Puzzle Pieces Falling Into Place

by Kevin D. Freeman on March 28, 2012

Two weeks ago we shared a post titled Yes, Wall Street Deserves Some Blame. Here is the gist of it:

There is an Op-Ed in the New York Times from a disgruntled former Goldman Sachs executive. He was employed there yesterday, in fact. Basically, what he charges is that Goldman put profits ahead of clients. We will go one step further. Wall Street can be accused of putting profits ahead of national security and we are all paying a price for it today.

Now, we do not make this charge lightly. In fact, our contacts both in Washington and Wall Street have warned that there is a backlash effort in the works to undermine the message of Secret Weapon and this Blog. It is a blatant attempt to deny the truth of the book and discredit me as the author. Never mind that the documentation we have is rock solid, well researched and properly referenced. Never mind that we have proof of just how well the research was received based on emails and shares that took place at the time and even months afterward. The discredit effort, we are told, will be to acknowledge the reality of economic warfare and even the risks of financial terrorism but to deny outright that any of that happened in 2008. This was the approach taken last year by critics when Bill Gertz first wrote about my 2009 Pentagon report that very clearly documented suspicious behavior connected to the 2008 collapse. There is a political and economic motive for denying that anything untoward happened in the crash. Many on Wall Street and others in Washington don’t want the American people aware of how greed and incompetence almost destroyed America. Don’t look back. Only look forward. Nothing to see here.

Now, we have another report in The New York Times from March 25 that is even more explosive titled Anger at Goldman Still Simmers. Here are some excerpts from that article:

Just before the financial crisis began in September 2008, a prominent hedge fund appeared well positioned to take advantage of any turmoil in the markets. That fund, Copper River Partners, had made sizable bets months earlier against companies whose stocks it expected to suffer.

Within weeks, however, Copper River, once a successful $1.5 billion hedge fund, was out of business, having unexpectedly absorbed losses on the very bets it thought would be profitable. While the market turmoil contributed to its problems, Marc Cohodes, head of Copper River, says that a significant force behind the failure was Goldman Sachs, which for years had been the firm’s broker.

Testifying recently in a lawsuit that is unrelated to Copper River’s closing, Mr. Cohodes maintained that actions taken in the fall of 2008 by Goldman in the handling of trades for Copper River had done irreparable damage to the fund. His testimony, which has not been made public, was obtained by The New York Times.

Copper River relied on Goldman to handle its negative bets, known as short sales, in compliance with securities laws. These regulations require that before a short sale can be made, the shares must be borrowed; Mr. Cohodes said his fund had paid Goldman approximately $100 million to borrow shares over many years.

In his testimony, Mr. Cohodes said he and his partners at Copper River had even come to wonder if Goldman had in fact borrowed the shares for the firm. Without the shares, Copper River faced losses, while Goldman could have come under regulatory scrutiny.

When asked whether Goldman had borrowed the shares, Michael DuVally, a Goldman spokesman, said: “Mr. Cohodes is wrong. We met our obligations under applicable law.” He added that Copper River’s problems were the result of the extreme stress in the financial markets at the time.

Goldman has sought to seal the transcript of Mr. Cohodes’s deposition, which is part of a case brought by Overstock.com, an Internet retailer, against two of the biggest Wall Street firms. Overstock contends that the firms — Goldman Sachs and Merrill Lynch — failed to borrow company shares that they or their clients sold short, a practice known as naked shorting. Overstock says that the firms essentially evaded rules intended to prevent stock manipulations, and that its stock came under outsize selling pressure as a result.

Both of the firms sued by Overstock have denied the company’s accusations. They have requested that the judge overseeing the case seal all the documents generated in the discovery process, contending that their release would disclose trade secrets about the business, known as securities lending, which is highly profitable for the firms. The Times has joined three other media companies in asking the court to unseal the documents. Mr. Cohodes’s deposition, however, is not subject to the seal.

Earlier this month, John E. Munter, the judge overseeing the case in California state court, ruled that many of the documents should be made public. The firms are expected to appeal the ruling…

When Fannie Mae and Freddie Mac collapsed in early September 2008 and the stock market began to fall, Mr. Cohodes thought that his firm was well positioned to profit from the downturn, he recalled. His troubles began after Lehman Brothers failed; Copper River’s funds at the firm were suddenly frozen. Then government regulators changed the rules governing short-selling, banning the practice altogether in shares of roughly 800 financial companies and decreasing the amount of time allowed for such trades to settle.

This caused a violent rally in these shares. But the stocks that made up Copper River’s largest short positions were not on the short ban list.

Nevertheless, the stocks climbed, and Goldman began requiring Copper River to unwind its short positions by buying back the shares. This upset Mr. Cohodes, he said, because the firm’s account was in compliance with its federal regulatory margin requirement. Moreover, the fund was not leveraged; it had not made its bets using borrowed money.

