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“The Global Bust-Out Series (Chapter 7): Michael Milken and the “Insider Trading” Network (as of 2013)

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“The Global Bust-Out Series (Chapter 7): Michael Milken and the “Insider Trading” Network (as of 2013)


This is Chapter 7 of a multi-chapter series. On your right is a Table of Contents to all chapters published so far.

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In earlier chapters of this series, we learned about an incredible enterprise known as the Bank of Credit and Commerce International (BCCI), which was operated by oligarchs with ties to the Muslim Brotherhood in partnership with governments that were among the Muslim Brotherhood’s principal state sponsors. We also learned that the BCCI enterprise operated with the consent and protection of Washington even though it not only counted among its partners numerous mobsters and global terrorists, but was also operating what amounted to a transnational organized crime syndicate involved in everything from the trafficking of narcotics and nuclear weapons components to terrorism and the perpetration of destructive financial crime.

In addition, we learned that BCCI counted among its most important business partners some of the leading figures of the American establishment, including Michael Milken, who was, during the 1980s, the most powerful financial operator on Wall Street. As we know, Milken and some of his closest associates, in league with the BCCI enterprise, perpetrated the “bust-outs” of numerous savings and loan banks, thereby contributing to the devastating savings and loan crisis that began in the late 1980s, and which ultimately cost taxpayers more than $2 trillion in bailouts—a portent of bigger and better things to come.

Also involved with these “bust outs” were (see earlier chapters of this series) some of the nation’s leading organized crime figures, such as Carlos Marcello, who was then the top Mafia boss in the city of New Orleans. Meanwhile, we know, BCCI was involved with a global network of brokerages, most of them operated by people with ties to organized crime, and most of them specializing in the “bust outs” of small to medium-sized publicly listed companies. As a judge remarked after BCCI shut its doors in 1991, the BCCI enterprise singlehandedly “shattered the integrity of the global financial system.”

And history did not end in 1991, when BCCI was shut down.

Most of BCCI’s former principals and their partners (“the larger BCCI enterprise”) continued in the years that followed to involve themselves with similar enterprises, the only difference being that the enterprises came to include some new and younger players, while the enterprises innovated new and more destructive financial schemes. Indeed, we will see that people formerly involved with the BCCI enterprise, along with their newly acquired business partners, contributed significantly to the great meltdown of 2008, and are presently threatening to deliver a repeat performance.

This might be one reason why the president of the United States was recently moved to take the unprecedented step of declaring a state of “National Emergency” in response to certain conditions that currently prevail in the American markets. See Chapter 1 of this series for more on the “National Emergency,” but I will remind readers that in the summer of 2011, President Barack Obama, in explaining why he had declared a “National Emergency,” stated that there was a clear “nexus” between transnational organized crime syndicates, the intelligence services of several unnamed countries, and the world’s leading terrorist organizations.

In addition, the president explained that transnational organized crime syndicates (and, we can confirm, others in the “nexus,”) had “penetrated” the “legitimate financial sector” (i.e. Wall Street). Not only that, but the president stated that this was a “National Emergency” because transnational organized crime syndicates with ties to terrorist organizations (presumably with help from the “legitimate” financial sector on Wall Street) were “undermining markets” to such an extent that they now posed a serious and imminent “threat to stability of the global financial system.”

Unfortunately, officials in Washington have yet to prosecute any of the people (e.g. mobsters, terrorist financiers, and miscreants on Wall Street) who account for our present “National Emergency.” Indeed, as was the case in the 1980s, when BCCI and its partners owned many of America’s leading politicians (including multiple U.S. presidents), it presently seems to be the case that Washington has been “deep captured” by a network (or “nexus,” as the president calls it) that includes the world’s leading mobsters, billionaires with ties to terrorist organizations, and the “legitimate” miscreants on Wall Street who do business with mobsters and terrorists.

In addition, officials in Washington have done little to crack down on the sorts destructive financial weapons (e.g. the “bust outs” of major banks and associated schemes, such as manipulative short selling, self-destruct CDO’s, mortgage fraud, death spiral finance, toxic debt, etc.) that nearly destroyed the world in 2008, and which are now, once again, threatening to collapse the global financial system.

Later chapters of this series will discuss in much greater detail the “global bust-out” that accounts for our current predicament, but first it will be useful to review a bit more history so far as it concerns the network of Michael Milken, formerly known as the most powerful man on Wall Street, later known as one of history’s most destructive financial criminals, and presently known (to readers of the major U.S. newspapers and officials in Washington) as one of Wall Street’s all-time greatest heroes and a “prominent” fixture of the American establishment, worthy of our respect and admiration.

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When Michael Milken was indicted in 1989, the major U.S. news organizations reported that he and one of his co-conspirators, Ivan Boesky, were the central figures in a nationwide “insider trading” network. In addition, the major U.S. news organizations reported that Milken was indicted thanks mostly to the fact that Boesky had cooperated with the government, providing the key evidence that allowed prosecutors to expose the “insider trading” network. It was true that Milken and Boesky were involved in “insider trading,” but the reports by the major U.S. news organizations contained some important omissions.

For starters, Milken and his network were involved in much more than “insider trading.” As we know from earlier chapters of his series, Milken and his closest associates, including Boesky, conspired with the BCCI enterprise and some of the nation’s leading organized crime figures to “bust out” (i.e. loot and destroy) many of the nation’s leading savings and loan banks. We also know that Milken was involved with numerous brokerages (some of them linked to the BCCI enterprise) that specialized in perpetrating the “pump and dump” bust-outs of small to medium-sized publicly listed companies.

In addition, a careful reading of Milken’s 99-count indictment (with many of those counts pertaining to his “bust-outs” of savings and loan banks and other companies, though he pled guilty to only seven counts) reveals that Boesky provided little of the information that was used to prosecute Milken. Instead, the government obtained the vast majority of the evidence used against Milken (and Boesky) in a 1989 raid of a major investment and brokerage operation called Princeton Newport, which had been a key component of the Milken network, involved not only in insider trading, but also the full panoply of other schemes that Milken and his network perpetrated during the 1980s. At the time, Princeton Newport was operated by man named Edward O. Thorpe, who was most famous for having worked with the Genovese Mafia family to develop a method for beating the black-jack tables in Las Vegas (Thorpe has never been charged with any crime, and he is presently one of the nation’s most prominent hedge fund managers).

Pulitzer Prize winning author James Stewart similarly reported in “Den of Thieves” (the seminal work on the government’s prosecution of Milken) that Boesky provided little information to the government. According to Stewart, Boesky told the government that he could not testify against Milken because he was afraid of what might happen to him. As Boesky put it, Milken had “friends in Vegas” – an apparent reference to the Mafia. As Stewart also reported, soon after Boesky expressed his fears, one of Milken’s closest associates, John Mulheren, got into his car and headed towards Boesky’s house. Police officers had been watching Mulheren, and knew that he had a gym bag in his car loaded with two handguns, a 12-gauge shotgun, and a .233 caliber Galil assault rifle.

Suspecting that Mulheren planned to murder Boesky, the cops arrested Mulheren and put him in jail, where Mulheren spent most of his time conversing with Anthony “Fat Tony” Salerno, who had been the top boss of the Genovese Mafia family until he was jailed on charges of manslaughter. Mulheren himself was investigated for his alleged role in Milken’s network, so it is possible that Mulheren thought about killing Boesky to keep Boesky from providing the government with information about his own (Mulheren’s) activities. Alternatively, it is possible, as some have reported, that Mulheren was simply on the wrong psychiatric medications and didn’t know what he was doing.

Either way, Mulheren was never charged for his suspected role in Milken’s insider trading (and “bust out”) network, and nor was he charged for trying to kill Boesky. He was quickly released from prison, and he subsequently reconciled with Boesky. Contrary to the message put forth by Milken’s public relations machine (which maintains that Milken despises Boesky, and that Milken was convicted only because Boesky was a dirty rat who provided the government with false information about Milken’s activities), Milken also reconciled with Boesky, and after Milken was released from prison (he served two years of a ten year sentence), he and Boesky began again to do business together.

Meanwhile, Mulheren c0-founded, with a trader named Izzy Englander, a hedge fund called Millennium Management, and though Mulheren died in 2003, Millennium is presently one of the most powerful hedge funds in the nation.

In 2010, the media began reporting that the FBI was once again investigating what the FBI described as a “network” of financial operators who were involved in “insider trading.” According to the FBI, this was, in fact, the biggest “insider trading” investigation in FBI history. This investigation is presently ongoing, and a key focus of the investigation, according to media reports, is the giant hedge fund SAC Capital, which is run by Steve Cohen. Back in the 1980s, Cohen was investigated by the Securities and Exchange Commission (SEC) for allegedly trading on inside information that he received from Milken’s shop at Drexel Burnham Lambert, and back in the 1980s, Cohen and all the others in Milken’s insider trading “network” were, of course, involved in much else (e.g. manipulative short selling, the “bust-outs” of publicly listed companies, etc.) besides insider trading.

Similarly, the “insider trading network” that the FBI is presently investigating has been involved in much else besides insider trading. Previous DeepCapture stories have provided ample evidence that SAC Capital and other hedge funds in its “network” have perpetrated a great deal of manipulative short selling, and they have, along with others, including Michael Milken (who is. to this day a key figure, along with SAC Capital and others, in an “insider trading” network), perpetrated the “bust-outs” of publicly listed companies. Cohen himself has not been charged with any crime, but multiple traders have been indicted for insider trading that they conducted while working for SAC Capital, and the media has reported that prosecutors are hoping to indict Cohen and SAC Capital, though the media continues to report that SAC Capital’s only alleged offense has been to trade on inside information.

Meanwhile, it is clear from SEC filings that SAC Capital and a larger “network” of other hedge funds (many of which employ former SAC Capital traders, and many of which have ties to Milken going back to the 1908s) regularly trade in the same stocks, and many of these hedge funds have not only coordinated their manipulative short selling attacks, but have also come under closer scrutiny during the course of the FBI’s investigation into what the FBI continues to describe as a “network” of financial operators.

One hedge fund in this “network” is Millennium Management, the outfit that was founded by Mulheren and Izzy Englander. The FBI has not publicly implicated Millennium in the “insider trading” network, but Millennium has acknowledged that it is concerned about the greater scrutiny. Indeed, soon after the FBI investigation became big news, Millennium hired an advisory board whose job is to make sure the hedge fund remains in compliance with regulations. Millennium’s advisory board includes former FBI Director Louis Freeh, former SEC enforcement division chief Stanley Sporkin, and former SEC Chairman Harvey Pitt (who has been a leading advocate of reform to address the problem of manipulative short selling).

Hopefully that advisory board will keep Millennium in compliance with the rules, and it will certainly keep Millennium immune from further scrutiny on the part of the FBI and the SEC, but it is clear that Millennium and SAC Capital, along with others in their “network” of hedge funds, have continued to collaborate with Milken, investing in companies that Milken was promoting, and attacking companies that Milken was seeking to undermine or destroy. Some details can be found in my recently published book (title: “The Dendreon Effect: How Felons, Con-men, and Wall Street Insiders Manipulate High-tech Stocks”) which also provides other information about the techniques used by a network of powerful hedge funds (and Michael Milken) to undermine the markets and hurt individual investors.

As we will see in later chapters of this series, this same crowd (i.e. Milken and the “network” that the FBI is now investigating, though so far with no prosecutions of any big fish) contributed to the meltdown of 2008, and continue to pose a threat to the markets today.

For our present purposes, we need to stress that Boesky was right when he said that Milken had “friends in Vegas.” Milken’s best friend in the world, according to Milken, is Steve Wynn, the Las Vegas casino mogul. Meanwhile, Wynn’s friends, according to Scotland Yard, have included the dons of the Genovese Mafia family. Indeed, according to a declassified report written in the late 1980s by Scotland Yard investigators, Wynn had “been operating under the aegis of the Genovese Mafia since he first went to Las Vegas in the 1960s.” Scotland Yard noted that both Wynn and his father had a long standing relationship with Genovese Mafia boss Anthony “Fat Tony” Salerno (the mobster with whom Mulheren spent most of his time convening during his stint in jail).

Wynn, however, denies any relationships with the Mafia, and he has won a defamation lawsuit against a Las Vegas newspaperman who published a book (title: “Running Scared”) that advertised itself as “explaining why a confidential Scotland Yard report calls Wynn a front man for the Genovese crime family.” Wynn also filed a suit against the book’s publisher, Lyle Stuart, who had published other controversial books, such as the “Anarchist Cookbook,” and “Turner Diaries,” which is a fictional account of home-grown rebels overthrowing the “Zionist” government of the United States. In explaining why he had filed a lawsuit against the publisher, Wynn said, “I want to put Lyle Stuart out of business. Every law enforcement agency has always vouched for me that any suggestion of me and organized crime is preposterous. I know one thing: If anybody says any different, they’re a fucking defendant.”

It is true that law enforcement agencies (other than Scotland Yard) have vouched for Wynn. Indeed, former FBI Director Louis Freeh (the same fellow who is employed by Millennium Management) is presently employed by Wynn. Freeh is helping Wynn investigate one of Wynn’s former business partners, a Japanese billionaire named Kazuo Okado. Meanwhile, Wynn has won multiple other defamation lawsuits against people and journalists who have accused him of having ties to the Mafia. For example, Wynn has successfully sued Joe Francis, creator of the “Girls Gone Wild” porn empire. Francis had said that Wynn wanted to “hit me in the back of the head with a shovel and bury me in the desert.” Wynn said that was a “terrible lie,” and that his friend, the Dalai Lama, taught him to be a man of peace and calm.

The takeaway, we must conclude, is that Wynn has no ties to the Mafia. As for Milken’s other closest friends and business partners, however, there can be no doubt that many of them have ties to the Mafia. As we know from earlier chapters of this series, Milken’s closest business partner is Gene Phillips, who was the central figure in the junk bond merry-go-round that Milken operated in the 1980s, and which was a key component of the larger operation to “bust-out” savings and loan banks. Phillips operated (and still does operate) an outfit called Southmark Corporation, which was the largest recipient of Milken junk bond finance in the 1980s. The largest subsidiary of Southmark in the 1980s, meanwhile, was San Jacinto Savings and Loan, which was “busted-out” with help from such Mafia luminaries as Herman Beebe and Carlos Marcello (the top boss of the New Orleans Mafia).

The man whom Gene Phillips appointed as the chief loan officer of San Jacinto Saving and Loan was named Joseph Grosz. Aside from being a banker, Grosz was a leading mobster, affiliated with the Chicago Syndicate, according to prominent journalist Pete Brewton, who is one of the nation’s leading experts on the involvement of organized crime in the savings and loan crisis. Brewton has also reported that San Jacinto’s parent, Southmark, was “used as a mob dumping ground to buy the investments of mobsters,” including not only Herman Beebe and Carlos Marcello, but also organized crime figure Harry Wood, and Morris Shenker, a former lieutenant of Meyer Lansky, then the most powerful mobster in the nation.

In 2000, Phillips was arrested and charged with manipulating stock prices in league with other leading figures in La Cosa Nostra. More specifically, Phillips was arrested as part of Operation Uptick, which was described by FBI spokesmen as the largest Mafia bust in U.S. history. More than 120 people, all with ties to organized crime, were arrested in Operation Uptick, and FBI officials described them as being part of nationwide “network” of stock manipulators, some of whom had committed various other crimes, which included (according to an FBI statement): “controlling and infiltrating broker-dealers…and employing tactics of violence, including threats, extortion, physical intimidation, and the solicitation of murder…”

Some of the 120 people arrested in Operation Uptick were members of Russian organized crime syndicates, while others were, variously, described by the FBI as having ties to each of La Cosa Nostra’s five major families—Genovese, Colombo, Gambino, Bonanno, and Lucchese. Among the 120 defendants, aside from Phillips, were: Robert “Little Robert” Lino, a capo in the Bonanno crime family; Anthony Stropoli, a soldier in the Colombo crime family; Frank “Frankie” Persico, a Colombo Mafia family capo; Sebastian “Sebbie” Rametta, an associate of the Colombo crime family; Robert Gallo, an associate of the Genovese crime family; and John Black, an associate of the Lucchese crime family.

The DOJ charged that Phillips, in league with various members of La Cosa Nostra, had manipulated the stock of one of his companies, an outfit called Transcontinental. Aside from Phillips, the largest shareholder in that company was Michael Milken. Meanwhile, the Dallas Business Journal reported that Phillips “allegedly met with two associates of New York’s legendary Bonanno organized crime family to discuss a plan to bilk a couple of ‘very friendly’ union pension funds through the sale of inflated stock.” However, Phillips was acquitted on all charges. In addition, most of the other people who were arrested as part of Operation Uptick got off with nothing worse than small fines, though this was the biggest Mafia bust in history, according to then FBI director Louis Freeh (who, of course, is now employed by Wynn and Millennium Management).

That same year, 2000, the media reported that an outfit called Sinex Bank was linked to the Bank of New York scandal, which saw the Bank of New York laundering upwards of $10 billion ($3.9 billion of which passed through Sinex Bank) for organized crime syndicates. The syndicate most closely linked to that scandal was the Mogilevich organization, the leader of which was (and is) a Russian (actually Ukranian, but he is a Russian citizen) named Semion Mogilevich, widely known as “the most dangerous mobster in the world.” What the media did not report was that the money laundering involved a network of brokerages that first invested dirty cash into the “bust outs” of publicly listed companies, with the money coming out partially cleaned as short selling profits that were delivered onwards to cooperative banks, including Sinex Bank and the Bank of New York.

Also linked to that money laundering was a brokerage called Sinex Securities, which was a subsidiary of Sinex Bank. Sinex Securities was controlled by Gene Phillips, though it was registered in the name of his son, Brad Phillips (Sinex changed its name to National Alliance Securities when it was linked to the Bank of New York scandal). SEC filings show that Transcontinental (the Phillips outfit whose largest shareholder was Milken, and which was at the center of the Operation Uptick charges) had placed more than 700 thousand of its shares with Sinex as “collateral for borrowings”. That is to say, a chunk of the cash that went through Sinex was delivered, as collateral, to Transcontinental shareholders. However, neither Sinex nor Phillips were charged with any crime related to the Bank of New York scandal.

