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

David Einhorn would have you believe that he is brave crusader against corporate malfeasance. The truth is, he’s a fraud who did serious damage to the markets.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Oops, did it again.

* * * * * * * *

Click here to read the inspector general’s report

  1. Mark, let not lowball Bernies indiscretions now, that figure should be 65 billion not 50. 15 billion here, 15 billion there soon we are going to start talking real money as Dr. DeCosta would say. Anyhow good stuff, I expect some of his cronies to be over here pointing out his good deeds soon and casting their usual aspersions at D.C. Again goodstuff.

  2. I wonder if this gang has BP in its sights now? Perfect set up and those nasty shareolders did blow out the well on pupose didn’t they?

    GS sold two weeks before?? and the CEO A week? before? If so the G

    You do start to wonder.S boyz and the CEO were so smart while all the shareholders were so stupid. Strip value seems to be the new business of business.

    1. Something funny about BP’s trading. It’s like it’s going to be taken to zero like the financials.

      There are new estimates that the pressure in the oil “volcano” is up to 70,000 PSI and that you can’t stop it without forcing the oil to bubble up somewhere else, yet they slice it clean to put a hat on it and now it looks like there’s ten times as much flowing as there was before.

      It’s like they WANT the price to go down, ocean be damned.

      1. I’ve been wondering about the vulnerability of BP too.

        Consider: The home-base for its stock is the London Exchange. It’s the American Depositary Receipts that trade on the NYSE. Which do you target, and would it matter?

        Right now – literally as I type – there is short-interest of 6.1-million ADRs, compared to a total of 3.1-billion ADRs outstanding.

        Also right now – literally as I type – there are roughly 6000 put-options on BP ADRs due to expire on June 19 with strike prices of $10 or less, and another approx. 24,000 put options with strike prices between $12.5 and $20. Combined, these deep-out-of-the-money puts are equivalent to 3-million shares, less than half the current short-interest and barely 0.1% of all outstanding shares.

        This isn’t anywhere near the scale of the notorious put-option attack on Bear-Stearns in March 2008, which represented something like 6% of all outstanding shares.

  3. Any company that trades in the U.S. subject to the DTCC-administered clearance and settlement system can easily go under if it should be unfortunate enough to pop up on the “easy prey” list for ANY amount of time and for ANY reason. When you can sell nonexistent securities all day long, refuse to ever deliver that which you sold and are only asked to collateralize the monetary value of your failed delivery obligation as the share price predictably falls out of bed then killing U.S. corporations is going to be a whole lot more lucrative than building them.

    How in the world was the NSCC management ever allowed to go off of the “delivery versus payment” (DVP) gold standard in order to allow their abusive partipants to sell nonexistent securities and still gain access to the funds of U.S. “long” investors without ever delivering that which they sold?

    If that’s not bad enough the NSCC acts as a “self-regulatory organization” (SRO) with the Section 17 A congressional mandate to “promptly and accurately settle all securities transactions” as well as the congressional mandate to provide “investor protection” and “act in the public interest while legislating and enforcing laws monitoring the BUSINESS CONDUCT of its participants”. Isn’t selling fake shares for a living while stealing from the investors you’re mandated to protect considered one’s “BUSINESS CONDUCT”?

    Oh silly me, that’s not a form of “BUSINESS CONDUCT” that’s a “proprietary trading methodology” designed to “inject liquidity”, increase “market efficiencies” and enhance the “price discovery” process.

  4. Here are some of the “greatest hits” from the recent speech made on the Senate floor by Sen. Ted Kaufman of Delaware in regards to “regulatory cature” at the SEC:

    Redressing the Imbalance of “Regulatory Capture”
    May 27, 2010

    “…repeatedly we see that regulators are dependent almost exclusively for the information and evidence they receive about market problems on the very market participants they are supposed to be confronting about needed changes.

    This is as true in other agencies – like the agency charged with the oversight of oil drilling – as it is at the SEC.

    The regulators are surrounded – indeed they consciously choose to surround themselves – by an echo chamber of industry players who are making literally billions of dollars under the current system.

    Who speaks to the regulators on behalf of the average investor?

    Who outside of the industry itself has access to the data that only the industry controls?

    Who other than the market players who have invested so much of their capital into the very systems that profit and serve their own interests has the analytical capability to lead the SEC in a different direction?

    We must have evidenced-based rules in our system, we are told.

    But when all the evidence comes from Wall Street, who is going to stop Wall Street from once again pulling the wool over the SEC’s eyes?”

  5. I just got an interesting call from a money manager. His question had to do with how a certain corporation’s share price can be plummeting even though 90% of its trades are buy orders at the offer. That very, very common phenomenon illustrates just how clever and therefore pandemic abusive short selling really is.

    A crook enters into a contract to deliver the securities he is selling by T+3. He sells nonexistent securities and then willfully breaks his contract and refuses to deliver anything on T+3. The NSCC management runs the resultant failure to deliver (FTD) through their totally corrupt “stock borrow program” (SBP) to theoretically “cure” the FTD. The shares taken from the SBP lending pool to “cure” the FTD are then electronically transferred to the buyer of the shares that were fail to be delivered and therefore needed an SBP “bailout” of the FTD. The brokerage firm of this buyer of previously undelivered shares becomes the new “legal owner” of those recently borrowed shares and therefore has all of the right in the world to re-donate them back into the very same SBP (self-replenishing) lending pool AS IF THEY NEVER LEFT IN THE FIRST PLACE.

    The investor that bought the shares that had been donated to the SBP lending pool then gets a readily sellable “security entitlement” credited to his account that looks exactly like real shares on his monthly statement. Out of thin air is created a readily sellable “security entitlement” over and above the number of shares already “outstanding”. Since it is readily sellable the “supply” of that which is readily sellable goes up a notch and therefore the share price goes down a notch. A buy order made the share price go down (because it was naked short sold into). Sell orders also make the share price of a corporation chosen to attack go down. How “rigged” can a market be when BOTH buy and sell orders can be programmed by naked short sellers to cause share price depression? All you have to do is to willfully break the contract you entered into to deliver that which you were selling by T+3 and voila you’re rewarded with the investor’s money flowing into your wallet.

  6. an off topic questions.
    so has the riddle been solved yet?
    if it hasnt what would be the result of the riddle being answered?
    would a massive flood of arrests take place upon answering the riddle?
    or just someone who answers the riddle correctly getting money?
    what is the purpose of the riddle?
    just wonderin.

  7. i got a class action notice on novagold and it seems i fit within their criteria. is this a good thing?

    i been a little out of touch with the folks at deepcapture and the message board due to classes.

  8. This is laughable.

    Lets start at the top:

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

    Allied did more than try to intimidate Mr. Einhorn. Allied Capital stole Mr. Einhorn’s phone records and admitted to doing so.

    By the way, if it “collusion” for a group of hedge fund managers to exchange their research on short ideas, is it also illegal for a group of investors to exchange their long ideas?

    Allied Capital clearly mismarked its portfolio. Its explained quite clearly why this is in Einhorn’s presentations. Further it committed a crime against the American public by making fraudulent SBA loans. To forgive them for this and the messenger

    “In addition, Allied was not, as Einhorn claimed, a massive Ponzi scheme. Einhorn had made the smarmy suggestion that Allied was a Ponzi because it supposedly raised money from the markets to pay its dividends.”

    The definition of a Ponzi scheme is any investment in which money is raised from one group of investors to pay other investors. If Allied Capital could not sustain its dividend from its earnings and thus had to raise capital to pay its dividend, that is the very definition of a Ponzi scheme.

    ” Einhorn blew the whistle on a crime that didn’t exist.”

    Allied Capital through its “Business Express” subsidiary made several fraudulent SBA loans. Due to these loans, the subsidiary later went bankrupt. Are you saying that the fraudulent SBA loans didn’t exist despite significant evidence to the contrary?

    “As for Einhorn being “right” about Lehman, it is important to note that the court-appointed examiner’s report on the Lehman bankruptcy does not support Einhorn’s principal claim – that Lehman’s executives fraudulently and massively overvalued the bank’s commercial real estate assets.”

    When Lehnman decleared bankruptcy it delcared that it had a negative net worth of $150B. If the bank was properly valuing its assets how exactly did this occur?

    “Lehman was a massive fraud for precisely the same reasons that Allied was a massive fraud – namely, that it had failed to mark down its real estate assets to “fair value,” with “fair value” defined not by any reasonable metric, but by Einhorn himself.”

    That’s not true Mark and you know it. The SEC, gives a very clear definition as to what “Fair Value” is. The SEC clearly states that investment assets must be marked to market.

    As for Lehman Brothers, the bank collapsed because no other bank would accept its collateral in exchange for rolling over its short-term debt. They were found to be $150B in the hole and the bankruptcy examiners report found that Lehman made very poor investment decisions that led to its bankruptcy.

    I would invite anyone who really thinks that Lehman and Allied weren’t overstating their results to look at the original presentation on both companies. Maybe when people look at the facts they’ll see what a loser this idiot Mark Mitchell is.

    1. Look, gangrene, Einhorn basically extorted Lehman bros by asking Callahan questions she wouldn’t have possibly be prepared to answer – like asking hospital administrators about a surgical procedure.

      This was done in a collusive fashion and deserves a RICO award from our gutless regulators.

      Who had the big short on Lehman that Chrissy Cox said congress would be so thrilled to learn about?

      And what happened there?

    2. Greenday, “By the way, if it “collusion” for a group of hedge fund managers to exchange their research on short ideas, is it also illegal for a group of investors to exchange their long ideas”

      Yes, exchanging “ideas” is illegal if there is collusion towards manipulation of the market or good. E.g., price fixing of commodities are just shared “ideas” right?

      1. “Yes, exchanging “ideas” is illegal if there is collusion towards manipulation of the market or good.”

        Fund managers “exchange ideas” all the time. Einhorn himself has presented several long ideas. The conference where he originally presented Allied Capital, also featured several fund managers with mostly long ideas. Were they colluding as well? Could you explain how in your deluded little mind that if two “long managers” exchange ideas that’s okay, but if two short managers do its not.

        What’s ironic and you are too stupid to understand is that its impossible for a group of fund managers to collude to manipulate a stock on the short side. Most of the money invested in this country is on the long-side. If a group of fund managers agreed to short enough stock to drive the price down there are plenty of long managers who will buy in and drive the stock up. As evidence of this, despite Einhorn’s criticism, Allied Capital’s stock didn’t collapse for several years. Lehman’s didn’t collapse for several months and only then when a $150B hole in their balance sheet was revealed.

        “price fixing of commodities are just shared “ideas” right?”

        The two aren’t even comparable. The lysine market, which was the subject of the commodities price fixing case in the mid 90s, isn’t a public market and only a few companinies could sell lysine in size. Hence those companies on their own could manpiulate the price of the commodity. Other market participants couldn’t sell their own lysine on the market because the companies involved had the technology to manufacture lysine.

        Please take a course in economics and then you’ll understand why a fund manager who manages a billion doesn’t have enough capital to manipulate anything but a completely illiquid stock.

        1. “What’s ironic and you are too stupid to understand is that its impossible for a group of fund managers to collude to manipulate a stock on the short side”

          Pffft. Your rhetoric and attempt with insulting language does not change a thing. Collusion with intent to manipulate pricing remains illegal. That includes stock prices, commodity prices, consumer goods, etc, etc.

          Also, it does not matter if it’s on the short side, the long side, or for that matter whether the action has any effect on the actual price. It is the collusion with the intent to manipulate that is illegal. Or, should I say, the sharing of “ideas”. It could be as simple as causing a stock price to increase 1% or for that matter 0.001%. Still illegal.

          “Please take a course in economics”. Uh, ok. Ditto to you. Let’s ignore all of the realities in the market while we are at it.

  9. Greenhorn..eerr I mean Greenday, what took you so long? I called for you in the very firstcomment oon this blog and here you are!!!

    1. Jerry-

      A very diverse group of investors are heavilly invested in Gold for similar reasons. How can it be that because Einhorn is one of these investors he’s colluding to alter the price of Gold?

      Further I am not David Einhorn.

