This is a collection of some recent illegal trading tactics. I quoted when able. I didn’t expand on a theory, but circumstantial evidence exists of White House involvement with an insider trade on Bear Sterns. The man who Gary Aguirre was fired for investigating is John Mack, CEO of Morgan Stanley, and he’s a big friend/supporter of Bush. Enjoy!
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 17th, 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.
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