With the exception of Mogilevich himself, nobody else of any significance was charged with any crime related to the Bank of New York scandal, and Mogilevich (“the most dangerous mobster in the world”) subsequently hired a lobbyist in Washington. Mogilevich’s lobbyist is William Sessions, formerly director of the FBI. The FBI still lists Mogilevich as one of the “Ten Most Wanted” criminals in the world, but there is no evidence that the FBI has ever tried to arrest Mogilevich, and others in the Mogilevich organization continue to this day to operate openly in the United States.

Some of them, we will see, are key figures in the Milken network.

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Back in the 1980s, another of Milken’s closest business associates was Fred Carr, who, like Phillips, was a central figure in the junk bond merry-go-round that was part of the larger scheme (that had help from BCCI) to “bust out” numerous savings and loans banks. Fred Carr used Milken junk bond finance to seize control of Executive Life, and that financial institution (like most of the other savings and loans that Milken’s closest associates took over with Milken junk bond finance) was subsequently looted and demolished (that is, “busted out”).

Prior to taking control of Executive Life, Carr had been a principal with Investors Overseas Service, which had ties to BCCI, and which was, at the time, the biggest Ponzi scheme in history. Investors Overseas had been founded by a financier named Bernard Cornfield, and later involved a criminal named Robert Vesco, who subsequently fled to Cuba and became involved (according to CIA reports) in trafficking drugs with Cuban dictator Fidel Castro. (Castro later claimed that Vesco had been imprisoned in Cuba).

One of Investors Overseas Services’ key “feeders” (that is, one of the people who “fed” the Ponzi much of its money) was Sylvian Ferdman, a Genovese Mafia courier, who routed money into the Investor’s Overseas racket from clients in South America. Another Investors Overseas feeder was John Pullman, whom the U.S. government had named as a close associate of Genovese Mafia boss Anthony “Fat Tony” Salerno. That’s the same “Fat Tony” who was later conversing with Mulheren in prison, and whom the Scotland Yard report linked to Wynn (The Scotland Yard report, however, was false, according to Wynn, and U.S. law enforcement officials have not accused Wynn of having ties to organized crime).

Another key component of Milken’s junk bond merry-go-round in the 1980s was MDC Global, an insurance and savings and loan company that (see Chapter 6 of this series) had been co-founded by a BCCI subsidiary. MDC Global, meanwhile, controlled a brokerage called Blinder Robinson, which specialized in “busting out” small to medium-sized publicly listed companies. MDC Global, of course, was itself “busted out,” and in 1989, Blinder Robinson was indicted, along with its founder, Meyer Blinder.

Blinder Robinson was known as “Blind’em and Rob’em” because it was not only a key player in a nationwide stock manipulation network, but also among the most crooked brokerages in America. Among the miscreants who manipulated stocks in league with Blinder Robinson were (according to various indictments) Thomas Quinn and Arnold Kimmes, both of whom (as we know from earlier chapters) had operated a number of brokerages linked to BCCI. Quinn, recall, was an associate of the Genovese Mafia family, while Kimmes had been identified in a 1973 FBI report as a “major organized crime figure.”

When Kimmes was arrested, he escaped prison by ratting on Meyer Blinder, who did not escape prison (though he was quickly released). In 2000, Richard Walker, then the SEC’s director of enforcement, gave testimony to Congress in which he described Blinder Robinson as being part of a “network” of brokerages — including D.H. Blair, Rooney Pace, FN Wolf, A.R. Baron, and many others – that were tied to organized crime. Most of these brokerages had been financed by Michael Milken and/or his close associates.

The proprietor of Rooney Pace, which was financed directly by Milken, was Randolph Pace, who was later indicted for running a $200 million stock manipulation scheme with a man named Judah Wernick. Many of the other brokerages mentioned in the SEC’s Congressional testimony – including D.H. Blair, A.R. Baron, and FN Wolf — were financed by Zev Wolfson, a Milken business associate who also financed Millennium, the hedge fund co-founded by Boesky’s prospective assassin John Mulheren.

D.H. Blair was particularly close to Milken. It was founded by Morty Davis, and run with help from Davis’s son-in-law, Lindsay Rosenwald, who served as vice chairman. After Milken went to prison in 1991, one of Milken’s top Drexel Burnham employees, Richard Maio, became president of D.H. Blair. In 2000, D.H. Blair was charged on multiple counts of stock manipulation and forced to shut its doors. To describe the full extent of D.H. Blair’s relations with La Cosa Nostra and Russian organized crime, I would have to bore you with a list of names so long that this story would begin to read like a telephone directory. But to give you just a small sampling, I will mention that the people indicted in just one of the hundreds of stock manipulation schemes perpetrated by D.H. Blair included: Frank Coppa, a capo in the Bonanno Mafia family; Edward Garafola, a soldier in the Gambino Mafia family; Daniel Persico, a capo in Colombo Mafia family; and Ernest Montevecchi, a soldier in the Genovese Mafia family.

After Milken got out of prison, he hooked up again with D.H. Blair’s former vice chairman, Lindsay Rosenwald, who is now one of the most powerful hedge fund managers in America, and perhaps the single biggest player in the world of biotech stocks. As described in my book (“The Dendreon Effect”), Milken and Rosenwald have sought to destroy biotech companies that were developing promising medicines while promoting dubious companies (financed by Rosenwald and Milken) whose medicines were killing people.

Many other powerful hedge fund managers operating today got their start in the 1980s working for Milken-financed brokerages with ties to organized crime. SEC filings and other evidence compiled by DeepCapture show with perfect clarity that all of the hedge fund managers in this network regularly trade in unison, investing in (or, more often, attacking) the same companies.

This does not mean that they have necessarily broken any laws, but, again, press reports suggest that some of the biggest players in this “network” are currently the targets a massive FBI investigation said to be targeting a “network” of financial operators suspected of insider trading. As I mentioned, one of them is SAC Capital’s Steve Cohen, who was investigated in the 1980s for trading on inside information that he allegedly received from Milken’s shop at Drexel. Cohen has been described by BusinessWeek magazine as “The Most Powerful Trader on the Street.”

When Cohen was investigated for trading on inside information that he received from Drexel, he was not yet a famous hedge fund manager, but he was among the select traders who effectively ran Gruntal & Company , a Mafia-tied brokerage that received much of its finance from Michael Milken.

There were just a few other traders who had special partnership agreements with Gruntal, and who effectively ran the place. I will name most of them, beginning with Maurice Gross, who handled the accounts of the Gambino Mafia family. Gross later founded his own operation with a Pakistani trader and former BCCI figure named Mohammad Ali Khan, who (according to a case filed by the New York attorney general) alighted with some of the Gambino family’s cash. This was no doubt much to the dismay of Gruntal CEO, Howard Silverman, who had come to depend on the Mafia’s good graces.

As of 2008, Silverman was running one of the nation’s biggest “dark pool” trading platforms, an outfit that enabled his hedge fund clients to conduct trading in total anonymity. It should be a matter of concern that a guy who once ran a brokerage with ties to the Mafia went on to run a major “dark pool”–especially since experts such as the authors of a report (see Chapter 1 of this series for details) commissioned by the Department of Defense say that such platforms could easily be deployed to do serious damage to the markets.

One of the people Silverman brought in to help run his brokerage – another of the select traders with special partnerships at Gruntal – was a fellow named Felix Sater, who was (and is) a Russian mobster and a member of the Mogilevich organization (controlled by Semion Mogilevich, often described as the “most dangerous mobster in the world”). While still at Gruntal, Sater was charged with stabbing a Wall Street trader in the face with the broken stem of a wine glass (actually, it was martini glass, according to a man who witnessed the attack).

While still at Gruntal, Sater and several other former Gruntal traders founded a brokerage called White Rock Partners. Most of White Rock’s employees were former Gruntal employees, and there is no doubt that White Rock’s partners all had ties to organized crime. In 1996, the FBI discovered a locker at a Manhattan Mini-Storage in Soho that belonged to Evgeny Klotsman, a White Rock principal who was formerly among the select traders who had effectively run the Milken-financed Gruntal & Company. The FBI announced that the locker contained guns and documents that linked Klotsman and Sater to a “global market manipulation and money laundering network controlled by Russian organized crime.”

In 1999, White Rock (renamed State Street Capital Partners) was indicted for orchestrating stock manipulation schemes in league with the above-mentioned D.H. Blair and A.R. Baron (financed by Zev Wolfson) and five members of La Costa Nostra, including a Genovese Mafia soldier named Ernest Montevechi, and Danny Persico, a capo in the Colombo Mafia family (and the son of Alphonse “Allie Boy” Persico, the top boss of the Colombo Mafia family). White Rock’s principals, in fact, included some of the top bosses of the Colombo Mafia family, among them not only Danny Persico (who was arrested, along with Gene Phillips, in Operation Uptick), but also a Colombo Mafia capo named Greg Scarpa, to whom we will return.

According to one of Felix’s White Rock partners (and according to The New York Times, which lent credence to the story), Felix escaped indictment (he was named only as an unindicted co-conspirator in the White Rock case) because Felix and his other partner, Evgeny Klotsman , had ties to the Russian intelligence services, and promised the U.S. government that they could work with Russian intelligence to buy Osama bin Laden’s stockpile of Stinger missiles (thereby preventing Al Qaeda from using the missiles to shoot down commercial airlines).

It should not be surprising that Felix Sater, a member of the Mogilevich organization, would have ties to Russian intelligence, and it is equally unsurprising that he would be capable of cutting a deal with Al Qaeda. As the White House national security staff made clear in August 2011, when the president announced that organized crime had “penetrated” the financial system (thereby inspiring the president to officially declare an “Emergency Order”), the Mogilevich organization has close ties to both the Russian intelligence services and to multiple terrorist organizations, including Al Qaeda.

A 1996 classified FBI report (since made public) noted that the Mogilevich organization was involved in everything from major league market manipulation to prostitution, Afghan heroin, and trafficking in nuclear weapons materials. This is why Semion Mogilevich sits high on the FBI’s list of “Ten Most Wanted” criminals. But, of course, Mogilevich has a good lobbyist (i.e. a former director of the FBI, the outfit that publishes that “Most Wanted” list), and few, if any, members of the Mogilevich organization are presently in jail. Many of them are residents of the United States, and we will see that many of them, including Sater, remain active in the U.S. markets.

Multiple reports from law enforcement, the United Nations, non-governmental organizations in Russia, and the mainstream media in London (distinct from the mainstream media in the United States, which has a peculiar reluctance to publish anything interesting) state unequivocally that members of the Mogilevich organization have been selling conventional weapons to Al Qaeda for many years. On at least one occasion, the Mogilevich organization tried to sell highly enriched (nuclear bomb grade) uranium to Al Qaeda. This is a matter of dispute for some “experts”, but European Union officials confirm that it is true, and there is evidence that members of the Mogilevich organization did, at a minimum, claim in meetings with Al Qaeda operatives in Europe that they could obtain the nuclear materials.

Felix, through Russian intelligence, was prepared to cut a deal with Osama bin Laden, but the CIA balked when Klotsman demanded that the U.S. government pay him and Felix $3 million for each Stinger missile. Nonetheless, Felix escaped doing jail time, and some of his other associates say that this is because he and his Russian intelligence associates promised that their relationship with Al Qaeda would eventually be put to use for the U.S. government. However, if American officials believe Felix is helping the U.S. government, they are certainly mistaken. Indeed, it is a bit unsettling that this dangerous criminal is still on the loose. Not only was Felix once charged with stabbing a Wall Street trader in the face with the broken stem of a wine glass (actually, a martini glass), but Felix has also threatened to kill multiple other people. For example, Felix Sater has threatened to kill DeepCapture founder Patrick Byrne.

According to one of Felix’s White Rock partners (who has written about this in a book called “The Scorpion and the Frog”), Felix also once threatened to kill a short seller named Alain Chalem, who then ran a brokerage called Taluca Pacific in partnerships with DeCalvacante Mafia capo Phil Abramo, who was widely known at the time as “The King of Wall Street.” As we know from earlier chapters of this series, Abramo had formerly been involved with brokerages linked to the BCCI enterprise.

Felix’s partner says that Felix did not ultimately kill Chalem, and we should assume that he did not, but soon after the threat (in late 1999), Chalem was, in fact, murdered, execution-style, in his New Jersey mansion. The FBI has yet to prosecute anyone for the murder, but media reports have suggested that one suspect was Danny Persico, the Colombo Mafia capo who was a partner in Felix’s White Rock Partners. Other media have reported that the FBI believes the murder was related to Chalem’s dealings with Russian organized crime.

In later years, Felix co-founded a real estate and mortgage outfit called Bayrock. As we will see in later chapters, Bayrock played a role in the larger “bust out” of the mortgage markets, but for the purposes of this chapter, I will note that Bayrock’s former CFO, Jody Kriss, has alleged that Bayrock is a massive money laundering operation. In 2009, Kriss filed a lawsuit to this effect, and noted that Felix had once threatened to have him (Kriss) tortured and then murdered.

One of Bayrock’s co-founders was Tevfik Arif. In 2011, Arif was arrested in Turkey after Turkish commandos raided a party that Arif was holding on a yacht that had once belonged to Mustafa Kemal Ataturk, Turkey’s founding president. Arif, a native of Kazakhstan, was arrested along with a small harem of prostitutes and some unnamed government officials from Central Asia. (It is unclear why the commandos raided the yacht; the media has reported that Arif was charged only with illegally hiring prostitutes, a crime that does not usually result in commando raids).

Another Bayrock partner was Tamir Sapir, a billionaire real estate investor whose real estate portfolio was managed by a man named Frederick Contini, whom the government has named as an associate of the Genovese Mafia family. In 2008, Contini entered a secret plea to racketeering. He has also faced charges for stabbing a man in the face with the stem of a broken wine glass. It seems to be the thing to do.

As Tamir Sapir himself has admitted, he spent his formative years running a company that specialized in selling high-tech electronics equipment to KGB operatives in New York. As Sapir has not admitted (though public records show that it is true), Sapir’s partner in his espionage operation was Semyon Kislin, who was (according to the FBI) a “member” of the Russian organized crime syndicate run by Vyacheslav Ivankov, then the top boss of the Russian mafia in the United States. In 2009, Ivankov was assassinated on a Moscow street, but not before admitting that his organized crime syndicate (which had close ties to the Mogilevich organization) had long been employed by the Russian intelligence services.

It is clear that Felix Sater has maintained relationships that he developed while working as a trader for Gruntal & Company. For example, he remains a close associate of SAC Capital’s Steve Cohen, and a man involved with a private investigation of Felix’s Bayrock says that Felix has laundered money for Cohen and other hedge fund managers. (Cohen presumably would deny this, and he has not been charged with any wrongdoing).

Meanwhile, Bayrock has had partnerships with several investment funds, nearly every one of which is controlled either by Milken’s former top employees at Drexel Burnham, or by others among the small band of people who are Milken’s closest associates. One of Bayrock’s partners, for example, is Apollo Real Estate, part of Apollo Management, a private equity fund controlled by Leon Black, who is one of the most powerful investors in America. Leon Black is the son of Eli Black, who was, in the 1970s, the head of United Brands, formerly known as United Fruit, a company that was accused of everything from bribing tin-pot dictators to dealing with La Cosa Nostra and funneling money to Latin American narco-terrorists.

In 1975, Carl Lindner, another of Milken’s closest associates and a key participant in Milken’s junk-bond merry-go-round and “bust out” scheme , used Milken finance to take over United Brands. In the midst of this takeover, Eli Black crashed through a plate glass window on the 44th floor of the Pan Am Building in New York, and fell to his death (the death was reported as a suicide). After this incident, Eli’s son, Leon Black, was named head of mergers and acquisitions at Drexel Burnham, the investment bank effectively controlled by Milken. The two men became friends, and after Milken’s criminal indictments, Black insisted that Drexel defend his friend at all costs. Even after Milken’s indictments resulted in Drexel’s collapse, Black continued to insist that Milken was innocent, and today the two men are close friends, involved together in multiple business ventures (some described in my book). Milken’s son, Lance, is a partner at Apollo, the Leon Black fund.

Another of the most powerful financiers in America (and also among Milken’s closest associates) is Carl Icahn. In the early 1980s, Icahn was the head of the options department at Gruntal & Company (the outfit whose key clients included the Gambino Mafia family, and whose key traders, such as Felix Sater and Evgeny Klotsman, were major Russian organized crime figures). After leaving Gruntal, Icahn started his own investment outfit, funded mostly by Michael Milken and Zev Wolfson (Wolfson being the guy who funded Mulheren and the above-mentioned Mafia-tied brokerages, which were indicted for schemes they perpetrated with La Cosa Nostra and Felix Sater).

As soon as he launched his investment fund, Carl Icahn hired several key employees: Harvey Houtkin, Allen Barry Witz, Gary Siegler, and Alan Umbria. Meanwhile, Umbria, who represented Icahn on the floor of the American Stock Exchange, served as the front-man for the Genovese Mafia in a New York restaurant called Crisci’s, which was featured in the movie “Donnie Brasco”—a movie about an undercover FBI agent who infiltrates the Mob. Umbria was also the Mafia’s front-man in another New York restaurant — The Court of the Three Sisters.

One day in the late 1980s, Umbria’s close business associate walked into The Court of the Three Sisters and found Umbria presiding over a meeting in one of the restaurant’s private rooms. The business associate was asked to leave before he could hear what was discussed at this meeting, but the businessman knows who was in attendance – namely, Alan Umbria, a collection of Genovese Mafia thugs, and Louis Micelli, who was a stock broker until his untimely death in 2005. In addition to being a stock broker, Micelli was a major league narco-trafficker with deep connections to the drug cartels of Colombia, and to a Paraguay cell of Hezbollah, the jihadist outfit that takes its directions from the regime in Iran.

It was the Paraguay cell of Hezbollah that helped Iran blow up a synagogue in Argentina, and for a long time, this cell trafficked in cocaine from bases in Ciudad del Este and other cities in the “tri-border” region where Brazil, Argentina, and Paraguay meet. That region has since come under greater scrutiny, so Hezbollah’s drug kingpins have moved deeper inside Paraguay, but they continue to traffic coke, working with Hezbollah jihadis resident in North America – especially in Toronto, Detroit, New York, and my hometown, Chicago. Hezbollah’s trafficking operation continues to be a partnership with La Cosa Nostra, the Russian mafia, and (yes) some stock brokers, more of whom we will meet later.

* * * * * * * * *

Back to Gruntal & Company, the brokerage that was financed by Milken.

