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31–059 PDF 2006

S. HRG. 109–696

HEDGE FUNDS AND INDEPENDENT ANALYSTS:

HOW INDEPENDENT ARE THEIR RELATIONSHIPS?

HEARING

BEFORE THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JUNE 28, 2006

Serial No. J–109–93

Printed for the use of the Committee on the Judiciary

(

(II)

COMMITTEE ON THE JUDICIARY 

ARLEN SPECTER, Pennsylvania, Chairman 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

MIKE DEWINE, Ohio 

JEFF SESSIONS, Alabama 

LINDSEY O. GRAHAM, South Carolina 

JOHN CORNYN, Texas 

SAM BROWNBACK, Kansas 

TOM COBURN, Oklahoma 

PATRICK J. LEAHY, Vermont 

EDWARD M. KENNEDY, Massachusetts 

JOSEPH R. BIDEN, JR., Delaware 

HERBERT KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

MICHAEL O’NEILL, Chief Counsel and Staff Director 

BRUCE A. COHEN, Democratic Chief Counsel and Staff Director 

(III)

C O N T E N T S 

STATEMENTS OF COMMITTEE MEMBERS 

Page

Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa, prepared 

statement .............................................................................................................. 143

Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah ............................ 2

Schumer, Hon. Charles E., a U.S. Senator from the State of New York ............ 4

Specter, Hon. Arlen, a U.S. Senator from the State of Pennsylvania ................. 1

WITNESSES 

Aguirre, Gary J., former Investigator, Securities and Exchange Commission, 

Washington, D.C. ................................................................................................. 16

Anifantis, Demetrios, former Client Relationship Manager, Camelback Research Alliance, Inc., Scottsdale, Arizona .......................................................... 27

Blickenstaff, Kim, Founder, Chairman and Chief Executive Officer, Biosite, 

Incorporated, San Diego, California ................................................................... 22

Blumenthal, Richard, Attorney General, State of Connecticut, Hartford, Connecticut .................................................................................................................. 8

Boersma, Jonathan A., Director, Standards of Practice, CFA Centre for Financial Market Integrity, Charlottesville, Virginia ................................................. 31

Friedrich, Matthew, Principal Deputy Assistant Attorney General and Chief 

of Staff, Criminal Division, Department of Justice, Washington, D.C. ........... 6

Kasowitz, Marc E., Senior Partner, Kasowitz, Benson, Torres & Friedman 

LLP, on behalf of the Alliance for Investment Transparency, New York, 

New York .............................................................................................................. 19

Lamont, Owen A., Professor of Finance, Yale School of Management, New 

Haven, Connecticut .............................................................................................. 25

McLaughlin, Joseph, Partner, Sidley Austin LLP, on behalf of the Managed 

Funds Association, New York, New York .......................................................... 20

Schilit, Howard, CPA, Founder and Non-Executive Chair, Center for Financial Research and Analysis (CFRA, LLC), Rockville, Maryland ...................... 29

QUESTIONS AND ANSWERS 

Responses of Gary Aguirre to questions submitted by Senator Specter ............. 48

Responses of Demetrios Anifantis to questions submitted by Senator Specter . 55

Responses of Kim Blickenstaff to questions submitted by Senator Specter ....... 61

Responses of Richard Blumenthal to questions submitted by Senator Specter . 62

Responses of Jonathan Boersma to questions submitted by Senator Specter .... 65

Responses of Matthew Friedrich to questions submitted by Senator Specter .... 66

Responses of Marc Kasowitz to questions submitted by Senator Specter .......... 87

Responses of Owen Lamont to questions submitted by Senator Specter ............ 90

Responses of Joseph McLaughlin to questions submitted by Senator Specter .. 91

Responses of Howard Schilit to questions submitted by Senator Specter .......... 96

SUBMISSIONS FOR THE RECORD 

Aguirre, Gary J., former Investigator, Securities and Exchange Commission, 

Washington, D.C., statement .............................................................................. 97

Anifantis, Demetrios, former Client Relationship Manager, Camelback Research Alliance, Inc., Scottsdale, Arizona, statement ....................................... 112

Bettis, Carr, Founder, President and Chief Executive Ofiicer, and Donn 

Vickrey, Founder and Editor-in-Chief, Gradient Analytics, Inc., statement ... 121

