Sauer selling america short; the SEC and market contrarians in the age of absurdity (2010)

SEL LING A M E R IC A S HORT S E C a nd M a rket C ont r a r i a ns i n t he A ge of A bsu r d it y T he RICHARD C SAUER SELLING AMERICA SHORT SELLING AMERICA SHORT The SEC and Market Contrarians in the Age of Absurdity Richard C Sauer John Wiley & Sons, Inc Copyright C 2010 by Richard C Sauer All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com Requests to the Publisher for 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our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993, or fax (317) 572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our web site at www.wiley.com Library of Congress Cataloging-in-Publication Data: Sauer, Richard Selling America short : the SEC and market contrarians in the age of absurdity / Richard C Sauer p cm Includes index ISBN 978-0-470-58211-4 (cloth) Sauer, Richard United States Securities and Exchange Commission Stock exchanges—United States Finance—Corrupt practices—United States Fraud investigation—United States I Title HG4910.S28 2010 332.6092—dc22 2009049435 [B] Printed in the United States of America 10 For Eileen and Neal, two good eggs The pure products of America Go crazy —William Carlos Williams Contents Prologue ix Chapter Rude Awakenings Chapter The SEC Steps Out Chapter Short People 17 Chapter Belgian Waffles 29 Chapter AremisSoft and the Deemster from Hell 53 Chapter Taking Out the Eurotrash 85 Chapter In the Shadow of Enron 121 Chapter The Easter Bunny Cometh 153 Chapter Mired in Muck 177 Chapter 10 Our Tax Dollars at Work 199 Chapter 11 Warming the Bench 213 vii viii CONTENTS Chapter 12 The Overstock Flame Wars 229 Chapter 13 The Bird in the Bush 249 Chapter 14 The Collapse of the American Financial Sector in One Easy Lesson 273 Chapter 15 Ashes, Ashes, All Fall Down 285 Epilogue 307 Picking up the Pieces About the Author Index 315 317 Picking up the Pieces 311 valuing economic assets It was for this reason that the original thrust of the Bush Administration’s Troubled Asset Relief Program—proposing to rescue failing financial institutions by purchasing their toxic assets—went nowhere There were no magic numbers that Treasury could use to set prices The government can only enforce rules requiring transparency in the marketplace Assets will then be valued by the best judges of their worth: people willing to risk their own money to own them The market as arbiter of economic value is, indeed, a bedrock principal of our system of financial reporting, however often honored in the breach The goal, therefore, is, as before, to make the financial machinery more open and understandable Discourage blind faith, guesswork, and mob behavior and promote informed decision-making Many reforms have been proposed and a few implemented The best require better disclosure of the substance behind complex transactions and greater internalization of risk by those who create and profit from it More market-based valuations Fewer off-balance-sheet entities and offshore black boxes No shadow markets Elimination of the informational blind spots that encourage excessive risk taking But regulatory fixes go only so far When the government imposes rules that come down to telling economic actors to “tell the world what you’re really up to” some will regard this as more a challenge than a directive Something to finesse when the stakes are high And experience teaches that they will often succeed in getting around the new rules and the government sloggers who enforce them—until they become altogether too good at it and bring on the next crisis A cycle of creative destruction that creates less than it destroys The trick, it would seem, is to encourage people with the necessary financial expertise and potential motivation to dig up the negative information that others are so well incentivized to conceal But who are these strange beings and how we know we can rely on what they tell us? Will they be truthful whistleblowers or mere disreputable troublemakers, come to mislead us? They may be short-sellers—spreading rumors as lethal as the joke in the Monty Python skit so hilarious it killed whoever heard it—dispatching red-blooded American companies without ever raising their voices above a whisper That is the perpetual fear But is it grounded in reality or mere prejudice and rumor? 