Funny Bunny
Looking for something a little lighter?
Catch Bob's more irreverent and amusing pieces in his Funny Bunny Blog.

Lies, Invention, Journalists, and the SEC

Location: Blogs Bob O'Brien's Sanity Check Blog    
Posted by:   bobo 8/21/2006 1:22 PM

Read this article. It's really priceless.

The subject matter, Mark Cuban's ill-conceived stock bashing website that's nothing more than a foil to slam his short positions, is the ostensible topic. I haven't even bothered commenting on the site, as it's pretty obvious to most upright bipeds what is being done there.

But this article is astounding - I literally thought that the guy who emailed me the link was making it up.

Check this out:

"Mark Cuban's New Best Friend: The person who should probably be most excited about the criticism being directed at Mark Cuban is Patrick Byrne, the chief executive officer of Overstock.com (Nasdaq: OSTK - News).

Cuban, by promoting Sharesleuth.com as a journalistic endeavor, has given Byrne more ammunition for his misguided war against the financial media. I imagine Byrne, if asked, could point to Sharesleuth.com as an example of how "miscreants" can wreak havoc on the public markets, and in doing so, throw the words "responsible journalism" out.

This is the perception versus reality problem. If Carey wants to continue to hold himself out as a journalist, it has a negative impact on other financial journalists, and opens doors for bullies like Byrne to try to squelch the media's ability to do its job. Carey and Cuban are essentially telling the public that Sharesleuth.com is operating under the same standards at The New York Times and Wall Street Journal, but no one I know at those newspapers is tipping off their publishers about potentially profitable stock trades.

Perhaps it's just a matter of semantics - after all, "journalism" is a rather ambiguous term in this day and age. The financial journalists I've talked to about the matter all have a lot of respect for Carey, and more than a few are envious of the fact that he was able to find a backer to do the type of investigative work that journalists crave and that is missing from too many business publications (I'm no different, and after Sharesleuth.com was announced, I sent a Carey a note saying so).

Nonetheless, not one journalist I've spoken to about Sharesleuth.com believes that Carey is acting in the role of a journalist, and it's for no other reason than the fact that he is providing pre-publication information to someone who is trading on it.

"You just don't do that," one well-known financial journalist told me. "I can't imagine working on an investigative story and telling people what I'm about to publish, and that they may want to trade a particular stock. It's unfathomable for a journalist."

Exactly, but it's not unfathomable for a stock researcher. A stock researcher with a singular client, no less."

Apparently you just don't do that, and he can't imagine doing it, but he can make stuff up about the head of a public corporation, and use it as material for character assassination.

Thank goodness the lines are now well defined in terms of journalistic ethics and outrage.

Here we have a Yahoo-distributed pundit, imagining what the CEO of a company would say, think or do, and then slamming him for this straw man invention.

It also unfairly characterizes Byrne's battle against illegal market manipulation, that could well pose a systemic risk to the markets, as a war on journalists.

I imagine that if the author had been handed an ATM card, complete with PIN number, that draws from a BVI or Costa Rican account, and had been instructed to bash Byrne, that would be the exact way he could do it while maintaining a veneer of deniability.

I love imagining! Imagine if the financial press actually reported on Wall Street and the SEC's conduct as recently exposed. Wouldn't that be a hoot?

 Isn't it fun to be a journalist? My only question is how much lower can some examples of the species sink?

Never mind. I'm quite sure we will see over the coming weeks.

----------------

The SEC has been at it again, torturing the truth with a zeal that any inquisitor would have been proud of.

Specifically, in their effort to convince the world that naked short selling isn't a big deal, and that their horrific failure in regulatory inaction, "Reg SHO," in some way "worked," is mangling the numbers every which way they can to squeeze out a defensible statement.

Unfortunately, as with their feeble efforts to protect investors, they fail miserably.

Take this nugget from their site.

In it, more specious claims are made with a straight face than in the average wrestling interview.

Dave Patch has a complete debunking of the claims now live at InvestigatetheSEC.com, but here's the capsule summary:

The SEC, mostly composed of attorneys, is massaging and distorting the data to support their provably false contention that Reg SHO has resulted in a material decrease in FTDs, and is thus "working." It is doing so in a flagrant and easily exposed manner, and speaks again to a regulator run amok, out of control, whose imperative is to deceive rather than to protect the public.

