Introduction: The Battle of Trenton
ixIt would be against all: The landmark 1987 Supreme Court case Shearson/American Express Inc. v. McMahon (482 U.S. 220) closed the door tightly on investor lawsuits against brokers, by requiring arbitration even in cases involving securities fraud. (Groves’s case didn’t involve fraud.) “The strong federal policy in favor of arbitration is by now well-established,” observed the Fourth Circuit Court of Appeals in its May 2000 ruling on Smith Barney v. Critical Health Systems, citing the Shearson case. Smith Barney illustrates Wall Street’s insistence upon not just arbitration but the Wall Street brand of arbitration. Critical Care had wanted to bring its case before the American Arbitration Association, which was allowed by fine print in brokerage agreements that made reference to the rules of the American Stock Exchange. This was known as the “Amex window” because Amex rules allowed customers to bring cases before the AAA. The Street fought hard and successfully, in this and other court cases, to close the Amex window and force investors into Wall Street’s brand of arbitration.
xWhenever anyone has sought: Even an innocuous attempt to impose common-sense conflict-of-interest rules was fought passionately by Wall Street regulators. In compliance with a law passed in 2001, the California Judicial Council required arbitrators in July 2002 to divulge a checklist of all business, personal, and professional ties that could represent conflicts of interest. The NASD and NYSE both reacted by stopping arbitrations in California, and then fought successfully in court, with the support of the SEC, to have the rules overturned. See E. Scott Reckard, “NASD Rules Preempt State Law,” Los Angeles Times, May 25, 2005.
xRand Groves was unlikely fodder for such a confrontation: Details of his complaint against Merrill derived from case documents in Rand Groves v. Merrill Lynch Pierce Fenner & Smith Inc., Llewellyn G. Ross and National Association of Securities Dealers, Inc., Superior Court of New Jersey, Law Division—Mercer County, Docket No. L-147104, June 4,2004. Also author interviews with Rand Groves, and his attorneys, G. Martin Meyers and Jonathan Colman.
xivThe Securities Industry Association maintains: “Why Arbitration Is Better Than the Courts,” statement, Securities Industry Association, January 2004; interviews with securities lawyers.
xivAccording to the NASD: “Fact Sheet on NASD Dispute Resolution Inc.,” NASD Regulation, July 2004.
xixOr, as one federal appellate court pointed out: Ruling of the Third Circuit Court of Appeals in Newark Stereotypers’ Union No. 18 v. Newark Morning Ledger Co., 397 F.2d 594 at 598–99 (1968).
xixI had just written a story: “Are Investors Walled Off from Justice?” by Gary Weiss, Business Week, March 22, 2004.
xxTyco, which Business Week glorified: “The Most Aggressive CEO,” by William C. Symonds, Business Week, May 28, 2001. The profile of this “little-known but remarkably successful $38 billion conglomerate” described Tyco as “what today may qualify as the leanest operation in Corporate America.” A different tone was taken in “The Rise and Fall of Dennis Kozlowski,” by Anthony Bianco in the issue of December 23, 2002, which described a man “unhinged by greed” and “a rogue CEO for the ages”.
xxA weekly business publication called NJBIZ: “When Value Vanishes,” by William T. Quinn, NJBIZ, August 2, 2004. The letter from a Merrill spokesman appeared in the August 16 issue.
xxiiiHe failed miserably: For example, Levitt was an outspoken critic of Wall Street research, delivering many speeches on the subject and denouncing analysts in his book. See Chapter 3 (“Analyze This”) of Take On the Street, by Arthur Levitt with Paula Dwyer (New York: Pantheon Books, 2002). However, a number of critics have observed that when Levitt actually had the power to do so, he did not bring so much as a single case against a major Wall Street firm involving fraudulent research. See Blood on the Street, by Charles Gasparino (New York: Free Press, 2005), p. 195.
xxivOne lasting legacy: “Exemption Won in 1997 Set Stage for Enron Woes,” by Stephen Labaton, New York Times, January 22, 2002.
xxivAt the conclusion of his term: “The Investor’s Champion,” by Mike McNamee, Paula Dwyer, and Christopher Schmitt, Business Week, September 25, 2000. The article, illustrated with a sketch of Artie brandishing an Arthurian sword, praised Levitt as “the most aggressive securities cop in history.” See also “SEC’s Levitt Gets Big Applause from Small Investors,” by Judith Burns, Dow Jones Newswires, October 13,2000. For a more skeptical view of his battle with accountants, the focus of the BW piece, see Unaccountable: How the Accounting Profession Forfeited a Public Trust, by Mike Brewster (New York: Wiley, 2003).
xxviiBy 2003, the press: “The Hole Story: How Krispy Kreme Became the Hottest Brand in America,” by Andy Serwer, Fortune, July 7, 2003. See “Merchants of Hype: Is the Media’s Focus on Good News Masking a Bad Economy?” by Ellsworth Quarrels, Across the Board, November 1,2003. Mind you, this was not an exercise in 20-20 hindsight. Across the Board was pillorying this syrupy 4,000-word story several months before Krispy Kreme hit the fryolator for alleged accounting irregularities. See also “A Hole in Krispy Kreme’s Story,” by Andy Serwer, Fortune, June 14, 2004; “Report Shows How Krispy Kreme Sweetened Results,” by Mark Maremont and Rick Brooks, Wall Street Journal, August 11, 2005. xxvii New York Times media columnist David Carr: “Bad Business for Magazines About Business,” by David Carr, New York Times, May 30, 2005. xxviii When he was SEC chairman: “Bush S.E.C. Pick Is Seen As Friend to Corporations,” by Stephen Labaton, New York Times, June 3, 2005.
xxviiiThe financial media: “The Man Who Moves Markets: Inside the World of Super-investor George Soros,” by Gary Weiss, Business Week, August 23, 1993.
xxixChances are, Wall Street is a part of your life whether you like it or not: Frederick E. Rowe, a money manager in Dallas and the chairman of the Texas Pension Review Board, put it this way in an interview with the New York Times: President Bush talks about transitioning to an ownership society. Well, we already have an ownership society, and the people who are owners don’t know they’re the owners. The owners are the people in America who hope to retire, and who are retired, and who depend upon a stream of income that their deferred investments generate. And they don’t have many advocates.” “Calpers Ouster Puts Focus on How Funds Wield Power,” by Mary Williams Walsh, New York Times, December 2, 2004.
xxixIn 1962, the Federal Reserve: “Survey of Financial Characteristics of Consumers,” Federal Reserve Bulletin, March 1964.
xxixAccording to the most recent figures: “Equity Ownership in America, 2002,” Investment Company Institute and Securities Industry Association, survey conducted in January 2002.
Chapter One: Mr. Grasso’s Neighborhood
2The markets are so rude and chaotic: Applications of chaos theory to the markets have been the subject of dozens of books and articles. See Trading Chaos: Maximize Profits with Proven Technical Techniques, by Justine Gregory-Williams and Bill M. Williams, 2nd ed. (New York: Wiley, 2004). See also “The Man from C.H.A.O.S.,” by William Green, Fast Company, November 1995.
3Wall Street firms don’t want you to know this: Brad M. Barber and Terrance Odean, “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors,” Journal of Finance, April 2000.
3Probably the most dramatic: “Defined Benefit vs. 401(k): The Returns for 2000–2002,” Watson Wyatt Worldwide, October 2004; “A Lesson for Social Security: Many Mismanage Their 401(k)s,” by Tom Lauricella, Wall Street Journal, December 1, 2004.
3All that: “You Can Do It,” by Gary Weiss and Jeffrey M. Laderman, Business Week, May 31, 1993. The Motley Fool investment Web site, which is in business to cater to investor greed and pipedreams, continued the “you can do it” mantra in a self-serving article, “Painfully Obvious Stock Tips,” by Rich Smith, April 20, 2005. The article goes on to belittle index funds, and concludes that investors can do better than average—by subscribing to Motley Fool, of course! Money back if not delighted.
4In May 2005: “Amex Says President Has Stepped Down; No Successor Named,” by Dow Jones Newswires, Wall Street Journal, May 3, 2005. The Journal was so indifferent to the story, briefly noted on page 4 of its Money & Investing section, that it didn’t even assign a reporter.
4Real estate agents put the value: “The Amex: Worth More Dead Than Alive?” by Mara Der Hovanesian, Business Week, November 29, 2004.