Instead, he said, he suspected that Goldman had never borrowed the shares for Copper River’s short positions and was trying to close out the trades to eliminate the problematic naked short positions. Because Goldman had a duty to borrow the shares, it could have risked regulatory questions about compliance, under Mr. Cohodes’s account…

“I think Goldman Sachs is a racketeering entity that does whatever they can to make a dime without conscience, thought, foresight or care about ramifications,” Mr. Cohodes concluded in his testimony. “I think they are cold-blooded and could care less about the law. That’s my opinion. I think I can back it up.”

Goldman said Mr. Cohodes had been a satisfied Goldman customer who changed his view only after his fund experienced losses.

Copper River closed at the end of September 2008. The stocks it had been short soon collapsed.

Basically, let me translate. It appears that the Copper River Hedge Fund was shorting the market during the fall of 2008. By all accounts, that would be viewed as a profitable market position. And, in hindsight, the stocks sold short did ultimately collapse as the Hedge Fund had expected. However, Copper River did not profit from the declines. To the contrary, the firm was put out of business. The former head of the firm, Marc Cohodes, has (according to the NYT article) reportedly testified regarding his belief that Goldman Sachs was illegally naked short selling while pretending to properly borrow shares for their client. He further appears to contend that Goldman forced his firm to cover their positions in order to cover up their naked short selling. The net effect was that this Hedge Fund, although on the right side of the trade since the market collapsed, was put out of business before they could profit.

The information came to The New York Times despite serious efforts by Goldman Sachs to have it permanently sealed in court records. It is our understanding that there is much more damning information from that trial yet to be released. The judge in that case (which is unrelated to Copper River’s closing) ruled that many of the documents should be made public.

The New York Times has now joined  The Economist and Rolling Stone (representing various parts of the media spectrum) in noting the risks of naked short selling. Yet, according to a scathing report by former SEC Inspector General David Kotz, the SEC basically ignored the problem for years. A good question would be WHY? Some have argued that the SEC has been the subject of regulatory capture and that this was evidenced by their failure to catch Bernie Madoff for a decade despite strong evidence and continual prodding. Here are a few links that make that case:



The issues raised by The New York Times, Rolling Stone, and the Economist suggest that bear raids were conducted using naked short sales and that Wall Street participated primarily for profit. The SEC Inspector General then makes the case that the SEC overlooked the naked short selling. Others then make the argument that the SEC has been “captured” by large firms that it oversees. Certainly Madoff had a “pass.” We may learn that former Senator/Governor/head of Goldman Sachs turned head of MF Global John Corzine was also given a pass.

It is important to understand what we have already shared:  Bear Raids are Real. This was proven statistically beyond doubt by the New England Complex Systems Institute. According to their research, it would have taken 4 billion years of “normal” trading activity to naturally duplicate the bear raid activity on Citigroup in late 2007. Can you imagine the complexity of matching the attacks on Lehman Brothers?

So, we have Wall Street firms using naked short selling and apparently the SEC overlooked it. But then, in 2008, it got so far out of hand that it threatened national security and almost destroyed the global economy. Amazingly, this activity was not the traditional Wall Street firms (see the book Secret Weapon for some of these details with more to be released soon) and the panic was extraordinary. The SEC stepped in with a ban on all short selling related to financial firms that swelled to almost every large company. Some “in the know” Wall Street folks acknowledged at the time that this ban was panicked and even might suggest that a financial terrorist attack was underway. They even noticed that it was not the traditional Wall Street players pressing their bets but rather something much more sinister. They also acknowledged that the main Wall Street firms had engaged in naked short selling for profit for years with the SEC asleep at the switch:

The grand irony of all this is that Naked Shorting has been very profitable for the big broker dealers, like Morgan And Goldman and Merrill and Lehman. They have looked the other way for years, and the SEC has been AWOL on this issue. Short sales require a locate (shares to borrow) and then a subsequent delivery. It should take less than 3 days to deliver the borrowed shares, but instead, delivery is often delayed indefinitely. Failure to deliver leads to a margin charge, which can be as high as 9-15%. If you want to know who to blame for the past 5 years of naked shorting, you only have two places to look: The Financial brokers themselves, and the nonfeasance of a feckless SEC.

This is a serious acknowledgement by a key Wall Street inside observer. We have extensively documented the national security risks. The most recent version is the cover story of this month’s American Legion Magazine (with 2.3 million subscribers). You can read that story here:


BOTTOM LINE:  The puzzle pieces are beginning to fall into place and the picture is not very pretty. It appears that Wall Street was engaged in naked short selling for profit and to the detriment of various companies and investors. For whatever reason, the SEC appears to have been ignoring the problem. Then, some off-Wall Street activity took the naked short selling to a whole new level and that destroyed Lehman Brothers and nearly destroyed the global economy. There are strong indications that this was an act of financial terrorism. To fully understand the big picture, read Secret Weapon: How Economic Terrorism Brought Down the U.S. Stock Market and How It Can Happen Again.

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