Don't take my word for it. Read Dave's piece. He breaks it down, and shows the lie for what it is.

Sadly, that's entirely consistent with the deceptive practices one would expect from a regulator which has just been exposed as colluding with market marauders who defrauded investors in the most blatant manner possible, as discussed in the last 3 blogs.

Where do we go from here? Congress doesn't seem to have a problem with their creation being shown to be a fraudulent enterprise that aids and abets Wall Street crooks. The media seems to greet every example of deceit and trickery from our market watchdog with stony silence, preferring to pretend nothing is happening.

How bad does this have to be shown to be before a special prosecutor is put into the mix, and the shiftiness at the SEC is halted?

Or have we become a nation so inured to the idea of the rule of law, so apathetic to flagrant abuse and crookery, that no amount of malfeasance and ugliness raises our pulses and causes outcry and indignation?

What kind of country does that leave for our kids? What kind of retirements are we headed for? If we don't deserve better than an apparatus that lies, cheats and steals from us, do we even care when it is exposed as a system doing exactly that? Judging by the spectacular silence from the mainstream media, the answer is, screw America, just gimme my vig, and I'll tell whatever story you want.

I have never seen a lower moment in American journalism, nor in the prospects for the system to ever be righted. When the pretense of fairness is discarded in favor of an acknowledgment of blatant, endemic corruption, the rot is so deep that the patient has no chance.

Bring on the special prosecutor. How much more of this do we have to see before we say, "Enough!?"

Copyright ©2006 Bob O'Brien
Permalink  |  Trackback
Comments (24)
Re: Lies, Invention, Journalists, and the SEC By bobo on 8/21/2006 9:19 PM
On another forum a poster basically made the claim that Global Links is a crap company that was busy dilluting the investors, so therefore we shouldn't much care.

Here's my reply to the "blame the victim" approach to ethics - I deliberately use a Jack the Ripper argument so as to show how silly the "bad victim" approach is:

"Except that the issue isn't whether the company is a bad or good company, and whether they dumped shares in late 2005 or not. The question is whether, in the period described (Feb - April, 2005, and the few months after), the SEC allowed the INVESTORS in the company to be defrauded by Wall Street by diluting their actual ownership, via naked short selling, by a factor of 350, and then covered it up, and continued to do so to this day? All the while they were telling the world that exactly that kind of massive fraud against investors by naked short selling wasn't occurring.

That's the only question. Whether the company is a bad, bad company is a different question. But you have to answer the question asked, not simply introduce a red herring question you would rather have asked.

Imagine this - a prostitute, a clearly bad woman of ill-repute, is butchered by a serial killer, and the authorities cover it up, assuring the public that there is no prostitute-killing serial killer on the prowl. When it is exposed that they lied, and allowed women to be butchered, all the while assuring the public that everything was fine, is the response, "Hey, they were hookers, and that's what can happen when you are loose moral character, so no big deal"?

Jack the Ripper would be delighted.

It is really simple, and the poster here ignores the obvious, and tries to convert the issue into a different issue. My issue, "Is it OK for the regulator chartered with investor protection, to allow a massive fraud against investors in companies targeted by Wall Street miscreants, and then engage in a cover-up, all the while assuring us that their rules were working?" is different than your poster's, which is. "The company is a POS that was diluting their shareholders, so what's the big deal if Wall Street engaged in a separate fraud, and the SEC covered it up?"

Again, by discussing dilution that occurred AFTER the NSS took place and the investors were defrauded, the poster attempts to make time fungible, and distort who was defrauded by whom. It is classical rhetorical and logical dishonesty. "The company is bad, thus who cares about the rule of law?"

Feel free to post this for your audience. They know better, or they should.

Tomorrow, Dave Patch will release further evidence that the SEC is lying through their teeth about the effectiveness of Reg SHO, too. and he proves it.

So how much lying and fraud aiding-and-abetting are you willing to tolerate from your top cop on the beat? Because there appears to be a lot."
Re: Lies, Invention, Journalists, and the SEC By davidn on 8/21/2006 10:18 PM
Sometimes I buy a lottery ticket. It is probably going to be worth nothing, but there is a chance it could be worth a lot.

It's like that when I invest in a small company like global links. They probably will be forced to dilute my investment to nothing and their business might fail. On the other hand, they might succeed and I might make hundreds of times on my money.

