Archive | May, 2012

Accidentally Released – and Incredibly Embarrassing – Documents Show How Goldman et al Engaged in ‘Naked Short Selling’

22 May

From: Charles Cox []
Sent: Thursday, May 17, 2012 5:19 AM
To: Charles Cox
Subject: Accidentally Released – and Incredibly Embarrassing – Documents Show How Goldman et al Engaged in ‘Naked Short Selling’

ally Released – and Irt Selling’

POSTED: May 15, 5:39 PM ET

It doesn’t happen often, but sometimes God smiles on us. Last week, he smiled on investigative reporters everywhere, when the lawyers for Goldman, Sachs slipped on one whopper of a legal banana peel, inadvertently delivering some of the bank’s darker secrets into the hands of the public.

The lawyers for Goldman and Bank of America/Merrill Lynch have been involved in a legal battle for some time – primarily with the retail giant, but also with Rolling Stone, the Economist, Bloomberg, and the New York Times. The banks have been fighting us to keep sealed certain documents that surfaced in the discovery process of an ultimately unsuccessful lawsuit filed by Overstock against the banks.

Last week, in response to an motion to unseal certain documents, the banks’ lawyers, apparently accidentally, filed an unredacted version of Overstock’s motion as an exhibit in their declaration of opposition to that motion. In doing so, they inadvertently entered into the public record a sort of greatest-hits selection of the very material they’ve been fighting for years to keep sealed.

I contacted Morgan Lewis, the firm that represents Goldman in this matter, earlier today, but they haven’t commented as of yet. I wonder if the poor lawyer who FUBARred this thing has already had his organs harvested; his panic is almost palpable in the air. It is both terrible and hilarious to contemplate. The bank has spent a fortune in legal fees trying to keep this material out of the public eye, and here one of their own lawyers goes and dumps it out on the street.

The lawsuit between Overstock and the banks concerned a phenomenon called naked short-selling, a kind of high-finance counterfeiting that, especially prior to the introduction of new regulations in 2008, short-sellers could use to artificially depress the value of the stocks they’ve bet against. The subject of naked short-selling is a) highly technical, and b) very controversial on Wall Street, with many pundits in the financial press for years treating the phenomenon as the stuff of myths and conspiracy theories.

Now, however, through the magic of this unredacted document, the public will be able to see for itself what the banks’ attitudes are not just toward the “mythical” practice of naked short selling (hint: they volubly confess to the activity, in writing), but toward regulations and laws in general.

“Fuck the compliance area – procedures, schmecedures,” chirps Peter Melz, former president of Merrill Lynch Professional Clearing Corp. (a.k.a. Merrill Pro), when a subordinate worries about the company failing to comply with the rules governing short sales.

We also find out here how Wall Street professionals manipulated public opinion by buying off and/or intimidating experts in their respective fields. In one email made public in this document, a lobbyist for SIFMA, the Securities Industry and Financial Markets Association, tells a Goldman executive how to engage an expert who otherwise would go work for “our more powerful enemies,” i.e. would work with Overstock on the company’s lawsuit.

“He should be someone we can work with, especially if he sees that cooperation results in resources, both data and funding,” the lobbyist writes, “while resistance results in isolation.”

There are even more troubling passages, some of which should raise a few eyebrows, in light of former Goldman executive Greg Smith’s recent public resignation, in which he complained that the firm routinely screwed its own clients and denigrated them (by calling them "Muppets," among other things).

Here, the plaintiff’s motion refers to an “exhibit 96,” which refers to “an email from [Goldman executive] John Masterson that sends nonpublic data concerning customer short positions in Overstock and four other hard-to-borrow stocks to Maverick Capital, a large hedge fund that sells stocks short.”

Was Goldman really disclosing “nonpublic data concerning customer short positions” to its big hedge fund clients? That would be something its smaller, “Muppet” customers would probably want to hear about.

When I contacted Goldman and asked if it was true that Masterson had shared nonpublic customer information with a big hedge fund client, their spokesperson Michael Duvally offered this explanation:

Among other services it provides, Securities Lending at Goldman provides market color information to clients regarding various activity in the securities lending marketplace on a security specific or sector specific basis. In accordance with the group’s guidelines concerning the provision of market color, Mr. Masterson provided a client with certain aggregate information regarding short balances in certain securities. The information did not contain reference to any particular clients’ short positions.

You can draw your own conclusions from that answer, but it’s safe to say we’d like to hear more about these practices.

