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Short-Sellers Spin Themselves Silly, SEC Sounds Strong
July 24th, 2008 by Mark Mitchell

After years of intermittently ignoring and whitewashing one of history’s biggest financial swindles, the Wall Street Journal today, for the first time, published some basic truths about the crime: “Illegitimate naked short selling is different from [legal short-selling]…this kind of manipulative activity can have drastic consequences…Eliminating the prospect of naked short selling will help assure investors that… when the market declines it is not because of unseen manipulators and `distort and short’ artists.”

Unfortunately, these words were not written by some enterprising journalist seeking to nail the criminal hedge funds who have manufactured billions of phantom shares (shares sold “naked” because they don’t exist) while using other dubious tactics – such as publishing false “independent” financial research, working with a crooked law firm (the recently indicted Milberg, Weiss) to saddle companies with bogus class action lawsuits, hiring thugs and private investigators to harass corporate executives, orchestrating dead-end government investigations, employing armies of basement-dwelling creeps to bash companies and smear reputations on Internet message boards, and feeding distorted and maliciously false information to compliant or naïve journalists – all part of a massive, collusive effort to destroy public companies for profit.

No, sadly for anyone who cares about the state of our financial markets and media, those crimes go mostly unreported. And as for the few basic truths that appeared in today’s Wall Street Journal, they were not products of any journalistic effort. They were, rather, the words of SEC Chairman Christopher Cox, who managed (no doubt, with some difficulty) to convince the Journal to publish an op-ed wherein he explains why he had to issue an “emergency order” to prevent abusive short-selling from crashing the American financial system.

Why is this not front page news? Why is the Journal not clamoring for the criminals to be put away?

We’ve noted that The Wall Street Journal’s “Money & Investing” section, which covers the hedge fund beat, was once under the control of editor David Kansas, who was known for unleashing reporters on companies targeted by his long-time short-selling friends, while ignoring, with seemingly purposeful intent, all evidence suggesting that his friends were up to no good. Kansas, I believe, was the principal reason why the Journal long held back from investigating the naked short selling scandal.

But Kansas and some of his comrades have left the Journal, and I believe most of the paper’s other reporters are well-intentioned. It’s just that this is a complicated story – it can take time to wade through the grim data, to see for yourself the rapes in progress, and to come to terms with the ugly dimensions of the problem. It’s all the harder when you’re having smoke blown in your face by people whom, for whatever mistaken reasons, you have come to respect.

It is no coincidence that Jim Chanos, manager of hedge fund Kynikos Associates, was elected chairman of the Coalition of Private Investment Companies, the hedge fund lobbying and PR outfit. Chanos is the guy who helped Fortune Magazine’s Bethany McLean break the Enron story. Ever since, he’s been the David Koresh of media, convincing a cohort of zombified journalists that he can bestow blessed immortality — the next big scoop. The reporters swoon to this guru’s sermons, even when they sense that there is something untrue – even when, Waco-like, the authorities are closing in and a gruesome end is nigh.

Chanos has been busy dishing out the usual proselytizations: short-selling is good for the markets, short-sellers help root out bad companies like Enron, short-sellers are victims – nice fellows under attack by crazies and people who don’t like free markets. “We’re on the side of the angels,” Chanos proclaimed yesterday, clearly hoping that the media’s cries of “Amen!” would drown out the rumblings of a government that finally seems to be waking up to the notion that while there is nothing wrong with short-sellers, and free markets are swell, there is something not so good, and not so free, about a market getting pummeled by peddlers of fake stock and false information.

Chanos and his followers should throw in the towel. Contrary to our earlier concerns, it seems like the SEC is blowing off the hedge fund lobby and its media followers. Short-sellers of stocks in 19 financial companies have actually been forced to borrow real shares — not just locate them; not just say “yeah, yeah, my buddy in Staten Island’s got ‘em in his drawer,” but have real shares in hand before selling them. Even better, Cox said today that he intends to expand the enforcement across the entire market. We’ll see if he follows through.

Perhaps to avoid panic, the SEC Chairman has said that his emergency order was a preventive step, and was not meant to suggest that naked short-selling of the financial stocks was already rampant. But we know from SEC data that more than $6 billion worth of shares go undelivered every day. We know further that the phantom stock has been targeted at specific companies, including Bear Stearns, which saw as many as 13 million shares fail to deliver in its final days. Much more naked shorting takes place “ex-clearing” – for which no public data exists.

