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July 19, 2012- Implications of Terror Attack, Fighting in Damascus?
There continue to be conflicting reports about the identity of those behind yesterday's targeted bombing in Bulgaria. The Prime Minister has stated, unequivocally, that Iran is behind the bombing. While the Bulgarians have stated they know who was behind the tragedy, they are still not saying. In the meantime, a picture with an alleged suspect has been making the rounds in the media. If the ID is correct, the bomber is a Sunni Muslim, born in Europe, who is said to have spent time detained in Guantanamo Bay. All of these details will become clear in the next few days.
There have been a couple of alarmist articles in the press in the last day. The first, in Ha'aretz, claimed that the Israeli government will use the bombing as an excuse to launch an attack on Iran. The second, the New York Times, stated that Israel is planning to attack the Syrian chemical weapons facilities to ensure that the chemicals do not fall into the hands of the terrorists. The first story is truly alarmist. There is not doubt that Netanyahu will, and already has tied the terror attacks to Iran's nuclear program. He warned today against allowing any country that supports terrorism to acquire nuclear weapons. For the moment, however, Netanyahu is using the tragedy to gain additional world support for a new and tighter round of sanctions against Iran. In the future... As to the second story, as I already reported, the Israeli government has made it clear that it will attack Hezbollah if it moves to acquire chemical weapons.
The fighting intensified in Damascus today, with the rebels seemingly gaining control of various parts of the city. It would seem the rebels have been sneaking men and material into the city over the last few months, and have waited for the signal that the time was right to try to seize the capital. The outcome should be clear in the next few days. Maybe China and Russia know something that the rest of the world does not. Once again, the two countries vetoed a security council resolution imposing sanctions on the Syrian government. They really seem to be backing the wrong horse, and when Assad falls, they will find themselves with new enemies in Syria.
Last night was the funeral of the leading rabbi of the Haredi movement, Rabbi Yosef Shalom Elyashiv, who died at 102. Elyashiv was called the "Posek Ha Dor" (the singular halachic authority of his generation). He was also known for his exceedingly conservative/reactionary rulings. Rabbi Elyashiv refused to allow for brain death, to be a criterion for the purpose of harvesting organ for transplants. This set up a situation where many more Haredim receive organs than were able to donate. Rabbi Elyashiv opposed putting pressure on men who refused to give their wife a Get (halachic writ of divorce). Most importantly, Rabbi Elyashiv was a strong advocate that a conversion should be retroactively annulled, if the convert was found not observe all of the mitzvot. There was one ruling of Rabbi Elyashiv that I really liked. Rabbi Elyashiv ruled that one should not pray in the aisles of planes, if doing so disturbs the other fellow passengers. This ruling does not seem to be kept as strictly by his followers as they followed most of his other rulings.
The Miscreants’ Global Bust-Out (Chapter 6): Al Qaeda’s Wash Trades, the Blind Sheikh, and the RLevi2 Algorithmic Market Manipulation Program
One of the world&rsquos most powerful hedge fund and brokerage operations had Al Qaeda as a client? Of course, I&rsquom kidding. Right? Actually, no &ndash I&rsquom not kidding.
One of Man Financial&rsquos clients was a key Al Qaeda money launderer and market manipulator.
This will no longer seem surprising once you come to understand that the underworld of illicit finance is a small world, and once you understand that the underworld is becoming the overworld, which is to say that criminality has gone mainstream.
The Mafia has been a player in the financial markets since the 1980s, and we have begun to see how Michael Milken and his friends (including the ones who run Man Financial) made that happen. Meanwhile, where there is Mafia, there are jihadis.
At the outset of this story, I quoted U.S. National Intelligence Chief Admiral Dennis Blair&rsquos warning about the &ldquonexus&rdquo between organized crime and terrorism. If you don&rsquot believe him, listen to the experts hired not long ago by the U.S.. Department of Justice to produce a report that was titled, &ldquoExploring Links between Transnational Organized Crime & International Terrorism.&rdquo
In this report, the experts (all noted academics and former employees of national security agencies) stated that &ldquocriminal and terrorist organizations will integrate and might even form new types of organizations.&rdquo
The experts said, &ldquoGranted, the motives appear different: organized crime focusing on making money and terrorism aiming to undermine political authority.&rdquo But, according to the experts, the evidence is clear that &ldquothe goals of crime and terror groups have coalesced in the past.&rdquo
The shared goal is not political in the sense of being rooted in a complex ideology, but it has political implications. &ldquoTerror groups,&rdquo said the Justice Department experts, &ldquosometimes seek and obtain the assistance of organized crime based on the perceived worthiness of the terrorist cause, or because of their common cause against state authorities or other sources of opposition.&rdquo
Indeed, according to the experts, the Mafia and the jihadis &ldquohave similar profiles, and are often the same individuals&hellip.many individuals belong to both terror and organized crime groups, and conduct a variety of tasks for both.&rdquo
Among the many examples cited by the experts was that of Dawood Ibrahim, the Indian Mafia boss. Recall that a CIA official said, &ldquoIf you want to know what Osama bin Laden is up to, you have to understand what Dawood Ibrahim is up to.&rdquo
Daniel Pearl, the Wall Street Journal reporter who was murdered by jihadis in 2002, had begun to investigate Mr. Ibrahim, but he never wrote a story about him. After Pearl&rsquos death, The Journal announced that it would henceforth stop sending reporters to dangerous places because doing so did not conform with the paper&rsquos mission to report on the world of business.
Apparently, The Journal had concluded that dangerous people in dangerous places do not conduct business. Since then, the newspaper has given up on investigating much of anything at all.
Meanwhile, most other newspapers seem equally disinclined to devote resources to serious investigations, or to publish stories that might suprise their readers. So you won&rsquot read much about Dawood Ibrahim in the press.
But Mr. Ibrahim is not just dangerous, he is one of the most important men in the world. He is someone who should be appearing on the front pages of every newspaper in the land.
Mr. Ibrahim, we know, used to run his global criminal operation out of Dubai, with the full acquiescence of the local ruler, Sheikh Mo. While in Dubai, Mr. Ibrahim came to be on close terms with everyone from Bollywood actresses to market manipulators (such as Ali Nazerali, formerly of BCCI) who inhabit the network of Michael Milken.