      Baloney articles like the one here on the Deep Capture site lead the country to a troubling place. The U.S. has a deep economic problem that can be laid at the feet of a huge asset bubble. This “bubble” was only made worse by companies that attempted to silence whistleblowers through underhanded tactics.

      Lehman Brothers collapsed because it took huge risks with its releatively small capital base. In doing so it ignored its own internal controlls. When it was clear that these risks would leave them in danger, Lehman attempted to cover up what it had done. Eventually, Lehman was left in a position where it didn’t have sufficient collateral to cover its overnight debt and was forced to default.

      Your parents probably taught you that pain is good if it teaches you adequate lessons. The lessons in this case should be to insure that investment banks never again skirt their internal controlls and don’t take risks that put their entire capital base in danger. After all, what these banks internal models called “low probablilty events”, happen all the time.

      I fear however with stories like Deep Capture’s that pervert the truth the wrong lesson will be learned. You see, according to them it wasn’t the skirting of internal controlls and inadequate risk assessment that damned Lehman, it was the naked short-sellers!!!! Puting the blame in the wrong place gives licence to the next Lehman Brothers to do the same thing. When they do, the concequences are likely to be much worse than before, especially if the whistleblowers trying to prevent a calamity are silenced.

      1. If Greenday isn’t Einhorn, I suggest this poster is the infamous Gary Weiss, who is thought to be the message board basher “medchal” on Raging Bull. The posting style matches him perfectly… he will repost a statement in quotation marks, followed by his comments. This megalomaniac is brash in his use of insulting language and rigorously points out any grammatical errors of those he attacks in a desperate effort to paint himself more intelligent than his target posters.

  10. Mark, i still don’t understand what made Lehman’s “deep” troubles unique amongst it’s peers?

    I strongly believe that the whole Repo105 rap is grossly exaggerated to make people think that Einhorn and the (predatory) Hedge Funds in general are and always were right and our saviours, reiterating the fact that they are here to do “God’s” work.

    What also troubles me is that Richard Fuld never got the chance to speak as a True Witness.

    He was judged guilty right from the beginning by the propaganda machine (see the “exhibition” of his portrait in front of the Lehman building on the 15th).

    Thanks to you and the team at deepcapture for continually providing good journalism!

    1. Fuld dared to utter a line about ‘shorts’ and they lambasted him mercilessly henceforth.

      Many others have said they are afraid to complain about short interest due to collusive naked shorting that attends any complaint voiced.

      Seems there is no protection for companies today thanks to the SEC.

    2. Bill-

      “Mark, i still don’t understand what made Lehman’s “deep” troubles unique amongst it’s peers?”

      I would urge you to read the Valukus report on this issue.

      Lehman had a smaller capital base than its peers and was significantly more leveraged. Furthermore, Lehman took the strategy of aggressively pursuing risky assets, often taking positions that skirted its own internal controlls. When these assets began to decline in value, Lehman doubled down and made more deals. These included buying troubled apartment REIT, Archstone-Smith.

      “I strongly believe that the whole Repo105 rap is grossly exaggerated to make people think that Einhorn and the (predatory) Hedge Funds in general are and always were right and our saviours, reiterating the fact that they are here to do “God’s” work.”

      Then nothing will keep you from being ripped off. Lehman Brothers specifically used Repo 105 to mislead the public into believing that its leverage was falling. In fact it was rising.

      The capital markets do “gods work” just fine as those who take excessive risks that don’t work out usually end up without their shirts. However, in many cases the rest of us get left holding the bag.

      Lehman Brothers chose to attack those blowing the whistle. Had it listened perhaps it could have raised enough capital to fill the massive hole it had created in its balance sheet saving the bank and more importantly its counterparties.

      This is what the less informed don’t understand. The hole in Lehman’s balance sheet is what caused the bankruptcy. Had Einhorn done nothing and said nothing, that hole still would have been there. It was Lehman’s reluctance to try to fill this hole by raising sufficient capital that was the problem not the guy that tried to tell them that the hole was there in the first place.

      Richard Fuld is no hero. He made several poor business decisions. When his own risk officers tried to warn him about these decisions he fired them. When the concequences of his business decisions became apparent he tried to cover it up. He was a cowboy who didn’t want to face the music when the clock struck midnight.

      1. Greenday,

        “Then nothing will keep you from being ripped off.

        The capital markets do “gods work” just fine as those who…..”

        The first point is certainly true as the current system of monetary policy almost guarantees rip off one way or another. So to emphasize, and again using your words, although Einhorn made “the hole” disappear, main street still gets ripped off, and my sure bet is, even more so than before.

        Second point, pls provide accurate prove that the capital markets do Gods work. Before you jump into lecture mode straight, i urge you to also consult the Scriptures.

        “Richard Fuld is no hero. He made several poor business decisions. When his own risk officers tried to warn him about these decisions he fired them. When the concequences of his business decisions became apparent he tried to cover it up. He was a cowboy who didn’t want to face the music when the clock struck midnight.”

        Well, i would have to take your word for this, cause the chance to hear Mr Fuld speaking as a true witness is being denied to me from the self proclaimed class of the “better” informed. I’m also convinced you consider yourself as part of this illustrious crowd.

        Still, i have to tell you that i consider myself quite capable and well informed enough to decide for myself, whom i consider to be a hero or not. I’m afraid, i have to let you know that your attempt at re-educating me has failed.

        1. “So to emphasize, and again using your words, although Einhorn made “the hole” disappear, main street still gets ripped off, and my sure bet is, even more so than before.”

          Einhorn didn’t make the hole dissapear he just brought it to light. The hole in Lehman’s balance sheet was there and would have swallowed Lehman hole regardless of if Einhorn had ever mentioned Lehman. If you are going to use my words, at least quote me accurately.

          “Well, i would have to take your word for this, cause the chance to hear Mr Fuld speaking as a true witness is being denied to me from the self proclaimed class of the “better” informed.”

          You clearly aren’t informed at all. Valukus’s report included interviews with Fuld, his and his risk officers, Lehman’s public statements, and e-mails between Fuld and his risk officers. Under Fuld’s direct orders, the firm took positions that were in violation of Lehman’s own internal compliance rules. Are you saying that Anton Valukus made all of this up? You must be mentally defective.

          Seriously if you and your ilk keep on thinking that there really wasn’t a credit bubble and that the whole thing is just made up by a few hedge funds then you’ll get hit again. The credit bubble should have taught us lessons about risk, leverage and the actual likelihood of so-called six-sigma events. It sounds to me like you didn’t learn anything.

          Now I’m sure there is a crack house that you can use as collateral for a loan you want to buy. When the loan suffers a total loss doesn’t pay you can blame the hedge funds.

        2. “Still, i have to tell you that i consider myself quite capable and well informed enough to decide for myself”

          I sincerely doubt that billyboy as you thought that Einhorn had created a $150B hole in Lehman’s balance sheet. Tell me, how is it that a fund manager who manages $1B creates a hole 150 times that large in one of the largest companies in the world? You probably don’t even understand the concept of leverage. The more levered a company is the greater the hit to equity if the value of the assets dropped.

          ” I’m afraid, i have to let you know that your attempt at re-educating me has failed.”

          You are correct. Its impossible to reducate a moron.

          1. Greenday

            “Under Fuld’s direct orders, the firm took positions that were in violation of Lehman’s own internal compliance rules.”

            Stop slobbering, it seems you have not fully read the Valukas report yet. The orders have to be seen in context and were within the limit of the business judgement rule. I urge you here to re-read the last part of volume one!

            The true witness got lost via intimidation, and no proper follow up investigation of the short selling attacks which hammered Lehman in it’s final months and made it impossible for them to raise capital.

            “You probably don’t even understand the concept of leverage. The more levered a company is the greater the hit to equity if the value of the assets dropped.”

            There were alot of people involved in getting the net capital rule (NCR) changed by the SEC. Who profits, both financially, professionally even politically from pushing the NCR back to 35:1 and then watching Lehman becoming a scapegoat?

          2. Greenday who gave you your “reducation”? Was it Einhorn, Cohen, Loeb or the almighty Milken himself?

    1. You’re onto something. These are rife with abuse as they trade like US shares, but aren’t regulated.

      In theory, some number of real shares are sequestered in a depository and the receipts trade as shares.

      The problem, is the real shares could be in China and the investors might not understand that the receipts are not audited here.

      Also, they are naked shorted more than any other security.

  11. This seems to be an interesting change of events…hhhhmmmnnnnn!!!

    Hmmmmm>>>>>>>>TORONTO, June 10 (Reuters) – Goldman Sachs Group Inc President Gary Cohn said on Thursday industry agrees that naked short selling should be banned.
    “I don’t think anyone in the industry has any problems with banning naked short (sales),” said Cohn, who is addressing a securities regulation conference here.
    “The concept of naked short sale is not a great concept. In fact, from a regulatory standpoint the more regulatory certainty we get on naked short sales the easier it is for us to force these down on our clients.”

  12. The oil industry is getting slaughtered and the phrases are coming right off this site “captured regulator” / “revolving door” / “self regulating doesn’t work”, etc.

    It’s almost like Wallstreet is throwing the oil guys under the bus as the sacrificial lamb distraction, but our time is now.

    The world “gets it” that self regulating doesn’t work. There are a ton of FINRA letters to congress about why they should regulate the industry rather than the SEC, so even the self regulators are fighting over how bad it is.

    The time couldn’t be riper for change.

    We have a window of opportunity to say the MMS = FDA = SEC = the rest of them and they all need to be fired and regulation needs to be by the DOJ.

    Politicians of either stripe know that they can harness anger against crimimal organizations like the SEC and that meaningful change will get them re-elected.

    It’s a wonder what jail time of individuals will do when fines against companies doesn’t work because the individuals that caused the problem are living it up with their severance on some offshore island.

  13. Anonymous,

    You just hit it out of the ballpark with your analysis. “Self-regulation” cannot work when those being regulated have a superior critical mass to leverage, a superior working knowledge of a complex business and insatiable levels of human greed UNLESS criminal repercussions are present should opportunists choose to leverage these superiorities. Without criminal repercussions there is no truly meaningful deterrence to accessing this leverage.

  14. In the case of abusive short selling it’s much worse than in the oil industry because the NSCC, an SRO, is owned by the abusive “participants” that are selling nonexistent shares all day long for a living. How in the world can you expect the NSCC management, the employees of the abusive short sellers, to bite the hand that feeds them? No conflict of interest there!

  15. Only a few months after Deepcature wrote about Linda Thompsen landing on her feet this comes out…LOL!!

    SEC ‘Revolving Door’ Under Review
    SEC ‘Revolving Door’ Under Review

    Staffers Who Join Companies They Once Regulated Draw Lawmakers’ Ire

    JUNE 16, 2010, By TOM MCGINTY

    A Senate panel asked the Securities and Exchange Commission’s inspector general to review the agency’s “revolving door,” which shuttles many SEC staffers into jobs with the companies they once regulated.

    In a letter sent Monday, Sen. Charles Grassley (R., Iowa), the ranking minority member on the Senate Finance Committee, asked David Kotz, the inspector general, to review the recent departure of a top official in the SEC’s Division of Trading and Markets who took a job with a prominent high-frequency trading firm.

    That move coincided with a continuing SEC examination of how high-speed, computer-driven trading in stocks and other securities is affecting markets.

    SEC Lawyer One Day, Opponent the Next

    Mr. Grassley also cited a Wall Street Journal article in April that reported how many former SEC employees have quickly turned around and represented clients before the commission, sometimes within days of leaving the agency.

    “We need to ensure that SEC officials are more focused on regulation and enforcement than on getting their next job in the industry they are supposed to oversee,” Mr. Grassley said in a statement.

    “The inspector general’s work,” said Mr. Grassley, “can be a valuable tool to help the SEC become more open and transparent about its employees’ ties to the industry it regulates.”

    Mr. Kotz declined to comment. But in a response to Mr. Grassley on Tuesday, he revealed a new revolving-door investigation he has undertaken.