Anyway, the document is full of other interesting disclosures. Among the more compelling is the specter of executives from numerous companies admitting openly to engaging in naked short selling, a practice that, again, was often dismissed as mythical or unimportant.

A quick primer on what naked short selling is. First of all, short selling, which is a completely legal and often beneficial activity, is when an investor bets that the value of a stock will decline. You do this by first borrowing and then selling the stock at its current price, then returning the stock to your original lender after the price has gone down. You then earn a profit on the difference between the original price and the new, lower price.

What matters here is the technical issue of how you borrow the stock. Typically, if you’re a hedge fund and you want to short a company, you go to some big-shot investment bank like Goldman or Morgan Stanley and place the order. They then go out into the world, find the shares of the stock you want to short, borrow them for you, then physically settle the trade later.

But sometimes it’s not easy to find those shares to borrow. Sometimes the shares are controlled by investors who might have no interest in lending them out. Sometimes there’s such scarcity of borrowable shares that banks/brokers like Goldman have to pay a fee just to borrow the stock.

These hard-to-borrow stocks, stocks that cost money to borrow, are called negative rebate stocks. In some cases, these negative rebate stocks cost so much just to borrow that a short-seller would need to see a real price drop of 35 percent in the stock just to break even. So how do you short a stock when you can’t find shares to borrow? Well, one solution is, you don’t even bother to borrow them. And then, when the trade is done, you don’t bother to deliver them. You just do the trade anyway without physically locating the stock.

Thus in this document we have another former Merrill Pro president, Thomas Tranfaglia, saying in a 2005 email: “We are NOT borrowing negatives… I have made that clear from the beginning. Why would we want to borrow them? We want to fail them.”

Trafaglia, in other words, didn’t want to bother paying the high cost of borrowing “negative rebate” stocks. Instead, he preferred to just sell stock he didn’t actually possess. That is what is meant by, “We want to fail them.” Trafaglia was talking about creating “fails” or “failed trades,” which is what happens when you don’t actually locate and borrow the stock within the time the law allows for trades to be settled.

If this sounds complicated, just focus on this: naked short selling, in essence, is selling stock you do not have. If you don’t have to actually locate and borrow stock before you short it, you’re creating an artificial supply of stock shares.

In this case, that resulted in absurdities like the following disclosure in this document, in which a Goldman executive admits in a 2006 email that just a little bit too much trading in Overstock was going on: “Two months ago 107% of the floating was short!”

In other words, 107% of all Overstock shares available for trade were short – a physical impossibility, unless someone was somehow creating artificial supply in the stock.

Goldman clearly knew there was a discrepancy between what it was telling regulators, and what it was actually doing. “We have to be careful not to link locates to fails [because] we have told the regulators we can’t,” one executive is quoted as saying, in the document.

One of the companies Goldman used to facilitate these trades was called SBA Trading, whose chief, Scott Arenstein, was fined $3.6 million in 2007 by the former American Stock Exchange for naked short selling.

The process of how banks circumvented federal clearing regulations is highly technical and incredibly difficult to follow. These companies were using obscure loopholes in regulations that allowed them to short companies by trading in shadows, or echoes, of real shares in their stock. They manipulated rules to avoid having to disclose these “failed” trades to regulators.

The import of this is that it made it cheaper and easier to bet down the value of a stock, while simultaneously devaluing the same stock by adding fake supply. This makes it easier to make money by destroying value, and is another example of how the over-financialization of the economy makes real, job-creating growth more difficult.

In any case, this document all by itself shows numerous executives from companies like Goldman Sachs Execution and Clearing (GSEC) and Merrill Pro talking about a conscious strategy of “failing” trades – in other words, not bothering to locate, borrow, and deliver stock within the time alotted for legal settlement. For instance, in one email, GSEC tells a client, Wolverine Trading, “We will let you fail.”

More damning is an email from a Goldman, Sachs hedge fund client, who remarked that when wanting to “short an impossible name and fully expecting not to receive it” he would then be “shocked to learn that [Goldman’s representative] could get it for us.”

Meaning: when an experienced hedge funder wanted to trade a very hard-to-find stock, he was continually surprised to find that Goldman, magically, could locate the stock. Obviously, it is not hard to locate a stock if you’re just saying you located it, without really doing it.

