted.

    27. On March 16, 2006 the Task Force issued a public release that “…we received a visit in our office [in Tyler, Texas] by an E-Trade rep today. This rep personally hand delivered copies of approximately 4000” certificates. Further information regarding on-going discussions with the DTCC and other brokerage houses was also provided.

    28. The Task Force provided additional information on March 20, 2006, extending the time for registration of certificates to May 15, 2006, advising the shareholders that Urban Casavant and his immediate family would not participate in the share distribution, and advising that a printed notice to stock holders would be published in at least one nationally circulated United States newspaper.

    29. On May 25, 2006 the Task Force received a second batch of 1,200 share certificates from AmeriTrade, having received some 1,000 share certificates a week earlier. AmeriTrade’s cover letter indicated that several hundred more certificates would be delivered within “the next few days.” The deadline for registering certificates of May 15, 2006 had not been extended, although the Task Force continued to advise shareholders that they should obtain their certificates and that the Task Force would honor any bona fide shareholder at the time of asset distribution. By late Fall, 2006, the Task Force had received and counted copies of certificates from more than 39,000 shareholders, evidencing more than 635 Billion shares.

    30. Kevin West was hired pursuant to a written agreement by CMKM during the summer of 2006
    to assist in winding up the affairs of the company and, more specifically, coordinating the share certificate pull. After serving nearly a year as Interim CEO, Kevin West was appointed Chairman of the Board on March 29, 2007 after which Urban Casavant stepped down as sole director, president, secretary and treasurer of CMKM Diamonds, Inc. Mr. West soon thereafter appointed Bill Frizzell as CMKM General Counsel and provided instructions for the filing of a number of lawsuits to attempt to recover moneys and other assets which had been wrongfully taken from the company.

    31. During the period of June 1, 2004 through October 28, 2005 a total of 2.25 Trillion “phantom” shares of CMKM Diamonds Inc, was sold into the public market through legitimate brokers, illegitimate brokers and dealers, market makers, hedge funds, ex-clearing transactions and private transactions. The sales of the majority of such shares were at all times known to the Securities and Exchange Commission, including Defendants herein.

    32. At some date prior to June 1, 2004 the Securities and Exchange Commission in concert with the Department of Justice of the United States, together combined with Robert A. Maheu and others to utilize CMKM Diamonds, Inc. for the purpose of trapping a number of widely disbursed entities and persons who were believed to be engaged in naked short selling of CMKM Diamonds Inc. stock and cellar boxing the company.

    The Securities and Exchange Commission and the Department of Justice, with assistance from the Department of Homeland Security, believed and developed evidence that said short sellers were utilizing their activities to illegally launder moneys, wrongfully export moneys, avoid payment of taxes, and to support foreign terrorist operations. To fulfill the plan to criminally trap such wrongdoers, the Securities and Exchange Commission, with assistance from the Departments of Justice and Homeland Security:

    (a) Assisted in and approved the retention of Roger Glenn, an ex-SEC trial attorney and drafter of Sarbanes-Oxley, to join CMKM Diamonds Inc. for the purpose of verifying claims value, increasing authorized shares of stock to 800,000,000,000, and supervising from the inside of the company;

    (b) Encouraged the company to expand its promotional activities, assisted in the set up of the “racing activities” of the company, and underwrote a substantial portion of the cost of such activities;

    (c) Consented to, facilitated, and supported the sale of certain company claims to several foreign corporations;

    (d) Consented to, facilitated, and supported the conferences between Robert A. Maheu and his associates on the one hand, and the wrongdoing short sellers on the other, all for the purpose of settling the potential liability of said wrongdoers with consent of the U. S. Government and a representation of no criminal prosecution for such illegal sales;

    (e) Consented to, facilitated, and supported the declaration of dividends payable by the company to each common shareholder of CMKM Diamonds, Inc.

    (f) Consented to, facilitated, and supported the distribution of shares of CIM, a private company owned by Urban Casavant, as a stock dividend, including consent and approval of distribution of said shares to holders of more than 1.4 Trillion shares of CMKM Diamonds, Inc. common stock.

