“Minkow’s manipulation of the market … caused a severe drop in the stock prices of a large local corporation. This type of deceit and abuse of trust will not be tolerated… we will investigate and prosecute stock manipulation cases to help protect the integrity of our capital markets…When false statements are disseminated to deceive the investing public, whether they’re designed to prop up a company or tear it down, the FBI will dedicate all available resources to bring disseminators of such falsehoods to justice.” – United States Department of Justice, Press release, March 24, 2011
“Minkow Charged In Stock Fraud, Extortion Case – A financial fraud investigator and ex-convict was charged with conspiracy in a Florida federal court on Thursday, a week after agreeing to plead guilty to allegations that he intentionally depressed a company’s stock with false accusations of fraud.” – Law360, March 24, 2011
DeepCapture is seeing an influx of visitors, many of them new. So I am going to give a concise explanation of the stock manipulation meme that Deep Capture explores.
THE STOCK MANIPULATION MEME
Years ago, Steve Cohen figured out that finding a good company to invest in and waiting for its stock to go from $4 to $28 took acumen and patience, whereas taking a company down from $28 to $4 could be done in weeks, and, through the magic of short selling, was just as profitable. For Steve Cohen and a number of associated players this insight led to the emergence of a business model: instead of simply betting against companies (short selling), it would pay to disrupt them (naked short selling, orchestrating smear campaigns in the press, instigating federal investigations and shareholder class action lawsuits, etc.)
In the intervening years a network has emerged that developed this business model into an industry. Michael Milken and Ivan Boesky (two famous criminals from the 1980’s) were financiers to the stock manipulation industry, and brought with them the involvement of Organized Crime (primarily, Genovese Family, and later, Russian Mafia). Its current shining lights appear to include Jim Chanos, David Einhorn, Dan Loeb, and Bill Ackman. Numerous wannabees have circled from time to time, from low-rent (David Rocker) to preppy (Whitney Tilson, it now appears). Profiting from stock manipulation would be difficult without the involvement of prime brokers who turn a blind eye to certain trading strategies, primarily, naked short selling, but also, variants such as married puts (by which hedge funds lay off an aspect of their criminal activity to the prime brokers, and prime brokers lay off an aspect of the crime to market makers).
The journalists who became spokesmodels for these cutpurses range from Pinto (Roddy Boyd, Carol Remond, Herb Greenberg) to Lexus (Bethany McLean), with every make and model in between (some, such as Bethany McLean and Roddy Boyd, have never written a story that was not sourced from this tiny set of hedge funds, and breezily engaged in email conversations which reveal their understanding of their role as puppets). Other financial journalists (e.g., Joe Nocera, Floyd Norris) sided with these now-exposed journalists not from corruption, but from having forgotten their duties as journalists. At the bottom of the food chain, we find a small group of phony “researchers” (Barry Minkow, Sam Antar, Gradient Analytics) who conduct no real research, but who produce endless phony “where there’s smoke there’s fire” allegations for parroting by C-list bloggers (Gary Weiss, Tracy Coenen, Floyd Schneider, Yolanda Holtzee, etc.), which are then imported into the mainstream financial press through the efforts of the shill journalists listed above.
For many years, these schemers made a federal toy of the SEC, whose staffers gave concierge service to stock manipulators before going to work for their law firms (e.g., Linda Thomsen), or sometimes, even directly for the hedge funds in question (e.g., Richard Sauer, for whom Rocker Partners and Bethany McLean had a code-name, “Lavaman”). Jim Cramer has participated both as a money manager (as he confessed on video), and also, as a journalist (as DeepCapture has demonstrated). DeepCapture also suspects the involvement of former New York Attorney General Elliot Spitzer’s, due to Spitzer’s proximity to Cramer (Spitzer’s college roommate and lifelong friend) and Chanos (Spitzer’s largest financial backer), the confluence among this network’s targets and the objects of Spitzer’s prosecution, and the slightly salacious fact that Jim Chanos let live rent-free in his house Eliot Spitzer’s main escort, Ashlee Dupree (who should be ashamed of herself for having anything to do with these low-lifes).
Such schemes are illegal, as is the trading that seeks to profit from them. Though these patterns are easy to spot, with this basic scheme distributed so cleverly across so many market participants (hedge funds, prime brokers, market makers) and typists who look enough like journalists to be shielded by the 1st amendment (e.g., Jim Cramer, Herb Greenberg, Carol Remond, Bethany McLean), they are difficult to prove, . In fact, any attempt to inform the public about these patterns has traditionally been met by tremendous smear campaigns by all the journalist-typists mentioned above. Importantly, these smear campaigns not only attack the messenger, they distort the message, insisting that what is at issue is “short selling” (a practice which is easy to defend), and systemically refusing even to mention the allegations of stock manipulation (via naked short selling and manipulation of journalists and law enforcement). It has become clear over the last six years that the New York financial press has a mandate to suppress the stock manipulation meme. That is why the New York financial press, once so intense on discrediting this meme, flipped off like a light-switch the moment we began expressing and documenting it in both particular and pattern on DeepCapture, criticism of which would have led readers to visit and understand the arguments for themselves.