For most of his career, Mr. Ibrahim was nothing more than a secular Mafia boss, involved in the usual trades &ndash narcotics smuggling, money laundering, trafficking of precious metals, proliferation of nuclear weapons materials, protection rackets, financial scams, and prostitution.
But in the early 1990s, Mr. Ibrahim and his Mafia outfit, which is called &ldquoD-Company&rdquo, began to form relationships with jihadis, including Osama bin Laden. And thanks to those relationships, he soon came to the attention of Pakistan&rsquos spy agency, the ISI.
In 1993, the ISI invited some of the top members of Mr. Ibrahim&rsquos crime gang to Pakistan to receive paramilitary training. That same year, Mr. Ibrahim and his henchmen, with cooperation from jihadis and the ISI, orchestrated the most deadly attack in Indian history, simultaneously exploding powerful bombs in thirteen locations throughout Bombay (now called Mumbai).
A total of 250 people were killed in those attacks, and 700 were injured. Clearly, this was not a typical Mob hit. It was an act of terrorism, coordinated by a man who was not by appellation a &ldquoterrorist&rdquo, but rather a Mafioso who happened to have found common cause with rogue spies and jihadis.
Mr. Ibrahim, who now lives in Pakistan under the protection of the ISI, is also suspected of involvement in the cataclysm that hit Mumbai in 2008, when Al Qaeda-linked jihadis (most of them officially members of Laskhar-e-Tayyiba) launched attacks in more than ten locations around the city, occupying several hotels and a synagogue, and killing at least 173 people, including at least five Americans, one a 13-year old girl.
This is why Dawood Ibrahim enjoys the distinction of being the only person labeled by the U.S. government as both a &ldquoForeign Narcotics Kingpin&rdquo and a &ldquoSpecially Designated Global Terrorist&rdquo.
But he is not the only person who has deserved those appellations. The Saudi billionaire Sheikh Mahfouz (formerly of BCCI) was, until his death in 2009, another person who was connected to both the drug trade and the Grand Jihad. And the leaders of Al Qaeda are heavily involved in the heroin trade, running their drugs through the Albanian Mafia, which is essentially an Al Qaeda affiliate, in close cooperation with the Russian Mafia and La Cosa Nostra.
There are purists who would insist that Dawood Ibrahim is not part of Al Qaeda because he never officially swore allegiance to Osama bin Laden. This would be to misunderstand the nature of Al Qaeda, which has never had more than a smattering of official members, though far more people have done its bidding.
Most of the hijackers who carried out the September 11 attacks were not officially members of Al Qaeda. Even the mastermind of the 9-11 conspiracy, Khalid Shiekh Mohammed, was not an Al Qaeda member when the attacks were carried out.
To defend against Al Qaeda, we must understand that the enemy is not just a few sworn members, but a large, loose network of people who collaborated with Osama bin Laden, and will continue to collaborate with bin Laden&rsquos successor.
In Osama bin Laden&rsquos formal declaration of war against the United States, the name &ldquoAl Qaeda&rdquo was not even used. Instead, the declaration was signed by bin Laden and the the leaders of mutiple other outfits &ndash the Jihad Group, the Egyptian Islamic Group, Jamiat-e-Ulema, and the Jihad Movement of Bangladesh.
Mr. Ibrahim&rsquos D-Company is closely affilitated with Jamiat-e-Ulema, and a number of Mr. Ibrahim&rsquos top henchmen are full-fledged members of the Jihad Movement of Bangledesh. So it is not surprising that D-Company has helped carry out multiple terrorist attacks linked to these and other Al Qaeda affiliates.
In addition to carrying out terrorist attacks, Ibrahim and D-Company are the single most important dealers of Al Qaeda heroin. Moreover, Ibrahim and D-Company play a key role in managing Al Qaeda&rsquos finances.
Thus, Dawood Ibrahim and his henchmen are, for all intents and purposes, members of a somewhat intangible network of closely affiliated people who are all on the same page. It is correct (and, indeed, essential if we are to understand the real enemy) to describe all of the people in this network as being &ldquomembers&rdquo of Al Qaeda, regardless of whether they openly declare themselves as such.
In 2008, one of Dawood Ibrahim&rsquos top henchmen was Naresh Patel, who presided over an underground Al Qaeda banking network with tentacles in the United Arab Emirates, India, Pakistan, China, Nigeria, Italy, Afghanistan, South Africa, the Congo, Nepal, the Cook Islands, Great Britain, and the United States.
The principal function of this network was to manage Al Qaeda drug profits &mdash hundreds of millions of dollars that both Al Qaeda and its subsidiary, the Albanian Mafia, had earned from selling not just heroin, but also cocaine.
According to the U.S. Department of Justice, much of that money was transferred through banks in Dubai, and onwards to at least fifteen accounts that Patel held at Man Financial, the outfit that was (as we have seen) tied to Michael Milken, Bernie Madoff, Tuco Trading, and BKS in Moscow.
Patel traded huge volumes through these Man Financial accounts in 2008, but the DOJ didn&rsquot catch him until 2009, at which point he was charged with transacting, through Man Financial, massive volumes of &ldquowash trades&rdquo &ndashsimultaneously selling and buying commodities. He was doing the same thing with securities.
The DOJ described this activity as &ldquomoney laundering&rdquo because money laundering was part of it, and money laundering is a concept that is fairly well understood by counterterrorism officials. Market manipulation, by contrast, is probably less well understood.
And what the DOJ might not have known (or chosen to ignore) is that people who deploy &ldquowash trades&rdquo are not just laundering money &ndash they are manipulating markets. This is because &ldquowash trades&rdquo (simultaneously buying and selling the same securities) increase volume artificially, causing prices to fall.
In other words, wash trades create static and drown out genuine market signals. Most often, as the information in the marketplace gets attenuated, wash trades are deployed simultaneously with naked short selling to create the appearance of panic selling. This induces the very sell-off on which the trader is betting.
Naresh Patel&rsquos wash trades alone did serious damage to the markets. But it would be a good idea for the SEC to check Naresh Patel&rsquos and Man Financial&rsquos trading records (not to mention those of Madoff&rsquos brokerage and others that transacted trades for Man Financial) to see if Patel&rsquos wash trades were, like most wash trades, part of an even bigger short-side market manipulation scheme.
