Emails Describe Overstock.com Waging War -- On Behalf of its Enemies

Byrne's suit hasn't worked out too well.

In case anyone has missed it, here's a link to my article in the latest issue of Barron's, which explored the latest chapter in the ongoing saga of Overstock.com and its crusade against sanity.

Overstock has been hyperventilating for months about some emails that were inadvertently made public in its 2007 lawsuit against 11 prime brokers. Nine of the defendants were dismissed or settled, and the holdouts are Goldman Sachs and Merrill Lynch. The emails, disclosed in this court filing, received a flurry of publicity when they were first revealed, mainly a Rolling Stone blog, but since then haven't gotten much ink.

That's a shame, because there is a really amazing, ironic twist to this suit. It seems that Overstock is spending millions of dollars in legal fees to benefit its enemies--the short-sellers who rightly believe that this company is cooking its books, mismanaged, grossly unethical, and generally on its last legs.

Overstock claims in its suit that it was a victim of a conspiracy by the prime brokers to drive down its share price. Now, ask yourself: why would the prime brokers give a damn about Overstock's share price? They don't. And the emails don't say a word about Overstock or its nutcase CEO, Patrick Byrne.

But the prime brokers do have a motive to maximize their profits. The emails suggest that they may have done so by loading up on stocks for their stock-loan departments that were created via naked shorting, specifically by options market-makers who used a trading technique called a "reverse conversion." Then they charged their customers for borrowing the shares -- when they weren't borrowed.

As I point out in the article, short-sellers have been complaining for years about prime brokers cheating them by not borrowing stocks on their behalf. Hedgie Marc Cohodes, one of the short-sellers that Byrne targeted in a separate lawsuit, has contended that Goldman put him out of business and has intimated that it did so to cover up naked shorting.

I didn't have space in the piece to explore the depth of the short seller discontent, which included a class action lawsuit filed against the same prime brokers in December 2006, months before Overstock filed its suit.

Here's a copy of the short sellers' 2006 lawsuit. Note that the shorts' suit complains about pretty much the same conduct that appears to be discussed in the emails. Aside from alleged price fixing, Bloomberg reported at the time, "the plaintiffs also claimed that the firms don't require one another to deliver 'hard-to-borrow' securities, enabling them to charge borrowing fees for securities that never actually change hands." The suit was dismissed on a technicality a year later.

So, assuming there was chicanery here (which Goldman and Merrill both deny), the victims would be the short-sellers Byrne hates.

I guess that might explain why there was a spate of director resignations when Overstock's suit was filed back in 2007. I have to admit that I was slow to grasp the magnitude of this idiocy when the suit was first filed.
 
Adding irony upon that irony, Overstock will be on the hook for $2.4 million in court costs if its appeal of the suit, which was dismissed in January, is unsuccessful. Given the company's precarious financial situation, ongoing consumer fraud litigation by California district attorneys, and a libel suit against Byrne that is likely to go against him (both dealt with here), this suit is just another disaster for a company with no shortage thereof.

© 2012 Gary Weiss. All rights reserved.
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My latest book is AYN RAND NATION: The Hidden Struggle for America's Soul, published by St. Martin's Press. Click here to order the book from Amazon.com, and here to order it from Barnes & Noble. Follow me on Twitter @gary_weiss.

The Tangled History of Occupy Wall Street 's Nemesis

Wall Street heroes are anti-naked shorting conspiracy theorists

There's an intriguing item in Business Insider today about two "heroes of Wall Street": John and Derek Tabacco, who counter-demonstrated against Occupy Wall Street last week, holding up green posters that read "Get A Job" and "Occupy A Desk!"

"They then declared their movement the 'Wall Street Freedom Fighters.'", Business Insider pointed out. Their two-man counter-demonstration was first reported by Business Insider and Salon.

The Tabacco brothers operate something called LocateStock.com. They are also leading "naked short selling" conspiracy theorists, who have been quoted all over the media, including by the estimable (and, on naked shorting, distressingly gullible) Matt Taibbi on the subject of this ferocious but largely imaginary menace to the financial markets.

What Taibbi didn't point out, in quoting Tabacco expounding on the subject, is that John Tabacco worked for the investor ripoff shop called First Hanover, as Salon has pointed out. He was barred from the securities industry for his activities there. Salon has previously reported the brothers' strange history in other areas. Kind of impacts on Tabacco's credibility, wouldn't you say?

John Tabacco's scuzzy background is not surprising. Naked shorting conspiracy theories were originally promoted by penny stock brokers, before being spread to the world at large by the ancestral bank roll of their friend and benefactor, Overstock.com CEO Patrick Byrne.

Byrne, an outspoken right-wing activist, foul-mouthed misogynist and campaign financier, has tried to link his nutty conspiracy theories to Occupy Wall Street, even though he is the living embodiment of everything OWS is fighting--and his conspiracy theories exonerate Wall Street banks for collapsing the market in 2008. Byrne has promoted his theories in tandem with the Tabaccos, promoting Locatestock.com on Overstock's website and on CNBC. In a bizarre incident in 2006, Byrne actually held up a sign naming LocateStock.com and a conspiracy-theory website during a CNBC appearance (above).

In addition to First Hanover, John Tabacco also was employed by Russo Securities and DH Blair, both notorious penny-stock emporiums. After his expulsion from the securities industry, Tabacco tooled around in various jobs before deciding to become an anti-nekked-shorting conspiracy theorist. At one point he was business partners with the worst SEC chairman in the history of the universe, Bush-appointed clown Harvey Pitt.

I've got to give the Tabaccos credit. At least they haven't tried to present themselves as friends of OWS, but rather as what they and the naked shorting conspiracists really are: shills for Wall Street, trying and failing to divert the public's attention from real issues and real problems.

