There was one accurate paragraph in Bethany’s “Phantom Menace” story. It described some comments that Patrick made to Bethany and Gradient.
“In the fall of 2004, I wrote a FORTUNE story title “Is Overstock the Next Amazon?” After the piece came out, Byrne sent me an e-mail saying “Fair. And balanced.” Two days later he wrote another e-mail: ‘I actually thought it was crap…So why exactly did you become a reporter? Giving Goldman traders blowjobs didn’t work out?’ Around the same time, after Gradient released another report questioning board members’ independence, Byrne wrote to [Gradient's Donn Vickery]: “Donn, you make a living toadying to bully hedge funds…you deserve to be whipped, f-d, and driven from the land.”
Patrick responds, “I agree that the comments were a little salty. But Bethany knew that the email to Gradient had nothing to do with their ‘questioning a board members’ independence.’ I sent it because Gradient was derisive and personally disrespectful, over the telephone and then in print, to Gordon Macklin, a board member and a 78 year-old lifelong friend. This was crystal clear in my email, but Bethany’s strategically placed ellipsis obscured it.”
Here’s Patrick’s email to Vickery, in full: “Donn - You make a living toadying to bully hedge funds. In this role you insulted Mr. Macklin, a friend, a lifelong mentor, and a decent and wonderful man. You deserve to be whipped, fucked, and driven from the land. Little punctilious submissive rejoinders such as your letter cannot change this or recalibrate our relationship on other terms.”
* * * * * * * *
Two weeks after Fortune magazine suggested that Patrick was nuts, the North American Securities Administrators Association (NASAA) held a conference on naked short selling. During the conference, Susan Trimbath, a former employee of that Big Black Box known as the Depository Trust and Clearing Corporation, provided a detailed description of how the DTCC aids the sale of phantom stock. Other panelists, including Peter Chepucavage, the author of the SEC’s Reg SHO rule on naked short selling, stated that phantom stock is a huge problem that the SEC is failing to control.
The host of the conference was Ralph Lambiase, president of the NASAA and director of securities enforcement for the state of Connecticut, where many hedge funds are based. In a letter to Dave Patch, the engineer and blogger-revolutionary, Lambiase announced that he was setting up a multi-state task force to probe phantom stock sellers and the DTCC. Dave noted the letter and covered the conference on his blog.
The Wall Street Journal, by contrast, did not cover the conference. Instead, while the panelists were describing one of history’s biggest financial crimes, the Journal published a front page story commiserating with the wife of Amr Elgindy, a.k.a. Manny Valasco, the Mob-linked phantom stock seller who’d been indicted for stock manipulation and bribing FBI agents, and who got caught when he gave his Smith Barney broker an order to liquidate his childrens’ trust funds on the day before 9-11.
Elgindy was about to be sentenced, and the Journal was begging for leniency. It glossed over the details of Elgindy’s crimes, and instead described how Mrs. Elgindy cried when agents raided their home, and how Mrs. Elgindy was sad because the paint on her $4 million mansion was pealing. “She has battled with the government over money,” the Journal reported.
Then this: “All the while, she has struggled with her own terrors [which] more than once have woken her up in the night.”
And this: “Mrs. Elgindy says she doesn’t know what she will do if her husband receives a lengthy sentence. ‘He was the first person who gave me the courage and strength to question what I had been taught,’ she says.”
And finally: “The situation has been particularly tough for their youngest son, Samy. On a recent family visit to the New York jail, Samy sat on his father’s lap and told him, ‘Daddy, if I could stay here with you, I would.’”
* * * * * * * *
A few weeks later, Elgindy appears in court for sentencing. It is noticed that he is missing one finger. He is asked about it, and claims it happened in a beach barbequing accident. The prosecutor points out that he has been under house arrest. Elgindy changes his story, maintaining that it was a home accident. However, sources familiar with the investigation inform Deep Capture that they believe Russian mobsters did it as a warning not to talk while he was in prison. One even maintains, “The Russians went to his house and forced Elgindy to saw off his own finger, to help him better remember the experience. They also told him that if he talked they would skin [a member of Elgindy's family] alive.”
While Elgindy is sawing, a church pastor named Jeff Matthews is writing on his blog that Overstock’s vice president of marketing works in a nudie bar. In addition to his church duties, Matthews is a former writer for TheStreet.com and a hedge fund manager who once worked for David Rocker. He claims to be writing “without having a dog in this fight” even though he owns “puts” in Overstock - which is another way to bet that the stock price is going to fall.