312 EPILOGUE Short-sellers and the few journalists who listen to them have exposed many bad companies A few are described above but there have been many more This has gone beyond spotting the occasional rotten corporate apple to touch on broad issues For example, contrarians were sounding the alarm about bad lending practices, residential and commercial, long before anyone chose to listen But what about the companies that claim they have been the victims of bear raids and similar nefarious conduct? Some may be sincere in their complaints, but, more commonly, companies that claim to have been bullied by short-seller cabals are later revealed as themselves the bullies—and worse Yet none of this seems to matter However often companies that attack their critics turn out to be crooked, the initial presumption of credibility never seems to diminish The SEC has been willing—indeed eager—to jump on weakly supported allegations of short-seller manipulations I’ve devoted Chapter 11 of this book to the Gradient fiasco David Einhon in his book Fooling Some of the People All of the Time recounts the SEC Enforcement scrutiny he received after going public with criticisms of the business development company Allied Capital I’ve heard from other hedge-fund managers that they became objects of suspicion after publicly “talking” their short positions Bear conspiracies make a good story Simple to understand, with clear villains and victims And, anyway, who likes nay-sayers? Who can sympathize with those who don’t share the American dream of endlessly ascending stock indexes? Don’t we all suspect that’s where the blame ultimately lies for every market decline? Risky commercial practices, inept regulation, and incompetence in the financial community may, in some way, have contributed to our reversals That can be conceded But was the root cause really any those things? Couldn’t it have been, at bottom, a simple failure of belief? A turning away from the dream, from faith in the financial gods, to indulge in the apostasy of doubt and analysis? Banish those who would infect us with these failings, destroy their evil works, and all will be well once again And indeed efforts to tar skeptics as the villains of the financial world and so exclude them from polite conversation is going well despite repeated failures of proof Fewer contrarians are willing to show their stripes in public What percentage is there in orating on soapboxes to Picking up the Pieces 313 the onrushing crowd? If it stops to listen at all, it will only be for long enough to jeer and throw rocks before continuing on its way The short-sellers whose adventures provided the early chapters of this book are mostly gone, or have at least gone quiet The independent research shops once lauded by the SEC as an antidote to sell-side bias, such as Gradient and “The Eyeshade Report,” have been knocked around or eliminated by the companies they criticize while the SEC watched in silence The mainstream financial press, for its part, displays dwindling interest in investigative pieces The sort of work Jesse Eisinger and others did on Lernout & Hauspie is no longer likely to appear in the pages of the Wall Street Journal Mostly this is dictated by economics Assigning teams of reporters to long-term speculative projects is hard to justify in an era of budgetary starvation Fortune, the New York Post and other publications have shed financial reporters as part of general staff cutbacks It might be thought the vacuum is being filled by “new media” gadflies Renegade reporters and amateur sleuths posting their views on blogs and other internet sites Some, like Gary Weiss, have tried to profit from their work by selling advertising space based on eyeball count, or, like reformed crook Sam Antar, by promoting themselves as experts for hire But they struggle to attract much attention beyond a niche audience And what does it say about our system that some of the most effective work on potential corporate misconduct is being conducted by an ex-felon with a dead parrot? Can it really be that the only ones willing to speak up are those