In the case of the lottery ticket, I consider the odds. I would be really peeved if more tickets were printed than what was claimed. What if the odds were ten times worse because my ticket had been diluted by extra tickets?

In the case of the small company, it is even worse. The thief not only diluted me, they sold me an IOU that isn't even a real share. At least the extra lottery tickets were real. In the case of an IOU, I have no real claim to dividends or voting rights.

Bobo is right. The pedigree of the company is an irrelevant red herring. The investor used real money to buy a real share based on SEC filings that disclose the fully diluted shares outstanding.

Anyone that adds to that outstanding with counterfeit shares is committing fraud, which is a criminal, arrestable offense.

This criminal offense is under the jurisdiction of the DOJ or possibly the secret service, not the SEC.
Re: Lies, Invention, Journalists, and the SEC By davidn on 8/21/2006 10:43 PM
I pulled the short data on GLLC (Global Links) as of

Only 6,851 shares are short. 785,839 trade each day, so the entire short position can be covered in a few minutes of trading.

Orlando Cortes, the arrestable human being that prepared this list (212) 858-5143; e-mail: orlando.cortes@nasd.com wouldn't lie, so it is obvious that the freedom of information act data must be wrong or else ten million failed shares have now been covered.

Orlando, the guy that gave us pages of companies that were short less than ten shares would never lie to us, would he? Mr. Cortes, say it isn't so!

Orlando will be regurgitating his next OTC short list this Friday.
Re: Lies, Invention, Journalists, and the SEC By Patchie on 8/22/2006 3:02 AM
Bob,

As requested, here is the link to that article. I also put it up as a blog for comments...

http://www.investigatethesec.com/20060822.htm

The SEC appears to be listening and appears to be scrambling. Both are good things.
Re: Lies, Invention, Journalists, and the SEC By Patchie on 8/22/2006 4:42 AM
davidn,

The FOIA data is Failed to Deliver not failed shorts. As I have outlined before, these fails are "Long Fails" and are not being reported as shorts. Global Links remains on SHO with a share structure of 15 Million equating to a MINIMUM FTD level of 75,000. That is 10 tims the reported short position.

The data is only as good as what comprises it. You must also consider that reported short positions are as reported by member firms. An offshore short is not a reported short
Re: Lies, Invention, Journalists, and the SEC By CUBANSHOULDSHUTUP on 8/22/2006 6:05 AM
THE GUYS A JOKE HE ACTS LIKE HE KNOWS THE MARKET..HE SHOULD GET DOWN ON HIS KNEES AND THANK GOD SOMEONE WAS DUMB ENOUGH TO PAY BILLIONS FOR A COMPNY THAT WOULD HAVE GONE BANKRUPT IF NAKED SHORTERS POUNDED HIS PIECE OF CRAP COMPANY...I WAS SO GLAD TO SEE HIM LOSE IN THE FINALS..BAD KHARMA WILL GET YOU EVERYTIME...HES A AVERAGE INVESTOR AT BEST TOUTING HIS BS SHORTS THAT ARE ILLEGAL AND THE GUY SHOULD CRAWL BACK INTO HIS HOLE WHERE HE BELONGS WITH THE RATS OF THE WORLD..HOPE CUBAN STOOD OUTSIDE IN THE HEAT A FEW WEEKS AGO BECAUSE WHERE HES GOING TO SPEND ETERNITY WITH THE SEC CROOKS AND HIS BUDDIES IS ALOT HOTTER THAN 106 DEGREES...HES A LOW LIFE CRYBABY WHO SHOULD BEG TO GO TO JAIL TO ATONE FOR HIS SINS NOW RATHER THAN LATER WHEN HE WILL WISH HE HAD/...SO SOMEONE TELL THIS JERK CRAWL BACK INTO THE GROUND WITH THE SNAKES OF THE EARTH HES A JO
Re: Lies, Invention, Journalists, and the SEC By gregcable2002 on 8/22/2006 8:16 AM
Cuban could end up in jail over his new site.eom
Re: Lies, Invention, Journalists, and the SEC By the fix is in... globally on 8/22/2006 8:16 AM
from silverseek website...
First Nickel, Then Silver?
By: Theodore Butler -- Posted 21 August, 2006
This past week, the investment world witnessed an event that has only occurred rarely in the past. I am referring to the extraordinary developments in the nickel market on the London Metals Exchange (LME), the largest base metals exchange in the world. Due to an unprecedented scarcity of metal, the LME was forced to revise the delivery terms of its nickel contracts. In return for allowing short sellers to delay delivery of metal, a daily penalty fee of around 1% of the contract value was payable by the shorts to long holders.