It would also be helpful to know exactly which Man Financial executives were responsible for transacting the jihadis&rsquo manipulative trades. It seems likely, for one, that Man Financial&rsquos vice president of trading control, Neda Nabavi, would have had some oversight of the trading. This might or might not be relevant, but I will nonetheless point out that Ms. Nabavi is also the executive director of an Iranian social club called Shabeh Jomeh.
Shabeh Jomeh appears to be an innocent enough organization &mdash it organizes parties and other social gatherings. But it is an instructive guide to Iranian business networks. The co-founder of Shabeh Jomeh, along with Man Financial&rsquos Nabavi, was Babak Talebi, who was also a board member of the National Iranian American Council (NIAC).
The NIAC was set up in the wake of the 9-11 attacks, ostensibly to serve as a voice for &ldquomoderate&rdquo Iranian-Americans who object to terrorism. In a remarkably short period of time, the organization gained access to high-level officials at the State Department and the Central Intelligence Agency.
But, as it turned out, the National Iranian American Council&rsquos principal mission was not to serve as a voice against terrorism. In fact, it said little at all about terrorism. Instead, it devoted most of its energies to advocating on behalf of the Iranian government.
In 2007, an Iranian American journalist named Hassan Daioleslam began publicly asserting that the NIAC should be officially registered as an agent working for the Iranian regime. The director of the NIAC, Trita Parsi, responded by suing Daioleslam for defamation.
This turned out to be a mistake, because it allowed Daioleslam to request &ldquodiscovery&rdquo of the NIAC&rsquos internal documents, which proved that the NIAC had, from its inception, been in regular contact with Iran&rsquos ambassador to the United Nations, who was (recall) also directing the operations of Palestinian Islamic Jihad, the Assa Corporation, and the Alavi Foundation.
It emerged from the court battle that the NIAC was coordinating its lobbying and advocacy with a man named Siamak Namaz. Some years earlier, Namaz had founded an outfit in Europe called Iranians for International Cooperation, the stated mission of which was to &ldquosafeguard Iran&rsquos interests&rdquo. The NIAC, it appeared, was founded to fulfill that same mission in the United States.
As to the credibility of NIAC&rsquos claims that it advocates on behalf of &ldquoIranian-Americans&rdquo, as opposed to the Iranian regime, it has been noted that the group has very few Iranian-Americans as members, while its leaders, Namaz and Parsi, are Iranian nationals who, by all accounts, are loyal to the rulers of the Islamic Republic, and have no intentions of becoming American citizens.
It is, moreover, the case that while Namaz was lobbying on behalf of the Iranian regime, he was also working as a managing director of a company called Atieh Bahar, which is the international consulting arm of the Atieh Group, a holding company that has contracts with Iranian government ministries and the Iranian banks that were financing the Islamic regime&rsquos nuclear program.
Shortly after this information became public, the head of the Atieh Group, Bijan Khajehpour, was arrested in Iran and supposedly imprisoned by the regime. Meanwhile, Namaz and Parsi suddenly claimed to support the democracy movement in Iran. In light of these developments, I feel confident in floating a hypothesis &ndash namely that the Iranian government instructs its agents to speak out in favor of democracy in order to provide cover for their activities on behalf of the regime.
It is quite possible that the Islamic Republic even stages the imprisonment of its best agents to provide them with a pro-democracy veneer that will enable them to operate more effectively in the West. Certainly, it seems unlikely that Namaz and Parsi are genuine democrats given that internal NIAC documents show that the organization aspired to snuff out the so-called &ldquoDemocracy Fund&rdquo and other pro-democracy movements led by Iranians living in the U.S.
In a document titled &ldquoCampaign for a New American Policy on Iran,&rdquo the NIAC vowed to &ldquoend the Democracy Fund as we know it&rdquo. Along these lines, the NIAC document lists several important goals. At the top of the list is the goal of convincing liberal Iranians and their supporters to &ldquoabandon the pursuit of regime change.&rdquo
As for Mr. Khajehpour, perhaps he really was a threat to the regime in Iran. Perhaps he really did go to prison. But he didn&rsquot stay in prison long, and he is now in London, from where he operates a business empire that has much reach into the United States.
I do not mean to suggest that Americans should view the NIAC as something mysterious or scary. To the contrary, Americans should engage the NIAC, just as the U.S. government should engage the Iranian regime.
Trita Parsi, NIAC&rsquos founder, has written an excellent book that is a must-read for anyone wishing to understand the Iranian party line. Perhaps, one day, Parsi can convince his associates in Iran that there is little to be gained by threatening to exterminate Israel and to wage &ldquoeconomic jihad&rdquo (with &ldquojihad&rdquo understood to mean &ldquowar against infidels&rdquo).
However, as long as Iran demonstrates by its actions that it is an enemy of the United States, it might be best to treat its agents with a degree of suspicion. Another book worth reading is &ldquoShariah: The Threat to America,&rdquo by former CIA director James Woolsey, who implicates Iran in everything from the September 11 attacks to the development of shariah &ldquocompliant&rdquo finance that poses a threat to the global financial system.
As we know, the Alavi Foundation, the other front for the Iranian regime that was dealing with Iran&rsquos UN ambassador, was indicted in 2009 for espionage and funding Iran&rsquos nuclear weapons program. A report in the New York Daily News even suggested that the Alavi Foundation was conspiring to import nuclear materials into the United States for use in a terrorist attack on a major American city.
As for Shabeh Jomeh, the Iranian social club co-founded by Man Financial&rsquos vice president of trading controls, it might well be nothing more than opportunity for Iranians to get to know each other. But it might also be worth noting that in addition to being tied to the NIAC, Shabeh Jomeh&rsquos other co-founder is Tamilla Ghodsi, a managing director of Goldman Sachs.
Ghodsi sits on the board of the Razi Health Foundation, an outfit that transferred large sums of money to the above-mentioned Alavi Foundation. Meanwhile, The Alavi Foundation delivered money back to the Razi Health Foundation, raising the possibility that these organizations were essentially one and the same thing.