Blickenstaff, Kim, Founder, Chairman and Chief Executive Officer, Biosite, 

Incorporated, San Diego, California, statement ................................................ 123

Page

IV

Blumenthal, Richard, Attorney General, State of Connecticut, Hartford, Connecticut, statement ............................................................................................... 126

Boersma, Jonathan A., Director, Standards of Practice, CFA Centre for Financial Market Integrity, Charlottesville, Virginia, statement .............................. 131

Friedrich, Matthew, Principal Deputy Assistant Attorney General and Chief 

of Staff, Criminal Division, Department of Justice, Washington, D.C., statement ...................................................................................................................... 136

Green, Stanton, Chairman, Investorside Research Association, statement ....... 144

Kasowitz, Marc E., Senior Partner, Kasowitz, Benson, Torres & Friedman 

LLP, on behalf of the Alliance for Investment Transparency, New York, 

New York, statement ........................................................................................... 151

Lamont, Owen A., Professor of Finance, Yale School of Management, New 

Haven, Connecticut, statement ........................................................................... 160

Manning, Greg, Escala Group, Inc. New York, New York, statement ................ 171

McLaughlin, Joseph, Partner, Sidley Austin LLP, on behalf of the Managed 

Funds Association, New York, New York, statement ....................................... 191

Pollock, Alex J., Resident Fellow, American Enterprise Institute, statement ... 205

Schilit, Howard, CPA, Founder and Non-Executive Chair, Center for Financial Research and Analysis (CFRA, LLC), Rockville, Maryland, statement ... 210

Smith, Rich, Chief Executive Officer, Taser International, Scottsdale, Arizona, 

letter ...................................................................................................................... 214

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HEDGE FUNDS AND INDEPENDENT ANALYSTS: HOW INDEPENDENT ARE THEIR RELATIONSHIPS? 

WEDNESDAY, JUNE 28, 2006

U.S. SENATE, 

COMMITTEE ON THE JUDICIARY, 

Washington, D.C. 

The Committee met, pursuant to notice, at 9:32 a.m., in room 

SD–226, Dirksen Senate Office Building, Hon. Arlen Specter, 

Chairman of the Committee, presiding. 

Present: Senators Specter, Hatch, and Schumer. 

OPENING STATEMENT OF HON. ARLEN SPECTER, A U.S. 

SENATOR FROM THE STATE OF PENNSYLVANIA 

Chairman SPECTER. Ladies and gentlemen, the Judiciary Committee will now proceed with this hearing to inquire into the adequacy of the Federal criminal statutes to deal with the potential 

issues for fraud on the investments of hedge funds in collaboration 

with so-called independent analysts. This is a subject of enormous 

importance to the United States economy, with hedge funds now 

having $1.2 trillion in assets and having stock transactions which 

involve some 30 percent of what goes on in the trading market. 

There have been some high-profile civil cases which have been 

brought with allegations, among other things, that hedge funds are 

collaborating with the so-called independent analysts to rig the information to make it appear that some companies are weaker than 

they really are, with short-selling and the potential for very, very 

substantial profits. 

The Judiciary Committee has been intimately involved in the 

regulatory process to the extent that it involves criminal prosecutions in the legislation captioned ‘‘Sarbanes-Oxley,’’ so much so that 

Senator Leahy, when he was Chairman of this Committee, and 

Representative Sensenbrenner, the Chairman of the House Committee, were conferees. The Banking Committees obviously have 

primary jurisdiction on the regulation of hedge funds. It is squarely 

within their purview. The issue of the adequacy of the criminal 

laws are a matter for the Judiciary Committee, and that is why we 

are making this inquiry today. 

Our focus will be on the adequacy of the provision of SarbanesOxley, which was reported out of this Committee since it dealt with 

a criminal law, making it a violation for anyone who knowingly 

executes a scheme or an artifice to defraud any person in connection with any security or to obtain by means of false or fraudulent 

2

pretenses any money in connection with the purchase or sale of any 

security. 

We have a representative of the Department of Justice and we 

have the Attorney General of the State of Connecticut to give us 

their thinking on this subject. 

