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

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


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 MarketWatch.com and TheStreet.com. 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

Posted in Featured Stories, The Mitchell ReportComments (159)

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

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


You don’t hear much about it, but the March 2007 bankruptcy of a company called New Century Financial was arguably one of the most important events leading up to the financial crisis that nearly caused a second Great Depression.

It was the demise of New Century, then the nation’s second largest mortgage lender, that triggered the collapse of the market for collateralized debt obligations. And it was the collapse in the value of collateralized debt obligations (a majority of which contained New Century mortgages) that hobbled a number of big financial firms. Once hobbled, the likes of Bear Stearns and Lehman Brothers were ripe targets for unscrupulous hedge fund managers who amplified their problems by spreading exaggerated rumors while bombarding them with illegal naked short selling.

So we must ask: Why did New Century Financial go bankrupt? Did the company die of natural causes, or did miscreants orchestrate its destruction? And if miscreants destroyed New Century, did they do so planning to profit from the broader economic calamities that were certain to result from its collapse?

I do not yet have definitive answers to these questions. But interviews with sources close to New Century and a review of documents, including the oddly biased 500-page New Century bankruptcy report, make it clear that at least two hedge fund managers — David Einhorn of Greenlight Capital and Dan Loeb of Third Point Capital — played a significant role in creating the conditions that made New Century vulnerable to catastrophe. And they did so while building massive short positions in Bear Stearns, Lehman Brothers, MBIA and other companies that were likely to be seriously damaged if New Century were to go bankrupt.

Einhorn was a major investor in New Century and took a seat on the company’s board in early 2006. He has gone to lengths to suggest that he lost a lot of money from his investment. But given that his activities on the board were so contrary to New Century’s best interests, and given that he was otherwise so heavily invested in the collapse of the mortgage markets, it is reasonable to ask if he was  in fact short selling New Century’s stock, or buying credit default swaps that would pay out in the event of the company’s bankruptcy.

Moreover, some banks, most notably Goldman Sachs, created and sold collateralized debt obligations containing New Century mortgages while simultaneously betting that the CDOs would plummet in value. Multiple media stories (such as this one in “Investment News”) have speculated that Goldman Sachs actually designed these CDOs in such a way that they would be certain to implode, delivering large profits to Goldman and preferred hedge fund clients. Those CDO could not have been created without Einhorn and his allies inside New Century delivering the mortgages that went into them. And there is no doubt that Goldman Sachs delivered the knock-out punch that put New Century out of business, ensuring that the CDOs would, in fact, implode. This constellation of facts may be coincidental, of course. Or not. This essay lays them out, and leaves it to the reader to decide.

New Century’s problems began in December 2005, when board member Richard Zona drafted a letter in which he threatened to resign if senior executives did not agree to sell a greater percentage of the mortgage loans on its books to various banks, such as Goldman Sachs. In his letter, Zona explicitly stated that he was making this demand in league with David Einhorn and Dan Loeb.

Unfortunately, according to the bankruptcy report, New Century’s executives never saw that letter. Zona stashed the draft letter on his computer and instead submitted a letter making a similar demand, but omitting all mention of Einhorn and Loeb. In all likelihood, Zona changed his letter because he knew that New Century’s executives had good reason to doubt whether Einhorn and Loeb, who had recently reported large shareholdings in New Century, were acting in the company’s best interests.

As Deep Capture has thoroughly documented, Einhorn and Loeb are part of a network of hedge fund managers and criminals who use a variety of dubious tactics to destroy, seize, and/or loot public companies for profit. It is not unusual for money managers in this network to appear as long investors in the companies they are attacking, and sometimes they seek to obtain a seat on a target company’s board in order to be better placed to run the company into the ground for their own private profit.

Essentially everyone  in this network – including Einhorn and Loeb — are connected in important ways to Michael Milken, the infamous criminal who specialized in loading companies with debt, looting them, and then profiting still more from their inevitable bankruptcies.

Einhorn spent his early career working for Gary Siegler, who was formerly the top partner in the investment firm run by Carl Icahn, a corporate raider and ne’er-do-well who owes his fortune to the junk bond finance that he received from Michael Milken in the 1980s. Icahn has various other seamy connections, and has employed people with ties to the Mafia (see “The Story of Dendreon” for details).