with nothing to lose? And how healthy is that for a system whose most fundamental principal is full and accurate disclosure? Not that I expect anyone will answer these questions They are simply not on the agenda I might as well put them to my canine companion as he gulps the Bay breeze from the car’s rear window At least he won’t hold it against me for asking About the Author R ichard Sauer has been, among other things, an Assistant Director with the Enforcement Division of U.S Securities and Exchange Commission, a partner in an international law firm, and an analyst with a Northern California hedge fund In his dozen years as an SEC attorney and administrator, he was responsible for many prominent financial fraud cases His articles on legal and financial topics have appeared in numerous publications including in the New York Times, the Wall Street Journal, and Barron’s He is also a published novelist and holds a doctorate in law (S.J.D.) from Harvard Law School He lives in Berkeley, California, with his wife, Eileen Killory 315 Index ACLN Limited, 118, 119, 173 Eyeshade Report, 88, 89n, 313 SEC investigation of, 86–113 Acme Capital Management (pseud.), 300–301 Actuaries, San Diego pension system and, 123, 124, 125, 126 Adelphia, 77, 121 Adjustable rate mortgages, Fed’s money policies and, 275 Age discrimination, 202–203 Aguirre, Gary, 202, 203, 204, 205, 206, 207, 208, 210, 211 Aguirre, Michael, 137, 138, 139, 140, 141, 142, 143, 144, 146, 147, 149, 150, 202 AIG See American International Group, Inc Allied Capital, 312 Alpert, Bill, 167 Ambec, 270 American Capital Strategies, 291, 295 American dream, 273–274, 308, 309 American International Group, Inc., 254, 270, 278, 281, 283 American Lawyer, 271 AMEX, 168 Anifantis, Demetrios, 185, 186, 187, 188, 196, 201, 219, 220, 221, 222, 223, 226 Antar, Sam E., 240, 241, 242, 243, 244, 245, 246, 313 Anti-naked shorting cult, 168 Antisocialmedia.net (ASM), 231, 232 AremisSoft Corporation, 179 SEC investigation of, 54–86, 118, 119, 222 Arnauts, Rudi, 87, 88, 101 Arthur Andersen, 132 Asset-backed products, 13 Asset bubbles, Federal Reserve Board and, 283 Bagley, Judd, 231, 232, 245 Bailey, Matthew, 169 Bank of America, 147n, 281 Bank of America Securities, 262, 263 Barclay’s Bank, 286 Barron’s, 170, 174 Barton, Joe, 22, 23, 24, 25, 28, 32 Barton, Tom, 22, 23, 24, 25, 28, 174 Bastiaens, Gaston, 35, 41, 45, 48, 215 BDO International, 110 Bear conspiracies, 312 Bear raids, detecting, 167–168 Bear Stearns, bailout of, 279–280, 281, 283, 286 Berenson, Alex, 57 Bernanke, Ben, 281n, 292, 294 317 318 INDEX Biovail Corporation, 192, 193, 199, 200, 201, 219, 227, 271 Bisschops, Joseph, 87, 90, 92, 94, 95, 100, 101, 102, 103, 104, 107, 111, 119 Black, Leon, 174 Black Monday (1987), 9–12 Blind-pig theorem, 300 Blogs, 313 Bloomberg, 239, 258, 287 Blum, Steven, 97 BNP Paribas Luxembourg, 93, 99, 100, 111 Body, Roddy, 169 Boesky, Ivan, 14, 15, 16, 234, 235 Boiller, Edwin, 237 Bormans, Anny, 97, 103, 104, 119 Boyd, Roddy, 227, 255, 261 “Bozo journalism,” 232 Brown, Dan, 234 Brown Brothers Harriman & Company, 64, 65, 66 Bucket shop drives, 293 Buffet, Warren, 157, 163, 251 Bush, George W., Bush administration: Fed’s monetary policies and, 283 Paulson Plan and, 293 Business Week, ix, 161 Byrne, Jack, 157 Byrne, Patrick, 169, 177, 200, 206, 207, 264, 292, 300 Gradient’s analysis of Overstock.com and, 157–162, 178–191, 194–197, 218–228 O’Brien and patronage of, 162, 166, 171–175 Overstock.com flame wars and, 229–234 California Constitution, 127, 145 California Supreme Court, 148 Campaign contributions, 308 Caporicci & Larson, 128, 129, 132 Carter administration, hyperinflation during, 124 Caruthers, Jim, 89, 91, 173 CFA Institute, 221 Chancellor, Edward, 181 Chanos, Jim, 256, 289 Cheap money, housing bubble and, 275–276 Chinese walls, at Goldman Sachs, 300, 301 Citigroup, 294 Citizen journalists, 232 Clinton, Bill, 283 Clinton administration: Fed’s monetary policies and, 283 Levitt’s tenure at SEC during, 141 San Diego pension system and bull market during second term of, 125–126 short-sellers and “great extinction” during, 32 CMOs See Collateralized mortgage obligations CNBC, 172, 207, 238 Cohan, William, 279 Cohodes, Emily, 216 Cohodes, Leslie, 215, 216 