We are dealing with a subject matter which has enormous potential to have a very, very major impact on the markets. The case involving the Long-Term Capital Management Company was one 

which illustrates the potential problems. In 1998, when LTCM was 

on the verge of collapse, the New York Fed stepped in and undertook what we call a ‘‘facilitation,’’ a rescue package of some $3.6 billion in cash contributed by 13 private financial institutions. You 

have a situation where this company, LTCM, with $3 to $4 billion 

in assets, was able to leverage some $80 to $100 billion, and if 

there had been a fire sale of their assets, it would have had an 

enormous impact on the market, and the Fed stepped in. 

Well, that is fine if the Fed can find 13 companies to step in to 

stabilize the market. But it raises some very, very important questions, especially in the context where the District of Columbia Circuit Court has held that the SEC does not have jurisdiction for 

some of the rulemaking. That is a matter, obviously, for the Banking Committee to take up. But the backdrop here of the applicability of the criminal laws is very, very important. 

Since this hearing was scheduled, the subject matter has attained substantial additional notoriety with the termination of a 

senior SEC lawyer, who will testify here today. We have had the 

decision by the Court of Appeals for the District of Columbia, and 

we have quite a heavy focus on these hedge funds. They had been 

attracting investors who were very, very wealthy, in the range of 

$400,000, and now we are finding people in the $10,000 to $20,000 

category. So it is a matter of great concern, and it is very important that there be adequate investigation and oversight by the Department of Justice and oversight on the Department of Justice by 

this Committee if we need any new laws. 

My red light just went on, so I will yield to my distinguished colleague, the former Chairman of the Judiciary Committee, Senator 

Hatch. 

STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 

THE STATE OF UTAH 

Senator HATCH. Well, thank you, Mr. Chairman. I want to thank 

you for holding this hearing today. I know there has been some discussion about our Committee’s jurisdiction here, and I want you to 

know that, in my opinion, our jurisdiction is clear. We have oversight responsibilities for the Department of Justice. Ultimately, the 

Senators on this Committee are the ones responsible for writing 

and amending our Nation’s criminal law. 

In 2002, the President created a Corporate Fraud Task Force. It 

is chaired by the Deputy Attorney General and includes U.S. Attorneys, the heads of DOJ’s Criminal and Tax Divisions, and representatives from the law enforcement community and government 

agencies, including the SEC. That task force is responsible for investigating corporate fraud, and we are responsible for determining 

3

whether DOJ is doing its job and whether we have provided them 

with the tools to do their job. 

Unfortunately, because of my schedule this morning—we have 

markups in both the HELP and Finance Committees, and one of 

my bills is being marked up this morning. Of course, I am a member of both of those as well, and I will not be able to attend all of 

this hearing, as much as I would like. But if I leave early, I do not 

want anybody to mistake that I am doing that for a lack of commitment to investigating this issue. I think that it is critical that we 

do so. 

I am pleased that Mr. Friedrich is here to testify today about the 

structure of the Corporate Fraud Task Force and its past successes. 

I think that the many successful prosecutions that he details are 

testament to the priority that the President and the attorneys at 

DOJ have given these cases. Market confidence and ultimately the 

health of our economy depends on them. There is no denying those 

successes. 

Now, I know that he cannot speak to ongoing investigations, but 

in reading your testimony, it seemed to me that there was a general reluctance to discuss, even in a general way, the Department’s 

capability to investigate and prosecute what we are here today to 

discuss: the relationship between hedge funds and so-called independent analysts. 

We all know that hedge funds are a powerful force in our financial markets. It is critical that the power and influence that hedge 

funds have attained be exercised responsible, and we need to be 

sure that our laws that we give to the law enforcement authorities 

are effective and adequate to ensure that the substantial power of 

hedge funds is not abused. This is of particular concern because 

hedge funds are so lightly regulated and operate largely in secrecy. 

I am not necessarily calling for new regulations here. In fact, I 

have real questions about whether we should. But we need to monitor this field and make that our markets have the integrity that 

our investors need to continue investing and maintain our vibrant 

economy. 

DOJ has an important role to play here. Mr. Friedrich, as you 

explain in your testimony, the Corporate Fraud Task Force maps 

out a strategy and identifies best practice. I have a number of 

questions. Do you have the tools that you need? How often do you 

meet? Are you incorporating U.S. Attorneys only from major financial centers or also from nontraditional locations? After all, we are 

going to hear today about an alleged fraud that began not in New 

York but in Arizona. And I know that in my State of Utah, the 

issue of hedge funds and corporate fraud has become such an issue 

that the State legislature went into a special session to address the 

issue. And as you know, DOJ and SEC work closely in these cases, 

but sometimes, as I read the testimony today, I get the impression 

that if somebody asked both agencies who was ultimately responsible for initiating these investigations, they might just point fingers at each other. 