As a mob of journalist-thugs try to confirm that Overstock is run by a stripper (the story is false, like most everything else written about Overstock) Patrick gives up on the mainstream media and appears on a radio program broadcast by the Christian Financial Radio Network - motto: “prosperity for God’s people.”
This outfit manages to air a mostly accurate story about phantom stock.
By contrast, shortly after pastor Matthews says Overstock is run by a nudie bar dancer, and now four months after Patrick’s Miscreants Ball presentation, and a few weeks after the sad-story about Elgindy’s wife, The Wall Street Journal publishes a highly positive profile of David Rocker. The author is Karen Richardson, the journalist who hoped Patrick wouldn’t “lose any sleep” over the bold lies of Rocker’s minions at Gradient.
Richardson praises Rocker for his “aggressiveness and nose for troubled companies.” She says we should take pity on Rocker because, notwithstanding his 50% return for the year, it is really tough to be short-seller. “We don’t get any respect. We’re the Roger Dangerfield of the investment community,” Richardson quotes Rocker as saying.
The reporter does not describe Rocker’s tactics. She does not note that Rocker’s minions have previously fed her false information. And amidst all her assurances that short-sellers are good for the market, she does not once mention the words “phantom stock” or “naked short selling.”
Meanwhile, Patrick has bought 50,000 shares of Overstock and made a simple request - that real stock be delivered. After weeks of equivocation, a broker at Wells Fargo writes Patrick an email. “It would seem that [Lehman Brothers, the Wall Street brokerage] did not have the shares when they sold them to us…Since Overstock is a ‘hot’ [i.e. manipulated] stock they are finding it just about impossible to find shares to borrow or buy…Talking with my traders they feel that…no one seems to have enough of the shares to deliver.”
So, it seems, Patrick has bought 50,000 shares of air - phantom stock.
* * * * * * * *
Around this time, Rocker sells his shares in TheStreet.com. A month later Cramer sells a bunch of his own shares. Then it is announced that the SEC is investigating Gradient, and has issued subpoenas to Herb, Cramer, Carol Remond, and TheStreet.com.
Our “financial media” goes ballistic. Cramer scribbles “Bull!” on his subpoena. Herb commandeers CNBC to holler about a conspiracy to get Herb. Jesse Eisinger, Herb’s former co-worker at TheStreet.com, who has spent the months since his foiled Bunny hunt writing hatchet jobs for David Rocker, now writes in The Wall Street Journal that the SEC is violating the First Amendment right to free speech by investigating a research shop and giving a subpoena to Herb. The New York Times’ top business columnist, Joe Nocera, who is one of Herb’s oldest friends, writes that Patrick is “loony beyond belief.” As evidence for this, Nocera quotes Roddy-Boyd-The-Post as saying that Patrick is, in essence, loony beyond belief.
Following these leading lights, other journalists write similar stories. Not one of these journalists interview Gradient’s former employees, or seriously investigate Patrick’s allegations.
In the midst of all this, the San Francisco-based investigator who had issued the subpoenas (with the approval of the SEC’s D.C.-based head of enforcement, Linda Thompson) is summoned back to Washington to meet with the SEC chairman. The investigator, Mark Fickes, is a slight, bespectacled man - but he has an iron will. He argues that Gradient is worthy of investigation - and the journalists are central to his case. Ultimately, though, the SEC caves under the media pressure. It announces that it is not going to enforce the journalists’ subpoenas (and ultimately drops its investigation of Gradient).
Herb breathes a brief sigh of relief, and then he takes the offensive. He calls my editor and demands that the Columbia Journalism Review stop work on this story. Indeed, he practically has a nervous breakdown on the phone, pleading his innocence and saying no editor could possibly allow a story like this to happen.Then Joe Nocera calls my editor - just to say that he has it on authority that Herb is innocent.
After that, Fortune magazine’s Carol Loomis, the grand dame of financial journalism, starts making calls to the Columbia Journalism School, asking questions about this story. (Recently, I asked Loomis whether she was trying to have the story killed. First, she said she couldn’t remember the circumstances - maybe she was calling on behalf of someone else. The next day, she told me that she remembered that she had heard that Columbia University was going to kill the story and her “journalistic instincts” led her to investigate).
With Herb, Nocera, and Carol Loomis making calls, the lawyers at The Wall Street Journal forbid its employees from speaking to me (so much for freedom of speech).
I send a list of questions to CNBC about Herb, Cramer, their connections to hedge funds, the network’s unbalanced coverage of phantom stock, the SEC investigation, and Patrick Byrne. A public relations man rushes to my office and says, “now let’s talk about this, maybe there is something we can do about this…Can we just hold off on this story for a while?” Just a “short while,” he says — he needs some time, but he’ll get answers to my questions, he promises.