As we know, there were just a few traders who had special partnerships with Gruntal, and who effectively ran the place. In addition, we know, all of these traders had close ties to Milken. One of them, of course, was Steve Cohen, future founder of SAC Capital. Another was the Russian crime figure Evgeny Klotsman. And yet another, of course, was the Russian mobster Felix Sater, who, along with Klotsman, was, in 1996 linked to what the FBI described as a “global market manipulation and money laundering network controlled by Russian organized crime.” Other key figures in that “global market manipulation and money laundering network” were, of course, members of La Cosa Nostra, several of whom were involved, along with Felix, Klotsman and other Gruntal principals, in White Rock Partners.

There were just a few other traders who effectively ran Gruntal, and one of them was Andrew Redleaf, whose wealthy family did a lot of business with Milken’s operation at Drexel. Redleaf got his job at Gruntal on Milken’s recommendation. After leaving Gruntal, Redleaf invested in Sun Country Airlines in partnership with Tom Petters, who was arrested in 2008 and indicted for orchestrating a massive Ponzi scheme in cahoots with Michael Catain, the son of a famous Genovese Mafia enforcer named Jack Catain. Redleaf currently runs a large hedge fund called Whitebox Partners, another of the hedge funds that regularly trade in unison with SAC Capital and others in the network. (Neither Whitebox nor its principals has been charged with any crime).

Another one of the hedge funds in this network is the massive and eminently powerful Cerberus Capital, run by Stephen Feinberg and Ezra Merkin. In the early 1980s, Feinberg was one of Michael Milken’s top employees at Drexel Burnham. In the mid-1980s, Milken asked Feinberg to move to Gruntal & Company to help the others (namely, Russian mafia boss Felix Sater, Evgeny Klotsman, Gambino Mafia broker Maurice Gross, and Steve Cohen, among a few others) oversee Gruntal’s operations, which had become important to Milken’s nationwide network. But aside from the SEC’s investigation of Steve Cohen, regulators did not catch on to Gruntal’s criminality until the mid-1990s, when it was forced to pay the largest fines in SEC history after a series of scandals that saw some of its other managers charged with embezzlement and cooking the books. By then, the traders who really ran the place in the 1980s had moved on to much bigger projects, one of which, we know, was Feinberg’s Cerberus Capital.

In 2006, Mainichi Shimbun, Japan’s most respected business newspaper, reported that Cerberus was tied to the Japanese Yakuza. Feinberg said it wasn’t true and he sued the Japanese newspaper for libel, but there is no doubt that Mafia outfits worldwide are becoming more closely intertwined, and I think we would be justified in asking whether Feinberg came into contact with various Mafia outfits while working for Gruntal & Company (which was effectively controlled by a select number of traders, some of whom were mobsters). Feinberg’s partner in Cerberus, Ezra Merkin, meanwhile, has been charged with civil fraud for his role in the massive “Ponzi” scheme (in fact, it was not just a “Ponzi” scheme, but more on that later) perpetrated by the infamous Bernie Madoff. One of Merkin’s other funds, Ascot Partners, was the second biggest “feeder” to the Madoff criminal operation.

Other big “feeders” to Madoff’s operation were, according to court documents, “made” members of the Mafia. One of them was Ralph Mafrici, who had a joint account with Madoff’s investment fund in the name of Eleanor Cardile, a relative of Madoff’s right hand man, Frank DiPascali. Mafrici was a Genovese Mafia capo who allegedly ordered the assassination of another Mob boss named Albert Anastasia. Since Anastasia was getting his hair cut at the time, the assassination was famously dubbed “The Barber Shop Hit.” In fact, Madoff’s operation had extensive ties to organized crime, as we will see in later chapters, wherein we will also see that Madoff’s brokerage was a key component of the Milken network (and had, in the 1980s been a key component of the larger BCCI enterprise). First, though, let us meet some of the other characters in the “network” that will feature in our later discussion of the 2008 meltdown.

Another of the traders who, in the 1980s, effectively ran Gruntal & Company was Sam Israel, who later became the proprietor of a criminal hedge fund called Bayou. When Israel was indicted in 2008, Bayou was said to be the “biggest Ponzi scheme in history.” Before that, the biggest Ponzi schemes in history had been the Ponzi schemes run by the above-mentioned Fred Carr and Tom Petters. Unfortunately, in December of 2008, Sam Israel’s Ponzi was topped by Bernard Madoff, who turned himself in to the FBI and announced that his “Ponzi” scheme (which absconded with upwards of $65 billion) was bigger.

When it came time for Israel to show up for prison, Israel instead parked his car on a bridge and left a note in the window that said, “Suicide is Painless.” Then he ran away.

After that, Israel had second thoughts and decided to turn himself in. Meanwhile, it emerged that Israel had been in business with Robert Booth Nichols, whom the FBI had identified as a close associate of both the Gambino and Genovese Mafia family and perhaps the key U.S. contact for the Japanese Yakuza. Back in the 1980s, Nichols had been involved with BCCI, and he was tied to a big scandal surrounding a software program called Promis.

The developers of Promis alleged that the software was stolen from them by the U.S. government, which (according to the developers) modified it so that it included a back door feature that would allow the U.S. government to access information on computers that had installed the software. At the time, the media gave considerable credence to this story, and suggested that the U.S. government had sold Promis software to multiple foreign governments. What has not been widely reported is that Mafia-tied Robert Booth Nichols also managed to gain rights to sell Promis software, and Nichols handed those rights to the famous Saudi arms dealer and market manipulator Adnan Khashoggi, who had been a key figure in the larger BCCI enterprise.

As a document obtained by DeepCapture shows, Khashoggi, in turn, licensed the software to Sheikh Khalid bin Mahfouz, then the largest shareholder of BCCI and executive director of the bank. (Recall from earlier chapters of this series that Sheikh Mahfouz was, until his death in 2009, also one of Osama bin Laden’s most important business partners). Mahfouz proceeded to sell this software to major banks around the world, raising the question of whether he used its back-door feature to obtain confidential information from the computer systems of banks that used the software.

The bizarre nature of the business that Nichols and Israel later did together has been reported in an entertaining book called “Octopus: Sam Israel, the Secret Market, and Wall Street’s Wildest Con,” which suggests that Israel was conned by Nichols into believing that he, Israel, could recoup his hedge fund losses by tapping into a “secret market” that was, according to Nichols, controlled by 13 powerful families who also controlled the whole world. The book, of course, casts doubt on the notion that the 13 families actually control a secret market, much less the whole world, and the book reports further that Israel was scammed by Nichols into paying a large sum of money to get his hands on U.S. Treasury notes with a face value worth billions.

The Treasury notes were said to be linked to “Yamashita’s gold,” which was reputed to be gold that had ostensibly been stashed in the Philippines by the Japanese just prior to the end of World War II, and later recovered by a secret U.S. government operation. This, too, seems an unlikely proposition, but there might, in fact, be more to this story than a tale of a hapless hedge fund manager (Sam Israel) who lost millions to a clever con-man (Nichols). Which is not to say that 13 families actually control the world (though, of course, anything is possible), but as court documents obtained by DeepCapture show, Nichols and Israel had, in fact, obtained U.S. Treasury notes valued at $250 billion (as in a quarter-of-a-trillion dollars).

Israel and Nichols told people that their $250 billion in Treasury notes were secured by 2,500 metric tons of gold (serial number SC 3040-20) at the Atlanta Federal Reserve. In fact, physical gold in this quantity was not sitting with the Federal Reserve, but Nichols and Israel said the Atlanta Federal Reserve had issued a serial number in confidence that the gold would be forthcoming, much of it from the Philippines.

More specifically, Nichols and Israel told people that many of their $250 billion in Treasury bonds were secured by “Yamashita gold” that had been located years earlier by then Philippine dictator Ferdinand Marcos, who had moved the gold to a new hiding place in the jungles of Mindanao, an island at the south end of the Philippine archipelago. According to Nichols, Adnan Khashoggi (who was once indicted for laundering money on behalf of Imelda Marcos, then widow of the former dictator) had reported that this gold was now in the possession of the Abu Sayyaf terrorist group on Mindanao, and that his associates were traveling to the Philippines to retrieve the gold.

Nichols later changed the story and said that the $250 billion in U.S. Treasury bonds were related to long-standing U.S. government obligations to the offspring of Chinese nationalist leader Chiang Kai-shek. Specifically, Nichols said the obligations had been confirmed by Tansri Teong, a representative of the Maiwah family, descendents of Chiang Kai-shek who lived in Luxembourg. However, Nichols began telling the Chiang Kai-shek story after Israel was arrested, perhaps to distract investigators from the fact that their scheme revolved primarily around Khashoggi’s assurances concerning the Yamashita gold in the Philippines.

In either case, while Khashoggi had spoken of this gold in the past, many considered the story to be rather implausible. Of course, anything is possible, but it is equally possible that the $250 billion Treasury bonds were a fake. Nonetheless, according to journalist Cheryl Seymour (who first reported parts of this story, though not the information about the gold in the Philippines), bankers around the world were convinced that the Treasury notes were real. And, again, they had a face value of a quarter trillion dollars—which is around 60% of what the U.S. government pays each year in interest on the national debt. It’s also around 60% of the U.S. government’s annual defense expenditures. Moreover, Nichols and Israel circulated the story about this supposed massive obligation just as the U.S. financial system was beginning to weaken.

That is, just as the system was weakening in 2008, Israel and Nichols claimed that they were going to cash in notes that would (if it they were real) effectively bankrupt the U.S. government and fuel panic with regard to any major banks that had liens on Treasury notes. As one banker told Seymour, this “shook the financial foundation around the world.” Other bankers reiterated that statement: Sam Israel’s claim (whether true or false) to have $250 billion in Treasury bonds linked to a stash of gold in the Philippines actually rocked the global financial system (though, of course, there were other activities that did quite a lot more to rock the global financial system).

After Israel was arrested, he and Nichols filed lawsuits against each other. Soon after, in 2009, reports emerged that Nichols had been found dead in Switzerland. People close to Nichols insist that Nichols faked his own death, but the truth remains unknown. It is also unlikely that we will learn whether the U.S. Treasury notes were fake because soon after Nichols and Israel filed their lawsuits, the notes vanished. They had been briefly entered into the public record, but they are not there anymore. There is no doubt, though, that the notes (whether they were counterfeit or not) did exist. And some bankers apparently did take them seriously.

No doubt I will be ridiculed as a conspiracy theorist simply because I have told this true (albeit weird) story, but I have been accused of worse, and I will note that an almost precisely similar story (though with a different set of protagonists) was recently discussed on the floor of the British parliament.

* * * * * * * *

Before he got involved with the bizarre $250 billion Treasury note scheme, and after he left Gruntal & Company, Israel spent time working for one of Michael Steinhardt’s hedge funds. In that capacity, Israel helped Steinhardt corner the market for U.S. Treasuries, posing a threat to economic stability until the government threatened to press criminal charges, convincing Steinhardt to back off.

John Lattanzio, the manager of Steinhardt’s hedge fund, was extremely secretive. There wasn’t much information on him until a court case revealed that Lattanzio once proposed marriage to a Russian hooker and gave her a $289,275 diamond ring. Nothing wrong with that (marriage is a wonderful thing), but the interesting development in this case was that the lovers quarreled, Lattanzio wanted his ring back, and the prospective wife told the judge that Lattanzio had big-time Mafia connections. She also said that Lattanzio “would not hesitate to use [the Mafia] to harm me.” Which is not surprising because the man who launched Lattanzio’s career, Michael Steinhardt, also has big-time Mafia connections.

When it became evident that Steinhardt’s ties to the Mafia might become public, Steinhardt preemptively published a book in which he revealed (as if were no big deal) that his father, Sol “Red” Steinhardt, had done time in Sing-Sing prison because he was, in the words of a Manhattan district attorney, the “biggest Mafia fence in America.” In fact, as noted in earlier chapters of this series, Steinhardt’s father was effectively the chief financial officer for the Genovese Mafia family. In his book, Steinhardt admitted that the first and most important investors in his first hedge fund were: the Genovese Mafia family; Ivan Boesky (Milken’s most famous criminal co-conspirator); and Marc Rich (who then shared office space with Boesky).

In previous chapters of this series, I discussed Marc Rich’s ties to BCCI and the Iranian regime, noting that Steinhardt’s lobbying helped convince President Bill Clinton to pardon Rich from his indictment for illegal trading with Iran. Although Rich was pardoned, he still owes the U.S. government taxes, so he lives in Switzerland, where his palatial home is guarded by a private army of mercenaries.

Rich has done quite a lot of business with companies, such as Highland Capital, that were under the control of Russian organized crime boss Semion Mogilevich, and Rich was linked to the late 1990s scandal that saw Russian organized crime syndicates (most notably the Mogilevich organization) launder more than $10 billion through the Bank of New York. This was the same scandal that involved Sinex, which handled around $3.9 billion of that money, most of it belonging to the Mogilevich organization. Rich was not charged in the Bank of New York affair, and nor were any of the other oligarchs (many of them previously linked to the BCCI enterprise) who were implicated in the Bank of New York affair.

Of course, Steinhardt was also among Milken’s closest associates. Nowadays, Steinhardt runs a big exchange traded fund (ETF) outfit called Wisdom Tree Investments. His partner in that operation is Jonathan Steinberg, son of Saul Steinberg, who was a key player in the junk bond “bust out” scheme that Milken ran in the 1980s. Steinberg used Milken junk bonds to seize Reliance, a giant insurance and financial services firm, which was subsequently looted and destroyed (i.e. “busted out”). Steinberg was not charged with any crime.

As noted in Chapter 6 of this series, a Wall Street Journal story published in 1985 (read it, as it was the last serious investigative report on short-side market manipulation published before the media started describing these miscreants as heroes worthy of our admiration) identified Steinhardt as being part of a “network” of short sellers who regularly attacked public companies using unscrupulous tactics, such as posing as journalists to obtain inside information and conspiring to cut off victim companies’ access to credit.

Among the others identified as being part of that “network” was Jim Chanos, who is now the proprietor of a famous hedge fund called Kynikos Capital, and the head lobbyist for the hedge fund industry. Chanos is also a favorite source for the New York financial media, one reason why the media no longer publishes stories about short-side market manipulation (which does not occur, according to the lobby headed by Chanos). When DeepCapture first started reporting on Chanos’s ties to Michael Milken and associates, Chanos went to lengths to distance himself from Milken, telling journalists that he had identified the fraud at Milken-financed companies.

In an email to some of his associates (the email was obtained by lawyers for the Canadian financial institution called Fairfax Financial, and later obtained by DeepCapture), Chanos outlines the party line, suggesting to the recipients of the email (namely, a long list of Milken-tied hedge fund operators and billionaires, such as Carl Icahn, who owed their careers to Milken) that they communicate the fact that he, Chanos, had been a short seller of companies financed by a “certain junk bond king” (i.e. Milken). But while Chanos, Steinhardt, and others in their “network” were certainly short sellers of Milken-financed companies, their short selling was always beneficial to Milken, and was simply the tail-end of the “bust-out” schemes that I have described, noting that every “bust-out” ends in a wave of short selling.

Indeed, as was revealed in the 1985 Wall Street Journal story, Chanos got his big start by shorting a company called Baldwin United. According to this story, Chanos went so far as to go to Baldwin’s bankers with false information that convinced the bankers to cut off Baldwin’s access to credit. As a result, Baldwin went bankrupt, and Milken got himself named as the advisor to the bankruptcy. According to a well-known and highly respected businessman who was involved in the bankruptcy proceedings, Milken abused his advisory role and ensured that all of Baldwin’s assets were delivered to his cronies at firesale prices. This success brought Chanos to the attention of Michael Steinhardt.

At the time, Chanos (who is now revered by The Journal) was working for a Mafia-tied brokerage called Gilford Securities. In 2000, five Gilford brokers were arrested (along with Phillips) in Operation Uptick, which was, of course, then the biggest Mafia bust in the history of the FBI. Gilford’s brokers were charged with manipulating stocks in league with ten members of La Cosa Nostra and a corrupt New York cop. By then, though, Chanos had left Gilford to start his own hedge fund, receiving his initial finance from Steinhardt (son of the biggest Mafia fence in America) and Steinhardt’s limited partner, Ivan Boesky (Milken’s most famous co-conspirator). Steinhardt’s other limited partner, Marty Peretz, introduced Chanos to Dirk Ziff, another powerful hedge fund manager (Och-Ziff Capital and Ziff Brothers), and for a while Chanos ran his hedge fund out of Ziff’s offices.

While Chanos was launching his hedge fund, future CNBC reporter Jim Cramer (who had once planned to work in partnership with Boesky) was running a hedge fund out of Steinhardt’s offices. Later, Cramer and Chanos were the biggest fundraisers for the political campaign of New York Governor Elliot Spitzer, who had been Cramer’s college roommate. For a time, Spitzer’s favorite hooker, “Ashley Dupree” lived (rent free) at Jim Chanos’s beachside villa. She called him “Uncle Jim.” As Patrick Byrne once said, Ashley should be ashamed of herself for associating with this crowd.

SEC filings make it clear that Chanos regularly trades in league with other hedge funds in the Milken network, and in 2006 they were attacking Fairfax Financial, one of the largest financial institutions in Canada. Fairfax filed a lawsuit against others in his “network,” including SAC Capital, and some of its affiliates, such as Exis Capital and Sigma Capital. (A judge has ruled that SAC Capital should be dropped from the suit, but Sigma and Exis are still in litigation, and Fairfax has appealed the ruling).

Emails obtained by Fairfax’s lawyers make it clear that these hedge funds were using the same tactics (such as trying to cut off the company’s access to credit) that they had been using since the 1980s.In one email, an employee of Exis Capital (a SAC Capital subsidiary) wrote that “the way to get this thing [Fairfax] down is to get them where they eat, like the credit analysts and holders. We’re taking this baby down for the count.” This email was addressed to Jonathan Kalikow, son of Peter Kalikow, who had, in the 1980s, been one of largest investors in Ivan Boesky’s criminal arbitrage fund (or “hedge fund,” as it would now be called).

Kalikow is also a former owner of The New York Post. At the time, the newspapers’ fleet of delivery trucks was controlled by La Cosa Nostra. The operation was run by Bonanno Mafia soldier Richard “Shellack-head” Cantrella. Soon enough, the New York Post delivery fleet began transporting cargos of smuggled weaponry and cocaine, in addition to newspapers. (Kalikow was not charged with any crime, and it is possible he was unaware that his delivery trucks were controlled by the Mob).