Prior to his attacks on Lehman Brothers and Bear Stearns, Einhorn was best known for his eminently dishonest attempt to demolish a financial company called Allied Capital. The attack on Allied began in 2002 at a hedge fund luncheon. Halfway through that luncheon, Einhorn stood up and declared that “Allied Capital is going to zero!” Sitting next to Einhorn at that luncheon was Carl Icahn.

Some weeks before the luncheon, Michael Milken had appeared in the offices of a top Allied Capital executive. “You know,” Milken told the executive, “I already am quite a large shareholder of your stock – but my name will never show up on any list you’ll see.” This may have been a reference to a practice called “parking stock” (owning stock but “parking” it in the accounts of friends with whom one has made under-the-table arrangements), a practice that figured in the high-count indictment that sent Milken to prison in the 1980s. Milken appeared to the Allied executives to be threatening Allied and fishing for information, paving the way for Einhorn’s more public vitriol.

The Allied story is outside the remit of this article, but it is enough to know that Einhorn proceeded to accuse the company of massive fraud and of failing to account for its loans at “fair value”. With some minor exceptions, none of Einhorn’s allegations of fraud were ever proven to have merit. And it was clear from the get-go that Einhorn’s notion of “fair value” had nothing to do with “fair” (as in “what the market was paying”). Rather, “fair value” was an arbitrary metric that could be taken to mean whatever Einhorn said the value of the loans should be. This is important because Einhorn’s outlandish “fair value” calculations featured prominently in his attacks on Lehman Brothers and Bear Stearns. In addition, as we will see, arbitrary and over-the-top “fair value” assumptions about mortgage loans featured in the bankruptcy of New Century.

As for Loeb, he is a long-time Einhorn accomplice who worked side-by-side with many of Milken’s former traders at Jeffries & Co. He got his first big break by obtaining preferential access to certificates of beneficiary interest that had been issued by Milken’s bankrupt operation at Drexel, Burnham, Lambert. Loeb seems to take a certain pride in his bad boy image, and has distinguished himself in all manner of chicanery, such as hiring a cast of convicted criminals and scofflaws to spread false information about public companies on the Internet. (Please search Deep Capture’s archives; we have compiled substantial evidence implicating Loeb in various misdeeds).

Given their backgrounds, there was every reason to doubt the merits of the demand that Einhorn and Loeb had articulated through New Century board member Richard Zona. Indeed, the majority of New Century’s top managers (the company had three CEOs at the time) were opposed to the Einhorn-Loeb demand to sell off all of New Century’s mortgage loans, and for good reason. Selling off all the loans would make the company entirely dependent on the banks, such as Goldman Sachs, that bought the loans. If, for some reason, the banks were to demand that New Century buy back its loans, the company would go bankrupt.

Shortly before Zona submitted his letter demanding that New Century sell off its loans, one of the company’s co-founders, Patrick Flanagan, said by sources to be an ally of Einhorn and Loeb, left the company. After a brief time, Flanagan went to work for hedge fund Cerberus Capital. Cerberus Capital was run by Ezra Merkin, famous for being one of the biggest feeders to the Bernard Madoff fraud, and Stephen Feinberg, who was formerly a top employee of Michael Milken. Cerberus is also the proud owner of an Austrian bank called Bawag, which was at the center of a scandal that wiped out Refco, once one of the most abusive naked short selling outfits on Wall Street. (Refco’s former CEO, Phillip Bennett, and executive Santo Maggio have been convicted and are serving prison sentences, while one of its naked short selling clients, Thomas Badian, is still living in Austria as a fugitive from US law)..

Sources tell Deep Capture that Cerberus made massive profits from the demise of New Century, and if so, it is likely that Flanagan had a hand in this. It is perhaps also no coincidence that Cerberus now also employs Thomas Marano, the former head of mortgage trading at Bear Stearns, and Brendan Garvey, the former head of mortgage trading at Lehman Brothers. Marano and Garvey helped sink their companies by buying New Century’s repackaged loans from Goldman Sachs and a few other banks.

While still at Bear Stearns, Marano seemed almost eager to see the bank collapse. At one point he called Roddy Boyd, a reporter with close connections to the Einhorn-Milken nexus of hedge funds, to leak an  account of  Bear Stearns’ problems, though as we have documented, that leak seems to have been exagerrated when Marano made it.  One has to wonder why he was leaking about his employer, and also wonder at the coincidence of the fact that he was doing this while preparing to go to work for a large hedge fund that was betting against that employer.

