Study: Bear Stearns and Lehman Brothers Not 'Destroyed' by Naked Short Selling

Readers of this blog may find this article in the Big Money of interest, particularly the last part, in which I cite an academic study that debunks the theory that Bear Stearns and Lehman Brothers were brought down by naked shorting.

The study was based on "fails to deliver" data, which naked shorting conspiracy theorists have been using as a proxy for naked shorting.

I think that fails are a questionable way of plotting naked shorting, but even if you use it as a proxy for NSS, as the NSS conspiracy theorists do, the numbers show very clearly that such trading did not cause the decline in share prices for Bear and Lehman. The fails took place after both companies tanked.

Matt Taibbi based his entire recent, wretched Rolling Stone article on that same premise, which turns out to be false. No surprise, as most of his named sources were related to Overstock.com's wack-a-doo CEO Patrick Byrne, or were otherwise old veterans of the NSS conspiracy circuit. Among them were someone from the Haverford Group, which he didn't mention is a Byrne-owned company, and ex-Overstock lawyer Brent Baker, without his mentioning that his client list includes two of the most wretched companies to use NSS as an excuse, Universal Express and the recently-indicted CMKM Diamonds.

You'd think that Taibbi could have at least discovered that Byrne owned Haverford. Isn't that hard, for chrissakes.

Looks like Taibbi was really conned--again.

© 2009 Gary Weiss. All rights reserved.

Patrick Byrne, Facing Dilemma, Lashes Out at Penson Financial

Conspiracy theorist/fantasist Mark Mitchell, Deep Capture blog

Sam Antar today describes the serious dilemma facing Patrick Byrne, the wacky CEO of Overstock.com. Thanks to an SEC investigation instigated by Sam, who has posted frequently about how Overstock has systematically inflated its financial statements, Byrne is caught between the proverbial rock and a hard place.

He has to either restate Overstock's recent earnings--including a much-ballyhooed "profit" in the fourth quarter that was actually a loss--or wait until the SEC forces him to do so. Sam writes:

If Overstock.com restates its financial reports it will be the third time in three years that the company had to correct financial reports due to violations of GAAP: (1) inventory accounting error - Q1 2002 to Q3 2005, (2) customer refund and credit error – Q1 2003 to Q2 2008, and (3) underbilled income from fulfillment partners – Q1 2003 to Q2 2009. Patrick Byrne will have the unique distinction being the CEO of a company that restated financial reports from overlapping prior accounting periods three times: Q1 2003 to Q3 2005.

As usual in such situations, Byrne has dispatched one of his underlings to stage a diversion, by posting an item in Byrne's Deep Capture blog entitled "On Rolling Stone, Penson Financial, the Mafia, and Naked Short Selling."

The Byrne employee to get this task is Mark Mitchell, former editor of the Audit column at Columbia Journalism Review online. Mitchell was forced out of his job at the Audit in the summer of 2006. This item gives a good idea why CJR was happy to see Mitchell walk out the exit door for the last time.

But phony "journalism" by PR hacks is sometimes first-rate propaganda, and what we have here is an excellent example of the tactics of the naked shorting conspiracy theorists. I don't know if what we have here is particularly good as propaganda, but I do know that the gullible lap up this kind of thing.

In this case, Mitchell targets Penson Financial Services, the subject of a famous hoax video posted on the internet by Matt Taibbi, and he uses insinuations, built on stuff he makes up, to drill his point: that Penson is up to no good, and that it is in the service of the Mafia.

Mitchell says as follows:

If I have anything to add to Taibbi’s terrific reporting, it is this: Penson Financial’s vice president in charge of stock clearing (that is, the head of the division that appears to have located stock that did not exist) is a man named Christopher Sandel. From 1985 to 1995, Sandel was a top executive at Adler Coleman, best known for being the clearing firm to the Genovese Mafia family.

