Dirty Tricks at Lehman?

Today’s must read commentary: naked capitalism calls shenanigans on Lehman Brothers illegal leak of an insider memo to CNBC’s Charlie Gasparino:

"On the issue of Lehman supposedly deleveraging (particularly to such a dramatic degree), The New York Times reported that Lehman had reduced its leverage from 31.7x to 25X via a $100 billion asset sale. Note even that claim demands more explanation. How was so much unloaded? What losses were taken? And (most probable) was this done the way recent disposals of leveraged loans have been accomplished, via part of the proceeds being financed? If so, the "sale" is far less meaningful than a true sale and involves the risk that the supposed buyer might try to put the asset back in the future (in this environment of high financial stress, do not underestimate the odds of extreme measures).

And of course, it’s also intriguing (to put it way too politely) that the leak to the Times is considerably at odds with the "internal memo" that got into Gasparino’s hands. 25x and 12x leverage are hugely different numbers.

Now to the tactics, which stink to high heaven. Why, pray tell, is Lehman resorting to leaks and whispers rather than the proper procedure of public disclosure via a press release?"

I usually love Charlie Gasparino’s work, but at this point he has been fed more disinformation propaganda and inside info. 

Regardless, leaking an internal memo with non-public, material financial information to CNBC is an SEC violation. Of course, the toothless tiger in charge of regulatory enforcement is too busy chasing down who spread what rumors about Bear Stearns (that turned out to be true) to be bothered with such obvious and blatant illegality.

More naked capitalism:

Don’t tell me this may have been an unauthorized employee leak; if this memo was circulated broadly to employees, it was done with the full intent that word would get outside the firm. That happens predictably with mass employee communications. And if it was limited distribution, the recipients, as anyone who has passed a Series 7 exam ought to know, selective disclosure of material information is a big no no under SEC Rule FD.

Would someone please tell me how this could be leaked to a major news organization without an immediate SEC investigation being opened? Or is Cox & Co. to busy investigating David Einhorn to look into his?

Color me disgusted . . .


Disclosure: no position in any stock mentioned.

Dirty Tricks at Lehman? (And a Defense of Shorts)
Yves Smith
naked capitalism, JUNE 5, 2008

Future of Lehman
CNBC  Wed. Jun. 4 2008 | 1:00 DT

What's been said:

Discussions found on the web:
  1. Yves Smith commented on Jun 5

    I am truly disgusted at the way companies play fast and loose with SEC disclosure and investor communications generally. There have been so many cases of leaks at CNBC (in particular) in lieu of normal communication that it drives me nuts.

    I have no idea whether it offends you as much as it disturbs me, but it really does everyone in the industry a disservice and confirms the bad image the public now has about securities markets.

  2. John Borchers commented on Jun 5

    Personally, I think Gasparino makes it up himself.

    He only gets paid by CNBC when he comes up with this garbage right?

  3. MM commented on Jun 5

    i’ve had my series 7 for 12 yrs, and i’ve always thought publication on the largest business network in the world, CNBC, is considering broad dissemination by the SEC – just as distribution in the WSJ or other print news outlet. i think your premise is wrong…

  4. Richard commented on Jun 5

    MM, is it broad dissemintation if they didn’t officially disseminate it?

  5. Steve Barry commented on Jun 5

    This Einhorn must be a hack…otherwise he wouldn’t be so public in shorting LEH. LEH is probably a good short, but others are likely better. According to exposure ratios on BoomBustBlog, MS, GS and MER might be much better shorts.

  6. D. commented on Jun 5

    When you come up with non-public material information, you’re supposed to do your best to make it public. This is what he did, no? Or is CNBC not public enough?

    Also, you’re not supposed to trade on the info until it is public.

  7. John T commented on Jun 5

    The problem is that all laws and values have been discarded in the name of the almighty bull market. Short sellers get investigated, companies’s statements which three days later are shown to be lies get a pass. None of this is going to end till all the crooks, greedy ceo’s, complicit regulators get flushed out of the system. Till then Wall Street will continue to be a den of thieves.

  8. Stuart commented on Jun 5

    The ole boys club…. SEC chase this, not a chance. Colour me cynical.

  9. Scott Frew commented on Jun 5

    I think what the “CNBC is broad dissemination and therefore the objection is irrelevant or misguided” group is missing is the following. If Lehman issues a press release, and disseminates information that way, they are responsible for its accuracy. If an internal memo is leaked, and announced on CNBC, it’s a way for management to avoid liability for its accuracy, if there’s no SEC interest in the matter. This is a way to get misinformation into the marketplace without liability.

