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July 23, 2012

Stock Market Mavens Manipulate Government

By CREW Staff

Stock Market chartWall Street’s influence in Washington no longer is limited just to the revolving door, campaign contributions, and gathering political intelligence for trading purposes. Growing evidence suggests Wall Street forces, particularly short sellers, hedge funds, and high frequency traders (HFTs), have been using other avenues to influence government decisions that will help them turn a profit.

Over the last two years, CREW has undertaken the task of uncovering efforts by short sellers and hedge funds to bend government policy to their will. CREW is not against the practice of shortselling (which is legal), but these firms cannot abuse government processes to manipulate the market. In many cases, their desired result may not be best for the country and the stability of the financial markets. Their actions not only drive stock prices down, but they also create uncertainty in the market, making investing dangerous for Main Street America.

In 2010, CREW found Steve Eisman, a New York-based hedge fund manager, attempted to use his testimony before a Senate committee and contacts with high-level Education Department officials to manipulate stocks in the for-profit education industry. Mr. Eisman previously had been able to manipulate the market reaction of certain for-profit education institutions and profited through short-sales through public speeches, such as the one he gave at an investment conference in which he claimed several for-profit education companies were not financially sound. In reaction to his dire predictions, the share values of those companies plummeted, reaping huge short-sale profits for Mr. Eisman. His remarks before a Senate committee that the for-profit education was as “socially destructive as the subprime mortgage industry” were an apparent attempt to elicit a similar reaction from traders on Wall Street.

In 2012, through the FOIA process, CREW found another New York hedge fund manager by the name of Martin Shkreli had attempted to influence FDA policy by filing a citizen petition with the agency and contacting several FDA officials in the hopes that the agency would ultimately deny approval of certain drugs manufactured by companies in which he held short positions. In addition, Mr. Shkreli has used his blog post on Seeking Alpha to post articles laden with controversial and dubious scientific claims about the efficacy of pending new drug applications. The stocks of those firms dropped significantly in almost every case. We must give Mr. Shkreli credit however - he always openly disclosed his short positions. But disclosure alone does not convert illegal market manipulation into legal investment strategy.

The actions of Mr. Eisman and Mr. Shkreli went beyond simply shorting stocks. They used government processes to employ a “short and distort” technique: short a company, then distort its public image in order to drive the stock price down, resulting in a healthy profit for their portfolio. “Short-distort” is a form of market manipulation and is illegal.

In recent months, CREW has also started looking into high frequency traders (HFTs) who have interfered with the release of market-sensitive monthly economic data by the Bureau of Labor Statistics (BLS) and the Energy Information Administration (EIA). These firms have interfered with the BLS and EIA websites to slow down the release of the information to the general public in order to gain a few seconds’ advantage in trading. The agencies have responded to these attacks by blocking the IP addresses of several firms from accessing their websites.

CREW is not against short selling or high frequency trading, both legal practices. What we cannot abide are those who abuse the government and its processes for personal financial gain. The United States government should not serve as a platform for Wall Street to make a quick buck.

 

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