As a hilarious side-note: when I contacted Goldman about this story, they couldn’t resist using their usual P.R. playbook. In this case, Goldman hastened to point out that Overstock lost this lawsuit (it was dismissed because of a jurisdictional issue), and then had this to say about Overstock:

Overstock pursued the lawsuit as part of its longstanding self-described "Jihad" designed to distract attention from its own failure to meet its projected growth and profitability goals and the resulting sharp drop in its stock price during the 2005-2006 period.

Good old Goldman — they can’t answer any criticism without describing their critics as losers, conspiracy theorists, or, most frequently, both. Incidentally, Overstock rebounded from the 2005-2006 short attack to become a profitable company again, during the same period when Goldman was needing hundreds of billions of dollars in emergency Fed lending and federal bailouts to stave off extinction.

Anyway, this galactic screwup by usually-slick banker lawyers gives us a rare peek into the internal mindset of these companies, and their attitude toward regulations, the markets, even their own clients. The fact that they wanted to keep all of this information sealed is not surprising, since it’s incredibly embarrassing stuff, if you understand the context.

More to come: until then, here’s the motion, and pay particular attention to pages 14-19.

UPDATE: Well, I guess I shouldn’t feel too badly for the lawyer who stepped on this land mine. For Morgan Lewis counsel Joe Floren, karma, it seems, really is a bitch.

FTC affirms consumers’ rights under holder in due course rule

22 May

From: Charles Cox []
Sent: Thursday, May 17, 2012 7:54 AM
To: Charles Cox
Subject: FTC affirms consumers’ rights under holder in due course rule

FTC affirms consumers’ rights under holder in due course rule

· Goodwin Procter LLP

· Crystal N. Kaldjob

The FTC issued an advisory opinion affirming its interpretation of the holder in due course rule. The rule permits consumers who enter into credit contracts with a seller of goods to assert the same legal claims and defenses against a third party who purchases the credit contract as they would have against the original seller. The advisory opinion, issued in response to a request from the National Consumer Law Center and other consumer protection advocacy groups, clarifies that courts should not limit consumers’ ability to seek affirmative relief only to instances where a rescission right under state law exists. The NCLC requested the opinion after a number of courts denied relief absent a state law rescission claim.

Press release from FTC:

Advisory Opinion is attached.

Charles Wayne Cox
Email: mailto:Charles
Websites:;; and
1969 Camellia Ave.
Medford, OR 97504-5403
(541) 727-2240 direct
(541) 610-1931 eFax

Paralegal; CA Licensed Real Estate Broker; Forensic Loan Analyst. Litigation Support and Expert Witness Services.



22 May

From: Charles Cox []
Sent: Friday, May 18, 2012 8:16 AM
To: Charles Cox

May 18th, 2012 | Author: Matthew D. Weidner, Esq.

Hat tip to Nye Lavalle and Jackie Mack!

In my mind, JPMorgan ranks among the very top of the most aggressive and abusive litigators in the whole fraudclosure arena. They surround themselves with monster paid lawyers then attack the whistleblowers and those who dare to challenge with the ferocity of an out of control criminal street gang.

And so I love seeing them get a few shots thrown back their direction.

Understand, the position we are in around this nation is the banks do whatever they want. They engage in whatever abusive and violent and bullying conduct they care to, then they just cloak themselves behind the highest priced lawyers and navigate their way through whatever court system they need to in order to walk away with no consequence.

In this case and so many others, you see them slithering and bashing and beating a homeowner in a federal case. I’ve read pleadings after pleadings and the legal position they assert is,


(and then just as a kicker they throw in)


But one judge dared to keep the scales of justice balanced equally, a quite extraordinary fact, frankly. Read the opinion: (order is attached)

Defendants, JP Morgan Chase & Co., a foreign corporation, JPMorgan Chase

Bank, N.A., individually and as successor to (collectively “Chase”), Washington Mutual

Bank, a dissolved federal bank (“WaMu”), and Federal National Mortgage Corporation, a

federally-chartered corporation (“FNMA”), (collectively, the “Defendants”), pursuant to

Rule 12(b)(6), Federal Rule of Civil Procedure, move to dismiss Plaintiff’s First

Amended Complaint. Defendants seek dismissal on grounds that (1) Plaintiff waived her

claims by failing to assert them in a 2006 mortgage foreclosure case; (2) Plaintiff fails to

state any causes of action in the various counts of the First Amended Complaint inasmuch

as she fails to differentiate among Defendants in her allegations; (3) Count I fails to state

a cause of action because the Florida Deceptive and Unfair Trade Practices Act

(“FDUTPA”), section 501.201, et seq., Florida Statutes, does not apply to Defendants; (4)

