October 17, 2005 -
(FinancialWire) The question on everyone’s minds has been, “How did Refco (NYSE: RFX) get through the regulatory vetting process when not only there were hidden liabilities but also the company’s key executives were under investigation for their roles in manipulatory short sales?”
The new SEC Commissioner, Christopher Cox, in China to “help” that country establish regulations to combat, uh, fraud in their markets, was clearly embarrassingly blind-sided by Refco and ill-positioned to deal with it from half-way around the world; although regulators are said to be leaning on Goldman Sachs (NYSE: GS) and Credit Suisse First Boston (NYSE: CSR), the underwriters in August, and lenders in the 2004 buyout such as Bank of America (NYSE: BAC), to step in and take on some of the liquidity risks.
The burning question as to the level of SEC complicity in this massive scandal was voiced, however, Friday by gadfly Dave Patch in an interview by Ron Insana on a long segment of CNBC’s “Street Signs.” That segment may be viewed in its entirety at vmsdigital.com
Patch, editor of “StockGate Today,” whose charges were first reported in March 7, 2003, has been predicting a meltdown associated with what he and others believe are tremendous unseen market liabilities associated with illegal naked short selling, for over two years.
His site, investigatethesec.com , has long held that the SEC has scrambled to protect illegal manipulators for fear that the lawbreaking had gone on so long and that it is so huge that it threatens the nation’s financial underpinnings. On CNBC, Patch again asked why the SEC can sit by and watch scores of companies listed on the Regulation SHO threshold list for almost a year, signifying that they are in continuous default of settlements required by the law.
He also asked why the SEC would try to “grandfather” the millions of settlement failures that preceded Regulation SHO, which went into effect in January. The “grandfathering” still hasn’t been court-tested as to whether it may be a kind of “pardon” that only a President may issue.
The SEC and the Depository Trust and Clearing Corp. continue to stonewall any attempt to require transparency in the marketplace as to the extent of fails to deliver, which some see as just a euphanism for “counterfeit shares.”
This scandal comes hard on the heels of allegations of misdeeds by Gradient Analytics and employees of TheStreet.com (NASDAQ: TSCM), in conspiracy with David Rocker and Rocker Partners in manipulating the stock of Overstock.com (NASDAQ: OSTK) and others comes another explosive case, this time against Refco Inc. (NYSE: RFX), one of the primary alleged miscreants in destroying Sedona Corp. (OTCBB: SDNA), once a Nasdaq-listed company.
Not since the Enron and Worldcom scandals has the financial markets been under such growing suspicion, except this time the cancer is not just in a treatable part of the body. This time it has spread through the lymph nodes and appears to be present in every vital organ as scores of companies seem permanently entrenched in the threshold lists maintained by Nasdaq and the NYSE, signifying over three-quarters of a year of the existence of counterfeit shares and unsettled trades.
Overstock CEO Patrick Byrnes, for instance, has released transcripts of discussions between himself and Morgan Stanley (NYSE: MWD) over shares that he could not get delivery on, and says his father has still not gotten delivery on 200,000 shares that he bought.
Byrne said that he believes between 5 million and 20 million counterfeit shares are currently in the marketplace, presumably on the major exchanges alone.
He has also added libel to the list of legal charges against Rocker and Gradient and others.
Former Refco CEO Phillip Bennett has been arrested on charges of deliberately misleading shareholders when they purchased shares in the company’s recent public offering. He had been placed on leave by his company as it launched an investigation into $430 million the company said was owed by an entity he controlled in a transaction that was hidden from the public.
The company had already lost $1.65 billion in market value, leaving investors in the public offering extremely angry.
Also fired was Santo Maggio, president of Refco Securities, whom the company said was believed to have known about Bennett’s activities.
According to the New York Post, Maggio was already “in the middle of an SEC probe that would have probably gotten him suspended one year from his supervisory duties” related to Refco’s relationship with Rhino Advisors, a hedge fund that illegally shorted the stock of Sedona Corp.
The new case winds its way right back to the growing StockGate scandal as the Post quotes a “source familiar with the investigation” that the receivables in the latest probe “probably came from short sale positions made from a shuttered hedge fund.”
The levees protecting the underworld of naked short selling, despite efforts of many regulators to try to prop up a system on weakened stilts appear to be crumbling, forecasting a potential Wall Street disaster that would not be unlike what happened in New Orleans and in other low-lying real estate.
An undermining of confidence in the “independence” of subscription-based institutional research, in the financial media that could even involve General Electric’s (NYSE: GE) CNBC and of course, the undeniable clout of already besieged hedge funds and the “King of Shorts,” David Rocker, whose targets are said to include Martha Stewart Living Omnimedia (NYSE: MSO), would be disastrous in the event of any one of them, but altogether, it could result in a total collapse as investors look for safer investment and savings venues than “crooked” markets.
In a commentary, Motley Fool said any “mirth” regarding “sith lords” and other irrelevant allegations are “obscuring a case with fairly broad implications for security analysis, First Amendment rights, and the credibility of our public markets.”
It said that in an affidavit recently acquired by The Motley Fool, and also apparently acquired by DealFlow and others, Demetrios Anifantis, who identifies himself as a former employee of the research firm Gradient Analytics, alleges that the company conspired with David Rocker of the hedge fund Rocker Partners to publish damaging information "for the purpose of negatively influencing the price of Overstock shares so that Rocker could profit from its existing or intended short positions in Overstock shares.