The immediate results of the SEC’s emergency order speak to just how big the ex-clearing problem is. Since Monday, when the order took effect, short-selling of the affected companies has decreased by 70 percent – and 90 percent in the cases of Fannie Mae and Freddie Mac. It is safe to say that a lot of that reduction is attributable to hedge funds that were previously selling shares without borrowing them. Now extrapolate to the entire market. We know that short-sales make up around 30 percent of total market volume. If we knock some points off that 70 percent number and decide that, say, half of short-selling has been naked – then 15% of total market volume on any given day could be phantom stock.

That is an admittedly rough number. The fact is, we just don’t know the exact figure. But as evidence for the hypothesis that the number is, in fact, even larger, consider that Chanos and friends insist that the SEC’s restrictions on illegitimate naked short selling will seriously reduce “liquidity” in the markets. Some Wall Street lobbyists have even suggested to the SEC that the New York Stock Exchange would have to temporarily shut its doors if the SEC were to enforce its emergency order market-wide.

In other words, people like Chanos (who has denied that he has ever participated in naked short selling and has previously expressed surprise that it even occurs) is now saying that the practice is so widespread that the markets cannot function without it. The market’s “liquidity” depends on illegitimate naked short selling. Without the phantom stock which predominates in our markets, nobody would know what to do–prices would go haywire, there’d be total chaos.

All of which is reminiscent of the SEC’s earlier weird statements that naked short selling occurs rarely, but there’s so much naked short selling that enforcing rules against it might “create excess market volatility.”

If you’re a journalist, and you’re still confused, just wrap your head around this: even the hedge funds now admit that a very significant chunk of the stock that they sell cannot be readily borrowed. It cannot be borrowed, because it does not exist. This massive supply of phantom stock is what is setting prices in our supposedly “free market.”

It is a recipe for financial meltdown It is the scandal of a lifetime. And the financial media fiddles.

Posted in The Mitchell Report | 26 Comments »

We Love Jim Cramer
July 23rd, 2008 by Mark Mitchell

“…the most falsely over-weighted topic on Wall Street these days is naked shorting…the concept of not finding shares before you short them, not locating them, is something that happens very rarely…”

- Jim Cramer, TheStreet.com, February 5, 2006



Do you believe in redemption?

In “The Story of Deep Capture,” we noted that CNBC’s Jim Cramer is at the center of a clique of dishonest journalists (most of them former employees of Cramer’s website, TheStreet.com) who have spent many years taking dictation for short selling hedge funds (most of them connected to Cramer). These same journalists, we pointed out, have steadfastly denied that hedge funds commit crimes or that illegal naked short selling is a big problem.

On the day after we published “The Story of Deep Capture,” Cramer went on CNBC to say that illegal naked short selling is a big problem.

This was the first time he had ever said such a thing, and he didn’t mince words. Comparing today’s hedge fund crimes to the short selling that contributed to the great stock market crash of 1929, he said, “We know that there was a lot of time spent in the 30s analyzing this issue and deciding that it was very easy to create a bear raid…What I’m trying to eliminate is the kind of bear raid…where people didn’t borrow stock [i.e., where they conducted illegal naked short-selling].”

Cramer was quiet on the issue after that. But last week, the SEC issued an “emergency order” suggesting that naked short-selling had the potential to topple the American financial system.

That evening, Cramer said, for the second time in his career, that naked short selling is a big problem. He said that, in fact, all along, “We’ve been on a crusade on this show…it’s a crusade to bring back honest short-sellers…Right now hedge funds, if they don’t like a stock, can just attack it by calling brokers and punishing the stocks, blitzing them down [by selling stock that they have not borrowed – naked short-selling].”

Meanwhile, the rest of the CNBC staff went to lengths to suggest that short-sellers are good people who do no wrong – that the SEC’s emergency order was some kind of witch hunt. The folks at CNBC also seemed keen to erase their own culpability in the short-seller attack that is widely believed to have destroyed Bear Stearns.

