Saturday, September 27, 2008

Naked Shorting Crybaby Skewered by SEC

Word emerged yesterday that the SEC is zeroing in on a notorious naked shorting crybaby, Pegasus Wireless.

The weak-kneed SEC is fast lapsing into irrelevancy, having admitted to doing a lousy job of supervising investment banks in the current financial calamity, so it's interesting to see this feeble agency do much of anything nowadays. In this case, it has taken action to enforce subpoenas ignored by some creep involved in this stock scam. Amazing! More can be found here.

Far from being the innocent victim of naked shorters, as portrayed in idiotic media reports a while back, Pegasus is a typical penny stock piece of rubbish. The SEC describes it thusly:

Pegasus Wireless Corporation is a once-high-flying now-bankrupt penny stock company that made extravagant claims about certain acquisitions and then mysteriously issued hundreds of millions of shares of stock to satisfy so-called debts that previously had never been publicly disclosed.

. . . in mid 2006, Pegasus began issuing large amounts of shares, claiming it was doing so to satisfy debts incurred by Blue Industries that had not been previously disclosed to investors. When the Commission staff requested documents relating to the so-called debts, Pegasus produced several promissory notes purportedly issued to Adams [the guy ducking the subpoenas]. Between mid 2006 and 2008, Pegasus issued nearly 500 million shares (more than 75% of the outstanding shares) based on promissory notes...

Etc. Etc. That's it. Just another crappy small company stock masquerading as a naked shorting "victim."

© 2008 Gary Weiss. All rights reserved.

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Friday, September 26, 2008

You Know We're in Trouble....

... before I complete that thought, I'd like you to identify the source of the following:

As the Bush administration attempts to ram a bailout package of nearly one trillion dollars through Congress, it begins to feel like Colonel Sanders asking the public to trust him to take care of the chickens.

If it weren’t so damn serious, there would be something almost comical about it. Here we have the White House, which has squandered trillions of dollars over eight years, and its point man, Hank Paulson, fresh from 38 years of gaming the financial system while working at Goldman Sachs, insisting that Congressional leaders hand over a trillion dollars to them with no debate and no strings attached.

Could have come from pretty much anywhere, right?

Give up? OK, I took it from an article entitled "Ramming Through the Bailout," published the other day by the Communist Party USA Online.

To finish the sentence...

You know we're in trouble when the Communist Party line on the bailout could have been crafted by the House Republican Caucus.

© 2008 Gary Weiss. All rights reserved.

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Markets to Bush: No Rescue Package

It's interesting to gauge the stock market's reaction to President Bush's declaration today that "we are going to get a [Wall Street bailout] package" passed. The market slide, which began at the opening bell, hesitated but then continued, unaffected.

You can say a lot of things about Bush, but he is no Lyndon Johnson when it comes to jawboning. He appears to be the politically weakest president since Gerald Ford, or perhaps Jimmy Carter at his least effective.

A lot's been said about the rescue package's failure to give any direct relief to homeowners, so I won't add to it. The New York Times editorial today framed the issues the best. But it is cheery to see that executive compensation will apparently be restricted in some unspecified way.

© 2008 Gary Weiss. All rights reserved.

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Thursday, September 25, 2008

A Solution to the Financial Mess?

Business Week's Peter Coy has an intriguing suggestion for resolving the financial crisis: a more focused approach that would help the strongest banks and let the weakest ones wither.

Read about it here.

Peter writes:
The risk. . . of a free-market bailout is that the money will be spent inefficiently. The companies that get the biggest benefits will be the ones that accumulated the biggest globs of unwanted securities. As a result, the government could be propping up zombie firms that wouldn't survive under ordinary circumstances. These companies are unlikely to have enough funds to lend effectively. Instead, they will focus all their energy on simply surviving, while sucking up funds that would be better used elsewhere.


He suggests that it may be better "for the government to focus less on buying bad assets and instead recapitalize the financial system by buying substantial stakes in selected companies. That amounts to picking winners and losers, a hated concept in free-market circles. But it would save money and give taxpayers some of the gains when banks eventually recover."

(Hat tip: Peter Cohan.)

UPDATE: Dow Jones's Michael Rapaport has another worthy idea:

First, the government should buy only a limited amount of bad assets - say 20% of each bank's holdings - at their full current carrying value. (Paulson's $700 billion plan might not buy all the bad assets anyway; banks now hold more than $1.3 trillion of mortgage-backed securities alone.) That would enable banks to unload some of their worst assets, inject a big chunk of capital into them, and start thawing the market freeze that has left banks reluctant to lend to each
other.