Count II fails to state a cause of action because Defendants are not debt collectors as

defined by the Fair Debt Collection Practices Act (“FDCPA”) and initiating a mortgage

foreclosure action does not constitute a debt collection; (5) Plaintiff fails to state a claim

under the Florida Consumer Collection Practices Act (“FCCPA”), section 559.72, Florida

Statutes, in Count II; (6) Plaintiff fails to state a cause of action for civil conspiracy in

Count III; (7) Plaintiff failed to state a cause of action for abuse of legal process in Count

IV; and (8) Count V, alleging violations of the RICO statute,18 U.S.C. § 1962, fails to

state a cause of action.

With respect to the asserted waiver of Plaintiff’s claims for her failure to assert

them in the 2006 foreclosure case, the Court is not convinced, at this stage of the

proceedings, that Plaintiff waived her claims because the complaint includes allegations

based on conduct that occurred after her alleged breach of the mortgage loan agreement.

She asserts that the facts supporting her claims were not brought to light until revelations

of fraud in the mortgage industry began to unfold in the fall of 2010. Additionally, the

Court cannot base a dismissal on matters outside the four corners of the complaint. See

Milburn v. United States, 734 F.2d 762, 765 (11th Cir. 1984). While JPMC claims it is

not liable for any conduct of WaMu that occurred prior to September 25, 2008, the date

on which the Purchase and Assumption Agreement (“PAA”) was executed between

JPMC and WaMu, the PAA has not even been filed with the Court. Furthermore,

Plaintiff asserts that her claims against Defendant JPMC are predicated on its alleged

servicing of the loan, conduct that occurred after September 25, 2008.

Defendants claim exemption from FDUTPA as banking corporations regulated by

a federal agency; however, application of the exemption cannot be determined with

certainty from the four corners of the First Amended Complaint. The Court is not

convinced that the exemption would apply to Defendants who, as Plaintiff alleges, acted

as loan servicers, and the exemption clearly would not apply to non-banks such as

JPMCC and FNMA. Also, although Defendants assert that they are not “debt collectors”

within the meaning of the FDCPA because they were not attempting to collect a debt due

another, there remains a question of fact as to whether 15 U.S.C. § 1692(f) applies to

activities by JPMCC, JPMC, WaMu, and FNMA, as alleged by Plaintiff, to enforce a

security interest via mortgage foreclosure. See 15 U.S.C. § 1692a(6).

Questions of fact preclude dismissal of Plaintiff’s FCCPA claim as well, because

she plainly alleges that Defendants knew they did not have the legal right to collect the

alleged debt and knew that Plaintiff was not in default. See Fla. Stat § 559.72(9).

Likewise, Plaintiff is able to overcome dismissal of her common law claims for civil

conspiracy and abuse of process through her factual allegations that Defendants acted

unlawfully, and in agreement, with the intent to defraud her through the use of sham

documents and fabricated evidence, and that their actions caused her damages. Finally,

her civil RICO claims under 18 U.S.C. § 1962 adequately allege facts, at least for this

stage of the proceedings, to support each of the statutory elements for the predicate acts

that allegedly divested her of her homestead. Plaintiff is able to avoid the time-bar of her

civil RICO claim inasmuch as she alleges she was prevented from discovering that she

was the victim of fraud by Defendants’ concealment of the alleged fraud.


FDCPA claims are reinstated – Debt Collector Status Depends on if Entity Originated the Debt and When “Default” Occurred

22 May

From: Charles Cox []
Sent: Friday, May 18, 2012 9:26 AM
To: Charles Cox
Subject: FDCPA claims are reinstated – Debt Collector Status Depends on if Entity Originated the Debt and When "Default" Occurred

FDCPA claims are reinstated

· Winston & Strawn LLP



On April 30th, the Sixth Circuit addressed liability under the Fair Debt Collection Practices Act. It held that an entity that did not originate the debt in question (a mortgage) but acquired it and attempts to collect on it, is either a creditor or a debt collector depending on the default status of the debt at the time it was acquired. The same is true of a loan servicer, which can either stand in the shoes of a creditor or become a debt collector, depending on whether the debt was assigned for servicing before the default or alleged default occurred.