At any rate, back in 2006, this network was going to take Fairfax “down for the count.” Fortunately, though, Fairfax was a strong company. Its bankers did not cut off access to credit, and it had the good luck to buy a lot of credit default swaps that massively boosted its profits.

However, two years later, Bear Stearns, Lehman Brothers, and other banks were taken “down for the count.” The public attack on Lehman began in May, 2008 with a speech by David Einhorn, a famous short seller who got his start working for Gary Siegler, one of the first people whom Carl Ichan hired after leaving Gruntal & Company. Einhorn is, for all intents and purposes, Ichan’s boy, and when he gave his Lehman speech, he was standing by Icahn’s side, just as he was standing by Ichan’s side when he initiated previous attacks on public companies.

In his speech and subsequent media tour, Einhorn cited data from a strange firm called The Markit Group to support his exaggerated contention that Lehman had improperly accounted for the value of its property and collateralized debt obligation holdings. See my earlier DeepCapture story, “The Markit Group: A Black Box Company that Devastated Markets,” which notes that this company was founded by a few hedge funds, which the company refuses to identify. It was, in 2008, run by two former Canadian bankers and a developer of Bulgarian property, and seemed to cherry-pick its data, which was provided by a few investment banks that are passive investors in the company.

The Markit Group is wholly without transparency, and yet it essentially dictates perceptions of market prices for collateralized debt obligations and other instruments (including credit default swaps) that are important barometers of health in the banking sector. And during the crisis of 2008, it consistently churned out wildly overstated valuations on credit default swaps, while valuing all collateralized debt obligations based on a sampling of CDOs that included only the worst of the worst (or more specifically, the “synthetic” CDOs that had been designed by short sellers to self-destruct).

The Markit Group’s wildly off-base statistics fueled the panic that helped bring down Bear Stearns, and it was a useful tool for Einhorn, when he initiated his attack on Lehman. That attack was akin to the launch of a new Ipod, with much-hyped speeches and a whirlwind media tour handled by a public relations firm, which presented Einhorn as the boy-wonder fraud-buster who had proved his mettle in an earlier battle with a financial services firm called Allied Capital. (See DeepCapture’s story, “Notes on David Einhorn: The Predator in a Cute T-Shirt,” for a fuller deconstruction of Einhorn’s blatantly dishonest attack on Allied Capital, which was perpetrated in league with Michael Milken and Carl Icahn).

While Einhorn was on his media tour, most of the other hedge funds in his network initiated a short selling attack on Lehman. After Lehman’s collapse, the bank’s creditors filed a lawsuit against the above-mentioned Steve Cohen and Dirk Ziff, alleging that the two hedge fund managers (along with Citadel Investment) helped destroy Lehman with manipulative short selling.

To be continued…Click here to read Chapter 7

Mark Mitchell is a journalist who spent most of his career working as a correspondent for mainstream media publications before joining DeepCapture.com. Mitchell is the author of a recently published book: The Dendreon Effect: How Felons, Con-men, and Wall Street Insiders Manipulate High-tech Stocks, which is available from most major online booksellers.

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There is More to the SAC Capital Story

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There is More to the SAC Capital Story


Around 10 years ago a small number of citizen activists began identifying SAC Capital as being a central player in a “network” of hedge funds that engaged in all manner of dubious practices.

The media ignored the citizen activists.

In 2005, Patrick Byrne, then CEO of internet retailer Overstock.com (and future reporter for  DeepCapture.com) gave a famous conference call titled “The Miscreants Ball” in which he sought to expose a “network” of miscreant hedge funds. Soon after, Patrick identified SAC Capital as being the central player in that miscreant network.

The media ridiculed Patrick.

In 2007, DeepCapture was founded, and in May 2008, we published “The Story of Deep Capture” to tell the story of how DeepCapture came into being and to expose a pack of prominent journalists who seemed to be doing the bidding for (i.e. they were “captured” by) a “network” of miscreant hedge funds, including SAC Capital.

Since then, DeepCapture has published numerous stories exposing various misdeeds that have been perpetrated by these journalists and hedge funds, including SAC Capital. Some of the journalists ignored us. Some of them ridiculed us. Some of them, such as the eminently corrupt Gary Weiss, ridiculed us and fought us at the same time.

Gandhi said: “First they ignore you, then they ridicule you, then they fight you, then you win.

Then the news broke (this week) that SAC founder Steve Cohen has received a subpoena to appear before a grand jury, possibly a prelude to an indictment of Cohen and/or his hedge fund. In addition, the media has reported that SAC Capital is the main target of the largest insider trading investigation in FBI history, and the media has even reported (at long last and accurately) that SAC Capital is part of a larger “network” of financial operators and hedge funds involved in insider trading. So, apparently, we win.

But we have not won.

We will not have won until the day when the media reports that SAC Capital and other hedge funds in its “network” are involved in activities that are more damaging to the markets than mere insider trading. For example, some of the creditors to Lehman Brothers have sued SAC Capital and two other hedge funds for allegedly perpetrating manipulative short selling that triggered the 2008 death spiral in the stock price of Lehman Brothers and the resulting collapse of that bank.

You will recall that the collapse of Lehman Brothers brought the global financial system to the brink of apocalyptic ruin.

It is not clear what the status of that lawsuit is, so we cannot yet say with certainty that SAC Capital was the culprit behind the manipulative short selling that contributed (as even the SEC noted in 2008 “Emergency Order”) to the collapse of Lehman, but there is little doubt that hedge funds in the “network” have schemed to destroy other important companies. Have a read, for example, of the following email.

= = = = =Begin Message= = = = =

Message # : 727

Message Sent: 02/22/2006 08:57:48

From: AHELLER3@bloomberg.net|ANDY HELLER|EXIS CAPITAL MANAGEM

To: JONKALIKOW@bloomberg.net|JONATHAN KALIKOW|STANFIELD CAPITAL

Subject: CNBC – FAIRFAX

Reply:

He did this one time before, and the stock went down 3 on the open, then closed up 1. the way to get this thing down is to get them where they eat, like the credit analysts and holders. we’re taking this baby down for the count. ads and I are going to toronto in 2 weeks for a group lunch. J

= = = = =End Message= = = = =

That email was authored by a top employee of Exis Capital, which is an offshoot of SAC Capital, and as you can see, it concerns a conspiracy to take “this baby down for the count.” The “ads” to attend the “group lunch” was former SAC trader Adam D. Sender, head of Exis. The “baby” to be taken “down for the count” (unsuccessfully, in the end) was Fairfax Financial, a major, publicly listed insurance and financial firm.

The emails were acquired through discovery in Fairfax’s lawsuit against a group of hedge funds, one of which was SAC Capital. Although SAC Capital was ultimately dropped from the lawsuit, SAC’s satellite funds (including Exis and an outfit called Sigma Capital) were not dropped from the suit, which is ongoing. And the discovery from that lawsuit has produced additional evidence of shenanigans at SAC Capital. See, for example, DeepCapture stories “Hedge Funds Reading Tomorrow’s Headlines Today,” and “Hedge Funds Scurry…”

It is important for the media to begin paying attention to SAC Capital’s more egregious behavior because far too many people believe that SAC has done no worse than engage in a bit of insider trading, and a lot of people regard insider trading as nothing worse than “good research.” In addition, failing to tell the full story ensures that history will repeat.

Back in 1991, when Michael Milken was sentenced to prison, the media reported that Milken’s principal crime was insider trading when, in fact, he and others in his “network” had also “busted out” (i.e. looted and destroyed) multiple savings and loan banks, some of them among the most important financial institutions in the nation. Those “bust-outs” contributed to the savings and loan crisis that began in the late 1980s, and which ultimately cost American tax-payers billions of dollars in bailouts—a portent of bigger and better things to come.

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The SAC Capital Scandal–Made For TV

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The SAC Capital Scandal–Made For TV


The SAC Capital Advisors insider-trading scandal has inspired an episode of the fictional television program “Person of Interest.” The show features a plotline that was probably taken from recent media headlines about SAC Capital, but we might humbly suggest that the show instead feature a plotline that DeepCapture published more than three years ago.

The CBS crime drama told the tale of insider-trading at a hedge fund called “VAC Capital,” a clear reference to SAC Capital, and just as the real SAC trader Mathew Martoma has been accused of earning for SAC Capital a massive sum ($276 million) from trading on tips about Alzheimer’s drug trials that he received from a University of Michigan professor, so too does the VAC trader turn a massive profit (inflated to $500 million for the purposes of television titillation) from an inside tip. However, readers of DeepCapture might recall that the full (true) story is a lot worse than just that.

In 2009, DeepCapture published a book-length story (“Michael Milken, 60,000 Deaths, and The Story of Dendreon”) demonstrating that Milken had worked with “captured” doctors to derail FDA approval for a promising cancer treatment while promoting less-than promising treatments from which they stood to profit. That story also demonstrated that there was a high probability that a small group of hedge funds, including SAC Capital, had not just traded on inside information about the FDA’s decisions, but had perpetrated manipulative short selling attacks on the stock of the company, Dendreon, that was manufacturing the promising cancer treatment.

I am no TV producer, but it seems to me that Wall Street miscreants trying to destroy companies with promising medical treatments (i.e. killing people, which is exactly what they are doing) is better television than miscreants merely “making a killing” on inside information. Or maybe not. It could be that the old narrative of Gordon Gecko, the greedy but charming rogue scoring the big bucks from his clever reading of inside information, is what people want to see on their TV screens—not the far uglier truth. Even the major U.S. news organizations seem intent upon portraying SAC Capital’s insider traders not as destructive miscreants, but as basically harmless rogues, perhaps even worthy of our respect and admiration.

During the three years while hedge funds were attacking Dendreon’s stock price and Milken was successfully scheming with FDA doctors to derail Dendreon’s cancer treatment (more specifically, a treatment for prostate cancer), more than 60,000 men who would have benefited from that treatment instead died before their time. In fact, Wall Street miscreants nearly destroyed Dendreon, but thanks largely to citizen activists (and not the media) who exposed the corruption that led to the FDA initially denying approval to Dendreon’s cancer treatment, the FDA did (albeit three years too late) finally approve the drug–so maybe it was a Hollywood ending, after all.

Either way, Wall Street miscreants are attacking many other companies with promising medical treatments…and nobody (aside from a few citizen activists) is watching.

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Michael Milken Redux: Insider Trading Indictments on the Horizon for SAC Capital and Others in its Destructive Network

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Michael Milken Redux: Insider Trading Indictments on the Horizon for SAC Capital and Others in its Destructive Network


It’s been a long time coming, but the guys with guns and badges might soon be slapping handcuffs on some of Wall Street’s most destructive miscreants. According to a report posted over the weekend on The Wall Street Journal’s webpage, “Federal authorities are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders and analysts  across the nation…”

The New York Times on Sunday followed up with its own report, quoting Preet Bharara, the United States attorney in Manhattan, who bemoaned “the lengths to which corrupt insiders will go to misuse confidential information for their own personal gain.” As the Times noted, the rhetoric is reminiscent of the 1980s, when the Feds busted the massive stock manipulation and insider trading ring led by the famous financial criminal Michael Milken – and, indeed, it might not be a coincidence that this weekend’s announcement of imminent indictments came exactly 20 years after Milken was sentenced to prison.

The names of some of the hedge funds mentioned in the press as likely DOJ targets – hedge funds like SAC Capital and Ziff Brothers – will be completely familiar to readers of DeepCapture.com. In fact, this website was founded in large part to expose the depredations of precisely this network – a network that has its origins (at least to some extent) in the criminal enterprise that Michael Milken built in the 1980s.

As we have long explained, this network not only regularly trades on inside information, it has pioneered new variations of the practice by, for example, manufacturing information (often false) which they can front-run in the market, employing abusive (and likely illegal) short selling techniques to manipulate the stock of public companies; and “capturing” some of the institutions this nation relies upon to curtail such behavior.

Most notable among these institutions are the financial press (large swaths of which have grown inappropriately close to precisely this network of hedge fund managers), and the SEC, which has not only failed in its regulatory duties, but has often assisted the hedge funds’ schemes by launching misguided (and go-nowhere) investigations of the companies the hedge funds have targeted, and providing the hedge funds with confidential information about those investigations.  All of this has been thoroughly documented within the pages of Deep Capture.

It was more than five years ago that Overstock.com CEO and future Deep Capture founder Patrick Byrne first gave a famous public conference call that he dubbed “The Miscreants Ball”. With more than 500 Wall Street executives and a few journalists listening in, Patrick outlined the existence of a “network” of miscreant hedge funds and “independent” financial analysts that he said was using underhanded methods to trade on privileged information and do serious damage to the financial markets.

In “The Story of Deep Capture”, we sought to explain the origins of the Deep Capture project by telling the tale of our extensive (and at times, arguably over-the-top) investigation of this network of hedge funds – a network that included SAC Capital (whose founder, Steven Cohen, was investigated by the SEC in the 1980s for trading on inside information given to him by Milken’s shop at Drexel, Burnham), Ziff Brothers, and others. This story was (I admit) exceedingly  long – it demanded its readers’ patience – but it provided plenty of detail of how the network operates.

Among the tactics we cited in that story was the use of so-called “independent” experts – experts who had been hired by hedge funds to ferret out inside information about companies targeted by the hedge funds, or to badmouth companies the hedge funds were selling short. It now appears that the Feds have themselves independently discovered how these “expert networks” actually operate and, as a result, some of these “experts” seem to be looking at possible jail time.

Another tactic we detailed at length was the use of supposedly “independent” financial research shops, such as Gradient Analytics, which were, in fact, in the business of publishing spurious reports for the benefit of their hedge fund clients, which would obtain the reports before they were made public and place trades that would profit from the effect that the reports would have on stock prices. Over and over again we noted how the false information in these reports ended up regurgitated in stories written by a small clique of journalists who appeared to have developed exceedingly close relationships to a small circle of hedge funds, and had come to depend on the hedge funds’ bogus analysis to the exclusion of all dissenting views.

The journalists (some of whom worked for The Wall Street Journal and The New York Times, whose editors must have swallowed hard before publishing this weekend’s stories announcing the imminent indictments) had, like the SEC, been “captured” by the hedge fund managers.

Some of these journalists even went to lengths to cover up the hedge funds’ shenanigans, insisting all along that their favorite hedge fund managers were innocent of any crime – indeed, insisting that the hedge fund managers were heroes and the smartest people on Wall Street. (The hedge fund managers were clever, to be sure, but apparently not clever enough to avoid becoming targets of what now appears to be the biggest criminal investigation in the history of Wall Street.).

In January 2009, in a story titled “Hedge Funds Reading Tomorrow’s Headlines Today”, Deep Capture reporter Judd Bagley provided indisputable evidence that SAC Capital, Ziff Brothers, and some of the network’s other major figures, such as James Chanos of Kynikos Associates, received advance copies, and traded ahead of bogus financial research produced by Morgan Keegan, a supposedly “independent” research shop that was, in fact, working for those same hedge funds.

Even after this evidence was posted for all to see, the press continued to use these hedge fund managers as sources, and never once cast doubts as to whether they really were wholesome geniuses who deserved the final say on the health of public companies. Meanwhile, James Chanos, who heads a hedge fund lobby, could be found regularly roaming the halls of the SEC, where he successfully convinced regulators to flinch from enforcing the rules against manipulative trading that he and his associates were skirting.

Some time ago, Deep Capture published another treatise titled “Michael Milken, 60,000 Deaths, and The Story of Dendreon.” In this book-length story (which might, indeed, have been the longest blog post ever published), we provided excruciating detail about the lengths that the Milken network of hedge funds – including SAC Capital – went to obtain (and manufacture) inside information about biotech companies.

We noted in that story that the hedge funds and  Michael Milken apparently even managed to “capture” doctors working for the Food and Drug Administration – prominent doctors who abandoned their duty to the public and served the interest of the most destructive network of financial operators in America. And we explained in that story that the hedge funds did not just trade on inside information, they also deployed their information advantage and abusive short selling to hobble public companies that were developing medicines that could have saved lives.

During the many years that Deep Capture has sought to expose these miscreants, we have struggled with our despair – our belief that the system might be so thoroughly corrupted that justice would never see the light of day.  In our view, the DOJ officials and FBI agents who are now going after this network of hedge funds deserve medals. They are “public servants” in the true meaning of the phrase.

If the indictments are indeed imminent, they are proof that there are some officials who will do what is right for the country in the face of great pressure — pressure from the media, which insisted on defending the hedge funds, and from an immensely powerful hedge fund lobby that had a lot of regulators and politicians on its side.

And make no mistake: the hedge funds that the Feds are targeting are not just “insider traders” – a term that makes it seem as if they are nothing more than outsized versions of Martha Stewart. These hedge funds’ tactics have damaged the integrity of the markets. And they have hobbled – perhaps even destroyed —  countless public companies. They even helped bring about our current economic troubles.

Indeed, it might not be a coincidence that the hedge funds named as likely to be facing indictments – SAC Capital, Citadel, Ziff Brothers, and others in their network – are the same hedge funds that attacked Lehman Brothers and Bear Stearns, the collapse of which contributed mightily to market cataclysm of 2008.

Bear Stearns executives reported seeing the managers of SAC Capital and Ziff Brothers celebrating the demise of that bank at a special breakfast meeting days after its collapse. The creditors of Lehman Brothers are suing some of these same hedge funds — SAC Capital, Och-Ziff (run by Dirk Ziff, also of Ziff Brothers) and Citadel —  because they seem to be the  most likely suspects in the illegal short selling and rumor mongering that helped topple or almost topple, not just Lehman, but multiple other pillars of the American economy.

Yes, make no mistake – these hedge funds are not just small-time insider traders. I do not even think it is a huge stretch to say that some of these hedge funds are a threat to the security of our nation.

As it happens, it is on this subject – the threat that some traders pose to national security – that Deep Capture is now on the verge of publishing an immensely long and detailed piece of research. For now I will refrain from revealing too much of the article’s contents except to alert you that it includes excruciating detail about this Milken network, shocking facts about some traders who are dangerous in every sense of the word, and a tremendous amount of information regarding some singularly ruthless organized crime groups and people tied to the world’s most violent terrorist outfits.

Given this, readers will understand if I remind them that immediately before Deep Capture published my work on Dendreon, Patrick Byrne posted a short piece, “Coming Attraction: Michael Milken, 60,000 Deaths, and The Story of Dendreon“. In it, he wrote:

Incidentally, I feel it only prudent to mention that, on the remote chance that anything happened to interrupt the serialization of this piece on DeepCapture (say, for example, a power failure), then arrangements have been made for it to receive immediate publication, in full, in a way that would reach 20 million people, instantly.  In addition, the whole package is already in the hands of some politicians who care.  Lastly, over the last couple of years I constructed a Doomsday Machine (and of course, there’s no point in having a Doomsday Machine if you keep it a secret). The reader who gets but a few pages into it will understand why I make this cautionary mention.

