Parts of this book-length story were published prior to October 2011, when a man named Ali Nazerali filed a lawsuit against me and DeepCapture and convinced a Canadian court to issue (without any notice to us, and without giving us an opportunity to defend what I had written) an injunction that forced the entire DeepCapture website to be removed from the internet on October 19, 2011.
I could be wrong, but I do not believe anything like this had ever happened before. Never in history had a court outside the United States blacked out (censored) an entire American media website, much less at the behest of one man who did not like what was written in only one of hundreds of articles on many subjects that were published on that website in the exercise of First Amendment rights.
Fortunately, on December, 13, 2011, the court heard my application opposing a continuation of the injunction and considered my detailed affidavits defending this story. Finding in my favor, and refusing to extend the injunction, the court noted that the October 19 injunction was based on an incorrect legal test for pre-trial injunctions which had been suggested to the judge by lawyers for Mr. Nazerali at the earlier one-sided hearing.
Applying the correct legal test for injunctions, which my lawyer described in his submissions on December 13, the court ruled that our freedom of speech had to be restored, at least until Mr. Nazerali’s claims were tested at a trial.
Since then, I have taken a few months to investigate further, and we are now publishing an updated version of this book-length story, chapter by chapter.
Even if you had followed DeepCapture prior to the interruption, I encourage you to read this updated version of the story because it goes quite a bit deeper, and contains additional evidence and information that supports my thesis. In addition, I have clarified and refined my argument, because some people had slightly misunderstood it, while others (such as Mr. Nazerali and the former journalist Gary Weiss, who features prominently in this story) had misrepresented what I had written.
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The Miscreants’ Global Bust-Out
Was the United States Attacked by “Financial Terrorists”?
I did not think that Zuhair Karam was violent, but I telephoned him because I thought his biography was interesting. For example, it was interesting that soon after making a home in the United States, Zuhair Karam obtained finance to publish a semi-famous work of jihadist propaganda, and soon thereafter, became a proprietary day trader of equities and derivatives at a small, unregistered brokerage in Chicago called Tuco Trading.
Many of the other people who operated through Tuco Trading also had interesting biographies. One of them was a trader who had ties to Russian organized crime, and whose business partner was killed in a brutal gangland-style murder in New Jersey. Also trading through Tuco was an account controlled by the top henchmen of a Russian oligarch and members of an organized crime syndicate that has been accused by U.S. officials of having ties to the Russian government’s intelligence services.
In addition there was (to name just one more) a trader whose family members worked for the Revolutionary Guard in Iran. One of this trader’s close relatives (based outside Iran) had employed an undercover Iranian government agent who was implicated in a terrorist attack and who was caught shipping sophisticated weaponry to Hezbollah, the jihadist outfit that takes its directions from the Iranian regime.
Meanwhile, Zuhair’s little brokerage, Tuco Trading, maintained partnerships with several other brokerages, all of which had business relationships with people of similarly colorful backgrounds. Among them were multiple associates of La Cosa Nostra; a number of traders with ties to Russian organized crime; and Saudi billionaires who are alleged to have been among Al Qaeda’s most important financiers.
The owners and/or top employees of these partner brokerages included: a fellow who once worked for a man who commands a private army in Lebanon; another guy who had worked for a trader who orchestrated an ill-fated scheme to topple the government of Afghanistan in league with a heroin-smuggling warlord who worked closely with Iran; and an Iranian trader whose family was, in the 1990s, flying cargo planes filled with gem stones from a remote Illinois runway, in partnership with a money launderer linked to an organization that had hosted the leadership of Hezbollah.
Aside from the backgrounds of these traders, it was also interesting that Tuco Trading was closed by an “Emergency Order” of the Securities and Exchange Commission on March 9, 2008, a few days before the March 13 collapse of Bear Stearns. Not that the SEC had any idea what was happening at Tuco; the commission seemed primarily concerned that the brokerage was massively exceeding margin limits.
What the SEC seems to have missed (though a report by Tuco’s bankruptcy receiver made it clear) was that in the month before it was shut down, this tiny, unregistered brokerage transacted trading equal to more than 20 percent of the volume of the largest brokerage on the planet. Moreover, much of this trading appears to have been short selling that could have contributed to the turmoil that hit the markets in early March of 2008.
As for Zuhair Karam – well, I didn’t know enough about him, but I knew a little. For example, I knew that he was born in Lebanon, and had recently spent some time overseas, where he came to be attached to an Islamic cleric named Sadathullah Khan, who tells the media that he is “moderate” – a term that, of course, has different connotations depending on your perspective.
Some people say that Sadathullah Khan is an extremist, partly because he has had ties to an outfit called the Supreme Council of Global Jihad, which espouses violence. Sadathullah Khan, meanwhile, has also worked closely on projects (an Islamic media project, for example) with a cleric named Zakir Naik, who has preached that “Every Muslim should be a terrorist.”
When he talks to the Western press, Zakir Naik says he is not fond of Al Qaeda, but in a video made for his followers, he said, “If Osama bin Laden is fighting the enemies of Islam, I am for him…If he is terrorizing America the terrorist, the biggest terrorist, I am with him.” Imam Naik also served as a mentor to Najibullah Zazi, an Al Qaeda operative who was arrested in 2009 shortly before carrying out a plan to plant explosives in the New York City subway system.
Imam Naik was banned from entering the United Kingdom after he was deemed to be immoderate, but the United States still grants him visas (he hasn’t been charged with involvement with any terrorist plot) and perhaps he will one day return to Chicago, where he once gave what he calls “my most famous speech” at a gathering organized by an outfit that has worked closely with the Bridgeview Mosque, a house of worship in Bridgeview, a middle-class neighborhood on Chicago’s south side.
Zuhair Karam, in addition to his work as a financial operator, has been fairly prominent among the small band of jihadis who congregate at the Bridgeview Mosque, where Zuhair’s relative has helped organize the mosque’s fund raising for groups such as Hamas and Palestinian Islamic Jihad.