    “[W]e are currently conducting an investigation of allegations very recently brought to our attention that a prominent law firm’s significant ties with the SEC, specifically, the prevalence of SEC attorneys leaving the agency to join this particular law firm, led to the SEC’s failure to take appropriate actions in a matter involving the law firm,” Mr. Kotz wrote.

    It couldn’t be determined which law firm he was referring to.

    SEC officials began examining the impact of high-frequency trading last summer, but the review took on new urgency after the “flash crash,” which sent the Dow Jones Industrial Average tumbling nearly 1,000 points in mere minutes on the afternoon of May 6, before a rapid snapback.

    Market experts believe the complex computer algorithms of high-frequency trading firms provided fuel for the brief but record-breaking market meltdown.

    Amid the speculation, the Chicago-based high-frequency trading firm Getco LLC hired Elizabeth King, an associate director in the SEC’s Division of Trading and Markets, which sets standards for orderly and efficient markets. A Getco spokeswoman said Ms. King has left the SEC and will begin her job on the firm’s regulatory and compliance team in the next few weeks.

    In his letter, Mr. Grassley said the hiring of Ms. King raises questions about her involvement in both the SEC’s flash-crash investigation and its general examination of high-frequency trading.

    Ms. King spent 17 years at the SEC. She was associate director for market supervision and oversaw the options and single-stock futures markets, a commission spokesman said.
    People familiar with her responsibilities said she “did not have a meaningful role” in the SEC’s examination of high-frequency trading.

    SEC spokesman John Nester said the commission has a “rigorous program for employees who are considering leaving the commission to help them comply not just with the letter but also with the spirit of the law.”

    In an emailed statement, a Getco spokeswoman said Ms. King had “recused herself from matters affecting our business beginning in March—well before the market events of May 6.”

    “Getco is fully committed to the highest ethical and legal standards,” the spokeswoman added. “We have elected the most rigorous and transparent level of regulatory oversight for all of our businesses, and our goal is to maintain a world-class compliance program.”

    Mr. Grassley and the finance committee asked Mr. Kotz to provide a summary of any matters the inspector has reviewed that involve revolving-door issues and conduct a review of Ms. King’s departure “so that Congress and the public can more accurately assess the integrity of the SEC’s operations.”

    Mr. Kotz said in his response that he was aware of Ms. King’s hiring by Getco and his office had already opened an investigation into “these issues of concern.”

    As a senior staffer, Ms. King is subject to a one-year “cooling off” period during which federal law prohibits her from representing clients before the SEC.

    Last week, Sen. Edward Kaufman (D., Del.) said that restriction doesn’t go far enough. Congress or the SEC should consider banning employees from taking jobs with companies affected by rule making in which the staffers had a significant role during the prior year, Mr. Kaufman said in a statement.

    “Ms. King, from the day she is hired, will be able to inform Getco of her knowledge of the current views of every commissioner and fellow staffers with whom she worked as to the meaning of the May 6 flash crash and the possible direction of future studies and rule makings involving high-frequency trading,” Mr. Kaufman said.

    As the Journal reported in April, lower-level employees of the commission can legally appear at the SEC on behalf of clients the day after they leave, as long as they file letters disclosing the representation.

    Employee disclosures obtained by the Journal under a public-records request showed some staffers made the transition quickly.

    As reported, a senior accountant who left the commission’s enforcement division in the summer of 2008 filed a letter five days later disclosing that he would be representing a client involved in a “nonpublic investigation” by his old division.

    An enforcement lawyer in the commission’s Los Angeles office left around the same time and signed on to represent a client 11 days later, a disclosure that he filed showed.

    Mr. Grassley’s letter also cited recent reports by Mr. Kotz, the SEC’s inspector general, that highlighted revolving-door conflicts that cropped up during SEC investigations of Allied Capital Corp. and R. Allen Stanford, who is fighting charges of operating a multibillion-dollar Ponzi scheme.

    In the Allied case, Mr. Kotz alleged that SEC staffers were swayed by one former commission employee who worked at the company and another who represented the firm in meetings with the commission. The report on the Stanford case accused a former SEC enforcement official in Fort Worth, Texas, of repeatedly quashing probes of Stanford and then seeking to represent Stanford in private practice.

    In his response to Mr. Grassley, Mr. Kotz cited two other cases. In a 2009 report, his office alleged that enforcement director Linda Thomsen, who had left the agency by the time the report was issued, had given improper disclosures and assurances about SEC matters to a former enforcement director working for J.P. Morgan Chase & Co. The SEC later cleared Ms. Thomsen of any wrongdoing. Ms. Thomsen didn’t respond to a request for comment.

    In a 2008 report, Mr. Kotz alleged that the director of the SEC’s regional office in Miami had failed to vigorously enforce an action against Bear Stearns & Co. due to his personal relationship with a former SEC staff attorney who was representing Bear Stearns.

    Write to Tom McGinty at [email protected]

    1. About time we got some righteous indignation on this issue.

      Now, if we could just stop the congressional hypocrites from becoming lobbyists…

  16. This story reminds me of the events that occurred around PLMD or Liberty Medical which many would associate with Wifurd Brimley.

    Several years ago Einhorn’s wife, Sheryl Strauss Einhorn authored a weekly column in Barrons. Sheryl, Jim Cramer and Herb Greenberg would make comments or write columns regularly (often citing each other) about possible accounting fraud, billing fraud or various other vague accusations about PLMD.
    At one point 65% or the stock was shorted representing 140% or the float.
    These RAT SHORTS even employed a Wall Street low life bum named Manuel Assensio to publish bogus “anaylists reports”.
    PLMD was eventually purchased by Merck for $54/share.
    The Einhorns, Cramer and Greenberg all deserve to be run over by a truck, shot until dead and then indicted for securities fraud.
    Little Davey needs his nose shoved into his brain.

  17. Thought we could add this to the blogs info. Thanks and credit to poster from Investorsvillage Ravenseye.

    Re: SEC ‘Revolving Door’ Under Review
    looks like a pretty cozy relationship that should be investigated too….
    “NEW YORK, May 6 (Reuters) – Ciena Capital LLC, a New York City business lender, has settled U.S. Justice Department fraud claims over its small-business lending practices for $26.3 million, in an agreement that also resolves a whistleblower lawsuit by a prominent hedge fund run by David Einhorn”…
    lma(zz)o be sure to note in chucklehead medchal rash”O”bash speak, there is no mention of the alleged dept of justice probe concerning the collusion of hedgefunds….
    “Justice Dept. eyes hedgers’ Euro trashing
    By MARK DECAMBRE Last Updated: 4:18 AM, March 4, 2010 Read more:
    …The US Justice Department has launched an investigation into whether a group of hedge fund maestros colluded to place massive bets against the euro.

    The probe centers on whether funds run by David Einhorn’s Greenlight Capital, George Soros’ Soros Fund Management, Steve Cohen’s SAC Capital and John Paulson’s Paulson & Co. conspired to help push the value of the euro down during “idea meetings” that were held over the past several weeks.”…
    let’s see, does that mean that settlement propped up greenlights revenues, which were dismal imo btw! is greenlight an offshore entity?

  18. From The Progress Report:

    MAIN STREET VS. WALL STREET: For nearly two years after a global financial crisis shook the world, progressives in Congress have been hard at work overhauling the nation’s financial regulatory system to address the concerns of hard-working Americans. Progressives have fought hard to make the legislation as tough as possible, pushing for provisions that would rein in abusive practices by the credit card industry, stop financial institutions from “trading taxpayer money for their own profit,” audit the Federal Reserve, and break up big banks so that they could never again grow large enough to endanger the world economy. Meanwhile, conservatives like Senate Minority Leader Mitch McConnell (R-KY) have fought this financial reform legislation every step of the way, choosing to stand with the nation’s biggest banks over working families. After legislators tried to create a special fund that banks would pay into to bail themselves out, Senate Minority Leader Mitch McConnell (R-KY) slammed the idea, falsely claiming it “institutionalizes” bailouts of Wall Street. Just a week before his statement, McConnell traveled to New York City for a fundraising meeting with “25 Wall Street executives, many of them hedge fund managers,” to enlist “Wall Street’s help” in funding Republican campaigns in exchange for fighting financial reform legislation. While House Financial Services Committee Chairman Rep. Barney Frank (D-MA) banned one of his staff members from talking to an ex-staffer who became a lobbyist for Wall Street, conservatives laid out the red carpet for financial lobbyists. Last December, the House Republican leadership huddled with more than 100 financial industry lobbyists to craft their strategy for killing Wall Street reform.

  19. Anonymous,

    I concur with your finding interest in the BCIT case. When the would be “shareholder advocates” on Wall Street that attack a suspected “scam” development stage U.S. corporation that was misdiagnosed as a “scam” and can’t kill it AFTER running up a gigantic naked short position then there are typically 4 “escape valves” available to these crooks.
    Valve #1 involves “recruiting” other abusive MMs, prime brokers, hedge funds, etc. to “pile on” and simply drown (the crooks refer to it as providing “liquidity”) the company with share price depressing “security entitlements” via refusing to deliver that which was sold. This typically results in bankruptcy associated with yet to be cash flow positive U.S. corporations not being able to attract financiers or being only able to attract corrupt “PIPE” financiers which represents the death knell for 99% of companies that go that route.

    Valve #2 is to get your buddies at the SEC or FINRA to aid in “delisting” the corporation. Valve #3 is to get the DTCC to refuse to allow the company to trade any more. The BCIT case involves using escape valve #3 which basically amounts to stealing an entire corporation from its shareholders. Valve #4 involves the recycling of the delivery failures through the NSCC’s “Automated Stock Borrow Program” in a Ponzi-like fashion wherein the same parcel of impossible to identify shares might be “co-beneficially owned” by a dozen different investors.

    The rarest event when these naked short positions get out of control is forced buy-ins that might lead to a short squeeze. The 2003 research of Evans, Geczy, Musto and Reed revealed that only one-eighth of 1% (0.125% or 1-in-800) of even “mandated” buy-ins ever occur on Wall Street. This one aberrant statistic explains the essence of abusive naked short selling because the fear of being bought-in is the primary deterrent to these crimes and the buy-in itself is the ONLY “cure” available once the securities sold are refused to be delivered. How does one explain that incredible statistic? After attaining 15 of the 16 sources of legal empowerment to execute buy-ins the NSCC management has the audacity to pretend to be “powerless” to buy-in the delivery failures of its NSCC “participating” co-owners i.e. it’s bosses. With the presence of these 4 escape valves there is absolutely no meaningful deterrence to perpetrate these frauds.

    In an effort to encourage participation in our markets the DTCC issues what is known as a “trade settlement guarantee”. They “guarantee” that your trade will “settle”. The legal “settlement” of a securities transaction involves the “good form delivery” of that which the buyer though he was purchasing i.e. legitimate voting shares. What investors typically receive is non-voting “security entitlements”.

    The trades in development stage U.S. corporations often do not legally “settle”. Only the illusion that “settlement” occurred is provided. Perhaps thousands of U.S. corporations like “BCIT” have had to be “sacrificed” in order to cover up the fact that the DTCC’s “trade settlement guarantee” is bogus especially when it comes to young U.S. corporations deemed to be an “easy prey”. The sad part is that the development stage U.S. corporations represent the job growth engine in the U.S.

    1. Dr. DeCosta,

      I am invested in an otc listed company that was suddenly delisted a few months ago to the otcqb (it still trades on the otc, but all the volume is on the otcqb, which doesn’t show up in any quote screens). Management explained to me that the otc is going out of business and until Finra and Pinksheets settle, otc companies are no longer quoted.

      The company is listing in Canada, but letting the crap listings in the otc and otcqb stand.

      Can we expect any difference in trading or will the TSX trading be the same?

  20. Hi Cdn,

    Welcome to the world of abusive short selling. You’ve got to remember that FINRA runs the OTCBB. There’s an arm wrestling match currently going on between FINRA and PinkSheets. Historically Canada has not had any issue whatsoever with the abusive short selling of U.S. development stage corportions. Quite to the contrary a significant part of the Canadian brokerage industry has been built upon it. When Canada’s regulators went from operating as the IDA (Investment Dealers Association) to the current IIROC I could detect no changes to this attitude.