5What made Grasso: Dick Grasso’s legacy flourished under the SEC reign of his predecessor at the NYSE, Bill Donaldson, who rammed through market structure rules that would retain the NYSE’s hegemony. The Wall Street Journal observed on April 4, 2005, in an editorial entitled “Donaldson’s Dinosaur,” “SEC Chairman William Donaldson is the powerful man he is because the U.S. has the most competitive financial markets in the world. So we have to wonder why he is about to use that power to preserve a monopoly for the very symbol of that capitalism, the New York Stock Exchange.” Not that it matters to most investors (which is why we’re dealing with this in a footnote), but the answer to the Journal ’s dilemma was this: The NYSE is a monopoly because it is the very symbol of capitalism. That means it has heap big clout. See “Big Board Still Carries a Big Stick,” by Aaron Lucchetti, Wall Street Journal, April 5, 2005.
7The NYSE and its defenders: A typical assertion of the party line came from John Reed, who briefly served as NYSE chairman, in testimony before the House Capital Markets subcommittee at the height of the Grasso scandal, October 16, 2003. Reed said: “The role of the auction market [NYSE-speak for the specialist system], every time it has been studied, has always been seen to have positive benefits for both investors and issuers.” (Of course, Reed testified earlier in the day that “we, in the New York Stock Exchange, are good regulators,” so maybe he was still kidding around.)
7They have a duty: The specialists and the exchange usually put it this way: “We supply liquidity when necessary to the proper operation of the market, acting as buyer or seller in the absence of public demand to buy or sell in those stocks”—Robert B. Fagenson, vice-chairman of Van der Moolen Specialists USA, Inc., and vice-chairman of the board of directors of the Specialist Association of the New York Stock Exchange, in testimony before the Senate Banking Committee on February 14, 2001.
7Well, here’s what the NYSE’s: If you look carefully—very carefully—on the NYSE Web site, you’ll find the stabilization numbers, updated annually, at this URL: http://www.nysedata.com/factbook/viewer_edition.asp? mode=table&key=19&category=4.
8Marios found that in 1990: Interview with Marios Panayides in June 2005. Marios is gathering the data for a paper, which will be titled “Specialist Stabilizing Actions in the Transaction Process.”
11Grasso was perfectly straightforward: See “The $140 Million Man,” by Gary Weiss, Business Week, September 15, 2003.
Chapter Two: How to Be a Wall Street Prophet
16Dick Grasso, now three years into his term: Grasso quote from “NYSE Summarily Suspends Eight Members and Four Member Firms; U.S. Attorney’s Office and SEC Also Take Action Against Members and Others,” New York Stock Exchange press release, February 25, 1998.
18D’Alessio and his lawyer: The legal documents quoted in this chapter are mainly from the voluminous filings in two cases, U.S.A. v. Oakford et al., Docket No. 98 Cr. 144, and SEC v. Oakford, Docket No. 98 Civ. 1366, both in the U.S. District Court for the Southern District of New York. The civil suit brought by D’Alessio against the SEC, appealing his NYSE sanctions, was D’Alessio v. SEC, 380 F.3d 112, decided by the Second Circuit Court of Appeals on August 16, 2004.
18There was some media coverage of: “A Street Scandal That May Not Die,” by Gary Weiss, Business Week, August 9, 1999; see also “SEC, U.S. Attorney Query the NYSE Anew on 1990s Illegal Trades,” by Robert Kowalski, TheStreet.com, February 16, 2001, and many other stories on the subject by Kowalski and Dan Colarusso.
18When Fortune lambasted Grasso: “The Fall of the House of Grasso,” by Peter Elkind, Fortune, October 4, 2004.
19The August 2004 appellate court ruling: In addition to ruling on D’Alessio v. SEC, the Second Circuit in 2004 issued a similarly worded decision in MFS Securities Corp. v. SEC, brought by the floor brokers Mark and John Savarese.
19Beginning in “at least” 1991:In the Matter of New York Stock Exchange, Inc., Respondent, Securities and Exchange Commission, Administrative Proceeding File No. 3-9925, June 29, 1999.
20When he sued the NYSE: Complaint in D’Alessio v. New York Stock Exchange et al., U.S. District Court for the Southern District of New York, Docket No. 99 cv 605616.
20Kwalwasser’s SEC testimony later: Opinion and Order in U.S.A. v. Oakford, December 13, 1999.
20As an appellate court ruling:MFS Securities Corp. v. SEC.
23Yep, all that was going on: See “NASD-Y Habits Will Have to Change,” by Michael Schroeder, Business Week, August 26, 1996. BW said that “SEC negotiators were stunned that a week before the pact, Ketchum was disputing the issue at the heart of the probe: the existence of a ‘pricing convention’ in which brokers colluded to keep bid and ask prices artificially wide to line their pockets at investors’ expense.” Sounds like a great choice to head enforcement at the NYSE, wouldn’t you say?
Chapter Three: The Best Analysts Money Can Buy
25Spending on research: “The Time for the Quant Is Now,” by Mark W. Riepe, Journal of Financial Planning, April 2005.
25So when the Nasdaq: “Stock Research ‘For Hire’ Offered,” by Deborah Lohse, San Jose Mercury News, June 8, 2005; “New Nasdaq Research Project Raises Objectivity Questions,” by David Enrich, Dow Jones Newswires, June 7, 2005.
25Gayle, who hails from Texas: Interview with Gayle Essary, October 2004.
27For that we have to thank: Brad M. Barber, Reuven Lehavy, and Brett Trueman, “Comparing the Stock Recommendation Performance of Investment Banks and Independent Research Firms,” working paper, August 2004.
27Paid research firms: “Buying Wall Street’s Attention,” by Gary Weiss, Business Week, January 27, 2003; “Amid Shrinking Research Pool, Companies Buy Their Coverage,” by Susanne Craig, Wall Street Journal, March 26, 2003; “What’s Research and What’s Promotion,” by David Baines, Vancouver Sun, May 12, 2004.
29Before coming to the SEC: “SEC Nominee Donaldson Also Has Penny Stock Experience,” by Brent Mudry, Canada Stockwatch, December 20, 2002; “A Thorny Question for Donaldson,” by Gary Weiss, Business Week, January 13, 2003.
29The SEC said:In the Matter of EasyLink Services Corp. et al., Securities Exchange Act of 1934, Release No. 51506, April 7, 2005. By then Donaldson was an investor icon in the Levitt tradition, so the very serious allegations contained in the release, and the mild penalties imposed, were almost entirely ignored in the press.
29The analyst community’s: “Best Practice Guidelines Governing Analyst/Corporate Issuer Relations,” CFA Centre for Financial Market Integrity/National Investor Relations Institute, December 2004.
32Gayle apparently forgot: “Waaco Kid on the 4th: Give Boston Harbor Back to British; Ten Undervalued Small Cap Stocks for the Second Half of 97; Planned Website Because ‘Waaco’s Momma Didn’t Raise No Fool,’” press release, Business Wire, July 7, 1997.
32Even at this early moment: “A Closer Look at the Waaco Kid and His Internet Gang,” by Erle Norton, TheStreet.com, June 5, 1997. Erle had a considerably more skeptical take on Gayle than my probably too gentle earlier piece, “The New Grapevine Is Online,” Business Week, May 27, 1996.
33Or you might have wound up: “Tiny Genesis Fall Shows Dangers of Internet Investing,” by Rebecca Buckman, Dow Jones Newswires, May 9, 1997.
34The IRI did good things: “Investors Research Institute, Inc., Announces 113 Public Companies Pledge ‘Best Practices in Investor Relations,’ Higher Standards of ‘Accessibility,’ ‘Scrutiny,’ ‘Disclosure,’” press release, Business Wire, January 25, 1999.
34By 2004: “Lifting the Lid: Paid-for Research Scores with Investors,” by Ritu Kara, Reuters, July 15, 2004.
34According to a 2002: “The Cost of Coverage/Credibility,” IRUpdate, National Investor Relations Institute, April 2002.
36As time went on: Various analyst reports issued by Investrend Communications Inc.
36It is certainly: “Starnet Took Bets, Warrants Disclose,” by David Baines, Vancouver Sun, August 24, 1999.
36Instead, John slapped: “Starnet Communication, Inc., Update,” John M. Dutton, analyst, PAR research report, August 23, 1999.
37Nowhere on the site was it mentioned:In the Matter of John A. Carley et al., Administrative Proceeding File No. 3-11626, Securities and Exchange Commission, Initial Decision, July 18, 2005.
37They took a hard look:In the Matter of John A. Carley et al., Order Instituting Adminstrative and Cease-and-Desist Proceeding, September 1, 2004.
39In September 2004:In the Matter of Taglich Brothers Inc. and Richard C. Oh, Securities and Exchange Commission, Securities Act of 1933 Release No. 8489, September 15, 2004.