    33. During the period from November, 2004 through April, 2005, CMKM Diamonds, Inc. negotiated the sale of some of its Saskatchewan, Canada, mineral claims to three Chinese domiciled corporations with the advice and consent, inter alia, of the Securities and Exchange Commission. Proceeds from the consummation of such sales were placed into a frozen trust for disbursal at a later time.

    34. During the period from March, 2004 through August, 2006, on behalf of CMKM Diamonds, Inc. Robert A. Maheu, with assistance from others, negotiated a settlement with the illegitimate brokers, dealers, market makers, hedge funds, and other persons and entities that had engaged in naked short selling of CMKM Diamonds Inc. stock and cellar boxing the company. In exchange for a U. S. Government promise of no prosecution for such sales, the wrongdoers each promised to pay negotiated amounts to a frozen trust for disbursal at a later time.

    35. Plaintiffs herein are informed and believe, and based thereon allege, that other moneys have been collected for the benefit of the shareholders of CMKM Diamonds, Inc. from the Depository Trust & Clearing Corporation, from the United States Government, and from the sale of additional assets including consent to enter into joint venture agreements with other companies holding mineral claims in Saskatchewan, Canada. Plaintiffs herein are further informed and believe, and based thereon allege, that said moneys, collected for the benefit of shareholders have also been placed in a trust or are otherwise now held in trust by the Depository Trust & Clearing Corporation and the United States Treasury.

    36. Plaintiffs herein are informed and believe, and based thereon allege, that at all times mentioned, the Securities and Exchange Commission reserved unto itself the sole and absolute discretion to determine when moneys collected pursuant to the scheme set forth above would and could be released for distribution.

    37. Demand for release of said moneys has been repeatedly presented to the Securities and Exchange Commission without result. Agents and employees of the Securities and Exchange Commission and the Department of Justice have represented repeatedly that the release of moneys for distribution was imminent, and/or would occur within several weeks, and/or would occur within less than a month. Each of said representations have been made knowing them
    to be false, and at the specific direction of the named Defendants. These actions of withholding distribution of said moneys, without compensation and without due process of law, amount to a taking of the property of the individual Plaintiffs and of all similarly situated.

    38. At all times mentioned herein, the Defendants acted with deliberate indifference or reckless disregard for the Constitutional and other rights of all Plaintiffs, or with the intention and knowledge that they were violating Plaintiffs’ Constitutional or other rights or to cause them other injuries, losses and damage.

    39. As a result of the Defendants’ misconduct, each of the named Plaintiffs and all of those similarly situated, have been denied their Constitutional rights, including, but not limited to, their Fifth Amendment right to be secure in their property, free from taking without just compensation and without due process of law, and have suffered injuries and property loss in excess of Three Trillion Dollars.


    40. Plaintiffs bring this action individually, and on behalf of all others similarly situated, and in the public interest.

    41. Plaintiffs bring this action on behalf of a class of persons who were and are bona fide shareholders in CMKM Diamonds, Inc., a public company directly supervised by the Securities and Exchange Commission.

    42. Plaintiffs are members of said class, have a claim typical of the claims of all members of said class, and will fairly and adequately represent the interests of the members of said class.

    43. The members of said class are so numerous that joinder of all members is impracticable.

    44. All of the class members are wholly identifiable from documents known to be in the possession of Defendants and of the Securities and Exchange Commission.

    45. The claims of the members of said class present common issues of fact and law which predominate over any questions affecting only individual members of the class.

    46. The defenses available to defendants to the claims of the members of the class present common issues of fact and law which predominate over any questions affecting only individual members of the class.

    47. The prosecution of separate actions by the individual members of the class would create a risk of inconsistent or varying adjudications which would establish incompatible standards of conduct for defendants.

    48. Adjudications with respect to individual members of said class would, as a practical matter be dispositive of the interest of other members not parties to the individual adjudications or would substantially impair or impede the right and/or ability to protect their interest.

    49. Defendants have acted or refused to act on grounds generally applicable to said class thereby making appropriate final injunctive relief with respect to the class as a whole.

    50. Unless ordered by this court, Defendants will continue their illegal and wrongful conduct, and repeated actions by individual class members will be required to obtain relief; and thereby the remedies available at law are inadequate.