After Flanagan left New Century, Zona organized a highly unusual “off site” board meeting. The directors at this meeting (which excluded all opposing viewpoints) decided to implement a radical change to New Century’s management structure. Among other changes, CEOs Ed Gotchall and Bob Cole were removed from their posts, and the company was put under the sole leadership of the third CEO, Brad Morrice.

Einhorn and Loeb orchestrated this change. Sources say the two hedge fund managers had considerable input at the “off site” board meeting even though Einhorn was not yet a director. And Zona stated in the initial draft of his letter (the one that stated that he was making his demands in alliance with Einhorn and Loeb) that Gotschall was “immature and disruptive,” while Cole was “not fully engaged” – because they opposed the demand to sell off the loans.

In Morrice, Einhorn and Loeb had a CEO whom they could work with. Prior to entering the mortgage business, Morrice had been the founding partner, along with Richard Purtrich, of law firm King, Purtrich & Morrice. In 2008, Purtrich was sentenced to prison for funneling illegal kickback payments from a crooked law firm called Milberg Weiss. Milberg’s top partners, Bill Lerach and Melvyn Weiss, were also indicted in the scheme.

According to the DOJ, the kickbacks were paid to plaintiffs who filed bogus class action lawsuits against public companies “anticipating that their stock prices would decline.” Deep Capture has published extensive evidence showing that Milberg prepared those bogus lawsuits in cahoots with hedge funds in David Einhorn’s network. The hedge funds, of course, profited from short selling the targeted companies, and it is indeed likely that the bribed plaintiffs were  “anticipating that the stock prices would decline” because they knew that the hedge funds were going to attack the companies via illegal naked short selling and other tactics.

So it is fair to say that Morrice (whose former partner was funneling kickbacks to plaintiffs who were conspiring  with Einhorn’s hedge fund network to attack public companies) was intimately familiar with the tactics of Einhorn’s hedge fund network.

In any case, soon after Morrice took the helm at New Century, he quickly set about meeting Einhorn’s demand to sell off New Century’s mortgage loans. Whole loan sales comprised less than 70% of New Century’s secondary market transactions in 2005. By September of 2006, whole loan sales comprised a full 95% of New Century’s mortgage lending. As a result, whereas in all of 2005, New Century had sold a mere $256 million worth of loans at a discount, during the first nine months of 2006, New Century sold $916 million worth of loans at a discount.

Much of the income from those loan sales was not used to build New Century’s liquidity. Rather, at Einhorn’s suggestion, it was used to buy back stock and pay out massive dividends to shareholders like Einhorn. At the end of 2005, New Century was paying $1.65 a share in dividends. In January 2007, two months before New Century’s bankruptcy, the company was paying dividends of $1.90 a share. If we accept the proposition that Einhorn might have profited from New Century’s collapse, it is clear that he planned first to profit from his long position. This is similar to a classic “pump and dump” scam, except that the strategy is to pump and destroy.

In March 2006, with the support of Morrice and Zona, Einhorn obtained a seat on New Century’s board of directors. At this point, according to one member of senior management, the “activist investors” on the board did become extremely “active,” agitating for more loan sales while pushing for changes in  New Century’s accounting. Many of these changes were based on the premise that New Century was not accurately recording the “fair value” of  loans that it had to repurchase from Goldman Sachs and other buyers.

Meanwhile, Einhorn convinced the board to create a finance committee and presented himself as the man to run it. According to the bankruptcy report, this committee met “unusually often,” and according to sources, its principal activity was to handle New Century’s relationships with Goldman Sachs and the 13 other banks that were buying New Century’s mortgage loans. In June 2006, at Einhorn’s behest, New Century hired a woman named Lenice Johnson to serve as chief credit officer, responsible for managing those same relationships.

As we shall see, two of those relationships – especially the one with Goldman Sachs – would later  mysteriously deteriorate, leading to New Century’s demise. And soon after New Century went bankrupt, Johnson went to work at the above-mentioned Cerberus Capital (the Milken-crony hedge fund).  You may remember that Cerberus Capital was mentioned above because  Thomas Marano the head of Bear Stearns’ mortgage trading desk, sunk Bear Stearns by buying Goldman-packaged new Century debt, then leaked information about Bear Stearns’ financial condition to New York Post reporter Roddy Boyd (Boyd is Deep Capture All Star; his dishonesty has been fodder for many of our stories), a few weeks before joining the hedge fund – Cerberus Capital — that was betting against Bear Stearns. In sum, then: Cerberus Capital bet that New Century would face a credit crunch and bet against Bear Stearns for buying New Century’s debt, then hired the New Century chief credit officer and the head of the Bear Sterns desk that was making the bad bets.

