Man Bites Dog, or Goldman Sachs Charged by the SEC

The SEC shocked and amazed the civilized world today, filing civil charges against Goldman Sachs & Co. -- charging it with fraud in the sale of subprime securities. And what a fraud! Friends, these charges, if they stick, are going to sink Goldman. This is pure sliminess.

It all has to do with a collateralized debt obligation that Goldman sold a bunch of institutional investors (a/k/a "suckers"). This was not any old fraud, according to the SEC complaint:

According to the Commission's complaint, the marketing materials for ABACUS 2007-AC1 — including the term sheet, flip book and offering memorandum for the CDO — all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management LLC ("ACA"), a third party with expertise in analyzing credit risk in RMBS. Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. ("Paulson"), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO played a significant role in the portfolio selection process. After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps ("CDS") with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure. Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. GS&Co did not disclose Paulson's adverse economic interest or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials.

Note what I've put in boldface. This is devastating. The Wall Street Journal says that "Goldman Sachs, which in a statement called the accusations 'completely unfounded in law and fact,' could face steep fines and be on the hook to repay nearly $1 billion of investor losses."

Now, I've long argued that short-sellers perform a valuable service to the markets, but this ain't an example of a short-seller performing a valuable service to the market. What it means is that Goldman entered into a slimy deal with a short to create a derivative that was ca-ca, and thus could create a profit opportunity for said short-seller, bigtime hedgie John Paulson.

It's a bit like designing a car in cahoots with an alternator manufacturer, for the purpose of being sure that it can break down so that it needs a new alternator. I can just see the anti-shorting nutcases going wild over this, and I can't really blame them. While nobody from the short side has been banged on this, yet, I expect that this is going to be like the Elgindy case: a big, fat black eye for short-sellers.

Paulson says it "is not the subject of this complaint, made no misrepresentations and is not the subject of any charges." JP is a quiet guy who doesn't care much for publicity, and is not happy with anything resembling negative press. Something tells me he's going to have to develop a thick skin, and fast, because a shit storm is coming. He didn't just sit back and smartly wager on a decline in the real estate market. This has him engaging in conduct that, morally speaking, is simply indefensible.

Interestingly, Paulson, as his statement acknowledges, wasn't charged. Whether he will be charged in the future is an open question. As I said a while back when I profiled him for Portfolio, this is one smart cookie. How he can escape from this with clean hands is beyond me. Fortune speculates on Paulson's possible exposure.

When I profiled Paulson for Portfolio, I said, " Left unexamined is the uncomfortable moral dimension of Paulson’s achievement. If he saw all of this coming, was it right for him to keep his own counsel, quietly trading while the financial system melted down?" According to the SEC complaint, he did considerably more than just see it all coming. Seems that he helped make it happen, by so generously helping Goldman design its toxic derivatives.

And now he's..... cooperating with the SEC, perhaps? Prepared to testify against Goldman, perhaps? If so, Goldman may be in major trouble.

Meanwhile, we have the amazing spectacle of a major bank actually being charged with wrongdoing in something related to the financial crisis. And Goldman Sachs, no less. Talk about man bites dog. Oh, and here's something else: the lead counsel for the SEC is Rick Simpson, who worked on the Crazy Eddie case years ago. Sam Antar tells me that Simpson is a dedicated, dogged guy. Diane Tucker has more on Simpson here. Goldman won't get off easy.

Still, you might argue that Goldman is already getting off easy in this sense: it has been accused of a criminal offense--fraud--in a civil action.

If I gave a bank a rubber check for twenty dollars I would wind up in the can. Can someone please explain to me why it is that a bank gets accused of defrauding people for a billion bucks and it gets a civil lawsuit?

Sure, it's a significant step. But what we're seeing, again, is the decriminalization of securities fraud.

UPDATE: Reports are filtering out of Goldman Sachs that a new theme song has been adopted by the company:

The Party's Over - Nat King Co...

© 2010 Gary Weiss. All rights reserved.

'Blame the Shorts' Backfires

The Wall Street Journal today has an article on the legacy of the Lehman Brothers collapse, and a detail that underlines a point I've made several times: that scapegoating short-sellers is a sure way to accomplish absolutely nothing.