The Bridgeview Mosque, it should be said, serves thousands of ordinary people, most of whom probably harbour no politics other than a desire for peace. Many jihadis, meanwhile, are not themselves violent people, and merely support the political ideology of jihad. But there was a time when the Bridgeview Mosque’s imam regularly gave fiery sermons urging jihadi freedom fighters to take up arms.
The sermons were toned down after the FBI began investigating, but it is assumed by some prominent terrorism experts that the Bridgeview Mosque’s top officials (and Zuhair’s family) are members of the Muslim Brotherhood. One reason to believe this is that the mosque is controlled by the Islamic Society of North America (ISNA), which government investigators have identified as being a Muslim Brotherhood front.
The Muslim Brotherhood is a diverse organization, and at least publicly disavows violence. It is probably wise to engage the Brotherhood, rather than vilify and incite it. Nonetheless, it should be understood that the Brotherhood is united in its opposition to the foundational principals of Western civilization and is making efforts to undermine the United States.
It is also true that many Muslim Brotherhood figures in the West (including some officials at ISNA) have been accused of providing material support (including money, personnel, and sometimes weapons) to violent terrorist groups, including Al Qaeda.
The Bridgeview Mosque itself has not been accused of directly supporting Al Qaeda, but there is no question that it has funded other violent jihadist groups. For example, according to the Chicago Tribune and others, the mosque was one of the most important funders of Palestinian Islamic Jihad, an outfit that was spawned by the Muslim Brotherhood and also takes directions from the regime in Iran.
Zuhair Karam and his relatives are close family friends of Sami al-Arian, who was not only a founding director of ISNA, but also a U.S.-based leader of Palestinian Islamic Jihad, indicted in 2003 for funding terrorist attacks in Palestine. As Rachel Ehrenfeld, now director of the Economic Warfare Institute, first reported, FBI investigators suspected (though never proved) that Sami al-Arian provided support to the Al Qaeda hijackers who carried out the 9-11 attacks on the World Trade Center and the Pentagon.
The Bridgeview Mosque was also one of the principal supporters of the Holy Land Foundation, which was indicted on charges of financing terrorism in 2007 after prosecutors demonstrated that it was the principal U.S. front for Hamas, another Muslim Brotherhood creation that receives support from Iran. The mosque’s directors, and one of Zuhair’s family members, meanwhile, help administer investment funds worth billions of dollars controlled by the North American Islamic Trust, an investment bank (and a unit of ISNA) that has been tied to the Muslim Brotherhood and was named as an unindicted co-conspirator in the government’s case against the Holy Land Foundation.
Some Bridgeview Mosque congregants (a number of them close family friends of Zuhair Karam) were also involved with a Chicago-based charity called The Benevolence International Foundation, which was actually an Al Qaeda front, founded by Osama bin Laden’s brother-in-law. According to federal prosecutors, Benevolence was “involved in terrorist activities” and had contacts with “persons trying to obtain chemical and nuclear weapons on behalf of Al Qaeda.”
More to the point of this story, Mark Flessner, a former U.S. prosecutor who was at the front lines of the government’s “war on terrorism”, has said that the Bridgeview Mosque was, at least until it came under closer government scrutiny, a “gold mine of information about terrorist finance.”
So, obviously, I wanted to know more about the Bridgeview Mosque, and I wanted to know more about Tuco Trading. Zuhair was not the only jihadi ideologue attached to both Tuco Trading and the mosque. But just as important, perhaps, was the fact that Tuco Trading and its partner brokerages had ties to Russian organized crime syndicates that had become politicized and were hostile to the United States.
When I called Zuhair for the first time in 2010, our conversation did not go well. Zuhair began by demanding to know how I had come to possess his telephone number. I told him, honestly, that I had found his phone number in the White Pages, but he refused to believe me. When I explained that I had some questions about the little brokerage where he had worked, he insisted that he didn’t know anything about the brokerage, and he said that he did not know anyone else who worked there.
After some additional prodding, Zuhair said, “Look, man, I’m just one of the little guys.” I said, “Yes, I know, but let’s meet anyway, I can tell you more about this investigation.”
Zuhair seemed already to know about some investigation. He said, “Shit, man, I thought this was over.” Which seemed strange to me because the only investigation I knew about was the investigation that I was conducting. But I wanted to be helpful, so I said, “Let’s meet, I can tell you more about it.”
Zuhair paused. He seemed to be figuring it all out. Finally, he said, “You’re not a journalist, that’s for sure, man, tell me who you are…Are you an Arabian?” No, I am not an “Arabian” – that’s what I told Zuhair Karam. I said there’s this investigation, I have information.
I did not have any negative feelings about Zuhair or the Bridgeview Mosque. I told him that I had some sympathy for some of the opinions expressed in the jihadist propaganda that he had produced. (The propaganda was focused on the situation in Palestine).
I had also developed a fascination with Islam, and considered it to be an attractive religion. I told Zuhair this, and I told him I would like to come down to the mosque to meet him. I said I’d also like to meet his father, Haaz Karam, who helped raise money for Islamic Jihad.
Zuhair said, “He’s not my father.” So I said, “Sorry, your relative.” And Zuhair said, “Yeah, so…what is this? Man, the FBI — you say you’re a journalist, why do you know about this investigation? That just isn’t right…the FBI…man, I’m telling you, I’m just one of the little guys…the FBI…the FBI can come, let them come, they know where I live, let them come, let them try – see if I care.”
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In his 2010 report to Congress, Admiral Dennis Blair, who was then the U.S. director of national intelligence, outlined one of the biggest threats to America’s economic well-being and national security. He began by noting that transnational organized crime syndicates are closely intertwined with the intelligence services and governments of some countries (such as Russia) that are considered to be adversaries of the United States. He then stated that “the nexus between international criminal organizations and terrorist groups [including, but not limited to Al Qaeda]…presents continuing dangers.”
