How Lehman, With The Fed’s Complicity, Created Another Illegal Precedent In Abusing The Primary Dealer Credit Facility

by ilene - March 13th, 2010 2:44 pm

How Lehman, With The Fed’s Complicity, Created Another Illegal Precedent In Abusing The Primary Dealer Credit Facility

Five months ago, Zero Hedge observed the nuances of the Federal Reserve’s Primary Dealer Credit Facility (PDCF) and concluded that this artificial liquidity boosting construct was nothing more than yet another scam to allow banks to extract ever more money from taxpayers, with the complicit blessing of the Federal Reserve Board Of New York (as the original piece also provided an in-depth discussion of the triparty repo market which is now a parallel to the buzzword of the day in the form of Lehman’s "Repo 105" off balance sheet contraption, it should serve as a useful refresher course to anyone who wishes to understand why while Repo 105 with its $50 billion in liability contingency may have been an issue, the true Repo market, with over $3 trillion of likely just as toxic assets, is where the real pain in the future will come from). The PDCF would allow assets of declining and even inexistent value to be pledged as collateral, thus making sure that taxpayer cash was funneled into sham institutions holding predominantly toxic assets, and whose viability was and is limited, yet still is backed by the Fed, which to this day continues to pour our money into them. Today, with a tip from the NYT’s Eric Dash, we demonstrate just how grossly negligent the Federal Reserve was when it came to Lehman’s abuse of the PDCF, and how the trail of slime of Lehman’s increasingly obvious manipulation of its books goes to the very top of the Federal Reserve Bank of New York, and its then governor - a very much complicit Tim Geithner.

1. The Liquidity Conundrum And the PDCF

In our original piece, we posited the following observation on the Fed’s constant involvement in liquidity provisioning, particularly in the context of the repo market:

Here is the liquidity crunch in its full flow-chart glory:

If can not obtain short-term (overnight or term) funding in repo market, go to Eurodollar market

If can not obtain short-term funding in Eurodollar market (LIBOR), go to asset sales

If asset sales are impossible due to lack bids, illiquid markets, and collateral consists of toxic MBS and CCC-rated junk bonds, yet margin calls are streaming and repo counterparties are demanding their cash back, go to bankruptcy

File for bankruptcy

This would be natural chain of events in a normal capitalist country. However, America in times of stress is anything but - which is…

Tags: Ben Bernanke, Eric Dash, Lehman Bankruptcy, Lehman Brothers, Primary Dealer Credit Facility, Repo 105, SEC, taxpayer, the Federal Reserve, toxic assets, Zero Hedge

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Hedge Fund Slams Rick Bookstaber For Comments On The Gold Bubble

by ilene - March 11th, 2010 1:59 pm

Hedge Fund Slams Rick Bookstaber For Comments On The Gold Bubble

Rick Bookstaber

Courtesy of Gus Lubin at Clusterstock/Business Insider

QB Partners fits the description of hedge funds that Rick Bookstaber accused of pumping the gold bubble and — even worse — of fueling the bubble with publicity.

The New York fund leapt to the defense of gold by sending an email to Business Insider with a message for Bookstaber.

Attached was the point-by-point rebuttal they gave to Nouriel Roubini in December when he had the nerve to diss gold.

Here are the highlights of QBAMCO’s Message To The Gold Haters >

The SEC’s Top Economist Quits In Protest Over Ridiculous Short Selling Rules

by ilene - March 9th, 2010 6:05 pm

The SEC’s Top Economist Quits In Protest Over Ridiculous Short Selling Rules

Courtesy of John Carney at Clusterstock/Business Insider

SEC, Mary Schapiro The news that the Securities and Exchange Commission’s top economist is leaving should highlight huge blot on the record of Chairman Mary Schapiro.

James Overdahl, the economist, run the unit of the SEC charged with evaluating the economic impact of proposed rules. In 2008 his office evaluated the impact of short sellers.