We will begin publishing this new story as a series in a few weeks. We apologize to our regular readers for not updating the Deep Capture site regularly during recent months. And we thank our readers for having the patience to wade through our previous stories, and for staying tuned for what will be by far our longest and most comprehensive story to date.

In other words – more bad news on the way.

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New Evidence Raises Serious Questions About Kingsford Capital’s “Donation” to the Columbia Journalism Review

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New Evidence Raises Serious Questions About Kingsford Capital’s “Donation” to the Columbia Journalism Review


A blog published by the University of North Carolina School of Journalism reported recently that Steve Cohen of hedge fund SAC Capital managed to kill a story by Reuters reporter Matt Goldstein. It seems that Goldstein was going to shed some light on allegations that Cohen engaged in insider trading. Cohen didn’t like that, and got in touch with Goldstein’s superiors.

It remains unclear how Cohen convinced Goldstein’s superiors to shelve their journalistic ethics, but it is not surprising that he succeeded. After all, Cohen is “the most powerful trader on the Street.” He is also part of a network of closely affiliated hedge fund managers that for many years all but dictated much of what was published by the New York financial press.

Three years ago, while working for the Columbia Journalism Review, a magazine affiliated with Columbia University’s school of journalism in New York, I began investigating this network of hedge funds. I worked for many months on this story, and compiled evidence that the hedge fund managers, including Steve Cohen, had developed extremely odd relationships with small number of dishonest journalists.

This evidence gradually convinced me that the hedge funds and journalists not only routinely worked together to disseminate false information about public companies, but also set out to cover up the serious crime of market manipulation via naked short selling.

As I was preparing to publish this story, a hedge fund called Kingsford Capital donated a large sum of money to the Columbia Journalism Review. Indeed, it was made clear to me that my salary would be paid directly from Kingsford’s donation.

I have made this abundantly clear in various stories that I have since written for Deep Capture, but new evidence confirms that Kingsford is tied directly to Steve Cohen’s network of hedge funds and shady journalists – that is, the very network that I was planning to expose in the Columbia Journalism Review when Kingsford announced that it would henceforth be paying my salary.

I left the Columbia Journalism Review soon after Kingsford announced its “donation.” It is possible that my editors would have done the right thing and published my story had I remained. However, I have no doubt that Kingsford Capital’s “donation” stemmed not from some newfound dedication to the field of media criticism, but was intended as a means of acquiring leverage over the Columbia Journalism Review.

Moreover, new information suggests that Kingsford’s financial inducements might have persuaded other journalists to cover up short seller crimes.

This is a scandal of rather significant proportions, so let’s review the evidence, old and new.

  • While at Columbia, a key focus of my investigation was a financial research shop called Gradient Analytics. Former Gradient employees had testified under oath that short selling hedge funds – especially Steve Cohen’s SAC Capital and Rocker Partners – wrote and traded ahead of Gradient’s false, negative reports on public companies. Former employees of Gradient also said that journalist Herb Greenberg, then of CNBC and MarketWatch.com, timed his false, negative stories, which were based on Gradient research, so that Rocker could profit from the effect those stories had on stock prices.
  • In the course of investigating SAC Capital and Rocker, I was taking a close look at the bear raid on a company called Fairfax Financial (NYSE:FFH). As we have since shown in numerous Deep Capture reports, Rocker, SAC Capital and a few closely affiliated hedge funds – including Jim Chanos’s Kynikos Capital, and Dan Loeb’s Third Point Capital – conspired to destroy Fairfax. As part of this ultimately unsuccessful attack, the hedge funds attempted to cut off Fairfax’s access to credit. They traded ahead of false financial research that had been written with their cooperation. And they hired a thug named Spyro Contogouris to harass and threaten Fairfax executives.
  • Emails obtained from discovery in a lawsuit filed by Fairfax Financial (NYSE:FFH) show that Kingsford Capital, the hedge fund that donated money to pay my salary at the Columbia, is directly tied to Steve Cohen, Rocker Partners and the other hedge funds that were attacking Fairfax at the time of my investigation. In one email, from Kingsford manager David Scially to Rocker Partners employee Russell Lyne, the subject line reads: “http://www.spyrocontogouris.com” – a reference to the website of the above-mentioned thug, Spyro Contogouris. The contents of the email is redacted, so it is difficult to know what was discussed, but it is safe to assume that Kingsford and Rocker were communicating about the attack on Fairfax.
  • It has also come to my attention that Kingsford Capital at one time employed the above-mentioned thug, Spyro Contogouris. Two weeks after Kingsford agreed to “donate” money to the Columbia Journalism Review, the FBI arrested Contogouris as part of an investigation into this same network of hedge funds.
  • Another target of my investigation was TheStreet.com (NASDAQ:TSCM). Although some good journalists work for that publication, a review of hundreds of stories and numerous bear raids made it clear to me that TheStreet.com had been founded partly to serve the financial interests of select short selling hedge funds, including Rocker Partners, which was then TheStreet.com’s largest shareholder (apart from founder Jim Cramer). Over the course of my investigation, I closely examined the journalism of TheStreet.com’s five founding editors. It was clear that these five journalists had routinely disseminated false information that served the interests of their short selling sources, including Rocker Partners and SAC Capital.
  • Four of the five founding editors of TheStreet.com were as follows:

1) Jim Cramer, famously of CNBC;

2) David Kansas, then of the Wall Street Journal;

3) Herb Greenberg, the CNBC and MarketWatch reporter mentioned above, said to be conspiring with Rocker and Gradient Analytics;

4) Jon Markman, then running a hedge fund out of the offices of the above mentioned Gradient Analytics. (Markman has since gone on the record saying that hedge funds pay journalists to write false stories.)

  • The fifth founding editor of TheStreet.com was Cory Johnson. In 2006, Cory Johnson was a manager of Kingsford Capital, the hedge fund that donated money to pay my salary at the Columbia Journalism Review, right before I was to publish a story exposing the five founding editors of TheStreet.com and the hedge funds in their network. After I published my first Deep Capture story raising questions about Kingsford’s donation to the Columbia Journalism Review, Johnson removed all references to Kingsford from his online profiles at LinkedIn.com and other social networking sights.
  • Another focus of my investigation at Columbia was a hedge fund manager named Jim Carruthers. Patrick Byrne, in his capacity as CEO of Overstock.com, had recently sued Rocker Partners and given a famous conference call presentation in which he described the shenanigans of Rocker and affiliated hedge funds. During this presentation, Patrick stated that he had been informed that Carruthers had been posing as a private investigator as part of the network’s efforts to smear public companies. An email obtained in the Fairfax discovery, written by an employee of the above-mentioned Third Point Capital, and addressed to the above-mentioned Dan Loeb, states: “Jim Carruthers (ex Eastbourne partner, Scially friend, etc.) would like to come up and meet with you…It would be well worth your time.” In other words, Scially, the Kingsford Capital manager, was on good terms with both Carruthers and Loeb, at the time that Kingsford announced that it would be paying the salary of the journalist (me) who was seeking to expose Carruthers, Loeb, and the rest of their network.
  • Deep Capture reporter Judd Bagley has obtained a list of people whom Kingsford Capital manager David Scially invited to be his “friends” on Facebook, the social networking site. Among Scially’s Facebook friends were Rocker Partners’ managing partner, and three of this managing partners’ family members. Several bloggers, such as Gary Weiss (more on him below), have written that Judd’s Facebook list is a Nixonesque “enemies list” dreamed up by Overstock CEO Patrick Byrne, when in fact Byrne was not involved in its creation, most of the people on the list have nothing whatsoever to do with Overstock.com, and it was not “dreamed up”, but merely documents cold facts (bilateral Facebook friendships) that are in fact public. When considered alongside the emails and other evidence, the Facebook revelation is excellent evidence that Scially is close to Rocker Partners – close enough to invite the managing partner and much of his family to be his internet pals. That is big news – a clear motive for Kingsford Capital to begin paying my salary right before I was going to publish strong evidence that Rocker Partners and others in its network were dirty players.
  • Scially’s Facebook friends also include the above-mentioned Dan Loeb, accused of conspiring with Rocker Partners in the attack on Fairfax; David Einhorn, a hedge fund manager whom I was investigating because he consistently attacks public companies in cahoots with Loeb and others in the network; and Dan Colarusso, a journalist I was investigating because he had vowed to use “barrels of ink” to “crush” Patrick Byrne, who was famously crusading against naked short sellers and this same network of miscreant hedge fund managers. (Patrick is now a Deep Capture reporter.) This additional Facebook information is clear evidence that Kingsford Capital is part of the network I was investigating when Kingsford Capital “donated” money to the Columbia Journalism Review.
  • Another target of my investigation at CJR was a journalist named Gary Weiss. Weiss, a former reporter for BusinessWeek magazine is flat-out corrupt. It is a disgrace to the profession of journalism that he is still working. While at BusinessWeek, he published stories fed to him by Kingsford Capital while deliberately covering up illegal naked short selling by Kingsford’s then business partner. Since then, Weiss has been caught anonymously authoring blogs that spew lies about people he considers to be his enemies. He has been caught anonymously authoring blogs in which he effusively praises himself — Gary Weiss. He has denied that he authored the blogs about himself despite all evidence to the contrary. He was caught shilling for the Depository Trust and Clearing Corp. (an outfit at the center of the naked short selling scandal) while posing as a journalist. He was caught lying about his shilling. He was caught lying and denying when he was caught controlling the Wikipedia entry on naked short selling. He has lied repeatedly in his blogs about Deep Capture reporters Patrick Byrne and Judd Bagley. He has lied about me – for example, stating that I was fired from the Columbia Journalism Review. He has continued to lie and cover up the crime of naked short selling. He has lied and covered up crimes committed by people tied to the Mafia. And the common denominator of all this lying has been to boost the profits of short selling hedge fund managers, such as his pals at Kingsford Capital, which “donated” a lot money to the Columbia Journalism Review shortly before I was going to publish a story exposing Gary Weiss and his hedge fund friends. (For complete evidence of Gary Weiss’s lying, and his ties to Kingsford Capital, please search through Deep Capture’s archives. We have published extensively on the subject).
  • Another target of my investigation at CJR was a hedge fund manager named Manuel Asensio, who is tied closely to Gary Weiss. Asensio previously worked for First Hanover, a brokerage tied to the Mafia. He is a self-confessed naked short seller and has been fined for naked short selling infractions. He was also once a business partner of Kingsford Capital. That is to say, Kingsford and Asensio contractually agreed to attack public companies together. I think it’s safe to say that Asensio was close to Kingsford Capital at the time that Kingsford Capital delivered a bundle of money the Columbia Journalism Review.
  • Another focus of my investigation at CJR was the appalling bear raid on a collectibles company called Escala (NASDAQ:ESCL). Not only was Escala the victim of massive amounts of illegal naked short selling, but a hedge fund convinced the Spanish government that Escala’s parent company, based in Madrid, was fleecing investors in philatelic collectibles. The Spanish government closed the parent company, Afinsa, but not a single executive of the company has since been prosecuted for any crime. Former clients of Afinsa are now petitioning the Spanish government, claiming that the closure was a gross miscarriage of justice. For the full story, I encourage you to visit a website (www.gregmanning.me) put together by Escala’s former CEO. This website provides evidence that the hedge fund at the center of the bear raid on Escala – the hedge fund behind the Spanish government’s decision to close Afinsa — was none other than Kingsford Capital, which donated a bundle of money to the Columbia Journalism Review while I was busy trying to figure out which hedge fund was at the center of the bear raid on Escala.
  • While I was working on my story for the Columbia Journalism Review, a reporter named Justin Hibbard was working on a similar story for BusinessWeek magazine. I have reviewed emails between Hibbard and one of his sources. These emails clearly show that Hibbard had received evidence that various companies had been clobbered by illegal naked short selling. The emails suggest that Hibbard was investigating ties between journalists and naked short sellers, and that he had interviewed the above-mentioned Herb Greenberg. But for some reason, Hibbard’s story was killed. It never appeared in BusinessWeek. Shortly after Hibbard’s story was killed, Hibbard had a new job – working as consultant to Kingsford Capital.
  • After I wrote my first story raising questions about Kingsford’s “donation” to the Columbia Journalism Review, Hibbard erased all mention of Kingsford from his profiles on LinkedIn.com and other social networking sites. In a phone interview, Hibbard told me that he “preferred not to discuss” his relationship with Kingsford. When I asked what happened to his BusinessWeek story about naked short selling and corrupt journalists, he said that he had never worked on any such story. When I told him I had evidence to the contrary, he said he might have done some initial research on naked short selling, but he never finished the story. Currently, Hibbard works as a private investigator catering to the needs of short sellers and other “activist” investors. In an interview with an online publication, he said he serves hedge funds by “covertly” observing executives of public companies, taking photos of the executives with a spy camera, staking out offices, using multiple cars to trail the executives, etc. I assume Kingsford Capital is one of his clients.
  • My successor at the Columbia Journalism Review is now referred to as the “Kingsford Capital Fellow.” He has written several stories arguing that the above-mentioned Gradient Analytics is innocent, despite massive amounts of evidence to the contrary. He has written that short sellers are swell and good sources for journalists (glossing over the distinction between short selling and abusive short selling, just as a child molester would gloss over the distinction between sex and pedophilia). He has criticized a 60 Minutes television news expose on Gradient and Steve Cohen of SAC Capital. He has criticized Bloomberg News for writing that criminal naked short sellers helped take down Bear Stearns and Lehman Brothers. And he has portrayed the corrupt Gary Weiss as a respectable reporter. I don’t mean to suggest that the “Kingsford Capital Fellow” is dishonest, but I predict he will not write about journalists who have been corrupted by Kingsford Capital’s network of hedge fund managers.

To summarize, a particularly nasty network of hedge fund managers and criminals use underhanded tactics to influence the press. We have a money trail, multiple motives, and plenty of other reasons to believe that this network got to the Columbia Journalism Review, which is the only watchdog there is to keep the press honest.

So it goes. Interesting world, isn’t it?

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Steve Cohen, the anti-Midas

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Steve Cohen, the anti-Midas


My most recent post, showing emails suggesting an instance of insider trading on the parts of short-selling hedge funds SAC Capital, Kynikos Associates and Third Point Partners, included a brief appearance by a fellow named Jeff Perry.

As with all those included on these emails, I had to do some research to determine the role each played for their respective employers at the time the emails were sent. For most, this was easy. But for Jeff Perry, it was difficult. That’s because since 2002, when the emails were originally sent, Perry has worked for SAC, Third Point, and Kynikos.

So, not only do these supposedly fierce competitors share and profit from inside information, they also share employees.

The sender of possibly the most damning of the highlighted emails was, at the time, SAC portfolio manager Forrest Fontana, who, with the help of a SAC investment of $50-million, left to start his own hedge fund, Fontana Capital, in 2005. However, despite a very strong start, Cohen suddenly pulled his money out of Fontana Capital in 2007, leaving the firm far out of the money and, according to Reuters, hardly a hedge fund at all these days.

And this brings us to another interesting phenomenon, recently examined by financial blogger and author Lila Rajiva: the startlingly high mortality rate of SAC-sponsored spin-off hedge funds. As Lila notes, the consistently poor performance of Cohen’s anointed proteges — often a result of Cohen’s inconsistent support of them — contrasted with the strong showing of one fund launched by former SAC traders who left under a cloud, is a little suspicious…as though maybe these satellite SACs weren’t supposed to succeed.

Here are Lila’s observations on the matter:

1. The high number of SAC traders who seem to have gone off into their own businesses.

You’d think with all that money and the fund’s record as the most consistently successful in the business (only one bad year on record), their traders would stay forever. Quite the opposite.  People seem to have been leaving all the time to form their own businesses.

But SAC was also said to be a very tough environment. You produced, or you left.

So maybe that’s why Lee and Far, Grodin and Goodman, all left to found their own firms?
Could be. But I’m not convinced.

2. None of the spin-off firms seems to have been very successful.

Why not? Why couldn’t these hot-shot traders make money on their own?

The Reuters piece suggests that perhaps the SAC experience didn’t foster business ability. And that perhaps SAC traders flounder without SAC’s huge supporting cast.

But those things are likely to be true of other firms as well, not solely SAC.

Still not convinced.

Furthermore, consider this.

3. A spin-off fund that didn’t get money from Cohen ended up quite successful:

“Healthcor, a healthcare industry focused fund, had raised $3.2 billion by June 2009 since launching four years ago. The fund returned 25 percent in 2006, 18 percent in 2007, and was up 4 percent last year, when the average hedge fund lost 19 percent. In the first 10 months of 2009, Healthcor was up 7 percent.

Healthcor, founded by Arthur Cohen and Joseph Healey, opened without any financial support from SAC. In fact, soon after Cohen and Healey struck out on their own, SAC sued the pair, accusing them of breaching their employment contracts. The matter ultimately was settled. (Healthcor’s Cohen is not related to SAC’s Cohen).”

4. Even spin-offs that were doing well were shut down.

When Stratix started in 2004, it had $60 million given to it by SAC. When it shut down, in 2007, it was up 17% and had $530 million under management. Yet it shut down. Why did it shut down? Those numbers sound pretty good.

Another spin-off, Fontana Capital, started out in 2005 with $50 million of SAC money. It grew to $325 million by 2006.  But sometime in 2007, Cohen pulled out all his money. And in 2009, Fontana was down to $16.1 million, despite being down only 7.69%, compared to the average S&P Financial index loss of 57%. Again, that sounds like it wasn’t doing all that bad.

Reuters quotes someone familiar with the record of ex-SAC traders:

“So many of the ex-SAC people seem to have this model where they attract you with fantastic returns in the first year but in year two or three or four you get annihilated,” said a person who is familiar with several former SAC employees’ records.

Shades of Bernie Madoff….

Someone need to look closely at what happened to the money at these firms…

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Blue Kryptonite and naked short selling

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Blue Kryptonite and naked short selling


bizarro-code

The Bizarro World Code

Within minutes of my introduction to the world of short selling hedge funds, I encountered the analogy that remains the best suited to describe the truth to which they subscribe: Bizarro World.