In the same breath, the national intelligence director warned that transnational organized crime syndicates are “undermining free markets,” and “almost certainly will increase [their] penetration of legitimate financial and commercial markets, threatening U.S. economic interests and raising the risk of significant damage to the global financial system.”
We should understand the implications of what the national intelligence director was saying. He was saying that organized crime syndicates (and, by inference, the jihadist groups and foreign governments that maintain ties to organized crime syndicates) have the capability to disrupt the financial markets and harm the American economy. The only question was: had they already done so?
On August 12, 2011, President Barack Obama answered that question in dramatic fashion. The president reiterated that there was a clear “nexus” between transnational organized crime syndicates, multiple terrorist groups, international drug cartels, and some foreign governments and intelligence services that are hostile to the United States.
The president also reiterated that transnational organized crime syndicates (and, by inference, perhaps others in the “nexus”) had not only penetrated the “legitimate” financial industry (i.e. Wall Street), but had already “undermined markets” to such an extent that they now posed an imminent “threat to the stability of the global financial system.”
The president did not just reaffirm this assessment. He declared it to be a “National Emergency.”
The president did not precisely define what he meant by “undermining markets,” but many in the national security community believe that one of the bigger threats “to the stability of the global financial system” is manipulative short selling and what I refer to as the “bust outs” of publicly listed American companies, the wider markets, and the economy itself.
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The term “bust-out” is one that I borrowed from organized crime. In the old days, mobsters would take over, say, the corner bar, load it up with debt, loot the cash, declare bankruptcy, and force the bar out of business. In the modern world of high finance, “bust outs” come in many permutations, but most of them follow the same routine of leverage, loot, and destroy.
Some “bust outs” see traders financing a company (often legitimate companies; in other cases companies that are frauds to begin with) and gaining a degree of control over the company’s stock price. The traders then “pump” the stock for a period of time, but ultimately the company is looted, the stock is “dumped,” and affiliated short sellers attack the company, sending its stock into a death spiral.
In a typical “pump and dump,” the manipulative short selling accompanying the “dump” ensures that the stock hits zero before the company has a chance to raise capital from more legitimate sources, and before shareholders have an opportunity to get out of the stock and cut their losses.
In other cases, individuals or firms will provide a legitimate company with toxic finance (often referred to as “death spiral” finance), which, for reasons explained in this story, immediately causes the company’s stock price to lose value. The financiers and affiliated traders then attack the company with manipulative short selling, sending the stock into a death spiral, and making it impossible for the company to raise new capital from more legitimate sources.
When the company is forced into bankruptcy, the people who provided the finance (often the same people as the short sellers) receive what is left of its assets, and they pocket short selling profits in excess of the cost of the initial toxic finance.
In still other cases, miscreants simply invest in a company’s shares or bonds, and gain a degree of control over the company’s management, either by demanding seats on the board or by exerting influence as major shareholders or creditors. Often the financial operators will then work with corrupt insiders to loot the company or engage in more complex schemes to saddle a company with toxic assets (purchased from the miscreants themselves or from their associates).
Ultimately, the goal is to loot and weaken the company.
If the company is publicly listed (private companies are also “busted out,” and this final step does not, of course, apply to them), the miscreants or their associates eventually attack the company with manipulative short selling. For complex reasons (to be outlined in this story), owning a company’s bonds (especially convertible bonds, sometimes known as “toxic converts”) makes it easier for the bond owners and their associates to engage in manipulative short selling.
There is also a long history of miscreants not just investing in a company, but taking the company over entirely, and looting its assets. Once sufficiently looted, the company is, as usual, attacked with manipulative short selling. Before the company’s board of directors or regulators have an opportunity to oust the miscreants, the company’s stock goes into a death spiral, making it impossible for the company to raise new capital, and forcing a bankruptcy.
In such cases, the tendency is to say, “Well, it was bad company, so its bankruptcy was inevitable.” But often, the companies are good companies until they were “busted out,” and often even troubled companies would be salvageable if it were not for the rapid death spirals of their stock prices, which do not allow time for restructuring or the ousting of the miscreants who gained control over the company.
There are also plenty of cases in which financial operators do not gain any control over their target company, but merely attack it with a steady barrage of manipulative short selling, meanwhile deploying any number of other tactics (for example, spreading false rumours about the company’s health, and manipulating credit default swap prices, which are an important measures of a company’s well-being) to drive down the company’s stock price.
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Financial operators have, in fact, been “busting out” major American companies since at least the 1980s, when numerous savings and loan banks were “busted out,” fuelling what came to be known as the “savings and loan crisis,” which delivered a devastating blow to the financial system. Many of the perpetrators of those bust-outs (see, for example, the book “Inside Job,” which is the seminal work on the savings and loan crisis) had ties to organized crime.
Sometimes organized crime syndicates perpetrate “bust outs” for the purposes of laundering money. The dirty cash goes into companies in the form of toxic finance, and comes out clean in the form of short selling profits. In cases where short sales are not “covered” (i.e. in many cases involving manipulative short selling, and in all cases where the target stock hits zero), the short selling profits do not even have to be reported to tax authorities.
Former FBI investigators and experts who study financial crime say that market manipulation and “bust outs” of publicly listed companies is one of the more important money laundering techniques deployed by the world’s leading organized crime syndicates and other miscreants. Indeed, many of history’s biggest “money laundering” scandals were, in fact, market manipulation and “bust out” scandals.
In 1999, for example, a famous scandal saw the Russian government and organized crime syndicates with ties to the Russian intelligence services laundering upwards of $7 billion through the Bank of New York. As later chapters of this story will demonstrate in great detail, this money laundering was (according to a careful reading of indictments, statements of government investigators, and other information) the tail end of a large scale market manipulation (“bust out”) network that destroyed countless U.S. public companies.
Some of the destroyed companies were pure frauds that were “pumped and dumped.” But many of the companies had been going concerns until they were targeted by people who had ties to Russian organized crime, and who gained control over the companies’ stock prices. Once in control, they “pumped” and then “dumped” the stocks while engaging in manipulative short selling that sent the stocks into death spirals.