    Here’s the issue, due to a combination of regulatory neglect, a corrupt clearance and settlement system and investor naivete there are perhaps a thousand or more (a guess) development stage corporations with enormous amounts of delivery failures currently on the books that the criminals that created these obviously don’t want to deal with. Nobody has forced them to go into their wallets and take out the money that they stole from “long” investors and buy back the nonexistent shares they willfully sold so that the buyer can finally get that which he paid for so that these trades can finally “settle”.

    The immensity of these “open short positions” is a testament to how incredibly easy it has historically been to sell nonexistent shares, refuse to deliver that which you sold and yet still gain access to the defrauded investor’s money.

    UNTIL these naked short positions are once and for all dealt with via mandated buy-ins the SEC, FINRA, the NSCC and Canada’s IIROC will continue on in cover-up mode to hide their failures in the past instead of robust investor protection mode. You can’t do both at the same time. UNTIL this one time cathartic event transpires our OTC markets will remain hijacked by its ugly past and development stage corporations will continue to get driven out of existence as the funds of “long” investors gets routed into the wallets of those that sell fake shares for a living.

    Part of the issue here is that it is so esy to commit these frauds that the size of the net open naked short position can grow rapidly. If the company targeted for destruction accidentally was misdiagnosed as a “scam” but really did have the goods then the first thing the crooks need to do to cover is to stop the day to day “maintenance” naked short selling done to keep the share price pinned down in order to minimize the marked to market daily collateralization requirements. If you’ve been pretty much the only seller in the market for 5 years and you stop the “maintenance” naked short selling then the share price will gap upwards. The issue becomes how do you cover an astronomically high naked short position in a market that’s already gapping upwards without risking financial obliteration. That’s why these once and for all mandated buy-ins keep getting postponed and why our entire financial system is being held ransom by a handful of crooks on Wall Street that painted themselves into a corner.

  21. Cdn,

    This need to sell nonexistent shares all day long by abusive short sellers that have “accidentally” painted themselves into a corner by amassing astronomical levels of delivery failures in legitimate development stage U.S. corporations they couldn’t bankrupt has given rise to an interesting new lexicon used by the lobbyists of these criminals lobbying for the maintenance of the corrupt status quo.

    When done by the secrecy-obsessed unregulated hedge fund community this criminal activity is now known as a “proprietary trading methodology” deserving of secrecy. Its purpose is to “inject liquidity” into the markets of thinly traded securities.

    The intentional flooding (via providing “liquidity”) of a corporation’s share structure with the readily sellable share price depressing “security entitlements” issued with each and every failure to deliver is now done to “enhance the price discovery process”. I kid you not, intentionally manipulating into orbit the “supply” variable that interacts with the “demand” variable to “discover” share prices really is now known to “enhance the price discovery process” while increasing “market efficiencies”. Knowing that the share prices of U.S. development stage corporations deemed to be an “easy prey” are “efficiently” being driven to zero is very comforting.

    Criminals that enter into a contract to deliver the securities they are selling by T+3 and then willfully break this contract in an effort to steal the money of shareholders are now known as “shareholder advocates”. So too are the Internet bashers hired to spread “FUD” (fear, uncertainty and doubt) in order to dissuade buying and induce panic selling by impressionable investors especially the elderly.

    Facilitating the theft of the investment funds of “long” investors by abusive short sellers is now known as “self-regulation”. An amalgamation of these facilitators of theft like FINRA and the NSCC is now known as a Self-Regulatory Organization” or “SRO”.

    The investors in development stage U.S. corporations “deserve” to have their money stolen from them by the sellers of nonexistent shares busy providing “liquidity”. The blatant fraudulent sale of nonexistent shares in corporations suspected of trading at too high of a share price is now known as “regulation”. It is performed by these “shareholder advocates” trying to bankrupt corporations so that future investors won’t fall prey to the mischief the management teams have intended for them.

    Committing blatant fraud against a corporation suspected of planning a “pump and dump” fraud is now a good thing. This current status quo should be ardently lobbied for.

    Intentionally driving down the share price and prognosis for success of a corporation or its bonds via abusing credit default swaps is now known as “hedging”. Parking the naked short positions of U.S. corporations trading in the U.S. and on the Frankfurt Exchange in Germany is now known as “arbitrage”. Abusing new trading platforms before the regulators figure out how to detect and address abuses is now known as “technical innovation”.

    The U.S. investors that bought Lehman Brothers shares at levels where they perceived the market would bottom out “deserved” to be sold nonexistent securities. They “deserved” to lose 100% of their money while buying securities that never did exist at a time in which the failures to deliver went up 151-fold (15,000%). Reg SHO is working flawlessly and our markets have never been this “efficient”.

    1. Well said. You’ve cracked the Orwellian doublespeak code with aplomb.

      I hope you have the ear of some of those in congress.

      If you don’t, this country deserves the rathole it finds itself in.

  22. I recently had an epiphany in my 30-year study of abusive short selling crimes. I’ve had 3 separate puzzle pieces rattling around in my brain for some time that never did seem to fit very well anywhere. Piece #1 was the role of organized crime in naked short selling frauds. The investigative journalists at laid out many of the connections in astonishing detail but something was still missing. It just didn’t seem right to put abusive short selling right alongside of prostitution, gambling, drugs, etc.

    Mal-fitting puzzle piece #2 had to do with some extremely brilliant abusive short sellers actually asserting that it is a good thing to sell nonexistent shares to U.S. investors as long as it was done to bankrupt corporations they deemed to be a “scam” or a company trading at too rich of a market-cap. What is it that makes intelligent people feel that their blatantly fraudulent behavior was somehow above the law? Mal-fitting puzzle piece #3 was why do Sen. Ted Kaufman’s (Delaware) efforts at addressing abusive short selling stand head and shoulders over the efforts of all other politicians combined.

    All 3 of these enigmas actually fit quite nicely under the umbrella hypothesis that politicians will do anything they have to in order to get re-elected. Fact: The hedge fund community are the prime donors to the political coffers of those whose mindsets agree closest with that of the hedge fund managers i.e. hedge funds need not be regulated and should be allowed to operate in the dark. Might the hedge funds that are instrumental in getting the makers of laws re-elected have a natural sense that their actions are therefore above the law or perhaps are likely to be above the reach of any politician in need of their future support?

    How does that explain Sen. Kaufman’s inspired efforts to end this crime wave? Sen. Kaufman didn’t get elected to his position. He assumed it when his predecessor Sen. Joe Biden was chosen as the vice presidential candidate. Further to this, Sen. Kaufman is not running for re-election this January. He has not had to ally himself with the hedge fund community and their financial interests.

    That which is donated to political coffers by either organized crime figures or abusive short sellers are basically one and the same. They are the proceeds of criminal behavior. Entering into a contract to deliver the securities you are selling by T+3 followed by willfully refusing to deliver that which was sold so that share price depressing “security entitlements” can be issued in association with the resultant FTD is a crime. The crime has to do with share price manipulation and the utilization of an “artifice to defraud” in connection with the buying and selling of securities as expressly forbidden by 10b-5 of the “34 Act. Why? Because the intentional breaking of the contract not only establishes a naked short position but it also gives it monetary value because of how “security entitlements” work and how the DTCC operates.

    The buyer of the nonexistent securities that were sold was defrauded. He was under the impression that legitimate voting shares were going to be delivered to his brokerage firm’s clearing firm on T+3. He thought his voting power would be the percentage derived by dividing the number of shares he paid for by the number of shares “outstanding” as referred to on the company’s last 10-K. He was wrong.

    It is not a criminal act to follow the rules of the DTCC. It is, however, a criminal act to exploit any loopholes within those rules and regulations that facilitate the sale of nonexistent securities to U.S. investors in a clever effort to route the investment funds of those investors into their own wallets. Abusive short sellers don’t “forget” to deliver that which they contracted to deliver day after day after day.

    Most securities scholars don’t see it this way but don’t the portion of the proceeds of abusive short selling thefts donated to political coffers constitute basically a “kickback” as it were after some “money laundering” was performed?

    Two very stark realities stick out in regards to abusive short selling. The first is that if all of the archaic pre-existing delivery failures above 0.5% of a U.S. corporation’s number of shares “outstanding” are not bought-in promptly then these crimes will continue on into perpetuity. The second is that the refusal of the SEC, FINRA and the NSCC to warn prospective U.S. investors of the levels of FTDs CURRENTLY poisoning the share structure and prognosis for success of a U.S. corporation that may have already been all but pre-ordained to die an early death represents not only the intentional cover-up of clearly criminal behavior but also a crime in and of itself.

    There is nothing more “MATERIAL” to the prognosis for the success of a U.S. corporation in need of being disclosed to the public than the existence of an inordinate amount of preexisting delivery failures. Why? It’s because those that are responsible have often painted themselves into a corner from which there is no escape UNTIL they successfully put that corporation out of its misery. The regulatory vacuum provided by the SEC, FINRA and the NSCC has allowed these criminals to venture well past the point of no return in which they can cover these “open short positions” without risking financial calamity.

    In other words they can’t even stop their daily “maintenance” naked short selling done just to keep the marked to market collateralization requirements for astronomically high naked short positions in check. U.S. investors need to be forewarned if the corporation they are contemplating an investment in has abusive short sellers that are past the point of no return.


    The concept of “moral hazard” involves a party “insulated from risk” taking more chances than a party exposed to risk would take. In the “too big to fail” version of “moral hazard” there is plenty of risk present it just doesn’t fall on the shoulders of the party engaging in the risky behavior. The primary deterrent to abusive short selling is the RISK of being bought-in at a time in which a “short squeeze” might be triggered. A “short squeeze” is a NATURAL market phenomenon that deters abusive short selling frauds.

    When the NSCC attained 15 of the 16 sources of empowerment to deter abusive short selling crimes by buying-in intentional delivery failures and then had the audacity to pretend to be “powerless” to execute those buy-ins the RISK of abusive short selling came off of the table leaving only reward and the door open for “moral hazard” implications beyond comprehension. These NSCC “participating” securities fraudsters had become “insulated from risk” by their own employees at the NSCC.

    With no risk of ever being bought in abusive short sellers no longer had to do extensive due diligence on corporations suspected of being “scams” that might be trading at what might be perceived as too generous of a share price level. Their own employees had “insulated them from any risk” of making misdiagnoses as self-fulfilling prophecies became available. All you had to do is to keep selling nonexistent shares until the readily sellable “security entitlements” resulting from each and every delivery failure drove the share price into the ground.

    An SRO like the NSCC that refuses to follow its congressional mandate to provide investor protection is one thing but this same “securities cop” intentionally removing the primary NATURAL market phenomenon deterring these crimes is quite another. If this wasn’t heinous enough the refusal to warn prospective investors of the presence of these “security entitlements” poisoning not only the current and future share price of this corporation but also the prognosis for the success of the corporation is a new crime in and of itself but providing a warning would be tantamount to pleading guilty of facilitating the crime in the first place. This past fraudulent behavior and the facilitative role that our regulators and SROs have played puts our regulators and SROs squarely into “cover-up” mode which leaves nobody left to be in robust investor protection mode.

    1. Many a crime has been perpetrated under the aegis of ‘price discovery’, which is no discovery process whatsoever.


    Once again the concept of “moral hazard” involves a party “insulated from risk” taking more chances than a party exposed to risk would take. In essence there is a “hazard” present that a party “insulated from risk” may choose to LEVERAGE that reality and act immorally or fraudulently. On Wall Street how do you get “insulated from risk”? It’s usually done by taking advantage of “informational asymmetries” i.e. some players on Wall Street have better access to “MATERIAL” (potentially market moving) information than other players.

    Why do they have a superior access to “MATERIAL” information? It’s because they were ENTRUSTED by the regulators, SROs and by default the investing public to perform as a “securities intermediary” like a market maker, clearing firm, prime broker, etc. By nature these “securities intermediaries” have to have access to “MATERIAL” information that is unavailable to the investing public in order to do their job. A form of “public trust” has now been thrown into the mix.