© 2011 Gary Weiss. All rights reserved.
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AYN RAND NATION: The Hidden Struggle for America's Soul, will be published by St. Martin's Press on Feb. 28, 2012. Click here to pre-order the book from Amazon.com, and here to pre-order from Barnes & Noble. Follow me on Twitter @gary_weiss.

Some Investor Bulletins the SEC Forgot ; The Economist is Suckered

In my Street.com column today I offer up some ideas for long-overdue "investor bulletins," in light of the SEC's recent issuance of a warning against reverse mergers--an investor danger since at the 1980s. Nice of them to get around to it.

I deal with other long-neglected dangers such as reverse stock splits, Apple mania, and, of course, naked shorting hysteria.

Speaking of which, The Economist this week has the stock market conspiracy set salivating because of an article on the danger of unsettled trades. It's innocuous enough until you get to the portion dealing with naked shorting, and then it flits off into outer space. The Economist repeats the old conspiracy-theorist canard that naked shorting creates "phantom shares." Not true -- see this SEC fact sheet, at 7.1, which was published in one of the agency's rare efforts to counteract the massive NSS disinformation campaign.

How did The Economist get suckered? Just look at who's quoted, John Wellborn of the Haverford Group, "an investment firm." But actually it's an astroturf operation run by Patrick Byrne, the conspiracymongering CEO of Overstock.com, and its sole mission is to push Byrne's conspiracy theories.

As disclosed whenever Overstock issues a proxy, most recently last March, "From 1994 to the present, Dr. Byrne has served as a Manager of the Haverford Group, an investment company and an affiliate of Overstock."

In a rational world, the naked shorting hysteria that commenced during the financial crisis would have subsided, given how every study of the crisis, including the Financial Crisis Inquiry Commission, has laid the blame where it belongs -- on the actions of the banks. NSS conspiracy tales are so irrelevant they are hardly mentioned at all. But thanks to Byrne's astroturfing "investment firm," the unwary will continue to be suckered.

So SEC, get cracking with those investor bulletins! (I'm not holding my breath.)

© 2011 Gary Weiss. All rights reserved.

Sharesleuth Hones in on a Naked Shorting Gasbag

Pitt is partners with a barred broker

Interesting article in Sharesleuth today, describing a cellular company's ties with a variety of shady characters--including a barred broker who has built a business catering to companies that use "naked short selling" to divert attention from their own wrongdoing.

The company at issue is called Lenco Mobile, and the site describes how the company is hooked up with a "recidivist SEC offender" named Michael Crow, and also is tied in with an odious character named Thomas C. Ronk.

Ronk is a regular on the naked shorting conspiracy carnival circuit:

Ronk operates several investment web sites, including BuyIns.net, which purport to identify companies whose stocks have been targeted by illegal "naked shorting'' and are poised for price jumps.

He also is partners with former SEC Chairman Harvey L. Pitt in RegSho.com, a site created to help short sellers locate shares to borrow so that they can remain in compliance with market rules.

Dealbreaker had an item a while back on Pitt's involvement in that creepy outfit, and how it constituted a conflict of interest. Pitt, arguably the worst SEC chairman in recent history, resigned in disgrace in 2002 after doing such a bad job that he just couldn't go on.

It's not news that Ronk has a regulatory history a mile long, or that he is in the business of helping crappy penny stock companies lure investors--as I described in this item in 2007--but Sharesleuth provides an interesting description of Ronk's pedigree.

Ronk was a stock broker in Southern California before running afoul of regulators.

In 1999, he was fined $50,000 and suspended for 30 days by the NASD. Without admitting or denying the allegations against him, Ronk consented to the entry of findings that he participated in private securities transactions without providing prior written notification to his firm, describing the proposed deals or his role in them.

Ronk's securities registration was later revoked for failure to pay the fine.

Ronk now is proprietor of several web sites, including BuyIns.net and SqueezeTrigger.com, that purport to identify stocks that have been the subject of heavy shorting and are poised to rise in price as traders cover their positions.

Ronk has been one of the most vocal proponents of a theory that a shadowy network of hedge funds and other investors have been driving down the stock prices of U.S. companies through so-called "naked shorting'' of their shares.

Two of the companies that complained most loudly about the issue - Universal Express Inc. and Pegasus Wireless Corp. - later became the subject of SEC cases alleging that they improperly dumped vast amounts of stock on the market, undercutting their own share prices.

True, but Ronk is even more closely tied in to stock scams than that. His Buyins.net suckers in hapless small investors looking for "short squeezes" in crappy penny stocks, including the Utah pump-and-dump Cyberkey Solutions, whose CEO, James E. Plant, was indicted for lying to the SEC about a pump and dump scheme involving his company. He pleaded guilty and was sentenced to 97 months in prison for promoting his bogus "homeland security" company, witness tampering and obstructing the SEC probe. (What's interesting about the latter charge is that he obstructed the SEC investigation far less blatantly than some other people I know.)

In this 2006 press release from Cyberkey, the now-imprisoned Plant uses Buyins.net "short squeeze" data in an effort to lure in more suckers. It's yet another indication of how the naked shorting conspiracy types provide a ready-made excuse for stock manipulators, or (as in the case of CEOs like Richard Altomare of Universal Express and Patrick Byrne of Overstock.com) are themselves cooking the books or otherwise ripping off shareholders.

Now, the one fly in the ointment here is that, as I've pointed out previously, Sharesleuth is financed by trading profits from shorting stocks mentioned in its articles. Such arrangements cross ethical boundaries. However, according to a disclosure in the article, "No one associated with Sharesleuth has any investment position, short or long, in Lenco Mobile."