Then, whatever amount the government saves by not buying more bad assets would be used to help homeowners facing foreclosure and commercial borrowers facing similar trouble, and to beef up federal deposit protection. . .
As of AM Friday, however, it seems that no idea (good, bad or indifferent) stands any chance of going anywhere. And none will give relief to homeowners, such as by amending the abysmally pro-business bankruptcy laws.

© 2008 Gary Weiss. All rights reserved.

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Tuesday, September 23, 2008

Journalists Need to Show Skepticism on the Mega-Bailout

Pulitzer winner and former New York Times reporter David Cay Johnston today posted an appeal for skepticism in the Romenesko journalism website.

Johnston writes:

In covering the proposed $700 billion bailout of Wall Street don't repeat the failed lapdog practices that so damaged our reputations in the rush to war in Iraq and the adoption of the Patriot Act. Don't assume that Congress must act instantly, as so many news stories state as if it was an immutable fact. Don't assume there is a case just because officials say there is.

The coverage of the Paulson plan focuses on the edges, on the details. The focus should be on the premise. And be skeptical of what gullible Congressional leaders, most of them up before the voters in a few weeks, say after being given a closed-door meeting on supposed horrors.
Johnston suggests some specific questions, including:
How does banning short selling of the stocks of 900 companies help the markets? (The markets are heavily biased toward the sell side, so why constrain the shorts, who often turn out to be right about stocks whose share prices has been artificially inflated.)

How is banning short selling of this growing list of companies show a commitment to "free markets," a stated goal of this and a long lost of previous administrations?

During this short selling ban, why are there no parallel controls on insiders getting out of their positions?
I would add to this list, as I suggested yesterday, why not simply reinstate the uptick rule rather than eliminate all shorting?

Coverage of the bailout has not been terrible, but Johnston is right -- more skepticism is needed, lest the media wind up complicit in yet another Iraq-style deception.

© 2008 Gary Weiss. All rights reserved.

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Monday, September 22, 2008

'Mind Blowing Stupidity' Update: Whither the Uptick Rule?

I've borrowed the title language from Simon Denham, writing in the Daily Telegraph concerning the British market's ban on short-selling of British financial stocks, but the same thing can be said about the SEC's ban on shorting 799 financial stocks. Paul Kedrosky calls the anti-shorting hysteria "a fun superstition, sort of like sacrificing the odd virgin into a nearby volcano. Or tossing a supposed witch into a shallow creek."

What makes the SEC action mind-blowingly stupid is that this: if there was abusive shorting of the financials--and there's no evidence of any, not that it matters--it was because the SEC allowed it, by revoking the uptick rule.

The uptick rule, which prohibits shorting of stocks in down-trending markets, was enacted during the Depression for the express purpose of preventing manipulative shorting. It was tossed out by Chris Cox's SEC, at the same time the agency began to waste enormous resources pursuing the naked shorting hobgoblin.

Cox's effort to restrict naked shorting, while dumb, pales in sheer magnitude of empty-headedness by his attack on legitimate shorting.

No real surprise here from an agency that did nothing to prevent the financial firms from spinning out of control, and which has cut corporate fraud enforcement dramatically, as set forth in the current issue of Portfolio by Scott Paltrow.

But at least this much is clear: Chris Cox is now, hands down, the worst SEC chairman in recent history, far outshining the previous title-holder, Harvey Pitt.

© 2008 Gary Weiss. All rights reserved.

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Wednesday, September 17, 2008

The SEC Fiddles While the Market Burns


Look carefully and you can see Chris Cox with a fiddle

The Dow Jones Industrial Average is down nearly 300 points -- 2.6% -- and the Standard & Poor's 500 is down over 3%. Lehman is bankrupt, AIG is bailed out, Merrill Lynch is acquired, because of a mortgage crisis about which the SEC, under its do-nothing chairman Christopher Cox, has done absolutely zippo.

So what does the aforementioned regulatory agency do while Wall Street burns like Warsaw in 1945? It issues a press release heralding regulations, effective tomorrow, targeting that great menace -- "abusive naked short sellers."
"These several actions today make it crystal clear that the SEC has zero tolerance for abusive naked short selling," said SEC Chairman Christopher Cox. "The Enforcement Division, the Office of Compliance Inspections and Examinations, and the Division of Trading and Markets will now have these weapons in their arsenal in their continuing battle to stop unlawful manipulation."
OK, but what has "abusive naked short sellers" got to do with the aforementioned Burning of Warsaw? Absolutely nothing, and the SEC does not even attempt to claim that it has, or even cite one company that has been victim of this Great Scourge.

To make this "action" even more laughable, Cox didn't take a step that actually might have had some logical basis, and reinstated the "uptick rule." But that would have upset Wall Street, and perhaps done some good, by preventing actual manipulative short selling, so Cox wasn't going to do that.