40The SEC, fresh from its triumph:In the Matter of John M. Dutton, Securities and Exchange Commission, Securities Act of 1933 Release No. 8524, January 19, 2005.
40Ditto for a soba-noodle slap:In the Matter of Corcom Companies Inc., dba Bluefire Partners Inc., Bluefire Research, Inc., and William P. Bartkowski, Securities and Exchange Commission, Securities Act of 1933 Release No.8584, July 6, 2005.
Chapter Four: Dialing the Globe for Dollars
43In 1997, word began to creep: “Farmer Regrets His Faith in Offshore Share Tipsters,” by Gail Seekamp, Sunday Business Post, Dublin, April 13, 1997.
44The shares that were being pushed: Details of the Irish stock scam from correspondence and documentation provided to the author from Ireland.
45Here’s a statistic:International Cold Calling Investment Scams, Australian Securities & Investments Commission, June 2002. See the ASIC Web site, http://www.asic.gov.au/asic/asic.nsf, and the Web site of the NewZealand Securities Commission, http://www.sec-com.govt.nz/.
46After paying a $4 million fine: Kott’s most recent accomplishment was outmaneuvering the U.S. criminal justice system. He was originally indicted on forty-eight counts of securities-law violations, but was let off in May 2004 with a guilty plea to two counts and no jail time. See “How a Big Securities-Fraud Case Unravels,” by John R. Emshwiller, Wall Street Journal, August 15, 2005. He was getting his name in the papers despite the guilty plea. See “SEC Probes Mamma.com over Kott,” by Bertrand Marotte, Globe and Mail (Toronto), January 11, 2005. Kott could have been sentenced to eighteen months in prison, but prosecutors recommended, despite his having not cooperated, a “downward departure” under sentencing guidelines, and he was sentenced to probation. It’s interesting to contrast this with the harsh treatment of Louis Pasciuto, subject of my book Born to Steal, whose bail was revoked when the book was published despite his extensive cooperation against dozens of mobsters and crooked brokers. Prosecutors claimed this was for his “own safety,” but critics of the decision believed he was being punished for angering prosecutors. See the Afterword of the book’s paperback edition (New York: Warner Books, 2004).
46Another early Vasco da Gama: “The Penny Stock Scandal,” by Pete Engardio and Gail DeGeorge, Business Week, January 23, 1989; “The Mob on Wall Street,” by Gary Weiss, Business Week, December 16, 1996.
47The SEC obtained:SEC v. Kimmes, 753 F. Supp. 695 (N.D. Ill. 1990). See also order dated June 23, 1993, SEC v. Thomas F. Quinn, United States Court of Appeals for the Seventh Circuit, Docket No. 92-2657.
47Tommy moved on:The Pretender: How Martin Frankel Fooled the Financial World and Led the Feds on One of the Most Publicized Manhunts in History, by Ellen Pollock (New York: Free Press, 2002).
48Some years later:International Cold Calling Investment Scams.
50One of the firms: “Trapped Without Trial,” by Rod Usher, Time (European edition), April 13, 1998.
50Even though the Thais: “Public Prosecutor Filed Charges against 7 Executives of the Brinton Group for Conducting Unlicensed Securities Businesses,” No. 29/2001, press release, the Securities and Exchange Commission, Thailand, September 24, 2001; “Conviction on Boiler Room Case—The Brinton Group,” No. 42/2004, press release, the Securities and Exchange Commission, Thailand, June 10, 2004; see also “Beyond the SEC’s Reach, Firms Sell Obscure Issues to Foreign Investors,” by John R. Emshwiller and Christopher Cooper, Wall Street Journal, August 16, 2000.
51The 2003 case:S.E.C. v. David M. Wolfson et al., Docket No. 03-CV-914, U.S. District Court, Utah, October 16, 2003.
51In 2002, David Wolfson:SEC v. Allen Z. Wolfson, et al., Docket No. 02-CV-1086, U.S. District Court, Utah, September 30, 2002; see also “Cops and Robbers,” by James Surowiecki, The New Yorker, June 27, 2005.
Chapter Five: The Ghost of Mutual Funds Past
53Charles Joseph Kerns Sr.: “Former Palm Beach Resident Sentenced to 27 Years,” by John T. Fakler, South Florida Business Journal, December 27, 2004; “Defendant Charles Kerns Sentenced to 27 Years in Prison for Role in Securities Fraud Scheme,” press release, U.S. Attorney for the Southern District of Florida, December 22, 2004; www.charleskerns.com and linked Web sites.
54Let’s go back: “Spitzer Alleges Mutual Funds Allowed Fraudulent Trading,” by Randall Smith and Tom Lauricella, Wall Street Journal, September 4, 2003.
55In October 2002: Statement by Paul G. Haaga Jr. “Maintaining the Industry’s Reputation and Our Investors’ Confidence in Difficult Times,” Investment Company Institute, October 2002.
56Business Week expressed: “Breach of Trust,” by Paula Dwyer, Business Week, December 15, 2003.
58In that year:Regulation by Prosecution: The Securities and Exchange Commission v. Corporate America, by Roberta S. Karmel (New York: Simon & Schuster, 1982), p. 279.
58It’s a mighty big till:Trends in Mutual Fund Investing, Investment Company Institute, June 2005.
61“Insiders and favored”:Protecting Investors: A Half Century of Investment Company Regulation, Division of Investment Management, Securities and Exchange Commission, May 1992, p. 300.
61An SEC study: Conclusions of SEC Investment Trust Study, quoted in Public Policy Implications of Investment Company Growth, report to the House Committee on Interstate and Foreign Commerce by the Securities and Exchange Commission, December 2, 1966, pp. 64–65.
62The SEC’s 1992 history:Protecting Investors, p. 301, note 43.
62A former SEC fund: “Memories from Early Days of the Securities and Exchange Commission,” by Karl C. Smeltzer, oral history, SEC Historical Society, June 2004.
63Fred Alger Management: The firm’s vice-chairman, James Connelly Jr., paid $400,000 in SEC penalties and pleaded guilty to state charges of tampering with evidence. See In the Matter of James Patrick Connelly, Jr., Administrative Proceeding File No. 3-11303, October 16, 2003; People v. Connelly, felony complaint, Criminal Court of the City of New York, New York County, October 15, 2003.
63Such as October 28, 1997: “Your International Fund May Have the ‘Arbs Welcome’ Sign Out,” by Mercer Bullard, TheStreet.com, June 10, 2000.
64Let’s turn to: “Remembering the Past: Mutual Funds and the Lessons of the Wonder Years,” text of speech by Barry P. Barbash before the 1997 ICI Securities Law Procedures Conference, Washington, D.C., December 4, 1997.
64An SEC lawyer: Scheidt’s 1999 letter to Tyle is posted on the SEC Web site, at http://www.sec.gov/divisions/investment/guidance/tyle120899.htm, as is the 2001 letter, which is at http://www.sec.gov/divisions/investment/ guidance/tyle043001.htm.
65According to studies at Stanford: The $400 million estimate—Eric Zitzewitz, “How Widespread Is Late Trading in Mutual Funds?” Stanford Graduate School of Business, September 2003 (revised draft, November 2004); the $4 billion market-timing estimate was also by Zitzewitz—“Who Cares About Shareholders? Arbitrage-Proofing Mutual Funds,” Journal of Law, Economics & Organization, October 2003.
Chapter Six: Happiness Is a Warm Fund Manager
67His advice:Feeling Good: The New Mood Therapy, by David D. Burns, M.D. (New York: Avon Books, 1999), p. 352.
67If you had shares in: “Reflections on the Efficient Market Hypothesis: 30 Years Later,” by Burton G. Malkiel, The Financial Review, 40, 2005.
68One study: “Survivorship Bias and Mutual Fund Performance,” by Edwin J. Elton, Martin J. Gruber, and Christopher R. Blake, The Review of Financial Studies, winter 1996.
69Then a consultant: “Putnam May Owe $100 Million,” by John Hechinger, Wall Street Journal, February 2, 2005.
70In early 2005: “Strong Finish,” by Ian McDonald, Wall Street Journal, January 6, 2005; “Mutual Funds Exit 2004 on a Positive Note,” by Karen Wallace, Morningstar.com, December 31, 2004; “For Value Funds, a Tough Act to Follow,” by Roben Farzad, New York Times, January 9, 2005.
71Another set of statistics:Standard & Poor’s Indices Versus Active Funds Scorecard, Fourth Quarter, 2004, Standard & Poor’s, January 18, 2005.
74His book:A Random Walk Down Wall Street, by Burton G. Malkiel, rev. ed. (New York: W.W. Norton, 2003).
