This rabbit hole involves the thugs surrounding Jim Cramer and some of the top financial "journalists" from the New York Times, WSJ, Fortune magazine and BusinessWeek, top hedge funds, the Mafia, and the DTCC. It also includes "blackmail, smear campaigns, espionage, fraud, harassment, extortion, bribery, rumor-mongering, sabotage, off-shore money laundering, political cronyism, frivolous lawsuits, witness tampering, biased financial research, false identities, bogus credit ratings, bribery, libelous blogs, bad science, forgery, wiretapping, counterfeiting, collusion, lying, cheating, threats and theft."
And if that wasn't fun enough, it may be the underlying story of what collapsed the entire, global banking system or at least served as the catalyst for the collapse.
Unfortunately, this story is so rich and multi-dimensional that I cannot possibly hope to do it justice here. So I will primarily focus on the financial media angle and, specifically, Jim Cramer and his thug cronies.
The story begins when a very highly respected journalist and business editor for the Columbia Journalism Review, Mark Mitchell, decides to look into allegations made by the CEO of Overstock.com, that some top hedge fund managers, in cahoots with a circle of financial analyst and reporters, had conspired to make a lot of money by betting short on companies and then systematically destroying those companies by spreading false negative information about them and employing other tactics such as flooding the market with "phantom shares" to drive down a stocks value.
To understand this you have to understand how short selling works. A short seller will borrow stock (say at $10) and then sell it immediately and pocket the money ($10). Then, when the company's stock value plummets ($1), they buy it at its deflated value and pocket the difference ($9). This is perfectly legal. But there's another variety that takes place because of a flaw in the system.
This is where a short seller sells stock that they haven't actually borrowed yet. There are loopholes that allow shorters to do this legally, but those loopholes have allowed the practice to be abused - which is illegal. Therefore, it is quite easy to fraudulently put on the open market shares of stock that do not, nor ever will, exist. These phantom shares do nothing but crash the value of a stock and therefore make legitimate short transactions highly profitable.
This is what Overstock CEO Patrick Byrne had discovered had been done to his company. Naked short selling combined with bogus financial analysis, lies and rumors propagated by CNBC reporters all served to trash his company's stock. So he decided to fight back. He gave a big conference call presentation to a bunch of corporate CEOs and broke the story. That's when Mark Mitchell comes in. (For the record, Byrne is a Republican. I don't much care for him. But this is completely irrelevant to this story.)
To the 500 Wall Street honchos who listened in to this conference call, Patrick said that a network of miscreants was using a variety of tactics – including naked short selling (phantom stock) – to destroy public companies for profit. He said this scheme had the potential to crash the financial markets, but that the SEC did nothing because the SEC had been compromised – or "captured" – by unsavory operators on Wall Street.
In January 2006, I [Mark Mitchell] was working as an editor for the Columbia Journalism Review, a well-respected ( if somewhat dowdy) magazine devoted to media criticism. Patrick had claimed that some prominent journalists were "corrupt" and were working with prominent hedge funds to cover up the naked short selling scandal, so I called to discuss.
Patrick picked up the phone and said: "Chasing this story will take you down a rabbit hole with no end." He said that the story had it all – diabolical billionaires, phantom stock, dishonest journalists, crooked lawyers, black box organizations on Wall Street, and a crime that could very well cause a meltdown of our financial system [This was in 2006].
Not only that, Patrick said, but "the Mafia is involved, too."
Well, Patrick seemed basically sane. I decided to write a story about the basically sane CEO who was fighting the media on an important financial issue while harboring some eccentric notions about the Mafia.
I figured it would take a week.
* * * * * * * *
Months later, my desk was buried under evidence of short seller miscreancy, I had done nothing but investigate this story since the day I first called Patrick, and I had just gone to a topless club to meet a self-professed mobster who told me all about a stockbroker who had peddled phantom shares for the Russian Mafia and the Genovese organized crime family.
Heh, it gets better. But, again, way too long to address here. So back to the media angle:. Here's Mitchell later on:
I have analyzed well over a thousand stories written by this clique of journalists. The vast majority of them were sourced from a small group of short-sellers who are also friends of Cramer. Other popular sources for this group of journalists include convicted felons, mobsters, dubious private investigators, crooked lawyers, hired stock bashers, and gun-toting goons - most of whom are tied to the Cramer constellation of short-sellers.
Some of the stories written by these reporters are accurate enough. But many are not. The journalists misconstrue data with seemingly purposeful intent. They exaggerate and obfuscate. They publish innuendo or merely repeat, Deus Optimus Maximus, the words of their hedge fund and criminal friends. A single negative story by one of these reporter-thugs can send a company’s stock tumbling by more than 50% — pure profit for their hedge fund sources, who of course sell the company short (often right before the articles are published). Meanwhile, an overwhelming majority of the companies targeted by these journalists will also be the victims of phantom stock selling and other shenanigans. The journalists do not mention this in their stories, and in fact go out of their way to deny that phantom stock exists.