What the economists found is that a lack of evidence for the so-called “bear raids” in which short sellers were allegedly piling onto distressed stocks. Rather, short sales increased when stocks rallied. They concluded that there is no evidence that “episodes of extreme negative returns are the results of short-selling activity.”

But the SEC went ahead and adopted rules restricting short sales anyway, voting 3-to-2 to to limit short sales when a company’s stock falls 10 percent from the previous day’s close. Overdahl’s departure highlights how much this is political pandering rather than good policy making based on empirical results.

Overdahl will step down March 31 to join NERA Economic Consulting, according to Bloomberg.

Presenting For The SEC’s Enforcement Pleasure: $21 Million In Medivation Insider Trading Profits

by ilene - March 3rd, 2010 12:33 pm

Presenting For The SEC’s Enforcement Pleasure: $21 Million In Medivation Insider Trading Profits

Courtesy of Tyler Durden

Medivation shares are not doing too hot: apparently if your core Alzheimer’s drug (developed in collaboration with Pfizer) ends up being a failure, your stock drops by almost 70%.

Pity, because that drug may have been useful to everyone else buying the broader stock market with the hope they won’t eventually suffer the same fate. Yet what is notable is that this information, which hit Business Wire at 7:30 am Eastern, was apparently good enough for someone to make a huge bet on a stock plunge just before the market closed yesterday, at 3:59pm to be specific, and to make almost $21 million on inside information.

Below, you can see the actual trades in MDVN April $40 puts, which amounted to nearly 16,000 in three unique trade blocks of 500, 4750 and 9850, just before the bell rang, at a price of $14/put.

Here is how the volume of this particular put has looked recently.

This class of puts now trades at about $27, meaning a profit of $13 per share, also meaning a total profit of 16,000*$13*100, or about $21 million.

SEC, take it away. Oh wait, we forget that most of your staffers are engaged in not policing this kind of behaviour, but looking at transvestite pornography. Oh well, we tried.

With kind gratitude to @Olivertse who first noticed this now perfectly acceptable market behavior.

SEC OIG Investigating SEC Complicity in Naked Short Selling

by ilene - December 3rd, 2009 7:20 pm

SEC OIG Investigating SEC Complicity in Naked Short Selling

Courtesy of Mark Mitchell at Deep Capture

The Office of the Inspector General of the Securities and Exchange Commission not long ago submitted a semi-annual report to Congress. There are two items in the report of interest to those of us who have argued that the SEC has turned a blind eye towards, or even assisted, unscrupulous hedge funds that make their fortunes destroying public companies for profit.

The first item reads as follow:

“The OIG has opened an investigation into complaints from an investor alleging that the SEC failed to investigate instances of market manipulation and other misconduct in connection with the review, and eventual non-approval, of a developmental drug. The investor also has alleged that the SEC failed to investigate a recent bear raid on the stock of the company that developed the drug, causing a severe plunge in the stock price. The OIG has reviewed several hundred pages of documents, including numerous emails and attachments provided by the complainant. The OIG expects to complete its investigation and issue a report of investigation in the next reporting period.”

I have confirmed that this is a reference to the bear raid on Dendreon, described in considerable detail by Deep Capture. There is plenty of evidence — including, perhaps, those documents and emails referred to by the OIG — pointing to miscreancy in this case. Indeed, it is one of the more despicable cases of market manipulation on record – and many cancer patients were deprived of potentially life-extending treatment as a result. We look forward to reading the OIG’s report – it should be a doozy.

The second item of interest in the OIG report is this:

“The OIG continued its investigation of an allegation that SEC staff engaged in retaliation against a company after it publicly complained about naked short selling in the company’s stock. During this reporting period, the OIG took the sworn testimony of the staff attorney who worked on the matter and reviewed numerous relevant documents. The OIG has completed its investigative work and plans to issue its report of investigation prior to the end of the next semiannual reporting period.”

