Russian Mafia Conspiracy on Wall Street in Media and Government - 16

Instead, the panelists all present the party line that short-selling is good for the market, that the law is working, that phantom stock is only a small problem - never mind that list of 300-plus victim companies.

There is one journalist at this event. His name is Floyd Norris, and he’s an old friend of Herb and the chief financial correspondent for The New York Times. Floyd has been an ardent critic of Patrick and those who decry phantom stock. (One wonders how Floyd and Nocera interact with Morgenson in the Times newsroom.)

Today Floyd is in the back of the room, looking bloated and pale, like a green grape. He seems to have ignored every word said by the panelists. But now his jowls are quivering as he snarls into the phone. Is he phoning in a story-perhaps an account of the SEC’s refusal to prosecute a massive financial crime?

No, Floyd is confirming a prescription.

Meanwhile, James Brigagliano, director of the SEC’s division of trading and markets, is standing on the side of the proceedings, laughing. “Gee,” he says to a colleague. “I thought the anti-naked short-selling bozos like Dave Patch would be here.”

“Oh we were there,” Patch later writes on his blog, “You just didn’t see us.”

* * * * * * * *

Patch also notes that while the SEC was calling him a bozo, billions of dollars worth of phantom stock was floating around the system. He gives the example of Escala, a company that auctions postage stamps and other collectibles. In May, Kingsford Capital and the criminal Spyro Contogouris of MI4 Reconnaissance convinced the Spanish constabulary to raid the offices of Afinsa, a Madrid-based company that owns a majority stake in Escala. Spyro and Kingsford (which, remember, I was investigating when its manager offered a large sum of money to the Columbia Journalism Review) accuses Afinsa of operating a pyramid scheme because it sells stamps as investments. A journalist working with Kingsford has also circulated rumors that the collectibles company is smuggling cocaine through the port of Cartagena.

By now, the reader should be able to assess the validity of these rumors.

Either way, at the moment that Brigagliano called Patch a “bozo,” 3.5 million phantom shares of Escala had been sold into the market, but had not been delivered to their presumed owners.

Meanwhile, a Toronto brokerage called Research Capital had just sent a letter to the SEC complaining that it had, despite 42 separate attempts, failed to gain delivery of a large number of Overstock shares that it had purchased months previously.

The “bozos” rightly suspect that Research Capital has purchased phantom stock.

* * * * * * * *

A week later, I’m at a party on a large balcony overlooking the Manhattan skyline. Spotlights criss-cross the black night; the perimeter is patrolled by giant men with shaved heads and earpieces in their ears. Everywhere there are beautiful women, Armani suits, and the accents of Staten Island.

Attending this party are the most powerful players in the so called “stock loan” business. These are the brokers responsible for borrowing (or failing to borrow) the stock that traders sell in order to create short positions. It is a close-knit community of mostly Italian Americans who have controlled this corner of the market for decades. The Russians are moving into the hedge fund and brokerage business, but the Italians still control stock loan.

The Johnny Walker is flowing, and the guys from Staten Island talk openly.

“Yeah there’s naked shorting. It happens all the time,” says one. “Who’s going to stop it? You?”

This party, though, is a grand opening for a company that is betting that the days of naked short selling are coming to an end. The company specializes in locating and borrowing real stock for traders who want to go straight - who don’t want to break the law by selling phantom shares. Everybody is here because the owner of this new company is a friend - one of the family. But there’s some anger. The owner has sided with Patrick Byrne because he will profit if Patrick’s crusade against illegal naked shorting is successful, but his friends, who are still selling stock that doesn’t exist, stand to lose money in equal measure.

On the balcony, I hear this comment: “What’s he doing with that guy Byrne?…What do you think? Is it over for us?”

And later: “Hey, Lou, I sent you an email!”

And Lou says: “What are ya doin’ sending emails? You can get indicted for emails….”

* * * * * * * *

But as of September, 2006, short-sellers are still getting a free ride. Certainly, the SEC’s investigation into Gradient is not going well. As we know, the lead investigator in the case - the man who issued subpoenas to Herb, Cramer and Carol Remond - was brought back to Washington and reprimanded. In June, another investigator on the case was hired away by Kroll, the private-eye outfit with close ties to Cramer’s friend, David Einhorn. Disgust and low-morale has crippled the SEC’s San Francisco office, where the investigation was hatched.

On October 6, 2006, The New York Times publishes an op-ed that sings the praises of short-sellers. Echoing the party line of our favorite financial journalists, the author of this op-ed, Richard Sauer, writes that the “first line of defense” against corporate frauds “has not been the S.E.C., which acts slowly when it acts at all, but rather the much disdained short seller. By putting their money where their mouths are, short sellers are the only market participants with an incentive to deflate bubbles and inject pessimistic information into the market.”

Richard Sauer is a former administrator in the SEC’s enforcement division. And during his tenure he did not act at all “slowly.” To the contrary, he was quick to launch many investigations - into companies shorted by David Rocker. Indeed, he seems to have spent most of his career sniffing down trails laid by Rocker and affiliated hedge funds. Unsurprisingly, many of Sauer’s investigations at the SEC led nowhere.

