Post by jannikki on Mar 26, 2007 21:32:08 GMT -4
STOCKGATE TODAY
An online newspaper reporting the issues of Securities Fraud
How Much Fraud....March 26, 2007
David Patch
In October 2004 the Financial Times reported on the hearings held by the Federal Reserve relative to regulatory interests in the hedge funds. While many within the financial press were in attendance and covered the hearings, it was only the Financial Times that reported one quote made by then SEC Chairman William Donaldson to Fed. Chairman Alan Greenspan. The Chairman asking, "How much fraud are you willing to accept for liquidity?"
Some 2+ years later this question remains unanswered as the members of Congress and Wall Street regulators debate the issues of acceptable fraud vs. liquidity. And while these delays continue, recent commentary by a former hedge fund manager may have exposed that the amount of fraud accepted for liquidity may be substantial.
Last December, CNBC personality Jim Cramer conducted an interview with TheStreet.com's "Wall Street Confidential" and exposed several different and illegal tactics used by Hedge Funds to manipulate these capital markets. The interview sat dormant until the NY Post picked up the story last week creating a frenzy of concern within the hedge fund and financial media circles.
Cramer, known for his off the wall comments, claimed that hedge funds would use a full arsenal of tools to manipulate a market should they need to. Tools that include the sacrifice of small amounts of capital to generate a panic in a market so that prior short positions could be closed but closed at a profit.
"Maybe commit $5 million in capital, and I could affect it [referring to a market in a position held]. What you're seeing now is maybe it's probably a bigger market. Maybe you need $10 million in capital to knock the stuff down.
But it's a fun game, and it's a lucrative game.”
Of course the reason a hedge fund can work a market in this manner is because the "commitment" of funds is trivial relative to the funds overall position and the funds overall wealth. The fund investors are not concerned regarding this commitment of funds because their personal liability is only a fraction of the overall commitment.
Hedge funds take up a long or short position that can range into the hundreds of millions of dollars. That investment is split amongst the fund investors as is the "commitment" money required to move a market. That $10 Million commitment may represent a small fraction of the investment but is used as like a commission in the game of generating a profit. The hedge fund could drive a market down several percentage points using a fractional investment.
It is this capital leverage that is created by a hedge fund that allows such a game to exist. Individuals investors would not necessarily take on such a risk because the risk would be 100% theirs, a game like this diversifies the risk across the investors making it far more palatable.
Cramer further explains;
"You can't "foment." That's a violation. You can't create yourself an impression that a stock's down. But you do it anyway, because the SEC doesn't understand it. That's the only sense that I would say this is illegal. But a hedge fund that's not up a lot really has to do a lot now to save itself."
And as part of this process of creating a false impression would be to feed lies into the members of the financial press.
For a long time the relationship between the financial press and a hedge fund has been suspect. The financial media has not the time or the manpower to come up with a story each day and thus they rely heavily on the tips they receive from "sources." Without the publication of such "tips" the sources would dry up and careers would be lost.
A perfect marriage for career development, the financial reporter and the fund manager.
"Then you would call the Journal and you would get the bozo reporter on Research in Motion, and you would feed that Palm's got a killer that it's going to give away. These are all the things you must do on a day like today, and if you're not doing it [feeding lies to the media], maybe you shouldn't be in the game.
What's important when you're in that hedge-fund mode is to not do anything remotely truthful. Because the truth is so against your view that it's important to create a new truth to develop a fiction. "
And why does all this work so effectively? Why do the hedge funds have such opportunity to manipulate our markets? According to Cramer, a former hedge fund manager it is simple, the strategy - while illegal - was safe enough because, "the Securities and Exchange Commission never understands this."
And ultimately the regulatory ignorance is all about blind liquidity. Our securities regulators have overlooked these mini pump-and-dumps or the mini bear raids because it created trade volume and trade volume means liquidity. It does not matter that the volumes traded are done with the sole intent to "beleaguer all the moron longs" out of their positions according to Cramer’s report it is the trade volume [liquidity] that counts.
Understand that this is how hedge funds operate in our markets and do so with the highest levels of protection.