. . . a study by the [SEC's] Office of Economic Analysis concluded that it was "long sellers" -- investors who had bought stocks thinking they would go up -- who were selling the most during stock declines. Short sellers, the study said, became more active when stocks rose sharply.

Credit Suisse found the ban made stock pricing less efficient, which in turn can make buying or selling a stock more costly for investors. The firm's data showed the difference between prices at which banned stocks could be bought and sold, the bid and asked prices, doubled during the ban. After the ban was lifted and short selling slowly resumed, spreads fell back to about 65% above preprohibition levels the third week of October.

It will take some courage for the SEC to face down the political pressure to act against shorts--and courage is a commodity in short supply under SEC chairperson Mary Schapiro.

© 2009 Gary Weiss. All rights reserved.

A Corporate Cry Baby Bites the Dust

Very few things are predictable in the markets, except that a company whose CEO cries about short selling ---especially the mythical menace of naked short selling --- is either a crook, a dummy, or both. So it is with a company that began its journey to that great bucket shop in the sky this week: a surgical supply outfit called Arthrocare.

Arthrocare has weeped bitter tears about short sellers who claim that its accounting is FUBAR. Poor thing, to be so ill treated! Isn't it awful how companies are attacked by short sellers? Except that yesterday it announced that it is under both SEC and criminal investigation into... the company's accounting, which Arthrocare concedes has been totally screwed up from head to tail:

The Audit Committee was informed that certain sales and marketing personnel within the Spine Business Unit provided physicians and their billing staff with merchandise and administrative services at no charge potentially in exchange for their utilization of the Company’s products. The Audit Committee has determined that Company personnel at all levels lacked adequate healthcare compliance training and that Company billing personnel lacked adequate training and supervision in insurance reimbursement requirements. In addition to considering and implementing remediation efforts, the Audit Committee is undertaking a review of such practices in other business units.

The Company is unable to estimate the possible effect of the review on the ongoing restatement of its financial statements for the years 2000 through 2007 and the quarter ended March 31, 2008.

Translation: if you have any 10-Ks or 10-Qs going back to the Clinton administration you can throw them in the trash can. Its crybaby-in-chief, CEO, is stepping down.

Another short seller crybaby that has been ground into dust by its own crappiness is an outfit called Medis Techologies has been screaming about naked shorting for years. Just a few months ago CEO Robert K. Lifton devoted a large portion of his quarterly earnings release to loud weeping over naked short selling, boasting about a meeting with George Bush's comatose SEC chairman Chris Cox:

During this period, much has been written and discussed about improper practices connected to short selling and the SEC has promulgated rules regarding naked shorting and other improper actions by short sellers as they relate to certain large financial institutions. Last month, I had the opportunity to meet with Counsel to SEC Chairman Cox and present our view that these new rules should apply to all companies, large and small. Our Company, for example, has the dubious distinction of being number one on the Regulation SHO list showing failures to deliver shares for 758 days. To be sure the harm to these large financial institutions can have serious broad based consequences, but as I pointed out in our SEC meeting, it is those smaller companies that predatory short selling- what Chairman Cox terms “distort and short” - can more easily destroy. These companies are the ones which help create new technologies that our country needs in order to compete successfully on today’s highly competitive playing field. Our recommendations to the Commission call for stopping illegitimate naked short selling in a number of ways. First, to amend Regulation SHO effectively to require...

The reference to "Regulation SHO" refers to a rule, passed by the SEC as a sop to blame-shifting CEOs like Lifton, requiring brokers to settle trades and thus wipe out any possiblity of naked shorting (despite the total absence of evidence that there is actually a problem called "naked short selling"). Reg SHO was a godsend tot he Liftons of this world, because it meant that if they appeared on the list they had a ready-made excuse for their own incompetence and/or crookedness.

Since those words were writte, Medis's stock has declined from $3 to under 50 cents because of poor financial performance, and yesterday, the company announced that its crybaby CEO was "retiring."

© 2009 Gary Weiss. All rights reserved.

'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.

Why Do I Write So Much About Short-Selling?

I'm asked that question from time to time. The reason is that I know of no area in finance where there is more wackiness and more inane disregard of the public interest.