Strangely, Charlie Gasparino, who has been one of the few CNBC reporters to acknowledge short-seller shenanigans (he once called Deep Capture reporter Patrick Byrne a “hero” for raising awareness of the problem), suddenly pronounced that people who believe that short-sellers destroyed Bear Stearns are all “morons” because hedge funds were pulling their money out of the bank “before all the CNBC chatter” [i.e., before CNBC’s David Faber sparked a panic by airing, as if it were fact, the scurrilous hedge fund lie that Goldman Sachs had cut off Bear’s credit].

This was somewhat in contradiction to Gasparino’s earlier suggestion that hedge funds had precipitated the demise of Bear Stearns. “If you look at the way Bear Stearns imploded,” he said in April, “it didn’t go down in a couple of months, it went down in a week. And if you look at what happened, it’s clients, which were hedge funds - these are the people that…trade with the firm. They precipitously started pulling cash while - while they were going short…”

Indeed, we challenge CNBC to name more than one hedge fund that had pulled out its cash before its reporter, David Faber, aired that well-timed fabrication on Wednesday, March 12 . We’ll say it again: The SEC should subpoena Faber to find out which hedge fund (perhaps illegally) fed him the false news.

In any case, Gasparino now says critics of short-sellers are “morons.” The rest of CNBC has not seen fit to interview the many experts who believe illegal naked short selling is threatening the stability of the American financial system, and has instead lined up people like Cramer pal Joe Nocera, of the New York Times, and Michael Steinhardt, the hedge fund manager who incubated Cramer’s first hedge fund. These people have reinforced the party line that short-sellers are the market’s “vital” untouchables while failing to address the data – the billions of phantom shares that crooked hedge funds have manufactured through naked short selling.

Thus, surreally, the only person on CNBC now acknowledging the scope of the problem is the one journalist who has done the most to cover it up – Jim Cramer. And Cramer is not just acknowledging the problem, he’s telling us how angry it makes him. I mean, we at Deep Capture have done our fair share of ranting about naked short selling, but our efforts pale in comparison to the 15-minute tirade that Jim Cramer launched against the SEC for failing to stop the law-breaking short sellers who are “viciously and quickly” driving down stock prices [tirade accompanied, literally, by a soundtrack of emergency sirens].

What to make of this?

We’ve given up trying to psychoanalyze the singular Jim Cramer. Maybe he sees where the wind is blowing and is trying to distance himself from his hedge fund cronies. Maybe CNBC has heard the critics who have been hollering for years that Cramer’s clique was running rampant, while Gasparino was the only reporter on CNBC who could be objective about short-sellers’ crimes. Maybe to neutralize that criticism, CNBC is flipping everything on its head. We’ve seen stranger goings-on at Cirque du CNBC.

But it doesn’t matter. We’d like to give Jim Cramer a hug. Yes, Jim, come on over — you bear, you — and give us a great big hug.

There is always the possibility that you are legitimately horrified by the destruction that illegal short-selling has wrought. Maybe you even feel a bit guilty about the role you have played.

Well, we feel your pain. All is forgiven. Come and give us that hug.

Sure, it’s beyond the pale for you to suggest that you’ve been on our “crusade” all along, but we’ll give you points for chutzpah. We’ll also give you points for taking a stance that will no doubt alienate you from some of your closest friends.

Most importantly, we give you points for speaking the truth – and doing it well. Although your speechifying against the problem of illegal naked short selling seems strangely timed, it has been unequivocal, incisive, and no doubt convincing to a great many people.

“Would you call me crazy?” you asked on CNBC, as a prelude to your 15 minute rant against the naked short selling problem. Yes, Jim, we would — but crazy ain’t such a bad thing to be, so long as you’re saying it like it is, and doing the world good.

Welcome to the Deep Capture team.

(Or….maybe not. Here’s a question for the long-time crusaders – the hundreds of good people who have been hollering about the problem of naked short-selling for years (you’re all members of the Deep Capture team, as far as we’re concerned): Do you believe that Cramer is truly reformed? Is he going to continue highlighting short-seller crimes. Can he really be one of us? Let us know what you think).

Posted in The Mitchell Report |


How Naked Short Sellers and CNBC Bamboozled the SEC
July 21st, 2008 by Mark Mitchell
You can bet that the hedge fund talking points were rolling off the CNBC fax machine last week, and really, the network did a stellar job – right on par with the high-powered lobbyists in Washington. Yes, the folks at CNBC should join hands with those lobbyists, and take a deep bow. It was a heck of a show – a real extravaganza.