Today, Russian organized crime continues to “bust out” public companies with a vengeance. While this activity has gone largely unreported by the media, a notable exception is Forbes magazine’s Nathan Vardi, who has written multiple stories (see, for example, his story, “Sewer PIPEs”) that note the extensive involvement of financial operators with ties to Russian organized crime syndicates in one form of “death spiral” finance (so-called “PIPEs) and the manipulative short selling that usually comes with such finance.
As we will see, there is no question that these organized crime syndicates have (as White House national security staffers maintain) ties to the Russian intelligence services. It is, moreover, my contention that when “bust-outs” are perpetrated by organized crime syndicates with ties to the Russian intelligence services, we should consider whether they are motivated, at least to some extent, by politics, and specifically by Russia’s disdain for the United States and the prevailing economic order.
But, of course, Russian organized crime is not the only concern. As we know, the president and his national security staff say that there is a “nexus” between transnational organized crime syndicates (including, but not limited to those emanating from Russia) and other potentially hostile constituencies, including jihadist organizations and foreign governments besides Russia.
Therefore we must ask whether sophisticated financiers with ties to jihadist organizations or hostile foreign governments are among those who have “undermined markets,” thereby inspiring the president to declare a “National Emergency.”
It is not often that a president issues a formal declaration of a “National Emergency,” and it is even less often that a president suggests that he is doing so because transnational organized crime syndicates (and perhaps others in the nexus, including terrorist organizations and hostile foreign governments) have “penetrated” the “legitimate” financial sector (i.e. parts of Wall Street) and are now posing a “threat to the stability of the global financial system.”
One would think that this would be front page news. But, amazingly, the president’s declaration of a “National Emergency” received almost no coverage at all from the major media outlets. One rare exception was the highly respected Economist magazine (based in Britain), which noted the “National Emergency” (and also noted the dearth of U.S. media coverage of the emergency) in a December 2011 article (titled, “Financial Terrorism”) that noted the possibility that the financial system might already have been attacked by hostile entitities.
While America’s media and financial regulators seem largely uninterested in this issue, some in the national security community are devoting a lot of attention to it. A 110 page report commissioned by the Department of Defense Irregular Warfare Support Program even goes so far as to state that there is high likelihood that the economic cataclysm of 2008 was significantly worsened by politically motivated “financial terrorists intent on wiping out the American financial system.”
The report (a copy of which can be found at DeepCapture.com) makes reference to (though it does not identify the brokerage by name) the massive volumes that went through Tuco Trading (the little, unregistered brokerage that I introduced at the outset of this story). The report also states with good reason that the weapons most likely to be used by financial terrorists are so-called “naked” short selling and other forms of short-side market manipulation.
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Before I continue, let me stress that short selling is a perfectly legitimate practice. It involves traders borrowing shares and then selling them, hoping the price will drop so that they can repurchase the shares at a discount, return them to the lender, and pocket the difference.
In “naked” short sales, traders do not borrow or purchase stock before they sell it. They simply sell what they do not have – phantom stock. You probably can imagine how easy it is for miscreants to suppress the price of a security if they are able to swamp a market with artificial supply.
Of course, by definition, if people are selling a phony supply of a security, then they cannot be delivering what they are selling. Regulators and Wall Street folks call this “failure to deliver.”
There are, in fact, a variety of methods that can be deployed to create “failures to deliver.” There are technical differences among the methods, but all share this one basic idea: generate “failures to deliver” that act as phony supply to drive down a security’s price. Because “naked short selling” is the most famous of these methods, and because the differences among it and the other methods are generally so technical as to interest only experts, I intend to refer to this whole class of methods as “naked short selling”, or even more generally, “market manipulation.”
As the report commissioned by the Defense Department correctly points out, foreign governments, terrorist groups, or organized crime syndicates wishing to manipulate the markets would not have to do the dirty work themselves. They would need only to invest in one among the multitude of American hedge funds that have ties to organized crime and have demonstrated that they are willing to deploy financial weapons of mass destruction for profit.
Under one scenario described in the Defense Department report, “a terror group could direct investments to a feeder hedge fund. The feeder fund would locate a Cayman Islands based hedge fund on their behalf that was predisposed to sell short financial shares. With sufficient new money, the hedge fund would expand its short selling activity (naked and traditional) and trade through dark pools or with sponsored access. At the same time, the same terror group might invest heavily in [credit default swaps] of the targeted short sales…”
Experts painted similar scenarios in testimony before a September 2010 informal meeting of the House Committee on Homeland Security. These experts were unanimous in their opinion that a hostile foreign entity could crash the U.S. financial markets. And to do so, it would most likely engage in manipulative trading through one of several brokerages that offer platforms – such as dark pools or so-called “sponsored access” – that enable miscreant financial operators to trade in anonymity.
Partly because such trading platforms exist, and for several other reasons (see Patrick Byrne’s DeepCapture story, “A Peace Sign to Wall Street”), SEC data reflects only a fraction of the naked short selling that occurs in the markets. But even the SEC’s partial data show that an average of 2 billion shares “failed to deliver” nearly every day in the months and weeks leading up to the 2008 market meltdown. Those shares, as I have explained, “failed to deliver” because they were phantom shares – artificial volume that drove down stock prices.
The SEC’s incomplete data also shows that more than 13 million shares of Bear Stearns sold short during the week before that bank’s demise in March 2008 failed to deliver. Soon after Bear Stearns collapsed, the CEOs of Morgan Stanley, Merrill Lynch, Lehman Brothers, and other major financial institutions began complaining to the SEC that naked short sellers had caused the demise of Bear Stearns and were now targeting their own banks.
We need to take seriously the complaints of the Wall Street CEOs because they were intimately familiar with the crime of naked short selling. Many of their own brokerages had engaged in it. When people are raising hell about a crime that has previously lined their pockets, it is reasonable to assume that they know what they are talking about.