Take this this New York Times story today. Seems a company has decided to pay a special dividend -- but only to shareholders whose shares are held in their own name. That will simultaneously cause trouble and expense for the many shareholders whose shares are held in "street name" -- and, simultaneously, squeeze short-sellers. Shorts must borrow shares in order to sell them, and they can only borrow shares held in "street name."

In short -- a nice way to punish people betting aginst your shares. The Times explains that "The warrant, as explained in the Pegasus news release, appeared to suggest that brokers — who can lend out stock they hold in certain client accounts — might have to recall the shares so that investors could prove they were the owners. Such action would require those who sell short to give the stock back to the brokers, pushing the price up and creating a short squeeze."

My question is this: What is Chris Cox's SEC doing while all this is going on? Oh, the Times reports the SEC is "examining the issue." How nice.



© 2006 Gary Weiss. All rights reserved.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

How the SEC Abets Stock Fraud

If you want a good example of how the Securities and Exchange Commission's misplaced priorities are screwing investors, I have the evidence blow.

It's in one of the several dozen comment letters that have come in to the agency on a proposed amendment to "Regulation SHO." That's the SEC's campaign to throw a bone to anti-shorting nutjobs.

In my book I describe how Reg. SHO is a thoroughly stupid bit of rulemaking. In neither this amendment nor previously does the SEC cite so much as one single shred of evidence that there is a "naked short selling" problem. Instead there are just a mass of meaningless, super-technical statistics, which are systematicaly distorted by the Baloney Brigade -- the better to advance its objective of diverting attention from real stock fraud.

A good example of how that diversion scheme works can be found in one of the comment letters, from a person who gave his name as Ron Melchior:

Dear SEC, I am an unsophisticated investor but am very concerned at naked short sales. I have tried to educate myself on how naked selling works and the ramifications to shareholders of companies being shorted. As far as I am concerned the system is being abused badly. . . My wife and I own several small companies we bought over several years ago and have recently been heavily naked shorted and we have lost over half our value. Naked shorting has hurt us badly and it needs to stop. The playing field needs to be level and fair for all investors big and small. I urge the SEC to do that job. Thank you.

Imagine that. This poor guy owned "several small companies" that have "lost over half" their value and who does he blame? Them. The "naked short sellers." Not the company, not its management -- and above all not his own poor judgment. Them.

Time for SEC chairman Christopher Cox to show some leadership on this issue. Time for the SEC to stop contributing to a mass-disinformation campaign, aimed at providing a ready-made scapegoat for the stock scamsters of America.

© 2006 Gary Weiss. All rights reserved.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

Byrne's Latest Gambit

Overstock.com chief executive/conspiracy theorist/journalist-taunter/short-and-analyst-suer/"miscreant"-blamer Patrick Byrne held a conference call today on his company's ever-increasing red ink.

Being Patrick Byrne, he spent a goodly amount of time talking about stuff other than the aforementioned red ink, among them a gambit aimed at sticking it to those evil short-sellers.

Byrne suggested that shareholders might want to take their shares out of "street name" and register them under their own names, which just happens to make them impossible to short. He and the company's press release noted that Overstock had joined something called the Direct Registration System, or DRS, which (the SEC website notes) "enables an investor to electronically move his or her security position held in direct registration book-entry form back and forth between the issuer and the investor's broker-dealer."

Some skeptics (I guess Byrne would call them "miscreants") sneer that if he just hates naked shorts and not ordinary short-sellers -- as he and Overstock insist -- why is he promoting a tactic to make it harder to legitimately short-sell Overstock shares?

Actually that's not the only problem. As the SEC points out, selling shares under DRS can also be a bit cumbersome, as one has to transfer the shares directly back to one's broker to do so (unless Overstock has a plan in place to allow shareholders to sell, which would be nice). Of course, the shareholders most likely to participate in the DRS are naked shorting cultists who probably wouldn't sell their shares until the "miscreants" are brought to justice. In other words, never.

Byrne's gambit won't work, by the way. History has shown that the only proven method of pushing up the share prices of bad companies is that they stop being bad. And Byrne just hasn't figured out a way to do that.

UPDATE: Why does Byrne do this? Turns out this has nothing to do with Overstock. Hell, this is just his way of serving his country in its hour of need!