Cohodes, Marc, 32, 33, 34, 53, 54, 163, 178, 215, 216, 228 “first mover advantage” concept of, 226 Lernout & Hauspie case and, 35–39, 44, 45 new hires at Copper River and, 213, 214, 215 O’Brien’s denunciation of, 166–167 Overstock.com case and, 160, 180, 183, 186 SEC anti-shorting rule, Goldman Sachs, Copper River collapse and, 297, 299, 300, 301, 303, 305, 306, 307 Cohodes, Max, 35, 216 Collateralized mortgage obligations, 163, 310 Columbia Journalism Review, 193, 233 Comparator Systems, 29, 30, 31 Congress, home ownership and, 274, 275 Conseco, 52, 252 Conspiracy theories, 231n, 232 Contogouris, Spyro, 256, 257, 258, 259, 260, 261, 269, 271, 272 Contrarians, 312, 313 Convertible arbitrage market, short sales and, 290 Cooley, John, 237 Copper River Management, x, xii, 238, 261, 271, 272, 280, 286, 289, 291, 295, 308 closing of, 305–306, 307 name change from Rocker Partners to, 213 office quarters described, 215 SEC anti-shorting rule, Goldman Sachs and, 296–306 Corridor funding, San Diego pension system and, 125 Countrywide, 278 Cox, Christopher, 190, 191, 288, 289, 292, 294, 307 Cramer, Jim, 190, 238, 293 Crawford, Broderick, 168 Crazy Eddie, Inc., 240, 241, 243 Credit crisis, 310 Credit default swaps, 13, 277–278, 279, 281, 309 fear factor and, 282 regulatory mistakes and, 283 short-selling and, 290 Index Credit market: seizure of (2008), 270 severe dislocations in, 279 Credit Suisse First Boston, 203, 204 Cruttenden Roth, 89 CSFB See Credit Suisse First Boston Daewoo, 94, 102, 111 D’Agostino, Justin, 70, 74, 114 Danish Car Carriers, 92, 93, 94 Decimalization, upticks and, 288 “Deemsters” (Isle of Man), SEC, AremisSoft case and, 68–75, 77–84, 86, 113–114, 118, 222 DeepCapture.com, 200, 232, 233, 238, 239, 245 Deloitte & Touche, 58 Democrats, American financial system crisis and, 283 Department of Justice, 122, 132, 174 HealthCare Services case and, 25 NovaStar investigated by, 171 Department of Labor, NovaStar investigated by, 171 Depository Trust Corporation, 65 de Ridder, Alex, 87, 101, 111, 119 Derivatives, 13, 283 Dictaphone Corporation, 43 Disclosure, financial machinery and, 311, 313 Document productions, 179 Don’t Blame the Shorts: Why Short Sellers Are Always Blamed for Market Crashes and How History Is Repeating Itself (Sloan), 294n Dow Jones Newswire, 161 Dragon Systems, 43 Drexel Burnham Lambert, 10, 14, 15 Duerden, John, 45, 46 Duffy, James, 106 Dunlap, Al, 90 “Dutch auction,” 180 Earnings before interest, taxes, depreciation and amortization, 241, 242, 243 “Easter Bunny, The.” See O’Brien, Bob Eavins, Peter, 252 EBITDA See Earnings before interest, taxes, depreciation and amortization Ehrman, Chris, 30 Einhorn, Cheryl Strauss, 174 Einhorn, David, 174, 312 Eisinger, Jesse, 44, 45, 173, 313 Enron, ix, 27, 52, 77, 91, 98, 121, 132, 142, 161, 169, 223, 249 319 Equity credit lines, 274 Eyeshade Report, 88, 89n, 313 Facebook, 232 “Fails to deliver,” 167, 167n Fairfax Financial Holdings, 278 chart for, 298 investigation of, 192, 249–272 Fairfax Financial Services, 291 Fairfax Gibraltar, 269 “Fairfax Project,” 257, 258 Fannie Mae, 274, 275, 276, 281, 287 Farrer, David, 79, 80 FBI, NovaStar investigated by, 171 Fear factor, 282 Federal fund rates, housing bubble and, 164 Federal Reserve Board, 12, 164, 275 interbank discount rate uptick (1987), loose monetary policies, asset bubbles and, 283 Federal Trade Commission, 13, 17 Credit Practices Division, 2, 3–4 NovaStar investigated by, 171 Feshbach, Joe, 24 Feshbach, Kurt, 24 Feshbach, Matt, 24 Feshbach Brothers (Dallas), 24, 25, 174 Financial innovation, systemic risk presented by, 13 Financial machinery, transparency and, 311 Financial Post, 182 Financial reinsurance, 254, 262 Financial Services Authority (UK), 286, 289, 290, 294 Financial Times, 287, 294 Finite reinsurance, 253 Fitch agency, 249, 277 “Flanders Language Valley” (Belgium), 40 Flanders Language Valley Fund, 46, 47 Fooling Some of the People All of the Time (Einhorn), 174, 312 Forbes.com, 217 Forbes magazine, 161 Foreclosure sales, 280 Forensic Advisors (Maryland), 88 Fortune magazine, ix, 161, 171, 227, 249, 260, 313 “Frauds, fads, and failures” (the three Fs), 33 Freddie Mac, 274, 275, 276, 281, 287 Front-running, 300 Fuld, Richard, xi, 283, 303, 307 