Now, I want to be clear about what we are not trying to get at 

through this hearing. This is not a hearing about naked shorting. 

It is most certainly not a hearing to drag anyone’s name through 

4

the mud. And this is not a hearing that challenges hedge funds as 

a whole or the practice of naked shorting in general. 

As our friends in the press have continually reminded us since 

the hearing was called, there is nothing wrong with short-selling. 

We do not need to be reminded again. The market trend is upward, 

and it is good to have some pessimists around who keep prices honest and help to maintain market balance. We also know that 

shorters were well ahead of anyone in discovering that there were 

problems at Enron. And nobody is attacking this activity in general. 

As Mr. Kasowitz has noted, though he does represent a number 

of clients who alleged harm through market manipulation and 

short-selling, he does represent hedge funds in a variety of matters. 

These are legitimate investment vehicles, and I do not doubt that, 

for the most part, they are acting on the up and up. Yet hedge 

funds are the Wild West of our financial markets. There are 11,500 

hedge funds. They are highly profitable to their managers and 

largely unregulated, more than all the stocks listed on the Stock 

Exchange, as I view it. They may be a small piece of the market, 

but they are growing. And because of their volume of trading and 

the commissions that they represent, they are an increasingly powerful member of the financial community. 

Well, there is a lot more I have to say, but my time is up. Let 

me just put the record of my statement in the record, Mr. Chairman. 

Chairman SPECTER. Without objection, Senator Hatch’s full 

statement will be made a part of the record. 

Senator SCHUMER. Mr. Chairman? 

Chairman SPECTER. Who is seeking recognition? 

Senator SCHUMER. I am, Mr. Chairman. 

Chairman SPECTER. Well, in that event, I will ask you if you 

would care to make an opening statement. 

Senator SCHUMER. I would indeed, Mr. Chairman. 

Chairman SPECTER. Proceed. 

STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR 

FROM THE STATE OF NEW YORK 

Senator SCHUMER. I thank you, Mr. Chairman. Good morning, 

Mr. Chairman and members of the Committee. As the only member 

of this Committee also on the Banking Committee, I would like to 

bring a different perspective to today’s hearings. 

First of all, Mr. Chairman, as you said, I support the jurisdiction 

of this Committee to hold hearings on legal issues raised by any 

industry, including the investment industry. But the very title of 

this hearing—’’Hedge Funds and Independent Analysts: How Independent Are Their Relationships?’’—raises a yellow flag of caution. 

From the written testimony submitted by many of the witnesses, 

it is clear that this hearing will focus on a broad range of regulatory issues facing the hedge fund industry. For starters, what are 

hedge funds? Just last week, the U.S. Court of Appeals negated the 

SEC’s hedge fund registration rules because the agency’s definition 

of a hedge fund was not adequately supported. 

Experts continue to disagree over what it is or is not, what a 

hedge fund is or what a hedge fund is not. Should hedge funds be 

5

regulated?—an issue we have discussed at great length in the 

Banking Committee. And a separate issue, does short-selling benefit markets? 

The bottom line, in my judgment, Mr. Chairman, as one who sits 

on both Committees, is that many of these issues are best addressed in the Banking Committee. The Banking Committee has 

exclusive jurisdiction, as they have asserted in a letter sent to the 

Committee yesterday afternoon. I am going to read the letter and 

ask unanimous consent it be added to the record. 

Chairman SPECTER. Without objection, the letter will be made a 

part of the record. 

Senator SCHUMER. Thank you. This is a letter—short—from 

Chairman Shelby and Ranking Member Sarbanes. 

‘‘Dear Senators Specter and Leahy: We understand that the Judiciary Committee will hold a hearing tomorrow on hedge fund advisers and independent equity research analysts. While we appreciate 

your interest in these important participants in the capital markets, we are writing today to note that the operation and regulation of both hedge funds and stock analysts fall within the exclusive jurisdiction of the Banking Committee. Furthermore, our jurisdiction over these areas is well established and clearly delineated 

by Senate rules. This Committee’’—the Banking Committee—’’has 

held numerous oversight hearings in the past year on both hedge 

funds and Wall Street analysts, and we intend to continue this active oversight for the remainder of the 109th Congress and beyond.’’ 

