The Miscreants’ Global Bust-Out (Chapter One): Was the United States Attacked By Financial Terrorists?

The Miscreants’ Global Bust-Out (Chapter One): Was the United States Attacked By Financial Terrorists?

Posted on 29 April 2011 by Mark Mitchell 
Tags: bear stearns, Department of Defense, ETF, Financial Terrorism, Irregular Warfare, Lehman, market manipulation, short selling, stock manipulation


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.

http://www.deepcapture.com/the-miscreant....al-te rrorists/