A planet that appears from time to time in the DC Comics universe, Bizarro World is noteworthy for its utter opposition to everything associated with reality on Earth (in fact, another name for Bizarro World is Htrae – “Earth” spelled backwards).

Bizarro World made very infrequent appearances in the DC Comics universe; however what few insights we’ve been able to gain have been telling.

For one, we know that the residents of Bizarro World adhere to a simple moral code: “Us do opposite of all Earthly things! Us hate beauty! Us love ugliness! Is big crime to make anything perfect on Bizarro World!”

bizarrosuperman

Bizarro Superman

For another, consistent with its black-is-white nature, the alpha-superhero of Bizarro World – a Superman-like figure appropriately named ‘Bizarro’ – is in fact a super villain, and one of many.

Fortunately, or possibly unfortunately, the Bizarro World of short selling hedge funds sits side-by-side with our own. Yet, true insights into how it actually operates have been startlingly rare.

Possibly the best behind-the-curtains view came in December of 2006, with Jim Cramer’s infamous admission as to how short selling hedge funds do (and indeed, according to Cramer, “must”) operate, moving the Bizarro World citizenship of that group from theory to undeniable fact.

See for yourself:

Cramer: “You can’t foment. You can’t create yourself an impression that a stock’s down. But you do it anyway because the SEC doesn’t understand it. So that’s the only sense that I would say that it’s illegal.”

Bizarro translation: “Us do opposite of all Earthly things! Us can break law to make money because regulator not understand regulations!”

Cramer: “Look what people can do. I mean that’s a fabulous thing! The great thing about the [stock] market is that is has nothing to do with the actual stocks. Look, over maybe two weeks from now the buyers will come to their senses and realize everything they heard was a lie…”

Bizarro translation: “Us hate beauty! Us pervert capital markets to make them hostile to small, promising businesses and technologies! Us stock market has nothing to do with actual stocks!”

Cramer: “These are all what’s really going on under the market that you don’t see. What’s important when you’re in that hedge fund mode is to not do anything remotely truthful – because the truth is so against your view, that it’s important to create a new truth to develop a fiction.”

Bizarro translation: “Us love ugliness! Us hate truth! Us prefer fiction!”

Cramer: “I think that it’s important for people to recognize the way that the market really works is to have that nexus of ‘hit the brokerage houses with a series of orders that can push it down’, then leak it to the press, and then get it on CNBC (that’s also very important), and then you have kind of a vicious cycle down. It’s a pretty good game.”

Bizarro translation: “Is big crime to make anything perfect on Bizarro World! Us make money by wrecking public companies! And here on Bizarro World, Jim Cramer not even pretend to be friend of small investor! Oh yeah…CNBC official network of Bizarro World!”

(Lest any suppose these clips have been taken out of context, I strongly encourage everybody to download and view the 10 minute conversation in its entirety.)

On Bizarro World, villains are treated like celebrities while the law-abiding are scorned and ostracized. So it should come as no surprise that on CNBC (the official network of Bizarro World), short selling hedge fund managers are called “titans” while those who question them are dismissed with a wink and a smirk.

Of course, this would seem consistent with the seemingly inverted reality that is short selling, where – as opposed to traditional investors who earn profits when they buy low and later sell high – shorts aspire to do the same by first selling high and then buying low.

While on the surface short selling might appear to have been invented on Bizarro World, that’s not true. Shorting is (as has been stated time and again on this blog) a healthy part of a normal market.

What was invented on Bizarro World, however, is shorting’s insidious doppelganger: naked short selling, which is a practice ripped straight from the Bizarro World welcome guide. Unlike legitimate short selling, which requires first borrowing the shares one sells short, naked shorting skips that step, allowing criminals to sell not only something they do not own, but something that does not even exist, except as a tradable electronic ledger entry which they themselves conspire with corrupt brokerages to create.

This, in turn has the effect of artificially increasing the supply of a company’s shares. In other words, on Earth, only companies get to issue stock, whereas on Bizarro World, it’s the naked short sellers that issue shares of a company’s stock, with impunity, sometimes in quantities rivaling the number of legitimate, company-issued shares in circulation (with the expected impact on share price).

Or, should I say, naked short sellers used to be able to do this.

The truth is, since shortly after the onset of the economic crisis naked short sellers themselves helped to spark, naked shorting has become an increasingly difficult crime to commit.

The result?

Despite the fact that we’re in the midst of an epic bear market – when one would normally expect short sellers to thrive – the biggest short selling hedge funds are getting hammered.

Today, Reuters business writer Svea Herbst-Bayliss has a shocking overview of the breadth of the situation, which she begins by comparing to Waterloo – the battle which forever put an end to Napoleon’s aspirations of world domination.

Based on insiders’ insights into forthcoming letters to investors explaining their performance over the first and second quarters of 2009, Herbst-Bayliss predicts that “To anyone considering hedge fund investments in the coming months, the data will illustrate that these managers who cashed in on last year’s financial markets crash now rank as the $1.4 trillion hedge fund industry’s worst performers.”

Specifically, Herbst-Bayliss notes, “In the first six months of 2009 [short selling hedge funds] lost 9.38 percent, compared with the 9.55 percent that other hedge funds gained.”

Most notably, the story quotes Brad Alford, a professional hedge fund advisor and investor, who says, “Every few years short-sellers have their day in the sun. Then things revert to normal where the markets rise and life becomes so difficult for them that many just go out of business,” he added.

In case you missed it, you might want to re-read Alford’s quote to make sure you catch what makes it so telling: that a rising market can be bad for short sellers.

But how can that be, given the recently-ended bull market – possibly the greatest in economic history – saw short selling hedge funds such as SAC Capital, Kynikos Associates and Third Point Capital experience mind-boggling growth, while a month-long rise in what is otherwise shaping up to be one of the greatest bear markets in economic history (when the shorts should be thriving) may prove to be their ultimate doom?

Talk about Bizarro World investing!

The difference, I suspect, is naked short selling: a crutch-like tool that allowed the shorts to defy gravity while the market soared, the effective removal of which has left them atrophied and uncoordinated when forced to fend for themselves in a market where capable, legitimate short sellers should thrive.

Blue vs. Green Kryptonite Click to see full version.

Blue vs. Green Kryptonite: Click to see full image

Or maybe a more apt metaphor is that of Kryptonite, the green version of which makes Superman weak and Bizarro strong, while the blue version has the opposite effect. For a long time, a captured media and SEC equipped short selling hedge funds with a big, fat slab of green Kryptonite, which their own hubris has caused to be replaced by a bit of the Bizarro-toxic blue stuff.

Will July of 2009 be the short sellers’ Waterloo?

Will short selling hedge funds’ greed simply assume another form?

Will the economy recover before it’s too late to matter?

Find out what happens in the next episode of Deep Capture!

Posted in Featured Stories, The Deep Capture CampaignComments (17)

Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 15 of 15)

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Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 15 of 15)



What follows is PART 15 of a 15-PART series. Soon, we will publish the full 15-part story as a single document.

Click here to read PART 1

Click here to read PART 2

Click here to read PART 3

Click here to read PART 4

Click here to read PART 5

Click here to read PART 6

Click here to read PART 7

Click here to read PART 8

Click here to read PART 9

Click here to read PART 10

Click here to read PART 11

Click here to read PART 12

Click here to read PART 13

Click here to read PART 14

Where we left off, we had learned that on March 29, 2007, an FDA advisory panel had overwhelmingly voted to approve Provenge, a prostate cancer vaccine developed by Dendreon.  As a result, most financial analysts and investors believed that Dendreon had a promising future. However, ten hedge funds (out of a universe of 11,500 hedge funds) held large numbers of Dendreon put options (bets against the company), suggesting they expected that Dendreon would be derailed. At least seven of those hedge funds can be tied to Michael Milken or his close associates.

We had also learned that Milken himself stood to profit if Dendreon were to experience  problems receiving FDA approval. This is because Milken was the early financier and principal deal maker for ProQuest Investments, a fund that (along with an affiliate) controlled a company called Novacea, which was one of Dendreon’s competitors in the race to produce a new treatment for prostate cancer. Meanwhile, Lindsay Rosenwald (a Milken crony who once helped run a Mafia-linked brokerage called D.H. Blair, which specialized in pumping and dumping fake biotech companies) controlled Cougar Biotechnology, which was Dendreon’s second competitor in the race to develop a treatment for prostate cancer. And hedge funds affiliated with Milken or his close associates were heavily invested in Cell Genesys, which was Dendreon’s third competitor.

We had learned further that Milken’s “philanthropic” outfit, the Prostate Cancer Foundation supported Novacea, Cougar and Cell Genesys. The Prostate Cancer Foundation’s support for these companies preceded announcements that they had signed massive deals with large pharmaceutical companies. In the cases of Novacea and Cell Genesys, those deals were soon cancelled on the news that their treatments were ineffective, and the companies’ investors quickly dumped their stock. This fact, combined with other evidence, suggests that the Prostate Cancer Foundation was supporting what amounted to sophisticated “pump and dump” schemes.

Meanwhile, the Prostate Cancer Foundation snubbed its nose at Dendreon. And in April, 2007, Dr. Howard Scher, who was an executive and director of Milken’s investment fund, ProQuest, and the chairman of the Prostate Cancer Foundation’s “Therapeutic Consortium”, spearheaded an unprecedented lobbying effort to convince the FDA to reject Dendreon’s treatment – the first time in history that the FDA had gone against an advisory panel’s recommendation to approve a drug for terminally ill patients. This lobbying effort had the support of government officials who have ties to Michael Milken.

In the days before and after the lobbying effort, Dendreon was trashed by a few captured journalists – most notably, CNBC’s Jim Cramer — and was also subjected to a blistering attack by naked short sellers who illegally flooded the market with millions of phantom shares to help drive down the company’s stock price. This criminal naked short selling continued intermittently for much of the next two years, while the SEC did nothing, and while other events conspired to hobble Dendreon, a company that had completed multiple clinical trials that strongly indicated that its product, Provenge, was capable of lengthening the lives of tens of thousands of men with prostate cancer.

Amazingly, the SEC will not reveal the names of the naked short sellers. As it says on its website, to release information about (illegal) naked short selling would be to reveal the (criminal) hedge funds’ “proprietary trading strategies.”

* * * * * * * *

When Dendreon’s FDA application was derailed simultaneously with a naked short selling attack that flooded the market with tens of millions of phantom shares, Dendreon’s supporters went berserk. They sent the government hundreds of letters complaining about the naked short selling and the apparent machinations of Michael Milken’s associates. After that, all but one of the ten hedge fund managers ceased to own “put options” in Dendreon.

However, the naked short selling continued pretty much unabated for two years. And in April 2009, Dendreon was once again on the SEC’s “Reg  Sho” list of companies whose stock was “failing to deliver” in excessive quantities.  Dendreon stayed on that list even after the company’s CEO announced that results of an Independent Monitoring Committee study of 500 patients were “unambiguous in nature…a clear hit” for Provenge.

After the CEO’s announcement, Dendreon’s stock, which had been as low as $4 weeks earlier, rose to the mid-20s. Then, on April 28, 2009, just hours before Dendreon was to present this “unambiguous” data to an all-important meeting of the American Urological Association, the now legendary Yahoo! message board post appeared, warning of  a “BEAR RAID” that was to occur at precisely 12:30pm Central time. Right on cue, Dendreon’s stock tanked 65% in matter of 75 seconds (to $7), within minutes of the moment predicted by that message.

Within hours after that amazing crash, Nasdaq announced that it had investigated the matter and decided to let the trades stand. This was quite remarkable, given that it would have been impossible for the exchange to determine the identity of that message board poster and sort through the trading data in such a short period of time. It is all the more remarkable considering that this “BEAR RAID” was most likely the work of naked short selling criminals.

At any rate, it is likely that short sellers, recognizing that it was now going to be more difficult to prevent Dendreon from getting FDA approval, used the opportunity of that sharp price drop to cover their short positions. Some short sellers might also have used the opportunity to buy shares, hoping to cash in on the bonanza that was to follow. After the “BEAR RAID,” Dendreon’s stock price quickly rose above $27.

The night after the “BEAR  RAID”, CNBC’s Jim Cramer (who has begun a “crusade” against the crime of naked short selling in an effort to distance himself from his previous efforts to cover up the crime of naked short selling) said “I’m not qualified to talk about Dendreon.” This was just two weeks after Cramer had screamed that Dendreon had no chance of receiving FDA approval. Now, he was no longer commenting on Dendreon’s chances, but he noted,  “I am a big believer in taking profits when I see a short squeeze. So I am going to recommend taking profits.”

Some people clearly did take profits. After Cramer’s comment, the stock started to fall, and by May 8, it was at $19. Then the buying started again. Quite possibly, some of the hedge funds that had been short selling Dendreon used the dip to $19 to purchase still more Dendreon shares. After May 8, the stock rose back up to around $25, which is approximately where it remains today. When SEC filings for this period are in, it will be interesting to see which hedge funds bought shares.

But it will remain impossible to know who the criminal short sellers were. As far as the SEC is concerned, that is a big secret –  “proprietary trading strategies.”

* * * * * * * *

After Dendreon reported its data to the American Urological Association –data that showed almost precisely what the data showed two years earlier (that is, that Provenge was safe, and that it lengthened survival times while greatly improving the quality of life for end-stage prostate cancer patients who would otherwise be subjected to the misery of chemotherapy) — Milken’s Prostate Cancer Foundation, which had long shunned Dendreon while Milken’s allies maneuvered to derail it, finally concluded that it was time to say something positive about Provenge.

“The PCF is delighted to see evidence of increased patient survival from Provenge,” the Milken “philanthropic” foundation said in a press release. “We share the analysis of Dr. Philip Kantoff, a leader in the PCF Clinical Therapy Consortium…and a principal investigator of the Provenge Phase III clinical study. The results validate 16 years of modern research to harness a patient’s own immune system to fight their prostate cancer and prolong their lives…”

The Prostate Cancer Foundation continued: “The PCF first provided funding to Dr. Eric Small…to support clinical research around measuring immune responses in patients treated with Provenge…”

In other words, Milken’s “philanthropy” hadn’t spent two years ignoring, and in some cases trying to quash Dendreon’s treatment. In fact, the Prostate Cancer Foundation had supported Dendreon all along!

This is nonsense. What the Prostate Cancer Foundation did not mention is that Dr. Philip Kantoff, the physician mentioned in the press release, was on the advisory board of Cougar Biotechnology, the company that Milken’s “philanthropic” foundation was promoting as a better alternative to Dendreon.  Moreover, Dr. Kantoff was one of the few physicians to publicly cast doubts on Provenge. He was never able to say that Provenge did not work, but when talking to the press at the time of the FDA advisory panel meeting in 2007, he was dismissive, or at least confused.

“I didn’t think [Provenge] had a snowball’s chance in hell of working,” Dr. Kantoff told Forbes magazine’s Matthew Herper, the journalist who went to lengths to argue against FDA approval. “I’m still skeptical, but I think there’s something going on here.” Kantoff suggested that Provenge could be a “slam dunk,” but maybe the trial size was too small. Left unmentioned was the fact the FDA had regularly approved treatments for dying patients when relatively small trials had shown such stunning results.

As for Dr. Small, he too was on the advisory board of Cougar Biotechnology. The Prostate Cancer Foundation did indeed give him funding to measure immune responses in patients treated with Provenge, but it is not at all clear that Milken’s “philanthropic” outfit was keen to see Dr. Small’s study yield positive results. When the study did yield positive results, Dr. Scher, the chairman of the Prostate Cancer Foundation’s Therapeutic Consortium (referred to in the above press release as the “Clinical Therapy Consortium”), spun them as negative results.

In his letter to the FDA (the one that quickly and mysteriously ended up in the hands of The Cancer Letter), Dr. Scher quoted Dr. Small as saying the following: “In summary, this study suggests that while sipuleucel-T fell short of demonstrating a statistically significant difference in TTP, it may provide a survival advantage to asymptomatic [prostate cancer] patients.” Dr. Small had not written the word “may” in italics. That was Dr. Scher’s improvisation, part of his effort to convince the world that absolute “proof” of efficacy was needed for FDA approval.

As both Dr. Small and Dr. Scher knew, the “gold standard” for physicians, and the federally mandated standard for drug approval, is “survival” — “substantial evidence” that a treatment may help patients live longer. Perhaps Dr. Small felt constrained in challenging Dr. Scher’s misuse of his study. Perhaps he also felt uncomfortable about joining Dr. Scher, who was, after all, the powerful chairman of Milken’s Therapeutic Consortium, at the meeting of the FDA advisory panel that voted on Provenge in March 2007.

Dr. Small was supposed to speak on behalf of Provenge at that panel. Perhaps this concerned the folks at the Prostate Cancer Foundation. Either way, Dr. Small was a no-show at the panel that day.

He apologized – something about a hitch in his travel plans.

* * * * * * * *

In May 2009, while Milken’s Prostate Cancer Foundation was rewriting history, Milken’s hedge fund crony, Steve Cohen, who was one of those seven hedge fund managers who had bet big against Dendreon after the advisory panel meeting in 2007, reached out to Care-to-Live, the grass-roots organization that had done so much to highlight the connections among Milken’s “philanthropy,” Milken’s investments, and Dendreon’s travails

On May 19, one of Care-to-Live’s founders received an email from an employee of CR Intrinsic Investors, which is one of Steve Cohen’s hedge funds.  “I’m an investor in biotechnology and pharmaceutical companies and I’m interested in understanding the patients perspective on Provenge and any other therapies in development…,” the email began. “Would you or someone from Care-to-Live be available speak with me…? I have spoken to a number of academic thought leaders, but I’d like to better understand what the patients want…”

And by the way, “I’m happy to provide compensation for time spent speaking with me if that is of interest.”

Milken-affiliated hedge funds already have analysts and journalists regurgitating their party line on command. They also have doctors on the payroll. Might as well put the troublemakers on the payroll, too.

* * * * * * * *

Or perhaps Cohen is genuinely thinking about investing in Dendreon. Perhaps he already has. The intentions of this network remain a matter of some speculation.

Much of this speculation focuses on Dmitry Balyasny, the Russian “whiz kid.” As recently as March of this year, when they filed their last SEC documents, Balyasny’s hedge fund, Visium, held around 900,000  call options in Dendreon. Simultaneously, the hedge fund owned 860,000 put options. It is possible that Balyasny and his associate, Jacob Gottleib, were implementing a split-strike pricing strategy – selling out of the money calls and buying out of the money puts. The effect is to create a large synthetic short position.