Great. So why not make that a rule? My suggestion to Mark Cuban, who owns Sharesleuth, is that he drop this "profiting from shorting" stuff and figure out another way of financing the site. More frequent items would be nice, and, of course, exposing the naked shorting crooks on a regular basis would certainly put his website on the side of the angels.

Cuban is involved in an insider trading case (dismissed but still being pushed by the SEC) that is increasingly appearing to be a waste of SEC resources. If he removes the "legal insider trading" aspect from Sharesleuth -- and continues to crank out good stories like this one -- he's going to get a lot more public support.

UPDATE: A reader brings to my attention that Ronk used to work for the L.T. Lawrence chop house, one of the most notorious fraud factories of the 1990s, belatedly shuttered by the NASD in 2000. Lawrence was one of the numerous employers of Louis Pasciuto, the subject of my book Born to Steal.

It's not clear from the filings whether Cyberkey paid Ronk for its "research" (nondisclosure, of course, would be spitting on the sidewalk compared to the companies other crimes). Overstock.com paid him $18,910 in 2007, and other crummy little companies also pay him handsome "data fees."

© 2010 Gary Weiss. All rights reserved.

'Naked Shorting' Scam Artist Indicted Again

About a year ago I described how one of the leading troubadours of the naked shorting conspiracy theorists, Joshua Lankford (left), had gone on the lam after a federal court indictment.

Lankford ran an Internet webcasting outfit called MN1.com, which had served as a sounding board for the likes of Patrick Byrne, the wacky, book-cooking CEO of Overstock.com, and Richard Altomare, the sticky-fingered chieftain of Universal Express.

A reader brings to my attention this press release from the FBI in Oklahoma City, announcing that Lankford and four other defendants were indicted in a $41 million pump and dump scheme. Lankford is still a fugitive, according to the FBI.

Late in 2006, while Lankford was running his schemes, Byrne sent his loyal acolytes to the crook-run MN1.com. He fed naive boobs to its pump-and-dump schemes by offering a "Club O membership worth $29" to listeners. All references to his support of the MN1 scam have been nuked from the Internet, but a mention of it can be found here.

Well, almost all references. After this item appeared, a sharp-eyed reader broad to my attention this Overstock press release extolling the virtues of MN1.com, with language cut-and-pasted from Lankford:

Market News First is an online, market news provider that brings investors current news on the market. Market News First is the only online, live radio web site that brings real market news to investors and features live interaction with companies from the Bulletin Board to NYSE.

Through daily, live interviews, we bring you up to date on all the established companies and inform the investors of the newest opportunities within the market. Market News First offers one-on-one interviews with the presidents and CFOs of companies to deliver answers to the questions that investors may ask and provides them insight into the companies’ present condition and future plans.

Seth Jayson at Motley Fool reviewed the MN1-Byrne relationship in this post in late 2007. Most of the links to which he refers, such as one from the Overstock community board in which Byrne praises MN1, have since been excised.

Byrne is enmeshed in criminal schemes of his own--sponsoring an Internet pretexting enterprise that stalked the spouses and kids of his critics. There is also a renewed SEC investigation into his own peculiar brand of "accounting," which created a "cookie jar reserve" allowing Byrne to manipulate his financials. And let's not forget that sales tax avoidance scheme he concocted during his failed attempt to bust into the diamond market a few years ago.

Byrne reported his 2008 results on Jan. 30, 2009, but reports that he would puke forth his latest set of phony numbers yesterday proved inaccurate. I guess he's still going back and forth with his latest auditors--he's on his third set of auditors in as many years--no doubt concerning how much phoniness is acceptable.

When Zero Mostel cooked the books in The Producers it was funny, but this long-running comedy is wearing thin. He really belongs in jail. Question is, will he go on the lam as Lankford has done?

Byrne, meanwhile, has yet to apologize for giving aid and comfort to the fugitive stock swindler Lankford. Of course, I imagine Byrne probably doesn't think the guy did anything wrong. Besides, what's that old saying, "Narcissism means never having to say you're sorry"?

UPDATE: One Byrne fan writes in to point out that it's not fair to tar Byrne with his association with Lankford, just on the strength of one appearance. Did I do that? Gee, I'm sorry. I should have pointed out that he appeared on MN1.com at least twice, and sent out an email (replicated here) to Overstock.com customers extolling Lankford's operation as "a kind of online CNBC."

Yet Byrne either knew or should have known that MN1.com was sleazy, as indicated by this follow-up post on its role as a stock promoter, and this one pointing out that it was an "analyst for hire shop."

Glad to correct the record.

© 2010 Gary Weiss. All rights reserved.

Today's Junk Lawsuit: CMKM Diamond Bagholders Demand Trillions

This is the kind of thing that gives shareholder lawsuits a bad name. Bagholders of the CMKM Diamonds stock fraud, as is their wont, are venting their justifiable rage not at the company's former management, the subject of an indictment, but at the SEC.

Instead of picketing or slinging mud in anonymous, loony emails, they just filed a class action suit against the SEC in California. The text of the suit can be found here. They want "3.87 Trillion Dollars."

The crux of the complaint, as best as I can understand it, is this:

32. At some date prior to June 1, 2004 the Securities and Exchange Commission in concert with the Department of Justice of the United States, together combined with Robert A. Maheu and others to utilize CMKM Diamonds, Inc. for the purpose of trapping a number of widely disbursed entities and persons who were believed to be engaged in naked short selling of CMKM Diamonds Inc. stock and cellar boxing the company.