Should, for example, you and a dozen of your friends decide to all go into a specific market and pump up that stock price or drive it into oblivion it is considered fraud. It can't be done because that is considered stock manipulation and not simply creating liquidity. But if the group of you pools your investment under one umbrella and do the same the SEC is willing to ignore the fraud because this is now a hedge fund.
There is one other difference in all this of course. The SEC insures that the investors of a hedge fund meet a minimum level of wealth so that this opportunity is limited to the richest in this nation. Our capital markets can't have the average Joe making money in these markets because that would impact the profits these edge funds thrive for.
So again back to that question "How much fraud are you willing to accept for liquidity?"
By any kind of conservative analysis, we can be assured that hundreds of billions in market cap losses have taken place in the few years that have passed since former Chairman William Donaldson first raised that question only 2 years ago.
“I think it's important for people to recognize that the way that the market really works is to have that nexus of: Hit the brokerage houses with a series of orders that can push it down, then leak it to the press, and then get it on CNBC-that's also very important. And then you have a kind of a vicious cycle down. It's a pretty good game. It can pay for a percentage or two.”
And a few percentage points in just one company, RIMM, with a $25B market cap is nearly $500 Million.
And while hedge funds have been directly linked to insider trading abuses, market timing fraud, and illegal shorting abuses the SEC remains committed to protecting this investment class. James A. Brigagliano, SEC’s Associate Director for Trading Practices and Processing in the Commission's Division of Market Regulation speaking at a Managed Funds Association-sponsored seminar in New York informed the audience of hedge fund managers that The Securities and Exchange Commission is stepping gingerly into the issue of short-selling abuse and is following a "carefully honed approach" so that it does not impose too many restrictions on prime users of short-selling, namely hedge funds.
That’s right, in the same week that Chairman Cox informed the audience at the US Chamber Summit that short selling reforms put in place just 2 years ago are not working, and that people continued to be victimized by the abuses the guy in charge of trading practices is finding ways to protect the abusers.
You read it all here first. Heck, with conflicted financial writers where else would you read it?
For more on this issue please visit the Host site at www.investigatethesec.com (posted with permission)
Copyright 2007
An online newspaper reporting the issues of Securities Fraud
How Much Fraud....March 26, 2007
David Patch
In October 2004 the Financial Times reported on the hearings held by the Federal Reserve relative to regulatory interests in the hedge funds. While many within the financial press were in attendance and covered the hearings, it was only the Financial Times that reported one quote made by then SEC Chairman William Donaldson to Fed. Chairman Alan Greenspan. The Chairman asking, "How much fraud are you willing to accept for liquidity?"
Some 2+ years later this question remains unanswered as the members of Congress and Wall Street regulators debate the issues of acceptable fraud vs. liquidity. And while these delays continue, recent commentary by a former hedge fund manager may have exposed that the amount of fraud accepted for liquidity may be substantial.
Last December, CNBC personality Jim Cramer conducted an interview with TheStreet.com's "Wall Street Confidential" and exposed several different and illegal tactics used by Hedge Funds to manipulate these capital markets. The interview sat dormant until the NY Post picked up the story last week creating a frenzy of concern within the hedge fund and financial media circles.
Cramer, known for his off the wall comments, claimed that hedge funds would use a full arsenal of tools to manipulate a market should they need to. Tools that include the sacrifice of small amounts of capital to generate a panic in a market so that prior short positions could be closed but closed at a profit.
"Maybe commit $5 million in capital, and I could affect it [referring to a market in a position held]. What you're seeing now is maybe it's probably a bigger market. Maybe you need $10 million in capital to knock the stuff down.
But it's a fun game, and it's a lucrative game.”
Of course the reason a hedge fund can work a market in this manner is because the "commitment" of funds is trivial relative to the funds overall position and the funds overall wealth. The fund investors are not concerned regarding this commitment of funds because their personal liability is only a fraction of the overall commitment.
Hedge funds take up a long or short position that can range into the hundreds of millions of dollars. That investment is split amongst the fund investors as is the "commitment" money required to move a market. That $10 Million commitment may represent a small fraction of the investment but is used as like a commission in the game of generating a profit. The hedge fund could drive a market down several percentage points using a fractional investment.
