Saturday, November 15, 2008

The SEC Scandal You Don’t Read About in the Papers

November 12th, 2008 by Mark Mitchell

There was an article in The New York Times yesterday about the SEC’s disgraceful ruling that it will take no disciplinary action against the SEC cronies at the center of the Gary Aguirre scandal. Read through the Times’ false veneer of objectivity, and it seems that reporter Walt Bogdanich is trying to say that it’s pretty damn strange that a corrupt SEC has been allowed to adjudicate its own corruption.

Aguirre blew this scandal wide open in 2006, when he wrote an 18-page letter to the U.S. Congress. The letter reads: “I believe our capital markets face a growing risk from lightly or unregulated hedge funds just as our markets did in the 1920s from unregulated pools of money – then called syndicates, trusts or pools. Those unregulated pools were instrumental in delivering the 1929 Crash….There is growing evidence that today’s pools—hedge funds—have advanced and refined the practice of manipulating and cheating other market participants.”

Aguirre then described the investigation that he had led at the SEC. “The investigation was two-pronged,” he wrote. One prong concerned “insider trading.” However, the second, and far more important prong, concerned “market manipulation.” Specifically, Aguirre and his colleagues were investigating “two suspected violations: wash sales and naked shorts.”

“My colleagues,” Aguirre wrote, “believed [the naked short selling] held a greater potential to severely injure the financial markets.”

That is, Aguirre and his colleagues believed that naked short selling (hedge funds selling stock that they have not yet purchased or borrowed in order to drive down prices and destroy public companies) ranked high among the tactics that “were instrumental in delivering the 1929 Crash” – a repeat of which now seemed entirely possible since the tactic had been “refined” by hedge funds intent on “manipulating and cheating other market participants.” But the SEC rank-and-file’s attempt to investigate this crime was “stopped in its tracks” by SEC leaders who had been corrupted by Wall Street fat cats.

At the time when Aguirre released his letter, a small clique of influential journalists with close ties to certain Wall Street fat cats were going to great lengths to whitewash the crime of naked short selling (see “The Story of Deep Capture” for details). Unsurprisingly, some of these journalists quickly sought to discredit the SEC whistleblower.

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