The Securities and Exchange Commission and the Department of Justice, with assistance from the Department of Homeland Security, believed and developed evidence that said short sellers were utilizing their activities to illegally launder moneys, wrongfully export moneys, avoid payment of taxes, and to support foreign terrorist operations. To fulfill the plan to criminally trap such wrongdoers, the Securities and Exchange Commission, with assistance from the Departments of Justice and Homeland Security:

(a) Assisted in and approved the retention of Roger Glenn, an ex-SEC trial attorney and drafter of Sarbanes-Oxley, to join CMKM Diamonds Inc. for the purpose of verifying claims value, increasing authorized shares of stock to 800,000,000,000, and supervising from the inside of the company;

(b) Encouraged the company to expand its promotional activities, assisted in the set up of the “racing activities” of the company, and underwrote a substantial portion of the cost of such activities;

(c) Consented to, facilitated, and supported the sale of certain company claims to several foreign corporations;

In fact, and even some of the naked shorting types themselves admit this, the company was just a big fraud, was not a subject of "naked shorting."

I agree that there's plenty of blame to go around, particularly the failure of the Bush Administration's Justice Department to pursue an indictment. But the main responsibility, apart from the company itself, lies with the naked shorting conspiracy nutcases, many of whom were shareholders who were just too dumb or dishonest to see what was really going on.

However, I do like the idea of transferring the assets of the government over to the CMKM nutcases, as is demanded in this suit. They can junk all the B-1 bombers and ICBMs, deploying the proceeds into Overstock.com Call Options, and turn Governors Island into a Baloney Theme Park.

At Mount Rushmore, we can lose Washington, Lincoln and Roosevelt and replace them with Wacky Patty Byrne, Richard Altomare and Urban Casavant.

We could even change the name of the country. Suggestions welcome.

UPDATE: The comments to this item are classic, and I let them all go through rather than exercise editorial judgment, as I usually do in such situations. I thought I thought one (no, not the pizza delivery boy one), made some good points.

© 2010 Gary Weiss. All rights reserved.

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.

My Marley Snarls at a Friend

I like to refer to Overstock.com's famously wacky CEO, Patrick Byrne, as "my Marley," as in the famously wacky dog that was depicted in a recent movie, a memoir, and, originally, in columns in a Florida newspaper by John Grogan.

I understand Grogan's fascination with his dog, because it is the same fascination that I have with Byrne. Marley and Byrne are journalistic gifts that keeps on giving, providing endless amusment. One is the world's worst dog, the other is the nation's worst CEO. Both are endlessly destructive, paranoid--howling at thunderstorms. The difference is that Marley was at bottom a lovable mutt, and the theaters overflowed with tears when the doggie died in the Owen Wilson-Jennifer Aniston movie. Great dog. A story of love.

Byrne is very much the same, if you replace "lovable" with "despicable."

This brings me to the latest adventures of my Marley. What has he chewed up this time? Whose leg has he humped? Has he peed in the ocean off Dog Beach? Well, this time, the Journalist's Best Friend has done it again, by wandering over to the website of a potential ally, a person not unsympathetic to his naked shorting crusade, and making do-do all over the place.

The venue was the blog of someone named Lila Rajiva, who posted on the fake Matt Taibbi video. This is hardly a mega-blog, and her point was hardly unique. Besides, it's sort of a moot issue by now. Taibbi has ceased defending the video since Penson Financial wrote a letter to the SEC saying that the video is a fake.

Byrne heard a dog whistle summoning him to this obscure blog. Still being careful not to vouch for the accuracy of an obvious fake, he could have simply politely pointed out to Ms. Rajiva that he felt the case for its being fake was shaky, or something like that, thanked her for her interest, and gone on his way. Most CEOs wouldn't post on obscure blogs at all, of course, since they're too busy running their companies. But the SEC-investigated Byrne knows that the less time he spends running the company into the ground, the better.

So here comes my Marley, as usual going totally bonkers, growling and snapping (unlike Marley, he is a vicious little pooch), personally attacking her and accusing her of being part of a "disinformation campaign" in a hysterical, paranoid rant beginning, "BEWARE ALL READERS." Lila Rajiva is now part of The Enemy, not only wrong but malevolent, acting on instructions from unseen powers:

You can imagine that if a journalist uncovers a loophole through which wealthy, powerful interests are stealing money, those interests will organize a disinformation campaign to block their exposure (perhaps written in weasel-words that a layman would not catch).

What needs to be kept in mind is that the object of this nutty attack is sympathetic to naked shorting arguments, as is a fellow blogger who posted as follows:

Although, I have never followed Byrne's ranting and ravings in detail, I am aware that he has been leading a near one man crusade against naked short-selling. On this limited bit of information, I have always considered him somewhere between an eccentric and a nut job.

Judging from Lila's post she has had about as much interest in Byrne as I have had....

He tells us that deep dark interests would attempt to battle Taibbi. And implies that these deep dark interests have decided to employ Lila and me as their conduits. LOL.

Let me tell you something, even people who I generally tend to agree with are probably nervous about getting too close to me, and try and tell me what to post.

The chance that some black hat operator is going to be comfortable approaching me to attack Taibbi is absurd. I rip the penultimate black hat operator Goldman Sachs regularly. I don't think I have ever said a good thing about them.

This blogger, Robert Wenzel, makes clear that he is sympathetic to some of Byrne's views. But that doesn't stop Byrne. He chews up the trousers of anyone who comes within range, potential friend, foe or total stranger. He can't help himself.

That is what makes Patrick Byrne my Marley.

© 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.

Why Did George Bush's Justice Department Pass on CMKM?

Reading through the CMKM Diamonds indictment, a rather obvious question arises: why did federal prosecutors in Nevada wait until now to make a case against the management of the company?

