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The SEC Declares Emergency, and Joe Nocera Yammers On


Folks, today was history in the making. The Deep Capture thesis, which is that miscreant short-sellers have put the American financial system at risk, can no longer be in doubt.

First came the stunning announcement that the SEC has sent subpoenas to 50 hedge fund managers as part of a major investigation into rumor-mongering and illegal short-selling of Bear Stearns and Lehman Brothers. Then came the even more remarkable announcement from SEC Chairman Christopher Cox that he is instituting an “emergency action” requiring traders to pre-borrow stock before shorting all “substantial” financial companies.

Of course, there is a some bitter irony here. Over the years, hundreds of public companies have been grievously wounded by hedge funds who sell phantom stock (ie. stock they have not borrowed), and the SEC has done nothing. Now Wall Street finance companies, including the very investment banks whose prime brokerages facilitated the creation of phantom stock, find themselves victimized by phantom stock, and the government decides it’s time to do – or at least, say – something about it.

We’d be glad to see the big banks suffer their Shakespearean fates if the SEC were to rescue the hundreds of innocent victim companies who have been hollering about the phantom stock problem for years. We’ll see if the SEC extends the emergency action to the rest of the market, as Mr. Cox suggested it might.

Either way, all the talk of an “emergency” suggests that the SEC recognizes just how big the phantom stock problem has become. Obviously, it sees the catastrophe of Bear Stearns as a clear-cut case of short-seller abuse. A well-timed false rumor, presented as fact by CNBC, combined with phantom stock sales, took the bank down. Now, the same people are using the same tactics against Lehman Brothers. Fannie and Freddie are on the brink. And experts say there are 300-plus other publicly traded companies – including 50 finance companies — getting similarly clobbered.

An “emergency,” indeed.

All of which makes certain journalists look like bona fide clowns. For years, a clique of influential reporters—I call them “the Media Mob”–have insisted that short-sellers do no wrong and that phantom stock is not a problem. On Friday, Deep Capture noted that the media’s hedge fund apologists, including Joe Nocera of the New York Times, had shied away from commenting on the collapse of Bear Stearns.

The next day, Joe Nocera of the New York Times commented on the collapse of Bear Stearns. Predictably, he argued that short-sellers had nothing to do with it. He wrote, “it takes some gall for Bear Stearns to blame short sellers for its failure…what Bear Stearns management fails to mention is how much of its capital was tied up in subprime sludge.”

The sludge, Joe, is not the point. As your close friend Jim Cramer has described (behind closed doors, if not on CNBC), “the game” of market manipulation is to find a weakness and amplify it out of all proportion to reality. It is one thing to say that Bear’s balance sheet was weak (I agree, Bear was a piece of crap). It is quite another thing to get a compliant television reporter (in this case, Cramer crony David Faber, on CNBC) to spark a run on the bank by reporting, as if it were fact, the completely false and utterly catastrophic news that Goldman Sachs had cut off Bear Stearns’ credit — and to do that while somebody’s selling millions of shares that do not exist.

As we said last week, the SEC shouldn’t just subpoena the hedge funds: It should subpoena CNBC’s David Faber. He says a hedge fund “friend” gave him that information about Goldman cutting off Bear’s credit. That hedge fund “friend” very likely broke the law. The SEC needs to find out who he is. Journalists have no constitutional right to cover up crimes under the guise of protecting sources.

But short-sellers don’t commit crimes. So says the Media Mob. Why do they say this? The kindest explanation is that Nocera and crowd honestly believe that it is simply too dangerous to criticize shorts because shorts are so absolutely “vital” – the only people able to provide negative information to the markets and the media. This worn notion fails, of course, to make the distinction between law-abiding short-sellers who provide real analysis and crooks who circulate scurrilous lies while churning out phantom stock.

It also contains a stunning admission: that the financial media is incapable of conducting financial research on its own. Journalists consider short-sellers “vital” sources of negative information because journalists do not have the wherewithal to look at a balance sheet and determine for themselves whether something might be wrong. Baffled by all those numbers, the journalists turn to short-sellers (and sometimes even convicted criminals) for help. Which is another way of saying that our financial media is written in large part by financially motivated Wall Street sharks–a real abomination, when you think about it.