Here are some excerpts from the LME’s press release of August 16 –
"Those with short positions in nickel falling prompt on Friday 18 August 2006, and on subsequent prompt dates until further notice, who are unable to effect physical delivery an/or unable to borrow metal at a backwardation of no more than $300.00 per tonne per day, shall be able to defer delivery for a day at a penalty of $300.00 per tonne. Those with long positions for prompt on those days who are subject to deferred delivery shall be entitled to compensation of $300.00 per tonne per day

Commenting on the announcement, Simon Heale, LME Chief Executive said:
"Nickel stocks are at historically low levels and we now have a genuine material shortage. Our first priority is to ensure that trading remains orderly and to prevent the risk of settlement defaults."
Although there has been widespread reporting of this event in all the popular media and news services, I have been thunderstruck by how mostly all of the reports have danced around the key fact at the heart of this matter. That key fact is that the LME just declared that its nickel contract has gone into default.

While Mr. Heale states that the action by the exchange is designed to prevent default, the action taken is nothing but a declaration of default, rendering his statement as absurd. Default is a simple word. Any time you unilaterally violate or negate the terms and conditions of any legal contract, that contract is in default. Period.
Moreover, a simple analysis of the situation reveals that the LME is aligning itself with the interests of the naked shorts in nickel, as common sense should tell you that no long holder asked the exchange to suspend the delivery obligation of the shorts.
I must say that it is troubling that with such widespread reporting of this event, the most important fact, the delivery default, seemed lost as a message. But make no mistake; this default is a most serious matter. In fact, as I have written previously, a contract default is the absolute worst event that could befall any exchange. In an instant, a delivery default renders an exchange suspect as an institution. It makes no difference if that exchange has existed for hundreds of years, a delivery default can immediately destroy the strongest reputation. This is the grave risk that the nickel debacle poses to the LME.
The main concern for the nickel market and the LME is that the abrogation of the shorts’ delivery obligation is not the end of problem, even though it may lead to the end of the LME itself. That is because legitimate long contract holders, particularly industrial consumers, have been left in a lurch by the deferral of delivery of actual metal. What do the industrial nickel users now do?

The legitimacy of any exchange or contract is based upon all conditions and obligations being upheld, and not suspended when it is expedient to certain interests. In the case of a futures or forward contract on a physical commodity, the most important conditions and obligations are those which guarantee and mandate how the contract is converted to actual delivery.

Although only a very small percentage of any futures contract normally results in actual delivery of the physical commodity, it is precisely the delivery mechanism that determines the legitimacy of the contract. Take away that delivery mechanism and you take away the legitimacy. Take away the delivery mechanism and all you have left is paper contract with no connection to the commodity involved. This is what has happened to the LME nickel contract – because the exchange has suspended the shorts’ responsibility to deliver actual metal, that contract has become, essentially, worthless to industrial consumers.

The key point here is not that every contract created between a long and a short will result in actual delivery, but that every contract will result in delivery if either party wants it to. Each party to a contract, the long and the short, entered into that contract voluntarily. No one held a gun to anyone’s head, forcing them to buy or sell any contract. It is unfair and illegal that any authority (the LME) intercedes on behalf of either side to override a contract that was entered into voluntarily.

What the LME has done in nickel is relieve the shorts of having to round up actual metal to deliver against their contractual promise to deliver, and unilaterally transferred the obligation to the longs, the industrial user. These industrial consumer longs (and other longs) entered into their nickel contracts voluntarily and legally, with the option of taking delivery. Now they are told, with no warning, they can’t take delivery and must secure metal elsewhere. The shorts don’t have to scramble for material they promised to deliver, the longs have to scramble for material they were legally promised to receive. Nothing could be more unfair.

Furthermore, as long as the shorts’ obligation to deliver nickel is suspended, there is no good reason for an industrial user to buy an LME contract. This is the greatest threat to the LME. And it’s not just deterrence for those buyers who want to take actual delivery. With the delivery mechanism destroyed in nickel, the linkage between the price of real metal and the LME contract is also destroyed. Without the requirement for delivery, the price of nickel on an LME contract and nickel in the real world loses its connection. In this case, the price of LME nickel is merely a figment of anyone’s imagination. What good does it do an industrial consumer to hedge on the LME, if there is no assurance his contract will converge with the price of actual metal on the delivery due date? Without the delivery mechanism, there is no linkage between paper contract and actual metal.