I doubt the American people even know what hit them.

It is hard to believe, given that the news has so quickly disappeared from the front pages, but the SEC last Tuesday issued an historic “emergency order” to head off financial apocalypse by preventing criminals from “naked short selling” the stock of 19 big finance companies.

The SEC’s move was kind of weird (Why only 19 companies?) but it was gratifying to Deep Capture and a band of crusaders who have long been hollering that crooked hedge funds use naked short selling (selling stock that has not been purchased or borrowed, and usually does not exist – i.e., phantom stock) to drive down prices and destroy public companies for profit.

For years, arrogant journalists brushed off the crusaders, while a pack of dishonest, but influential reporters with close ties to hedge funds harassed and ridiculed them (see, “The Story of Deep Capture”). Meanwhile, government agencies denied that phantom stock was a problem. SEC Director of Trading and Markets James Brigagliano once referred to the crusaders as “bozos.”

But on Tuesday…well, here was something altogether different. The SEC said that phantom stock was not just a problem; it was an “emergency” that had the potential to crash the nation’s financial system.

In other words, the bozos were right!

Well, we cheered, and then we closed our eyes to take in that warm glow of vindication. My eyes were closed a bit too long, I’m afraid, because I missed the curtain opening on Cirque du CNBC and its amazing spectacles – great feats of flimflammery, upside down speechifying, all manner of contortionism and illusion.

Within three days, this grim circus, with a lot of help from the mighty hedge fund lobby, would reduce the SEC’s “emergency order” to a twisted joke – a grand gesture to do nothing whatsoever.

The day after the SEC’s declaration, the circus was already well under way, with the hedge funds spinning furiously and their media marionettes singing the party line: short sellers are “vital” to free markets; everybody loves free markets; only bad companies and bad CEOs complain about short sellers – go investigate the CEOs, hands off the “vital” hedge fund managers.

As for billions of dollars of phantom stock threatening to topple the American financial system – don’t even mention it. If somebody does, repeat, over and over, “Only bad companies complain about shorts…shorts are vital”

I sketch out the hedge fund party line only for those who are new to the so-called “debate” over naked short-selling. If you’re a long-time crusader, you’ve heard it all before. You’ve heard it on CNBC so often that you’re probably now banging your head against a wall and saying something like, “oogly oogly oogly,” half-mad with incomprehension – still unable to come to terms with the utterly surreal spectacle of an important television news network, in the United States of America, completely whitewashing a massive crime.

By the time CNBC interviewed SEC Chairman Christopher Cox on Wednesday, the top market cop seemed to have become rather befuddled by it all. Amidst the incessant chants — “bad CEO’s…vital short-sellers” — Cox backed away from his earlier suggestion that he might extend the emergency order to protect the entire market, rather than just 19 big financial firms with ties to Wall Street.

Meanwhile, Chairman Cox suggested, preposterously, that it’s somehow more acceptable to naked short smaller companies because their shares are harder to locate and borrow. This is something only a hedge fund contortionist would say. There are always shares to borrow at some price, and a tough borrowing environment hardly justifies selling millions of non-existent shares to drive down prices.

But we sympathize with Mr. Cox. While the CNBC lady suggested that the SEC should investigate bad companies instead of shorts, and questioned whether the SEC had initiated some kind of “witch hunt” against short-sellers generally, the chairman labored valiantly to point out the obvious (though apparently not to CNBC) distinction between legal short-selling and the blatantly illegal practice of spreading maliciously false information while selling non-existent stock to create panic and drive down prices.

Mr. Cox seemed like he wanted to do the right thing. It’s just that Cirque du CNBC can be a rather discombobulating place.

Moments before the SEC Chairman was interviewed, circus clown Joe Nocera, who doubles as the New York Times’ top business columnist, was on CNBC, working up the crowd by suggesting that Mr. Cox had lost his mind and was doing the bidding of bad companies and stupid people “saying woe is us, woe is us, blame it on the shorts.”

Remember, Joe Nocera is the anti-investigative journalist whom Deep Capture has tape recorded telling some of his media colleagues that the naked short-selling scandal “makes his eyes glaze over,” and he isn’t going to look into it because “life is too short.”