Futures market, portfolio insurance and, 11–12 320 INDEX Gain-on-sale accounting, NovaStar’s pretax earnings and, 165 Garbage in, garbage out, 163 Gemstar-TV Guide, 133 General Electric, 203 Generally Accepted Accounting Principles (GAAP), 221, 227, 242, 246 Gibson, William, 232 GIGO See Garbage in, garbage out Giuliani, Rudy, 15 Global credit crunch, 280 Goldman Sachs, 16, 161 AIG bailout and, 281–282, 307 SEC anti-shorting rule, Copper River’s demise and, 296–306 “Gonzo journalism,” 232 Google Corporation, 229 Government Sponsored Entities, 274–275 Gradient Analytics, 194, 196, 197, 313 Biovail Corporation suit and, 192 Overstock.com case and, 157–162, 177–191, 217, 218–228 reports and services provided by, 156 Grassley, Chuck, 207 Great Depression, 283, 310 Greed, 309 Greenberg, Hank, 254 Greenberg, Herb, 36, 38, 44, 53, 54, 55, 57, 91, 97, 165, 166, 186, 189, 190, 191 Greenlight Capital, 174 Greenspan, Alan, 12, 275 Grimaldi ship line, 88 Grissom, Larry, 134, 146 GSEs See Government Sponsored Entities Gutfreund, John, 23 Gwynn, John, 252, 253, 256, 272 Haircuts, 299 Hanson, Tom (pseud.), 252, 253, 254, 262, 272 Hatch, Orrin, 199, 200 Hauspie, Pol, 40, 41, 47, 51 Hawking, Stephen, 49 HealthCare Services, 22, 25, 26, 27, 28 Hedge funds, xi, 303 See also Rocker Partners collateralized mortgage obligation sales to, 163 failures of (2008), 299 SEC antishorting rule and, 292, 293 Heilizer, Deborah, 41, 90 Helburn, Mary, 169 Heller Financial, 203, 204, 205, 209 Hemingway, Ernest, 113 Home ownership, American dream and, 274 Hoover, Herbert, 284 House of Cards (Cohan), 279 Housing and Urban Development, NovaStar investigated by, 171 Housing bubble See also Mortgages cheap money and, 275–276 decline in lending standards and, 276 federal fund rates and, 164 NovaStar and, 163 rating agencies and, 277, 278 securitization and, 276–277 Housing market See also Real estate government support of, 274 2007 stall in, 278 HSBC Bank (Monaco), 101 HUD See Housing and Urban Development Hurricane Katrina, 265 Hwang, Gary, 94, 111 Iceland, destabilized economy of, 280 ICP Capital, 258, 261, 264 Independent investigations, 122 India, destabilized economy of, 280 Innovation, double-edged nature of, 10 Insider trading, material information and, 155 See also Securities and Exchange Commission Institutional behavior, Parkinson’s “laws” of, 204n Insurance companies: collateralized mortgage obligation sales to, 163 valuation challenges with, 249 Interest rate environment, housing bubble and, 275 Internal Revenue Service, 264 International Office of Justice, 40 Internet, 166, 229, 232, 235, 239, 310 Interpol, 111 “In the Matter of Gradient Analytics,” 189 Investigative journalism, budgetary starvation and state of, 313 Investment banks: failures (2008), 279–280, 281–282, 283, 284 severe dislocations in credit market and, 279, 280 InvestorVillage.com, 231 Jacobs, Irwin, 57 JAG Media Holdings, 217 Index JCPenney, 153, 154, 155, 179 J.P Morgan, 91, 280 Junk bonds, 13–16, 309, 310 Jyske Bank (Denmark), 101 Kang, B J., 260, 261 Kasowitz, Marc, 200, 271 Kasowitz Benson Torres & Friedman, 192, 256, 271 Kerry, John, 231 Keyes, Rob, 56, 66, 69, 76, 90 Kingsford Capital, 233 KPMG, 132, 133, 136, 137, 139, 140, 142, 144, 145, 146, 149, 150 KPMG Belgium, 42, 43 Kroll & Associates, 141, 142, 145, 146, 150, 173, 191 Kynikos Capital, 256 Kyprianou, Lycourgos, 57, 62, 64n, 66, 67, 69, 70, 74, 75, 76, 105, 109, 110, 119 Labiad, Aldo, 87, 92, 93, 94, 95, 96, 97, 99, 100, 101, 102, 103, 104, 106, 107, 111, 112, 119 Lamont, Owen, 201 Layoffs, at financial firms (2008), 299 LBOs See Leveraged buy-outs Lehman Brothers, xi, 303 collapse of, 281–282, 283, 284, 289, 290 U K operations, 286 Lending standards, housing bubble and decline in, 276 Lerach, Bill, 142 Lernout, Jo, 40, 41, 51 Lernout & Hauspie, 86, 98, 313 investigation of, 35–48, 50–52, 89, 173 Leveraged buy-outs, 10, 14 Levine, Dennis, 14, 15, 16 Levitt, Arthur, 141, 142, 146 Lewis, Ken, 281n Lindsey, 71, 72, 74, 245 Livermore, Jesse, 167, 293 Lloyd’s of London, 267 Lock-in agreements, 3, Lomas Mortgage, 3, “Long-tail” coverage, 267, 268 Lower income buyers, Government Sponsored Entities and home ownership for, 275 Ludlum, Robert, 234 Lynch, Gary, 57, 58, 62 Lynde, Russell, 