Not only do the Banking Committees—and the letter is now in 

the record. Not only does the Banking Committee have exclusive 

jurisdiction, but it also has the critical expertise needed to examine 

these very complicated financial market issues. I worry that today’s 

hearing will not afford us the benefit of the views and expertise of 

many of the critical Federal agencies charged with overseeing and 

enforcing our Nation’s security laws. I understand that Mr. 

Blumenthal, my friend and a man I have great respect for, will be 

making claims that there should be additional regulation of hedge 

funds. Those arguments should absolutely be heard, but they 

should be heard before the Banking Committee, which has exclusive and relevant jurisdiction. And we should hear the views of the 

relevant regulators and the people in the industry who might disagree with those views so we could come to a fair and adequate 

conclusion. 

Though the Department of Justice undoubtedly plays an important role in securities enforcement, without the expert views of the 

SEC as principal regulator or other members of the President’s 

Working Group on Financial Markets—Treasury, Federal Reserve, 

CFTC—this Committee is not likely to get a full and complete picture, complete view of the way in which participants in the capital 

markets operate legally and ethically. 

Thank you, Mr. Chairman. 

Chairman SPECTER. Thank you very much, Senator Schumer. 

We turn now to our first witness, Matthew Friedrich, Principal 

Deputy Assistant Attorney General and Chief of Staff of the Criminal Division of the Department of Justice; previously had been an 

Assistant United States Attorney in the Eastern District of VirVerDate 0ct 09 2002 13:18 Dec 04, 2006 Jkt 031059 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\31059.TXT SJUD4 PsN: CMORC
6

ginia; served as a member of the Enron Task Force and co-counsel 

in the first two criminal cases tried as part of the Enron investigation; a graduate from the University of Virginia, the University of 

Texas School of Law; clerked for District Judge Royal Ferguson in 

the Western District of Texas. 

Thank you for coming back to testify before this Committee, Mr. 

Friedrich, and we look forward to your views. 

STATEMENT OF MATTHEW FRIEDRICH, PRINCIPAL DEPUTY 

ASSISTANT ATTORNEY GENERAL AND CHIEF OF STAFF, 

CRIMINAL DIVISION, DEPARTMENT OF JUSTICE, WASHINGTON, D.C. 

Mr. FRIEDRICH. Thank you. Good morning, Mr. Chairman and 

members of the Committee. On behalf of the Department of Justice, I want to thank you for inviting me here today to testify about 

the Department’s ongoing efforts to combat corporate and investor 

fraud. The Justice Department appreciates the Committee’s concerns, and I look forward to discussing this issue with you today. 

Prosecuting corporate and investor fraud is more than just enforcing the rules. It is about protecting the reliability, integrity, 

and transparency of American markets. Investing, after all, is a 

measure of trust. Investors generally will not put their money into 

companies or markets that they do not trust. Thus, in the global 

competition for investor dollars, market integrity is essential to the 

strength of our economy. It is a competitive edge that can bring 

with it new investment, new capital, and new jobs. 

Conversely, and as we were all reminded during the corporate 

scandals of 2001 and 2002, instances of corporate fraud put us at 

a disadvantage in that competition because, simply put, fraud is 

bad for business. Lack of investor confidence leads to weak markets 

and job loss. I am sure that concerns like these were paramount 

in the minds of members of this Committee in passing the landmark Sarbanes-Oxley legislation in 2002. You gave those of us in 

the front lines of prosecution new tools to use in our efforts against 

corporate fraud. 

We have utilized the tools which you have given us, and we are 

grateful to you for them. For example, since the inception of Sarbanes-Oxley, more than 53 defendants have been charged with securities fraud under Section 1348 of the Act. Additionally, through 

fiscal year 2005, we have issued five indictments involving violations of the certification provisions of Section 1350. 

I would note that the importance of the certification provision of 

Sarbanes-Oxley, however, is not measured solely by indictments. 

Section 1350 has had an enormous deterrent effect on corporate 

fraud, which ultimately is one of the primary purposes of this powerful law. 