As Einhorn and Morrice eagerly sold off all of New Century’s loans, other board members became alarmed. In August 2006, board member Fred Forster wrote a letter to Einhorn stating: “Whatever we do, we need to be very comfortable that less capital/liquidity does not in any material way threaten the very existence or viability of New Century.”

It needs to be stressed that at this point New Century was seemingly in good health. Defaults on its mortgages had increased only slightly, and in the third quarter of 2006, the company recorded a profit of more than $200 million. The problem was that nearly 100 percent of the mortgages it wrote were now being sold to Goldman Sachs and 13 other banks. With no mortgages on its books, the company depended entirely on the banks for income. If just one of those banks were to pull the plug, the company would go bankrupt. And as we know, one of those banks, Goldman Sachs, was placing large short bets on CDO’s containing New Century mortgages, meaning that Goldman had a motivation to see New Century fail. In other words, New Century climbed into Goldman’s life support chamber while Goldman kept its hand on the plug and bought insurance that would pay out in the event of New Century’s death.

Of course, as we know, Goldman was also selling CDOs that had been stuffed with New Century’s subprime mortgages. No doubt, Einhorn and his allies at New Century aided the proliferation of these CDOs by selling Goldman ever-larger numbers of subprime mortgages. Again, the problem was not that the subprime mortgages had high default rates. The mortgages were always expected to have high default rates. That’s why they were called “subprime.” The problem was that Goldman (perhaps with encouragement from their key client Einhorn) was selling the subprime mortgages in essentially fraudulent CDOs that disguised the subprime mortgages as AAA rated debt.

It was just a matter of time before the markets would discover the true nature of these CDOs. That, no doubt, is one reason why Goldman was simultaneously shorting them. All the better for Goldman if New Century were to collapse before the CDO scam was discovered. According to a McClatchy news report, when New Century did collapse, Goldman was prepared with shell companies in the Cayman Islands through which it could offload the last of its New Century debt to unwitting foreign investors.

Supposing that miscreants did want New Century to go bankrupt, all that was required was some precipitating event – an event that would allow one of the 14 banks (say, Goldman Sachs) to force New Century to repurchase its mortgage loans under the terms of its contractual repurchase agreement.

As it happened, the foundations for that precipitating event were laid in November 2006, when New Century demoted its chief financial officer, Patti Dodge, and hired a man named Taj Bindra to take her place. As Morrice, the New Century CEO, told the bankruptcy examiner, Zona and Einhorn “had expressed doubts about Dodge’s capabilities and competence to be the company’s CFO,” and sources tell Deep Capture that Bindra was hired at Einhorn’s behest.

Prior to joining New Century, Bindra had been the vice president of mortgage banking at Washington Mutual. A lawsuit filed by a consortium of respected insurance companies that were investors in Washington Mutual alleges that JP Morgan conspired with “investors” (read: “short sellers”) to drive down Washington Mutual’s share price and manufacture falsehoods about its financial health so that JP Morgan could take the company over at a substantial discount. As part of this scheme, the lawsuit alleges, JP Morgan “deceptively gained access to Washington Mutual’s confidential financial records through the use of ‘plants’ and ‘moles’ engaged in corporate espionage.” The lawsuit alleges that one of the “moles” was … Taj Bindra. It is this same Taj Bindra who then went on to bigger things as CFO of New Century Financial.

Whether or not you believe that Bindra was part of a conspiracy to take down Washington Mutual, it is clear that his actions as CFO of New Century Financial were strange. Understanding why, however, requires delving into a bit of accounting arcara.

According to one source, Bindra had been CFO for “no more than two days” before he began asking questions about New Century’s accounting for mortgage loans that the company had so far repurchased from Goldman Sachs and the 13 other buyers. Specifically, Bindra asked why New Century did not include so-called “income severity” (i.e. a mark down of the value of repurchased loans to reflect their actual resale value) in its reserve calculation.