215, 216, 299, 300, 305, 307 321 Mack, John, 202, 203, 204, 205, 209, 210, 211 Mack, Linda, 237 “Mad Money,” 190 Madoff, Bernie, 13, 20, 310 Mannaerts, Edwinne, 96 Maremont, Mark, 44 “Mareva injunction,” 70 Market declines, Federal Reserve Board and, 12 “Mark-to-market” accounting, 278 Martin, Jenna, 56 Materiality, 129, 155 Matrixx Initiatives, 89n Mayor, Heidi, 86, 90, 94, 99, 105, 107, 108, 112, 117 McCain, John, 283 McLaughlin, Campbell, 70, 74, 114 McLean, Bethany, 161, 171, 238 Medicare fraud, HealthCare Services case and, 25, 26, 27, 28 Melnyk, Eugene, 192, 193 Merhi Ali Abou Merhi, 87, 94, 99, 100, 105, 107, 108 Merrill Lynch, 15, 16, 95, 96, 98, 102, 147n, 281 Message boards, 230 MFT, 92, 111 Miers, Harriett, Milken, Michael, 13, 14, 15, 16, 17, 175, 234, 235, 245 Milosevic, Slobodan, 109 Mincavage, Karen, 30 “Miscreants’ Ball, The,” 174 Mitchell, Mark, 232, 233, 235, 238 Montgomery, Mark “Monty,” 36, 37, 44, 215, 216, 252, 262, 307 Moody’s, 277 Moore, Michael, 86, 90, 94, 104, 105, 106, 107 Moral hazard, 12, 281 Morgan Keegan, 252, 255, 256, 258, 264, 272 Morgan Stanley, 202, 203, 205, 208, 210, 211 Morgenson, Gretchen, 164 Mortgage interest payments, tax deductions for, 274 Mortgage originators, housing bubble and, 163 Mortgages See also Housing market; Real estate default rates, 275, 278 lock-in agreements, 3, low-interest rate environment (early 2000s), 275 no-documentation, 309 Municipal disclosure system, 129 322 INDEX Municipal unions, San Diego city elections and, 124 Murphy, Dick, 127, 138, 139 Naikan, Navid, 215 Naked short-selling, 167, 287, 288, 292 NASDAQ, 25, 30, 32, 33, 168, 203, 275 National Coalition against Naked Shorting, 169, 172, 292 Nationally Recognized Municipal Securities Repositories, 129, 130 NCANS See National Coalition against Naked Shorting Neal, Charlie, 86, 90, 91, 93, 102, 104, 105, 107, 108, 116 NERMSERS See Nationally Recognized Municipal Securities Repositories Newspapers, staff cutbacks at, 313 New York Attorney General, 171, 174 New York Post, 162, 191, 192, 217, 255, 261, 313 New York Stock Exchange, 9, 86, 90, 97, 98, 203 New York Times, 57, 98, 121, 133, 161, 170, 207, 238, 240, 261, 291 NFI-info.net, 166 NMS Services, 262, 263, 264, 265, 266 Nocera, Joe, 161, 191, 193, 228 No-documentation mortgages, 309 Norris, Floyd, 291 NovaStar Financial Corporation, 159, 162, 169, 170, 171, 172, 189, 278, 280 aggressive gain-on-sale accounting and, 165 annual dividends of, 164, 165 housing bubble and, 163 promotional web sites for, 166, 167 nSpireRe, 259, 267–268, 269, 270 Obama, Barack, 283 O’Brien, Bob (“The Easter Bunny”), 169, 170, 191, 194, 195, 216, 230, 234, 235, 257, 287, 292 anti-naked shorting cult and, 168 Byrne joins forces with, 171, 172, 173, 175 NovaStar, Rocker Partners and, 162, 166, 167, 189 Odyssey Re, 255, 258, 259, 262, 263, 264, 265, 266 Old Man and the Sea, The (Hemingway), 113 Ontario Securities Commission, 193 O’Quinn, John, 217 Overstock.com, 167, 172, 173, 174, 175, 177, 178, 180, 181, 192, 194, 195, 196, 201, 233, 239, 244, 245, 295 defamation suits filed by, 173, 177, 199, 200, 217–228, 238 EBITDA numbers and, 241–243 Fairfax Financial Holdings and, 255 Gradient Analytics, Rocker Partners and, 157–162, 178, 182–190, 197, 199 Pan, Christopher, 95, 96, 102 Parkinson, C Northcott, 204n Parmalat, 52, 255 Paulson, Hank, 281, 283, 284, 292, 294, 303 Paulson Plan, 296 SEC emergency rule in tandem with, 293 Pearlrose Holdings, 96 Peikin, Steve, 60, 61, 62, 64, 66, 67, 68, 71, 73, 74, 79 Penny stock scams, 25 Pension funds, collateralized mortgage obligation sales to, 163 Pension systems, actuaries and, 123 Pequot Capital Management, 202–211 Perez, Francis, 96 “Phantom stock,” 264 Pitt, Harvey, 117 Portfolio insurance, 10, 11–12, 277, 309 Pound, Ezra, 169 Poyiadjis, Roys, AremisSoft case and, 59, 60, 62, 64, 65, 66, 67, 68, 69, 70, 71, 72, 73, 74, 75, 76, 77, 79, 82, 83, 84, 105, 109, 113, 114, 118, 119 Predation, populist rhetoric and, 169 Presidential election (2008), world financial crisis and, 282–283 PricewaterhouseCoopers, 92, 246, 258 Program trading, 10, 12 “Pump-and-dump” schemes, 25, 28, 34, 288 Puwaoski, Kevin, 74, 75, 78, 80, 82, 115, 116, 119 Racial discrimination, 202 Rainier III (prince of Monaco), 