© 2006 Gary Weiss. All rights reserved.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

Mark Cuban: His Righteousness Endureth

Mark Cuban today stoutly defended his much-criticized plan to trade -- in advance of publication -- on information his reporters dig up for his new investigative reporting website.

Cuban's response is that he has no choice. Otherwise he would have to dirty his hands with crude stuff like selling advertising. Not for this guy. You know advertising -- the conflicts of interest and all. Naah, just turn your reporters into a personal stock-tip service. Cuban concludes by observing that "right is its own defense."

Yup, it's important to do the "right" thing -- particularly when it means getting market-sensitive info unavailable to the public, extracted by his reporters from sources who may not be aware that they're helping some billionaire get even richer.

And I thought Cuban aimed to make a buck by throwing the basic ethical principles of investigative reporting (and reporting generally) out the window! How stupid of me. All the time he wanted to take a principled, moral stance, like Gandhi or Oskar Schindler.

Anyway, you can read all about it in his blog.

What makes this whole thing frustrating is that this is otherwise a good idea. A website on stock fraud would be welcome because of the media's indifference to the subject -- as I explored in Wall Street Versus America.

I still hope that Cuban comes to his senses and decides to act responsibly with his website. But so far he's acting like just another rich guy with a new toy.

(Related blog entries can be found here, here and here. )

© 2006 Gary Weiss. All rights reserved.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

Cuba, again

I see that the New York Times picked up an item in this little author bloggie -- actually two items, this and this -- in which I decry Mark Cuban's approach to his new investigative journalism website. My problem is that he plans to trade on the stocks his reporters probe, and do so before publication.

I repeat, before publication.

That would seem to be legal, if disclosed, but it would rip down the barriers between journalism and stock research. It would hurt all financial muckraking by feeding paranoia that journalists are on the payroll of hedge funds and other mysterious market devils.

If Cuban wants to use his people's work as a trading vehicle, fine. But don't call it an "investigative journalism website," because that's not what it would be.

What's irksome about the whole thing is that the website that he describes is badly needed. As I describe in my new book Wall Street Versus America, the financial media has pretty much foresaken coverage of stock fraud in recent years.

The few practitioners remaining are under a constant barrage of criticism, McCarthyite smears, and even SEC subpoenas. I can only imagine the kind of regulatory scrutiny Cuban's new venture would get, if it were to be his personal short-selling research machine.

So I'm hoping Cuban comes to his senses, so I can cheer him from the sidelines and not throw tomatoes.

© 2006 Gary Weiss. All rights reserved.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

A Pause That May Refresh

The Senate Judiciary Committee has postponed a hearing it had scheduled for June 20 on the "Short Selling Activities of Hedge Funds and Independent Analysts." Hopefully the senators will use this pause constructively, as this hearing was shaping up to be a dog and pony show for the benefit of blame-shifting CEOs.

Increasingly, corporate managers who can't run their companies competently have been shifting the blame to short-sellers, who bet on stocks declining. This is actually an old phenomenon, and certainly not the first time that Congress has obediently served as a PR conduit for such scapegoating.

In Wall Street Versus America, I describe how a House hearing on the same subject in 1989 left one congressman -- future SEC chairman Christopher Cox -- wondering something aloud. He asked if the committee hadn't been "snowed" by excuse-mongering CEOs. It had been. The whining CEOs who appeared before the committee came from three companies, two of which were later prosecuted for fraud.

Different era, different side of Capitol Hill, same snow.

Unless, that is, the senators decide to actually investigate something worth investigating.

They may want to use the extra time -- the AP says the hearing is off till the 28th -- to probe the anti-shorting conspiracy campaign, which is pushing a line of baloney in an apparently well-funded propaganda operation.

Or they could probe actual stock fraud. It's still a massive problem, and its practitioners have long cried the loudest about short-selling.

Indeed, the committee might want to devote its scarce time to hear about any actual problem facing the markets. There are a bunch.

However, as usual when Congress confronts subjects involving Corporate America, money talks -- and the clout of corporate interests is talking in favor of the bogus anti-shorting campaign. As I pointed out in Salon a few weeks back, its aim is to shift the blame from poor corporate performance to amorphous outside malefactors -- them.