Gathering evidence for white collar crime prosecutions is an onerous process, but it looks suspiciously likely that George Bush's Justice Department just sat on its hands. It's not a coincidence, I think that this indictment, not to mention the renewed SEC investigation of Overstock.com, comes after the change in administration. It's certainly no secret that the old administration did not put much of a priority on prosecuting corporate crime, and that it was prone to pressure from "naked shorting" activists and their pals in Congress, such as Utah's Orrin Hatch and Robert Bennett.

The feds have also failed to prosecute the principals of Universal Express, another outright fraud whose management has been shrilly defended by a small but vocal core of "NSS" crackpots writing letters to Congress.

This comment letter to the SEC from last year shows how hard Mark Faulk, a leading NSS lobbyist and later "CEO" of CMKM, pushed to have the SEC to divert them from going after the crooks who raped CMKM shareholders.

See the latter portion of the letter, quoting Falk's account of a meeting with the SEC, and a strenuous effort to push the hapless SEC lawyer assigned to the case, Leslie Hakala, to waste her time chasing naked shorting phantoms. Note the outrage, and ignorance of the securities laws, greeting an SEC official's warning that the SEC would oppose a "cert pull" aimed at squeezing shorts and manipulating share prices.

Now Faulk is singing a different tune, and in a letter to President Obama posted on the CMKM website, he claims that "an FBI spokesperson said that they were weeks away from issuing indictments in September of 2006."

This is a good example of the gift from the heavens that the "naked shorting" campaign has been to stock crooks. No matter how foul the transgressor, from operators of pump-and-dump stock schemes like CMKM's Urban Casavant to Dick Fuld of Lehman Brothers and Alan Schwartz of Bear Stearns, "naked shorting" is now used as an all-purpose counterattack in the face of gross irresponsibility that practically toppled the financial system (Fuld and Schwartz), to more routine cases of cooking the books (Overstock.com's Patrick Byrne) to outright stealing, as happened at CMKM.

© 2009 Gary Weiss. All rights reserved.

Indictments in CMKM Diamonds Naked Shorting Scam

In tracking the strange story of CMKM Diamonds, an outright stock scam whose shareholders noisily blamed "naked short selling" and not the company, one thing always bothered me as SEC actions piled up: why haven't there been indictments?

Well, today there were. The Las Vegas Review-Journal reports that indictments have been unsealed naming six people in the $60 million CMKM stock swindle, including loudmouth ex-CEO Urban Casavant, who has been replaced by the loony Patrick Byrne as love object of the naked shorting conspiracy theorists.

Casavant "remains at large," according to the newspaper.

"At the threshold, the scheme required that the conspirators control a publicly traded corporation," according to the indictment. "The conspirators found a corporate shell suited to their needs in Cyber Mark International Corp."

Cyber Mark had been incorporated in Delaware in 1998, according to the indictment, and had been defunct since 2001.

The document alleges that Edwards used the name "Ian McIntyre" to acquire control over the Cyber Mark corporate shell around September 2001 and that he incorporated a Nevada company with the same name in April 2002.

Casavant later gained control of Cyber Mark, according to the indictment, and the company changed its name in December 2002 to Casavant Mining Kimberlite International.

In February 2004, according to the indictment, the company took the name CMKM Diamonds.

And the rest is history. The company instantly became a naked shorting poster child--the invariable fate of pump-and-dump scams as the law starts to put a noose around their necks. CMKM managers gambled on the sheer stupidity of a large number of their shareholders--after all, they had bought this piece of dreck--and they were right. They were dumb. Some pranced around the offices of the villainous Depository Trust & Clearing Corp. in 2005 (I work there, according to these morons), made damned fools of themselves and diverted scarce police resources.

It's been an interesting couple of days in the world of baloney. First Overstock.com is investigated by the SEC--which has nothing to do with naked shorting, but proves again how people screaming loudest about NSS are often crooks and scoundrels themselves. In this case, Overstock has systematically cooked its books, and has been allowed to do so by an inert SEC.

And now this, the long-delayed criminal case against CMKM. Will wonders never cease. Will Universal Express be next? The hood-in-chief there is named Richard Altomare, and the sleazy cast of characters includes uber-loon Bud Burrell, a self-confessed, undisclosed "consultant" to that crooked company. Altomare has already spent some time in prison, but for contempt of court.

It takes a while for crooks to be brought to justice, but eventually, most of the time, it happens. It's funny how the naked shorting loons always have contended that "jail is coming" for their real and imaginary adversaries. Yet their heroes are the ones targeted in investigations and indictments. The way some of these guys talk in the stock message boards, with their homicidal fantasies, I'm tempted to get the cops to dig up their backyards.

One down, several more to go.

© 2009 Gary Weiss. All rights reserved.

More Fallout from the CMKM Stock Fraud

A CMKM shareholder making a fool of herself, 2005

In Wall Street Versus America I described how a bunch of brainless boobs, mainly shareholders in a piece of dung called CMKM Diamonds, were demonstrating in front of the offices of the Depository Trust and Clearing Corp. in lower Manhattan--and not at CMKM's offices, wherever they might be.

It was a prelude to the Tea Parties that would follow a few years later: a handful of idiots, one demonstrating in assless chaps, who were unhappy with something and lashed out at a phantom menace. The difference is that the CMKM demonstrators had plenty of evidence, freely available on the Internet, that their company was an outright fraud.

CMKM was at the time one of the leading standard-bearers in the naked shorting conspiracy club, a job now taken by the loopy CEO of Overstock.com, Patrick Byrne.

Today an article in the Las Vegas Review-Journal describes how bad a scam CMKM was, and how just plain dumb some of these people were:

If at first you don't succeed, try again.