106 Rating agencies, real estate bubble and, 277, 278 Reagan, Ronald, Real estate See also Housing market; Mortgages residential, government and capital flow into, 274 subprime mortgage market and, 274, 275, 276 Index Real estate lending, private-public partnerships and, 274–275 Reg SHO list, SEC anti-shorting rule and, 293, 295, 296 Regulatory agencies, 310 Regulatory mistakes, world financial crisis and, 283 Reinsurance, 253, 254, 255, 262, 267, 268 Reminiscences of a Stock Operator (Livermore), 167, 293 Remond, Carol, 306 Reporters for Freedom of the Press, 221 Republicans, American financial system crisis and, 283 Reuters, 161, 306 Risk analysis models, 277 Rocker, David, 32, 39, 153, 194, 196, 199, 216, 219, 235, 238, 257 Byrne, Overstock.com and, 159, 160, 162, 173, 177, 180, 183, 185, 186, 187, 195, 218, 224 Fairfax suit and, 257 retirement of, 213, 216, 306 Rocker Partners, 32, 36, 153, 165, 170, 191, 192, 194, 196, 197, 201, 238, 252 AremisSoft suit and, 57 Fairfax suit and, 192, 252, 256, 257 Gradient Analytics, Overstock.com and, 156–162, 172–174, 177–190, 199, 217–227 investment model motto for, 33 Lernout & Hauspie and, 45 NovaStar and, 165, 170 Roeder, Rick, 125, 134 Rosen, Murray, 70, 79, 82, 84 Rosenfeld, Richard, 56, 63, 65, 66, 67, 69, 70, 74, 75, 76, 77, 78, 80, 83, 94, 105, 119 SAC Capital, 192, 235, 256 Sadak, Kamal, 95, 96 Salinger, Pierre, 237 Salomon Brothers, 23 Samberg, Arthur, 204, 209, 211 San Diego City Charter, 145 San Diego City Employees Retirement System, 123–150 Manager’s Proposal I and, 125, 135, 143, 149 Manager’s Proposal II and, 126, 127, 135, 139, 143, 148, 149 San Diego Municipal Code, 124, 127, 145 San Diego pension system scandal, 121, 122 323 San Diego Union-Tribune, 121, 129, 135, 137, 138, 140, 141, 142, 148, 149 San Francisco Chronicle, 53, 285 SanityCheck.com, 167 Sarbanes-Oxley Act of 2001, 122, 283 Saunders, 232 Savings, foreign, American housing bubble and, 275–276 Savings and loan associations, 274 Schumer, Chuck, 200 Schwartz, Alan, 279 Scially, Dave, 53, 54, 55, 57, 89, 90, 91 SDCERS See San Diego City Employees Retirement System Sea Atef car carrier, 86, 93, 94, 99, 108 Securities and Exchange Commission (SEC), ix, x, xi, 17, 25, 121, 122, 174, 207, 208, 214, 286, 309, 310, 312, 313 ACLN Limited case, 86–113 AremisSoft Corporation case, 54–86, 118, 119, 222 Comparator Systems case, 29, 30, 31 Division of Corporate Finance, 20 Division of Investment Management, 20 emergency antishorting rule by and consequences, 287–296, 297, 300, 304, 306 Enforcement Division, 18, 22 Gradient Analytics investigation, 188–197, 199 HealthCare Services case, 25–27 Lernout & Hauspie case, 35–48, 50–52 1934 recall established by, 294 NovaStar investigated by, 171 Office of Municipal Securities, 122 Pequot Capital Management case, 202–211 post 9/11 New York City office location, 194–195 San Diego City Employees Retirement System case, 123–150 Securities fraud, short squeezes and, 293–294 Securitization: financial services industry profits and, 276–277 subprime mortgages and, 163, 164, 165 Senate Judiciary Committee, 199, 200, 202, 203, 206 Seo, Joo Chul, 46, 51, 52 September 11, 2001 terrorist attacks, 194, 287 Sharpe, William, 11 Shea, Pat, 127, 137 Shipione, Diann, 127, 128, 133, 135, 137 “Short-and-distort” manipulation, 25 Short funds, significant losses in (2008), 305 324 INDEX Short sales: convertible arbitrage market and, 290 defined, x regulation of, 288 Short-sellers: “great extinction” during Clinton second term, 32 massive naked shorting and, 167 Short-selling rule (emergency powers), invoked by SEC, and consequences related to, 287–296, 297, 300, 304, 306 Short squeezes, 293–294 Simon, Stormy, 162 Singapore Securities Commission, 47 Sitrick, Michael, 192 Sitrick and Company, 192, 256 60 Minutes, 188, 192, 193, 199 Skilling, Jeffrey, 148 Sloan, Robert, 294n Smith, Herbert, 70, 80 Social Security, 123, 141 “Solvent scheme or arrangement,” 268 Specter, Arlen, 199, 200, 201, 207 Sphere Drake, 268, 269, 270 Spitzer, Eliot, 20, 117, 188, 254 Stahl, Leslie, 193 Standard & Poor’s, 277 Stone, Oliver, 107 “Story of Deep Capture, The” (Mitchell), 232, 233, 235, 236 “Strategic Lawsuit Against Public Participation” statute, 218, 219, 220, 221, 