Moreover, the Wall Street CEOs continued to demand that the SEC take action against the market manipulators even after their high-paying hedge fund clients (some of whom might themselves have been naked short sellers, others of whom were merely inclined to object to stronger regulation of any sort) asked the CEOs to stop their campaign.
When the CEOs continued to complain about the naked short selling, many of their big hedge fund clients began to pull their business in protest. It goes without saying that Wall Street CEOs do not sacrifice large chunks of their profits to speak out against crimes that do not exist.
On July 15, 2008, the SEC responded to the Wall Street CEOs by issuing an “Emergency Order” that temporarily protected 19 of the nation’s largest financial institutions (the biggest banks plus Fannie Mae and Freddie Mac) from naked short selling. The stock prices of these financial institutions immediately soared in value, and it looked like a major crisis had perhaps been averted.
Amazingly, though, the SEC lifted its “Emergency Order” just weeks later, on August 12. The next day, the naked short sellers resumed their attacks. The SEC’s own data (which, again, incompletely reflects the full magnitude of the problem) shows failures to deliver rising steadily from August 12 onwards, and these failures to deliver correspond directly to the downward spiral of stock prices.
According to the SEC’s partial data, Lehman Brothers saw an astounding 30 million of its shares fail to deliver during the week before the bank collapsed on September 15, 2008.
And make no mistake: Lehman might well have survived if it were not for the naked short selling and other attacks (such as the seemingly deliberate insertion of damaging false rumors into the marketplace, and the apparent manipulation of credit default swaps) that hammered its stock price.
Three days after Lehman’s collapse, on September 18, the SEC issued another Emergency Order, this one banning all short selling. In that Emergency Order, the SEC (without mentioning any banks by name) stated clearly that manipulative short selling was contributing to the collapse or near collapse of multiple banks, and thereby threatening to collapse the entire financial system.
In the weeks before Lehman’s collapse, the bank had plenty of liquidity to remain a going concern, and it had deals in the pipeline that would have enabled it to raise capital. But the freefall of Lehman’s stock price and (I will show) other maneuverings by short sellers derailed those deals, and panicked clients pulled their cash. Only then was Lehman forced to declare bankruptcy.
Lehman was not a healthy bank, to be sure. And there is no doubt that it was weakened with help of corrupt insiders who leveraged and looted. But that leverage and looting was only one part of larger “bust out” that saw miscreants selling to the corrupt insiders toxic assets (which I will describe in a moment), while others attacked the bank with manipulative short selling.
If it were not for that manipulative short selling, the stock would not have gone into a death spiral, and there might have been time to restructure and oust the corrupt insiders. Lehman was a venerable bank that had survived plenty of bouts of ill health and worse economic downturns. But it had never faced an assault on its stock price like the one that it saw in the lead-up to September 18, 2008.
And nearly every other major bank, regardless of its health, faced precisely similar fates during the gory month of September, 2008. All seemed doomed to collapse until the SEC issued its September 18 “Emergency Order” banning all forms of short selling, legal or otherwise.
There was no reason to ban legal short selling (a crackdown on illegal naked shorts would have been enough), but the Emergency Order gave the markets some breathing room while the Treasury Department prepared the massive (and now notorious) bailouts that signified that the government would not allow any more banks to collapse, no matter what sort of attacks might be directed at them.
As the authors of the report for the Defense Department’s irregular warfare unit conclude, there is no question that short-side market manipulators contributed to the collapse or near-collapse of many of America’s largest financial institutions in 2008. The report states further that “the [short selling] attacks on [America’s biggest banks] were so brazen that it is difficult to imagine that they were uncoordinated.”
And it wasn’t just the banks that were attacked. The SEC’s partial data shows that there was also massive naked short selling of exchange traded funds, or ETFs. These are publicly listed funds that are often highly leveraged and typically trade a basket of multiple stocks across a given industry. When market manipulators attack an ETF, they inflict damage on the entire industry that the fund indexes – and the high leverage magnifies the impact.
Meanwhile, there is strong evidence that the markets for U.S. government debt have also come under attack. The first naked short selling assault on U.S. Treasuries was launched in September 2001, at the time of Al Qaeda’s attacks on the World Trade Center and the Pentagon. Prior to the 9-11 tragedy, a daily average of $1.5 billion worth of U.S. government bonds failed to deliver. During the week immediately after 9-11, the daily failures to deliver were an astounding average of $1.5 trillion.
This was new and unusual market manipulation on a Herculean scale, but it was even worse during the months leading up to and following the 2008 crisis, when an average of $2.5 trillion worth of U.S. Treasuries failed to deliver every day. The authors of the report for the Defense Department speculate that financial terrorists, having precipitated the financial crisis, might have intended to attack the government bond markets in an attempt to bankrupt the national treasury.
Unfortunately, the government has done little to address the problem. Despite having issued its 2008 “Emergency Order” stating that manipulative short selling had contributed to the demise of major banks and now threatened to collapse the financial system, the SEC has yet to prosecute even one manipulative short seller involved in those attacks. That is, the SEC has yet to prosecute even one of the people who (according to the SEC) nearly obliterated the global financial system in 2008.
After the president declared a “National Emergency” in 2011, he never said another word about it. The government has yet to prosecute any of the “legitimate” Wall Street outfits that have (according to the president) been “penetrated” transnational organized crime syndicates. Nor has the government arrested any members of transnational organized crime syndicates that have (according to the president) “undermined markets” to such an extent that they now pose an imminent “threat to the stability of the global financial system.”
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The media, meanwhile, fails to give sufficient attention to these problems, insisting instead on reinforcing the narrative that the financial crisis was in essence caused by “reckless” lending to home buyers who could not pay back their mortgages. It is correct that the financial crisis of 2008 had its proximate cause in the collapse of the mortgage and property markets a year earlier, but that is only the surface of the story.