As you know, and as Senator Hatch referred to earlier, the focal 

point of the Department’s efforts in this arena is the President’s 

Corporate Fraud Task Force. The task force is chaired by the Deputy Attorney General and includes members from the U.S. Attorney community, the head of the Criminal Division, and a broad 

array of Federal law enforcement and regulatory agencies, including the FBI and the SEC. 

7

From its inception in 2002 through this past December, the task 

force has obtained over 1,000 corporate fraud convictions. As to corporate officers, the task force has convicted 92 corporate presidents, 

82 CEOs, 40 chief financial officers, and 17 corporate counsel or attorneys. In the Enron investigation alone, 34 individuals were 

charged, and 25 convictions to date have been obtained. Two of 

those recent convictions came last month. On May 25th, a Houston 

jury found Enron’s top two executives, Kenneth Lay and Jeffrey 

Skilling, guilty of committing one of the largest financial crimes in 

history. 

As you know, in December of 2001, Enron, which was then one 

of the ten largest companies in the United States, collapsed into 

bankruptcy. Thousands of employees lost their jobs, investors and 

retirees lost billions of dollars in savings, and the investing public 

began to seriously question the integrity of our financial markets. 

During the 4-month trial earlier this year, the Department presented 22 witnesses, including many former top Enron executives 

who pled guilty to Enron-related crimes. These executives testified 

that at an Enron run by Lay and Skilling, the company’s image 

and stock price were valued above anything else at any cost. The 

defense presented over 25 witnesses of their own, which included 

weeks of testimony from both Lay and Skilling. 

The jury ultimately found that Lay and Skilling orchestrated a 

conspiracy to inflate profits artificially, to hide millions of dollars 

in losses, and misrepresent the true nature of the company’s finances through misleading statements, omissions, half-truths, and 

lies. 

As one newspaper reported on the eve of trial, ‘‘The implications 

of the outcome of this case are sure to be felt far beyond the courtroom. Most people in the white-collar world would agree that 

Enron is the Granddaddy of all frauds in the last two decades. How 

this comes out is a test of the limits of what the corporate community will tolerate in business practices.’’ 

The verdict also had a closer and more personal impact on the 

victims, some of whose reactions were carried by the press. 

‘‘Justice has been served,’’ said Roger Boyce, who worked in 

Enron’s plant building business. ‘‘I’m satisfied with the verdict, but 

I’m happy for all of us employees and retirees that a just verdict 

has been reached.’’ And, Mr. Chairman, for our prosecutors and 

agents who labored in bringing that trial, I am sure that there is 

no more fitting reward than comments like that from a victim. 

In summary, I can tell you that our work in combating corporate 

fraud is both continuing and vigorous. We are working with our 

law enforcement colleagues at State, local, Federal, and international levels. We are partnering with the SEC and the FBI, and 

we are doing many of those things using the impressive arsenal of 

new laws contained within Sarbanes-Oxley. Our corporate citizens 

are stepping up to the plate to follow the new rules created by Congress. 

Mr. Chairman, on behalf of the Department of Justice, I would 

like to again thank you for having the opportunity to testify today, 

and I will be happy to answer any questions which you may have. 

[The prepared statement of Mr. Friedrich appears as a submission for the record.] 

8

Chairman SPECTER. Thank you very much, Mr. Friedrich. 

We turn now to the distinguished Attorney General of the State 

of Connecticut, Richard Blumenthal. Previously he had been in the 

Connecticut State Senate and the State House of Representatives 

and the United States Attorney for Connecticut. He served as a law 

clerk to Supreme Court Justice Blackmun, was an assistant to 

former Senator Abraham Ribicoff and an aid to then-Presidential 

Assistant Daniel Patrick Moynihan; Phi Beta Kappa graduate from 

Harvard University and from the Yale Law School, where he was 

an editor of the Yale Law Journal, a prestigious position. Thank 

you for again joining us, Attorney General Blumenthal, and the 

floor is yours. 

STATEMENT OF RICHARD BLUMENTHAL, ATTORNEY GENERAL, STATE OF CONNECTICUT, HARTFORD, CONNECTICUT 

Mr. BLUMENTHAL. Thank you very much, Mr. Chairman, and to 

you, Senator Hatch, and to Senator Schumer, for being here today 

and for your leadership in having us address this critically important topic. I speak today as a former prosecutor, as United States 

Attorney, former Federal prosecutor, and I want to congratulate 

and thank the Department of Justice for the prosecutions that have 

just been discussed by my co-panelist and for its initiative and intense and successful action in that area. 