There's only a few problems with this paragraph, as in "everything":

1. Adler Coleman cleared trades for a rotten brokerage named Hanover Sterling, and, as I reported a good 13 years ago in a Business Week cover story, The Mob on Wall Street, Hanover was connected to the Genovese crime family. But it's nonsense to claim that Adler "cleared" for the Genoveses, and there's no evidence tying Adler to the Mafia.

2. Sandel is not in charge of stock clearing at Penson. He left that position two years ago. See this press release.

Mitchell goes on to build on his lie:

... when some of America’s biggest financial companies collapsed under a barrage of short selling last fall, an enormous chunk of that trading was being cleared by a fellow who used to work for a company that seemed to specialize in clearing trades for the Mafia.

The "fellow" is Sandel, who left in August 2007, seven months before the financial companies starting collapsing. And they collapsed because of their swan dive into derivatives, not because of a "barrage of short selling."

Mitchell then proceeds to wander down memory lane, back into microcap stock-land in the 1990s, misquoting and fabricating, finding opportunities for lies in every sentence. What's interesting, to me at least, is that the source material he twists into fabrications is stuff I've written over the years, and the guy whom he misquotes and lies about is moi.

For example:

Mitchell:

He [me] wrote a great deal about Hanover Sterling, but not once did he mention that naked short selling was central to that case.

The only reason Mitchell can yammer on, inaccurately, about shorting of Hanover stocks is that I wrote about it in the BW cover story, in which I described how the mob was shorting those stocks. In Wall Street Versus America I delve into the shorting of Hanover stocks, and point out that it was naked short selling. What was central to "that case" was not the shorting, however, but brokers who were paid kickbacks ("chops") to sell worthless stocks to the public.

Mitchell:

In his book, “The Mob on Wall Street,” Weiss told the story of a Genovese Mafia broker, and mentioned that this Mafia broker claimed to clear his trades through none other than…Penson Financial.

The book is Born to Steal, it told the story of a broker tied to an associate of the Colombo crime family, and, when he set up a fictitious firm called United Capital, he forged statements indicating he cleared through Penson. United Capital was an imitation brokerage, just a vehicle for stealing. It didn't trade and there was nothing to "clear."

Mitchell:

Several traders tied to the Gambino crime family were charged with naked short selling companies that were underwritten by Hanover.

Nobody was ever charged with naked shorting companies underwritten by Hanover. However, traders tied to the DeCavalcante crime family did indeed short Hanover "house" stocks (not necessarily underwritten by the firm), as I described in Wall Street Versus America and first reported way back in 1996.

As a matter of fact, when former FBI director Louis Freeh praised my BW stories for aiding prosecutions in Florida, he was directly referring to the DeCavalcante prosections. So I guess you can say that I helped put a naked shorter in jail--though, as it happens, naked shorting was not part of the criminal case against the DeCavalcante crew.

There's more goofy, casual lies, which most people probably wouldn't notice unless they happen to have written a book on the subject:

Hanover Sterling, self-imploded in one of the greatest naked short selling scandals of all time.

Though there was naked shorting, what made this a scandal was that customers were sold worthless stocks.

That the Genovese Mafia brokers at Hanover were not charged in this case seems odd...

Sure is odd, because top Hanover brokers were charged, indicted, convicted and imprisoned.

Mitchell melodramatically concludes:

Might the Mafia have played some role in the collapse of the financial system? If I were more heavily armed, I would venture an opinion.

He does need to be more heavily armed. With the facts, not fantasies.

Usually I don't respond to Mitchell. If I did, I'd be doing nothing but responding to that psycho in this blog. But I think it's important in this instance to demonstrate the kind of moronic lies floating around the naked shorting world, most of them deliberately promulgated by Mitchell and other Byrne employees.

I think it's pretty plain now that the hoax video came from somebody in the naked shorting la-la land. Taibbi is only the most recent and best-known victim to be suckered by these idiots, and he won't be the last.

All of the above deliberate misrepresentations and lies are underwritten by Byrne, who founded and finances Deep Capture. But none of this is going to save Byrne from his day of reckoning with the SEC, if they have the guts to enforce the securities laws.

© 2009 Gary Weiss. All rights reserved.