The "them defense" was used unsuccessfully by the Enron defendants, and it is sweeping the nation. Next stop: Capitol Hill.

(revised 6/17)

© 2006 Gary Weiss. All rights reserved.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site. T

More on Mark Cuban's Folly

Business Week online today has a good piece on Mark Cuban's tin-eared approach to financial investigative journalism -- an otherwise laudable venture that he plans to exploit to trade stocks based on the stuff his reporters dig up. (Hat tip: Talking Biz News blog.)

Got to admit, it's handy having financial journalists on your payroll when you want to trade!

“There are a million ugly stories in the financial underground,” Cuban told BusinessWeek.com in an e-mail. “We plan on finding and sharing and profiting from them.” He declined to comment further.

Of course not. What more is there to say? I mean, when you're a billionaire and stuff like that, you can do whatever you damn well please, and I suppose that includes turning investigative journalism into a private money machine. “At first blush, it just sounds so weird it's kind of hard to get my mind around,” said one journalism dean quoted by BW.

What I find particularly noxious about Cuban's Folly is that it feeds all the misperceptions about journalism being promoted by the conspiracy nuts of the short-bashing Baloney Brigade. Of course, Cuban has got a nice basketball team and stuff to fall back on, so not to worry.

This episode is, I think, a good example of the mentality that I've encountered all too often on Wall Street. Making a buck is everything, and the rest of the world can go to hell.

© 2006 Gary Weiss

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

A Great Idea -- But Don't Screw it Up

I was delighted to hear about the new investigative journalism blog being started by a terrific reporter named Chris Carey, who wrote award-winning stories on global stock fraud for the St. Louis Post Dispatch. Carey's new blog, sponsored by Dallas Mavericks owner and blogger Mark Cuban, will focus on an area neglected by the media -- stock fraud.

It is a brilliant idea. So I was distressed to read an AP story that quoted from an item in Cuban's blog some weeks ago. In it, he said that he would profit from information uncovered by the new blog before the articles come out.

Here's what he said:

Business is an easy place for me to start because the fraud and sithlord wannabes uncovered can not only create great stories of interest for the webite and HDNet World Report, but also allow me to buy and the sell the stocks of the company. A journalistic conflict you say ? Not any more. Not in this world. It will be fully disclosed and explained. This site is for the profit of its owners and we will buy and sell stocks that are discussed, before they are made available on the site. So make any decisions based on this information accordingly.

A journalism conflict I say? Yes, it is a journalism conflict. A big journalism conflict. In this world or any other.

A bedrock principle of journalism, what distinguishes journalism from stock research, is that you carry out sleuthing for public enlightenment and only public enlightenment, not private gain. Sure, you can make a living at it, through advertising or subscriptions, if you can. But you don't trade on the info. Ever. It is not even at the level of Journalism 101, it is that basic.

True, if you disclose it the Securities and Exchange Commission won't get mad at you. As I pointed out in Wall Street Versus America, regulators view disclosure as a self-absolving confession. Disclosure=no fraud. However, the absence of fraud is no reason to chant hosannas. Freedom from conflict of interest is also a necesiity.

What makes that idea particularly bad is the lynch mob atmosphere surrounding short-selling, which has actually gotten worse since I described it in the book. I've written numerous blog items on the crazies of the naked short-selling conspiracy cult, many of whom have targeted Cuban -- whose blog is excellent, by the way -- as well as tough journalists like Herb Greenberg. But if Cuban trades in the stocks that are probed in his new venture, even if disclosed, it will simply reinforce the view that journalists and independent stock analysts are in bed with the shorts.

Take, for example,a hearing that will be held on June 20 by the Senate Judiciary Committee: "Examining Short Selling Activities of Hedge Funds and Independent Analysts."

I've said many times, such as in this Salon piece, that this campaign to shift blame from corporate incompetence and crookedness is gaining steam. The last thing we need is for the good guys to fuel the canard that investigative journalism is a profiteering tool for short-sellers.

© 2006 Gary Weiss

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

Two Ways to Fight the Shorts

In the press this morning we have on display two ways to fight short-sellers: the right way, and the dreary, dumb, and dishonest way. 