It has long been a contention of Deep Capture that the SEC has not just ignored allegations of naked short selling, but has gone after companies that complain about it, often at the behest of the short sellers themselves. This report, too, should be interesting, to say the…

Goldman, Sears, Others Named In Insider Trading Subpoenas

by ilene - December 2nd, 2009 12:30 pm

Goldman, Sears, Others Named In Insider Trading Subpoenas (GS, SHLD)

Courtesy of Clusterstock, by Lawrence Delevingne

Tags: Crime, Hedge Funds, insider trading, Legal, regulation, SEC, Wall Street, white collar crime

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SEC Nails MN-Based Currency Trading Fraud

by ilene - November 25th, 2009 11:58 pm

SEC Nails MN-Based Currency Trading Fraud

Courtesy of Joshua M Brown, The Reformed Broker

The SEC nailed a Minnesota-based currency fraud today, a bust that I believe will be the opening salvo in a much bigger battle to protect Americans from this burgeoning area of fraud.

SEC Obtains Asset Freeze in Minnesota-Based Foreign Currency Trading Scheme

FOR IMMEDIATE RELEASE
2009-253

Washington, D.C., Nov. 24, 2009 — The Securities and Exchange Commission has obtained an emergency court order freezing the assets of a self-proclaimed Minneapolis-based money manager, a nationally syndicated radio personality and four companies they controlled in a foreign currency trading scheme that raised at least $190 million from more than 1,000 investors.

The SEC alleges that Trevor G. Cook and Patrick J. “Pat” Kiley sold unregistered investments through shell companies by misrepresenting that they would deposit each investor’s funds into a separate account in the investor’s name to trade in foreign currencies and generate annual returns of 10 percent to 12 percent. They also misrepresented that their foreign currency trading program involved little or no risk and that investors’ principal would be safe and could be withdrawn at any time. Kiley pitched the investments on his financially themed “Follow the Money” show that he hosted on radio stations nationwide.

As I mentioned in my piece “3 Potential Bubbles for Retail Investors“, currency and forex trading has historically been only lightly regulated in terms of sales practices. As a result, many fraudsters from other industries have jumped on the bandwagon.

There is a ton of leverage employed in even the most common strategies and with daily headlines trumpeting the weak dollar, individuals are being led like sheep to the slaughter into this arena.

I applaud the SEC for shutting down this ponzi scheme and I hope everyone reads the full press release before sending money to someone who represents currency speculation as “riskless”.

Source:

SEC Obtains Asset Freeze Against MN Currency Scheme (SEC.Gov)

To The SEC: Prove It

by ilene - November 7th, 2009 6:05 am

Here’s a handy list of coincidences to file under insider trading in plain site. - Ilene

To The SEC: Prove It

Courtesy of Karl Denninger at The Market Ticker

The SEC is laying out more details of their "bust" in the hedge fund world:

The defendants behaved like “common criminals” who took a “page from drug-dealer handbooks,” Manhattan U.S. Attorney Preet Bharara said yesterday at a press conference. The probe is focused on hedge funds and their sources of information, he said, adding that more arrests may be coming….

“And if you find yourself chewing the memory card in your cell phone to destroy any record of your misconduct, something has gone terribly wrong with your character,” Khuzami said.

Is it ok if you perform your insider trading in plain sight?

I am of course referring to (among other outrages):

The blatant and outrageous buying of stocks, options and futures contracts the day before Options Expiration in August of 2007 - the afternoon before Ben Bernanke made his "unannounced" discount rate cut. The market was down huge in the morning before reversing in an "unexplained" fashion that later proved prescient. What are the odds that was a "lucky guess?" A few hundred million to one?
A similar "magical" reversal right in front of the financial stock shorting ban - announced the next morning.
The put buying on Bear Stearns - front month with roughly a week left and dramatically out of the money, not to mention the request to open up strikes all the way down to $2.50 - with the stock trading at $60. There is no possibility that was a "lucky bet" either.
Ditto on Lehman Brothers, although somewhat (and only somewhat!) less-dramatic.
The incessant rumor-mongering and "pump and dump" played during the entirety of the summer and early fall of 2008 with MBI, Ambac and other mortgage insurance companies, which were the recipient of daily "leaks" promulgated through CNBC and elsewhere on "imminent" rescues (that never materialized.) Who fed Charlie Gasparino that (later proved false) information and did they trade on it, knowing that it would (and did) produce a huge pop in the market every time he came on the air?
The documented example of UBS employees sending emails stating that a security they were peddling was "Vomit" - yet they were peddling it to customers. They still have a banking license, despite this coming from a judge in that case:
“Pursuit has established probable cause to sustain the validity of a claim that…

