What is infuriating to many people is the SEC’s response to being called out by Ackerman.  They deflect, diminish, and claim executive privilege. Their response makes perfect sense when one understands the SEC is in bed with those who are gaming the system.  What’s also upsetting is this is a rerun.  The Senate met exactly one year ago to talk about the same issues! Last year GTM published two pieces from SEC whistleblower Garry Aguirre:

How Manipulators Game the Market

Our Engineered Meltdown: SEC Evidence

After having watched this video consider the following.  There is evidence of foreknowledge the crisis management team knew a crash was coming and allowed it to happen.  Gary Aguirre was fired from the SEC (right after a promotion) while investigating John Mack, just prior to his CEO appointment at Morgan Stanley.  This is an excerpt from one of his letters to the Senate.

Gary Aguirre memo to Senate Banking Feb. 13, 2008

Courtesy of: InvestigatetheSEC.com:

Re: Hearing on the of State of the United States Economy and Financial Markets

Dear Chairman Dodd and Ranking Member Shelby:

As the current credit crisis unfolds, investors and the public must rely upon your Committee to uncover its causes and scope. Your hearing on Thursday, The State of the United States Economy and Financial Markets, offers an opportunity to question those regulators who are responsible for protecting the capital markets from this evolving crisis. I respectfully submit there are two key questions that penetrate to the core ofthis crisis:

1) Why did counterparty discipline fail?

2) Why did the SEC stop an investigation three years ago that could have averted the subprime crisis?

I will try to put these questions into sharper focus with the context below.

Where is the SEC?

Over the past two months, the Wall Street journal, the New York Times, Reuters, CNBC and Forbes have all asked a single question: where was the SEC on subprime debt? Significantly, three years ago, the SEC was conducting an investigation that could have averted the subprime crisis. The investigation focused on Bear Stearns’ evaluation of subprime debt, the core issue in the current crisis. The investigation reached a point where Bear Stearns was told it would be charged. Then, for no known reason, the investigation was switched off. A recent Wall Street Journal article suggests that the effective prosecution of the Bear Steams case might have averted the subprime crises.

The Bear Steams investigation is stunningly similar to the SEC investigation of Pequot Capital Management which I headed. Like Bear Steams, the Pequot investigation appeared to be advancing towards a filing. Like Bear Steams, senior SEC management decided to halt the investigation. Like Bear Steams, the SEC was later forced to focus on the underlying abuse, but only after that abuse grabbed media attention. In Bear Steams, the underlying abuse was overvalued subprime debt. In Pequot, the underlying abuse was widespread insider trading by hedge funds.

We know why the Pequot investigation was stopped. According to a joint report by the Senate Judiciary and Finance Committees, a major investment bank, Morgan Stanley, retained an influential attorney who intervened at the highest level of the Division of Enforcement to stop the investigation. The two Senate committees concluded that senior SEC officials gave preferential treatment to a member of Wall Street’s elite and then fired the lead investigator (me) when he questioned that decision. None of the senior SEC officials who derailed the Pequot investigation were ever disciplined. Was the Bear Steams investigation stopped in a similar way? Did another influential attorney, hired by Bear Steams, place a call to a high-level official at the SEC?

Your Committee has oversight jurisdiction of the SEC. The SEC’s mission is to protect the capital markets and investors. It had a chance to protect the capital markets from the current subprime crisis three years ago, when it was investigating whether Bear Steams overvalued subprime debt. Why did the SEC call a halt to the Bear Steams investigation? Who made that decision?

Sincerely,

Gary J. Aguirre

Here is evidence of foreknowledge the crisis management team knew a crash was coming and allowed it to happen. This is from Gary Aguirre (SEC whistleblower see story) who was fired for investigating John Mack prior to his CEO appointment at Morgan Stanley.