74The EMH originated: “Efficient Capital Markets: A Review of Theory and Empirical Work,” by Eugene Fama, Journal of Finance, 25:2, 1970.
76At the time: Memo to Limited Partners, Tiger Management LLC, from Julian Robertson, March 30, 2000; see also “What Really Killed Robertson’s Tiger,” by Gary Weiss, Business Week, April 17, 2000.76 Yet well into the new: Typical is this passage from a profile of Michael Steinhardt: “On Wall Street, Steinhardt was almost as much a legend as George Soros. He battled Warren Buffett in a threatened bid to control airline USAir, and paid a $40 million fine to settle charges that he disrupted U.S. Treasury-bill trading, according to the Justice Department.” (“Millionaire Steinhardt Says Art Is Riskier Than Hedge Funds,” by Linda Sandler, Bloomberg news service, June 7, 2005.) This misidentifies Steinhardt, and not his company, as the fine-payer. And, more to the point, it omits that Steinhardt closed his funds after immense losses and two years of being creamed by the indexes, that his investments in USAir were a disaster, and that he was fined for allegedly cornering, not “disrupting,” the market in two-year notes (not “bills”). See also “The Tiger in Winter,” by Stephen Taub, Institutional Investor, December 2002. II glossed over the collapse of the Robertson funds, saying that he “issued warning after dire warning” about an upcoming decline of tech stocks—but left out that he failed to position his portfolios to profit from a tech stock decline.
76In December 2002: “The Tiger in Winter.” Now, in fairness to II, I must point out that I wrote a story about Robertson some years before that was even worse: “The World’s Best Money Manager,” Business Week Assets, November/December 1990. His subsequent implosion certainly belied that title.
77According to fund data: Malkiel, “Reflections,” pp. 5–6.
Chapter Seven: Mutual Funds Aren’t Bullies
79Mutual funds have long embraced: See (and I mean that literally—it’s a great film noir) Deadline at Dawn (director, Harold Clurman; RKO, 1945).
82Or, as one of: “Mutual Fund Advisory Fees: The Cost of Conflicts of Interest,” by John P. Freeman and Stewart L. Brown, The Journal of Corporation Law, December 2001.
82As is usual: Data from Morningstar, Inc.; “Top Funds at Fire-Sale Prices,” by Timothy Middleton, MSN Money, September 7, 2004.
83Even the ICI: In reaction to the hubbub over fees, the ICI published a paper intended to show that fees had declined. It did so by factoring in “distribution costs”—including sales charges, or “loads,” which used to be as high as 8 percent and have pretty much gone out the window. By skewing the numbers that way, the ICI showed that what it described as “total shareholder cost” declined from 2.25 to 1.25 percentage points between 1980 and 2003. But if you take out sales loads, you find that fund operating expenses—“expenses used to support investment management, fund administration, and shareholder servicing”—rose from 0.77 percentage points, when the fund industry was tiny in 1980, to 0.88 in 2003, when funds were a multitrillion-dollar behemoth. See Total Shareholder Cost of Mutual Funds, 2003, Investment Company Institute, December 2004.
84The numbers work out:Mutual Funds: Additional Disclosures Could Increase Transparency of Fees and Other Practices, GAO-04-317T, statement of Richard J. Hillman before the Senate Governmental Affairs Committee, January 2004.
84The ICI actually:2004 Mutual Fund Factbook, Investment Company Institute, May 2004, p. 8. In the 2005 edition of the Factbook, the ICI wisely dropped the first sentence with the “very high standard” malarkey.
85Staffers of the: Remarks of Senator Peter G. Fitzgerald (R-Ill.), Oversight Hearing on Mutual Funds: Hidden Fees, Misgovernance and Other Practices That Harm Investors, Senate Governmental Affairs Committee, January 27, 2004 (transcript, p. 20).
85Bear became known: See In the Matter of Bear Stearns Securities Corp., Administrative Proceeding File No. 3-9962, August 5, 1999. As for Eddie Haskell, I respectfully refer the reader to the official Leave It to Beaver Web site, at http://www.leaveittobeaver.org/gang/gang_eddie.htm, which states as follows: “He is a model white-collar delinquent, a creep who goads people into trouble rather than perpetrating the crime himself”. Since Mr. Haskell was never found guilty of any wrongdoing, the word “alleged” should be inserted at relevant points in the foregoing.
86But when the American Funds:NASD Department of Enforcement v. American Funds Distributors, Inc., Disciplinary Proceeding No. CE3050003, NASD, February 16, 2005.86 One inkling: Comments of John C. Carter, SEC File No. S7-06-04, June 10, 2004.
87That has been an:In the Matter of Morgan Stanley DW Inc., Administrative Proceeding File No. 3-11335, November 17, 2003; “Morgan Stanley Settles with SEC, NASD,” by Brooke A. Masters and Kathleen Day, Washington Post, November 18, 2003.
88As a conservative: Oversight Hearing on Mutual Funds, Senate Governmental Affairs Committee, p. 27.
88In March 2005:In the Matter of Citigroup Global Markets, Inc., Administrative Proceeding File No. 3-11869, Securities and Exchange Commission, March 23, 2005.
89Smith Barney listed: The list can be found at http://www.smithbarney.com/products_services/mutual_funds/investor_information/revenue share.html.
91There is actually some: “Fund Returns and Trading Expenses: Evidence on the Value of Active Fund Management,” by John M.R. Chalmers, RogerM. Edelen, Gregory B. Kadlec, working paper, August 30, 2001.
92The MarketWatch: “Work in Progress: SEC’s Next Fund-industry Regulator to Inherit Challenges,” by John Spence and Robert Schroeder, MarketWatch, February 24, 2005.
Chapter Eight: Mutual Fund Payback Time—Not
96In his book:Take On the Street, by Arthur Levitt with Paula Dwyer (New York: Pantheon Books, 2002), p. 45.
96Artie forgot to mention:In the Matter of Van Kampen Investment Advisory Corp. and Alan Sachtleben, Administrative Proceeding File No. 3-10002, Securities and Exchange Commission, September 8, 1999.
96As he bragged:In the Matter of The Dreyfus Corporation and Michael L. Schonberg, Administrative Proceeding File No. 3-10201, Securities and Exchange Commission, May 10, 2000. “Major Financial Services Firm Settles Mutual Fund Case,” press release, office of Attorney General, state of New York, May 10, 2000. Dreyfus shamelessly treated the whole thing as a public relations victory. See “Dreyfus Deserves More Than a Slap on the Wrist,” by Gary Weiss, Business Week, May 29, 2000.
97In June of that year:Mutual Funds: Greater Transparency Needed in Disclosures to Investors, General Accounting Office, GAO-03-763, June 2003, p. 4.
97Donaldson, flush from: “Memorandum to Chairman William H. Donaldson from Paul F. Roye, Division of Investment Management, Date: June 11, 2003, Re: Correspondence from Congressmen Paul E. Kanjorski and Robert W. Ney,” from House Capital Markets Subcommittee.
99The SEC proposed:Mandatory Redemption Fees for Redeemable Fund Securities, Securities and Exchange Commission, Release No. IC-26375A, File No. S7-11-04, March 5, 2004.
99In a statement: “Redemption Fees for Redeemable Securities,” opening statement of Paul F. Roye, director, Division of Investment Management, Securities and Exchange Commission, March 3, 2005. Even some people in the fund industry were shocked by the SEC’s capitulation. “Here we are a year and a half after the scandals, and all we’ve got so far is a voluntary measure,” said Russ Kinnel, director of fund research for Morningstar, quoted in “SEC Votes to Back Off on Market Timing Fees,” by Jonathan Peterson, Los Angeles Times, March 4, 2005.
100The same thing happened:Amendments to Rules Governing Pricing of Mutual Fund Shares, Securities and Exchange Commission, Release No. IC-26288, File No. S7-27-03, December 11, 2003.
100That point was underlined:Reopening of comment period and supplemental request for comment, Release Nos. 33-8544, 34-51274, IC-26778; File No. S7-06-04, Securities and Exchange Commission, February 28, 2005.
100Nothing else has covered the SEC:Investment Company Governance, Release No. IC-26323, File No. S7-03-04, Securities and Exchange Commission, January 15, 2004; see also “SEC is Sued Over Fund-Board Rule,” by Deborah Solomon, Wall Street Journal, September 3, 2004.
101When the subject of corporate governance: See The Non-Correlation Between Board Independence and Long-Term Firm Performance, by Sanjai Bhagat and Bernard Black, Journal of Corporate Law, vol. 27 (2002). Bhagat and Black found no relationship between board independence and long-term corporate profitability.