  10. Gari N. Corp commented on Jun 5

    Media do indeed enjoy an exemption from the selective disclosure rule, although this exemption is far from broadly understood and open to abuse by overzealous compliance officers. This exemption, while it can make the level playing field less level (if the outlet is an obscure or expensive one), generally serves as a useful corrective to the stage-managed disclosures from corporations. Still, an officially-sanctioned, selective disclosure of major information like is a frankly terrible communications strategy.

  11. bigdayj commented on Jun 5

    @ Steve Barry –

    As the previous 2 mentioned, Einhorn is the last person you should call a hack. His analysis of Lehman Brothers has been SPOT ON since last year. Do yourself a favor, do your own research, and stop using BoomBustBlog as a crutch. My 2 cents…

  12. steve commented on Jun 5

    Isn’t it SOP for banks to reduce their leverage by having a hedge fund “purchase” their “assets” for a specific length of time and then buy back the asset while guaranteeing a specific return for the hedge fund?

  13. curmudgeonly troll commented on Jun 5

    I’m usually on the side of people who call like they see them and Einhorn is no hack

    BUT… his New Century call was a bit of a dud, I have to wonder how I managed to be on the right side of that trade without even being a superstar money manager and an insider.

    And after Bear he is kind of throwing fuel onto the forest fire. The first rule of money management is don’t fight the Fed. And if the Fed is in the middle of bailing out the brokers I fail to see the point of complaining about bad marks.

    Maybe he was right about this one, but once the Fed gets involved the right thing to do is take the bad beat gracefully and walk away.

  14. michael schumacher commented on Jun 5

    Gas bag a rino is a hack and is nothing more than a shill for whoever sees fit to use him and his access to CNBC.

    “I usually love his work”- BR

    and what would that be Barry??…becoming the poster boy for monoline, I-bank, etc. rumors used to push the moon shot button on the market.

    Call him out for the shill he is or do you share the same train with him too?

    You’re losing it by heaping praise on these people when the should be served a huge steaming pile of what they have been serving us.

    Remember the actual write down at C was less than his rumor? I guess using people works when you can just back off and say “what me worry”.

    You called out that douchebag builder simply because he dropped an F-bomb on you via email…..how is Charlie G. ANY different than that??? None at all except you have to take the initiative to connect the dots.

    Ciao MS


    BR: Gasparino is not the shill you think he is — His books are excellent — especially: “Blood on the Street: The Sensational Inside Story of How Wall Street Analysts Duped a Generation of Investors”

    He might be a bit “scoop” hungry, but thats live tv for you.

  15. Karen commented on Jun 5

    Steve Barry, there are some good videos at cnbc featuring Einhorn. Watch him and listen, then you’ll know what an exceptional individual he is. I also recommend his book Fooling Some of the People All of the Time every chance I get. Buy it on principal. Buy it because all proceeds go to charity. Go to the Greenlight Capital website and poke around.

  16. Uncle Jeffy commented on Jun 5

    On CNBC this morning, Einhorn refused to discuss other financial sector short positions he might be holding or considering. He’s smart – and admitted he blew it on New Century. How many other guys in his position are willing to admit it when they were wrong?

  17. Peter Davis commented on Jun 5


    You’are assuming that the Feds actually have the public’s interest in mind. I think that the last 6 months, at the very least, have shown this not to be the case.

    Unfortunately, we live in an age of asymmetrical market manipulation, in which the feds will do whatever they can to extend our Endless Bubble. Our regulatory agencies have absolutely no interest in, you know, regulating stuff.

    Between the SEC, the Treasury and, of course, the Fed, it’s a total sham.I honestly wonder if anybody believes them anymore – including the firms they “regulate”.

  18. michael schumacher commented on Jun 5

    I see BR… it’s completely fine to do nothing about the rampant rumor and innuendo while it’s happening and “just reporting on it”….but write a book about it and everything is forgiven.

    I think I’ve seen that movie play out over the last few years with those tell all books from the Tenet, Clarke, McClellan…did I miss any?

    Sorry but he is a hack no matter what book he writes….or more importantly.. will write…since I ‘m certain that is coming next year.

    Defend him all you want but he has been the “source” for many of the crap rumors that have allowed this charade to continue…it’s too bad you are unable or unwilling to see it. Putting a question mark after the headline just shows you are trying to play both sides….get a spine.


  19. Eric davis commented on Jun 5

    If you missed it, Gasparino just went off about this..