Gary Aguirre memo to Senate Banking Feb. 13, 2008

Courtesy of: InvestigatetheSEC.com:

GARY J. AGUIRRE
By Facsimile or Electronic Mail

February 13,2008

Senator Christopher Dodd
Chairman
United States Senate Committee on
Banking, Housing and urban Affairs
728 Hart Senate Office Building
Washington, D.C. 20510

Senator Richard C. Shelby
Ranking Member
United States Senate Committee on
Banking, Housing and urban Affairs
110 Hart Senate Office Building
Washington, DC 20510

Re: Hearing on the of State of the United States Economy and Financial Markets

Dear Chairman Dodd and Ranking Member Shelby:

As the current credit crisis unfolds, investors and the public must rely upon your Committee to uncover its causes and scope. Your hearing on Thursday, The State of the United States Economy and Financial Markets, offers an opportunity to question those regulators who are responsible for protecting the capital markets from this evolving crisis. I respectfully submit there are two key questions that penetrate to the core ofthis crisis:

1) Why did counterparty discipline fail?

2) Why did the SEC stop an investigation three years ago that could have averted the subprime crisis?

I will try to put these questions into sharper focus with the context below.

In essence, the nation has two capital markets: one market is semi-transparent and semiregulated; the other market is opaque and unregulated. The semi transparent market appears on balance sheets. It is subject to SEC regulations requiring disclosure. It includes investment banks and public companies that regularly file SEC forms disclosing their financial operations.

The opaque market has its own players and its own playing field. The players are hedge funds-also unregulated and opaque-and the proprietary desks of investments banks. As investment banks own more and more hedge funds, their players also become unregulated and opaque. The playing field is the over-the-counter derivatives and instruments, such as subprime debt, which are off the balance sheets.

The opaque market is experiencing geometric growth. The notional value of the derivative market has increased fivefold since 2003, from around $100 trillion to over $500 trillion. Likewise, hedge funds are having the same geometric growth in assets under management and in sheer numbers. The SEC predicts the assets under managements by hedge funds will grow from $2 trillion to $6 trillion by 2015. Hedge funds currently dominate the trading markets around the world-with only $2 trillion in assets. It is hard to envision the extent to which they will control the markets when their assets grow to $6 trillion, all operating in the shadows.

Hedge funds love to play with the most dangerous forms of derivatives-credit default swaps (CDS). There are now $42 trillion in CDS. These guarantees differ little from gambling. The potential rewards for insider trading are nearly unlimited, as is the negative impact on the capital markets.

After the Great Crash, Congress enacted legislation designed to make our markets transparent. The same legislation created the Securities and Exchange Commission. As money flows from the regulated market to the unregulated market, we are now recreating the conditions that existed immediately before the Great Crash.

The investment banks and hedge funds have come up with a new principle for protecting the capital markets. It is called counterparty discipline. Translated, it means: “Trust us.” The term is tossed around as if it were natural law in the financial markets, much like gravity in the physical world. In reality, counterparty discipline is a slogan, a myth, which has been sold to regulators by investment banks and hedge funds so they can operate in the shadows without regulation.

We hear about counterparty discipline during Congressional hearings from those who wish the opaque, unregulated markets to grow. During financial crises, the same folks talk less about “counterparty discipline.” Indeed, we are only told that it “eroded” without explanation why.

In fact, the theory of counterparty discipline reverses reality. When the markets are moving upward, optimism is high. It is a cliche, but nevertheless true, that upward trading markets are driven by greed. All of our major investment banks, with the possible exception of Goldman Sachs, failed to detect that subprime debt was a time bomb. Why did counterparty discipline fail the investment banks in their moment of need? I respectfully submit this question should be posed to the three regulators who are testifying on Thursday.

Over the past two months, the Wall Street journal, the New York Times, Reuters, CNBC and Forbes have all asked a single question: where was the SEC on subprime debt? Significantly, three years ago, the SEC was conducting an investigation that could have averted the subprime crisis. The investigation focused on Bear Stearns’ evaluation of subprime debt, the core issue in the current crisis. The investigation reached a point where Bear Stearns was told it would be charged. Then, for no known reason, the investigation was switched off. A recent Wall Street Journal article suggests that the effective prosecution of the Bear Steams case might have averted the subprime crises.