224 Street Insight, 160 Structured products, collateralized mortgage obligations as, 163–164 Subprime mortgage origination, 276 Subprime mortgages:, 13 Fed’s money policies and, 275 industry collapse and, 164, 275, 280 Sunbeam Corporation, 52, 77, 90, 121 Supreme Court, 132, 148, 155 Sussman, Richard, 299, 302, 303, 304 Swift Boat Veterans, 231 Swiss Re, 254 Systemic risk, regulators and, 281n TARP See Troubled Asset Relief Program Tax deductions, for mortgage interest payments, 274 Taxes, San Diego pension system and, 124, 126 Technology stocks bubble, 164 TheStreet.com, 53, 57, 91, 252 Thompson, Hunter S., 232 Thomsen, Linda, 205, 206, 208, 210 Thornton, Grant, 246, 247 Toxic assets, 277, 311 Toxic waste tranches, 164, 165 Transparency, financial machinery and, 311 Treasury Department, 23, 280, 281, 282, 283, 284, 292 Troubled Asset Relief Program, 311 Turner, Lynn, 141, 142, 146 Unions, San Diego pension system and, 124–125, 126 “Uptick rule,” elimination of, 288 Vervaet, Patrick, 87, 88, 103 Vickrey, Donn, 156, 159, 180, 182, 183, 185, 186, 187, 196, 197, 224, 227 Vinson & Elkins, 122, 130, 142, 149, 150, 177, 213 W R Hambrecht, 180, 182 Wallander, Mike, 65 Wall Street Journal, 154, 161, 170, 191, 207, 313 Washington Post, 172 Waste Management, 121 Watsa, Vivian Prem, 250, 251, 255, 256, 257, 270 Webb, Lee, 232, 246 Webber, Paul, 128, 129, 130, 132 Web-threads, 313 Weil, Jon, 287 Weiss, Gary, 169, 231, 232, 237, 239–240, 313 Weiss, Milberg, 115, 116, 119 “Wells notice,” 154–155 Whistleblowers, 226, 227 White, Mary Jo, 205, 208 White Rock Capital, 174 Wikipedia, 232 Wilkie Farr & Gallagher, 141, 145, 150 WorldCom, ix, 27, 52, 77, 91, 121 World Financial Center, SEC offices at, 195 World financial crisis, regulatory mistakes and, 283 World financial system, destabilization of (2008), 280 Wyden, Ron, 191 Xerox Corporation, 132 Yahoo!, 230 Zeta-Jones, Catherine, 78 Praise for SELLING AMERICA SHORT “Richard Sauer’s riveting Selling America Short lifts the veil on two powerful and secretive worlds that dominate our financial markets: those of hedge funds and the Securities and Exchange Commission regulators Accounts of the inner workings of both don’t come more informative—or more entertaining.” —Jesse Eisinger, Senior Reporter, ProPublica “Every stock market cop should be as determined—and witty and frank—as Rick Sauer Assigned reading for anyone investigating stock swindles, or just stocks Finally, an inside narrative of the SEC and the scams that wrecked Wall Street.” —Bill Alpert, Senior Editor, Barron’s “Rick Sauer’s journey through the underbelly of finance is black humor at its best Truly hilarious and deeply frightening.” —Bethany McLean, Contributing Editor, Vanity Fair Selling America Short: The SEC and Market Contrarians in the Age of Absurdity is the gripping chronicle of twenty years of crooked companies and financial philanderers as seen through the eyes of Richard Sauer, a veteran of the U.S Securities and Exchange Commission, private legal practice, and the hedge fund subculture Sauer began chasing financial fraud at the SEC before it exploded into an issue of national concern Before, that is, Enron and WorldCom and other turn-of-the-century financial scandals made people wonder whether our business leaders should be seen as presumptive felons, including those paragons of capitalism who loom like stuffed predators from the covers of Fortune and BusinessWeek Written in a straightforward and accessible style, this book recounts Sauer’s first-person experiences with the sometimes comic, sometimes tragic flaws of the American financial system and those who attempt to control it ... Richard Selling America short : the SEC and market contrarians in the age of absurdity / Richard C Sauer p cm Includes index ISBN 97 8-0 -4 7 0-5 821 1-4 (cloth) Sauer, Richard United States Securities and. .. SELLING AMERICA SHORT SELLING AMERICA SHORT The SEC and Market Contrarians in the Age of Absurdity Richard C Sauer John Wiley & Sons, Inc Copyright C 2010 by Richard C Sauer All rights... father and grandfather and great-grandfather and God-knows-howmany other pedantic forebears and never, ever go back to the billable hour treadmill of private legal practice The first year in the