That appears to be the guiding principle for Daryl O. Anderson, 41, of Henderson.

Anderson was one of the defendants named in June in a federal court judgment over the $64 million CMKM Diamond stock fraud.

He was a stock broker at now-closed NevWest Securities which sold CMKM stock. Many of the shares were purchased by NASCAR race fans around the country because CMKM was promoted at NASCAR events.

While CMKM was promoted as a mining company, U.S. District Judge Larry Hicks ruled that CMKM had no legitimate business.

That lawsuit was handled by the Los Angeles office of the Securities and Exchange Commission in June. On Thursday, the SEC's Fort Worth, Texas, office sued Anderson and accused him of a "stock scalping scheme" involving over-the-counter stock Cloudtech Sensors.

Stock scalping is the illegal practice of recommending others buy a security or stock while secretly selling the security or stock.

"During the scalping scheme, he secretly sold 323,405 of his personal Cloudtech shares, realizing a profit of $930,852," the lawsuit said.

I guess Anderson knew a bunch of suckers when he saw them. Here's a link to the SEC action.

Now, in fairness I should point out that not all CMKM shareholders should be lumped together. Many rejected the conspiracy pap. But all too many used their victim status to push conspiracy theories that enabled other shareholders to be victimized in the future.

Fool me once, shame on you, fool me twice shame on me -- or, in this case, shame on them.


© 2009 Gary Weiss. All rights reserved.

'Renowned Attorney' Wes Christian Smacked Down in Baloney Lawsuit

One of the earliest of the recent spate of junk lawsuits involving the hobgoblin of "naked short selling" was filed back in 2002, by a company called ATSI Communications. In a press release at the time, the company announced that it had hired the "renowned trial lawyers" of Wes Christian's law firm to bring the suit.

Christian was indeed well reputed at the time (he certainly won "renown" for his share dumping). But he since has supped from the kool aid springs of baloney, filing one "nekkid short selling" lawsuit after another, as well as by representing the nitwits at Overstock.com in their junk suit against Rocker Partners--and getting nowhere.

ATSI said:

The suit alleges that during the relevant time period, the defendants masterminded what has commonly been called a "Death Spiral" funding scheme, and illegally manipulated the stock price through "toxic convertible Toxic Convertible.

Used by companies that are in such bad shape, that there is no other way to get financing. This instrument is similar to a convertible bond, but convertible at a discount to the share price at issuance and for a fixed dollar amount rather than a specific number of " mechanisms and the methodical operation of naked short selling Naked short selling, or naked shorting refers to the practice of selling a stock short without first borrowing the shares or making an "affirmative determination" that the shares can be borrowed. to depress the value of the stock. In the Company's opinion, these actions have resulted in devastating losses to the Company's market capitalization.

The U.S. Second Circuit Court of appeals, in a ruling issued the other day in the ATSI suit, provides a clue as to why he's gotten nowhere with suits like this: because his claims have no merit. The court feels pretty dang strongly that his claim had no merit. It upheld a lower court decision imposing sanctions on him, his partner Gary Jewell, and another lawyer involved in the suit.

The lower court decision found that Christian and his pals "lacked any reasonable factual basis" for suing the principal defendant, Knight Capital Markets, and ordered them to cough up $69,656.69 in fees and costs. The appellate panel agreed, though it sent the case back to the lower court for review of the amount.

The lower court was really teed off. Knight hadn't even asked for monetary damages.

One interesting sidelight: seems that Wes Christian worked hard to keep this penalty out of the public record. As noted in a footnote on page four, Christian and Knight agreed on a settlement that would have vacated the lower court's judgment and short-circuited the appeals process. The judges of the Second Circuit, bless their hearts, would have none of it, observing that "it is precisely to avoid the public's scrutiny of the sanctions that ATSI's counsel seeks vacatur."

The court observed:

We would be hard pressed to conclude that the judgment here, sanctioning lawyers appearing before a United States District Court, is insignificant.

No, it sure ain't. Tough luck, Wes.

I wonder if journalists who have blithely quoted Wes Christian in the past, for articles such as this and this, will continue to swallow his drivel? I'll also be curious to see whether media outlets who picked up the initial press releases, in this and similar suits he's filed, will follow up by reporting the court's decision.

If you ask me, Christian and his buddies were treated leniently by the court. Stock manipulation is a serious allegation. Lawyers who throw around that charge without adequate basis should not be allowed to practice law.

© 2009 Gary Weiss. All rights reserved.

Today's Naked Shorting Poster Child: The 'Enron of Spain'

As I noted in my item the other day on the famous "Sith Lord" delusion at Overstock.com,"naked short selling" has been used as an excuse for malfeasance, fraud and even criminality at a host of miserable companies. There is Overstock, of course, Universal Express, CMKM Diamonds, and even Enron.

Today comes a particularly grotesque example of the NSS excuse genre: the "Enron of Spain," Greg Manning Auctions a/k/a Escala Group.

The "sad tale" of this horrific company unfolds today on the website of R. Emmett Tyrrell Jr.'s American Spectator, in a truly dreadful article by Brett Joshpe.

Here's the story reduced to its essentials: As a result of "allegations" against this company, there is a Spanish police raid accompanied by suspicious trading. The terrible thing is not the reason the company was raided, involving pyramid scheme allegations that have "never been proven and vigorously denied."

What's horrid here, according to Joshpe, are insinuations of "naked short selling"--which has never been alleged, much less denied--and, of course, collusion by the evil financial press which had the audacity to say that this was a bad company. There's lots on that, as well as the usual "fails to deliver" statistics.