Did Penson Lie in its SEC Letter?

Matt Taibbi hasn't responded to the letter made public yesterday by Penson Financial Services, which he accused of a pretty serious securities law violation in a blog post the other day.

But while he's remaining mum, somebody spoke up in his defense, positing the following in a comment to Clusterstock:

LOL. Go to law school. Then re-read that letter. "There was no locate at the time of the video" is hardly the same thing as saying, "There was no locate for x-billion shares for CITI." They also didn't say, "We would never approve a locate greater than the float."

When a lawyer speaks, it's best to pay attention to what he or she *did not* say.

Now, it could be that the video is a hoax.

I find it telling, though, that the letter does not deny any of Taibbi's underlying allegations. Would Penson have approved such a trade? If not, why not say, "The video must be a hoax, because we would NEVER approve such a trade." Etc.

Actually the letter did more than just say that. It starts out by saying, "The purpose of this letter is to inform you of an apparent hoax and unsupported accusation of a violation of Regulation SHO by Penson."

In the third paragraph it says, "The purpose of this letter is to inform you that Taibbi's post is based on false information." And then, toward the bottom, it says, "While we are uncertain whether Taibbi's article is the result of a hoax or something more deliberate......"

(A copy of the letter can be found here.)

I don't see much wiggle room here. Penson is saying that the video is either a hoax or something worse than a hoax, something "more deliberate." I guess that's a gentle way of saying that Taibbi made the whole thing up.

As I said yesterday, there are possibilities: Either Penson is lying, or it is not.

Perhaps Penson knows full well that this is a legit video, and is sliming and lawyering through the thing by sending a letter intended to mislead the SEC. Or the video is a hoax, but in fact the company really engages in the kind of behavior depicted in the video. Then it misled the SEC when it said that it has "written supervisory procedures" on short sales.

In either case, Penson is in major doo-doo. That letter would constitute what is known in the criminal justice system as obstruction of justice. That's because the letter is designed to head off any possible SEC or Justice Department investigation into securities law violations at the firm.

The other possibility, as another blogger put it yesterday, is that Penson is not lying and Taibbi got "punk'd." He fell for a fugazy video.

Hey, I'm comfortable with both scenarios. My first major investigative piece for BusinessWeek was way back in 1988, when I wrote about sleaziness by what was then the largest clearing firm, Pershing, then a division of Donaldson, Lufkin & Jenrette. Pershing used to engage in various practices, too complex to explain here, that enriched itself at the expense of shareholders. I learned back then how sleazy the back office and stock-clearing business can be.

Some years later I wrote about how Bear Stearns apparently knew about customers being ripped off by slimy penny stock houses. Bear came charging at us, lying through its teeth about the whole thing--but had the good sense not to lie to the SEC.

So maybe Penson is lying too, maybe its denial is a lot of hooey. But if it isn't, Matt Taibbi has put out some pretty serious misinformation. Not only hasn't he corrected that misinformation, but he has stood by his story in an emphatic way.

UPDATE: Investment News reporter Dan Jamieson says that Taibbi would not respond to an email requesting comment. Odd. You'd think he'd be anxious to defend his "scoop," if he still thinks it's genuine.

Jamieson reports that "Daniel Son, president of Penson's parent, Penson Worldwide Inc., said several 'doctored' versions of the video have appeared on YouTube."

The naked shorting conspiracy crowd still hasn't attested to the genuineness of the video, although there's a reasonable chance it came from one of those loons. Really not very nice to let Taibbi hang like that. Mark Mitchell, an ex-CJR editor who was pushed out of his job in 2006 and now works for Overstock.com's wacky CEO Patrick Byrne, came galloping to Taibbi's defense in a blog post Wednesday--almost.

Writing in Byrne's Deep Capture blog, the cracked-up ex-journalist carefully doesn't endorse the genuineness of the video. Instead he wanders down memory lane, making stuff up, in an effort to smear Penson. Since this is a good idea of how the naked shorting loons rewrite history, I've provided a full analysis here.