But the SEC has not investigated Man Financial at all. In fact, it has almost never prosecuted a major case of market manipulation, much less checked the trading records of a key Al Qaeda money manager who was manipulating the markets through a brokerage that also does business with the Mafia.
So nobody is prosecuting Man Financial, despite the fact that it was clearly complicit in Al Qaeda man Naresh Patel&rsquos illegal trading, and despite the fact that the Milken cronies who run that operation must have known precisely who Naresh Patel was. Indeed, it is the law &ndash as prescribed by the Patriot Act &mdash that brokers and hedge fund managers must know whether their customers are Mafiosi, jihadis, or both.
This is especially true when the customers appear to be conducting massive volumes of manipulative short trades at the height of a financial crisis.
As for Madoff&rsquos brokerage &ndash well, too late to investigate that operation. It was sold to the Milken network, right at the time of the 2010 arrest of Daniel Bonventre, the guy responsible for transferring $750 million of Ponzi money to Madoff&rsquos &ldquoclearing and settlement&rdquo operation (i.e. the operation that would have transacted any manipulative trading coming to it from Man Financial and others in the Milken network).
Madoff&rsquos brokerage was quickly sold in an auction that may have been rigged. Three brokerages attended the auction, only one of which made a bid. One of the brokerages in attendance was Guzman & Co, owned by Leopoldo Guzman, who had recently been serving as chief investment officer of the Gulf Investments Company, a Saudi-owned outfit in Kuwait.
The other observing brokerage was Aleo Capital Markets. I haven&rsquot been able to find out much about that outfit except that it is run by David Weisberger, former CEO of Lava Trading.
Lava Trading is part of a larger group called SunGard, which was spun off from the Sun Oil Company. Sungard has been at the forefront of providing trading platforms to shariah compliant financial institutions in the Middle East.
In 2008, Sungard sponsored a &ldquoGala Networking Reception&rdquo where it was declared that &ldquoIslamic finance can be the model for the global economy.&rdquo The keynote speaker at this event was the CEO of Dar Al-Maal Al-Islami, or the &ldquoHouse of Islamic Money&rdquo
Victims of the September 11 attacks have sued the The House of Islamic Money, noting that it kept accounts for Wael Jalaidan, a founder of Al Qaeda, and that it has done business with companies that were owned by Osama bin Laden.
The House of Islamic Money&rsquos board members included Haydar bin Laden, Osama&rsquos brother, and &ldquoSpecially Designated Global Terrorist&rdquo Yasin al Qadi (Osama&rsquos favorite financier). One of it subsidiairies, Shamal Islamic Bank, was run by Abdul Jalil Batterjee, who was the chairman of an outfit that controlled Benevolence International, the Al Qaeda front that had contacts with people trying to obtain nuclear weapons for the Grand Jihad.
SunGard supplies trading platforms to several brokerages that have been fined for deploying those trading platforms in naked short selling schemes. SunGard was also found to be &ldquosystematically&rdquo reporting short sales as long sales in the summer of 2007 &ndash a habit that is beneficial to manipulative trading.
SunGard, meanwhile, owned a brokerage called Assent. Many of Assent&rsquos traders were, in 2008, also trading through Zuhair Karam&rsquos Tuco Trading, accounting for some of that brokerage&rsquos large volume. At Tuco, recall, there were several interesting accounts.
One was the Orange Diviner account, controlled by the top henchmen of Roman Abramovich (the Russian prime minister&rsquos right-hand man) and Russian Mafia kingpin Semion Mogilevich. Also involved with Orange Diviner were people affiliated with Alfa Group, the outfit that is funding Iran&rsquos nuclear program.
Also interesting were two Tuco accounts that traded 2 billion shares (equal to 20 percent of the volume at the biggest brokerage on the planet). One of those two accounts contained more 2,000 anoymous subaccounts based in China.
And in the fall of 2010, I had received a tip that the accounts responsible for those 2 billion shares had been set up by an Iranian fellow with high-level ties to the Revolutionary Guard and Palestinian Islamic Jihad (whose leader in the U.S. was taking directions from the Iranian abassador to the UN). However, Tuco&rsquos Zuhair Karam had yet to confirm the identity of that Iranian.
But I did now that some traders at Assent (the Sungard outfit whose traders were also operating through Tuco) were involved with a brokerage called Carlin Equities. One person involved with Carlin was Arik Kislin, whom the U.S. government has named as being a &ldquomember&rdquo of the gang run by Vyacheslav Ivankov, or &ldquoLittle Japanese&rdquo &ndash the top boss of the Russian Mafia in the United States during the 1980s.
In 2009, Ivankov was assassinated on a Moscow street after admitting that he had long been employed by the Russian intelligence services. Meanwhile, Kislin and a Russian Mafia figure named Michael Chernoy were partners in a money laundering outfit called Trans Commodities, which has been linked to the Russian government.
In addition, Kislin was named by the FBI as an associate of an Iranian arms dealer named Babeck Seroush, who operated out of Moscow and worked with the GRU, Russia&rsquos military intelligence agency. In 1984, prosecutors for the Southern District of New York indicted Seroush for smuggling semiconductors and military-issue night-vision goggles to North Korea. Kislin has admitted that he has done business with Seroush.
Assent, the outfit associated with Kislin&rsquos traders is tied in other ways to Zuhair Karam&rsquos Tuco Trading. For example, a brokerage called Lightspeed (which had a partnership with Tuco and provided Tuco with one of its trading platforms) referred some of its trades to Assent, which in turn referred trades to a California brokerage called Wedbush Morgan and to a Texas outfit called Penson Financial.
Wedbush, meanwhile, referred most of its trades onwards to Bernie Madoff&rsquos brokerage. In other words, trades were passed down a long line of brokerages and, in many cases, ultimately executed by Madoff.
So to summarize: the bidding for Madoff&rsquos brokerage was atttended by three other brokerages. One of those brokerages was owned by a fellow who had most recently been working for a Saudi outfit in Kuwait.
The second brokerage was owned by the former CEO of a brokerage that was a subsidiary of SunGard, which has ties to the House of Islamic Money and also owns Assent, which has ties to Lightspeed, Tuco, and Carlin Equities, the outfit tied to Russian Mafia figure Arik Kislin.