“Two additional sworn statements in our possession, ostensibly by former Gradient employees Robert Ballash and Daryl Smith, also allege that Gradient provided biased research on behalf of its clients. Both Anifantis and Ballash additionally accuse Gradient of running a hedge fund advisory called Pinnacle Investment Advisors, contrary to the company's public statements at that time.”
Motley Fool notes “the most detailed and apparently most damaging affidavit, if it is true, was delivered by Anifantis. He worked as a customer service representative for Gradient from November 2003 until November 2004. New York Post reported that he was fired from the research firm for forwarding his employer's client list to his personal email.
“According to his statement, Anifantis recalled being on phone discussions, during which "David Rocker, Marc Cohodes, or other representatives of a hedge fund called Rocker Partners, LP, requested that the special report contain more negative information, or that the report emphasize a specific negative fact and that the report downplay any positive facts.
“Anifantis also states that customers like Rocker would ask that Gradient not disseminate a negative report ‘to the public for a specific period of time, so the customer could get their own position in the stock before the public got the information.’ This conspiracy went beyond just Vickrey and Rocker, according to Anifantis, who also says that it "appeared" to him that Herb Greenberg, who then wrote for TheStreet.com, joined in coordinating the attacks on Overstock.
“At first glance, the affidavits raise troubling questions about the nature of ‘independent research.’ If the three former employees of Gradient are telling the truth, the alleged conspiracy between the research firm and Rocker Partners would represent an egregious example of market manipulation, which most likely would have seriously harmed individual investors, as well as Overstock itself.”
The Fool points out that “the veracity of these individuals has not been established, and Rocker Partners and Gradient vigorously deny the charges.
“As New York Post has reported, at least two of the affiants may have credibility issues or reasons to hold grudges against Gradient. If this case makes it to trial, Anifantis, Ballash, and Smith will have to testify in court and withstand cross-examination by top defense attorneys. It will be interesting to see whether their charges are supported by documentary evidence, such as emails, revised reports, notes of phone calls, and the like. Within the affidavits are charges that would prove quite persuasive if supported with concrete documents.
“For example, in support of the charge that Rocker had considerable input on the creation of reports, Anifantis's affidavit refers to an "exhibit 5" (which we did not receive) allegedly containing revised reports on Overstock with Rocker's revisions in brackets.
“Ultimately, we believe that these affidavits raise important questions for investors about the integrity of our financial system. Unlike a lot of the silliness in the media relating to Overstock, this complaint is not frivolous on its face, and although Overstock will need to prove its allegations, the case must be taken seriously. The question to us is why the atmosphere around this lawsuit has, from the beginning, been comical. If the behavior set forth in these allegations is true, then the implications of the ease at which the financial professionals can manipulate the public markets are stark.”
Overstock has been on the Regulation SHO list, the government’s official list of illegal fails to deliver, for “only” 114 days, far less than 32 other companies. Martha Stewart Living Omnimedia (NYSE: MSO) and Krispy Kreme Doughnuts (NYSE: KKD), among others, have been on the list for 186 days. Legally, trades are supposed to settle within a few days time.
The affidavits, from former employees of Gradient, according to DealFlow state that the research firm provided “hatchet jobs” on companies chosen by clients “coordinated to deliver maximum trading benefits to them.” The affidavits state that reporters for TheStreet.com “leaked” Gradient’s negative reports to the market ahead of their release. It notes that Rocker Partners is the largest shareholder in TheStreet.com and that Rocker is a contributing columnist. The affiants also say that former TheStreet.com columnist Herb Greenberg had an office at Gradient where he ghost-wrote research reports for Gradient clients such as Rocker.
The former employees, one of whom had been fired after raising questions about Gradient’s practices, said the firm stated its team of 18 to 20 analysts were comprised of CPAs and CFAs when none of them had advanced credentials, and were instead recent college graduates with business-related degrees.
They also note that the research firm’s executives, Donn Vickery and James Carr Bettis, also managed hedge funds and a mutual fund that traded in the securities of companies covered by the research side.
If so, this, among the other allegations, is a violation of the “Standards For Independent Research Providers” at firstresearchconsortium.com.
Gradient is a member of InvestorSide, which has provided it and other member research providers with a seal that “certifies” its research is “free of investment banking conflicts.” It is not clear if running a hedgefund would violate that certification, and no one was available at InvestorSide over the weekend to comment on whether charges such as have been leveled at Gradient would disqualify such a research provider from its membership.
Former employee Demetrios Anifantis, in a sworn statement, said that Gradient would regularly generate “custom reports” for clients, after receiving specific instructions from the clients on whether it should be a “negative” or “positive” report.
Many of the reports were redistributed to PIPES traders and hedge funds by Sagient Research, which distributes the Placement Tracker database of PIPES transactions. Sagient reportedly said it has not distributed Gradient reports since August, 2004. Release dates on the reports were said to have been often delayed for three to five days while Rocker and other Gradient partners secured short positions. These allegations were contained in several affidavits.
The affidavits said that an associate editor working with Greenberg, now at Marketwatch.com, Brian Harris, worked for Gradient to draft research, and had an office in a Gradient office in Seattle. It was noted that TheStreet.com removed Harris’ name as an associate editor shortly after Overstock’s lawsuit was filed. |