Interestingly enough, Congress issued a report in 1991 on short selling in which it stated that the publication Barron's was used by short sellers to spread negative information about companies. Louis Corrigan from Kingsford Capital, a hedge fund with heavy short positions, also reportedly told Spanish authorities that Afinsa was a fraudulent company.

Following these reports and protests by Escala, the brokerage firm Oppenheimer looked into the company and reported on November 29, 2005 that "two financial publications published false, negative stories on Escala Group, driving the shares down 25%. Based on our research, the implied allegations in the stories are false." It also said that "the articles of November 22 again imply that the authors worked in conjunction with these same hedge fund managers. The fact that both articles were published on the same slow news day further raises our suspicions."

Note that the veracity of the Oppenheimer reports is not questioned.

Then came the May 2006 raid by Spanish police and then, again, the emphasis is not a company that lies on its books, but evil naked shorts:

In December 2006, Escala shook up its management and announced that it was restating prior earnings going back to 2003.

So what does that mean? Bad company, right? No, according to Joshpe, what's bad is that the stock went down after the company admitted that it's accounting was FUBAR.

In December and into January of 2007, the market for Escala shares again exhibited signs of potential manipulation, as volume exploded, along with fails to deliver.

Well, yeah. When a company admits that its financial statements are about as valuable as used toilet paper, naturally volume will "explode" and so will failures to deliver the stock.

The SEC finally took action, very belatedly in March 2009, against Escala. The SOBs just can't get their act together, says Joshpe. The forgot to act against the evil nekkid short sellers.

For Manning, it is an unfortunate irony that the body charged with ensuring fair marketplace trading declined to investigate prior trading irregularities but is now pursuing him.

Damn! The SEC forgot to act against the really important thing that happened here.

Speaking of which, what really happened here? For that, you have to spend approximately forty seconds on the Internet. I guess Joshpe didn't have the time.

First of all the "vigorously denied" is a bit imprecise. The company agreed to the consent decree without admitting or denying the allegations. The SEC litigation release is interesting reading, but doesn't tell the whole story. To find that requires about ten seconds of the forty required to research this company.

You need to go to a scathing article by my Project Klebnikov colleague Rich Behar on the Fox website back in 2006. He pointed out that "some 350,000 working and middle-class investors in collectible stamps in Spain and Portugal may have lost billions of dollars in savings."

These investors were guaranteed annual returns of 6 to 10 percent in their stamp collection investments, depending on how many years they held the stamps. But as one top stamp fraud expert told FOX News: “You could buy these stamps all day on eBay (EBAY) for one-tenth of what Afinsa had valued them at for their investors.”

The allegation is that rather than earning investment returns, early investors were simply being paid out of revenues that later investors brought to the party – essentially a Ponzi scheme.

The "Enron of Spain" expression was used by a philatelic expert quoted by Behar.

Oppenheimer, whose pumping of Escala merited a pat on the back from Joshpe, was raked over the coals by Behar.

Manning himself is quoted in Behar article three years ago: saying “the real story is what short-sellers and the media have done to the company, and that story I’m confident will someday be told."

Manning got his wish three years later.

There's an ironic postscript to this story. Joshpe points out that class action suits were filed on the day of the police raid--a hardly surprising denouement, but made out in the article to be a sign of nefarious evildoing. Well, it so happens another class action suit was filed against Escala a week after the raid by Berman DeValerio, one of whose partners, Joseph J. Tabacco, sits on the board of fellow naked shorting poster child Overstock.com.

Seems that Tabacco's firm had a nice payday:

Thereafter the parties agreed to settle the action and on September 22, 2008 the Court preliminarily approved the Settlement. Pursuant to the Stipulation of Settlement between the Lead Plaintiffs and Defendants, a Settlement Fund in the amount of $18,000,000, consisting of $10,000,000 in cash, plus interest, and 4 million shares of Escala Common Stock with a value of at least $8,000,000, will be created for the Class. The Judge approved the settlement at a final approval hearing on December 3, 2008.

© 2009 Gary Weiss. All rights reserved.

Naked Shorting Poster Child Hit With Default Judgment

CMKM shareholders picketing the wrong offices in 2005

In Wall Street Versus America I describe how the naked shorting conspiracy theorists were clustering around a crappy little stock called CMKM Diamonds. I was struck how some CMKM shareholders stuck loyally with management, despite constant SEC actions that showed fairly clearly that the company was a fraud.

Some CMKM partisans made fools of themselves in a mid-2005 demonstration in lower Manhattan, in front of the offices of the hated Depository Trust Clearing Corp. I wondered at the time why they weren't demonstrating at CMKM's offices--if they could find them.

Well, today the Las Vegas Review-Journal reports that a last nail has been driven into the CMKM coffin, with a $55 million default judgment against four defendants in an SEC action. The article is here.

The newspaper's summary of CMKM's sordid history is fairly cogent:

The scheme started when [John] Edwards did a reverse merger between his public company, CMKM, and several private Canadian companies controlled by Urban Casavant, according to the order.

Casavant was chief executive and chairman of CMKM while Edwards, using the alias Ian McIntyre, was director of post-term matters.

CMKM, whose "only activities were illegally issuing and promoting its own stock," increased its outstanding shares to 800 billion from 500 million, the court papers said. CMKM shares were traded over-the-counter for prices ranging from one-tenth to one-hundredth of a cent.

CMKM gave investors "phony maps and fabricated videos" of alleged gold and diamond mines, according to the order.

If indeed CMKM's "only activities were illegally issuing and promoting its own stock," it is odd indeed that no one involved in the company has been criminally prosecuted.

Meanwhile, I wonder whatever happened to all those deluded CMKM shareholders. Picket line, anyone?

© 2009 Gary Weiss. All rights reserved.