But those brokerages most likely attended the bidding simply to ensure that Madoff&rsquos brokerage would, in fact, be sold to the third brokerage in attendence. That brokerage was called Surge Trading, and in the end, Surge did indeed buy Madoff&rsquos operation.
Surge Trading was run by Frank Petrilli, former vice president of a brokerage called Datek Securities. In 1999, the SEC charged Datek with running trading accounts for a guy named Martin Clainey, except that Clainey wasn&rsquot his real name. His real name was Phillip Gurian, and he was the right hand man to a Decalvacante Mafia family capo named Phil Abramo, who was one of America&rsquos most notorious market manipulators, known in Mafia circles as the &ldquoKing of Wall Street.&rdquo
Sources close to Abramo say he had been among the Mafia characters who were involved with Ali Nazerali&rsquos BCCI outfit, First Commerce Securities.
Datek&rsquos clearing firm, meanwhile, was AR Baron, the Mafia outfit that was (recall) financed by Milken crony Zev Wolfson and later charged by the DOJ with manipulating stocks in league with a host of La Cosa Nostra characters and Russian Mafia boss Felix Sater&rsquos White Rock Partners.
Datek also did quite a lot of business with one Joseph Gutnick, who was an important figure in the ultra-orthodox Lubavitch Hasidic movement in Israel. Mr. Gutnick was long known in Israel as the Goldener Rebbe, or the Golden Rabbi, because he ran several extremely generous charities that played key roles in securing the elections of a succession of Israeli prime ministers.
The grateful leader of the Lubavitchers, the late Rabbi Menachem Mendel Schneerson, once predicted that Gutnick would discover diamonds and gold in the Australian desert &ndash a prediction that Mr. Gutnick included in promotional videos that he showed to his Datek brokers, who referred to him as &ldquoDiamond Joe.&rdquo
In 1993, Mr. Gutnick was the most ardent Israeli opponent of the Oslo Peace Accords, and his charities later orchestrated much of the Israeli building in occupied territories of Palestine, helping to provoke Palestinian radicalism and the rise of Hamas and Palestinian Islamic Jihad.
In 1999, Gutnick was exposed by Barron&rsquos magazine for using his charities to launder money and manipulate stocks for such characters as Judah Wernick, the Milken crony who was indicted for his role in a $200 million stock manipulation scheme that he ran with Milken crony Randolph Pace, who (recall) would later be implicated in the scandal that saw the Russian Mafia and Russian government laundering money through the Bank of New York.
Datek Securities was founded in the 1980s by a man named Omar Amanat. Mr. Amanat was also the founder of Lightspeed, which provided a trading platform to Tuco Trading. Those 2 billion shares (equal to 20 percent of the volume of the largest brokerage on the planet) were mostly transacted on the Lightspeed platform.
In the fall of 2010, I had not yet received confirmation that a certain Iranian fellow was behind the two accounts that traded the 2 billion shares. But I knew that Mr. Amanat (founder of Datek, whose former vice president bought Madoff&rsquos brokerage and designer of Tuco&rsquos Lightspeed trading platform) was also the founder of Bridges TV, an American television network devoted to broadcasting Islamic teachings and other programming that is ostensibly of interest to Muslims.
Omar Amanat&rsquos brother, Irfan Amanat, who co-founded Datek, now lives in Dubai, where he is partner in MNA Partners, which is run by Kamal Tayara, the founder off the Alarabiya News Channel, which does a good job of cataloging the atrocities committed by American troops in Iraq, stressing that Al Qaeda&rsquos crimes pale in comparison.
There is, of course, nothing wrong with Islamic television. It&rsquos better than &ldquoDukes of Hazard&rdquo reruns. I include Bridges in this story only because people choose their business partners and the company they keep, and it is probably no coincidence that Omar Amanat (founder of Datek and Lightspeed) chose as his partners in Bridges TV two men &ndash Muzzammil Hassan and Nihad Awad.
Mr. Hasan served as Bridges CEO until he chopped off his wife&rsquos head.
He chopped off his wife&rsquos head because he was a radical jihadi and he believed that it was a matter of honor to chop off the head of a disobedient wife. This would have been legal in Taliban-ruled Afghanistan, but it&rsquos against the law in California, so Mr. Hassan is now in prison.
Meanwhile, Mr. Awad, the other partner in Bridges, is a jihadi who is a member of both Hamas and the Muslim Brotherhood. He is a close associate of Palestinian Islamic Jihad leader Sami-al-Arian and the Blind Sheikh, mastermind of the 1993 terrorist attacks on the World Trade Center.
Mr. Amanat knew this when he chose Mr. Awad as his partner because Mr. Awad had been the chief propagandist for a Hamas-linked outfit called the Islamic Asssociation of Palestine, and he was under investigation (and soon to be named as an unindicted co-conspirator) in the government&rsquos case against the Holy Land Foundation, which was the principal front for Hamas in the United States.
Court documents from that case noted also that Mr. Awad had attended a secret meeting for 20 Hamas leaders that was held in 1993 at a Marriot Hotel in Philadelphia. The FBI secretly monitored and recorded this meeting, so we know who was there, and what was said.
There is one thing the people at this meeting did not say &ndash the word, &ldquoHamas.&rdquo Instead, they said, &ldquoSamah,&rdquo which is Hamas spelled backwards, an attempt to use coded language to disguise the purpose of this meeting, which was to advance the Hamas political agenda and figure out ways to derail the Oslo Peace Accords.
Perhaps they even had assistance in this effort from Diamond Joe a.k.a. the Golden Rabbi. Spend some time in any war zone and you will see that avowed enemies often collaborate to fuel the conflict from which both sides profit. It is, in fact, widely accepted that right wing factions of the Israeli government were at this time nurturing Hamas as an alternative to the Palestinian Liberation Organization.
The Hamas leaders at the secret meeting also discussed ways to advance the Grand Jihad to &ldquosabotage the West&rsquos miserable house from within.&rdquo The document that described that Grand Jihad was presented by prosecutors in the Holy Land Foundation case.