    Nowhere is this “insulation from risk” associated with a superior visibility of “MATERIAL” information leading to potential “moral hazard” issue more prominent than in the larger market makers. This is because the larger a MM is the greater visibility it has of buy and sell orders queuing up right in front of their very eyes. This is the ultimate access to “MATERIAL” information leading to “insulation from risk” and therefore “moral hazard”.

    Once an abusive MM that has succumbed to this “moral hazard” risk has amassed a gigantic naked short position but has been unsuccessful in bankrupting the corporation what options does it have to bring about the demise of the corporation? The most powerful weapon an abusive MM has is its ability to illegally access the “bona fide MM exemption” from needing to perform a pre-borrow or “locate” prior to executing a short sale. The “bona fide MM exemption” is a “moral hazard” beyond comprehension.

    The larger abusive MMs have the incredible power to convert the natural share price buoying effect of a buy order into the share price depressing effect of a readily sellable share price depressing “security entitlement”. How? By simply naked short selling into that buy order while ILLEGALLY accessing the “bona fide MM exemption”. You have to appreciate the difference between merely neutralizing or muting the share price buoying effect of a buy order and the actual converting of it into share price depression. This leads to self-fulfilling prophecies wherein you target a corporation for destruction and then you predictably destroy it. Note that the LEGAL accessing of that universally-abused exemption is followed by covering that naked short position on the very next downtick when buy-side liquidity is in need of injection. This, however, is when abusive MMs that have chosen to succumb to “moral hazard” are nowhere to be found.

    The abusive MM’s succumbing to “moral hazard” results in both buy and sell orders resulting in share price depression. This is the ultimate “rigging” of a market and hijacking of the “price discovery” process. Once a large abusive MM has amassed a gigantic naked short position in need of being collateralized in a daily marked to market fashion all buy orders in that corporation all of a sudden need to be naked short sold into. If a large abusive MM’s position becomes uncomfortably large and it doesn’t want to add to its position then it can always call these buy orders to the attention of outside hedge funds or hedge funds operated by the large MM itself.

    The key is to get somebody to naked short sell into that order to induce the conversion from the share price buoying effect to the share price depressing effect. When you’ve already amassed a gigantic naked short position and caused the manipulation of the share price into perhaps the penny stock range even the slightest uptick will result in a significant PERCENTAGE gain which is what needs to be collateralized in a daily marked to market fashion.

    Abusive short selling, the “rigging” of markets and the hijacking of the “price discovery” process all are related to “moral hazard” and the refusal to ACT IN GOOD FAITH with the superior access to “material” information that you were ENTRUSTED with.

  25. Imagine these guys doing something like this??LOL!!!

    sam and barry whatcha been talkin bout …
    from June 22, 2010 10:03 AM
    The SEC Is After Two Dow Jones Journalists’ Emails
    By Ryan Chittum

    lma(zz)o i wonder why henry didn’t mention ostk?
    SEC Has Launched Investigation Of InterOil (IOC) Skeptics And Wants Their Emails To The Media
    by Henry Blodget Jun. 23, 2010, 9:56 AM

    1. is it almost time to order red white and blue popcorn?
      will non profits acting as for profit loopholes close?
      i wonder if there is orange popcorn … thx for sharing!

    1. Unlike conventional short selling whereby traders borrow securities to sell and buy back at a profit once their price has fallen, naked short selling leapfrogs the borrowing process altogether and is thus viewed as far riskier form of trading.

      should be

      Unlike conventional short selling whereby traders borrow securities to sell and buy back at a profit once their price has fallen, naked short selling leapfrogs the borrowing process altogether and is thus is a fraudulent form of electronic counterfeiting where shareholders send the seller money and receive nothing in return.

  26. Bobaboo,
    Thanks, that was a good article. It’s funny how these new forms of securities fraud are based upon the same fundamental concepts that have been present forever. High frequency trading utilizing algorithms basically involves “front running” the orders of us poor shmucks with no access to HFT. Where there are advantages created there are going to be opportunists trying to lever it. There exists a “lag period” with all of these new technical innovations within which the regulators have no clue as to how to detect or address fraudulent behavior associated with the technical innovation.

    The largest market maker in the U.S. was fined $79 million for “front running” a few years back. This did not involve HFT and algorithms. What the largest MMs have is a superior visibility of buy and sell orders. They see a large buy or sell order and they can choose to front run it with their own buy or sell order. These “front runners” are simply levering an advantage they have access to whether it be superior speed or superior visibility.

    Abusive naked short selling is typically perpetrated by the largest MMs levering their superior visibility of BUY orders. When you’re a huge MM you get to see that many more BUY orders and you need a BUY order to naked short sold into. The larger MMs simply have “first dibs” on naked short selling opportunities. Corrupt hedge funds specializing in abusive short selling will have tendency to congregate around the larger MMs. A large MM’s superior visibility can be levered into attracting order flow from corrupt hedge funds. Hedge funds direct $11 billion per year to the Wall Street “securities intermediaries” willing to break the greatest amount of securities laws while leveraging their advantages while looking out for the financial interests of the hedge fund manager. Access to the “bona fide MM exemption” from making pre-borrows or “locates” before short sales when combined with the superior visibility of a large MM is worth an absolute fortune not only for the corrupt MMs wishing to exercise their “first dibs” option but also to outsiders in need of gaining access to the exemption and the enhanced visibility.

    If an abusive large MM runs up a gigantic naked short position but can’t kill a development stage corporation it targeted for destruction then it simply has to invite into the fray one of its like thinking allies to help polish off the corporation. This favor can be repaid later when the corrupt hedge fund is having trouble bankrupting a corporation it targeted for destruction. This phenomenon is how many large MMs got to be large MMs and while they’ll continue to rule the roost ad infinitum. When “decimalization” kicked in a while back and the “spreads” that honest MMs live off of got razor thin then survival was predicated on committing these frauds while leveraging these advantages. MMs were entrusted to ACT IN GOOD FAITH with this superior visibility and superior access they have as “securities intermediaries” theoretically functioning in a “gate-keeping” capacity. When ACTING IN GOOD FAITH butted heads with the need to survive then something had to get thrown under the bus and it happened to be the financial interests of U.S. investors placing bets on easy to destroy development stage U.S. corporations.

    1. Dr. DeCosta wrote: “It’s funny how these new forms of securities fraud are based upon the same fundamental concepts that have been present forever. High frequency trading utilizing algorithms basically involves “front running” the orders of us poor shmucks with no access to HFT.”

      Last weekend I read Markopolos’s book “No One Would Listen.” Very well-written, it’s a page-turner. One of the things that impressed me was how – for years – the debate between Markopolos and his co-investigators had been “is Madoff front-running or is he a Ponzi scheme?” Their question wasn’t whether he was a fraud and a criminal, but what type of fraud and what type of crime. That so many other Wall Street people had their suspicions but kept silent, effectively making them complicit, reminded me of the _omerta._

  27. Something to ponder:

    “Deceit becomes fraud but only after the purchaser of securities demands delivery and those selling the (nonexistent) securities can’t or won’t deliver them”.

    1. Dr. DeCosta, I’m involved in a heavily naked shorted profitable high growth penny stock company with a tiny share float and they’re listing in Canada on the TSX to fight the naked shorting. They’ve already been heavily buying back their own stock, but it gets naked shorted to them as fast as they can buy it and they are not allowed to buy back more than 20% of the daily trading volume which is tiny and they can’t buy in the first or last hour, which brings the buy back to a crawl and doesn’t stop the open and close manipulation.

      The market makers already delisted them from the OTC, moving all trading to the invisible pinksheet OTCQB to hide it from online quotes and they’ve opened up the spread to 50% from bid to ask to dry up trading volume.

      How does the company delist in the corrupt US clearing system? As far as I can tell, they are required as an American issuer based in an American state to keep current with the SEC, but as long as they do that, they have no right to be delisted and move off the corrupt American clearing system to be cleared in the no market maker computer system in Canada.

      I’ve advised the company that they should press release that shareholders move their shares into Canadian currency in their brokerage accounts and only trade in the Canadian market. Would that solve the problem? The Canadian listing isn’t live yet.

      Should they do a dividend and stop the buy back?

      There must be an answer besides buying back every share in existence, then notifying electronic shareholders they should approach their brokerage for a refund because the company is no longer public and their stock is fake.

      The system is broke beyond repair.

      1. BTW: It was a development stage company that deserved to be shorted, but insiders lent the company money and it became highly profitable without any dilution.

          1. Was development stage and losing money heavily as they were pre-revenue.

            Now, it makes no sense. They are way below obvious fair value, but the naked shorting continues even though it is irrational.

            I won’t name the company because I don’t want to make them an example to be punished.

          2. I still find the ‘deserved to be shorted’ comment ridiculous for just about ANY development stage company.

          3. I meant you could make an argument that it was overvalued, not that it deserved it. Now it is obviously undervalued, but there is no end to the supply of selling, even though the share structure is tight.

            Can they delist from the OTC? If so, how?

  28. Former regulators find steady work with hedge funds
    Wed Jun 30, 2010 12:27pm EDT

    (Reuters) – The hedge fund industry’s latest attempt at making nice with U.S. securities regulators appears to involve going out and hiring former regulators of their own.

    In recent weeks a handful of former top U.S. Securities and Exchange Commission officials have started to advise some of the world’s biggest and most prominent hedge funds.

    Hedge fund manager John Paulson in June tapped former SEC chairman Harvey Pitt and former commissioner Roel Campos as outside directors at some funds run by his $35 billion firm, to help beef up compliance and governance operations.

    Earlier this year, Pitt plus former SEC Commissioners Aulana Peters and Joseph Grundfest signed on as advisers to Israel Englander’s $7.8 billion Millennium Management hedge fund. Former SEC Chairman Arthur Levitt also is doing his fair share of consulting work for private equity firms and hedge funds.

    The high-profile consulting assignments are raising eyebrows of some on Wall Street and Capitol Hill, who worry hedge fund managers may be trying to find ways to influence or lean on regulators. Critics see the move by hedge funds to rent-a-regulator as just one more example of the historic revolving door between government agencies and Wall Street.

    “When you’re trying to move from a non-regulatory environment to one where you have regulation, you can’t have the police officers negotiating for a security job for someone who they’re trying to track down for stealing,” said Sen. Ted Kaufman, a Democrat from Delaware.


    But despite the skepticism, it is likely that more hedge funds will look to find their own regulatory experts, especially with the SEC moving aggressively against insider trading and federal lawmakers about to require big hedge funds to register as investment advisers.

    After decades of avoiding regulatory scrutiny, many hedge funds will soon have to disclose more about their trading strategies and internal operations, making many nervous enough to seek out expert guidance.

    While the regulatory advice requested can vary, “the concerns run the gamut of issues currently confronting these funds,” Harvey Pitt said in an email. They want to know “the best way to prepare for the new onslaught of regulations, identifying and responding to potential and actual conflicts and improving investment decision-making,” he explained.

    Paulson signed his deal with Pitt and Campos just two months after the SEC sued Goldman Sachs Group Inc over a subprime mortgage-linked security that the investment bank had arranged so the hedge fund could bet against it.

    While the SEC did not allege any wrongdoing at the hedge fund, the lawsuit has tarnished John Paulson’s well-crafted image as a savvy manager and prompted some grumbling among investors who privately considered pulling their money out.

    Paulson, who personally earned $3 billion for having the foresight to short the U.S. housing market before it crumbled and is known for paying for outstanding research, declined to comment, according to a spokesman for the fund.

    “Hedge funds want someone who’s been on the inside and know how it works,” said Scott Berman, a partner at law firm Friedman Kaplan Seiler & Adelman. “They are buying the guy’s brains,” he said.


    But Sen. Kaufman, a frequent critic of the SEC, said the accelerated trend of hedge funds hiring former top regulators as advisers can be problematic. For too long, high-level SEC employees have left government to immediately take lucrative jobs in the securities industry, he said.

    He was especially critical when high-frequency trader Getco LLC recently hired a key SEC official who oversaw that area of the market and said the SEC should consider banning senior officials from taking jobs at companies directly affected by their recent government activities.