Normally, one wants reserves in any financial company to properly estimate the risks of certain events, and their potential costs. However, Bindra’s  question was somewhat esoteric (especially for  a CFO who had only been at New Century for two days) because it referred specifically to an obscure change in New Century’s accounting that had been made in the second quarter of 2006. That change was as follows: instead of recording the mark-down in its reserves, it recorded it in “loans held for sale.”  This does not mean that New Century had stopped including income severity in its calculations, but rather, had  moved it to another (and equally or more visible) part of its balance sheet.  The books continued to balance (that’s why they call it a “balance sheet”) and, accounting experts tell Deep Capture, the change had absolutely no effect on New Century’s  bottom line, nor was it any less transparent. Multiple New Century executives explained this to Bindra. In addition, KPMG, New Century’s accountants, confirmed to Bindra that the change did not affect earnings.

But Bindra persisted. And, according to the bankruptcy report, “such inquiries by Bindra led in relatively short order to the discovery of material accounting errors.”  Those “material accounting errors” were none other than the obscure change in accounting for income severity – i.e. the change that had no effect on New Century’s earnings. By remarkable coincidence, just as Bindra discovered this supposed “error” in December 2006 (which was long before the “error” was mentioned in any other public forum), the Center for Financial Research and Analysis, an outfit known to cater to short sellers, published a report that alluded to this very same “error.”

When Bindra took this supposed “error” to the board, there was much confusion among most of the directors. But Einhorn and Zona insisted adamantly that New Century would have to restate its earnings. This was strange not only because the change in how the company recorded income severity had no material effect on earnings, but also because Einhorn had eagerly signed off on the change in the first place. In fact, the change had been  one of the board’s first initiatives after Einhorn took over the finance committee. Given this, it certainly appears possible that Einhorn  initiated the accounting change so that his hand-picked CFO would have some “irregularity” to point to a few months later.

In any case, on February 7, 2007, New Century announced that it had violated accounting rules and would have to restate earnings for the previous year. Oddly, New Century never indicated by how much it would have to restate earnings. It simply said that it would restate. Given that the “violation” discovered by Bindra had no effect on earnings, it makes sense that the company would not provide a figure. That is to say, the figure could not be provided because, as far as anyone at New Century knew at the time, the figure was zero.  But this “restatement” announcement was nonetheless catastrophic for New Century, and the beginning of the end for the stability of the American financial system.

It was catastrophic because Goldman Sachs and the 13 other banks that were buying New Century’s mortgage loans had small print in their contracts that allowed them to cut off finance and force New Century to buy back its loans if New Century were to restate earnings. Indeed, a restatement was one of the only events that would allow the banks to force New Century to repurchase all of its loans.

Still, nobody actually expected any bank to act on this small print.  Presumably it would be mutually assured destruction, with New Century going bankrupt and the banks losing a fortune in the market for CDOs. Several weeks after the earnings restatement, Citigroup made a large investment in New Century, obviously reckoning that the fundamentals of the company were just fine.

But as we know, Goldman Sachs was impervious to mutually assured destruction because it had been short selling the CDOs all along. And sure enough, on March 7, 2007, Goldman, acting on that small print in its contract, sent a non-public letter demanding that New Century repurchase every single one of its Goldman-financed loans. The next day, IXIS Real Estate Capital, then a subsidiary of the French bank Natixis, sent New Century a similar letter. David Einhorn had recently become a major investor in Natixis and had been threatening to topple its management, but that is no doubt another coincidence.

Certainly not a coincidence is the fact that a massive illegal naked short selling attack on New Century began just before Goldman Sachs sent its letter. SEC data shows that there were “failures to deliver” of more than 4 million New Century shares on March 8, 2007. Since failures to deliver occur three days after the selling date, those 4 million phantom shares must have been sold by March 6, one day before Goldman sent the letter. It appears that somebody knew what Goldman had in store for New Century.

An independent company that tracks the trading of hedge funds reports that the biggest traders in New Century stock at this time were SAC Capital, run by Steve Cohen, who was once investigated for trading on inside information provided by Michael Milken’s shop at Drexel Burnham, and none other than Dan Loeb, who was Einhorn’s early ally in the ultimately successful effort to force New Century to sell off all its loans. We do not know for certain that those trades were short sales because the SEC does not require hedge funds to report their short positions (on the grounds that it might reveal their “proprietary trading strategies” which  are, in some cases, flagrantly illegal), but it would be unlike Cohen and Loeb to invest in a company that was about to be wrecked by Goldman Sachs.