One of the attendees at the secret meeting, Abu Baker, noted that the jihad against the United States would have to be conducted by stealth. &ldquoWar is deception,&rdquo he said. &ldquoDeceive, camouflage&hellipDeceive your enemy.&rdquo
Nihad Awad (future partner of Datek Securities founder Omar Amanat) was at the secret meeting in his capacity as the deputy director of the Islamic Association of Palestine, which was the propaganda arm of Hamas in the United States, principally tasked with that &ldquodeception&rdquo and &ldquocamouflage.&rdquo
Also at the meeting was Awad&rsquos boss, Islamic Asssociation of Palestine President Omar Ahmad. The FBI recorded these two men plotting ways to keep the Blind Sheikh out of prison, despite the fact that he had been implicated in the 1993 World Trade Center attack.
Which is not surprising because the Blind Sheikh (Osama bin Laden&rsquos most important spiritual inspiration) had been living in Ahmad&rsquos house (free room and board) while he was plotting other terrorist atrocities. This is the same Blind Sheikh who first called on jihadis to destroy American corporations and the American economy.
I do not mean to suggest that Mr. Amanat, the Datek and Lightspeed founder, is a terrorist. But he definitely knows some terrorists, and seems to be on exceedingly good terms with them.
It is therefore of some concern that aside from founding Datek and Lightspeed, Mr. Amanat was the founder of Island, the largest Electronic Communications Network (ECN) in America. And he has been a founder or key consultant to nearly every other major ECN.
Since ECNs act like their own private stock exchanges and enable stock manipulators to operate in anonymity, they are cited by experts in threat finance as among the bigger loopholes that could be exploited by financial terrorists.
As it were, Irfan Amanat used one of his Electronic Communications Networks to engage in a massive market manipulation scheme &ndash precisely the sort of scheme that worries experts in threat finance. This scheme was carried out in September 2001, in the days before and after the Al Qaeda attacks on the World Trade Center. While the timing may have been a coincidence, there is no question that Mr. Amanat&rsquos attacks did serious damage to the markets.
The scheme involved MarketXT, a trading firm and Electronic Communications Network founded by Irfan Amanat and his brother Omar. According to the SEC, in September 2001, Irfan Amanat and MarketXT deployed &ldquoa [computer] program without any arbitrage features&hellipThe program, dubbed &lsquoRLevi2&rsquo, automatically placed buy or sell orders at timed intervals&hellipIn other words, wash trades and matched orders were the result of the program&rsquos design.&rdquo
Strangely, the SEC wrote that Irfan&rsquos wash trades were &ldquomarket manipulation&rdquo but it did not charge him with that crime. In response to the SEC&rsquos claim that this was a &ldquomarket manipulation&rdquo scheme, Mr. Amanat said that his RLevi2 computer program was not meant to manipulate the markets massively (as it appeared), but was instead designed &ldquosolely to generate tape rebates&rdquo (i.e. rebates that stock exchanges pay to traders who generate massive volumes).
The SEC clearly did not accept this explanation. That&rsquos why it stated unequivocally in its charges against Amanat that he had &ldquomanipulated the markets.&rdquo But the SEC seems incapable of ever actually charging anyone for market manipulation, and so the commission charged Amanat of only the lesser crime of using wash trades to generate tape rebates.
Mr. Amanat&rsquos scheme (like that of Al Qaeda man Naresh Patel) was, in fact, blatant market manipulation &ndash a scheme that created the illusion of massive volume, and did servere damage to stock prices by specifically targeting Exchange Traded Funds (ETFs). As I noted at the outset of this story, threat finance experts worry about ETFs because their high leverage amplifies the impact they have on the markets.
The biggest player in the world of ETFs is Michael Sapir. He invented them. He is also, I believe, a relative of Russian Mafia boss Tamir Sapir, who runs an outfit called The Sapir Organization. Tamir Sapir is also a partner in Bayrock, the alleged money laundering outfit run by Russian Mafia boss Felix Sater (the guy said to have sold weapons to Al Qaeda).
By his own admission, Sapir used to be primarily in the business of selling electronics equipment to KGB operatives in New York. His partner in the electronics business was Semion Kislin, uncle of the above-mentioned Arik Kislin. Like his nephew, Semion has beenassassinated on a Moscow street in 2009, shortly after revealing that he had long been employed by the Russian intelligence services.
Note: I do not have a birth certificate or DNA test confirming the relationship between the two Sapirs, so there is chance that I am mistaken about this, but I am going to go out on a limb and report it anyway because some of Michael Milken&rsquos associates have told me that the two men are related. Michael Sapir&rsquos spokesman refused to comment on the record.
Tamir Sapir&rsquos spokesman said &ldquoThe Sapir Organization is very private, we don&rsquot provide that sort of information.&rdquo Then &mdash &ldquoclick&rdquo &ndash he hung up the phone.
The other innovator of ETFs, and the second biggest provider of them after Mr. Sapir, is Michael Steinhardt&rsquos Wisdom Tree Investors. Steinhardt, we know, is the son of the &ldquobiggest Mafia fence in America&rdquo (as the Manhattan DA put it) and as Steinhardt himself has disclosed, he started his hedge fund with money from the Genovese Mafia, and two fellows who were on close terms with the regime in Iran &mdash Marc Rich and Ivan Boesky.
Steinhardt&rsquos partner in Wisdom Tree is the son of Saul Steinberg, who in addition to being a key player in the junk bond merry go round that Milken ran in the 1980s, also ran a fund with finance from Zev Wolfson, the guy who funded the above-mentioned A.R. Baron (Datek&rsquos clearing firm) and numerous other Mafia brokerages.
So, another summary: in September 2001, Mr. Amanat was busted for using his ECN and his &ldquoRLevi2&rdquo computer program to generate massive volumes of wash trades (the same sorts of wash trades conducted in 2008 through Man Financial by Al Qaeda man Naresh Patel). Mr. Amanat was doing this, the SEC said, to &ldquomanipulate the markets.&rdquo
Yet, at the same time, the SEC accepts the explanation that he was not trying to manipulate the markets. He was trying to generate rebates from the exchanges. Which makes no sense, because he wasn&rsquot just churning stocks, he was specifically targeting Michael Steinhardt and Michael Sapir&rsquos highly leveraged ETFs, trying to inflict as much damage as possible.