    Lawyers who work with hedge funds, however, said there is nothing wrong with managers looking to bring on advisers who once worked in government, saying it makes sense for hedge fund managers to surround themselves with former regulators who understand the intricacies of the changing face of the law.

    “What these people can provide is intelligence and insight into how the SEC might react and what regulators might be thinking,” said George Mazin, a partner in the financial services group at law firm Dechert LLP.

    And for former top regulators, the hedge fund advising jobs are a way to parlay all that government experience into potentially lucrative assignments. Industry analysts say that regulators-for-hire can fetch anywhere from as little as $10,000 a year to as much as $100,000 or more per assignment.

    Pitt, for example, said he works with “funds that are trying to get ahead of the curve, and are looking at the various ways in which new regulations could influence their existing businesses.”

    Similarly, former SEC Commissioner Paul Atkins now consults with hedge funds on regulatory matters, including a fund that had some involvement in the big Galleon Group insider trading case.


    A Reuters analysis found that least nine of the last 30 commissioners to leave the SEC — including Pitt and Levitt — have done some type of advisory work with hedge funds. Other former commissioners appear to have done work for hedge funds in their capacities as lawyers or consultants in private practice.

    “People usually go where the money is and there is definitely more money and less heavy lifting available in the hedge fund industry right now,” said Cornelius Hurley, a professor at the Boston University School of Law and a former counsel to the Federal Reserve Board of Governors.

    The industry’s top hedge fund managers routinely earn hundreds of millions of dollars a year and many spend heavily on research and outside help.

    Of course, the movement from the SEC to securities industry work is nothing new.

    In 2003, John Freeman, a professor at the University of South Carolina Law School, found that 80 percent of former employees of the SEC’s investment management division were either working in-house at investment companies or as advisers to the mutual fund industry.

    Similarly, Freeman said he’s not surprised to see former SEC commissioners jumping to the hedge fund circuit.

    “Hedge funds need them now,” Freeman said. “With all the new laws and regulation, they’re saying we better get ourselves a few smart guys to help us schmooze with the SEC.”

    Indeed most regulators — short of Richard Breeden, a former SEC chairman who now runs his own hedge fund — are not hired to make investments. And — ironically enough — that lack of investment experience could be a potential downside for the funds that hire them, some lawyers said.


    Still, to many hedge fund investors, the trend of hiring regulators is mildly comforting.

    “Aesthetically and from a due diligence perspective, it gives investors comfort to know someone who looks at things with a regulatory eye is in your shop,” said Peter Greene, vice chair of the investment management division at law firm Lowenstein Sandler in New York.

    But at the end of the day, one investor said it’s not who a hedge fund manager turns to for regulatory advice that matters. The most important measure for investing or not is still the returns a manager generates.

    “I don’t really care who he hires as long as the returns are strong,” said Bradley Alford, founder of Alpha Capital Management, which invests with Paulson.

    (Editing by Gerald E. McCormick)

  29. If this seems mystifying, it is. John Lanchester, in his superb guide to the world of Finance, Whoops! Why Everybody Owes Everyone and No One Can Pay, explains: “Finance, like other forms of human behaviour, underwent a change in the 20th century, a shift equivalent to the emergence of modernism in the arts – a break with common sense, a turn towards self-referentiality and abstraction and notions that couldn’t be explained in workaday English.

  30. A heads up to you corporate management folks,

    Be very careful in executing “share swap” mergers and acquisitions of smaller corporations that may have been naked short sold to death. Let’s say development stage corporation “Acme” has 100 million shares outstanding and a naked short position of 250 million shares. If your company which also has 100 million shares outstanding executes a 1-for-1 share swap tender offer for Acme’s shares then you and your BOD may think that at the end of the transaction your new company will have 200 million readily sellable shares making up the “supply” of that which is readily sellable.

    In reality, after the transaction you will have 200 million readily sellable legitimate “shares” PLUS 250 million readily sellable “security entitlements” weighing down on your share price. The NSCC management is not about to force its employers holding those naked short positions and their co-conspiring hedge fund “guests” to cover just because you decided to do a merger. Those 250 million readily sellable “security entitlements” that were poisoning Acme’s share price and prognosis for success are now going to be poisoning the acquiring company’s share price and prognosis for success. Keep in mind that the reason Acme looked so inexpensive and enticing to take over might just have been because of the enormous amount of toxic waste in the form of “security entitlements” that were manipulating its share price downwards.

    The NSCC management might argue that it’s not that bad of a deal if you think of those 250 million “security entitlements” as short positions that will eventually have to be covered. Baloney. If the crooks that sold those nonexistent Acme shares never had to cover why should they ever have to cover their new short position in the larger company? What if the new company goes bankrupt before “eventually” ever occurs? If the shareholders and the BOD of the acquiring company had access to this very MATERIAL information regarding the naked short position of Acme then they obviously would have not voted for the deal.

    If on the other hand the NSCC management revealed the size of the naked short position to possible acquiring corporations then the fraud would be exposed and the entire world would learn that many of the investments we have made in development stage corporations never did have a chance for success. Due to the historical pandemic nature of abusive short selling crimes the DTCC, the SEC and FINRA have been forced into “cover-up” mode and by definition you can’t be in cover-up mode and robust provider of investor protection mode at the same time. Until all of these preexisting archaic delivery failures are once and for all bought-in the prognosis for the success of our development stage corporations and the job creation function they provide is bleak and we individual investors and corporate investors alike have all been relegated to be blindly buying a “pig in a poke”. Once the short positions are covered then the handcuffs will drop off of our SROs and regulators and they can start following their congressional mandate to provide investor protection. Until then we’re all screwed investors and non-investors alike.

    1. I understand that the holders of the entitlements are potential sellers, so the acquiring company has more supply weighing down their stock, but isn’t it also an opportunity to screw the counterfeiters?

      What if the acquiring company is profitable? In your example, there are 2.5 fake shares for every one real share. Let’s say the company pays out a $1 dividend. The counterfeiters now have to come up with $2.50 for every $1 the company pays out.

      It doesn’t matter if the company being acquired is a fraud. The entitlements are still real. Let’s say fraudco has 1 million real shares and 10 million fake shares. The investors of acquireco could buy the 10 million fake shares out of the market, prior to acquireco buying the 1 million real shares in a merger.

      Now, every time acquireco pays $1 dividend, the investors of acquireco get $10. The counterfeiters are stuck in a game of magnifying profits at their expense.

  31. Anonymous,
    Your comment is correct; those sitting on the naked short positions must match all cash dividends. The trouble is a development stage corporation under attack ever getting to the point of being able to distribute a cash dividend. Those targeted for destruction are typically yet to be cash flow positive issuers. Due to the increase in “supply” of all of these readily sellable “security entitlements” that result from all delivery failures the share price can easily be manipulated downwards.

    Yet to be cash flow positive issuers can thus be forced to raise money to pay their monthly burn rate by selling shares at usually steep discounts (due to implied risk) at constantly lowering values i.e. the share price can easily be put into a “death spiral”. As the share price plummets the ability to find financiers also plummets and the discounts to market value of willing financiers increases due to the inherent risk of financing a company whose share price is already in a death spiral. It’s a brilliantly designed fraud. If the company can get lucky and find itself in a position to distribute a cash dividend then the tables can be turned quite dramatically.

    The status quo on Wall Street is this; the shareholders of companies whose share price has been forced downwards from $2 to 2-cents get organized and try to “outmuscle” the abusive short sellers. They muster up a bunch of buy orders and get the share price back to perhaps 4-cents. Most of these buy orders are naked short sold into. Like all waves of buying this must come to an end and then the crooks predictably “walk” the share price back downwards to 1.8 cents. Why? Because after this new wave of naked short selling now there are that many MORE readily sellable share price depressing “security entitlements” weighing down on the share price. The moral of the story is not to try to “outmuscle” billionaire behemoths.

    Where opportunities currently abound is in the junior mineral exploration sector. These firms are universally naked short sold because of their 1-in-100 chance of making an economic mining discovery. As gold went from $200 to $1,200 recently a lot of solid discoveries went from interesting to worth a fortune. This has allowed several of these firms to be in a position to make extremely generous dividend distributions because their share prices are still in the cellar from astronomically high naked short positions which Wall Street is too arrogant to cover.

    1. I guess what I’m saying is to use pure economics to force the regulators to fix the system so Wallstreet isn’t bankrupted. This won’t help the development stage company, but it will force them to regulate.

      Imagine this scenario.

      1. Acquireco does positive cash flow of $1 million per year.

      2. Scamco has a 1 million short position and 10 million phantom position.

      3. The major investors in Acquireco purchase the 10 million phantom shares in scamco out of the market. It might be cheap, such as 10 million at $.001 or $10,000.

      4. Acquireco buys the 1 million real shares with payment in shares of acquireco.

      5. Acquireco pays out a $1 per share dividend. It costs the company $1 million for dividends to the scamco investors, but the scamco investor receive $11 million, with $10 million coming back to the major investors in acquireco.

      6. Now rinse and repeat. Those investors can lend Acquireco $10 million to pay out in dividends and now they are paying out $10 per share. Rinse and repeat and those investors can lend Acquireco $100 million to pay out in dividends of $100 per share. Rinse and repeat. Now the investors can lend acquireco a billion dollars to pay out in dividends of $1000 per share. (I realize I am ignoring the shares in acquireco before the purchase, but I’m trying to keep the math simple and the point is the same – it goes exponential).

      It seems clear to me that you could bankrupt the system. The most likely outcome is that Wallstreet would halt the stock, but then there’s an opportunity to sue and use the discovery process to bring all of the corruption to light.

  32. Anonymous,
    The phenomenon cited in the article you offered the link to is pretty much what we’ve seen over the years with the “PIPE” (Private Investment in Public Equity) financiers. Corporations whose credibility and share price have been beaten up so bad often only have access to capital formation opportunities via thugs known as “PIPE” financiers. Typically they offer “death spiral convertible” financings.

    The desperate development stage company feels comfortable in signing the deal because there is a clause that says that the financiers promise not to “short sell” the securities they later have an option to convert into. The terms of the financing is that the financier can convert the instrument into a fixed dollar amount of shares AT NO MATTER WHAT THE SHARE PRICE LEVEL IS. Thus there is obviously a huge incentive to naked short sell the heck out of the company and then convert at super cheap levels. Here’s the problem; the “PIPE” financiers had a superior knowledge of the securities laws and they knew that selling the shares that you could later convert into was not TECHNICALLY a “short sale”. This loophole was closed in 2005 with Reg SHO.

    What happened was the evolution of a bunch of “PIPE” financier “groupies”. They would keep their ear to the ground and launch a naked short selling attack on any corporation even rumored to be considering a “PIPE” financing. They made a fortune on this “front running” or “insider trading”. A study of I think it was 431 corporations that did “PIPE” financings revealed that the majority were wiped out and those that did survive lost a huge percentage of their share price. To go one step further often the corporations desperate enough to commit to a “PIPE” financing did so because they had already been under attack by certain naked short sellers. It often turned out that the “PIPE” financiers were in cahoots with the original naked short sellers and brought in to polish them off. Can you see the racketeering opportunities available to crooks that are not severely punished when they refuse to deliver that which they sold after entering into a contract to deliver that which was being sold by T+3?

    1. Interesting that we’ve now collectively gotten to critical mass in understanding the modus operandi of these miscreants and yet still nothing is being done…

      Is the inaction due to ignorance or malfeasance?

      Even Kaufman is like Diogenes and his lantern — unable to find the few honest beings who could affect change…

      Very sad.

  33. Dr. DeCosta, how can a newly producing gold silver company with a massive resource get a hold of you? They are in what I believe is the perfect postion that you describe to fight back. Do you still consult?

  34. Jim Hall,

    In response to your assertion: “Interesting that we’ve now collectively gotten to critical mass in understanding the modus operandi of these miscreants and yet still nothing is being done…” the reality is this: What do the SROs and regulators that have facilitated all of these thefts over the years do with all of those development stage corporations that have astronomically high levels of naked short positions poisoning both their share price and their prognosis for success that haven’t been “successfully” bankrupted yet? The choice made to date is to kick the can down the road a little further, let them quietly die off and let your successors deal with it. Recall that the “revolving door” is only accessible to those that have not messed with the corrupt status quo.