Tags: hedge fund, insider trading, SEC

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Gasparino on “The Sellout”

by ilene - November 6th, 2009 1:00 am

Gasparino on "The Sellout"

obama Courtesy of Jesse’s Café Américain

RealClearMarkets has an interesting interview with Charlie Gasparino regarding his new book "The Sellout." There seems to be a consensus forming that something has gone seriously wrong with the US republic, and that the Obama administration is failing to address it, failing badly.

One has to wonder what it will take to give Washington a wakeup call. It seems that, when confronted by white collar crime, people lose all the perspective which they have when it comes to fighting crime and injustice. "It won’t work, it can’t be done, they will just come back and do it again."

Well, duh. If you make it worth their while, administer wristslap justice at worst, and let all the top dogs openly flout the law, of course they will be back. What the US needs is the reincarnation of Melvin Purvis with a minor in finance. I would put Eliot Spitzer in charge of the SEC with the right resources and let him rip through Wall Street like the wrath of God, and make the bankers howl.

But that probably won’t happen, because there is too much dirt, too many scandals on both sides of the aisle for this crew to administer its oath to uphold the Constitution.

Here is an excerpt from the interview:

"I don’t know when it’s going to happen, but if history is any guide, it has to happen again–the "it" being another financial crash. Of course, it won’t happen tomorrow or next week, or maybe not even two years from now. But when the memory of 2008 wears off, and mark my words it will wear off, excessive risk taking will be back in a form that evades all these alleged regulatory controls that have been established. Regulation can never cure the disease of excessive risk.

The only thing that can cure it is tough love–allowing firms to fail. That doesn’t mean I wanted the Fed and the Treasury to walk away last year. That would have meant Armageddon. But they should have walked away before that, when the systemic risk was smaller and the damage would have been limited. 1998 would have been a great place to start. Let Long Term Capital Management fail; let Lehman, and as I show in my book, possibly Merrill to fail, because the trades were the most vulnerable to LTCM’s bad bond market bets.

Instead, by arranging a bailout,…

Tags: Charlie Gasparino, Citi, Eliot Spitzer, Goldman Sachs, Merrill Lynch, SEC

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New Insider Trading Arrests At Schottenfeld Group, Incremental Capital, And Ropes & Gray

by ilene - November 5th, 2009 12:23 pm

New Insider Trading Arrests At Schottenfeld Group, Incremental Capital, And Ropes & Gray

Courtesy of Joe Weisenthal at Clusterstock

here’s the complaint.

This new insider trading bust is not limited to Galleon, though one of the new 7 to be arrested did apparently work there.

According to CNBC, which first got the complaint, there have been arrests at hedge fund Incremental Capital, the Schottenfeld Group, and the law firm Ropes & Gray.

In addition to the 7 arrested, there are, it seems, an additional 7 who have been charged, but not aprehended.

Update: Bloomberg has the full list of names here:

Craig Drimal, who according to court documents worked at Manhattan-based Galleon, wasn’t an employee of the firm. Also arrested were Zvi Goffer, Arthur Cutillo, Jason Goldfarb, Emanuel Goffer, David Plate and Michael Kimelman. Charges against the men include conspiracy and fraud, according to documents filed in New York federal court. Names of the other seven defendants weren’t immediately available.

Stay tuned…

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Here are the highlights of QBAMCO’s Message To The Gold Haters >

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