Is Mr. Amanat a financial terrorist? I know he&rsquos part of the Milken network, and that&rsquos all I need to know to report that he is a threat to the national security of our &ldquomiserable house.&rdquo Decide for yourself.
However, it is probably a good idea to keep a particularly close eye on people who have not only inflicted massive damage on the markets coinciding with the collapse of the World Trade Center, but have also chosen to do business with a Hamas operative (Nihad Awad) who plotted to help the Blind Sheikh, mastermind of the first attack on the World Trade Center, stay out of prison. This after the Blind Sheikh had been living in the house of Awad&rsquos boss.
Of course, when Mr. Amanat&rsquos Datek came under investigation for its ties to Mafia characters like Martin Clainey a.k.a. Phillip Gurian, it was quickly purchased by one of Milken&rsquos closest associates, a guy named Steven Schonfeld, who was formerly a principal at the Milken-financed Blinder, Robinson (the outfit known as Blind&rsquoem and Rob&rsquoem, indicted by the DOJ for manipulating stocks with the likes of Mafia capo Thomas Quinn).
Schonfeld bought all of the assets of Datek (including the executives who had handled the accounts of the Mafia) and folded them into a new outfit called Heartland.
Schonfeld is now the owner of one of the nation&rsquos largest hedge fund and brokerage empires. He also has a securities rap sheet a mile long, having been fined by the Financial Industry Regulatory Authority for everything from naked short selling to bribing stock loan executives at major brokerages.
Once paid off by Schonfeld, the stock loan guys would routinely vouch that there was stock available to be borrowed (the necessary prerequisite for a legal short sale), when in fact there was no such stock. It is fair to say that a hedge fund manager implicated in a scandal such as this is managing a large scale market-demolition operation. Indeed, it is fair to say that Schonfeld belongs in jail.
Since Schonfeld is one of Michael Milken&rsquos closest associates, it is unsurprising that SEC filings show that he regularly trades in league with others in the network, including Steve Cohen of SAC Capital and the Man Group, owners of Man Financial (which, like Lightspeed, provided a trading platform to Tuco).
It is also worth noting that in 2008, Schonfeld was a co-owner of Lightspeed, the Omar Amanat outfit that provided Tuco Trading with one of its trading platforms, and transacted those 2 billion shares. And there are many reasons to believe that the trading conducted through Lightspeed was manipulative short selling.
One reason to believe this is that FINRA ultimately fined Lightspeed after finding that at the height of the financial collapse in September 2008, Lightspeed had transacted massive volumes of &ldquoshort sales of financial institution securities on behalf of customers in contravention of the Commission&rsquos [the SEC&rsquos] emergency order of September 18, 2008 that provided that &lsquoall persons are prohibited from short selling any publicly traded securities of any included financial firm.&rsquo&rdquo
Under normal circumstances, FINRA refers such cases to the DOJ and the SEC, which investigate further and decide whether to press civil or criminal charges. But before the SEC or the DOJ could investigate this case, Schonfeld sold Lightspeed to Penson Financial.
Meanwhile, as we know, the guy who used to help run Datek (Omar Amanat&rsquos Mafia outfit, purchased by Schonfeld when it came under investigation) bought Madoff&rsquos operation, ensuring that nobody would investigate how all of these brokerages were tied together and processed massive volumes of trades at the height of the financial crisis in 2008.
In the Fall of 2010, I was beginning to understand how this network was tied together, so I called the jihadi and Tuco trader Zuhair Karam again. This time Zuhair was little bit more forthcoming. He confirmed that he knew Omar Amanat and many of those Hamas leaders who attended the secret meeting in 1993. He suggested that my tip about an Iranian being behind those 2 billion shares might be right, but he still would not elaborate.
Only later would I learn the identity of that Iranian. But after talking to Zuhair, I recalled some information that a former spy had given me when I first began investigating the Milken network in 2006. The former spy had spent a number of years tracking the Milken network, but when I met him, I did not realize the importance of what he was telling me.
In fact, I pretty much ignored that former spy, and did not return to his information until the Fall of 2010, when it was too late. This is one of my life&rsquos great regrets because this former spy was telling me, in a nutshell, that the Milken network was going to wreck the economy.
What, precisely, did that former Israeli spy tell me? How did I come to meet him in the first place? Well, this requires some explanation.
To be continued&hellip
This story was first published on Deep Capture. Deep Capture features original investigative reporting on the all-too-cozy relationship Wall Street has with regulators, media, government and the intellectual establishment.
Zuhair Karam is an alias. I have chosen not to use his real name for now because he has begun to cooperate with our investigation. However, I intend to publish the names of all 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.
I did not know if 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 Illinois, Zuhair Karam obtained finance to publish a semi-famous work of jihadi propaganda, and soon thereafter, became (without any relevant experience) a proprietary day trader of equities and derivatives at a small, unregistered brokerage in Chicago called Tuco Trading.
Most of the other people who operated through Tuco Trading also had interesting biographies. Among them (just to name a few) were a Russian Mafia figure who is knowledgeable about a brutal gangland-style murder in New Jersey the top lieutenants of a Russian Mafia kingpin and oligarch who have been accused by U.S. officials of having ties to the Russian government’s intelligence apparatus and an Iranian fellow whose family has high-level ties to Palestinian Islamic Jihad, and the terrorist-sponsoring Revolutionary Guard in Tehran.
Meanwhile, Zuhair’s little brokerage, Tuco Trading, maintained partnerships with several other brokerages, all of which had close business relationships with people of similarly colorful backgrounds. Among them were multiple associates of La Cosa Nostra numerous traders with ties to the Russian Mafia and a jihadi who not only was Al Qaeda’s most important financier, but also operated a secret bomb factory in a Chicago warehouse district before the U.S. government named him a “Specially Designated Global Terrorist”.
Many top employees of these partner brokerages were similarly colorful. They included a fellow who once worked for a man who commands a private army in Lebanon another guy who had participated in an ill-fated scheme to topple the government of Afghanistan in league with heroin-smuggling warlord who worked closely with Iran and an Iranian trader whose family was, for much of the 1990s, flying cargo planes filled with gem stones from a remote Illinois runway, in partnership with a money launderer tied to Hezbollah, the jihadi outfit that receives support and direction from the regime in Tehran.