The Financial Crisis Inquiry Commission (FCIC) made clear in its January 2011 report to Congress that the principal cause of the mortgage and property disaster was the freakish collapse in 2007 of the market for collateralized debt obligations (CDOs), which are packages of mortgages that trade like securities.
As the FCIC also made clear, the collapse of the CDO market was by no means inevitable. Nor did it have much to do with “predatory” lending or the quality of most subprime mortgages. Rather, the problem was that more than half of the CDOs issued in 2006 and 2007 were so-called “synthetic” CDOs, every single one of which was deliberately designed to self-destruct.
That is, just a few firms that specialized in marketing “synthetic” CDOs worked with a select number of bankers and short sellers to hand-pick a relatively small number of mortgages that seemed certain to default. The miscreants then packaged bets against those relatively few toxic mortgages into so many self-destruct CDOs that they came to account for (I must repeat) more than half of the overall market.
It is not quite correct to say that this was phantom supply similar to what is generated by naked short selling. But there is no question that the “synthetic” CDOs created a market that was, alas, “synthetic.” It was a market overwhelmed by a supply of instruments that purported to contain representative samplings of an underlying asset (subprime mortgages) that a reasonable person might expect to have some value, but which actually contained (as only the short sellers knew) assets that were worth zero.
In other words, a small number of miscreants effectively flooded the market with massive volumes of synthetic toxicity.
As these miscreants surely knew, the self-destruct CDOs would, indeed, self-destruct, and thereby wipe out the overall market for CDOs, causing property values to crash. And when that happened, the banks that had leveraged themselves to the hilt to buy CDOs and overvalued property would be weakened. They would not be so weak that they had to die. But their weakness would create negative sentiment that could be turned into a panic if miscreants were to circulate exaggerated rumors about the banks’ problems and unleash waves of naked short selling that would send stock prices into death spirals.
In short, the report commissioned by the Department of Defense Irregular Warfare unit was correct to note that the financial crisis that nearly destroyed the nation went “far beyond normal expectations…” The authors of this report were also right to note that all of the events that precipitated the financial cataclysm raise “serious questions about whether this was a purposeful attack and if so, by whom, and why?”
By whom? And why? Over the coming weeks, DeepCapture will be publishing the remaining chapters of this book-length story, which is the product of a years-long investigation into the underworld of market manipulation and the vulnerability of the U.S. economy to malicious attacks. To that first question – by whom? – we do not have all the answers, but we have quite a few. That is, our investigation has led us down many paths, but they all seem to circle back to a distinct network of individuals and financial firms.
This social and business network did not single-handedly wreck the economy, but we will see that financial operators in this network were responsible for much of the mortgage fraud that occurred in the lead-up to the crisis, while others in the network created (with fraudulent mortgages) most of the self-destruct CDOs that crashed the CDO market in 2007.
People in this network also sold toxic asset to corrupt insiders at the leveraged big banks. These toxic assets included not just CDOs, but also (we will see) a number wildly overvalued properties whose prices were certain to collapse, and all the more so after the CDOs self-destructed. Once poisoned by the toxic assets, the banks were vulnerable to the short selling attacks that came in 2008. And the social and business network described by this story includes many of the world’s most notorious short sellers and market manipulators.
Moreover, this social and business network nicely illustrates the “nexus” described by the president and a his national security staff on August 12, 2011, when the president stated that the “legitimate” financial sector (i.e. parts of Wall Street) had been “penetrated” by transnational organized crime syndicates with ties to terrorist organizations and hostile foreign governments. As we know, the president suggested that this “nexus” had “undermined markets” and now posed a “threat to the stability of the global financial system.”
In other words, the social and business network (or “nexus”) described in this story is comprised mostly of “legitimate” American financial operators. However, the extent to they are actually “legitimate” deserves scrutiny given the extent to which they have “undermined markets,” and given that many of them have done business with others in a “nexus” that includes transnational organized crime syndicates, agents of hostile foreign governments, and sophisticated financiers with ties to the global movement of radical jihad.
Before I continue, though, let me define what I mean by “network.” It is not the case that all of the people in this network know each other, and it is certainly not the case that all or any of its constituencies (i.e., terrorist financiers, transnational organized crime syndicates, agents of rogue states, and “legitimate” American financial operators, among others) gathered in some secret meeting hall to hatch one grand conspiracy to wipe out the global financial system. Some of the relationships I will describe in this story are, in fact, once or twice removed.
However, it is the case that a number of “legitimate” firms and individuals in this network have engaged in activities (sometimes in tandem with organized criminals, terrorist financiers, and/or agents of hostile foreign governments) that have done damage to the markets. I also feel that it is fair (indeed a matter of some urgency) to describe the larger “social network” and the relationships between the people who inhabit this network.
Nobody, of course, is guilty by virtue of his relationships alone. Before I became a journalist, I myself did business with foreign governments that were then adversaries of the United States, and I do not mean for this story to feed xenophobia or paranoia even with regards to funders of terrorism.
That a “legitimate” financial operator (whether he be from the United States, Canada, Saudi Arabia, or wherever) has done business with, say, a Saudi billionaire who has funded Al Qaeda, does not mean that the “legitimate” financial operator supports terrorism or would knowingly participate in a politically motivated act of financial terrorism against the United States.
But it is also the case that relationships are not altogether irrelevant, and to describe relationships (even those that are once or twice removed) is not to postulate some far out conspiracy theory. To the contrary, it is to articulate an eminently mainstream understanding of how markets and social networks function. More specifically, it is the most basic of observations that information travels between people within social networks, and it is another basic observation that information moves markets.
Suppose that a few Saudi billionaires or American jihadis who have funded Al Qaeda were to initiate a short selling attack on major financial institutions in the United States. Information about this attack might travel along the “nexus” (or through the “network”) to its other constituencies, including transnational organized crime syndicates, agents of hostile foreign governments, and “legitimate” American financial operators who have done business with some or all of the above. The information might also travel to others whose relationships are once or twice removed.