This is the real meaning of the LME’s delivery default. It is also the same thing with the short-side manipulation in COMEX silver. It is a coincidence that this LME nickel disaster has occurred precisely at the same time others and I have been alleging a manipulation in COMEX silver. However, nothing could prove our case more clearly.

A long-side manipulation, evidenced by a concentrated long position and prices higher than would be without the concentrated position, is something the regulators have vast experience in dealing with. While disruptive and illegal, long-side manipulations are usually short in duration and easy to terminate. The concentrated longs, usually speculators, are forced to sell their positions, causing prices to collapse and end the manipulation.

A short-side manipulation, like those in LME nickel and COMEX silver, is evidenced by a concentrated short position and prices lower than would be without the concentrated short position. (The concentrated short position in nickel has been reported in news stories, while the concentrated short position in COMEX silver is reported by the CFTC). The regulators have little or no experience with short side manipulations, and since the concentrated shorts are industry insiders, rather than outside speculators, there is little incentive for the regulators to move against their own.

The real problem with short-side manipulations is that it is very difficult to terminate without great damage because they have a long duration. When a short-side manipulation is terminated, like in LME nickel, it threatens great and lasting disruption to the actual market because the resultant shortage of material causes real hardship with no easy remedy. This is in addition to the damage caused to an exchange or contract involved in such a short-side manipulation, which ends in a delivery default.
Clearly, the UK regulators and LME officials waited too long to attack and resolve the short-side manipulation in nickel. If they had acted responsibly and forced the concentrated shorts to cease their manipulative activities, the delivery default might have been averted. Now it is too late in nickel, as the damage is done. Is it too late for silver?
I think there may still be time for the US regulators to act in silver and avoid a COMEX silver delivery default. But I also have my doubts. That’s because the CFTC and NYMEX/COMEX officials have been dragging their feet on the issue of the concentrated short position. Instead of promptly responding to allegations of manipulation and a looming delivery default, the regulators are stalling. Stalling didn’t benefit the regulators in LME nickel. It only made matters much worse.

In fact, the main, if not only, difference between nickel and silver is that the regulators will never be able to say they were not warned in silver. And if the regulators in silver still do not see how the recent events in LME nickel are directly foretelling what is going to happen in COMEX silver, then they do not deserve to be regulators any longer.
While I will continue to attempt to end the silver manipulation (with your help), it is entirely possible that government regulators and COMEX officials will continue to evade their legal responsibilities and allow the silver manipulation to exist, right up to the inevitable delivery default. That will be tragic, but it will be on their heads.

Fortunately, there is something else that you can do. You can take the debacle in LME nickel as yet another confirmation as what will happen in silver and position yourself accordingly. If there has ever been an exclamation point given to "buy and hold real silver", it has been given to you by the LME actions in nickel. If an exchange that has been in existence for hundreds of years can suddenly terminate delivery obligations in its contracts, how hard do you think it will be for those issuing pool and leveraged accounts in silver to do exactly the same thing? I think anyone holding such accounts needs to have their heads examined.

But the strongest message of the LME default is being sent to the silver industrial consumers of the world, because the biggest potential losers in nickel are the industrial users. If the LME can get away with suspending delivery requirements in nickel, how hard will it be for the COMEX to suspend delivery requirements in silver? Do you think the CFTC will come to your defense? The same CFTC that is stalling on the concentrated short issue in silver? Even more than those investors and speculators dealing in paper contracts, any user who is not stockpiling real silver inventories, in light of what just occurred on the LME, is missing the boat.

I hope the CFTC and the NYMEX does the right thing with this concentrated silver short position and moves against the manipulators. But even if they don’t, there is no good reason for investors and industrial users to not protect themselves and buy real silver. How many wake-up calls are necessary?