But in the case of Nocera, there is something even more sinister at play. To understand Joe Nocera’s positions on short-selling, it is necessary to understand the crowd he runs with. It is a clique of journalists and short-selling hedge funds, most of whom are connected in some way to CNBC’s Jim Cramer.

Some journalists challenge power; this clique of journalists covet it. They desire nothing more than to be players in “the game.” (Some are quite blatant about this; witness Nocera pal Herb Greenberg, who sells “forensic” research to short-sellers while using them as sources in his CNBC reporting).

These journalists defend their short-selling friends at all costs. They routinely pat each other on the back and pimp each others’ books. They quote each other in their stories, and snicker almost out loud as they attack the same public companies, always parroting the same financial analysis, delivered to them by the same small group of dubious hedge fund managers.

This is an old boys and girls network tighter than anything on Capitol Hill – and infinitely more saddening, because the media’s not supposed to be this way. .

You could see this network at work in the case of Gradient Analytics, a research shop that publishes blatantly false information for short-selling hedge fund managers, many of whom are connected to Cramer. For awhile, Jon Markman, a former editor for Cramer’s website, TheStreet.com, was running a dodgy hedge fund out of Gradient’s back offices, while one of Gradient’s managers was accumulating multiple identities and social security numbers to conceal his activities.

At the same time, the Media Mob, including CNBC’s Herb Greenberg, who was Markman’s former co-editor at TheStreet.com, churned out stories containing Gradient’s false information about companies that also happened to be victimized by phantom stock – and still more stories labeling anyone who mentioned the words “phantom stock” or “naked shorting” as “loony” or “seeing UFOs.” A former Gradient employee testified under oath that Herb conspired with Gradient and a hedge fund manager named David Rocker so that Rocker could illegally profit from his stories on CNBC and Marketwatch.com.

When the SEC launched an investigation into Gradient, and issued subpoenas to Jim Cramer and Herb Greenberg, the Media Mob rose up in their defense. Pathetically, the SEC allowed itself to be terrorized by this mob, and closed down its investigation before enforcing the subpoenas. When I began a story about this for the Columbia Journalism Review, the Media Mob turned on me. Joe Nocera called my editor to defend Herb and pressure CJR to kill my investigation. (This was unheard of; working journalists do not make quiet calls to try to have stories killed).

Then Nocera, Herb, and their friend Dan Colarusso, of the New York Post, sat on a famous panel at the Society of Business Editors and Writers. The panel’s stated mission was to defeat “business journalism bashers” – namely, Deep Capture reporter Patrick Byrne and Bob O’Brien, a.k.a. the “Easter Bunny,” a devastatingly effective blogger who had been writing about the media’s failure to cover the problem of phantom stock.

A Deep Capture ally snuck into Nocera’s panel and got it all on tape (see “The Story of Deep Capture” for the recording). Colarusso vowed to “crush” Patrick and the Easter Bunny with “barrels of ink.” Herb said that he wouldn’t write about phantom stock because it’s “not what I do” – even though a majority of the companies he had written about were phantom stock victims. Nocera, meanwhile, said that naked short-selling (phantom stock selling) “makes his eyes glaze over” and he “can’t be bothered” to cover it because “life is too short.”

Maybe so, but before and after that panel, Nocera wrote columns insisting that short-sellers do no wrong and phantom stock is not a problem – even though he had been presented with heaps of data proving otherwise. Nocera’s columns, widely circulated and praised by the Media Mob, contained no data and not a single reference to a credible source. One of his columns quoted, as an expert — Herb. Another column quoted the expert Roddy Boyd, then a reporter for the New York Post.

I know why Nocera quoted Roddy – Roddy’s a card-carrying member of the Media Mob who has worked closely with criminals doing dirty work for Cramer-affiliated short-sellers. (See “The Story of Deep Capture” for more on this.) Still, this was something amazing: the New York Times quoting a New York Post reporter as an expert! You’d think some editor somewhere would have wondered about this. (Roddy Boyd, now with Fortune, is, not incidentally, one of the few reporters still insisting that short-sellers of Bear Stearns and Lehman have done no wrong).