Once armed with this information, the network’s various constituencies might, each independently of the other, choose to join the attack, knowing that there is money to be made. The others would be all the more likely to participate because they would understand that they are part of a larger, but fairly cohesive network of sophisticated financial operators, all of whom understand the power of a coordinated attack, and many of whom (judging by their record of manipulative trading) would be equally inclined to participate, knowing that the participation of others in the network would magnify the impact (and the profit).
As we will see, Saudi billionaires alleged to be funders of jihadist terrorist outfits are, collectively, among the wealthiest people in the world. They are also among the world’s most sophisticated financial operators. Even if they were to act alone, they could do significant damage to the markets. But to appreciate the full magnitude of the threat that they pose, we must understand that they inhabit a larger network of financial operators, and we must understand that many of these financial operators (including those who are widely deemed to be “legitimate”) would be inclined to participate in an attack, no matter who initiated it.
While some of the people in the network (not just terrorist financiers, but also members of transnational organized crime syndicates) might be motivated by their disdain for the United States or the prevailing economic order, many others in the network might be motivated by only profit, and might be unaware of the motivations of the other attackers. In the hypothetical example above, the “legitimate” American financial operators might join a terrorist financiers’ attack on the markets without knowing that their fellow attackers were waging jihad against the United States.
As I mentioned, many Saudi financial operators accused of financing jihadist groups are among the most prominent and wealthy people on the planet. The flash of money tends to blind “legitimate” American financial operators to the jihadist ideology of their Saudi associates. Similarly, many “legitimate” financial operators in the U.S. seem blind to the anti-West ideologies of Russian oligarchs and organized crime figures whose operations are (as we will see in detail) closely intertwined with those of the Russian government and its allies, such as Iran.
Of course, this blindness requires a certain degree of effort. It is also the case that some “legitimate” American financial operators have an ideology of their own. It is the ideology of corruption and avarice. Most of the “legitimate” financial operators in this story have demonstrated a willingness to destroy corporations, ruin lives, wipe out communities, and inflict serious damage on the American economy, so long as doing so increases their power and wealth.
Indeed, it might be that generalized corruption and the avarice of some “legitimate” financial operators are a bigger threat to America’s economic well-being (and thus to its national security) than, say, the ideology of radical jihad. As we will see in the coming chapters of this story, it was “legitimate” American financial operators who hatched the schemes that have resulted in our current economic woes.
It was not a grand conspiracy. It was, rather, a multitude of “conspiracies”
It was the conspiracies to commit mortgage fraud, and the conspiracies to create self-destruct CDOs. It was the conspiracies to “bust out” (leverage up, loot, and then destroy with manipulative trading) the nation’s largest mortgage companies.
It was the conspiracies to similarly “bust out” some of the nation’s biggest banks by selling to the leveraged banks toxic assets (e.g. self-destruct CDOs and overvalued property). And it was the conspiracies to engage in manipulative short selling that would help finish off the banks.
It was a number of activities that were independent of each other, but were also to some extent overlapping, in that the various people engaged in them might well have known (because, as we will see, many of them have done business together, and because information travels along the “nexus”) that their various activities complemented and reinforced each other.
There is also reason to believe (because so many of them bet on this eventuality) that various people involved in these activities knew or were indifferent to the prospect that their activities would do serious damage to the overall markets. Because the stakes are so high, we should probably consider the possibility that some people even had an inkling that the various activities would effectively “bust out” the global economy and bring the financial system to the brink of collapse.
This is what I call: “The Miscreants’ Global Bust-Out.”
And while the “bust out” concept originated in the minds of “legitimate” American financial operators, there is strong reason to believe that information about the various “bust-outs” traveled to others in the “nexus” (or “network”), and that these others included: agents of rogue states (e.g. Iran, Russia, and others); sophisticated financial operators who are leading figures in the movement of radical jihad; and transnational organized crime syndicates. There is also strong reason to believe that these various other constituencies contributed to the “bust-out” in various ways.
That is, there is strong reason to believe that the report for the Department of Defense Irregular Warfare Support Program was right: the United States was attacked by financial terrorists. The evidence is not 100 percent conclusive, but the facts are suggestive. At a minimum, they point to a scenario for how things might have played out in 2008–a scenario that needs to be taken seriously because it does show that the United States is, without doubt, vulnerable to future attack. Indeed, there is every reason to believe that such an attack is inevitable.
When the attack comes, I hope that this story will have provided at least a few good answers to that first question: ”By whom?”
As to the Defense Department report’s second question – why? – I have no definitive answers. And ultimately, the question might be irrelevant. The damage to the economy is the same whether it has been done in the name of profit or jihad; in the name of terror, geopolitics, another billion bucks, or nothing more than the fun of the game. The miscreants who will be described in this story come in many stripes, but they are all, every one of them, a threat to American prosperity and national security.
The first chapters of this series set out to describe the relationships that define the social and business ”network” (or “the nexus”). I repeat (because some people have misinterpreted my writings) that I do not mean to suggest that anyone is guilty by virtue of his relationships alone, and my purpose in describing relationships is not to weave a conspiracy theory. My purpose is simply to describe the structure of the financial underworld (a small world that also includes some “legitimate” figures of the overworld), and to show that information can and does travel to its various constituencies.
After describing the social and business “network” and some history of the damage caused by various members of this network, I will move backwards through the various events leading to the 2008 meltdown. More specifically, I will start by identifying a network of brokerages that seem to have transacted most of the manipulative short selling that finished off the banks in 2008, and I will identify many of the key clients of those brokerages.
In some cases, I have hard evidence (such as internal documents) identifying the key clients of brokerages. The bankruptcy receiver for Tuco Trading, for one, has provided a full list of Tuco’s clients and partner brokerages. With this list and data on Tuco’s trading, I will be able to present a strong case that particular individuals were responsible for the massive volumes that went through Tuco and its partner brokerages in the month before the collapse of Bear Stearns.