102Just before Donaldson: “Former U.S. Technologies CEO Sentenced to 125 Months in Federal Prison for Securities Fraud Schemes,” press release, U.S. Attorney for the Southern District of New York, February 25, 2005.
102Mutual fund governance: Fund board composition information derived from Securities and Exchange Commission filings.
103Note the really good score:In the Matter of Pilgrim Baxter & Assoc., Ltd., Administrative Proceeding File No. 3-11524, Securities and Exchange Commission, June 21, 2004.
104The ICI itself: “ICI Board Adopts Resolution Urging Fund Industry to Strengthen Governance,” press release, Investment Company Institute, July 7, 1999.
105This standard: The Gartenberg case can be found at 694 F.2d 923 (2d Cir. 1982). See discussion in “Mutual Fund Advisory Fees: The Cost of Conflicts of Interest,” by John P. Freeman and Stewart L. Brown, The Journal of Corporation Law, December 2001, pp. 643–53.
105Donaldson’s emergence: “Donaldson’s Balancing Act,” by Amy Borrus, with Mike McNamee, Business Week, February 28, 2005. The piece reported that Donaldson “plans to keep practicing what he preaches at the SEC’s Washington headquarters for at least another year.” He left three months later. Contrast with other, less sycophantic news accounts that were generated by Donaldson’s PR offensive: “SEC Chief Is Open to Revising Rules, Yet Stiff Fines Stay,” by Deborah Solomon, Wall Street Journal, February 10, 2005; “SEC Chief, Under Cross-Pressure, Sees Some Modest Changes,” by Stephen Labaton and Jenny Anderson, New York Times, February 10, 2005; “SEC Chief Says Proxy Rule Needs Rewriting,” by Ben White, Washington Post, February 10, 2005. (Apparently February 9 was a busy day for Bill Donaldson!)
Chapter Nine: It’s a Bird, It’s a Plane…It’s Superinvestor!
108In 1990, a total of $50 billion: “Hedge Funds: Risk and Return,” by Burton G. Malkiel and Atanu Saha, working paper, December 1, 2004; 1990 mutual fund figure from 2004 Mutual Fund Factbook, Investment Company Institute, p. 55.
109In 1990, there were: “The Millionaires Club,” by Gary Weiss, Business Week Assets (undated but published in late 1990). Assets was a short-lived personal-finance magazine published as a supplement to Business Week. Data on growth of hedge funds in 2002 from Implications of the Growth of Hedge Funds, staff report to the Securities and Exchange Commission, September 2003, p. 68.
109About a fifth: Testimony of William H. Donaldson before the Senate Committee on Banking, Housing, and Urban Affairs, July 15, 2004.
109One study estimated: Data from research by LGT Capital Partners, June 2004.
110The biggest endowments: NACUBO statistics reported in “Endowment Assets in Fiscal 2004,” by Elise Coroneos, MAR/Hedge, March 2005.
110Even the New York Times: “Fund Managers Raising the Ante in Philanthropy,” by Jenny Anderson, New York Times, August 3, 2005. The front-page article reported that at one recent charity event, “the crowd of 4,000 at the Jacob K. Javits Convention Center in May raised an eye-popping $32 million.” That worked out to $8,000 a head, which hardly represented much of a sacrifice for the hedge fund crowd.
111The 1998 failure: See Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management, Report of the President’s Working Group on Financial Markets, April 1999.
111LTCM could: The high concentration of funds in some global markets—80 to 90 percent of the participants in some markets, according to the International Monetary Fund—has troubled some observers. See “Could a Few Hedge Funds Spoil the Party?” by Anna Bernasek, New York Times, July 3, 2005.
113Offshore is also Hedgefallatio: A detailed discussion of the whys, wherefores, hows, and whatnots of hedge fund structure can be found in “Selecting the Appropriate Type of Hedge Fund,” by Jeffrey C. Blockinger and Prufesh R. Modhera, Review of Securities & Commodities Regulation, September 25, 2002. For more on Soros, see “The Man Who Moves Markets: Inside the World of Super-investor George Soros,” by Gary Weiss, Business Week, August 23, 1993.
115According to research: See “Hedge Funds: Risk and Return.”
118Needless to say: “Historical Hedge Fund Returns Fairly Represent Performance,” by George Van with Zhiyi Song, Van Hedge Fund Advisors International LLC, January 2005.
Chapter Ten: Hedge Funds: The Birth of a Notion
120The concept of hedging: “A Brief History of Derivatives,” Derivatives Quarterly, winter 1995.
121We know that: “The Legacy,” by Lawrence C. Strauss, Barron’s, May 31, 1994.
123Salomon Brothers:Joint Report on the Government Securities Market, board of governors of the Federal Reserve System, Department of the Treasury, and Securities and Exchange Commission, January 1992.
123As later set forth:United States of America v. Steinhardt Management Co. and Caxton Corp., U.S. District Court, Southern District of New York, Docket No. 94 Civ. 9044. See also joint Justice Department–SEC announcement, December 16, 1994.
124Seven years later:No Bull: My Life In and Out of the Markets, by Michael Steinhardt (New York: Wiley, 2001), p. 231.
124As lawyers: “The Legal Structure and Regulation of Investment Partnerships,” by Victoria E. Schonfeld and Daniel W. Sasaki, Arnold & Porter, paper, October 1, 1993 (presented to a seminar in New York City called “Starting, Managing and Investing in Hedge Funds,” October 21 to 22, 1993).
Chapter Eleven: How to Stuff a Wild Hedge Fund
125The Big Four were: “Will Another Shoe Drop at Kidder,” by Leah Nathans Spiro, Business Week, May 23, 1994; “The $700 Million Mystery,” by Gary Weiss, Business Week, December 18, 1995; see also Final Report of Harrison J. Goldin, Trustee, In re Granite Partners, L.P., Chapter 11 Case No. 94 B 41683/85, April 18, 1996.
126The Chicago Tribune: “Interest Grows in Mortgage Securities,” by Pat Widder, Chicago Tribune, September 28, 1987.
126Askin took over: The details of the Askin saga in this chapter are from the voluminous court record, including the Final Report of Harrison J. Goldin, filings in the Granite Chapter 11 bankruptcy, and in Kidder Peabody & Co.v. Unigestion International and Askin Capital Management, et al., Docket No. 94 Civ 3241. A good early press account is “The $600 Million Man,” by Jack Willoughby, Investment Dealers’ Digest, September 12, 1994.
128In 1990: See “The Millionaires Club,” by Gary Weiss, Business Week Assets, undated, 1990.
131One bright spot: “Merrill to Pay $6M to Settle Granite Funds Suit,” by Colleen DeBaise, Dow Jones Newswires, March 20, 2003.
132A task force:An Assessment of Developments with Potential Implications for Market Price Dynamics and Systemic Risk, President’s Working Group on Financial Markets, September 27, 1994; see also testimony of Richard R. Lindsey, director, Division of Market Regulation, Securities and Exchange Commission, before the House Committee on Banking and Financial Services, concerning Hedge Fund Activities in the U.S. Financial Markets, October 1, 1998.
134The Oops! Template: “Bayou Funds Chiefs Plead Guilty in Federal Court to Defrauding Investors in $450 Million Hedge Fund Collapse,” press release, U.S. Attorney for the Southern District of New York, September 29, 2005; complaint in Jewish Federation of Metropolitan Chicago v. Bayou Mgmt LLC et al., U.S. District Court, District of Connecticut, Docket. No. 05-cv-01401, September 2, 2005.
135The first Superinvestor:No Bull: My Life In and Out of the Markets, by Michael Steinhardt (New York: Wiley, 2001), pp. 227, 233, 241.
135The next überinvestor: “Tiger Is Licking Its Wounds,” by Gary Weiss, Business Week, March 13, 2000; “Humbled Tiger,” by Jaye Scholl, Barron’s, April 3, 2000; “What Really Killed Robertson’s Tiger,” by Gary Weiss, Business Week, April 17, 2000.
Chapter Twelve: The Money Floats In—From Your Wallet
137Jonathan D. Iseson: “Still Chic? The Hamptons Feud and Fret, but Keep On Beckoning,” by David Barstow, New York Times, June 1, 1999.
137The problem was: The Blue Water saga received scant attention in the media, and the full majesty of its journey through hedge-fund-land emerges in legal papers. See the filings in Tremont International et al. v. Blue Water Fund, Ltd. et al., U.S. District Court, Eastern District of New York, Docket No. 00-cv-03768. See also “Blue Water, Hedge Fund’s Top-Performing Manager, Sued for Fraud,” Bloomberg, July 2, 2000; “The Peddlers,” by Josephine Lee, Forbes, August 6, 2001; “Why Hedge-Fund.net Is Getting Tarred by a Legal Tangle,” by David Shook, Business Week Online, July 26, 2000.