The Bear Steams investigation is stunningly similar to the SEC investigation of Pequot Capital Management which I headed. Like Bear Steams, the Pequot investigation appeared to be advancing towards a filing. Like Bear Steams, senior SEC management decided to halt the investigation. Like Bear Steams, the SEC was later forced to focus on the underlying abuse, but only after that abuse grabbed media attention. In Bear Steams, the underlying abuse was overvalued subprime debt. In Pequot, the underlying abuse was widespread insider trading by hedge funds.

We know why the Pequot investigation was stopped. According to a joint report by the Senate Judiciary and Finance Committees, a major investment bank, Morgan Stanley, retained an influential attorney who intervened at the highest level of the Division of Enforcement to stop the investigation. The two Senate committees concluded that senior SEC officials gave preferential treatment to a member of Wall Street’s elite and then fired the lead investigator (me) when he questioned that decision. None of the senior SEC officials who derailed the Pequot investigation were ever disciplined. Was the Bear Steams investigation stopped in a similar way? Did another influential attorney, hired by Bear Steams, place a call to a high-level official at the SEC?

Your Committee has oversight jurisdiction of the SEC. The SEC’s mission is to protect the capital markets and investors. It had a chance to protect the capital markets from the current subprime crisis three years ago, when it was investigating whether Bear Steams overvalued subprime debt. Why did the SEC call a halt to the Bear Steams investigation? Who made that decision?

Sincerely,

Gary J. Aguirre

CC: Members of the U.S. Senate Committee on Banking, Housing and urban Affairs.

1 Michael Siconolfi, Did Authorities Miss a Chance To Ease Crunch?–SEC, Spitzer Probed
Bear CDO Pricing in ’05, Before Backing Away, Wall S1.J., Dec. 10, 2007, at C1.
2 Id.; Gretchen Morgenson, 0 Wise Bank, What Do We Do? (No Fibbing Now), N. Y. times,
January 27, 2008, at 1; Karey Wutkowski, SEC Chief Awaits Final Senate Report on Pequot,
Reuters News, February 9, 2007; http://www.cnbc.com/id/22706231/site/14081545/; and Liz
Moyer, Credit Crisis: Where Was The SEC? Forbes.com, Feb. 6,2008. Available at
http://www.forbes.com/2008/02/05/ sec-cmos-banking-biz-wall-cx 1m 0206sec.html.
3 Michael Siconolfi, Did Authorities Miss a Chance To Ease Crunch?–SEC, Spitzer Probed
Bear CDO Pricing in ’05, Before Backing Away, Wall S1.J., Dec. 10,2007, at Cl.
4Id.
5 Senate Report No. 110-28 (2007), at 684 Available at
http://finance.senate.gov/sitepages/leg/LEG%202007 /Leg%20 110%20080307%20SEC.pdf.

Okay, not exactly shot, but they’ve had it with the illegal games that rob them of a peaceful retirement. The laws are already there, except for some glaring problems. One is the SEC does not have a mechanism to enforce the law! The practice is much harder and less profitable in Canada and the EU. Also, there is a theory naked shorting is allowed to exist in order for privileged groups to destroy unwanted companies and/or their CEOs. Overstock.com comes to mind. More on that later! The following is from Harris Interactive:

How Good Is This Survey

A recent survey commissioned by Working Americans for an Open Economy, conducted online by Harris Interactive®, polled 1,243 investors nationwide.

In theory, with probability samples of this size, one could say with 95 percent certainty that the overall results have a sampling error of plus or minus 3 percentage points of what they would be if the entire U.S. adult population had been polled with complete accuracy.

Worth Voting For

We found 38% of investors said they would be more inclined to vote for a congressional candidate who addresses the issue of naked shorting.

Among investors aged 55 or older, fully one-half (50%) say they would be more inclined to vote for such a candidate.

Give Them Real Penalties!

When it comes to specific actions that could be taken against those found guilty of naked shorting, vast majorities of investors are behind every alternative tested:

* Requiring the federal government to publish the identity of brokerages and individuals found guilty of naked shorting (79%)

* Allowing individuals, investors, pension funds, and small companies financially damaged by naked shorting to sue to recover their financiallosses (75%)

* Revoking the securities licenses of those found guilty of committing naked shorting (75%)

When a stock is naked shorted, there is no limit on the downward pressure a short-seller can apply to that stock and some companies can be put out of business by this practice. Naked short sellers sell and profit from something they don’t own or haven’t borrowed. Naked shorting is illegal.