Let me address the precise question that has been raised by this 

Committee. I strongly urge and believe that penalties should be 

strengthened for the kind of manipulation that has been alleged involving hedge funds, in effect, shorting and distorting, using supposedly independent analysts that are really independent in name 

only. Right now the penalties, in my view, are inadequate. They 

are inadequate in a monetary sense, certainly, and in my testimony, I have recommended that there be a civil penalty of treble 

damages imposed for this kind of manipulation and deceptive practice as well. 

I believe that the susceptibility of the markets is particularly 

acute where hedge funds are involved and supposedly independent 

analysts because hedge funds can engage in short-selling, unlike 

other institutions, they operate in secret, and the supposedly independent analysts may be beholden to them as a result of very substantial fees that they receive in connection with the supposed custom reports that are meant to be unbiased but may not be. And 

I want to stress, borrowing a phrase from Senator Hatch, that 

there is nothing wrong with short-selling. It can be a very constructive and positive technique in the market. There is nothing wrong 

with hedge funds. By and large, they are operated honestly and effectively, and Connecticut is home to many of them. 

But there is a need for stronger scrutiny and oversight, and the 

Goldstein decision, which I think brings us to a turning point, a 

really critical juncture in this area, really makes absolutely certain 

the need for some kind of Congressional action. And it should be 

to establish a new framework of regulation that encompasses hedge 

funds, which previously had been unregulated. The Goldstein decision turns on a very narrow and technical point—namely, the definition of ‘‘client’’—that could be easily clarified by the Congress or 

perhaps by the SEC. But the point is that States will fill the void 

9

that the court of appeals has created. Right now hedge funds are 

in a regulatory void without any disclosure or accountability. The 

absence of transparency and Federal inaction or inertia will invite 

State action. And under our State statutes in Connecticut, which 

track the Federal statutes, we could easily amend our laws, as 

could other States. 

Federal action and regulation is vastly preferable because the 

Federal Government can bring to bear the expertise as well as authority and uniformity that is so important in this area to assure 

credibility and trust in the markets. But States must consider their 

own regulatory standards, perhaps modeled on the SEC rules, 

achieving the same goals of disclosure and accountability. And if 

Federal agencies abandon the field, as they have done at other 

points in history, in other areas of regulation, then States will join 

forces, as we have done in joint legal action, to act separately or 

together to proactively protect our consumers. 

Let me conclude simply by saying that the recommendations that 

I have included are simply an opening shot or a beginning shot in 

this debate that post-Goldstein I think will be very much in the 

fore. And whether it is in this Committee, which I believe has clear 

authority over the criminal areas that are involved, or in the Banking Committee, I hope that the States are given a role in this debate. 

Thank you. 

[The prepared statement of Mr. Blumenthal appears as a submission for the record.] 

Chairman SPECTER. Thank you very much, Attorney General 

Blumenthal. 

Senator Grassley could not be here this morning. He is Chairman of the Finance Committee and is otherwise engaged. But he 

asked that this statement be put into the record. 

Senator Grassley says, ‘‘Chairman Specter, I am pleased that you 

are holding this oversight hearing on hedge funds and independent 

analysts. I share the Chairman’s concern regarding corporate fraud 

and integrity in the marketplace. The allegations we are hearing 

today remind me of the Enron debacle where positive accounting 

information was fabricated and disseminated about the company to 

increase the value of its stock. This Committee held hearings on 

Enron’s fraudulent partnership and accounting practices, and we 

passed legislation included in Sarbanes-Oxley that strengthened 

the criminal prosecutions of persons who defrauded investors in 

publicly traded securities. The Sarbanes-Oxley law also included a 

provision that I offered’’—Senator Grassley—‘‘with Senator Leahy 

providing whistleblower protection to individuals who raised concerns about fraudulent activity.’’ 

‘‘All in all, I felt the Sarbanes-Oxley law had done much to assist 

Federal regulators to prosecute illegal activity and to keep our financial markets on the up and up. But maybe we did not go far 

enough. The wholesale fabrication of information and collaboration 

with market players to pull down the price of stock sounds suspect 

to me. In my mind, this kind of market manipulation seriously distorts the integrity of the financial marketplace, and everyone—that 

is, everyone except the bad actors—loses.’’ 