138One of the more: Interviews with Harry Strunk and materials generously provided to me by Harry, 2004 and 2005.
141Breeden put his staff: Letter to Edward J. Markey from Richard C. Breeden, dated June 12, 1992.
143Besides, it might have actually done: An SEC official testified years later that the trader reporting system would have had “little relevancy” to the Long-Term Capital Management disaster, which did not involve stocks. See testimony of Richard R. Lindsey, director, Division of Market Regulation, Securities and Exchange Commission, before the House Committee on Banking and Financial Services, concerning Hedge Fund Activities in the U.S. Financial Markets, October 1, 1998. That’s a good all-purpose excuse, by the way, that could apply to a great many things the SEC doesn’t do: “What’s the point? It wouldn’t have done any good.”
144In 2000, the Commodity: “Hedge Funds vs. the SEC,” by Gary Weiss, Business Week, March 3, 2003.
145Its Multi-Strategy Hedge: Merrill Lynch Web site, August 2005: http://www.mlim.ml.com/usa/Template.asp?id=AN4&rurl=/content/retail/ html/multi-strategy-solutions.htm.
145When it came time:Registration Under the Advisers Act of Certain Hedge Fund Advisers, elease No. IA-2266, File No. S7-30-04, Securities and Exchange Commission, July 28, 2004.
146Since pension funds: Glassman address to the thirteenth annual Public Fund Boards Forum, San Francisco, December 6, 2004.
Chapter Thirteen: Bear in the Woods
149In August 1999:In the Matter of Bear Stearns Securities Corp., Administrative Proceeding File No. 3-9962, August 5, 1999.
151It seems that: “Bear’s Muni Deals Post Test for Rule Makers,” by Aaron Lucchetti and Diya Gulapalli, Wall Street Journal, January 5, 2005.
151“County officials: “Panel Urges Stricter County Bid Rules,” by David Umhoefer, Milwaukee Journal Sentinel, November 29, 2004; see also “Bond Deal Records Missing,” by David Umhoefer, Milwaukee Journal Sentinel, July 14, 2004.
151It also emerged: “Bear, Stearns Letter Reveals ‘Bob’ Did Nothing for $800k ‘Success Fee,’” Illinois Leader, June 30, 2004; “Bear Stearns Officer Resigns Amid Probes,” Wall Street Journal, July 16, 2004; “Bear Stearns Unit Probed over Alleged Hospital Graft,” Associated Press, October 19, 2004.
151Bear continued saying: “Fraud Charges Faced by Ex-Aide of Bear Stearns,” by Joseph T. Hallinan, Wall Street Journal, May 10, 2005.
153Let us turn: FBI transcript of intercepted conversations, introduced in Philadelphia municipal corruption trial (see below).
153In June 2004:USA v. Ronald A. White, U.S. District Court for the Eastern District of Pennsylvania, Docket No. 04-cr-370; “As Banks Bid for City Bond Work, ‘Pay to Play’ Tradition Endures,” by Mark Whitehouse, Wall Street Journal, March 25, 2005.
154Commonplace—and legal: G-37 forms filed by UBS Financial Services with the Municipal Securities Rulemaking Board. “Insiders Are Cashing In on State’s Bond Market,” by Evan Halper, Los Angeles Times, September 27, 2004; see also “SEC Asks What Political Consultants Do for the Money,” by Joe Mysak, Bloomberg, August 20, 2004.
154In New Jersey: Attachment to Form G-37/G-38, filed by Bear Stearns for consultant Jack Arseneault for 2004, Municipal Securities Rulemaking Board. “Underwriter terminates McGreevey middleman,” by Dunstan McNichol, Star-Ledger, February 16, 2005; See also “Budget-balancing bond deals cost 19.2M in fees,” by Dunstan McNichol, Star-Ledger, December 31, 2004.
156Instead, as one law journal: Review of Take On the Street, by Richard W. Painter, Michigan Law Review, May 1, 2003. Painter was referring to Model Rules of Professional Conduct, R. 7.6 (2003), which provides that “[a] lawyer or law firm shall not accept a government legal engagement or an appointment by a judge if the lawyer or law firm makes a political contribution or solicits political contributions for the purpose of obtaining or being considered for that type of legal engagement or appointment.” Try proving that.
156So in March 2005: Release No. 34-51561, File No. SR-MSRB-2005-04, Securities and Exchange Commission, April 15, 2005; “Municipal Bond Regulator to Bar Hiring Consultants,” by Darrell Preston and Eddie Baeb, Bloomberg, March 15, 2005.
157Another loophole: “Muni Cleanup Just Might Be Sweeping Corruption Along,” by Karen Richardson, Wall Street Journal, April 25, 2005.
158Studies of the subject: See, for example, “Another Look at the Effect of Method of Sale on the Interest Cost in the Municipal Bond Market—A Certification Model,” by Jun Peng and Peter F. Brucato Jr., Public Budgeting & Finance, March 2003. The authors of this study went to a lot of trouble and found that negotiated bond deals were neither better nor worse than competitive ones.
Chapter Fourteen: The Answer: Freed-up Markets
160The other common: It’s also, no doubt unintentionally, a pervasive theme in Artie Levitt’s book. Richard Painter’s review in Michigan Law Review observes that it is a blow-by-blow look at a regulatory agency knuckling under to the people it regulates: “Although academic work on regulatory capture theory is abundant, a behind-the-scenes account of how capture actually takes place is rare.” Michigan Law Review, May 1, 2003. See also “After a Boom, There Will Be Scandal. Count on It,” by Kurt Eichenwald, New York Times, December 16, 2002. However, as you are seeing, scandals are determined by media spin more than they are by market cycles.
161It was headed:Go East, Young Man, by William O. Douglas, paperback ed. (New York: Dell, 1974).
Chapter Fifteen: Clueless in Microcapland
162In 2005, financial fraud: Survey by Commtouch, developer of antispam software, released April 13, 2005.
163Lebed was the subject:In the Matter of Jonathan G. Lebed, Administrative Proceeding File No. 3-10291, Securities and Exchange Commission, September 20, 2000.
163Onepostmortem: “Jonathan Lebed: Stock Manipulator, S.E.C. Nemesis—and 15,” by Michael Lewis, New York Times Magazine, February 25, 2001.
164Lebed had learned: Emails sent by Lebed to the author and others on his email list, 2002 to 2005.
164The low point: “Wall Street Is Sometimes the Wild West,” by William Power, Wall Street Journal, February 1, 1995.
165So it should come: Interviews with confidential sources, 1996.
165A “sweep” of penny-stock: “SEC Reports Drop in Penny Stock Fraud,” statement by Sen. Richard Bryan, June 30, 1994; “Regulators Say Penny Stock Abuses Greatly Reduced,” Reuters, June 29, 1994.
167Years later: Author interview with Randolph Beatty, 2005.
167“This bill ranks”: Congressional Record, October 1, 1990.
167A GAO report:Penny Stocks: Regulatory Actions to Reduce Potential for Fraud and Abuse, General Accounting Office, GAO/GGD 93–59, p. 20.
168They could do that: The penny-stock definition can be found in the Code of Federal Regulations at 17 CFR 240.3a51-1.
168That didn’t matter: See “Broker-Dealer Regulation Under the New Penny Stock Disclosure Rules: An Appraisal,” by O. Douglas Hernandez Jr., Columbia Business Law Review, 1993; “‘Click Here to Buy the Next Microsoft’: The Penny Stock Rules, Online Microcap Fraud, and the Unwary Investor,” by Kevin C. Bartels, Indiana Law Journal, 2000; “Impact of the Penny Stock Reform Act of 1990 on the Initial Public Offering Market,” by Randolph Beatty and Padma Kadiyala, Journal of Law and Economics, October 2003.
168(footnote) One example was: “Hardball at the SEC: Arthur Levitt is stepping on toes. Is that really such a bad thing?” by Paula Dwyer, Business Week, September 29, 1997; “Ripoff! The secret world of chop stocks—and how small investors are getting fleeced,” by Gary Weiss, Business Week, December 15, 1997.
169On January 16, 2004:Amendments to the Penny Stock Rules, Release No. 34-49037, File No. S7-02-04, Securities and Exchange Commission, January 16, 2004.
170After all:Putting Investors First: The Role of State Regulators, North American Securities Administrators Association, 2003; “Ripoff!”
171If you go back to 1996: Trading statistics from the OTC Bulletin Board Web site, www.otcbb.com.
173The philosophy:Go East, Young Man, by William O. Douglas (New York: Dell, 1974), p. 272.