In 2004 Gradient Analytics, a Phoenix-based company putatively in the business of providing research to hedge funds, began a smear campaign against Overstock (a company in which I work by day). The zeal with which they stretched to make any allegation they could muster in literally dozens of poorly-researched publications, and their strange behavior in communication with us (aggressively turning a deaf ear to any attempt to explain to them the accounting basics they had misunderstood) left us certain that they were up to mischief, but puzzled as to their motives. Soon, several sympathetic hedge funds contacted me to inform me that this was Gradient’s business model: any hedge fund could pay them $25k/year, and for that fee, command the preparation of multiple hatchet jobs. Clearly, someone had bought the economy pack regarding us. Not long thereafter, several employees of Gradient Analytics got in touch with me and described, in great detail (and ultimately in three affidavits) how a hedge fund named “Rocker Partners” (run by David Rocker) was the hedge fund behind this stock manipulation scheme (they named Herb Greenberg as participating, and also said that Steve Cohen was “twenty times worse”). As much from a sense of civic duty as anything else, Overstock sued Rocker and Gradient, and then, the entire prime brokerage industry.
Throughout the litigation, pretty much the entire aforementioned set of typists, pseudo-journalists, and C-list bloggers who had spent so many years carrying water in these hedge fund schemes (i.e., Jim Cramer, Herb Greenberg, Bethany McLean, Roddy Boyd, Carol Remond, Joe Nocera, Floyd Norris, Sam Antar, Gary Weiss, Tracy Coenen, Floyd Schneider), tried to convince the public that Overstock’s lawsuits had no merit and that no such schemes exist. All but the most shameless C-list players, however, contracted laryngitis on the subject when Overstock received apologies for and withdrawal of Gradient’s smear campaign, a $5 million check from Rocker (“Rocker Pays $5 Million to Overstock.com to Settle Lawsuit“), another $5 million check from some of the prime brokers, and got going a serious-as-a-heart-attack RICO action going against Goldman Sachs and Bank of America subsidiary Merrill Lynch, with a trial date in December, 2011.
An identical scheme starring many of these players has come to light in federal court in Florida over the last two weeks. Barry Minkow (like Sam Antar, an ex-convict with a history of enormous financial crimes) “was charged with conspiracy in Florida federal court… after agreeing to plead guilty to allegations that he intentionally depressed a company’s stock with false allegations of fraud.” The company whose stock was being “intentionally depressed… with false allegations of fraud” was a Fortune 500 company named Lennar, Inc. The modus operandi was identical to the David Rocker/Gradient Analytics scheme against Overstock.
The fact that there is such overlap among the cast of characters should not be surprising. As is documented in numerous places in DeepCapture (“The ties that bind Sam Antar and Barry Minkow”, “Today’s ‘If Only There Were a Pattern’ Moment: Sam Antar Crony Barry Minkow Still a Crook. Who Knew?“, “The Honorable Gill Freeman Throws Book at Barry Minkow, Nicks Paymaster Sam Antar. Plus, A Question for Whitney Tilson, Minkow Paymaster #2″, ” Memo to Barry Minkow and Sam Antar: Roll Early, Roll Often”, etc.) these folks all work together. Sam Antar paid Barry Minkow $250,000 for services Barry could not explain; Gary Weiss re-introduced Sam Antar to the world in 2006; Gary Weiss introduced Tracy Coenen in 2007; Whitney Tilson paid Barry Minkow $40,000 for “research” in the model of Gradient Analytics’ smear campaign; Barry Minkow paid Sam Antar $30,000 back for cooperation in another smear campaign; Dan Loeb’s hedge fund, Third Point, employed as a cut-out another ex-convict stock manipulator named Michelle McDonough to manage related manipulation campaigns conducted by Floyd Schneider and Yolanda Holtzee. Gary Weiss brags in email to Floyd Schneider about feeding Joe Nocera his material. And so on and so forth.
What is not yet public is who was behind this particular stock manipulation scheme now being pursued in federal court. Barry Minkow’s publications, filled as they were with “false allegations of fraud,” were always closely preceded by large trading activity far beyond the capacity of Barry, Sam Antar, or even Whitney Tilson (who, as his hedge fund is about $120 million, is something of a pisher in the hedge fund world). That is to say, someone knew every time that Barry was about to publish “research” that would move a stock price, and was betting big that Barry’s publications would move those prices (that is, after all, the point of a stock manipulation campaign: to create a lead-pipe cinch on which to bet). Given the size of the bets, it had to be someone big.
Far bigger than Whitney Tilson.