    The self-regulatory organizations (SROs) like FINRA and the NSCC as well as the SEC are in a pickle of their own making. Thousands of development stage corporations have been pushed over the cliff by these crooks and those naked short positions were sealed within the corporate coffin as was the case with Lehman Brothers. The two options open to these “securities cops” are to either finally buy-in these delivery failures or continue to cover them up. In other words the options become to encourage the future commission of these thefts by covering up past thefts and refusing to deal with them or to provide investor protection.

    Which choice has been made? Let me put it this way the official position of the SEC, FINRA and the NSCC to this very day is that the 151-fold increase in the number of delivery failures that occurred to the purchasers of Lehman Brothers near the end was inconsequential “background noise” and non-contributory to their demise (not that there wasn’t any poetic justice involved). The problem now becomes what to do with those U.S. development stage corporations forced to the edge of the cliff but that have refused to be pushed over.

    Until these “securities cops” get out of cover-up mode and into investor protection mode and deal with these “unholy alliances” between corrupt market makers, corrupt clearing firms and corrupt hedge funds then U.S. development stage corporations and the job growth engine they provide are toast.

  35. Saturday, January 2, 2010
    A dark privatised social security story: Astarra, the missing money and how examining a fund manager owned by Joe Biden’s family led to substantial regulatory action in Australia

    In Mid September I wrote a letter to Australian regulators which detailed my concerns about a fund manager in Australia known as the Astarra Strategic Fund – formerly known as Absolute Alpha. This letter resulted in regulatory action against a cluster of related funds (almost twenty), however my letter was almost entirely about only one fund in the group. I did not make any major suggestions in the letter about other funds in the Astarra complex. My involvement was detailed today in the Sydney Morning Herald (see stories here, here and here, with the first story on the front page below the fold). There was no genius in my letter – everything could be found (fairly easily) on the internet – and the original tip-off came from a reader of my blog – who noticed links with a story I wrote up in March 2009.

    For reasons I will explain below this fund collapse is qualitatively different and more serious than any previous fund collapse in Australia and that the Australian press have not yet detailed why this one is important.

    The letter argued that it was possible that the Alpha Strategic fund was a fraud. I did not have the ultimate proof of that so I did not make my letter public and will not do so yet. However there is a way of proving that a fund is not a Ponzi – and that is to “show us the money”. If the assets are really there then it should be possible to convince regulators of that fact by showing them the assets. If Bernie Madoff had been asked to prove the existence of all the money he supposedly managed then he would have been caught because he could not comply. An honest fund should be able to comply fairly quickly – sometimes within 20 minutes – but almost certainly within a week.

    The Australian regulator asked Astarra to show them the money – and to date that has not happened. That does not mean that the money is not there. It is however suggestive, especially as approximately three months have elapsed whilst regulators and fund administrators have tried to “value” the fund assets. Indeed the difficulty of valuing assets was sufficient for the regulator to cancel licenses and to place the funds in the hands of administrators.

    At a meeting last week the (regulator appointed) administrator Neil Singleton said that with respect to one fund the only proof of assets they have is a letter from a Virgin Islands company stating that the fund (presumably the Strategic Fund) held 118 million in interests in other hedge funds. This letter did not detail any interests held and gave no mechanism for confirming that statement. However the administrator has not stated that the assets are not there – so – like the regulator and the administrator I too will leave that question open. The press simply says the details as to the $118 million are “sketchy”.

    Background to the Australian privatised social security system and where various Astarra entities fit in to that system

    Australia has a privatised social security system. Much of the money is with large honest players run in a nearly index manner and which have cut fees to relatively low amounts. Those funds are run by Australia’s otherwise dying trade unions. Privatised social security (which Australians call “superannuation”) has been the saviour of the union movement in Australia – and – through their control of funds the unions now are within a breath of control (though generally do not vote their control) of a large proportion of Australia’s industry.

    The money that is not with the union funds is in a rag-tag of funds run by large banks (for example Colonial’s wraps owned by Commonwealth Bank) or with independents and/or self-managed funds. The money in those funds (wraps) is let to a large number of sub-funds – sometimes large, sometimes boutique funds managers who live off the large and mandated fund flows from our “superannuation system”.

    The boutique funds range from very good to awful and shonky. Indeed I think the best no load mutual available anywhere in the world is in Australia (I used to work for the manager). But there have been some flea-bitten dogs sold to Australians. One thing is for sure – you cannot do privatised social security without very good fraud protection because that amount of money from unsophisticated investors is a truly massive honey-pot for scammers and flim-flam artists. As an aside, possibly the worst thing about George W’s privatised social security proposals was that they would be supervised by Cox’s toothless and supine Securities and Exchange Commission.

    Trio Capital (the “mother-ship” of the Astarra entities) is a “wrap provider” – meaning a financial planner might use Trio to invest all their client’s retirement money. The Astarra Strategic Fund is an individual fund under that wrap. My letter was about the Strategic Fund – and the collapse of the Strategic Fund would not be qualitatively different from the collapse of any of about six funds that collapsed during the financial crisis. The financial planner might have put her clients in six (or more) funds – and the loss of one of them is a blow – but in no way imperils the system.

    But (somewhat surprisingly) the entire Trio edifice has been placed with administrators – which means that the end-beneficiary has had their entire retirement savings blocked. In some funds there is not even enough cash to pay pensions to retired people for the month of January. Some pensioners are not having their current payments blocked but there are doubts about future payments. [Details as to who will receive pensions for the month of January can be found on Trio’s website.] This is qualitatively different from earlier fund failures because it is a failure of every fund that a person might have invested – a failure of the core asset protection mechanism in the Australian system. [I cannot work out why the otherwise sensationalist Murdoch press has not written a single story on this yet. All they need to do is find a cluster of pensioners who will not receive their pension this month and who will have no idea as to why.]

    How I came to write my letter to regulators

    Six months ago a reader pointed me to a fund of hedge funds (called Absolute Alpha) based in Australia.

    I looked – and within forty minutes I became very concerned – but could not prove harm to the fund’s investors. I tipped off the Sydney Morning Herald.

    The journalists at the Herald worked hard at the story but alas they too could not prove harm. Indeed a major bank misled them as to whether the assets were in (their) safe custody. The bank confirmed the assets were in custody – a statement they have now withdrawn. Obviously with a reputable third party vouching for the assets any hypothesis of harm was going to be hard to sustain. The Herald published nothing.

    I however remained suspicious – but could not easily do anything. For there to be something desperately wrong either the bank had to be a party or grossly negligent as to their custody of the assets.

    Absolute Alpha was a boutique fund manager loosely associated with – and partly owned – by a superannuation wrap provider called Astarra. Astarra is now called Trio. The wrap provider did all the superannuation compliance and in turn (claimed to) invest funds with other fund managers – mostly reputable managers. The relationship between Trio and some of the funds in which they were supposed to invest is complex.

    The amount of money in Absolute Alpha was probably under 100 million. There were plenty of things that did not look right – but I did not think there was much I could do about it.

    So I let it go – though I did not forget about it.

    Later I tried to log into Absolute Alpha’s website and it was dead.* This (falsely) indicated my worst fear.

    Again I alerted the Herald.

    Alas it was not so simple. Absolute Alpha it seems had taken over the funds management of all the money in the Astarra wrap. They had renamed themselves Astarra. Astarra later renamed itself Trio. Astarra’s website boasted of a billion dollars in funds under management.

    This was potentially very bad news. Australia is about a twentieth the size economically of the United States – so $1 billion in funds under management was the equivalent economically of $20 billion in the US. If my bad-case was true we had a Madoff (at least proportionately) in the making. [Now the funds have been taken into administration the official numbers are about 40 percent of the numbers boasted on the website. The danger was not quite as big as I thought it was.]

    Anyway I wrote a letter to the Australian Securities regulator (ASIC) laying out all my concerns and (implicitly) the method for testing my concerns were false. [I sincerely hoped I was wrong – and hoped the regulator would prove me incorrect by identifying and valuing the assets. I still sincerely hope all the money turns up in the British Virgin Islands.]

    I have heard lots of criticism of the Australian Securities regulator. However on this important matter their actions were exemplary. They did what the SEC could not do and act on a “Markopolos letter” within weeks. They did what the SEC should have done when they investigated Madoff – and attempted to confirm the existence and value of the assets.

    Three weeks later ASIC put a stop on all Astarra funds – prohibiting new money going in or any moneys going out. They acted to protect investors. This showed responsiveness that Mary Schapiro and American regulators can only aspire too. The Sydney Morning Herald finally published a cryptic story on the front page. The Sydney Morning Herald article did not suggest – and I did not reasonably think – that the problems extended further in the Trio edifice.

    A few months have passed and eventually all major Trio entities were placed in administration by the superannuation regulator. They will probably be liquidated. The funds have been passed to (reputable) private sector “forensic accountants” – the choice of accountants being made by the securities and superannuation regulators. They are the sort of liquidators you use when (as stated by the regulator in their press release) you are not “able to satisfy concerns regarding the valuation of superannuation assets”.

    The whole mess will be explored by the accountants – and if the assets are not there then the matter will played in court – at which point I will publish my “Markopolos letter” analysing what I got right and wrong.

    But for the moment I will leave you with what attracted me to Absolute Alpha in the first case. It was the CV’s of the principal players. Here they are:

    Shawn Richard – Chief Executive Officer

    Shawn is the founder of Absolute Alpha and a key member of the investment team. Prior to founding Absolute Alpha, Shawn has held and continues to hold, various senior positions, including directorships of companies both in Australia and overseas.

    Shawn has been involved in financial markets since 1996 and had been specialising in alternative investments for more than 8 years, both offshore and in Australia. Over this time, Shawn has established relationships with some of the most exclusive hedge fund managers around the globe.

    Shawn’s offshore experience in alternative investments includes among others, structuring and analysis of derivative instruments with some of the largest private hedge funds in the United States. Shawn was also part of a small team of professionals providing risk management services to Asian institutions and regional banks in relations to their exposure in equities.

    Shawn holds a bachelors degree in Finance from the University of Moncton.

    Eugene Liu -Chief Investment Strategist

    Eugene is the Chief Investment Strategist of Absolute Alpha. As Chief Investment Strategist, Eugene is involved in the development and evaluation of asset strategic plans, development and modelling of analytic tools, reviewing and analysing investment data to formulate investment strategies, and the investment risk management process. Prior to joining Absolute Alpha, Eugene worked with the Asset Management team of Pacific Continental Securities and World Financial Capital Markets in the US and Asia. In these roles, Eugene performed extensive financial modelling and valuation analyses of various hedge fund strategies. Eugene also led a team of arbitrage specialists who provided structured product deal flow to many of the largest hedge funds in the industry.

    Eugene holds a degree in economics from Trenton State College in New Jersey.

    Charles Provini (US) – Asset Consultant

    Charles has been involved in hedge funds for more than 20 years and is a senior asset consultant and member of Absolute Alpha’s investment committee. Currently, he is the President of Paradigm Global Advisors, a well established hedge fund manager based in NY and he is also the Chairman of C.R. Provini & Co., Inc., a financial services firm, founded in 1991. Prior to this, Charles held various senior positions, including, President of Ladenburg Thalmann Asset Management, Director at Ladenburg Thalmann, Inc., one of the oldest members of the New York Stock Exchange, President of Laidlaw Asset Management, Chairman and Chief Investment Officer of Howe & Rusling, Laidlaw’s Management Advisory Group, President of Rodman and Renshaw’s Advisory Services, and President of LaSalle Street Corporation, a wholly-owned subsidiary of Donaldson, Lufkin & Jenrette.

    Charles has been a leadership instructor at the U.S. Naval Academy, Chairman of the U.S. Naval Academy’s Honour Board and is a former Marine Corp. officer. He is frequent speaker at financial seminars and has appeared on “The Today Show” and “Good Morning America” discussing financial markets.

    Charles is a graduate of the U.S. Naval Academy and has an MBA from the University of Oklahoma.