173Let’s say someone: Lebed email, distributed via his Internet list, May 25, 2005.
Chapter Sixteen: The Holistic Approach to Corporate Crime
177Just about every major: See statement of James Chanos, president of Kynikos Associates, before the SEC Roundtable on Hedge Funds, May 15, 2003.
177One rogue short: Indictment in USA v. Amr I. Elgindy et al., U.S. District Court, Eastern District of New York; “Stock Trader Elgindy Is Convicted of Securities Fraud, Extortion,” by John R. Emshwiller, Wall Street Journal, January 25, 2005.
178Out it always: Asensio & Co. press releases, 2001 and 2002. See also Sold Short: Uncovering Deception in the Markets, by Manuel P. Asensio with Jack Bart (New York: Wiley, 2001).
178It got him bold See NASD Department of Enforcement v. Asensio Brokerage Services, Inc., n/k/a Integral Securities, Inc., and Manuel Peter Asensio, Disciplinary Proceeding No. CAF030067, Hearing Panel Decision, January 4, 2005.
179A good example:High and Low Financiers, by Watson Washburn and Edmund S. De Long (Indianapolis: Bobbs-Merrill, 1932), p.265.
179The fault for that: For a graphic, entertaining description of the precrash manipulations, see The Day the Bubble Burst: The Social History of the Wall Street Crash of 1929, by Gordon Thomas and Max Morgan-Witts, paperback ed. (New York: Penguin, 1981).
180For example: “The World Price of Short Selling,” by Anchada Charoen-rook and Hazem Daouk, working paper, rev. version, October 2004.
180Two of the big hedge fund: “US Air Headache: Robertson Is in Good Company,” by Susan Pulliam and Mitchell Pacelle, Wall Street Journal, August 4, 1999; footnote: see “Tiger Makes It Official: Hedge Funds Will Shut Down,” by Gregory Zuckerman and Paul Beckett, Wall Street Journal, March 31, 2000.
181In their account:24 Days, by Rebecca Smith and John R. Emshwiller New York: Harper Business, 2003), p. 40.
182BW instead ran: “Power Broker,” by Wendy Zellner, Business Week, February 12, 2001. A typical line from a sidebar on Skilling: “From an early age, Skilling, the son of a sales manager for an Illinois valve company, showed the same kind of supreme confidence and derring-do that are his trademarks now.” See also “The Fall of Enron,” by Wendy Zellner and Stephanie Anderson Forest, Business Week, December 17, 2001.
184Speaking of restrictions: “Go down fighting: Short sellers vs. firms,” by Owen A. Lamont, working paper, rev. draft, July 2004.
184Edwin Lefèvre:Reminiscences of a Stock Operator, by Edwin Lefèvre (New York: George H. Doran, 1923; republished, Burlington: Books of Wall Street, 1980), p. 194.
186In an interview: NASD transcript of interview with Robert Catoggio, May 23, 1995.
188What their arguments: Enron, WorldCom, and the other crop of large-scale frauds are a prime example of that principle, and not even the looniest anti-short-sellers were claiming that naked short-selling caused those dogs to turn south.
189In his 2001 book:Sold Short: Uncovering Deception in the Markets, by Manuel P. Asensio with Jack Bart (New York: Wiley, 2001), p. 241.
Chapter Seventeen: The Baloney Blitzkrieg
190In its edition: “Stock Wars: The Longs vs. The Shorts,” by Chris Welles, Business Week, May 11, 1987.
190As later emerged: The SEC found that Haas stocks collapsed, thereby ending the manipulation, “as a result of net capital violations and cessation of its clearing relationship”—not because of shorts, naked or otherwise. See In the Matter of Eugene Laff, Stanley Aslanian, Jr., and Lawrence Caito, Administrative Proceeding File No. 3-9654, Securities and Exchange Commission, order dated March 18, 1999.
191As for the lawsuits: “Editor of Barron’s Is Cleared in a Suit by Investment Firm,” Wall Street Journal, December 5, 1988.
191Typical of the irresponsible: “Naked Shorts and Bare Facts—A House Committee Tries to Sort out Truth from Fantasy,” by Edward A. Wyatt, Barron’s, January 1, 1990.
191During the hearings: Prepared statement of Richard G. Ketchum, director, Division of Market Regulation, and John H. Sturc, associate director, Division of Enforcement, Securities and Exchange Commission, before the House Committee on Government Affairs, Subcommittee on Commerce, Consumer, and Monetary Affairs, December 6, 1989.
191(footnote) Barron’s swiftly ran: “De-pressing Story—Read All About the Big Expose That Wasn’t,” by Jonathan R. Laing, Barron’s, May 18, 1987; see also letter to the editor from Chris Welles, Barron’s, May 25, 1987, and editor’s note in response.
192In mid-1987: See “De-pressing Story.”
192In July 2004: You can find this bureaucratic idiocy nestled in the Code of Federal Regulations at 17 CFR, parts 240, 241, and 242. The SEC identifier is Release No. 34-50103, File No. S7-23-03.
193It later was revealed: See USA v. Coppa et al., U.S. District Court for the Eastern District of New York, Docket No. 01-cr-3031.
194It didn’t hurt the shorts: “Short Selling and Trading Abuses on Nasdaq,” by Timothy R. Smaby, Robert L. Albert, and H. David Robison, Financial Services Review, vol. 6, no. 1, 1997.
194Among the most voluble: “GeneMax Corp. Announces Naked Short Selling Lawsuit Against Broker-Dealers, Market Makers and Clearing Agents,” press release, PR Newswire, October 3, 2002; “GeneMax battles short sellers: Says it’s target of bold campaign,” Globe and Mail, November 18, 2002; “Universal Express-USXP-Declares War on ‘Naked ShortSelling,’” press release, Business Wire, September 23, 2003; “Universal Blames Shorts, But What of Dilution?” by Carol S. Remond, Dow Jones Newswires, October 6, 2003. See also Investrend Research Note, Universal Express, July 14, 2003.
194A lot of the anti-shorting noise: Web site of the National Association Against Naked Short Selling, January 2003, March 2003; “Don’t Force the Shorts to Get Dressed,” by Gary Weiss, Business Week, December 8, 2003.
195It was so brilliant: “Naked Short Selling and the Stock Borrow Program,” a “Q and A” with DTCC First Deputy General Counsel Larry Thompson, DTCC Web site, March 2005, posted at http://www.dtcc.com/Publications/dtcc/mar05/index.htm.
196There was even: “Universal Express to Support ‘Dateline,’” press release, Business Wire, March 29, 2005; “StockGate: 12 Days to Dateline NBC While Influential Washington Group Weighs In,” FinancialWire, March 30, 2005; “StockGate: 10 Days to Dateline NBC As New Naked Short Selling Video Surfaces,” FinancialWire, March 31, 2005; “StockGate: 6 Days to Dateline NBC and NCANS Accuses SEC Official of Lying to Senate,” FinancialWire,” April 4, 2005.
196“In yet another”: “StockGate Shocker: DTCC Stuns with Admission It Interfered with News Media,” FinancialWire, April 13, 2005.
196One missive: Email to media, October 21, 2003.
197Word crept out:In the matter of the Securities Act, S.B.C. 1985, chapter 83, and in the matter of Gordon Brent Pierce, order under Section 144, Superintendent of Brokers, British Columbia, June 8, 1993; “Lawsuit Calls into Question GeneMax Float,” by Carol S. Remond and Steve D. Jones, Dow Jones Newswires, March 14, 2003; see also Definitive Information Statement (Form 14C), filed at the SEC by Hadro Resources Inc., dated December 16, 2002, which lists Pierce as president of ICI. Footnote: “Investor Communications International, Inc., Announces Corrections to Investrend Communications, Inc., Financial Wire of January 23, 2003,” press release, PR Newswire, January 24, 2003; “Investor Communications International, Inc., Announces Further Corrections to Inaccurate Reporting Conducted by Steve Jones and Carol Remond,” press release, PR Newswire, March 17, 2003.
197ICI’s links:SEC. v. Agora, Inc., Pirate Investor, LLC and Frank Porter Stansberry, Docket No. MJG 03 1042, U.S. District Court, District of Maryland, April 14, 2003.
197Similar difficulties:SEC v. Universal Express, Inc., et al., Docket No. 04 CV 02322, U.S. District Court, Southern District of New York, March 24, 2004.
197If anything, the rhetoric:Universal Express v. SEC et al., U.S. District Court, Southern District of Florida, Docket No. 04-20481, March 2, 2004.