It is this capital leverage that is created by a hedge fund that allows such a game to exist. Individuals investors would not necessarily take on such a risk because the risk would be 100% theirs, a game like this diversifies the risk across the investors making it far more palatable.
Cramer further explains;
"You can't "foment." That's a violation. You can't create yourself an impression that a stock's down. But you do it anyway, because the SEC doesn't understand it. That's the only sense that I would say this is illegal. But a hedge fund that's not up a lot really has to do a lot now to save itself."
And as part of this process of creating a false impression would be to feed lies into the members of the financial press.
For a long time the relationship between the financial press and a hedge fund has been suspect. The financial media has not the time or the manpower to come up with a story each day and thus they rely heavily on the tips they receive from "sources." Without the publication of such "tips" the sources would dry up and careers would be lost.
A perfect marriage for career development, the financial reporter and the fund manager.
"Then you would call the Journal and you would get the bozo reporter on Research in Motion, and you would feed that Palm's got a killer that it's going to give away. These are all the things you must do on a day like today, and if you're not doing it [feeding lies to the media], maybe you shouldn't be in the game.
What's important when you're in that hedge-fund mode is to not do anything remotely truthful. Because the truth is so against your view that it's important to create a new truth to develop a fiction. "
And why does all this work so effectively? Why do the hedge funds have such opportunity to manipulate our markets? According to Cramer, a former hedge fund manager it is simple, the strategy - while illegal - was safe enough because, "the Securities and Exchange Commission never understands this."
And ultimately the regulatory ignorance is all about blind liquidity. Our securities regulators have overlooked these mini pump-and-dumps or the mini bear raids because it created trade volume and trade volume means liquidity. It does not matter that the volumes traded are done with the sole intent to "beleaguer all the moron longs" out of their positions according to Cramer’s report it is the trade volume [liquidity] that counts.
Understand that this is how hedge funds operate in our markets and do so with the highest levels of protection.
Should, for example, you and a dozen of your friends decide to all go into a specific market and pump up that stock price or drive it into oblivion it is considered fraud. It can't be done because that is considered stock manipulation and not simply creating liquidity. But if the group of you pools your investment under one umbrella and do the same the SEC is willing to ignore the fraud because this is now a hedge fund.
There is one other difference in all this of course. The SEC insures that the investors of a hedge fund meet a minimum level of wealth so that this opportunity is limited to the richest in this nation. Our capital markets can't have the average Joe making money in these markets because that would impact the profits these edge funds thrive for.
So again back to that question "How much fraud are you willing to accept for liquidity?"
By any kind of conservative analysis, we can be assured that hundreds of billions in market cap losses have taken place in the few years that have passed since former Chairman William Donaldson first raised that question only 2 years ago.
“I think it's important for people to recognize that the way that the market really works is to have that nexus of: Hit the brokerage houses with a series of orders that can push it down, then leak it to the press, and then get it on CNBC-that's also very important. And then you have a kind of a vicious cycle down. It's a pretty good game. It can pay for a percentage or two.”
And a few percentage points in just one company, RIMM, with a $25B market cap is nearly $500 Million.
And while hedge funds have been directly linked to insider trading abuses, market timing fraud, and illegal shorting abuses the SEC remains committed to protecting this investment class. James A. Brigagliano, SEC’s Associate Director for Trading Practices and Processing in the Commission's Division of Market Regulation speaking at a Managed Funds Association-sponsored seminar in New York informed the audience of hedge fund managers that The Securities and Exchange Commission is stepping gingerly into the issue of short-selling abuse and is following a "carefully honed approach" so that it does not impose too many restrictions on prime users of short-selling, namely hedge funds.
That’s right, in the same week that Chairman Cox informed the audience at the US Chamber Summit that short selling reforms put in place just 2 years ago are not working, and that people continued to be victimized by the abuses the guy in charge of trading practices is finding ways to protect the abusers.
You read it all here first. Heck, with conflicted financial writers where else would you read it?
For more on this issue please visit the Host site at www.investigatethesec.com (posted with permission)
Copyright 2007