I'll start with the right way, described in the latest Business Week. Seems that a company called Hansen Natural Corp. has been under attack from shorts, who believe that its Monster energy drink is a fad. Even if it isn't, the shorts say, Monster will be crushed by the competition if their own energy drinks catch on. 

So how has Hansen fought back? BW's Roben Farzad recounts the anti-short campaign:

Hansen's shares have surged from $2 to $130 since 2003, and earnings have increased from 28 cents a share to an expected $3.92 this year. Hansen's market value sits at a lofty $2.9 billion. The company reaches its core demographic, males aged 18 to 30, by flooding retailers with giant cans of its energy concoctions

In other words, Hansen has fought the shorts by performing. By actually making money for shareholders. "Hansen. . . is beating the pros by doing what it does best: selling drinks," says Farzad. 

Meanwhile, on the Wall Street Journal Editorial Page, we get the dreary, dumb and dishonest way. The blow-smoke-against-nonexistent-conspiracies way. The Patrick Byrne way. 

Today, the CEO of this chronically money-losing retailer bloviated in a letter to the editor. As usual, his bloviation responded to a columnist who had committed the ultimate offense in the eyes of Patrick Byrne: criticizing Byrne's "jihad" against a nonexistent "conspiracy" of short-sellers, analysts, hedge funds and journalists. 

No need to quote from it. It's typical Byrne: sneering and rambling, vaguely lashing out against unnamed "blackguards." 

Since Byrne's jihad has been getting a lot of criticism, Byrne has been fighting it on a bunch of fronts, and he appears to spend a goodly amount of time and energy doing so. He has responded to criticism in a Motley Fool message board and, most recently, the New York Times's DealBook blog. 

Byrne, of course, has also filed a lawsuit. He has not been shy about talking about it and taunting one of the defendants, David Rocker. Jeff Matthews pointed to that as evidence (not that there wasn't plenty already) that Patrick Byrne is a "little, little man." 

So there you have it. You can fight the shorts by making money or making noise. Got to say this much: if you're a CEO who craves attention, adores the adulation of crackpots and views himself as the Savior of the Financial System, the "making noise method" makes a hell of a lot more sense! Particularly when your company is in the red. 

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Wall Street Versus America was published by Penguin USA on April 6. Click here for its Amazon.com listing and here for more information on the book, from my web site.

Beware the Short-Bashers

Great commentary today on MSN Money by hedge fund manager Bill Fleckenstein: "Beware of Companies that Attack Short Sellers." Fleckenstein observes:

Let me repeat something I've said before: Short-sellers do not mismanage companies. They don't cause them to stuff the channel, build receivables or cook the books generically. Company managements do that. Short-sellers catch them.

The very fact that someone actually has to say that shows how short the public's memories are. And it's not just the public. A few weeks ago -- I blogged on it at the time -- I chatted with a journalist about short-selling. At one point he remarked that short-sellers had damaged companies by driving down their share prices.

I asked him to cite an example. His response: Enron.

Like I said -- memories are short.

(Hat tip: SABEW's Talking Biz News blog.)

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Wall Street Versus America will be published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

The STFU Campaign & the Joys of Paranoia

So the STFU Campaign is going full-blast, I see.

I refer, of course, to the "Shut the F--- Up" Campaign being waged by the cruddy pharmaceutical company Biovail and the cruddier Internet retailer Overstock.com against their respective critics. The cable-TV business channels are following every twist and turn of the campaign by these two companies, with the assistance of an obligingly dumb Securities and Exchange Commission, to silence their critics.

The hopes and dreams of money-losing companies everywhere are going with them! I am sure the STFU Campaign will spread across this great land of ours, silencing the few independent research firms and financial journalists who fail to fall in line with corporate dogma.

To me, the most interesting thing about the STFU Campaign is its use of a time-tested technique in American discourse -- paranoia. Overstock.com's goofy CEO, Patrick Byrne, pioneered the use of Applied Paranoia in the multi-pronged short-seller-research firm-media-etc.-etc. conspiracy theory that he unleashed at a conference call last August. Biovail, while less goofy, is also alleging that the company's share price is in the toilet because of a conspiracy involving much the same characters.