The bio at the bottom of Sauer’s op-ed notes that just “this week,” he has “joined the management of a short-biased hedge fund…” Days later the “bozo” pajamahadeen discover and reveal that the “short biased hedge fund” is the one run by - you guessed it — David Rocker.

The SEC is full of employees waiting for high-paying hedge fund jobs. This might explain its reticence to prosecute hedge funds for selling phantom stock. It might also explain why, a few months before Sauer joined Rocker Partners, the SEC backed off its investigation of Rocker’s minions at Gradient Analytics, and opened an investigation into — you guessed it — Overstock.com.

Rocker, of course, instigated this investigation. Patrick says he “welcomes” it. Indeed, he goes on the radio and says that he is ready to meet the SEC in any court in the land - and put the SEC on trial. The miscreants say this is another example of Patrick being “Whacky Patty.”

Others say that Patrick has exposed the “deep capture” of America’s regulatory bodies.

* * * * * * * *

One day in the Fall of 2006, Senator Orrin Hatch called Patrick to his home. He does that sometimes - they take walks together, discuss politics and the state of the nation. But this time, the senator wanted to talk about something else.

When Patrick entered the building, the senator pulled him into a corner of the lobby. “I am going to tell you something,” he said. “But I cannot tell you more than this. You are up against some really nasty, vicious people. They will not hesitate to kill you.”

The senator took a deep breath and continued. “I want you to do something for me. I want you, the next chance you get, to go on TV or radio and say the following. Say that if anything happens to you, Orrin Hatch says that he’s never going to rest until the United States government has gotten the people who did it. Now I’m not kidding, Patrick, I want you to do that tomorrow if you can.”

The senator repeated this several times. And he made Patrick repeat it back to him.

* * * * * * * *

A couple of days later, Mike Wilkins from Kingsford Capital appeared in my office. This was one of the hedge funds at the center of the scandal that I was investigating - a hedge fund that Wilkins managed along with Herb’s friend, Cory Johnson, who was a founding editor of TheStreet.com — a hedge fund whose principals had collaborated with Manuel Asensio and the creepy former BusinessWeek journalist, Gary Weiss, to malign companies that were the victims of phantom stock selling — a hedge fund that was now attacking the same small stamp company as Spyro Contogouris, the proprietor of MI4 Reconnaissance also known as “Martin Gardner,” “P. Fate,” and “Dick Tracy.”

This was early November 2006, a couple weeks before Spyro went to jail for ripping off a Greek shipping magnate.

The Columbia Journalism Review was in serious financial trouble. Wilkins of Kingsford Capital offered to make that trouble go away.

I can only assume that he intended to make this story go away, too.

* * * * * * * *

The editors of the Columbia Journalism Review are honest people who did, after all, let me work on this story for nine months. I resigned from my job days after Kingsford appeared in my office, before I could raise a fuss, so the editors were perhaps unaware that this hedge fund was engaged in a cover-up.

That said, Kingsford must be pleased with my successor - who is now called “The Kingsford Capital Fellow.” CJR’s “Kingsford Capital Fellow” has been remarkably favorable towards short-selling hedge funds and their friends. He has written an article sympathetic to Jim Cramer and recently, he slammed the CBS News program, 60 Minutes, for running a story pointing out that Gradient Analytics is a tool of market-manipulating hedge funds.

The Kingsford Capital fellow, Dean Starkman, argues that since Biovail, the company highlighted in the 60 Minutes segment, has since been sued by the SEC, this proves that “Gradient was right.”Meanwhile, says the Kingsford Capital Fellow, short-sellers are “a vital counterpoint to the Wall Street hype machine” and helpful sources to financial journalists.

This is standard party line. If a target company is ill, the short-sellers are “right” - vital, even. Never mind if the short-sellers are all the while publishing false research, churning out phantom stock, working with the Mob, spreading malicious rumors, hiring criminals, bribing doctors, using false identities, colluding with journalists to front-run false media stories, giving kick-backs to witnesses in bogus legal cases - and now, funneling large amounts of cash to the one publication that was going to suggest that some of this might be illegal.

* * * * * * * *

A few weeks after I left CJR, a pair of metal garment shears were thrown through the window of a restaurant owned by a woman who is very close to Patrick. Earlier, somebody broke in to the restaurant, messed things up a bit, and stole nothing. It seemed as if somebody had been monitoring the restaurant’s phone and heard that the alarm would be left off that night.

Around the same time, Patrick’s lady friend learned that copies of her cell phone bill were being sent to an address that was not hers. A Deep Capture investigator checked out that address and discovered that it belonged to a Russian man named Semyon Faivinov. Further investigation revealed that the man’s son, Elliot Faivinov, worked as a vice president for Goldman Sachs Execution and Clearing (formerly Spear, Leeds & Kellogg).

A few months later, the New York Stock Exchange and the SEC implicated Goldman Sachs Execution and Clearing in a massive phantom stock scheme (Goldman paid a $2 million fine). Previously, Spear, Leeds, & Kellogg had been accused of catering to known phantom stock sellers, including Kingsford Capital collaborator Manuel Asensio.

I called Faivinov and asked him why he had the phone records of Patrick’s lady friend. He said, “That wasn’t me…I’m not the right person to ask about that.”