Anyone who says otherwise is subjected to a vicious media smear.
To fully appreciate the Jim Cramer angle a little journey to his past is in order. This is from Cramer himself:
"We had it down to a science in 1992: my wife would pick stocks that technically looked ready to go up, or she would keep track of merchandise to see what was down to tag ends. She would then generate a list of stocks that could move quickly on good news. Jeff would then go to work calling the companies to try to find anything good we could say about them. I would call the analysts to see I they were hearing anything. When we found a stock that looked ready technically to break out, or where the supply had been mopped up, and Jeff found something positive at the company, and I knew the analyst community didn’t know anything positive, we would load up with call options and common stock and then give the good news to our favorite analysts who liked the stock so they could go do their promotion. That would get the buzz going and we would then be able to liquidate the position into the buzz for a handsome profit." (Confessions of a Street Addict, page 61).
This is Cramer's big secret. He figured out early that the way to make money betting on stocks was to rig the game - control the news and you control a stock's value. Now he has his own TV show.
Nicholas Maier worked for Cramer until 1998. He quit and wrote a book about it called, Trading with the Enemy: Seduction and Betrayal on Jim Cramer’s Wall Street (New York: HarperCollins, 2002). Here's an excerpt showing that Cramer was into naked short selling early on:
Jim turns toward his head trader. "Mark, sell ten thousand Bristol Myers."
"We never bought any Bristol Myers," Mark replies.
"We own the calls," Jim corrects Mark impatiently, aggravated by the delay.
"So sell it short?" Mark asks for clarification. Mark knows that according to the SEC rule book, selling stock you don’t already own (even if you do own the call options) must be marked and executed as a short sale.
"You are confusing me with someone who gives a shit. Just sell it! I said hit the fucking bid!" adds Jim, not interested in wasting time over petty semantics. Skirting the "plus tick" rule in this case won’t necessarily make us a lot of extra money, but in Jim’s eyes, the rule is still an unenforceable annoyance. "And don’t ever ask me that again!" (Trading With the Enemy, pages 70-71).
The story of Jim Cramer cannot be fully presented here. BUt here's an excerpt from Mitchell's book length expose that will get you into the ballpark:
Cramer, who is a sociopath, owns TheStreet.com with Marty Peretz, who is an aristocrat. Peretz is also the former editor of the New Republic magazine. He dabbles in high finance and Harvard professing, which has resulted in his entrusting a large portion of his family fortune to a close-knit group of hedge fund managers, several of whom were his students. For example, Cramer was his student. Then Cramer was destitute. He lived in a car with a loaded gun hidden under the seat. Eventually, though, Peretz gave Cramer some money to start a hedge fund, which Cramer managed with celebrated ruthlessness until he resolved to seek spiritual enlightenment as a TV news host.
Cramer had originally planned to run his hedge fund out of the offices of Ivan Boesky. Shortly before he was to move in, however, the feds busted Boesky for insider trading, making him one of the most famous criminals of the 1980s. (This is not necessarily to suggest that Boesky is the "Sith Lord" mentioned in Patrick’s "Miscreants Ball" presentation. Some people have wagered that Patrick was referring to Michael Milken, a business colleague of Boesky known as the "junk bond king," who also went to prison in the 1980s. Patrick has since modified the analogy, saying that the crime has multiple masterminds - "like Al Qaeda").
When Boesky went to prison, Cramer worked instead with hedge fund manager Michael Steinhardt. The media portrays Steinhardt as a financial wizard, a deep thinker and an all-around swell guy. The truth is, he’s a thug who perfected the concept of trading on privileged information, and pounded it into the heads of his employees. "What’s your edge!?" he’d shout, pacing his trading room floor. "What’s your fucking edge!?" After one of Steinhardt’s tirades, a top employee (and the godfather to Steinhardt’s children) had a heart attack. It is said that Steinhardt showed no remorse.
Indeed, Steinhardt has one of the most fearsome reputations on Wall Street. Which is perhaps unsurprising given that Steinhardt’s father, Sol "Red" Steinhardt, was a mobster once described by a Manhattan district attorney as the biggest Mafia fence in America. Steinhardt Sr. worked for the Genovese organized crime family, with goons like Meyer Lansky and Vinnie "Blue Eyes" Alo, before he was sentenced to a number of years in Sing-Sing prison.
