If you follow investment and financial news, you are no doubt aware of the bankruptcy of MF Global, a powerful futures brokerage. Before its bankruptcy, MF Global was helmed by former Senator and New Jersey governor Jon Corzine, a very wealthy and influential Democrat power player. Before he ran for the Senate in 2000, Corzine was the chief executive of Goldman Sachs; Corzine helped take the company public during the 1990’s and was rewarded with nearly $400 million in Goldman Sachs stock for his efforts.
According to insiders, in the months preceding its collapse, MF global loaded its asset portfolios with high risk European bonds. In a panic to stay cash solvent, MF Global managers apparently raided the cash accounts of investors (which were touted as “safe” by the firm) to the tune of somewhere between $600 million and $1 billion. Investigators are still poring over MF Global’s books, but at this point it looks as though at least some of that money could have been used to cover trading losses, which would mean that the funds are gone for good. Although Corzine has denied any wrongdoing and reportedly refused a $12.1 million severance package, he has retained the services of noted criminal defense attorney Andrew Levander. There are also lingering questions about the role that Goldman Sachs will play in the liquidation of MF Global’s remaining assets.
Unsurprisingly, this is not the first time Corzine has been involved in a trading scandal.
During the 1990’s several unscrupulous brokerage houses (some with ties to organized crime) made a great deal of money by a method known as “chopping.” “Chop” is a slang term for the price spread between what a brokerage pays for a stock, and what an investor pays the firm for the stock. “Chop house” brokerages bought large numbers of penny stocks (either from foreign companies, or in the form of warrants for domestic stocks that could not be legally sold for two years) and then sold them to unsuspecting buyers, usually via high-pressure telephone cold calling, at markups of 200% – 300% or more. Shady disclosure and accounting practices kept buyers from discovering the details of their investments, and kept details of the sales hidden from regulators.
According to Wall Street insiders, big brokerage houses, including Goldman Sachs, engaged in similar practices during the heyday of the Dot Com stock market bubble:
Nicholas Maier, who was syndicate manager of the Wall Street firm Cramer & Co. from 1996 to 1998, told SEC investigators in the spring that Goldman Sachs routinely forced him to buy stocks at inflated prices if he wanted to purchase shares of an initial public offering (IPO).
“Goldman, from what I witnessed, they were the worst perpetrator,” Mr. Maier said. “They totally fueled the [market] bubble. And it’s specifically that kind of behavior that has caused the market crash. They built these stocks upon an illegal foundation manipulated up, and ultimately, it really was the small person who ended up buying in.”
For example, Mr. Maier told the SEC that Goldman Sachs would offer him shares of a new company’s IPO at the initial, low price of $20 per share only if he agreed to purchase “aftermarket” shares of the same company at $100 each. In turn, he would sell the shares of the higher-priced stock to small investors.
“None of these aftermarket orders had anything to do with what I honestly valued a company to be worth,” Mr. Maier said.
… A class-action lawsuit filed in April 2001 accused Goldman Sachs and others of engaging in “laddering” on the initial sale of stock of NetZero, driving up the company’s share price to artificially high levels.
In another class-action suit, shareholders of Buy.com have accused the firm and its underwriters, including Goldman Sachs, of engaging in a laddering scheme in its IPO in February 2000, after Mr. Corzine left Goldman. And investors of defunct online grocer Webvan.com have filed a similar suit in federal court concerning that firm’s initial public offering in November 1999.
Another class-action suit filed last year (2001) says that underwriters, including Goldman Sachs, manipulated several IPOs since 1997, including at least six when Mr. Corzine was still at the helm of Goldman.
Naturally, Corzine denied any knowledge of “laddering” IPO share prices during his tenure at Goldman Sachs. But the stench of corruption and dirty money keeps following him around.
And it smells an awful lot like “Goldman Sachs.”
ADDED: The Washington Examiner’s David Freddoso reminds us that The Nation endorsed Jon Corzine for Secretary of the Treasury in 2008. And The Nation fancies itself an intellectual’s magazine. Heh.