As Max Boot observed in the Los Angeles Times yesterday, paranoia is a time-honored feature of American public discourse. Boot observed that in his 1964 essay, "The Paranoid Style in American Politics," the late Richard Hofstadter noted:

"One of the impressive things about paranoid literature is the contrast between its fantasied conclusions and the almost touching concern with factuality that it invariably shows. It produces heroic strivings for evidence to prove that the unbelievable is the only thing that can be believed."

As examples, Boot noted, Hofstadter "cited a 96-page pamphlet by Joseph McCarthy that contained 'no less than 313 footnote references' and a book by John Birch Society founder Robert Welch that employed 'one hundred pages of bibliography and notes' to show that President Eisenhower was a communist."

Boot was citing Hofstadter's essay to debunk a study on the Israel lobby, but I think his point extends to the STFU Campaign.

The paranoid "naked shorting" conspiracy cult embraced by Byrne is, of course, notable for amassing mountains of meaningless "evidence" -- mostly statistics concerning "fails to deliver" securities. The lawsuits, similarly, support their conspiracy charges with detailed allegations and sworn statements by objective, dispassionate fired former employees.

So onward with the STFU Campaign! And remember: If your company's stock falls in price, it's not your fault. It's them.

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Wall Street Versus America will be published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

Early Kudo etc. etc. etc.

The first general-circulation review of Wall Street Versus America has come out (a bit, ahem, early) -- and it is a rave from the Houston Chronicle. Here is a link.

Golly. "Erudite and savagely funny." Very nice. True, but nice.

I've been blogging a bit less than usual because of the press of other business, including this op-ed piece that ran in the New York Times on Saturday. Bear Stearns was recently the subject of a $250 million fine that was, as I describe, chump change.

Meanwhile, I see that there has been a lot of activity on the short-selling-subpoena-baloney-Overstock-Biovail-etc.-etc.-etc. front, including a report on 60 Minutes on Biovail's lawsuit against a hedge fund and independent research firm. It was a straightforward account, and it had nothing to do with the nonexistent "naked short selling" scandal, so naturally it was immediately proclaimed as a major public relations victory by the Baloney Brigade.

Oddly, a Dateline NBC segment last August, though sympathetic to the balonies, was vilified by these same knuckleheads. Logic has never been their strong point.

Lesley Stahl said something to the effect that this segment should interest every small investor with an IRA or 401k. I agree. If the CEO of a company you own goes on a crusade against short-sellers, dump the stock immediately.

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Wall Street Versus America will be published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

The Smear du jour .... Redux

I promised myself, for the sake of my digestive tract, to avoid quoting from the childish demagogues of the "sanity check" naked-shorting conspiracy cult website. But... well, today's smear du jour is too juicy to resist.

The sanity check item, widely touted on the Internet, has the giddy title "Is word out? Is Cramer going to jail?" and the item was devoted to that theme. The bravely pseudonymous author of the item, "Bob O'Brien," (nom de smear of ex-used medical equipment peddler Phil Saunders) had a good source this time -- one sentence spoken on the Don Imus radio show this morning. All, according to O'Brien, in support of his thesis that Cramer has an unholy alliance with short-sellers. And profited, presumably. After all, why else would one "go to jail"?

The only problem is that, as has been widely publicized -- everywhere but on the naked-shorting cult websites, that is -- Cramer hasn't done any short-selling since 2000. He can't. CNBC editorial policy won't let him. (Though I guess he could, theoretically, violate CNBC editorial policy or commit murder or.... whatever.) The other targets of O'Brien's smears are financial journalists who are also strictly prohibited from doing any trading on stocks they mention. And, like Cramer, their integrity is beyond reproach.

Well, I guess that's one of the nice things about having a phony name: You can smear people all you want, and get away with it. Sure, they can sue you -- if they can penetrate the several layers of secrecy you have carefully erected for just that very eventuality.


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Wall Street Versus America will be published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

The Short Selling Hysteria Continues

Readers of New Jersey's largest newspaper, the Star-Ledger, read today that the scourge of naked short-selling has descended on Wall Street. Word of that came from a man in a position to know -- New Jersey's next state treasurer, Bradley Abelow, at his confirmation hearing before the state senate Judiciary Committee in Trenton.