Sources:

Naked Shorting: Majority of Investors Say Penalties Should Be as or More Severe Than for Fraud and Counterfeiting

www.buyins.net

How to Rig Shareholder Meetings

Is it wise to buy and hold corporate stock long term? Here is an example of how the system has changed. This is evidence to the illusion of corporate democracy.

The following story was reported by Bloomberg. In 2005 the Securities Transfer Assoc. audited 341 NYSE listed companies that had corporate contests. It was looking to see how naked short selling, which creates counterfeit shares called failures to deliver, influence fair voting practices for shareholders. In all 341 cases they found more votes cast than shares registered. Those ballots were stuffed full of FTDs, and the outcome of the votes were manipulated by firms holding fake shares–in all 341 cases!

This is illegal hedge fund activity sanctioned by the SEC. They fail to recognize any hedge fund fraud or manipulation against other market participants from 1979 until 2004. Recently most of the enforcement action has been PIPE cases, more on that later.

Using fake FTD shares effectively gives hedge funds a +5% stock owner interest without the requirement of disclosure. This is a crime against the retail investor on a mass scale. There have been 1,000 companies pushed over the edge in the last 10 years from these tactics.

During this time the SEC said FTDs did not exist on a large scale. They stated people who complain about naked shorting are paranoid investors who simply lost money. When Reg Sho became law the existing FTDs floating in the system were grandfathered. This was due to the SEC’s concern about “creating volatility where there were large pre-existing open positions.” The effect was to shield the illegal behavior of the firms creating FTDs. The Columbia Journalism Review discovered this and worked for six months to publish an expose. They were immediately placed under extreme pressure by Wall Street firms. Eventually one night, while in a bookstore, the author was approached and told his 4-year-old would be killed if the story ran. That was the end of their investigation and the story was killed.

Who Runs the SEC?

Much of the following information is from Gary Aguirre’s Senate testimony. He is a former SEC investigator who was fired while investigating an insider trading scheme that pointed to a US official of the “highest level.” He became a whistleblower and we can now glimpse inside the Wall Street collusion machine.

Four of the SEC’s top seven officials quit within two weeks of each other after Aguirre’s testimony. This fact was never reported in the financial press.

Prior to this scandal The Nation published a web only story about President Bush’s insider trading of Harken Energy stock:

“Bruce Hiler, the associate director of the SEC’s enforcement division, who wrote a letter to Bush’s attorney saying the investigation was being terminated, now represents former Enron president Jeff Skilling in matters before the government. Richard Breeden, the SEC chairman at the time, was deputy counsel to Bush’s father when he was Vice President and was appointed SEC chairman when H.W. Bush became President. James Doty, the SEC’s general counsel at the time, helped W. Bush negotiate the contract to buy the Texas Rangers. Bush used the proceeds of his sale of Harken stock in 1990 to pay off a loan he took out for a minority stake in the baseball team. Doty has said that he recused himself from the SEC’s two-year probe into Bush’s sale of Harken stock.”

How Hedge Funds Leverage Power

So what are some of the tactics hedge funds will threaten to kill to protect? Let’s look at the power of their leverage in the market. Mutual funds collectively manage $9.2 trillion. The bond and equity markets are more than $40 trillion. Globally, $90 trillion of financial assets are under management.

There are roughly 400 key hedge funds linked to illegal activity. In total 11,500 hedge funds have $1.2 trillion under management. Overall, it’s not a big chunk of change. However, that money has a very high cycle rate. Hedge funds execute up to 50% of the daily trading on the $21 trillion New York Stock Exchange. They also do 70% of the trading in the US distressed debt market, US exchange-traded fund market, and the convertible bond market.

Who also profits from hedge funds? The people they pay above market commissions to. Investment banks collected $15 billion either directly from hedge funds or because of them, producing $6 billion in profits.