In just a few cases, my sources have identified the clients of certain brokerages in the network, but I do not have documents that corroborate what my sources have told me. In addition, most of these sources have asked to remain anonymous. Nonetheless, I will, in just a few cases, relate the information that I received from these sources. In most of these cases, the sources themselves were trading through those brokerages, and they say they were trading in tandem with the other clients whom they have identified.
In the few cases where I rely on such sources, I will provide information about their backgrounds and affiliations to help readers judge for themselves whether the information provided by the sources justifies further investigation. I will also provide additional facts (noting, for example, other business relationships between principals at the brokerages and the supposed clients identified by the sources) that will help the reader understand why I think the information from sources is credible enough to be published.
In still other cases, there have been regulatory actions that have identified some clients of certain brokerages. Meanwhile, those same brokerages have been sanctioned for manipulative trading, and I have data that suggests those brokerage have transacted massive volumes of trading that appears to have been manipulative.
If regulators have identified some of the clients of those brokerages of being, say, members of Russian organized crime syndicates, and if the owners of the brokerages have other ties to Russian organized crime syndicates, I will suggest that this gives us reason to believe (but not absolute proof) that Russian organized crime syndicates were at least partly responsible for the volumes of apparently manipulative trading that went through those brokerages.
Similarly, if the owners of a brokerage were involved in a venture with a man identified by the U.S. government as a “Specially Designated Global Terrorist”; and if that brokerage has been sanctioned for transacting manipulative trading; and if that same brokerage has been sanctioned for violating the rules prohibiting brokerages from conducting trades for terrorists and organized criminals; and if the top employees of that brokerage have other relationships with financiers of terrorism, I will suggest that one would be justified in asking whether that brokerage has transacted manipulative trading for financiers of terrorism. I will not state that I have proven the case with 100 percent certainty, but I will suggest that it is worthy of further investigation.
So, again, in some cases, I will be able to state with 100 percent certainty that hostile entities (e.g. jihadists and transnational organized crime syndicates with ties foreign intelligence agencies) have done damage to the U.S. economy. In other cases, I will use some intuition and float some conjectures.
The conjectures, however, will be posed as questions, not as assertions, and readers will be left to judge the merits. I trust that my readers are intelligent enough to understand the difference between educated conjecture and conspiracy theory, and I trust that my readers are capable of assessing the evidence and determining for themselves whether it is meaningful.
Whatever judgement my readers ultimately reach, I will feel that I have done right to engage in educated conjecture, and I will continue to urge other journalists to do the same when it comes to matters of national security, and especially when it concerns the stability of the financial system. If the financial system takes another hit, we will be in sorry shape indeed, and so we need to identify people who have definitely done damage, and also people who pose a threat, though we do not know with certainty how much, if any, damage they have already done.
Because our markets are relatively opaque, it is impossible for journalists and other investigators to paint a perfect picture of activities in the markets. But I feel that it is the duty of every journalist to use what evidence is at hand, connect some dots, and point to problematic scenarios.
If there’s a 50 percent chance that a meteor is heading towards New York, the public deserves to know, and the government (assuming its vigilance with regard to meteors is as lacking as its regulation of the markets) needs to be presented with the available evidence, and encouraged to put up defenses. The same is true when there is a reasonably high degree of probability that we are faced (as the president maintains) with an imminent “threat to the stability of the global financial system.”
After identifying the network of brokerages (all of which were relatively obscure before 2008) that certainly transacted most of the short selling of financial institutions in the lead-up to the financial crisis, and after presenting everything that we know about the clientele of those brokerages, I will identify many of the financial operators who were involved in the other components of the bust outs, from mortgage fraud and self-destruct CDOs to the sale of toxic assets to the leveraged banks that were subsequently finished off by the manipulative short selling. Much of this information can be found in government documents and regulatory filings (though readers will, I think, be surprised by much of it, because it has not appeared in the media).
Armed with this information, we will be able to reach some reasonably confident conclusions as to whether the various phases of the “bust-outs,” including the short selling attacks, were to some degree coordinated. That is, we will try to determine whether information did, indeed, travel along the “nexus” (or within the “network”) and whether various constituencies (including entities hostile to the United States) did, in fact, act on that information.
My apologies for the long introduction, but it is necessary because, as I mentioned, some have misunderstood my earlier writings, while others have gone to amazing lengths to make sure that they are misunderstood. Among these others is a former BusinessWeek journalist named Gary Weiss, who (along with his associates, such as the Mafia-tied Sam Antar) has flooded the internet with false assertions about this story and about me personally.
At any rate, with my intentions and caveats clarified, I will now proceed to describe the business and social “network” that (no conjecture here) poses a serious threat to the stability of the financial system and U.S. national security.
In Chapter 2, I introduce more information about Tuco trader Zuhair Karam* and his friends, including some of the prominent Saudi billionaires alleged to have financed Al Qaeda, and one fellow who ran an Islamic organization accused of inserting Al Qaeda spies into the U.S. military, and who subsequently set up a financial weapon of mass destruction that has, without doubt, done damage to the American markets.
To be continued…
* * * * * * * **
*Zuhair Karam is an alias. I have chosen not to use his real name because despite his initial reluctance to cooperate with our investigation, he subsequently became quite helpful.
However, I intend to publish the names of many of the other people affiliated with his brokerage, along with details about their backgrounds and activities. In addition, I will, in upcoming chapters, provide complete data and information to support the allegation that Tuco contributed to the financial crisis. That data and information can only be understood, however, in light of other information that I must present first.
* * * * * * * *
Mark Mitchell is a journalist who spent most of his career working as a correspondent for mainstream media publications before joining DeepCapture.com, which is the only publication devoted entirely to exposing the corruption and cracks in the American financial system. Mitchell is the author of a recently published book: The Dendreon Effect: How Felons, Con-men, and Wall Street Insiders Manipulate High-tech Stocks, which is available from most major booksellers, including Amazon and Overstock.com.
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