Re: Lies, Invention, Journalists, and the SEC By gregcable2002 on 8/22/2006 8:33 AM
The LME is aligning itself with the interest of the NAKED SHORTERS,HUMMMMM,where have we heard something like that before? Great article,but sad,very very sad. SETTLE THE TRADES ON TIME AND WE HAVE NO PROBLEM.
Re: Lies, Invention, Journalists, and the SEC By newspaper on 8/22/2006 1:54 PM
The US markets are trying to buy the foreign exchanges. Nasdaq just tried to buy the London stock exchange. They already own 15% of it. Scary truly scary stuff.
Re: Lies, Invention, Journalists, and the SEC By ranger on 8/22/2006 2:02 PM
The only way to beat them is to join in on the short selling. If everbody piles into all the companies that are shorted and nobody ever buys any stock and only shorts it then it will end the markets and solve the problem. I for one have lost so much money trying to invest in companies that have been shorted into the ground that I am done with it. I am only looking for SHO companies with FTD"s to short. I short the stock with the rest of them and cover every day. Nothing else makes any sense because it is not a crime to take shareholders money. Sorry to be so blunt about it but I buy and sell stocks to make money and the only way to make any money in the markets is to follow the short sellers around and do what they are doing because they are winning.
Re: Lies, Invention, Journalists, and the SEC By newspaper on 8/22/2006 2:05 PM
Bobo, can Mark Cuban a retail investor short an OTCBB stock?
Am i correct in assuming he would need an offshore account to short an OTCBB issue? Is this legal what about taxes?
(OTCBB:XTHN)
Re: Lies, Invention, Journalists, and the SEC By newspaper on 8/22/2006 2:07 PM
Unless I am mistaken we as Americans cannot short OTCBB issues in the US.
Re: Lies, Invention, Journalists, and the SEC By newspaper on 8/22/2006 2:44 PM
Investors cannot legally short a stock unless it is both marginable and borrowed.
OTCBB stocks are not marginable.
Re: Lies, Invention, Journalists, and the SEC By DobbieGillis on 8/22/2006 3:16 PM
Failed Hedge Fund Haunts Celebrities
Investors Sue Those Who Cashed Out Early To Return More Than $100 Million

By IANTHE JEANNE DUGAN
August 22, 2006; Page C1
http://online.wsj.com/article/SB115621127427241839.html

In the annals of hedge-fund collapses, Sylvester Stallone is among lucky investors who walked away unscathed -- or so it seemed.

In 1997, the actor invested $2.5 million in a private investment partnership called Lipper Convertibles. Four years later, with his statements showing the investment had swelled to about $3.8 million, he cashed out. Fellow actor John Cusack also walked away with big gains, as did former New York City Mayor Ed Koch and a trust fund for the children of investor Henry Kravis.

Now, they are all being sued to give money back.

What none realized, according to their lawyers, was that Lipper never made all that money. A portfolio manager had inflated profits by at least 40%, Lipper discovered in 2002. "We want all the money to be put back in the pool, so we can divvy it up equitably among all the partners," says Thomas Dubbs, an attorney representing the federal trustee overseeing Lipper. (The hedge fund is unrelated to Lipper Inc., the mutual-fund data firm, which is part of Reuters Group PLC.)

In lawsuits filed in recent months in New York state court in Manhattan, the trustee, Richard Williamson, charges the investors who got out with "unjust enrichment." He wants them to return more than $100 million, including $1.3 million plus interest from Mr. Stallone alone.

Messrs. Stallone and Cusack, in court documents, say they were unaware of the fraud and didn't harm fellow investors. In an interview, Mr. Koch, who now works as an attorney at a private firm, says he intends to keep his profits, which amount to about $1 million, including interest. "It's just wrong," he says.

The battle highlights a trend emerging from the boom in hedge funds, which now control assets of more than $1 trillion for wealthy investors and institutions. In the wake of some failures, those investors who lost money are chasing those who cashed out. However, there is little precedent in terms of applying this legal argument to failed hedge funds. As a result, it remains to be seen whether the new cases have any success.

A trustee liquidating Bayou Management LLC, a failed Connecticut hedge fund, is attempting to reclaim more than $100 million from investors, including a fund called Sterling Stamos in which the owner of the New York Mets baseball team, Fred Wilpon, has a stake. In a separate matter, a Long Island family is suing several fellow investors in a bogus hedge fund called Sterling Watters. Among defendants: a former official of the Securities and Exchange Commission. (See related article.1)

Those cases, like the Lipper case, are pending in state Supreme Court in Manhattan. Individuals who profited "should be sharing the pain," says Jeff Marwil, the federal trustee in charge of liquidating Bayou. "Our goal is to equalize in a fair and equitable fashion."