    Now the first CV – Shawn Richard – is notable only for what it does not say. It does not mention a single firm that Shawn ever worked for – and hence reduces the possibility of doing due-diligence.

    Eugene Liu’s CV is not so careful mentioning two firms, Pacific Continental Securities and World Financial Capital Markets. Pacific Continental is easy to find – it was a bucket shop of enormous proportions in the UK. Essentially the firm found hapless victims and steadily moved their life savings into soon-to-be worthless scam stocks for huge commissions. This was explored widely in the UK press including beautiful articles about a salesman’s time as scam artists. World Financial Capital Markets is a little harder to trace as a firm. Several firms have had that name – but one firm by that name met an unfortunate end involving fraud and the principals reappeared at Pacific Continental.

    It turns out that Shawn Richard was a manager with Pacific Continental in Taiwan.

    The third CV is of Charles Provini who used to be the CEO of Paradigm Global and who was (falsely) claimed to remain in that position. When I copied these CVs off the Absolute Alpha website Provini had not worked for Paradigm for about two years. Some of the rest of Mr Provini’s CV is raised my eyebrows too – for instance he worked as the President of Laidlaw Asset Management. A firm of that name was cited by the UK securities regulator (the FSA) for cold-calling and selling scam funds to UK investors.

    The link to Paradigm Global was what raised my eyebrows. Paradigm is an asset manager (for funds of hedge funds) owned by Hunter Biden and James Biden. These are the Vice President’s son and brother respectively. I have written about Paradigm extensively before as it has an unfortunate habit of being associated with scams. Absolute Alpha was not difficult to do due diligence on. It took me only 40 minutes to work out that they were needing very close scrutiny. It does not speak well to the due-diligence of a fund of hedge funds (which is what Paradigm claims to be) that they keep being associated with cases like this.

    The Biden connection was what prompted me to look at Absolute Alpha and hence what led me to write my “Markopolos letter” to ASIC and hence what rapidly led to the closure of Astarra and Trio. It is worth asking how deep that connection is.

    Are Absolute Alpha/Astarra really associated with the Biden’s firm?

    At first glance the links between Astarra and the Bidens’ firm are weak. Provini could have been marketing “vapourware” with no real association.

    All that is certain is that Provini was cited on the Absolute Alpha website as an asset consultant and President of Paradigm for at least two years after he was sacked from Paradigm. Provini is now running inconsequential penny stock companies.

    But the links run deeper than that. Absolute Alpha also used to cite other staff members who worked at Paradigm – indeed the original “managing partner” was also a staff member at Paradigm.

    Absolute Alpha used to publish a process diagram as to how they identified funds to invest in. I have reproduced that diagram below:

    It mentions two things which link Absolute Alpha (now called Astarra) to Paradigm global. These are the use of the Park Score (named after James Park – the founder of Paradigm) and the PASS database – the core database of hedge funds from which Paradigm claims to make its investment decisions.

    Still, this could all have been ripped off Paradigm without Paradigm knowing.

    Alas Paradigm does not get off so lightly. The boys from Absolute Alpha went to New York and co-marketed with people from Paradigm. Indeed I know someone who thought that Absolute Alpha were OK because staff at Paradigm had vouched for them. Whether Paradigm knew that Shawn and Eugene in Australia were using “Paradigm inspired” marketing material however is unknown.

    Paradigm – the Biden’s firm – had unwittingly got involved in another funds management firm which has been closed by regulators or been exposed as Ponzis. That is four I know of now – and I have yet another one that I suspect of being unsound.

    A plea to Michelle Malkin

    So much of what is published by the conservative blogosphere is non-fact based muckraking. And yet – sitting here has been my observation that the fund of hedge funds associated with the Vice President’s family has an unnerving habit of association with scams and other funds closed by regulators. Surely a competent muckraking conservative blogger can actually do some digging rather than pontificating from the sidelines.

    It makes me think of conspiracy theories. Maybe conservatives in the US do not want to do this sort of financial digging because most the fraudsters and scamsters are part of the Republican movement and do not like regulators because – well – they might catch them.

    But there must be honest Republicans out there. It is time for Michelle Malkin to do some honest work. So I will plead with her – can you please do some digging into Paradigm or find some other muck-raking conservative to do it for me.

    I for one want to get back to making money honestly.


    *Incidentally – I was attempting to log into the Absolute Alpha website because I was discussing the whole matter with a reader from Talking Points Memo. You know you you are. Thank you.

  36. The bunny had been quiet too long, now the lack of new material here leaves me worried.
    I hope this is only the calm before the storm…

  37. What if the bad guys control both sides of the fight and they go dark when the “wrong” side is winning?

    I run into this all the time. Effective opposition sites that have gone dark in the past with a sudden lack of updates have included sites I have sent thousands of dollars to and sites I won’t list here that won’t return requests to advertise:
    the ncaans guys, forget their URL, made progress in 2003 moving companies out of DTC

    Think about it. If you’ve stolen trillions and control politicians and the media, you probably also control your own opposition in the alternative press.

    Smart fighters befriend other fighters and don’t look to websites for support.

    If Deepcapture goes completely dead, we need to find a way to find each other because us activists can make a difference and we don’t need the permission of some host site to adjudicate our comments.

    The truth is inevitable and the people are waking up. There was a story about how the bank of Nova Scotia refused delivery of warehoused silver to a near death cancer patient that is making headlines globally. They claimed concern for the heirs when the reality was the silver they were charging warehouse fees on for twenty years didn’t actually exist.

    People are waking up to the fact that custodians steal from their customers and if they go bankrupt, the whole system is at risk.

    Us activists need to stop letting sites like Deepcapture hold us back, because change needs to happen now because change always works like that.

    Like an earthquake, change is big and instant and based on growing previous forces.

    Is there a blog we can rendezvous at now that Deep Capture has gone dead?

    I for one see this battle as bigger than any one website.

  38. I disagree with Kay Jewelers.
    I would bet on any given friday or saturday night more kisses
    begin with contract ass kissing than K.

    (July 19) — The U.S. intelligence community is bracing for a Washington Post story published today. The story, largely reported by Pulitzer Prize-winner Dana Priest, details the billions of dollars of intelligence contracts fielded out to private companies. Both the State Department and the Office of Director of National Intelligence (ODNI), which oversees all intelligence agencies, have sent out internal memos regarding the story. Here’s what we know about the story, what we know about private intelligence contracting, and how intelligence agencies are responding.


    Marv Eatinger

  40. Yes Marv and I among many others requested that your redundant posts be removed. You were spamming off-topic nonsense over and over again wasting valuable bandwith. Don’t blame deepcapture, blame its readers such as myself. Thank you.

  41. Marv Eatinger,

    Please don’t feel that anybody here is taking your situation lightly. You are experiencing the human pain that millions of investors in development stage corporations have and are experiencing from being the victims of abusive short selling. In the last 3 hours I’ve had 3 corporations calling asking for help. My office manager said that the 2nd caller was literally in tears.

    What’s especially frustrating is that certain individuals within FINRA, the NSCC and the SEC with the congressional mandate to provide investor protection have actually been the primary facilitators and enablers of these thefts. The NSCC in particular has done this by gaining a monopoly on the legal sources of empowerment to execute buy-ins of archaic delivery failures followed by their pretending to be “powerless” once buy-ins are indicated. The result is no risk and all reward and a green light to tee off on any corporation that presents itself as an “easy prey” like Lehman Brothers did near the end when they got “pig-piled” by delivery failures.

    It’s as if these SROs and regulators have deputized these crooks to go out and attack any corporation that they in their infinite wisdom deem to be a scam. With no risk of being bought-in when you refuse to deliver that which you sell then it’s become so predictably profitable to kill development stage corporations nowadays that they need not be a scam but they only have to be attacked during a stage of development where they are easy to kill.

    What’s truly informative is what happens when it is clearly proven that the purported scam company really did have the goods and was misdiagnosed as an easy to kill scam and the crooks have run up enormous naked short positions without being able to “successfully” bankrupt the company. This is when the predatory “hunters” can become the “hunted”. Marv, it is a shame that nobody ever wants to talk about the human misery that these theoretically beneficent “providers of liquidity” have induced.

    1. “…This is when the predatory “hunters” can become the “hunted”. …”.

      Unfortunately, the spectre of the so-called short-squeeze seldom, if ever, occurs.

      Hence, it’s a win-win for the shorts. They can’t lose.

      1. Profitable companies can get them with buy backs and dividends.

        No one commented on my idea to purposely bankrupt the counterfeiters and sham custodians that don’t hold what they are supposed to hold and embarrass the regulators.

        1. Find a crazy shorted company, it could be a scam, with billions of shares outstanding. What you are looking for is one that is heavily naked shorted, say 10 to 1.

        2. Buy control of it. It might be as cheap as $25,000 to buy 100% of the float as it is a scam corporation.

        3. Take a private company you own that is profitable and sell it to the public scamco you control for shares.

        4. Pay dividends. For every $1 you pay out, you get $10 back.

        5. Lend the $10 to the company and get them to pay dividends.

        6. For every $10 they pay out, you get $100 back.

        7. For every $100 they pay out, you get $1000 back.

        8. For every $1000 they pay out, you get $10000 back.

        9. Rinse and repeat until the scumbags are bankrupt. Ten times is a geometric progression they can’t fight.

        The regulators will halt the stock, but then do it again with another stock. They wouldn’t be able to fight the press as they couldn’t halt that many stocks.

        What if someone set up a hedge fund, boldly titled “Expose the Counterfeits, LLC”?

        I’m sure every reader of this site would send in money to invest.

  42. This site’s been awfully quiet.

    – the naked short lawsuits die with the death of the litigator
    – ncaans goes dark
    – goes dark
    – the nfi crowd gives up as the stock fails
    – goes dark (where’s the Easter Bunny, he didn’t even say bye)

    We need an update.

  43. I still do not understand why critics of David Einhorn fail to address the realities of the Allied situation. I have yet to read a reasonable refutation of his basic analysis. Like this article, critics bitch about conspiracy theories; about a plot to pick on poor Allied. Instead, perhaps you could explain the obvious failure on behalf of Allied to provide a reasonable, conservative, fair value measurement of its portfolio. Fair value does not equal fire sale as you and other critics of Einhorn have claimed he said. How can any reasonable person see bonds trading in a decent market at 2 cents be OKAY with putting those same bonds on their books at say 40 cents? How could such accounting not be suspect? Furthermore, in Einhorn’s original speech he did hypothesize that Allied may have been running some type of scheme. However, not once in the speech did he say “fraud” or “Ponzi.” In all likelihood this was because he could not prove that they had a scheme going. In any case, as Keynes once said, its better to be roughly right than precisely wrong. Given the facts as set forth by Einhorn, it would be foolish to claim he wasn’t at least roughly right about Allied.

  44. One thing for sure, The NY Mets baseball club sure pick some strange bedfellows.
    While still dealing with a possible dealings charge with Bernie Madoff, David Einhorn is being allowed to invest 200 million into the team to be a minority owner. This will happen in about a month 7/2011

    Which will probably become the majority owner once the Wilpons have to sell when their dealings and alleged collusion and awareness of Madoff and his business dealings is verified.

    I wish I was a Yankee fan

  45. The NY Mets sure do make some strange bed-fellows

    Stories published in the above newspaper, the same David Einhorn now is paying $200 million to be a minority owner in the troubled NY Mets baseball club.

    From the stories in Newsday I saw, the fact that the present majority owners allegedly had dealings with those who ‘allegedly’ had ties to Bernie Madoff and supposedly knew what he was doing. This, if proven in court will or has put them in a position where they might have to sell the team.

    The are trying to move the case to Federal court as David Einhorn waits 1 month to write his check upon approval. Only in NY and in a NY minute!

    What happens then? It is written that it is likely that Mr. Einhorn will than be the shoe-in to become the majority owner of a professional baseball team

    Pete Rose looks like a choir boy now

    Why couldn’t I be a Yankee fan

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  52. I laugh at morons like you. Upset because you don’t have a seat at the table. Because you didn’t work hard enough or aren’t smart enough. Of all the hedge fund mangers to trash you choose Einhorn?? Thats funny.


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