You have to admit that Cox is working hard, not to do his job of protecting the markets, but at outdoing Harvey Pitt for the distinction of being the worst SEC chairman in recent history. Pitt, a former lawyer for white collar crooks, now is a paid lobbyist for anti-shorting crowd -- mainly CEOs of small companies who want to divert blame from their incompetence.

Cox is far more competent than Pitt was at pretending to actually do stuff while actually serving corporate interests. So he issues press releases claiming to help investors, while actually carrying water for Corporate America. In this instance, the anti-shorting jihad has the full support of such champions of investor rights as the U.S. Chamber of Commerce and Washington Legal Foundation.

© 2008 Gary Weiss. All rights reserved.

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Friday, September 12, 2008

Since 'Phantom Shares' Don't Exist, Make 'Em Up

Floyd Norris of the New York Times yesterday addressed one of the central tenets of the anti-naked-shorting movement, which has been to portray every financial scandal out there -- even when there is zero evidence-- as "proof" of "naked short selling."

Conspiracy theorist/fantasist Mark Mitchell, Deep Capture blog

Floyd's column concerned the latest rant emanating from that camp, this time from the delusional ex-journalist Mark Mitchell, who is employed by Overstock.com CEO Patrick Byrne. Floyd points out that there is no evidence whatsoever that, as Mitchell suggested, an NYSE action against Deutsche Bank demonstrated issuance of "phanton shares." Floyd diplomatically suggests that Mitchell was being "nutty or prescient." Nothing prescient about it, of course. (Times style discourages use of the word "lie," I guess.)

Mitchell has similarly woven out of thin air a "naked shorting conspiracy" in the arrest of a Jonathan Curshen the other day. Curshen was not, however, charged with anything of the kind. See the SEC complaint, which shows that Curshen was involved in the popular late-nineties practice of paying brokers to push stocks. Those were known as "cash deals" back in the day, and I see that (surprise surprise) they are still apparently alive and well.

Nothing new here. As I described in Wall Street Versus America, the naked shorting conspiracy nuts turned the Eagletech stock swindle into a naked shorting conspiracy. There' s a kind of rough logic to that, because microcap scamsters have been screaming "naked shorting" for decades. Before being replaced by Byrne, the standard-bearer of the naked shorting conspiracy cultists was imprisoned fraudster Richard Altomare of the Universal Express stock fraud, and to this day devotees of a pump and dump called CMKM Diamonds lionize the crooked management of the company and condemn the SEC for taking action against the firm.

Byrne complains loudly that nobody will take him seriously, but he hardly helps his case by hiring lowlifes like Mitchell, who left CJR Online under a cloud after a bizarre tenure writing a financial column, to fabricate naked shorting his conspiracy theories. Byrne's increasingly loony public statements -- get a load of this whopper -- don't help much either.

© 2008 Gary Weiss. All rights reserved.

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Tuesday, September 09, 2008

Mr. Tabacco Has Some Explaining To Do

Two of the leading poster children for naked shorting conspiracy theorists are BIDZ.com and Force Protection. BIDZ has claimed that the big, bad naked shorters (and not anything management has done) is the reason its shares are in the commode.

While Force Protection's management has stayed away from the subject, it has been pushed doggedly by Overstock.com's wack-a-doo CEO Patrick Byrne--who has disgustingly wrapped the flag around the issue, because Force Protection is a defense contractor.

Now comes word that Force Protection is the subject of a class action suit. Nothing surprising there, except that co-lead counsel is the law firm of Berman DeValerio Pease Tabacco Burt & Pucillo.

The "Tabacco" in the name of the firm is Joseph J. Tabacco, a member of the Overstock.com board of directors.

When Tabacco was named to the Overstock board, I raised the issue of the conflict of interest--from the standpoint of future plaintiffs--between Tobacco's duties as a plaintiff's lawyer, fighting securities fraud, and his job on the board of a company that routinely violates the securities laws and has no concept of corporate ethics. There may not be a legal conflict of interest, but this certainly raises a serious question about Tabacco's judgment.

According to a copy of the order appointing Tabacco's firm, posted on the firm's website, Berman De Valerio was picked by the Chicago Laborers Group. Seems to me that these good union folks owe it to their members to give this whole subject a close look.

As for BIDZ -- oh, just the usual shaky financials and questionable backers that one expects from companies like this. Sam Antar has been all over the story, and my old colleague Bill Alpert of Barron's ran a good piece. The Barron's article is available by subscription only, but here is a Seeking Alpha summary.

© 2008 Gary Weiss. All rights reserved.

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