The Economist stated, “At a time when mutual and pension funds have become ever more reluctant to pay the traditional five cents a share for trades, hedge funds pay up to four times that amount if in the process they can receive good ideas or particularly effective execution.”

The SEC projects the hedge fund asset base will increase from $1.2 trillion to $6 trillion by 2015. Aguirre states, “For individual firms, hedge funds were critical to last year’s [2005] performance. They produced one-quarter of Goldman Sachs’s profits, estimates Guy Moszkowski of Merrill Lynch, and only a slightly smaller slug of Morgan Stanley’s returns.”

How to Time the Markets: You Cheat Is How!

Most people are familiar with insider trading, and how unfair it is to retail investors. “This species of fraud has an easier target and a far greater potential to disrupt the capital markets. Its victims have no connection with the hedge fund. They are random victims. Much like the victims of a sniper, they never knew what hit them,” says Aguirre.

The United Kingdom’s Financial Services Authority states “insider trading is now institutionalized” because of the flow of tips from investment banks to hedge funds. The FSA “had uncovered signs of insider dealing at almost a third of British M&A deals, with possible culprits including traders at hedge funds and investment banks.”

A great example is the recent failure of Bear Sterns. The Tuesday prior to BSC’s collapse of Monday March 17^th, the stock was trading at $65. A single entity purchased 30,000 put options at the $30 strike. A total of 55,000 put options traded at that strike for an average cost of $0.15/contract or $825,000. Contracts did not exist under $25 at that time.

These put options expired on March 20, so that left only seven trading days for a catalytic event to occur. By Friday that week BSC stock closed at $30. Then on Monday it opened at $3.18/share. The 55,000 March 30 puts cost $825,000 and netted a profit of $137.5 million in less than a week.

What many people don’t know is the massive daily collusion between hedge funds, banks, and brokers. Many of them have a relationship that allows for late trading activity.

The SEC found that 25% of brokerage companies allow late trading. Late trading occurs where a hedge fund puts in a trade after the 4 p.m. cutoff, but gets the pre-4 p.m. price. Aguirre states, “Some of those brokers who helped hedge funds pilfer mutual fund accounts were the brokerage arms of large investment banks like Bear Stearns, Merrill Lynch, and CIBC.”

According to Time Magazine, “Academics estimate that late trading costs investors $400 million a year and market timing $4 billion to $5 billion.” According to The Wall Street Journal, “[H]edge funds…reaped the lion’s share of gains from the [unlawful] trading.” In March 2005, the SEC was investigating 400 hedge funds for their participation in this scam.

Hedge funds could not skim mutual fund accounts without help. “Thirty percent of the brokerage firms the SEC surveyed helped clients mask market-timing trades, either by breaking up big orders or creating special accounts to hide identities. And 70% of the brokers said they were aware that some of their customers were timing the market.”

The PIPE Case
Over the past year, the SEC has brought three cases for a new type of hedge fund fraud that victimizes other market participants. All three involved a very specific form of insider trading. The facts follow the same pattern. A public company decides to raise money by making a private placement of its stock with the intent to register the stock a few months later. This is commonly known as a private investment in public equity or PIPE. A hedge fund agrees to purchase stock through the placement. The hedge fund also knows that the public announcement of the PIPE will depress the market price of the stock. Knowing that, the hedge fund shorts the company’s stock and covers it with the private placement for a quick and sure profit. In executing the short, the hedge fund acted on material nonpublic information and violated the securities laws.

Resources:

Corporate Voting Charade

By Bob Drummond

http://www.rgm.com/articles/FalseProxies.pdf

Gary Aguirre PBS Interview:

http://www.pbs.org/now/shows/315/whistleblowers.html

Gary Aguirre former SEC investigator. This is his whistleblower testimony:

http://judiciary.senate.gov/testimony.cfm?id=1972&wit_id=5485

If you haven’t seen Overstock’s CEO Dr. Byrne give this presentation it’s fantastic.

http://www.deepcapturethemovie.com/

George Bush and Harken Energy

http://www.thenation.com/doc/20020722/leopold20020718