A few days later, he says, “sorry,” he couldn’t get answers to the questions because he was on vacation. After that, he can’t get answers because Cramer is busy. Then it’s Friday, and it’s hard to get answers on Fridays. After that, he’s been ill, then he’s on another vacation, then he’s still trying to find the information. But he promises– he’s going to get me the answers really soon.
That was two years ago. I’m still waiting for the answers.
* * * * * * * *
As the media whines about the SEC’s investigation of Gradient being a violation of the First Amendment right to free speech, Rod Young, CEO of a telecom company called Eagletech, argues that the SEC has violated Fifth Amendment property rights by “grandfathering” the undelivered stock of all the companies on the SEC’s Reg SHO victim list. At this point, phantom stock is “pervasive” or “under control” depending on which SEC official is speaking. Either way, the agency has listed more than 300 companies whose stock has been sold and not delivered in excessive quantities.
And to add insult to injury, it has “grandfathered” much of that stock, saying that anything sold before January 2005 doesn’t have to be delivered - ever. The SEC says it is allowing this phantom stock to remain in the system because forcing delivery of real stock would cause “excessive volatility from large preexisting open positions.” So on the one hand, the official policy of the SEC is that it has naked short selling under control. On the other hand, it seems to believe there is so much phantom stock in the system that there would be market chaos if it were to actually do something about it.
This seems pretty outrageous to the 300-plus CEOs currently affected (not to mention the 1,000-plus CEOs whose companies might already have been obliterated), so in February 2006, Rod Young writes an open letter to the SEC.
In this letter, he describes how Solomon Smith Barney arranged a so-called private placement in public equity (PIPE) to invest in his company. PIPEs, sometimes referred to as “toxic financing,” have been a key weapon of hedge funds and brokers wishing to illegally naked short companies out of existence. Sometimes companies hard up for cash have sold discounted shares (PIPEs) to unscrupulous hedge funds. The hedge funds know that news of the fire sale will cause the stock price to drop. So they naked short the stock in the knowledge that the PIPE will deliver them shares with which to cover, creating virtually guaranteed profit. Under certain conditions, this act (which is illegal) can cause a company to go into a “death spiral” and collapse.
In a February 2007 story, “Sewer Pipes,” Nathan Vardi of Forbes magazine provides details of the Genovese Mafia family’s involvement in PIPES.
Thomas Badian, the fugitive in Austria, gave toxic financing to companies he naked shorted through Refco. Solv-ex, the company Gary Weiss highlights in his first big story, “The Secret World of Short-Sellers,” might have received toxic financing from Mafia-connected investors. And now, Rod Young of Eagletech is describing in an open letter to investors how his own company fell prey to a similar, Mafia-led scheme.
He notes that ten days after Solomon Smith Barney brokered Eagletech’s toxic financing, Amr Elgindy “and his short-selling cartel appeared on chat boards claiming that Eagletech was a scam.” He adds that FBI agents later explained to him that a New Jersey labor racketeering investigation had revealed that Eagletech’s first investment banker was selling phantom stock through a mobster from the Colombo crime family (which, according to multiple federal cases, usually does its illegal stock trading in league with Genovese and Russian mobsters). Then, in August 2004, at an Eagletech luncheon, an agent from a different federal agency showed up unannounced, looking for information on Jonathan Curshen, the same money launderer who was cased in Costa Rica by Deep Capture’s operative.
In his open letter, Young writes that, in a perfect world, the SEC would face “a silent lynch mob of aggrieved shareholders, the 13 State Securities Regulators (who unlike fed regulators are taking an interest in phantom stock)…CEOs of other victim companies, the media, congressional staff assistants, and our rock star advocates Byrne, Burrell, Patch, O’Brien (with or without the rabbit suit) Faulk, DeWayne, and Ferrara.”
The “rock stars,” with the exception of Patrick Byrne, are all bloggers and stock message board aficionados. They are now the only “media” covering the phantom stock problem with any degree of seriousness. Only one journalist shows up at Young’s meeting with the SEC. His name is Hugo Cancio, and he is a documentary film maker for a new company, Fuego Entertainment, which so far has made one film — about Cancio’s father, a Cuban musician.
Fuego Entertainment, meanwhile, has announced that it also has an agreement to distribute “Dr. Joe Vitale’s Revolutionary Sugarless Margarita Mix, Fit-a-Rita.”
Russian Mafia Conspiracy on Wall Street in Media and Government - 2 - 3 - 4 - 5 - 6 - 7 - 8 - 9 - 10 - 11 - 12- 13 - 14 - 15 - 16 - 17
