July 21, 2008

How Naked Short Sellers and CNBC Bamboozled the SEC

July 21st, 2008 by Mark Mitchell

You can bet that the hedge fund talking points were rolling off the CNBC fax machine last week, and really, the network did a stellar job – right on par with the high-powered lobbyists in Washington. Yes, the folks at CNBC should join hands with those lobbyists, and take a deep bow. It was a heck of a show – a real extravaganza.

I doubt the American people even know what hit them.

It is hard to believe, given that the news has so quickly disappeared from the front pages, but the SEC last Tuesday issued an historic “emergency order” to head off financial apocalypse by preventing criminals from “naked short selling” the stock of 19 big finance companies.

The SEC’s move was kind of weird (Why only 19 companies?) but it was gratifying to Deep Capture and a band of crusaders who have long been hollering that crooked hedge funds use naked short selling (selling stock that has not been purchased or borrowed, and usually does not exist – i.e., phantom stock) to drive down prices and destroy public companies for profit.

For years, arrogant journalists brushed off the crusaders, while a pack of dishonest, but influential reporters with close ties to hedge funds harassed and ridiculed them (see, “The Story of Deep Capture”). Meanwhile, government agencies denied that phantom stock was a problem. SEC Director of Trading and Markets James Brigagliano once referred to the crusaders as “bozos.”

But on Tuesday…well, here was something altogether different. The SEC said that phantom stock was not just a problem; it was an “emergency” that had the potential to crash the nation’s financial system.

In other words, the bozos were right!

Well, we cheered, and then we closed our eyes to take in that warm glow of vindication. My eyes were closed a bit too long, I’m afraid, because I missed the curtain opening on Cirque du CNBC and its amazing spectacles – great feats of flimflammery, upside down speechifying, all manner of contortionism and illusion.

Within three days, this grim circus, with a lot of help from the mighty hedge fund lobby, would reduce the SEC’s “emergency order” to a twisted joke – a grand gesture to do nothing whatsoever.

The day after the SEC’s declaration, the circus was already well under way, with the hedge funds spinning furiously and their media marionettes singing the party line: short sellers are “vital” to free markets; everybody loves free markets; only bad companies and bad CEOs complain about short sellers – go investigate the CEOs, hands off the “vital” hedge fund managers.

As for billions of dollars of phantom stock threatening to topple the American financial system – don’t even mention it. If somebody does, repeat, over and over, “Only bad companies complain about shorts…shorts are vital”

I sketch out the hedge fund party line only for those who are new to the so-called “debate” over naked short-selling. If you’re a long-time crusader, you’ve heard it all before. You’ve heard it on CNBC so often that you’re probably now banging your head against a wall and saying something like, “oogly oogly oogly,” half-mad with incomprehension – still unable to come to terms with the utterly surreal spectacle of an important television news network, in the United States of America, completely whitewashing a massive crime.

By the time CNBC interviewed SEC Chairman Christopher Cox on Wednesday, the top market cop seemed to have become rather befuddled by it all. Amidst the incessant chants — “bad CEO’s…vital short-sellers” — Cox backed away from his earlier suggestion that he might extend the emergency order to protect the entire market, rather than just 19 big financial firms with ties to Wall Street.

Meanwhile, Chairman Cox suggested, preposterously, that it’s somehow more acceptable to naked short smaller companies because their shares are harder to locate and borrow. This is something only a hedge fund contortionist would say. There are always shares to borrow at some price, and a tough borrowing environment hardly justifies selling millions of non-existent shares to drive down prices.

But we sympathize with Mr. Cox. While the CNBC lady suggested that the SEC should investigate bad companies instead of shorts, and questioned whether the SEC had initiated some kind of “witch hunt” against short-sellers generally, the chairman labored valiantly to point out the obvious (though apparently not to CNBC) distinction between legal short-selling and the blatantly illegal practice of spreading maliciously false information while selling non-existent stock to create panic and drive down prices.

Mr. Cox seemed like he wanted to do the right thing. It’s just that Cirque du CNBC can be a rather discombobulating place.

Moments before the SEC Chairman was interviewed, circus clown Joe Nocera, who doubles as the New York Times’ top business columnist, was on CNBC, working up the crowd by suggesting that Mr. Cox had lost his mind and was doing the bidding of bad companies and stupid people “saying woe is us, woe is us, blame it on the shorts.”