Robo-signing lawsuit reinstated/4th says TILA 3 year SOL doesn’t require borrowers to file rescission but just notify creditor

22 May

From: Charles Cox []
Sent: Friday, May 18, 2012 9:26 AM
To: Charles Cox
Subject: Robo-signing lawsuit reinstated/4th says TILA 3 year SOL doesn’t require borrowers to file rescission but just notify creditor

Robo-signing lawsuit reinstated

· Winston & Strawn LLP

· May 7 2012


On May 3rd, the Fourth Circuit reinstated the homeowners’ Truth in Lending Act ("TILA") and state consumer law claims asserted against the bank holding plaintiffs’ mortgage. The Court holds that TILA’s three-year statute of limitation does not require borrowers to file a claim for rescission to invoke that right. TILA rescission claims are timely if the consumer notifies the creditor within three years.

Charles Wayne Cox
Email: mailto:Charles
Websites:;; and
1969 Camellia Ave.
Medford, OR 97504-5403
(541) 727-2240 direct
(541) 610-1931 eFax

Paralegal; CA Licensed Real Estate Broker; Forensic Loan Analyst. Litigation Support and Expert Witness Services.


Hogan Highlights

22 May

From: Charles Cox []
Sent: Friday, May 18, 2012 11:54 AM
To: Charles Cox
Subject: Hogan Highlights

Hogan Highlights

by Beth Findsen at Findsenlaw

Here is the AZ Supreme Court decision in Hogan v WaMu

Hogan v WaMu AZ SC 2012

In my opinion, the best parts (even though some should be entirely obvious, in Arizona, they aren’t always) are:

Hogan argues that a deed of trust, like a mortgage,“may be enforced only by, or in behalf of, a person who is entitled to enforce the obligation the mortgage secures.”Restatement (Third) of Prop.: Mortgages § 5.4(c) (1997); see Hill v. Favour, 52 Ariz. 561, 568-69, 84 P.2d 575, 578 (1938). We agree.

The trust deed transfers an interest in real property, securing the repayment of the money owed under the note. See A.R.S. §§ 33-801(4), -801(8), -801(9), -805, -807(A).

Arizona’s anti-deficiency statutes protect against such occurrences by precluding deficiency judgments against debtors whose foreclosed residential property consists of 2.5 acres or less, as is the case here. See A.R.S. § 33-814(G); Mid Kansas Fed. Sav. & Loan Ass’n of Wichita v. Dynamic Dev. Corp., 167 Ariz. 122, 126, 804 P.2d 1310, 1314 (1991); Emily Gildar, Arizona’s Anti-Deficiency Statutes: Ensuring Consumer Protection in a Foreclosure Crisis, 42 Ariz. St. L.J. 1019, 1020 (2010). Moreover, the trustee owes the trustor a fiduciary duty, and may be held liable for conducting a trustee’s sale when the trustor is not in default. See Patton v. First Fed. Sav. & Loan Ass’n of Phoenix, 118 Ariz. 473, 476, 578 P.2d 152, 155 (1978).

And these selections show what needs to be pled in Arizona, if feasible:

But Hogan has not alleged that WaMu and Deutsche Bank are not entitled to enforce the underlying note; rather, he alleges that they have the burden of demonstrating their rights before a non-judicial foreclosure may proceed.

Hogan’s complaints do not affirmatively allege that WaMu and Deutsche Bank are not the holders of the notes in question or that they otherwise lack authority to enforce the notes.

The dispositive question here is whether the trustee, acting pursuant to its own power of sale or on behalf of the beneficiary, had the statutory right to foreclose on the deeds of trust. See Cervantes v. Countrywide Home Loans, Inc., 656 F.3d 1034, 1043-44 (9th Cir. 2011).

Hogan does not dispute that he is in default under the deeds of trust and has alleged no reason to dispute the trustee’s right.


Class Action Certified in ND of California USDC for Mortgage Loan Appraisal Suit

22 May

From: Charles Cox []
Sent: Saturday, May 19, 2012 6:13 AM
To: Charles Cox
Subject: Class Action Certified in ND of California USDC for Mortgage Loan Appraisal Suit

Conspiracy to inflate appraisals…imagine that.

Charles Wayne Cox
Email: mailto:Charles
Websites:;; and
1969 Camellia Ave.
Medford, OR 97504-5403
(541) 727-2240 direct
(541) 610-1931 eFax

Paralegal; CA Licensed Real Estate Broker; Forensic Loan Analyst. Litigation Support and Expert Witness Services.


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