In the days after Goldman and IXIS cut off credit, New Century’s remaining bankers panicked. With Goldman pulling out and naked short sellers on the rampage, it was clear that New Century’s days were numbered. The other bankers pulled the plug and within a matter of weeks, New Century, a company that had reported a strong profit a few months before, declared bankruptcy. The news of the bankruptcy immediately crashed the CDO market (the market actually began to sink around the time Goldman sent New Century its letter, but it went completely under on the news of the bankruptcy). This set off shockwaves that ultimately collapsed the American economy. Meanwhile, of course, Goldman made a handsome profit, having bet that all this was going to happen – that is, it bet that the instruments with which it was flooding the US financfial system would turn toxic.

As we also know, Einhorn also earned a tidy sum — from his short sales of MBIA, which insured the CDOs, and later from his short selling of Bear Stearns and Lehman Brothers, which had bought the CDOs. Did Einhorn or others in his network profit more directly from the collapse and naked short selling of New Century? That is for the SEC to decide.

But, of course, the SEC is unlikely to look into this. Instead, it has charged New Century’s former CFO, Patti Dodge, and two other New Century executives for violating accounting rules.

Yet to this date, no reputable independent body has provided evidence that the change in accounting that Bindra “discovered” in December 2006 actually affected earnings. And it is that change that prompted the disastrous announcement two months later that New Century was going to restate. KPMG, New Century’s accounting firm, was never consulted about the “restatement” and was fired before it had a chance to object. The decision to announce this restatement (and to not specify by how much the restatement would affect earnings) seems to have been made entirely by Bindra, the CFO, and one of Bindra’s minions, with the encouragement of David Einhorn and his ally Richard Zona.

In prosecuting Dodge and her colleagues for accounting violations, the SEC seems to have taken its cues from the bankruptcy examiners’ report, which goes to lengths to paint Dodge and other New Century executives (namely, those who were not allied with David Einhorn) as criminals. But strangely, while the bankruptcy examiner insists that there were all manner of misdeeds, it nonetheless admits that it is possible that no actual accounting rules were violated.

Indeed, the bankruptcy report is convoluted  beyond belief, and to this eye, biased beyond explanation. The examiner who authored this report stated that he “found no persuasive evidence” that New Century had deliberately inflated its repurchase reserve calculation. He notes that the all-important income severity component was indeed recorded in “loans held for sale” (and therefore had no effect on earnings). But he nonetheless suggests that earnings were inflated, noting that the “elimination of Inventory Severity in the LOCOM valuation account increased earnings by approximately 23.4 million” in the second quarter.

This is a actually a neat trick. The examiner is not stating here that income severity wasn’t recorded accurately. He is saying that it wasn’t recorded in the “LOCOM valuation” – i.e. at “fair value.” As I have mentioned, notions of “fair value” are often arbitrary. Indeed, from the report itself, it would appear that the examiner  pulled that $23.4 million figure out of thin air. The tactic seems to be to point to a change in accounting (one that had no effect on earnings) and suggest that this change did inflate earnings by alluding to something altogether unrelated – i.e. random assumptions about fair value.

That is, the argument (which, incidentally, is the same argument that was heard from Einhorn at New Century board meetings) seems to go like this:

Einhorn/bankruptcy examiner: “New Century changed its accounting. It didn’t book income severity in repurchase reserves. Therefore, New Century inflated earnings.”

Innocent executive: “But we did record income severity, in ‘loans held for sale.’ Earnings aren’t affected by the change.”

Einhorn/bankruptcy examiner: “New Century changed its accounting. Therefore, New Century must have inflated earnings.”

Innocent executive: “But Einhorn signed off on the change. In fact, it was his idea. And, again, it had no effect on earnings.”

Einhorn/bankruptcy examiner: “Well, there was a change. That must mean something is wrong.”

Innocent executive: “No”

Einhorn/bankruptcy examiner: “Look, the problem is that income severity wasn’t recorded at ‘fair value.’”

Innocent executive: “What is ‘fair value’?”

Einhorn/bankruptcy examiner: “Here’s a number. I found it in my underpants.”

Innocent executive: “That’s completely arbitrary. We have a formula for marking to market that has served us for years.”

Einhorn/bankruptcy examiner: “No, we should use the number from my underpants. To prove my point, I will note that New Century changed its accounting.

Innocent executive: “Changing the accounting had no effect on the calculation of the expense!”