SEC documents show that during much of the past two years, Balyasny’s funds also owned large numbers of Dendreon shares. These could have been shares that they bought to cover short positions. Or it could be that they owned shares to gather proxy votes and put pressure on Dendreon’s management to act in ways that might not be  good for the company.

Dendreon’s latest Schedule 14-A, filed on April 30, showed that Balyasny (remember, Balyasny’s other fund was previously one of the seven hedge funds with large  bets against Dendreon) had become one of Dendreon’s largest shareholders, with a 5.5% stake in the company. Another major shareholder was Capital Ventures International, the unit of Susquehanna that did the PIPEs deal with Dendreon. Meanwhile, Joseph Edelman, the hedge fund manager who was employed in 2007 by Lindsay Rosenwald, formerly of the Mafia-connected D.H. Blair, has bought at least 2 million Dendreon shares.

In addition to those purchases, many of the Milken network hedge funds that bought Dendreon’s convertible bonds now have the capability to convert, so  they, too, might soon count themselves among Dendreon’s largest shareholders. Altogether, this network may already control (or have the ability to convert into control of) as much as 30% of the company.

It is possible that this network is planning to seize control of Dendreon by stealth. This was the modus operandi of the Milken network in the 1980s. As most every book on Milken recounts, affiliated investors (some combination of Milken, Ivan Boesky, Carl Icahn, Princeton-Newport, John Mulheren,  and others) would each buy, say, 4.9% or 9.8% of a company without declaring themselves to be affiliated investors. In some cases, Milken would “park” stock (e.g. Princeton would secretly buy stock on Milken’s behalf) in order to conceal that he had any ownership at all.

By secretly holding large blocks of shares, the network was able to acquire controlling stakes while bypassing regulatory requirements to declare such positions. Besides putting them in a position to manipulate prices, Milken and friends then put pressure on companies’ managements by quietly letting it be known that they had, as a group, a controlling number of proxy votes.

If Milken’s friends come to control Dendreon, Milken’s “philanthropic” foundation will no doubt continue to articulate its new position of being “delighted” that the data shows that Dendreon’s treatment is safe and effective (which is the same thing the data showed two years and 60,000 American deaths ago). And if the Milken network takes over Dendreon, perhaps Michael Milken will, in the name of “philanthropy,” convince his government minions to grant approval to Provenge, so that it can be administered to the patients who so desperately need it.

But that should not cause us to ignore the ordeal that Dendreon has endured during these past few years. And we should demand an end to a status quo which lets Wall Street miscreants, cheats, and manipulators (and not free markets) decide which companies survive unmolested, and which will be crippled or killed off entirely.

But it is not surprising that criminals see fit to maim public companies.

Consider that it is impossible to buy life insurance on another person’s life. The legal principle has developed that one can only insure something in which one has “an insurable interest.” But imagine that this were not the case. Imagine if it were possible for people to buy insurance on other people’s lives. One can see that there might evolve a type of criminal who would buy life insurance on the lives of others, and then arrange for those people to die.

One can even imagine that, as society wised up to this practice of buying life insurance and then manipulating outcomes, such criminals would evolve new tactics towards the same end. For example, the criminals might target newborn babies in hospitals, because babies are vulnerable, and it would be difficult for anyone to know for certain whether they were dying naturally, or as a result of criminals manipulating outcomes.

One could even imagine that the most sophisticated of these criminals would come to target newborn babies who were already sick, because manipulating their medical outcomes in order to cause their deaths would leave the slightest statistical footprint possible.

In our society one cannot buy life insurance on another person, but one can buy “life insurance” on a company: that is, one can make a bet that a company will fail, and collect on that bet when the company dies. It is the contention of Deep Capture that there are criminals who take out life insurance policies against companies, and then manipulate their outcomes so as to collect on those policies.

And just as we can understand the logic of criminals focusing on newborn babies, so too can we understand why the financial criminals have learned to focus on small, early-stage public companies. And to extend the morbid metaphor one last step: just as the criminals might focus on newborns who are already sick, because their outcomes are already in the most doubt (making the criminal manipulations hardest to spot), so too have the financial criminals learned to focus not just on early-stage public companies, but on early stage public companies working in the field of biotechnology.

That is because in biotechnology the difficulties in valuing a company are at their greatest. There is often little to no revenue.  The idea behind the company may be nothing more than the theory of a scientist. No one knows whether it will work. If it works, no one knows how long it will take to prove that it works. And even if it can be proven to work, no one knows how long it will take to clear all the legal and regulatory hurdles it will face. Such companies are favored targets for manipulators because it is easy to manipulate the truth when no one knows the truth, and whatever truth there is lies behind so many veils.

In the case of Dendreon , the truth was hard to miss. It was more than a company with a blockbuster treatment. It was the first company in decades to develop a medicine that could truly revolutionize the way that doctors treat cancer. The company had gathered its data, and the data was conclusive (to a 95% confidence level): Provenge was safe and effective. A panel of experts assembled by the FDA had declared that the treatment should be approved.

So when naked short sellers attacked, and the treatment was derailed, it was obvious that there had been foul play. Hundreds of concerned citizens took it upon themselves to investigate, and document, the footprints of the miscreants. As a result we have been able to present a highly discernible, if admittedly imperfect, picture of their trail.

But we must ask: How many other small biotech companies have been victimized in less obvious ways? How many companies were like the babies in our morbid metaphor — snuffed out before they could demonstrate their potential; killed by criminal naked short sellers and their captured accomplices (journalists, regulators, doctors) who successfully pled innocence, saying the companies died because they were sick or weak? And how many of those murdered companies, weak or not, had medicines that could eventually have improved health and saved lives?

Our morbid metaphor, you see, is not entirely metaphor. Real people have died.

In answer to the question of how many people have died, we know only from the data that abusive and illegal short selling has affected many hundreds of small biotech companies with all manner of medicines. We know that the vast majority of those companies are now gone, and that some number of them, if left to the rigours of the market, but not to the whims of criminal short sellers, would have one day delivered their medicines to patients.

But, of course, we do not know who the criminal short sellers are. According to the Securities and Exchange Commission, that is a big secret – “proprietary trading strategies.”

THE END

* * * * * * * *

Note: The original draft of this story incorrectly stated that BAM Capital was affiliated with Dmitry Balyasny’s Balyasny Asset Management. Having mistaken BAM Capital with Balyasny’s fund, I aslo suggested in the original draft of this story that Balyasny had aquired more than ten percent of Dendreon’s shares in the Spring of 2009. This was incorrect. Balyasny’s Visium hedge fund had aquired 5.5% of Dendreon’s shares. I regret the error.

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Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 14 of 15)

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Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 14 of 15)



What follows is PART 14 of a 15-PART series. The last installment will appear on Deep Capture in the coming days, after which point the story will be published in its entirety.

Click here to read PART 1

Click here to read PART 2

Click here to read PART 3

Click here to read PART 4

Click here to read PART 5

Click here to read PART 6

Click here to read PART 7

Click here to read PART 8

Click here to read PART 9

Click here to read PART 10

Click here to read PART 11

Click here to read PART 12

Click here to read PART 13

Where we left off, we had learned that on March 29, 2007, an FDA advisory panel overwhelmingly voted to approve Provenge, a vaccine that Dendreon had developed for prostate cancer. As a result, most financial analysts and investors believed that Dendreon had a promising future. However, ten hedge funds (out of a universe of 11,500 hedge funds) held large numbers of Dendreon put options (bets against the company), suggesting they expected that Dendreon would be derailed. At least seven of those hedge funds can be tied to Michael Milken or his close associates.

We had also learned that Milken himself stood to profit if Dendreon were to experience unexpected problems receiving FDA approval. This is because Milken was the early financier and principal deal maker for ProQuest Investments, a fund that (along with an affiliate) controlled a company called Novacea, which was one of Dendreon’s competitors in the race to produce a new treatment for prostate cancer. Meanwhile, Lindsay Rosenwald (a Milken crony who once helped run a Mafia-linked brokerage called D.H. Blair, which specialized in pumping and dumping fake biotech companies) controlled Cougar Biotechnology, which was Dendreon’s second competitor in the race to develop a treatment for prostate cancer. And hedge funds affiliated with Milken or his close associates were also heavily invested in Cell Genesys, which was Dendreon’s third competitor.

We had learned further that Milken’s “philanthropic” outfit, the Prostate Cancer Foundation, which appears to act in concert with Milken’s investment fund, ProQuest, had supported Novacea, Cougar and Cell Genesys. The Prostate Cancer Foundation’s support for these companies preceded announcements that they had signed massive deals with large pharmaceutical companies. In the cases of Novacea and Cell Genesys, those deals were soon cancelled on the news that their treatments were ineffective, and the companies’ investors quickly dumped their stock. This fact, combined with other evidence, suggests that the Prostate Cancer Foundation was supporting what amounted to sophisticated “pump and dump” schemes.

Meanwhile, the Prostate Cancer Foundation snubbed its nose at Dendreon. And in April, 2007, Dr. Howard Scher, who was an executive and director of ProQuest, and the chairman of the Prostate Cancer Foundation’s “Therapeutic Consortium”, spearheaded an unprecedented lobbying effort to convince the FDA to reject Dendreon’s treatment – the first time in history that the FDA had gone against an advisory panel’s recommendation to approve a drug for terminally ill patients. This lobbying effort had the support of government officials who have ties to Michael Milken.

In the days before and after the lobbying effort, Dendreon was trashed by a few captured journalists – most notably, CNBC’s Jim Cramer — and was also subjected to a blistering attack by naked short sellers who illegally flooded the market with millions of phantom shares to help drive down the company’s stock price. This criminal naked short selling continued intermittently for much of the next two years, while other events conspired to hobble Dendreon, a company that had completed multiple clinical trials that strongly indicated that its product, Provenge, was capable of lengthening the lives of tens of thousands of men with prostate cancer…

* * * * * * * *

In July 2008, not long before Cell Genesys announced that its drug was killing people, CNBC’s Jim Cramer called Dendreon a “dog.” Cramer, of course, did not mention that the illegal naked short selling of Dendreon was continuing apace. Throughout that month, more than 1 million Dendreon shares “failed to deliver” every day, according to SEC data.

At the end of August 2008, after Cell Genesys announced that its drug was killing people, Milken’s Prostate Cancer Foundation posted a story that suggested that this failure was a sign that Dendreon could be in trouble, too. Clearly, the Prostate Cancer Foundation, whose top officials had done so much to derail Dendreon in 2007, were not eager to see the company’s treatment reach patients.

Not once did the Prostate Cancer Foundation note that the difference between Dendreon and the three companies promoted by the Prostate Cancer Foundation was that Dendreon had provided heaps of evidence that its treatment actually worked.

In October 2008, Dendreon released still more favorable data. Its Independent Monitoring Committee’s studies were showing (as had the company’s phase 3 trials in 2007) that Provenge was safe, and offered a significant survival advantage over a placebo.

Meanwhile our two favorite financial analysts – the singing Sendek and Jonathan Aschoff – continued to reiterate their sell ratings on Dendreon.

The attacks continued through March 2009, which is when we were treated to the reappearance of  Matthew Herper, the Forbes reporter who had dismissed Dendreon during those strange occurrences in April 2007. Now, Herper published a story in which he made it clear that Dendreon’s treatment would not, and should not, be approved by the FDA.

In support of his claims, he cited the analysis of Dr. Thomas Fleming, one of the three people whose missives had ended up in the hands of The Cancer Letter. To show that Fleming (who is not a physician, but rather a statistician) was not the only “expert” opposed to Dendreon’s treatment, Herper cited several other “experts”  – Susan Ellenberg, Donald Berry, and Janet Wittes – who had views that were remarkably similar to Fleming’s.

What Herper did not mention is that Susan Ellenberg had co-authored a book with Fleming, Janet Wittes was credited with editing that book, and that book enthusiastically cited the work of Donald Berry. Clearly, these “experts” had worked together to make sure that one message was whispered in Herper’s ear.

While Herper was working on his article, John Stewart of the “Daily Show” began exposing Jim Cramer as a fraud. This created quite a stir, and in the midst of it Cramer went on CNBC to tout none other than….Cougar Biotechnology, the company controlled by Lindsay Rosenwald, formerly of the Mafia-linked “pump and dump” shop D.H. Blair. Cramer said he thought Cougar was the next big thing in prostate cancer treatment, and everybody should load up on its stock.

Meanwhile, with Novacea and Cell Genesys killing people, Milken’s “philanthropic” outfit was now directing much of its energy to promoting the mostly untested treatment then being hawked by Cougar Biotechnology.

Cougar’s treatment “has recently attracted global media coverage,” began one Prostate Cancer Foundation press release, which described the treatment as “a promising experimental medication with the potential to treat patients who have failed conventional medical treatment for advanced prostate cancer…”

The press release continued:  “The [Prostate Cancer Foundation] Therapeutic Clinical Investigation Consortium played an important role by accelerating US clinical testing of this new agent in Phase II clinical trials….In Phase 1 studies, [Cougar’s treatment] exhibited the potential to attenuate disease progression and shrink tumors.”

Actually, the studies were not quite so encouraging as Milken’s foundation would have one believe. Abiraterone had been tested on a total of 30 patients. These patients purportedly experienced declines in levels of “prostate specific antigen,” but this is a long way from demonstrating that  Cougar’s treatment “attenuates disease” or “shrinks tumors.” As for that “potential to treat patients,” it will be at least two years before Cougar has enough data to submit an application for FDA approval.

For the sake of prostate cancer patients everywhere, Deep Capture hopes that Cougar’s drug proves to be successful. We wish merely to note the different reception the network of Milken cronies delivers to a drug like Provenge, whose supporting data is ample and overwhelmingly positive, versus the opinions the network expresses about a drug whose data is preliminary and inclusive, but whose investors hail from the Milken network.

We also wish to reiterate that Milken’s Prostate Cancer Foundation and people tied to Milken gave ringing endorsements to companies – Novacea, Cell Genesys, and Cougar Biotechnology – right before those companies entered into purportedly massive deals with major pharmaceutical companies. In the cases of Novacea and Cell Genesys, those massive deals were canceled soon after they were signed because the companies’ treatments were shown to be ineffective.

Yet, in all three cases, investors with ties to Milken or his close associates made large fortunes selling out their stock soon after the companies received over-the-top endorsements from the Prostate Cancer Foundation. Meanwhile, the Prostate Cancer Foundation, whose officials had played a key role in derailing Dendreon back in 2007, continued to snub its nose at Dendreon’s Provenge, the one treatment that could be safely and effectively administered to patients – right away.

* * * * * * * *

It is not clear if Milken himself was invested in Cougar, but Dr. Samuel Saks, who was a director on Cougar’s advisory board, was also a board member of Milken’s fund, ProQuest Investments. Three other members of Cougar’s advisory board were doctors affiliated with Milken’s “philanthropy,” the Prostate Cancer Foundation.

In addition to Rosenwald, the biggest investors in Cougar Biotechnology have included Millennium Management (the hedge fund that was co-founded by the guy who was going to murder Ivan Boesky, and later died of an early heart attack) and Visium Capital, which is co-owned by Dimitry Balyasny and Jacob Gottleib.

As noted, Millennium, Visium and Balyasny were also among the largest shareholders in Cell Genesys when the Prostate Cancer Foundation began promoting that company’s treatment, GVAX, in mass mailings and flyers handed out in front of shopping malls. Millennium’s manager and Dmitry Balyasny, meanwhile, were among the seven traders who were betting big against Dendreon in March 2007.

The few media stories about Balyasny make him seem like he is a “prominent” investor – and a poster boy for the American dream. Born in Russia, he came to America as a young man and soon started raking in the bucks as a “whiz kid” investor. In addition to Visium, Balyasny is the proprietor of Balyasny Asset Management. Some of Balyasny Asset Management’s employees —  including, for a period of time, the fund’s chief risk officer — have come from SAC Capital, the hedge fund run by Milken crony Steve Cohen.

A great many of Balyasny’s other employees were hired from a hedge fund called Magnetar Capital. The senior partner and investment committee chairman of Magnetar is Michael S. Gross, who was previously a founding partner of Apollo Advisors, the investment fund run by Milken crony Leon Black.

As you will recall, Leon Black funded the new Milken “philanthropic” foundation that hired National Cancer Institute prostate cancer chief Alison Martin after she helped the chairman of Milken’s Therapeutic Consortium foil Dendreon’s FDA application. Leon Black is also a business partner of Felix Sater, the alleged Russian mobster who once stuck a broken stem of a wine glass through a stock broker’s face and then went on to run White Rock Partners, a Mafia-infested brokerage that was indicted for manipulating stock in cahoots with the above-mentioned Lindsay Rosenwald’s D.H. Blair.

Prior to starting his own hedge funds, Balyasny was the top trader at an outfit called Schonfeld Securities, the proprietor of which is a man named Steven Schonfeld. Prior to founding his firm, Schonfeld worked for Blinder Robinson (then known on the Street as “Blind’em and Rob’em”). Blinder Robinson was among the first firms to be shut down by the Feds when they began investigating a network of Mafia-linked brokerages that included Rosenwald’s D.H. Blair and Sater’s White Rock Capital.

Schonfeld worked at Blinder Robinson with Anthony Elgindy, the criminal naked short seller who was was later sentenced to prison for stock manipulation and bribing FBI officials. As you will recall, Elgindy appeared for his sentencing missing a finger – reportedly because the Russian Mafia forced him to saw it off, giving him something on which to meditate while he served his 11 years in jail. Meanwhile, the Elgindy investigation led the authorities to other hedge funds, such as Gryphon Partners, whose manager was later among the few who bet big against Dendreon.

As should be clear by now, it is significant that a preponderance of the hedge funds that bet big against Dendreon, and a preponderance of the hedge funds that were invested in the three Milken-promoted companies – Cell Genesys, Novacea, and Cougar Biotechnology – were part of the same network. And it is significant that much of this network seems to be centered on Michael Milken and Steve Cohen, who became the “most powerful trader on Wall Street” some years after he was investigated by the government for trading on inside information provided to him by Milken’s shop at Drexel Burnham.

Permit me to repeat a few facts:  Cohen was once the top earner for Gruntal & Company, which was simultaneously employing several traders who were later tied to the Mafia. When Gruntal was indicted for embezzling millions of dollars, many of its former employees went on to fill the ranks of  White Rock Capital, run by the alleged Russian mobster Felix Sater (he with the broken wine glass).