198Another rare voice of reason: See “The Naked Shorts Get Some Clothes,” Blog Maverick, http://www.blogmaverick.com/entry/1234000 833040434/, April 2005; “A New S.E.C. Rule Fails to Raise Share Prices, and Some Are Angry,” by Floyd Norris, New York Times, February 18, 2005.
199On October 28, 2003:Short Sales, Release No. 34-48709, File No. S7-23-03, Securities and Exchange Commission, October 28, 2003.
200Wall Street’s reaction: See, e.g., comment letters of Securities Industry Association and Security Traders Association, File No. S7-23-03.
202One study was: “Strategic Delivery Failures in U.S. Equity Markets,” by Leslie Boni, working paper, November 13, 2004.
202The new rules: Final Rule, Short Sales, SEC Release No. 34-50103, July 28, 2004; “New Rules to Put Squeeze on Shorts,” by Henry Sender, Wall Street Journal, January 27, 2005.
204In April 2005: “Universal Express’ Lawsuit of $1.4 Billion USD to Move SEC to United States Appellate Court,” press release, Business Wire, April 4, 2005; “Federal judge Dismisses Universal Express Suit,” by John T. Fakler, South Florida Business Journal, April 8, 2005.
205As for that “grassroots”: “The Emperor’s New Shorts,” by Justin Lahart, Wall Street Journal, March 2, 2005.
2052. Krispy Kreme’s accounting: Later in 2005, an internal report blasted Krispy Kreme to smithereens: “Report Shows How Krispy Kreme Sweetened Results,” by Mark Maremont and Rick Brooks, Wall Street Journal, August 11, 2005. Damn those naked shorts!
206Demonstrations were organized: “Small Protest in N.Y. Against Naked’ Short Selling,” Reuters, June 7, 2005.
208The SEC had ordered:In the Matter of CMKM Diamonds, Inc., Administrative Proceeding File No. 3-11858, Securities and Exchange Commission, March 16, 2005; see also Initial Decision, dated July 12, 2005.
Chapter Eighteen: Fighting Back
211In a New Yorker: See “Cops and Robbers,” by James Surowiecki, The New Yorker, June 27, 2005.
Chapter Nineteen: An Outbreak of Informational Bacteria
213On October 23 and 25:Stratton Oakmont Inc. and Daniel Porush v. Prodigy Services Co., New York State Supreme Court, Nassau County, Index No. 31063/94, see order dated May 24, 1995.
214In the months to come: See, e.g., “Prodigy Is Sued for Libel,” New York Times (from Bloomberg), November 12, 1994; “Stratton Oakmont Calls Independent Consultant Report Impractical and Irresponsible” press release, PR Newswire, December 15, 1994; “Stratton Oakmont Smacked with Lawsuit from SEC,” by Alan J. Wax, Newsday, December 16, 1994; “A New Twist in an On-Line Libel Case,” by Peter H. Lewis, New York Times, December 19, 1994.
214In July 1995: “The Hard Sell/Money Machine: As penny-stock brokerage Stratton Oakmont tries to shake a sullied reputation, many questions still remain,” by David M. Halbfinger, Newsday, July 16, 1995.
215A joint press release: The release ran on the Business Wire, October 24, 1994; “$200M Online Libel Case Settled/Prodigy apologizes to LI firm,” by Alan J. Wax, Newsday, October 25, 1995.215 In 1999, Porush:USA v. Belfort, et al., U.S. District Court for the Eastern District of New York, Docket No. 98cr859; “Stratton Oakmont Executives Admit Stock Manipulation,” by Edward Wyatt, New York Times, September 24, 1999.
216(footnote) This deliciously ironic: “Jail Time for Stratton Broker, Madden,” by Susan Harrigan, Newsday, May 4, 2002.
216Only one reporter: Susan Antilla’s two Times stories on Solomon-Page were “Look Who’s Selling Solomon-Page,” November 13, 1994, and “Looking beyond the flash in the meteoric rise of Solomon-Page,” May 26, 1995.
216In fact, the only legal:Stratton Oakmont Inc. and Daniel Porush v. Prodigy Services Co., order by Justice Stuart L. Ain, dated May 24, 1995.
216In 1996, with the enactment: “How to protect your organization from online defamation,” by Nicole B. Casarez, Public Relations Quarterly, July 1, 2002.
217One of the people:Scott Bowen et al. v. ZiaSun Technologies, California Superior Court, San Diego County, Docket Nos. GIC762921, GIC772344, February 2001.
219The chatter on the popular: Postings on Silicon Investor, 1998 to 2005.
Chapter Twenty: The Gunfight at ZiaSun Corral
223The prime mover: Interviews with Floyd Schneider, 2002 through 2005.
224He is not publicity-shy: “Revenge of the Investor,” by Gary Weiss, Business Week, December 16, 2002; Scam Dogs & Mo-Mo Mamas, by John R. Emshwiller (New York: Harper Business, 2000).
225In June 1999:ZiaSun Technologies, Inc., and Anthony L. Tobin v. Floyd D. Schneider et al., U.S. District Court, Northern District of California, Case No. C 00-1612 PJH; “Beyond the SEC’s Reach, Firms Sell Obscure Issues to Foreign Investors,” by John R. Emshwiller and Christopher Cooper, Wall Street Journal, August 16, 2000.
225“Through this settlement”: “ZiaSun Technologies Settles Groundbreaking Lawsuit over Internet Stock Manipulation,” press release, PR Newswire, October 25, 2000.
227When Telescan merged: “ZiaSun Technologies, Inc., and Telescan, Inc., Sign Two-Year Agreement to Provide BusinessWeek Investor Workshops,” press release, November 8, 2001; ZiaSun filings with the SEC.
228On December 21, 1999: “The Investor Relations Group Files Libel Suit Against TheTruthseeker.com in Supreme Court,” press release, Business Wire, December 21, 1999.
Chapter Twenty-One: Turning On the Lights at Yale
230That distasteful chore: “Steyer Power,” by Loch Adamson, Institutional Investor, February 14, 2005.
232When the Times: “No, You Can’t Invest Like Yale. Sorry!” by Joseph Nocera, New York Times, August 13, 2005.
232In fact, these supposedly: “In Pursuit of Learning Investments’ Whereabouts,” by Jonathan Peterson, Los Angeles Times, December 19, 2004.
233College and university endowments:2004 NACUBO Endowment Study, National Association of College and University Business Officers, anuary 2005.
234One of the principal student: Interview with Andrea Johnson, 2005.
234In the 1990s: “Yale Unions Attack Ties to Hedge Fund,” by Roderick Boyd, New York Sun, March 9, 2004; “Lawsuit over Pueblo, Colo.-Area Ranch Still Alive in Federal Court,” by Robert Boczkiewicz, Pueblo Chieftain, February 1, 2002.
235So in early 2004: “Seeking Investment Disclosure, Coalition Targets Farallon Capital,” by Chris Clair, HedgeWorld News, March 4, 2004; “Protesters Will Hit Yale Investments,” by Kim Martineau, Hartford Courant, March 3, 2004.
236Swensen’s superstar status: IRS Form 990 filed by Yale University, for fiscal year ending June 30, 2003, May 17, 2004.
236Yale does not disclose:The Yale Endowment, 2004 (annual report).
237In March 2004: “Protestors question Baca Ranch investments,” by Sarah Marberg, Yale Daily News, March 4, 2004.
Epilogue: The Second Battle of Trenton
240His losses in 2000: Interviews with Rand Groves, 2004 and 2005.
241Trade associations: Occasionally the truth would sneak past the spin. “Mercer Bullard, a former SEC attorney and founder of Fund Democracy, a leading advocate for mutual fund shareholders and outspoken critic of high fees, says the industry is simply laying low. ‘It would be foolish not to want these accounts and position yourself to get them, but it would be more foolish for firms to show how much they wanted them,’ he says.” “Small Change,” by John Churchill, Registered Representative, March 1, 2005. As its name implies, Registered Representative is read almost exclusively by securities industry professionals.241 Neither Groves nor Meyers: Interviews with Rand Groves and G. Martin Meyers at hearing, 2005.
241She was an obscure jurist: “Judges Ranked Statewide by Overall Score,” New Jersey Law Journal, January 31, 2005.
245Let’s just say:In the Matter of Eagletech Communications, Inc., Administrative Proceeding File No. 3-11832, Securities and Exchange Commission, Initial Decision, June 7, 2005; SEC v. Labella et al., U.S. District Court for District of New Jersey, Docket No. 05-civ-852, February 15, 2005; indictment in USA v. Labella, U.S. District Court for District of New Jersey, February 15, 2005.
248Gayle Essary was upset: Interview with Gayle Essary, August 2005.