Far easier to read from the script: “Bad companies! Vital shorts!”

The next day, CNBC had yet to televise any of the CEOs, economists, and many other experts who agree that the phantom stock problem is, indeed, an “emergency.” Instead, the network brought on hedge fund cronies to say that their hedge fund cronies are “vital.”

Predictably, CNBC did a long interview with the dreaded Michael Steinhardt, a mentor and incubator of some of the most notorious short-and-distort hedge funds in the land. Steinhardt, for example, once employed David Rocker, who has regularly used the media (most notably, CNBC’s Herb Greenberg) and a dubious financial research shop called Gradient Analytics to disseminate misleading information about target companies, most of which are also victimized by massive levels of phantom stock. Jim Cramer, CNBC’s top-rated “journalist,” once ran a hedge fund out of Steinhardt’s offices, and CNBC’s “Money Honey,” Maria Bartiromo is married to the top partner in Steinhardt’s newest fund.

These are the sorts of relationships that prevail at CNBC. Our critics say it is too “conspiratorial” to point out these relationships, but we believe otherwise. Watch CNBC. Observe the lubrications that are lathered on favored hedge funds. Then judge for yourself.

Steinhardt didn’t have much to say about hedge funds that destroy public companies by selling billions of dollars of phantom stock while publishing false financial information, colluding with crooked law firms to file class action lawsuits, orchestrating dead-end government investigations, hiring convicted criminals and thugs to harass CEOs, and feeding false information to compliant journalists. Indeed, he didn’t have much to say at all, except the predictable mantra that all the “moaning and groaning” about short-sellers comes from bad companies and silly people who are angry about falling stock prices.

Participating in this interview was Paul Roth, another hedge fund manager who was mentored by Steinhardt. When asked whether it would be a problem if, say, a hedge fund were to sell ten times as many shares as actually exist in a company, Roth said, “That’s not illegal…the problem is sometimes you located the shares [and sold them] but somebody scooped them up [before you could deliver them to their rightful owners].”

CNBC’s Joe Kernen, who conducted the interview, characteristically let this statement go unchallenged. So let us state, for the record, that it would be a crime of monumental proportions to sell, say, 1,000 shares in a company that had only 100 shares outstanding. It is a crime because you cannot possibly “locate” or “scoop up” 900 shares that do not exist. It is a crime because there is only one possible reason why a hedge fund would sell ten-times a company’s public float, and that’s to manipulate the stock price.

But understand how these people think: If you can get away with it, it’s not illegal.

Around the same time that CNBC was massaging Steinhardt and Roth, members of the Securities Industry and Financial Markets Association, the leading Wall Street lobbying outfit, were on a conference call with some high-level SEC officials.

As it were, none of the hundreds of companies victimized by phantom stock got to be on any conference calls. But they’re used to that.

They’re also not too surprised that after CNBC aired the hedge funds’ talking points for three days, and the lobbyists wailed on the conference call, and uncounted other hedge fund billionaires bellowed in the name of “efficient markets” and the right to destroy “bad” public companies, the SEC announced that it would preserve its “market maker exemption,” which allows some brokers to sell stock they don’t have in order to “make a market.”

The “market maker exception” is one of several loopholes that hedge funds have been using for years to create billions of dollars worth of phantom stock. Market makers are, in fact, required to eventually deliver the stock they sell. But the name “market maker” imbues magic powers. If the SEC asks why you haven’t delivered the shares you sold, stick the words “market maker” on your forehead, mutter something about keeping things “liquid”, and the SEC goes away — even when you’ve sold ten times the float and even when the phantom stock goes undelivered for months or years at a time.

Since it was already against SEC rules to use naked short selling to drive down prices, the most exceptional feature of the commission’s “emergency order” was that it was going to close the “market maker exception” loophole – at least as it applied to trading in 19 big financial companies. By retaining that exception, the SEC has, in essence, decided that it isn’t going to do anything after all. Hedge funds and their “market makers” can go right on selling phantom stock and threatening the stability of the American financial system.

From “emergency” to “exception” in a few short days…Behold the powers of Cirque du CNBC and its hedge fund choreographers.




Posted in The Mitchell Report