The Anti-Shorting Nuts Are Loose

I'm fascinated by the split personality of the anti-short selling campaign. At the top you have a phalanx of lobbyists and pressure groups, some totally respectable (if predictable), like the U.S. Chamber of Commerce and Washington Legal Foundation, and including consultants and other top-level spokespeople for the cause, such as former SEC commissioner Roel Campos. 

 And then, on a sliding scale of respectability, you have astroturf organizations and websites spouting "stock counterfeiting" conspiracy theories. These tend to have "market reform" in their titles -- even though genuine market reform, such as abolishing mandatory arbitration and reforming executive compensation, is not part of their mission. 

Below them are what I call the "pond scum," the crazies and the hired thugs. 

What all levels of the campaign have in common are the inspiration and deep-pockets financing of the guru of the movement, Overstock.com CEO Patrick Byrne. 

As part of his mission to gain respectability, for himself as well as his movement, Byrne recently has hired a Los Angeles public relations firm, Levine Communications, to get Byrne face time with members of the media as the "Wyatt Earp of Wall Street." That's odd because the real Earp was married to a Jewish lady named Josephine Marcus and was buried in a Jewish cemetery. Byrne, by contrast, is an old pal of the far-right wingnut Bo Gritz and has been beset by charges of anti-Semitism for years. 

That brings me to the latest examples of the pond scum element that have come to my attention. 

One was a post on a Yahoo stock message board shortly before 7 p.m. yesterday. It said as follows:

WOULD UNDERSTAND IF SOMEONE SHOT AND KILLED CRAMER AT HIS HOME at [address redacted]. He's an alan berg wannabee.

The message, which was quickly deleted by Yahoo, was signed "kikevermin3." Alan Berg was a radio talk show host who was killed by a right-wing extremist in 1984. 

What apparently caused this spasm of hate was a posting on Byrne's "Deep Capture" blog, which weaved a conspiracy between Cramer and others, while reviving the old and easily refuted claim that Dendreon Corp. was a victim of "naked short selling." 

 Now, I can understand how Byrne might disclaim responsibility for this death threat--even though it was directly inspired by his latest Internet craziness. In my view, he would be directly culpable for any harm that might come to people as a result of the trash published in his blog. What he publishes in Deep Capture is believed by the conspiracy-minded, many of are "nucking futs," and some whom are crazy enough to actually carry out their fantasies. 

Byrne realizes that, or should realize that, and is morally--and perhaps legally--responsible for the actions of his followers.

There is certainly no question that he is directly responsible for the second recent example of the pond scum element: I'm told that his hireling Judd Bagley has sought to get in touch with the estranged wife of Sam Antar, a frequent critic of his boss. 

Mrs. Antar, I'm told, has refused to respond to Bagley's request for phone call. Bagley was, no doubt, intending to dig up dirt on Antar and, at the very least, to harass him, in a disgraceful attempt at issuer retaliation. 

Byrne's p.r. campaign has already resulted in some dumb journalism, and that's ok. Heck, that's why the good Lord created p.r. people. But the pond scum element, whether they are Bagley or the creep who threatened Cramer, are a different order of magnitude. Such punks are dangerous, and they need to be criminally prosecuted. 

© 2009 Gary Weiss. All rights reserved.

The Phony-Baloney Naked Short Selling 'Problem'

I'm a little late with this, but I guess it's better late than never: John Hempton's terrific post on the harmfulness of the naked shorting crackdown is making the rounds of the Internet. The original can be found at John's blog, here.

One of John's more interesting points is that the crackdown on this phantom "problem" is costing taxpayers a billion dollars.

An excerpt:

. . . in pursuing the bogus issue of naked short selling not only has the SEC diverted resources from its real job (which is chasing the real crims in the financial market such as Madoff) but it has imposed significant and real costs on the taxpayer and made it harder and more expensive for banks to raise capital in a financial crisis.

Well worth reading, and a fresh viewpoint in an increasingly wearisome debate, which has pitted a wacky Utah billionaire (you-know-who) against his arch-enemy, "common sense."

© 2009 Gary Weiss. All rights reserved.

Naked Short Selling Crusader Targeted in Criminal Probe

A few months ago I described the legal entanglements of a Canadian stock promoter named Brent Pierce, who was Patrick Byrne's predecessor as leader of the "naked short selling" stock market conspiracy fraudsters. Pierce at the time was targeted in an SEC action.

Word emerged today in an article by David Baines, a Vancouver Sun reporter, that Pierce is even more hot water than we had thought. Apart from being ordered to disgorge $2 million in trading profits, he also faces a criminal investigation.

Baines reported:

[An SEC administrative law] judge noted that Pierce didn't attend [an SEC] hearing in February because, according to his lawyer, he "is the target of a federal criminal investigation involving CellCyte Genetics and was concerned that he might be arrested if his whereabouts became known in the U.S. courthouse in Seattle, where the hearing was held and where the U.S. Attorney's office is located."

The irony is that Pierce is practically Little Lord Faunteroy compared to the slimy Byrne and the sticky-fingered Richard Altomare, another naked shorting crusader who has magically avoided criminal prosecution for his larcenous stewardship of Universal Express. Evidently he lacks the ancestral wealth that has kept Byrne from being nailed by the SEC, and the good fortune that has (except for a short stretch in the pen for contempt) kept Altomare out of prison.

Pierce's firm was the underwriter of an astroturf group called the National Assn. Against Naked Short-Selling. Byrne funded its successor, the National Coaltiion Against Naked Shorting. That has since fizzled out, and there are a few other groups with access to Byrne's wallet that are pushing this phony cause.

© 2009 Gary Weiss. All rights reserved.