Cohen, meanwhile, had left to start his own hedge fund empire. Cohen’s hedge funds have helped pump stocks promoted by D.H. Blair, which was eventually indicted on 173 counts of securities fraud and implicated in a Mafia stock manipulation scheme that was orchestrated by White Rock Capital.

Lindsay Rosenwald, who is the son-in-law of D.H. Blair’s founder and a former top executive of D.H. Blair, was not only the controlling shareholder of Cougar Biotechnology, but also the proprietor of a hedge fund called Paramount Capital. The vice president of Paramount was formerly a top trader for Steve Cohen’s SAC Capital. The vice president of the above mentioned Millennium Management is also a former top trader of SAC Capital.

And Cohen, who is maniacal about his working relationships, is on close terms with Schonfeld Securities, run by the former employee of Blind’em and Rob’em.  Cohen has employed Schonfeld’s traders, including Anthony Bassone, who was until recently assistant controller of SAC Capital; and Rob Cannon, who is Cohen’s top personal trader at SAC. Another “Russian whiz kid”, Michael Orlov, created the computerized trading infrastructure at both SAC and Schonfeld Securities. And, as mentioned, Cohen shares employees and trading strategies with that other “Russian whiz kid” — Dmitry Balyasny, who was once Schonfeld’s biggest earner.

All of which I mention only because I fancy myself a biographer of a particularly destructive network of Wall Street personalities. It may be of no significance that out of Planet Earth’s 11,500 hedge funds, there were only ten hedge funds with large numbers of Dendreon put options at the end of March, 2007.  There may be no significance to the fact that of those ten hedge funds, seven were in the same network — Millennium Management; Balyasny Asset Management; WS Capital (the successor to Gryphon Partners); Perceptive Advisors (whose manager was simultaneously working for Paramount Capital); Bernard Madoff Investment Securities; Pequot Management; and SAC Capital (managed by Steve Cohen, who is said to be maniacal about maintaining working relationships with people in his network).

And it could be purely coincidence that these hedge funds were the largest holders of put options on Dendreon shares right at the time that Dendreon was getting clobbered by massive amounts of illegal naked short selling – and right before Dendreon’s treatment for prostate cancer was stymied by an unprecedented lobbying effort led by FDA-contracted doctors and government officials tied to Michael Milken.

By the way, three months later – at the end of June, 2007 — there was just one more hedge fund with large numbers of Dendreon put options. It is not clear from SEC filings whether these put options were bought before or after the FDA announced (on May 8, 2007) that it would  not approve Dendreon’s treatment.

Either way, it is probably another coincidence that this eleventh hedge fund that bought large numbers of put options was the above-mentioned Magnetar Capital.

* * * * * * * *

To be continued…Check in soon for Chapter 15.

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Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 13 of 15)

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Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 13 of 15)



What follows is PART 13 of a 15-PART series. The remaining installments will appear on Deep Capture in the coming days, after which point the story will be published in its entirety.

Click here to read PART 1

Click here to read PART 2

Click here to read PART 3

Click here to read PART 4

Click here to read PART 5

Click here to read PART 6

Click here to read PART 7

Click here to read PART 8

Click here to read PART 9

Click here to read PART 10

Click here to read PART 11

Click here to read PART 12

Where we left off, we had learned that on March 29, 2007, an FDA advisory panel overwhelmingly voted to approve Provenge, a vaccine Dendreon developed for prostate cancer. As a result, most financial analysts and investors believed that Dendreon had a promising future.  However, ten hedge funds (out of a universe of 11,500 hedge funds) held large numbers of Dendreon put options (bets against the company), suggesting they had expected that Dendreon would be derailed. At least seven of those hedge funds can be tied to Michael Milken or his close associates.

We had also learned that Milken himself stood to profit if Dendreon were to experience unexpected problems receiving FDA approval. This is because Milken was the early financier and principal deal maker for ProQuest Investments, a fund that (along with an affiliate) controlled a company called Novacea, which was one of Dendreon’s competitors in the race to produce a new treatment for prostate cancer. Meanwhile, Lindsay Rosenwald (a Milken crony who once helped run a Mafia-linked brokerage called D.H. Blair, which specialized in pumping and dumping fake biotech companies) controlled Cougar Biotechnology, which was Dendreon’s second competitor in the race to develop a treatment for prostate cancer.

We had learned further that Milken’s “philanthropic” outfit, the Prostate Cancer Foundation, which appears to act in concert with Milken’s investment fund, ProQuest, had supported Novacea and Cougar, neither of which had shown that their treatments were safe or effective, while turning its back on Dendreon.

In addition, we had learned that in April, 2007, Dr. Howard Scher, who was an executive and director of ProQuest, and the chairman of the Prostate Cancer Foundation’s “Therapeutic Consortium”, spearheaded an unprecedented lobbying effort to convince the FDA to deny approval to Dendreon’s treatment – the first time in history that the FDA had gone against an advisory panel’s recommendation to approve a drug destined for dying patients.

In the days before and after the lobbying effort, Dendreon was subjected to a blistering attack by naked short sellers who illegally flooded the market with millions of phantom shares to help drive down the company’s stock price. This criminal naked short selling continued intermittently for much of the next two years, while other events conspired to hobble Dendreon, a company that had completed multiple clinical trials that strongly suggested that its product, Provenge, was capable of lengthening the lives of thousands of men with prostate cancer….

* * * * * * * *

In December 2007, three U.S. Congressmen — Mike Michaud (D-Maine), Dan Burton (R-Indiana) and Tim Ryan (D-Ohio) — called on the House Commerce Committee to investigate why the FDA failed to approve Dendreon’s treatment for prostate cancer. Referring to Dr. Scher and his ally, Dr. Hussain, the lawmakers said in a letter that “there are reasons to believe that serious ethics rules were violated by two FDA advisory panel members in their decision [to vote and lobby against Dendreon] and that these violations played a role in the subsequent FDA decision not to approve Provenge at this time.”

A bipartisan group of 12 additional Congressmen eventually signed on to the request for an investigation. And in February 2008, as outrage over this scandal spread through the medical community, a group of seven respected doctors, calling themselves “Physicians for Provenge” wrote a letter to the ranking members of the House Commerce Committee, suggesting that the investigation should urgently proceed.

“Please consider why our colleagues and we KNOW that Provenge works and why tens of thousands of men with late stage prostate cancer should be given access to it,” the physicians wrote. Noting the “egregious conflicts of interest” of Dr. Scher and Dr. Hussain, the “Physicians for Provenge” added that the “FDA should be carefully assessing risk versus reward for the treatment of terminally ill patients, rather than ‘gate keeping’ based on outdated statistics, reducing short-term health costs or backroom shenanigans.”

Nonetheless, Commerce Committee Chairman John Dingell denied the requests for an investigation. To justify this decision, Dingell wrote in a letter to the committee that an “investigative hearing prior to an agency’s final decision runs the risk of interfering with the normal regulatory process.”

Apparently, it was fine if FDA-contracted doctors and government officials tied to Michael Milken corrupted the normal regulatory process by obfuscating approval standards (“substantial evidence” versus “proof”) and by drafting unsolicited post-vote letters with back-channel help from a government employee who was weeks away from taking a new job created by Michael Milken.  But investigating such improprieties would corrupt the regulatory process, in the eyes of Commerce Committee Chairman John Dingell.

Dingell also pointed out that “a new law strengthening conflict of interest provisions now governs FDA panels.” Unfortunately, that law was passed in September 2007, some months after Milken’s conflicted allies derailed Dendreon’s application.

In any case, it is not clear that the old conflict of interest provisions were not violated in the Dendreon case. Dr. Scher received a conflict of interest waiver, but in his application for that waiver he did not mention his financial ties to Milken’s ProQuest Investments. There should have been an investigation into why that waiver was granted. And while he was at it, Representative Dingell should have investigated the illegal naked short selling of Dendreon and the “backroom shenanigans” of Milken’s captured officials at the FDA and the National Cancer Institute.

At any rate, while the congressional investigation was being stopped in its tracks, Milken’s Prostate Cancer Foundation was becoming more brazen.

In March 2008, for example, the Prostate Cancer Foundation sent out a peculiar mass mailing. Written by a cardiologist on Prostate Cancer Foundation letterhead, the mailing began, “I’ll never forget the day my 5-year-old son came home from school, worried. One of the other kids told him I was going to die.”

The letter went on to describe the horrors of being diagnosed with prostate cancer. So far, all kosher. But then came the strange part – the charity’s solicitation explicitly promoted a mostly untested experimental treatment that was being developed by a public company that was considered to be one of the few competitors to Dendreon. The treatment was called GVAX, and the company developing it was called Cell Genesys.

The author of the letter noted that during his treatment, he had “learned about some of the groundbreaking research projects supported by the Prostate Cancer Foundation, such as GVAX, a drug now in phase 3 clinical trials that boosts the immune system to fight off prostate cancer cells.”

Notice that the name of the drug – GVAX – was printed in boldface letters, so nobody could miss it. Notice, too, the underlining, which stressed that this treatment (as opposed to others, such as Dendreon’s) was endorsed and supported by the Prostate Cancer Foundation. And, finally, notice the unequivocal statement that GVAX works – that it “boosts the immune system” and is able to “fight off” cancer.

Lest there be any question that Milken was eager to promote GVAX, the Prostate Cancer Foundation, soon after, began distributing flyers at supermarkets and shopping malls with a similar message. “My 5-year-old didn’t want to lose his daddy,” read the flyers, which then proceeded to describe a “groundbreaking” new medicine – GVAX.

At the time, Cell Genesys was nowhere near bringing GVAX to market. It had just finished phase 2 clinical trials on a total of 65 patients. Lab results showed that GVAX might increase prostate cancer antibodies, but they did not show that the immune system was actually boosted in such a way as to better “fight off” cancer or improve survival. Phase 3 trials, which would determine whether GVAX actually improved the health of patients, had just begun.

But if you were an average Joe who read those flyers – or a wealthy Mary who received that solicitation in the mail – you’d be mighty convinced that Cell Genesys was the next big thing in cancer therapy. You might even be tempted to buy its stock.

* * * * * * * *

When Milken’s Prostate Cancer Foundation began distributing his fliers promoting GVAX, a number of hedge funds had accumulated large numbers of shares in Cell Genesys.

One of these was Millennium Management, the hedge fund that had been founded by the fellow who planned to murder Ivan Boesky when it seemed that Boesky might cooperate with the authorities in their case against Milken. Again, Millennium is one of those seven hedge funds that had the foresight to own put options in Dendreon back in March 2007, right before Dendreon’s treatment was unexpectedly scuttled by the FDA.

Another hedge fund with a big stake in Cell Genesys was Forest Investment Management, owned by Michael Boyd, the father of hedge fund shill Roddy Boyd, currently of Fortune Magazine.  Michael Boyd, remember, had previously been involved in two big ventures – one with a former Milken colleague from Drexel Burnham; the other with Santo Maggio, the convicted criminal CEO of Refco Securities.

Hedge fund Perceptive Advisors also held a moderately large stake in Cell Genesys. Recall that Perceptive was then run by Joseph Edelman, who was not only another one of those seven hedge fund managers who held put options in Dendreon, but was also simultaneously serving as a trader for Paramount Capital.

As you might recall, the vice president of Paramount Capital was a former employee of Milken crony Steve Cohen, who was also one of those seven hedge fund managers betting big against Dendreon. The owner of Paramount, of course, is Lindsay Rosenwald, who used to run the Mafia-controlled D.H. Blair with Milken’s former national sales manager, and controlled Cougar Biotechnology, another Dendreon competitor promoted by the Prostate Cancer Foundation.

Another big buyer of Cell Genesys shares was Mazama Capital, a hedge fund based in California. In December 2006, Mazama also owned 2.1 million shares of Dendreon. It dumped more than a million of those shares sometime before or immediately after the March advisory panel meeting, when it seemed certain that Dendreon would receive FDA approval.

Only one other hedge fund dumped similar quantities of Dendreon shares at that time. It was JL Advisors, which is controlled by the above-mentioned Steve Cohen. This dumping of shares contributed to the selling volume that was amplified by whoever was selling massive amounts of phantom stock in Dendreon.

Then there was Renaissance Technologies, which held 800,000 shares in Cell Genesys when Milken’s “philanthropy” began promoting the company.  The CFO of Renaissance is James Rowen, who was previously the chief financial officer of SAC Capital, the hedge fund run by the above-mentioned Steve Cohen, who is known to be maniacal about making sure that his former employees remain satellites of his trading empire.

Meanwhile, hedge funds Balyasny Asset Management and Visium Capital held a combined 12 million shares of Cell Genesys. Balyasny and Visium have overlapping ownership (Dmitry Balyasny is a partner in both hedge funds) though they don’t generally disclose that in their SEC filings.

Dimitry Balysasny is a close associate of Steve Cohen. He has employed some of those former SAC Capital traders and managers with whom Cohen maniacally maintains relationships. And he and Cohen have attacked the same companies.

As I mentioned, Balyasny was one of our seven hedge fund managers with large numbers of put options in Dendreon. I will return to him, because this enigmatic Russian might have more surprises in store for Dendreon.

* * * * * * * *

Three weeks after Milken’s Prostate Cancer Foundation began publicly promoting Cell Genesys’s virtually untested prostate cancer treatment, Cell Genesys announced that it had signed a gargantuan $320 million deal to develop and commercialize GVAX with Takeda Pharmaceutical, the Japanese biotech giant.

The press reported this deal dutifully and uncritically, making it sound like GVAX was the next big thing. The stock price soared, earning large profits for the Milken-network hedge funds that had invested in Cell Genesys.

But just as there was something fishy about the Milken-invested Novacea and its $500 million deal with Schering Plough, so too did the “$320 million” Cell Genesys deal deserve a hearty dose of skepticism.

For starters, only days before Cell Genesys announced the Takeda deal, Takeda had bought a company called Millennium Pharmaceuticals. Millennium had been transformed into Takeda Pharmaceutical Capital Ventures. It was Takeda Capital Ventures, not the Takeda parent company, that signed the deal with Cell Genesys.  In other words, it was almost certain that Millennium’s management, most of whom had been retained by Takeda Capital, orchestrated the whopping $320 million deal.

That was rather strange because Millennium had been founded by a man named Mark Levin. It was Levin who orchestrated Millennium’s merger with LeukoSite, the biotech company that belonged to Marty Peretz, the Boesky-Milken crony who founded TheStreet.com. And more important to this particular episode,  it was Levin who had founded Cell Genesys. He founded the company basically by investing in himself (just as Domain Associates had created the Milken-invested Novacea out of thin air).

So, assuming Levin still had influence over Millennium/Takeda, and assuming he was still invested in Cell Genesys, he had just orchestrated a deal to use other people’s money to invest $300 million in himself.

Or, at least Cell Genesys’s press release said that Takeda (which was, in fact, Millennium) was going to “pay Cell Genesys an upfront payment of $50 million and additional milestone payments totaling up to $270 million…Takeda [actually Millennium, now known as Takeda Capital Ventures] will pay Cell Genesys tiered, double-digit royalties based on net sales of GVAX immunotherapy for prostate cancer…”

Sounds good, doesn’t it? Sounds like those “net sales” are imminent, right? In fact, just as the Milken-invested Novacea’s $500 million deal was dependent on clinical trials showing good results, so too was Cell Genesys’s big deal with itself dependent on the company producing some evidence that it’s drug actually worked. The operative phrase in that press release was “milestone payments totaling up to $270 million.”

Of course, just three months later, Cell Genesys announced that it had halted its trials of GVAX after its Independent Data Monitoring Committee, in a “routine safety review meeting,” observed “an imbalance of deaths…”  In other words, GVAX was not helping patients. It was killing them. And, of course, the $270 million worth of “milestone payments” announced with so much fanfare were unceremoniously canceled.

Either before this announcement, or immediately after, the big investors in Cell Genesys – Mazama, Balyasny, Millennium, Perceptive Advisors – all dumped their shares. Given the big boost those shares got from Milken’s Prostate Cancer Foundation promotions and the giddy announcement that Cell Genesys would receive $330 million, we can assume that those investors made a nice profit on their sales, just as Milken’s ProQuest and affiliated funds made nice profits on their sales of Novacea.

It seems to me that Cell Genesys, like Novacea, was a sophisticated pump and dump scam, aided by Michael Milken’s  “philanthropic” outfit, the Prostate Cancer Foundation.

Which brings us to Cougar Biotechnology, the third Dendreon “competitor” promoted by Milken’s Prostate Cancer Foundation.  Cougar Biotechnology, as we know, was controlled by Lindsay Rosenwald, who used to help run D.H. Blair, the Mafia-linked pump-and-dump shop whose two vice chairman pled guilty to securities crimes, and whose president was Milken’s former national sales manager.

D.H. Blair was indicted on 173 counts of securities fraud, and it was notorious for pumping and dumping biotech companies with no real medicine. But who knows? Maybe Cougar has a genuine product. It is hard to say at the moment, and will remain that way for years to come, because its prostate cancer treatment remains virtually untested.

In any case, just last month, Cougar, no doubt aided by the Prostate Cancer Foundation’s vigorous endorsements, wangled a $1 billion deal to merge with Johnson & Johnson, so Rosenwald and friends did quite well on their investments.

Remember that while Milken’s Prostate Cancer Foundation was using unwitting donors’ money to promote Novacea, Cougar Biotechnology, and Cell Genesys, its top officials, and perhaps Milken himself, were actively seeking to derail Dendreon, the one company that actually had a promising treatment for prostate cancer. This was certainly to the benefit of the short sellers (some of whom were illegally naked short selling) and the buyers of put options who were betting big against Dendreon

Meanwhile, it should be noted that Cougar Biotechnology experienced almost no naked short selling, according to SEC “failures to deliver” data. The Milken-invested Novacea also experienced virtually zero naked short selling, even after it announced that its treatment was killing people. The same goes for Cell Genesys — relatively little naked short selling, even when its treatment flopped.

The miscreant party line is that hedge funds do not engage in naked short selling to manufacture phantom stock. The party line is that most “failures to deliver” are the result of mechanical “errors.” It’s funny how those “errors” tend to occur when miscreants in a certain network are short a company. It’s also funny that those “errors” don’t happen to companies in which Milken and his cronies are invested.

If only there were a pattern.

* * * * * * * *

To be continued…Click here for Chapter 14.

Posted in Featured Stories, The Deep Capture Campaign, The Mitchell ReportComments (67)

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