Einhorn/bankruptcy examiner: “Right, but you changed the accounting.”

Innocent executive: “I give up. This may wreck the American economy, but I give up.”

Aside from the income severity issue, the bankruptcy examiner provides a litany of other accounting violations that might have been committed by New Century even though the examiner says it found no evidence that any were broken. None of these supposed misdeeds had anything to do with the restatement announcement that enabled Goldman to torpedo New Century, and most of the alleged violations concern supposed miscalculations of “fair value.” Time after time, the examiner opines as to what the fair value of various loans should be, but not once does he explain where in the world he is getting his numbers. If anyone were to ask where he got his numbers, his answer would no doubt be: “They changed the accounting.”

This sort of shifty eyed, misdirecting gobbledygook defines David Einhorn’s style, so it is perhaps no surprise that the bankruptcy examiner seems to think that Einhorn is the one New Century insider who is actually a terrific fellow (though he is the one who instigated the accounting change that the bankrupcy examiner thinks is so evil).

The examiner, by the way, is named Michael Missal. Prior to becoming a bankruptcy examiner, Michael Missel was a defense lawyer for the above-mentioned, infamous Michael Milken. But that is probably another coincidence.

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Fairfax and just the facts, Ma’am.


In July of 2006, Fairfax Financial Holdings (NYSE: FFH) filed a lawsuit alleging stock manipulation on the parts of several hedge funds, contract hedge fund operatives, and John Gwynn, an analyst with stock brokerage Morgan Keegan & Co.

The complaint is very enlightening and detailed in its claims, which can be broadly summarized as follows: certain hedge funds, which stood to profit by scuttling Fairfax’s stock price, illegally conspired and acted to do as much.

More specifically, the complaint says:

As a result of [S.A.C. Capital]’s frequent communications with Morgan Keegan and Gwynn, S.A.C. learns when Gwynn intends to issue reports and what they will say and, indeed, frequently directs Gwynn on when to issue reports and what to say. (p.14)

Also like S .A.C., Exis is a significant client of Morgan Keegan and has substantial influence over Gwynn, with whom Exis also collaborates closely. (p.15)

…[convicted hedge fund operative Spyro Contogouris] orchestrat[ed] negative analyst coverage — particularly through Gwynn… (p.18)

Gwynn collaborated with certain hedge funds, including Enterprise member Trinity Capital, in developing extreme criticisms of Fairfax to support both short-term and long-term shorting strategies dubbed “the Fairfax Project.” Gwynn communicated these developed criticisms and his intention to release a highly negative report containing those criticisms in a series of road show presentations to major hedge funds including, among others S.A.C., Lone Pine, Kynikos, Highfields, Greenlight Capital, and Perry Capital . The hedge funds participating in this discussions understood at their conclusion that Gwynn intended to initiate coverage of Fairfax with an extremely critical report, they understood and contributed to the substance of the criticisms to be included in the report, and they understood that the report’s release would be timed to provide them an opportunity to establish their short positions. These critical Morgan Keegan clients also understood that once they had established a short position in Fairfax, Gwynn would continue to support that position with negative reports until they covered. This understanding was critical because the Fairfax Project contemplated short-term and longer term components, the latter of which involved enormous potential exposure to the Enterprise if the stock price increased substantially. (p.20)

The S.A.C. Defendants, Exis Defendants, Lone Pine Defendants, Rocker Defendants, Third Point Defendants and Trinity Defendants…frequently had communications and coordinated with [John Gwynn] and caused [Gwynn] to disseminate [his] reports to numerous clients, investors, journalists, and media outlets… (p.62)

Reading the complaint in full, it’s clear that Gwynn’s actions played a pivotal role in the execution of the defendant hedge funds’ manipulation efforts.

So clear, in fact, it may have contributed to Gwynn’s decision, six months later, to terminate coverage of Fairfax Financial (a fact bemoaned by Herb Greenberg, not surprisingly one of Gwynn’s biggest fans).

As expected, the suit’s many named defendants responded to the complaint with indignant denials and, in the case of John Gwynn, a countersuit filed in November of 2007, accusing Fairfax of making him “a scapegoat” for the company’s “financial, legal and accounting problems.”

Today, ten months after Gwynn’s countersuit was filed, a spokesman for Morgan Keegan told Bloomberg that Gwynn has been fired “for violation of a firm policy relating to his apparent advance disclosure of his pending research coverage of Fairfax Financial Holdings.”