Abelow is a former board member of the Depository Trust and Clearing Corp., and as anyone who has followed the issue -- at least from the perspective of the anti-naked-shorting conspiracy cult -- can tell you, the DTCC is up to its eyeballs in that horribleness. Abelow confirmed it thusly, according to the newspaper:

Abelow acknowledged the problem of "naked short selling" is "endemic." He said he personally never engaged in the abusive practice and, as an executive and a director of the corporation, took extensive precautions to try to minimize it.

Terrible isn't it? According to the dictionary, "endemic" means "prevalent in or peculiar to a particular locality, region, or people" -- the locality or region in this case being "Wall Street."

The only problem is that Abelow didn't say that. As a matter of fact, according to the archived audio feed of the hearing, he said the exact opposite: "The issue of fails to deliver of securities are endemic and occur as a matter of course and that my experience is that everyone at the DTCC and its participant firms work diligently to clean them up."

As Abelow had patiently explained to the committee, "fails" occur for a whole bunch of reasons. They are routine. Happen as a "matter of course." Nothing. Sometimes, he explained, FTDs happen because the transaction is off by a penny. It's something that anyone who knows a blessed thing about the subject, including the regulators, have explained again and again and again.

Now, I don't mean to beat up on the Star-Ledger, which is a damn good paper that regularly takes awards away from the big guys in New York. If I had covered the hearing for a daily paper and if I hadn't been writing about this stupid "naked shorting" issue for the past ten years, I probably would have gotten confused about the subject myself. What was particularly confusing to the uninitiated was that Abelow was preceeded by four "witnesses" who spewed sheer baloney on the subject without contradiction.

See, what you have here is not really a regulatory issue but a kind of hysteria, cynically promoted by stock promoters and CEOs of cruddy companies seeking to take the heat off their own lousy performance. The stock-clearing system is complicated, and they've exploited the complexities of the system to conjur up a "scandal" out of nothing, to divert attention from real investor issues such as the unfair arbitration system and real stock fraud.

DTCC has the thankless task of overseeing the stock-loan system that is at the center of the naked shorting non-scandal, so it has been regularly a subject of screwball lawsuits that have been monotonously tossed out of court. The stalking continued in Trenton yesterday, with Abelow hounded by the aforementioned four witnesses, and by some particularly brainless questioning by one state senator. "Have you ever, for your own account, engaged in naked short selling?" a legislator named Gerald Cardinale asked the dumbfounded Abelow.

One of the "witnesses" who came to serve up baloney was Gary L. Valinoti, former CEO of a sad, blameless company called Jag Media Holdings that he claimed was an innocent victim of naked short-selling. Valinoti forgot to mention that he too is a victim -- of SEC charges that he engaged in "unregistered sales and transfers of securities of [Jag Media Holdings] in violation of Section 5 of the Securities Act of 1933." He settled the charges last September without confirming or denying the allegations.

None of the press coverage mentioned Valinoti's little run-in with the SEC, while providing a forum for the idiotic nonsense spewed at the hearing by the naked-shorting cultists.

Meanwhile, in another example of short-selling hysteria, a tough and smart reporter who would not have been bulldozed had he covered the hearing -- Herb Greenberg of Marketwatch -- reported this morning that he was slapped with an SEC subpoena that's been served upon him as part of an investigation of Gradient Analytics.

Herb says "the subpoena seeks 'all' unpublished 'communications,' including emails and phone records, between me and people and organizations I've quoted -- and at least one I've never quoted -- regarding five stocks. Never mind that I have never written about one of those companies. And never mind that the other four (yes, including Overstock) deserved every word I wrote -- and then some." He and Dow Jones (which owns Marketwatch) are, of course, fighting it.

That's how nutty things have become. Think about it. An innocent guy who used to be a paper-pusher on Wall Street gets grilled over a non-scandal, and a tough reporter who is the bane of cruddy companies gets an SEC subpoena.

If that isn't hysteria, I don't know what is.

UPDATES:

SEC Chairman Elaborates on "Never Mind." (Feb. 27)

The SEC's Keystone Kops in action. (Feb. 25)

Naked shorting cultists smear Greenberg. (Feb. 26)

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Wall Street Versus America: The Rampant Greed and Dishonesty That Imperil Your Investments will be published by Penguin USA on April 6.

Click here for its Amazon.com listing and here for my web site.