Bayou collapsed last summer after two founders revealed they had inflated profits figures and did not have the $450 million investors believed they had in the fund. The founders pleaded guilty to fraud and await sentencing. In February, Bayou filed for protection under Chapter 11 of the U.S. bankruptcy code.

Mr. Marwil has filed several lawsuits in recent months to retrieve money from investors.

Among them is UT Medical Group, a private-practice arm of University of Tennessee Health Science Center, which declined to comment on the lawsuit. Mr. Marwil is still tallying how much money was removed; others familiar with the matter estimate that as much as $250 million could be reclaimed. He says he intends to file several more lawsuits.

Unlike the Lipper cases, Mr. Marwil wants Bayou investors to return more than their profits: He also wants them to give back the money they originally put into the fund. So far, he is concentrating on investors who cashed out less than two years before he brought suit. That is the statute of limitations under bankruptcy law, though under state laws he could ultimately extend further back.

"Every payment made by the hedge fund needs to come back," he says. "We will then determine a payment scheme based on the amount of time the investor was in the fund and the losses in the fund."

Among investors who got out before the meltdown was Sterling Stamos. In early 2005, it withdrew tens of millions of dollars from Bayou, according to people close to the matter. The firm hasn't been sued, but its account has been reviewed by Mr. Marwil. An attorney for Sterling Stamos declined to comment.

The suit alleges that the money was unfairly paid out as part of the scheme by the managers to defraud investors. It is akin to Ponzi schemes, in which newcomers' money is paid to people who want to cash out, in order to create the false impression that the business is financially successful.

Similar issues surrounded Bennett Funding Group, which sought protection under bankruptcy laws in the mid-1990s, after federal securities regulators accused company officials of a scheme to cheat investors. A trustee overseeing the case, former SEC chairman Richard Breeden, liquidated Bennett, then sued thousands of investors who had cashed out. The effort recouped only a fraction of the money.

Charles Gradante, a partner in Hennessee Group, a hedge-fund consultant, is among those lauding the wave of new suits. Those who invested in Bayou on the advice of Hennessee collectively lost an estimated $20 million, he says. Ross Intelisano, a lawyer representing about 20 investors who also collectively claim to have lost $20 million in Bayou, said, "Our clients are very supportive."

The legal grounds are similar in a case filed by a Long Island family that claims to have lost about $7 million in a fund called Sterling Watters. It was launched in 1995 by a former Merrill Lynch broker named Angelo Haligiannis. He reported to investors that he was making annualized returns of 35% to 40%.

Among investors who profited was Peter Derby, who last year left the SEC where he was managing director for operations under former chairman William Donaldson. Mr. Derby had invested $1 million in 2002 and got that back, along with $185,000 in profits, when he redeemed a year later, according to records reviewed by people close to the matter.

Another investor, Jerry Drenis, contends that Mr. Derby and others were essentially paid with money stolen from others, including Mr. Drenis and his family. Mr. Drenis and his relatives collectively lost more than $7 million, he says. They are suing Mr. Derby and two dozen other investors.

"Angelo Haligiannis gave away our money to pay off other investors," says Mr. Drenis, the owner of a heating-oil business. "It's not their money to keep."

Sterling Watters, the Justice Department says, raised more than $25 million by misrepresenting its performance figures through a classic Ponzi scheme. Mr. Haligiannis vanished before his sentencing earlier this year.

Mr. Derby has filed a motion to dismiss the suit. "Even if the allegations are true -- which, of course we'd dispute if the ruling went against us -- there is no viable cause of action in which plaintiffs can recover" money, says Mr. Derby's attorney, Gary Kushner. Among other things, he says, limited partners in a corporation can't sue each other under state law.

Another defendant, Joseph Biasucci, a 68-year-old retired executive of the Teamsters union, says that he can't give back his profits. "I don't have it," he says. "I paid capital-gains taxes, and I spent the rest."

Mr. Biasucci says he found out about Sterling Watters through a lawyer in the mid-1990s and invested $50,000. He says that it ostensibly grew to about $130,000 over 10 years. He dipped in now and then, he says, to pay bills and taxes, coming out a bit ahead. Still, the paper loss was devastating, he says. "This was my retirement money."