In other words, Fairfax was correct about what Gwynn was doing.

Given that fact, what are the chances Fairfax was not also correct about who benefited from Gwynn’s corruption: mega hedge funds such as S.A.C. Capital, Third Point Partners, Greenlight Capital, Rocker Partners, et al?

And, supposing that aspect is true, there would appear to be quite a bit of coordination between short-selling hedge funds and shady stock research outfits.

And that sounds suspiciously like the claim Deep Capture reporter Patrick Byrne has been making, ad nauseum, for over three years.

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Fairfax and just the facts, Ma'am.


In July of 2006, Fairfax Financial Holdings (NYSE: FFH) filed a lawsuit alleging stock manipulation on the parts of several hedge funds, contract hedge fund operatives, and John Gwynn, an analyst with stock brokerage Morgan Keegan & Co.

The complaint is very enlightening and detailed in its claims, which can be broadly summarized as follows: certain hedge funds, which stood to profit by scuttling Fairfax’s stock price, illegally conspired and acted to do as much.

More specifically, the complaint says:

As a result of [S.A.C. Capital]’s frequent communications with Morgan Keegan and Gwynn, S.A.C. learns when Gwynn intends to issue reports and what they will say and, indeed, frequently directs Gwynn on when to issue reports and what to say. (p.14)

Also like S .A.C., Exis is a significant client of Morgan Keegan and has substantial influence over Gwynn, with whom Exis also collaborates closely. (p.15)

…[convicted hedge fund operative Spyro Contogouris] orchestrat[ed] negative analyst coverage — particularly through Gwynn… (p.18)

Gwynn collaborated with certain hedge funds, including Enterprise member Trinity Capital, in developing extreme criticisms of Fairfax to support both short-term and long-term shorting strategies dubbed “the Fairfax Project.” Gwynn communicated these developed criticisms and his intention to release a highly negative report containing those criticisms in a series of road show presentations to major hedge funds including, among others S.A.C., Lone Pine, Kynikos, Highfields, Greenlight Capital, and Perry Capital . The hedge funds participating in this discussions understood at their conclusion that Gwynn intended to initiate coverage of Fairfax with an extremely critical report, they understood and contributed to the substance of the criticisms to be included in the report, and they understood that the report’s release would be timed to provide them an opportunity to establish their short positions. These critical Morgan Keegan clients also understood that once they had established a short position in Fairfax, Gwynn would continue to support that position with negative reports until they covered. This understanding was critical because the Fairfax Project contemplated short-term and longer term components, the latter of which involved enormous potential exposure to the Enterprise if the stock price increased substantially. (p.20)

The S.A.C. Defendants, Exis Defendants, Lone Pine Defendants, Rocker Defendants, Third Point Defendants and Trinity Defendants…frequently had communications and coordinated with [John Gwynn] and caused [Gwynn] to disseminate [his] reports to numerous clients, investors, journalists, and media outlets… (p.62)

Reading the complaint in full, it’s clear that Gwynn’s actions played a pivotal role in the execution of the defendant hedge funds’ manipulation efforts.

So clear, in fact, it may have contributed to Gwynn’s decision, six months later, to terminate coverage of Fairfax Financial (a fact bemoaned by Herb Greenberg, not surprisingly one of Gwynn’s biggest fans).

As expected, the suit’s many named defendants responded to the complaint with indignant denials and, in the case of John Gwynn, a countersuit filed in November of 2007, accusing Fairfax of making him “a scapegoat” for the company’s “financial, legal and accounting problems.”

Today, ten months after Gwynn’s countersuit was filed, a spokesman for Morgan Keegan told Bloomberg that Gwynn has been fired “for violation of a firm policy relating to his apparent advance disclosure of his pending research coverage of Fairfax Financial Holdings.”

In other words, Fairfax was correct about what Gwynn was doing.

Given that fact, what are the chances Fairfax was not also correct about who benefited from Gwynn’s corruption: mega hedge funds such as S.A.C. Capital, Third Point Partners, Greenlight Capital, Rocker Partners, et al?

And, supposing that aspect is true, there would appear to be quite a bit of coordination between short-selling hedge funds and shady stock research outfits.

And that sounds suspiciously like the claim Deep Capture reporter Patrick Byrne has been making, ad nauseum, for over three years.

Posted in AntiSocialMedia with Judd BagleyComments (0)

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