Last month, after we named Nocera in “The Story of Deep Capture,” Nocera wrote a column in which he was critical of Milberg Weiss, the law firm that was caught paying kickbacks to plaintiffs who filed bogus class-action lawsuits against public companies. He wrote, “I’ve long thought that [Milberg] ran a kind of extortion racket, filing class-action lawsuits against companies whose stock had dropped – without a shred of evidence that any wrongdoing had taken place – and then torturing them with legal motions until they settled.”

What Nocera did not mention (though we made it clear in “The Story of Deep Capture,” which Nocera had read) is that Milberg Weiss coordinated its attacks on public companies with short-selling hedge funds, skeezy “independent research” shops (most notably, Gradient Analytics) and Nocera’s media friends.

Indeed, a Gradient timesheet, obtained by Deep Capture, shows that while Gradient was allegedly colluding with Herb Greenberg, its employees were getting paid by the hour to work for Milberg Weiss. .

But Herb is a friend of Nocera, Gradient’s short-selling clients are friends of Herb – and well, you know how it works. These journalists don’t get their friends in trouble. Indeed, check their work – not one of them, in all their years, has ever identified, or even hinted at, a single instance of short-seller wrongdoing.

In his most recent article apologizing for the short-sellers who destroyed Bear Stearns, Nocera refers extensively to one of our favorite hedge fund managers, Jim Chanos, of the aptly named Kynikos (“Cynical,” in Greek) Partners. This is the fellow who provided a rent-free beach mansion to a hooker employed by Elliot Spitzer, who was Jim Cramer’s college roommate. Chanos is also the fellow who helped Bethany McLean of Fortune magazine break the Enron story, which partially explains why his media fans seem to believe he can do no wrong. Everything he says–including his reassurances that phantom stock doesn’t exist–is reported as fact.

So now, Nocera reports that Chanos believes that, in the case of Bear Stearns, there were no crimes committed by short-sellers. And, according to Nocera, Chanos “knows what he’s talking about. In the last days of Bear Stearns’ death spiral, a top executive called Mr. Chanos, who was not short the stock but had been a client for years. The executive pleaded with him to go on CNBC and tell the world that all was well at Bear Stearns…Mr. Chanos declined the request.”

This is at least partly false. Good sources tell us that Chanos was short Bear Stearns, though he may have already cashed out “in the last days” of the “death spiral.” As for that “top executive” at Bear Stearns, he seemed to be doing his job by asking people to vouch for his company. Surely, he has nothing to hide. Why does Nocera keep him anonymous? Did Nocera check to see if this person even existed? Well, anything’s possible.

In any case, it is entirely misleading to suggest, as Nocera does, that Chanos really believed that Bear Stearns was not a victim of rumor-mongers. In fact, Chanos believed that it was quite possible that hedge funds were circulating false information about Bear Stearns.

We know Chanos suspected as much because he said so at a recent conference of the Securities Industry and Financial Markets Association. Clearly trying to distance himself from this scandal, Chanos said, “I would urge our regulators at home to examine the sources of these [rumors], whether there’s evidence that people are trading on information they know to be false and inducing others to trade on information they know to be false, which is against the law and always has been…”

On CNBC, Jim Cramer is similarly insisting that illegal short-selling should be stopped. This is a far cry from a year ago, when he said the issue is the most “falsely overweighted topic on Wall Street,” and phantom stock selling is something that happens “very rarely.” Today, he said “hundreds” of companies have been affected, adding, preposterously, that he has long been on a “crusade to bring back honest short-selling.” Cramer, like Chanos, seems intent on distancing himself from the scandal that they helped cover up for the past three years.

Message to Media Mob: The rest of you should also start to distance yourself from this scandal. Do it quickly – before somebody exposes the enormous fraud that you have perpetrated on the American public.

For the complete, very long tale of how a clique of journalists helped cover-up a massive crime on Wall Street, see “The Story of Deep Capture.”

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At the time much of the content on DeepCapture.com was written, the Great Financial Crisis of 2008 was either on the verge of happening or had just occurred. In those days, emotions among this publication’s contributors were raw and, in an effort to get their warnings noticed and appropriate blame placed, occasionally hyperbolic language and shocking imagery were employed.

Were we to write these entries today, a different tone would most certainly prevail.

Yet, being a record of a pivotal time in our global economic history, we’ve decided to leave the rawness unedited, with the proviso that readers take the context of the creation of certain posts into account, and that those easily offended re-consider the decision to read them.