In the Lipper case, the fund's namesake, Ken Lipper, made many connections working as a former deputy under Mayor Koch, and as the author of the novel "Wall Street."

Among numerous prominent investors was Mr. Kravis's children's trust, which court documents show made a $2.6 million investment in 1995. In 2001, the trust was paid a profit of $2.8 million.

It wasn't until two years later that Lipper sent the letter to investors saying that it had discovered that the profits had been inflated by more than $300 million. A portfolio manager, Edward Strafaci, pleaded guilty in 2004 to a federal charge of securities fraud and was sentenced to six years in prison.

Given the revised figures, the lawsuit filed last year by Mr. Williamson says, the Kravis trust should have received only $712,346. Thus, it "erroneously" received a $2.17 million windfall that "greatly exceeded the value" of its interests. The Kravis trust has filed a motion to dismiss that suit.

Mr. Cusack's Lipper investment, which totaled $300,000, was made in the mid-1990s, court documents show. In 2000, he was given $537,705, or an alleged overpayment of $166,123 plus $67,025 interest.

In an answer filed last month, a lawyer for Mr. Cusack says that "the damages alleged in the complaint were not caused by the alleged 'excess' payments to Cusack."

Write to Ianthe Jeanne Dugan at ianthe.dugan@wsj.com2

URL for this article:
http://online.wsj.com/article/SB115621127427241839.html
Wake Up and Smell the Coffee By InTheKnow on 8/22/2006 4:27 PM
Newspaper.... It ain't the investor!

IT'S:
1. Market Makes aka MM's
2. Hedge Funds
3. Miscreants that have the tickets for a short/naked shorts marked LONG
4. Foreign miscreants
Re: Lies, Invention, Journalists, and the SEC By newspaper on 8/22/2006 4:37 PM
intheknow,
ahh...
well then how can Cuban short on the OTCBB if he is neither of those?
Re: Lies, Invention, Journalists, and the SEC By InTheKnow on 8/22/2006 4:52 PM
Why ask me? Ask him!
Re: Lies, Invention, Journalists, and the SEC By InTheKnow on 8/22/2006 5:04 PM
Does anyone know why James Brownfield has it in for Jag Media and why he even mentioned Jag Media in his rambling letter to the SEC.

Would someone be stuck naked short up the koola?
Re: Lies, Invention, Journalists, and the SEC By Divieden on 8/22/2006 5:42 PM
Ranger,

Is that you Bear? Thought you were banned.

Bobo, getting to many cloggers on this board, imo.
Re: Lies, Invention, Journalists, and the SEC By bobo on 8/22/2006 7:27 PM
Isn't James Brownfield a poster at 'lil GW and the dwindling Jeff Mathews blog? He probably got his instructions confused, or Carol wrote them. Who knows?
Re: Lies, Invention, Journalists, and the SEC By BrainDamage on 8/23/2006 5:50 AM
CNN Money is taking notice too:

http://articles.moneycentral.msn.com/Investing/CompanyFocus/BillionaireGoesMuckrakingForProfit.aspx
Re: Lies, Invention, Journalists, and the SEC By Sean on 8/23/2006 7:47 AM
A must read for all!!

http://money.aol.com/news/articles/_a/failed-hedge-fund-haunts-celebrities/n20060822103609990005
Re: Lies, Invention, Journalists, and the SEC By NO on 8/31/2006 7:32 AM
Please I don’t like equating prostitutes with women of ill repute.

In the future use Gary Weiss as an example.

Gary Weiss is a poop head of that we can all agree.
But if he were to go to jail for some minor crime I do not wish that he were raped.

No more equating prostitutes with bad companies.

Look at it this way you got caught shoplifting. You are found guilty and you go to jail. You never committed violence just shoplifting.

But while in jail you get raped repeatedly and maybe catch HIV.

And most people don’t care. Most people say if you are in jail you deserve everything that comes your way.

But does one deserve to get raped because they got caught shoplifting once?
The punishment here does not fit the crime.

No more equating prostitutes with bad companies.
Prostitutes are much nicer, they work harder; and more ethical than those Wall Street hedge fund criminals.

Your name:
Title:
Comment:
Please limit your comments to 500 characters. For longer comments, use our forums.
Subscribe via Email
Get This Blog via Email:


Powered by Squeet.com
Sanity Check Archive
Resources