Remember, Joe Nocera is the anti-investigative journalist whom Deep Capture has tape recorded telling some of his media colleagues that the naked short-selling scandal “makes his eyes glaze over,” and he isn’t going to look into it because “life is too short.”

Far easier to read from the script: “Bad companies! Vital shorts!”

The next day, CNBC had yet to televise any of the CEOs, economists, and many other experts who agree that the phantom stock problem is, indeed, an “emergency.” Instead, the network brought on hedge fund cronies to say that their hedge fund cronies are “vital.”

Predictably, CNBC did a long interview with the dreaded Michael Steinhardt, a mentor and incubator of some of the most notorious short-and-distort hedge funds in the land. Steinhardt, for example, once employed David Rocker, who has regularly used the media (most notably, CNBC’s Herb Greenberg) and a dubious financial research shop called Gradient Analytics to disseminate misleading information about target companies, most of which are also victimized by massive levels of phantom stock. Jim Cramer, CNBC’s top-rated “journalist,” once ran a hedge fund out of Steinhardt’s offices, and CNBC’s “Money Honey,” Maria Bartiromo is married to the top partner in Steinhardt’s newest fund.

These are the sorts of relationships that prevail at CNBC. Our critics say it is too “conspiratorial” to point out these relationships, but we believe otherwise. Watch CNBC. Observe the lubrications that are lathered on favored hedge funds. Then judge for yourself.

Steinhardt didn’t have much to say about hedge funds that destroy public companies by selling billions of dollars of phantom stock while publishing false financial information, colluding with crooked law firms to file class action lawsuits, orchestrating dead-end government investigations, hiring convicted criminals and thugs to harass CEOs, and feeding false information to compliant journalists. Indeed, he didn’t have much to say at all, except the predictable mantra that all the “moaning and groaning” about short-sellers comes from bad companies and silly people who are angry about falling stock prices.

Participating in this interview was Paul Roth, another hedge fund manager who was mentored by Steinhardt. When asked whether it would be a problem if, say, a hedge fund were to sell ten times as many shares as actually exist in a company, Roth said, “That’s not illegal…the problem is sometimes you located the shares [and sold them] but somebody scooped them up [before you could deliver them to their rightful owners].”

CNBC’s Joe Kernen, who conducted the interview, characteristically let this statement go unchallenged. So let us state, for the record, that it would be a crime of monumental proportions to sell, say, 1,000 shares in a company that had only 100 shares outstanding. It is a crime because you cannot possibly “locate” or “scoop up” 900 shares that do not exist. It is a crime because there is only one possible reason why a hedge fund would sell ten-times a company’s public float, and that’s to manipulate the stock price.

But understand how these people think: If you can get away with it, it’s not illegal.

Around the same time that CNBC was massaging Steinhardt and Roth, members of the Securities Industry and Financial Markets Association, the leading Wall Street lobbying outfit, were on a conference call with some high-level SEC officials.

As it were, none of the hundreds of companies victimized by phantom stock got to be on any conference calls. But they’re used to that.

They’re also not too surprised that after CNBC aired the hedge funds’ talking points for three days, and the lobbyists wailed on the conference call, and uncounted other hedge fund billionaires bellowed in the name of “efficient markets” and the right to destroy “bad” public companies, the SEC announced that it would preserve its “market maker exemption,” which allows some brokers to sell stock they don’t have in order to “make a market.”

The “market maker exception” is one of several loopholes that hedge funds have been using for years to create billions of dollars worth of phantom stock. Market makers are, in fact, required to eventually deliver the stock they sell. But the name “market maker” imbues magic powers. If the SEC asks why you haven’t delivered the shares you sold, stick the words “market maker” on your forehead, mutter something about keeping things “liquid”, and the SEC goes away — even when you’ve sold ten times the float and even when the phantom stock goes undelivered for months or years at a time.

Since it was already against SEC rules to use naked short selling to drive down prices, the most exceptional feature of the commission’s “emergency order” was that it was going to close the “market maker exception” loophole – at least as it applied to trading in 19 big financial companies. By retaining that exception, the SEC has, in essence, decided that it isn’t going to do anything after all. Hedge funds and their “market makers” can go right on selling phantom stock and threatening the stability of the American financial system.

From “emergency” to “exception” in a few short days…Behold the powers of Cirque du CNBC and its hedge fund choreographers.