Aside from the amazing backgrounds of this cast of characters, it was also interesting that Tuco Trading was closed by an “Emergency Order” of the SEC on March 9, 2008 — just 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, data and other evidence obtained by Deep Capture suggests that most of this massive deluge was aimed at manipulating the stock prices of America’s largest financial institutions, including Bear Stearns.
In other words, there is good reason to believe that Zuhair’s strange, little brokerage with all of its odd connections, contributed to the 2008 financial cataclysm that nearly brought the United States to its knees.
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 in South Africa, where he had told people that he was a recovering drug addict. There is some doubt as to the accuracy of that claim. Some say Zuhair never touched drugs. But there is no doubt that he was doing something in South Africa when 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.
From the perspective of Osama bin Laden, Sadathullah Khan might be moderate. Some people, though, say that Sadathullah Khan is an extremist. Certainly, he has close ties to an outfit called the Supreme Council of Global Jihad, which espouses violence. And one of Sadathullah Khan’s closest associates is 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.” Backing his words with actions, Imam Naik served as the 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 blown up anything yet) and it is just a matter of time before he will return to Chicago, where he once gave what he calls “my most famous speech” at a gathering organized by an outfit linked to the Bridgeview Mosque, a house of worship in Bridgeview, a middle-class neighborhood on Chicago’s south side.
When he returns to Chicago, Imam Naik will likely meet Zuhair Karam, who, 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 helps run day-to-day operations. The Bridgeview Mosque, it should be said, serves thousands of ordinary people, most of whom probably harbor no politics other than a desire for peace. But there was a time not long ago when the 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 still widely assumed by terrorism experts that the Bridgeview Mosque’s top officials (including Zuhair’s relative) are members of the Muslim Brotherhood, an outfit whose leaders in the West have provided material support (including money, personnel, and sometimes weapons) to Al Qaeda. Since the Muslim Brotherhood is a secretive organization, there is no way to confirm with absolute certainty that the Bridgeview Mosque’s directors are, indeed, members, but there are plenty of reasons to suspect that they are.
One reason is that the Bridgeview Mosque has been among the chief benefactors of jihadi groups closely tied to the Muslim Brotherhood. 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 the U.S. leader of Palestinian Islamic Jihad until his 2003 indictment on terrorism charges. As Rachel Ehrenfeld, the director of the American Center for Democracy first reported, FBI investigators suspect 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 terrorism charges 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, meanwhile, help administer investment funds worth billions of dollars controlled by the North American Islamic Trust, an investment bank 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.
The Bridgeview Mosque and the Muslim Brotherhood were also involved with a “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”, says that the Bridgeview Mosque is a “gold mine of information about terrorist finance.” So, obviously, I wanted to know more about Zuhair Karam’s little brokerage, Tuco Trading. Not only because of its ties to jihadis, but also because of its ties to La Cosa Nostra and, more importantly, to Russian Mafia figures who have become quite politicized and are eminently hostile to the United States.
Unfortunately, when I called Zuhair for the first time in September of 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, quite 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 began to plead. He 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 told Zuhair I could come down to the mosque to meet him. And I said I’d also like to meet Zuhair’s father, Haaz Karam, who helped run the mosque.
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 the 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.”
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 a number of organized crime outfits are closely intertwined with the intelligence services and government leaders 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 [the Mafia] and terrorist groups [including Al Qaeda]…presents continuing dangers.”
In the same breath, the national intelligence director warned that organized criminal outfits [the Mafia] 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.”
Let me stress the implications of what the national intelligence director was saying. He was saying that the Mafia (and, by inference, the jihadi groups and rogue states that maintain ties to the Mafia) have the capability to disrupt the financial markets and harm the American economy. The only question is: have they already done so?
While America’s media and financial regulators seem largely uninterested in that question, 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 a reasonably high likelihood that the economic cataclysm of 2008 was 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) states with good reason that the weapons most likely to be used by prospective financial terrorists are so-called “naked” short selling and other forms of short-side market manipulation.
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 someone 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 or terrorist groups 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 that have demonstrated that they are willing to deploy financial weapons of mass destruction for fun and 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 shady 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 Deep Capture 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 have some idea 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 from naked short selling. The banks’ stock prices 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 may 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) that hammered its stock price. In the weeks before its 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 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, but it had survived plenty of bouts of ill health. It had also survived worse economic downturns, though it had never faced a stock market crash of such magnitude.
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 another “Emergency Order” on September 18, this time 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 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. In the months and weeks before the 9-11 tragedy, a daily average of $1.5 billion worth of U.S. government bonds failed to deliver. On the days immediately before 9-11, the daily failures to deliver soared to an astounding average of $1.5 trillion and continued to rise in the days after the attacks.
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.
The media 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. And 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 were 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 (I must repeat) for more than half of the overall market. It is not quite correct to say 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. That is, 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 owned a lot of CDOs or 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 next several weeks, Deep Capture will be publishing the remaining chapters of this book-length story, which is the product of a year-long investigation into the underworld of financial crime 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 miscreant financial operators. Some of these miscreants work for obscure, unregistered outfits like Zuhair Karam’s brokerage, Tuco Trading. Others are powerful American hedge fund managers.
In coming installments of this story, I will name all of the colorful characters affiliated with Tuco Trading, and tell you who was responsible for its massive short selling deluge in 2008. (I am not trying to create suspense it is simply that there is other ground that we have to cover for you to understand the significance of who these Tuco characters were).
And Tuco is not the only strange financial firm in America. A surprising number of people in the broader network that I will describe have ties to jihadi groups, including, in some cases, Al Qaeda. In addition, a number of financial operators in this network have disturbing ties to the governments of rogue states, such as Russia and Iran. And nearly all the people in this network have ties to the Mafia.
In other words, this is a colorful network. And though it would be a stretch to say these people were the cause of the financial crisis, there is no doubt that many of them contributed to that cataclysm. The rest, meanwhile, have both the capability and the inclination to do considerable more damage.
As to the Defense Department report’s second question – why? – I have no good 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 our national security.
In our next installment, we learn a bit more about Zuhair Karam* and his friends, including a jihadi who inserted Al Qaeda spies into the U.S. military and then set up a financial weapon of mass destruction for use against the markets.