The Proxy Partisans blog opines: "We'll see how it pans out. But it seems to me that it is Taibbi who is way out on a limb here. And I hear wood cracking."

© 2009 Gary Weiss. All rights reserved.

Was Matt Taibbi the Victim of a Hoax?

Folks, I have a confession to make: I was in a minor auto accident the other day. I am really not in the mood for any massive fight with some guy who likes to call people "assholes." I have a sensitive disposition, am in a bad mood, and I don't think my constitution could take it.

But nevertheless, we have an interesting situation here: Matt Taibbi, who writes for Rolling Stone, posted the other day what he described as a "video" showing a "naked swindle" as in "naked short selling" in action.

The video is here.

One of several responses from Clusterstock is here.

Taibbi's response to that is here.

The back-and-forth over the video has been vitriolic, but this blogger seems to have a good handle on the thing.

Two things struck me as odd about this whole situation. One is that naked shorting conspiracy theorists, who you'd expect to rally around Taibbi in a situation like this, were strangely silent. So was Penson Financial Services, the actual location of the naked swindle in question, according to Taibbi:

A clearing firm that worries about the rules and whines about not being able to locate this or that stock is not going to keep the business of a lot of these day traders. So you see a lot of cut corners.

This video is an example of a cut corner.

Well, there you go. That's the guilty party: Penson and only Penson, according to Taibbi. No other brokerages are mentioned by Taibbi as being involved.

This is a serious accusation. If Penson okayed a "locate" of a massive number of shares without good cause, if it "cut a corner" as he put it, Penson could be accused of being an accomplice (or accessory or something) to a genuine market manipulation. See, while I've said numerous times that naked shorting conspiracy theories are overblown hooey, the fact remains that if someone actually did use naked shorting to drive down the price of a stock, that would be market manipulation.

If a trading system or clearing firm allows naked shorting that could drive down the price of a stock, it's a big problem. And by the way, that's got nothing to do with Regulation SHO or any of the other sturm und drang from the SEC over the past few years. Market manipulation has always been illegal.

If not, it's Taibbi who's got the big problem. Someone gave him a "fugazy" video and he got taken in. Is that what happened?

I went to the Penson website and noticed that the chief spokesperson there is a gent named Andy Yemma. I wrote him to ask if there was a response, and he emailed me a letter Penson has sent to the SEC:



So either Penson Financial Services is a bunch of crooks that just committed a criminal act and compounded it by lying to the SEC, or Matt Taibbi is the victim of a hoax. There is no third alternative.

At first I thought that maybe Taibbi got this from one of the conspiracy theorists themselves. But now I'm not to sure. Was Taibbi set up? Was he sandbagged? See, I'm a bit conspiracy-minded myself.

Of course, the NSS conspiracy types are not always the brightest bulbs in the package, and they do indeed traffic in sheer hokum.

But Taibbi is on record rather profanely rejecting the charge that he was the victim of a hoax.

Since he's standing by his story, what I can't understand is why Taibbi underplayed the seriousness of this whole thing. What he's saying is that Penson--a rather large Wall Street firm--is a criminal enterprise. Remember, he's saying that unequivocally, no weasel words. He's claiming direct culpability by that firm, by Penson, not by some broker clearing trades by the firm. He says Penson "cut corners" and that the video proves it.

He's got a big story on his hands. Bigger than Madoff! Unless it's a hoax, that is.

By the way, if it's not a hoax, where are the naked shorting conspiracy sites? Why aren't they flocking to his side? Hmmmmm?

UPDATE: Penson issued a vigorous denial in a letter to the SEC, which is unwise if it isn't innocent. Taibbi would not respond to an email from a reporter from a Wall Street trade publication. Guess he wants it to go away. It won't. See my follow-up here.

It seems pretty likely now that the video is a hoax, probably concocted by a naked shorting conspiracy nut.

In this post I describe how the naked shorting loons systematically lie, sometimes crudely, in the hope of trapping the unwary. Taibbi would appear to be their latest target.

© 2009 Gary Weiss. All rights reserved.