  20. RichardN commented on Jun 5

    The market is in fact up huge and I never thought I’d say this but………………….well said MS.
    If you’re going to bring some people (who move markets) on after the close (i.e Whitney) you should do so for everyone. Charlie’s “news” appears to break at exactly between 15 and 30 minutes before the close.

  21. John commented on Jun 5

    Gasparino is a journalist in a fairly sensational line of work. He gets kudos and big raises by breaking “scoops” so to that extent he’s just doing his job. As is Einhorn who, as several have pointed out, has been completely on the money about Lehman. The bad guys in all this aren’t these two but Lehman’s management if they are skirting SEC rules to leak info and, of course, the toothless tiger SEC led by Cox who is either asleep at the stick or pursuing a deliberately hands off policy. I can’t believe his name is not near the top of any lists of those destined for early retirement if Obama wins in November since in this case as for most of the last couple of years he appears to have MIA.

  22. Joanie commented on Jun 5

    What’s wrong with this picture? It’s an excerpt from a B’berg story that hit at 3:18 p.m. yesterday afternoon:


    “Regulators are leaving it up to Lehman for now to decide whether it needs to raise money, said the official, who declined to be indentified because discussions between regulators and the firm are private. Lehman is unlikely to face the type of run that drove Bear Stearns Cos. near bankruptcy because the FED is now lending money directly to brokerages, the person said.”…

    Right off the bat, here we have another “official” who is leaking information albeit the conversations between the regulators and the broker are private. So he is now a “person”, eh? Right. Meanwhile, the article went on to state that every official spokesperson “declined comment”, so I am ticked off right away. Do they not understand that we fully grasp that the leak is an intentional move to let it be known publicly yet anonymously that LEH is not in the same boat as the late BSC? And despite both Paulson and Bernanke calling for the industry to raise capital which is an indirect order to “Stand on your own two feet”, here we have an unidentified “person” who opines that LEH can continue to access the PDCF instead, i.e., continue to exchange assets running the gamut from tri-party collateral (totally vanilla) right on down to “investment-grade” (not exclusively AAA-rated which is what the article incorrectly indicates) corporates, munis, MBS and ABS (“for which a price is available”, of course!).

    And just to get the bile to rise a little higher, how about we remind you that it is the clearing banks who determine if its clients have put up sufficient collateral to the FED. In exchange for do-re-mi. Which the FED has raised by depleting its stash of T-bills.

    Oh, this is some freakin’ chop-shop operation, eh? You bet. Now we have to figure out why officials are unofficially indicating that they are okay with LEH NOT raising capital. I mean, why are these miscreants even responding to Street calls for LEH to take that tack? First thing comes to mind is the reality that the FED cannot handle another BSC. We already went over that yesterday. That point is inarguable. But how about this: Since the regulators are said to be sitting with LEH day and night, do you think that they’ve got a better handle on just what LEH’s true condition is? They absolutely should! And I’m not so sure if that’s a good thing, either. Well, from a legal standpoint, that is. Because here we have the FED as LEH’s second pair of eyes and ears. And then the proclamation downplaying their need to raise capital. These actions are an endorsement of LEH’s balance sheet by the Federal Reserve Bank, are they not? Clearly, that is what they want us to understand. But with every endorsement comes liability. Is that why we got an official “no comment”, receiving only hushed information from a “person”? I think I’ll busy myself today, makin’ phone calls, stirrin’ a few pots.

    Meanwhile, Street analysts, unlike the FED, are suggesting that LEH raise specific amounts. We’ll use Mike Mayo’s suggestion of $4 bil or 129 mil shares at $31. That would reduce book value by ~4%. Some analysts say that LEH raising capital would demonstrate an extra cushion or as Mayo calls it “an insurance policy”. Don’t know about you, but the government sending a whisperer into our midst to indicate that LEH can do what it wants, sends up a bright red flag to this member of the lunatic fringe. Come to think of it, it’s about the same shade of red as the one that flew outta’ the top of my head when I read yesterday that MER had upgraded LEH to a Buy. After having downgraded them to Underperform on Monday. At that time, they cited caution over high leverage and illiquid positions. As the story goes, the MER analyst upgraded LEH in response to the bum rap he believes they were takin’, bein’ thrown in the same category as BSC. Okay. Fine with me if he thinks they are NOT a BSC.

  23. Jason commented on Jun 6

    There’s a difference between net leverage, and gross leverage. You might want to look it up before you write another article about Lehman’s leverage.


    BR: Thanks for the insight — but you missed the main point we are discussing.

    Now, how about commenting on the issue we are actually discussing — whether LEH selectively leaked material non-public inside information?

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