    51. For all of the above reasons, a class action is superior to other available methods for the fair and efficient adjudication of the claims alleged herein.


    52. Plaintiffs incorporate as though fully set forth herein, all of the allegations contained in Paragraphs 1 through 39 above.

    53. Plaintiffs allege that an actual controversy exists in this jurisdiction, in that it is the Plaintiffs’ contention that:

    (a) The Defendants are, or in the past were, Commissioners of the SECURITIES AND EXCHANGE COMMISSION, an agency of the UNITED STATES OF AMERICA. At all relevant times herein, said Defendants were acting as individuals and in their official capacity as agents of the SECURITIES AND EXCHANGE COMMISSION.

    (b) On and after January 1, 2006, the Defendants, acting alone and acting in concert with each other, and acting without just cause, did consciously, knowingly, intentionally and wrongfully cause certain acts and omissions to proceed in such manner as to hinder, delay, and ultimately prevent the distribution of moneys held for the benefit of Plaintiffs, and all similarly situated, said moneys being payable to each said person on a per share basis.

    (c) The Defendants, and each of them, acted in their individual and their official capacities with deliberate or reckless disregard for the Constitutional and other rights of Plaintiffs and all similarly situated or with malicious intent and with the knowledge that their acts and omissions violated and denied the Constitutional and other rights of Plaintiffs and all similarly situated, or that their acts would cause said Plaintiffs and all similarly situated other injuries.

    (d) The Defendants, and each of them, did unlawfully and wrongfully cause certain acts and omissions to proceed in such manner as to hinder, delay, and ultimately prevent the distribution of moneys held for the benefit of Plaintiffs and all similarly situated, even though the Defendants knew that said persons had a vested interest and Constitutional right to receive said moneys in a timely, unfettered and unconstrained manner.

    (e) The Defendants, and each of them, knew that Plaintiffs and all similarly situated had a vested interest and Constitutional right to receive said moneys in a timely, unfettered and unconstrained manner when they committed the acts and omissions set forth above, causing each said person to be deprived of property without just compensation and without due process of law.

    54. The Defendants, and each of them, contend to the contrary. Therefore, it is necessary and proper for this Court at this time to determine and declare the validity of the contentions of the parties as set forth above.


    55. Plaintiffs incorporate as though fully set forth herein all of the allegations contained in Paragraphs 1 through 51, above.

    56. Defendants, by committing the above-mentioned acts and omissions, violated and denied the Plaintiffs’ Constitutional rights, and those of all similarly situated, including, but not limited to, their Fifth Amendment right to be secure in their property, free from taking without just compensation and without due process of law.

    57. Defendants, and each of them, acted and failed to act with the intent to deny the Constitutional rights of Plaintiffs and of all those similarly situated, or with the intentional or callous disregard or deliberate indifference to those rights. The above described acts of the Defendants, all charged with securities law enforcement as Commissioners of the Securities and Exchange Commission, in violation of the Constitutional rights of Plaintiffs and of all those similarly situated, were not intended to be exempt from liability.

    58. As a result of the Defendants’ acts, Plaintiffs and all those similarly situated have suffered injuries and property loss in excess of 3.87 Trillion Dollars in an exact amount to be determined at the time of Trial. Because Defendants’ actions were intentional or done with callous disregard or deliberate indifference to the Constitutional and other rights of all Plaintiffs, this Court should award punitive damages against each individually named Defendant.

    WHEREFORE, Plaintiffs seek judgment as follows:

    1. For a declaratory judgment, pursuant to Title 28 U.S.C., Sections 2201 and 2202, which determines and declares the validity of the contentions of the parties set forth in Paragraphs 52 to 54, above;

    2. For a judgment for compensatory, general and special damages in the amounts prayed for in the Second Cause of action set forth above;

    3. For a judgment for punitive damages in an amount sufficient to punish and to make examples of these Defendants, and to deter these Defendants and others from engaging in similar conduct;

    4. For an award of reasonable attorney’s fees, expenses and costs of suit incurred herein; and:

    5. For such other and further relief as this Court deems just and proper.

    Dated: January 10, 2010.


    By: [Signed]

    Attorneys for Plaintiffs

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