By Steinhardt Jr.’s own account, the principal partners in his first hedge fund were the Genovese Mafia, Ivan Boesky, Marty Peretz (the aristocrat who funded Cramer), and a man named Marc Rich. Rich is closely connected to Ronald Greenwald, described in the authoritative book Red Mafiya as the man who, along with the Genovese family, brought the Russian Mob to America.
In 1983, Rich was indicted for trading illegally with Iran while Islamic revolutionaries were holding the American embassy hostage in Tehran. Along with his associate, "Pinky" Green, he fled to Switzerland. In 2001, Steinhardt, a big-time operator in Democratic circles, convinced Bill Clinton to give Rich a scandalous presidential pardon, but Rich remains in Switzerland to avoid paying his tax bill.
In the early 1990s, Steinhardt shut down his hedge fund after he was implicated in a scheme to corner the U.S. treasuries market - a horrendous infraction with serious implications for the U.S. economy.
So this is a rough crowd. Says one Wall Street trader: "It was the day the bad guys came to town — when Steinhardt and his people arrived."
One of Steinhardt’s people is Jim Cramer. Another is Cramer’s wife, who was known as the "Trading Goddess" when she worked as Steinhardt’s head trader. Maria Bartiromo, a CNBC anchor known as the "Money Honey," is married to the top partner in Steinhardt’s newest hedge fund. (A former employee of Cramer’s hedge fund has written that Cramer often fed tips to the Money Honey, trading ahead of her stories, and it is rumored that she recruited him to CNBC.)
And then there is David Rocker, the short-selling hedge fund manager believed to be scheming, along with Cramer and Herb, with Gradient Analytics, the financial research shop under SEC investigation in 2006.
Cramer says he’s met Rocker only once - apparently while squeezing the grapefruit at some grocery store. But the truth is, Cramer knows Rocker well. Rocker is a former employee of Steinhardt’s hedge fund. He worked there at the same time as the Trading Goddess.
And, until recently, Rocker was the largest outside shareholder in Cramer’s website, TheStreet.com. Cramer sometimes quotes the hedge fund manager on his television show, and once interviewed him live. Rocker is also a regular writer for TheStreet.com, where he bashes stocks that Cramer subsequently also bashes in multiple stories on both the website and CNBC.
In February 2006, the SEC is investigating Gradient Analytics for disseminating false information about public companies. The agency has affidavits from former employees who say that Gradient’s "independent research" is produced by recent University of Arizona graduates who know little to nothing about finance and essentially take dictation from hedge fund managers, including David Rocker.
One of these employees says that Herb conspired with Rocker to hold his negative stories (premised on Gradient’s false information) until Rocker could establish short positions. This is called front-running - a jailable offense. It is reasonable to suspect that Rocker had similar relationships with TheStreet.com (of which he has owned a substantial portion) and other media.
Not long before Cramer announced his SEC subpoenas, Rocker sold all of his shares in TheStreet.com. Cramer sold around $2 million of his own shares. If Cramer knew about the SEC investigation before he sold his shares, which was almost certainly the case, he was trading on insider information - another jailable offense.
But Cramer don’t know nothin’ about nothin’. And Herb thinks the SEC investigation is an outrage. So Herb and Cramer have commandeered CNBC. They are live on CNBC. Herb has jabbered something about a conspiracy - a conspiracy to get Herb.
And now Cramer is going to show us something.
He’s pulled out a big, red magic marker. Veins are popping, rope-like, from his bald cranium. And he’s snarling. Cramer is actually snarling while he uses the big red magic marker to scribble something on a piece of paper.
He holds the paper up to the camera.
It’s...it’s his government subpoena...Cramer has vandalized his government subpoena! On live TV... in big red letters...
It says, "BULL!"
Jim Cramer is a crook. Wall Street is full of crooks. The next time you see CNBC, keep that in mind. They are not reporting. They are trying to sell you something and, quite possibly, trying to manipulate the market.
Now, one last bit about how this all relates to the financial crisis. The SEC is investigating whether abusive and illegal naked short selling brought down Bear Stearnes and Lehman as well as many other companies.
SEC Chairman Christopher Cox, 55, told the Senate Banking Committee yesterday the agency is investigating whether illegal trading contributed to the collapse of Bear Stearns in March and the 75 percent drop in the market value of Lehman Brothers this year. The probe focuses on traders who seek to profit by intentionally spreading false information about the New York- based firms.
In the Jon Stewart video, you can see Cramer talking up Bear Stearns. That doesn't sound like he or one of his hedge fund buddies going short. But remeber, naked short sellers will often try to pump a stock before they trash it to create a wider spread and, consequently, more profit.
But that said, there is some evidence Cramer changed his tune after that SEC subpoena. After mocking people who complained about naked short sellers, he eventually joined the call for reform. Always covering his ass.
Watch Bloomberg's report, which was inspired by the work of Deep Capture, on Naked Short Selling here.