10

‘‘So what is independent analysis? Is research ever independent? 

Is there enough scrutiny of this kind of activity, or do we need 

more disclosures and safeguards in the trade? I want to make sure 

that the Department of Justice and SEC are being aggressive in 

their investigations of alleged wrongdoing. I want to make sure 

that they are doing everything in their power to protect investors 

and the public from fraudulent activity and manipulation of the 

marketplace. I want to find out whether the Department of Justice 

has a need for more tools or resources to get the job done. The 

stakes are high because so many are impacted by fraudulent market information—pension plans, small investors, seniors, ordinary 

workers, and their families. So we need to support our enforcement 

agencies in their efforts to clean up the market and make sure that 

we have enough tough laws in place, not just to punish but to deter 

these bad actors.’’ 

Mr. Friedrich, starting with you on the 5-minute round of questions, we are not looking at the regulatory approach. That is for 

others, and regulations obviously are very important. But there is 

nothing like a criminal prosecution. Criminal prosecutions may 

have a questionable effect on violent criminal conduct or barroom 

killings or a variety of street crimes where motivations are hard to 

understand. But when you deal with the corporate community, 

when you deal with white-collar crime, criminal sanction is very, 

very effective, much more effective in a regulatory scheme which 

may or may not be imposed. When it is imposed, not a whole lot 

happens except filing of a report or perhaps a civil proceeding or 

perhaps a fine within the regulatory scheme. But a jail sentence 

means a lot, especially to thoughtful white-collar criminals. 

You went over a litany of corporate fraud convictions that you 

have had. How about on hedge funds? Have there been any convictions by the Department of Justice on hedge funds or the so-called 

independent analysts going to the allegations which are current 

now about collusion and market manipulation? 

Mr. FRIEDRICH. Senator, I am not aware of any closed cases that 

deal—or publicly reported cases that deal with that specific issue 

as between hedge funds and analysts. The Department has done 

some prosecutions in the area of hedge funds. Two I can think of 

offhand. In September 2005, the Southern District of New York 

had a couple pleas— 

Chairman SPECTER. You have done some prosecutions on hedge 

funds? 

Mr. FRIEDRICH. YES. 

Chairman SPECTER. Have there been jail sentences? 

Mr. FRIEDRICH. My understanding is that as to the one closed 

case, there was a jail sentence. 

Chairman SPECTER. Well, would you please provide that information to us? On a hearing dealing with Department of Justice enforcement of criminal actions against hedge funds, I would have 

thought that would have been at the top of your agenda to tell us 

what you have done. 

Mr. FRIEDRICH. Senator, the case that I was referring to involved 

the prosecution of two executives, I believe it was Bayou Capital 

Management in the Southern District of New York. If you would 

give me a moment, I can give you some more detail on that. 

11

Chairman SPECTER. Well, provide it in writing. There is a limited 

amount of time, and I want to turn to Attorney General 

Blumenthal. But give us the detail, if you will, please, as to what 

prosecutions have been brought in this field. And I do not want to 

ask you in open session about investigations, but we have oversight 

authority on pending matters. Would you please provide us on a 

confidential basis what the Department of Justice is doing on current investigations? 

Mr. FRIEDRICH. I can provide you information as to the cases 

that are publicly reported as to closed cases. I am not aware that 

I am free to provide, even in a confidential format, information 

about pending cases. 

Chairman SPECTER. Well, take a look at the testimony in the 

confirmation of Deputy Attorney General McNulty and our discussion about our authority to get into pending cases and give me a 

response on that. 

Mr. FRIEDRICH. Yes, sir. 

Chairman SPECTER. Attorney General Blumenthal, you say you 

would like to see some treble damage cases. I would be interested 

in your evaluation of the efficacy of treble damages against wealthy 

companies or wealthy individuals contrasted with a tough jail sentence behind bars? 

Mr. BLUMENTHAL. Well, clearly, Senator, I agree with you wholeheartedly that incarceration has a much stronger impact, both in 

terms of deterrence and also a message to the public, than does 

any fine or monetary penalty. The case that involved the Bayou 

group, in fact, I think illustrates that idea because the two individuals there, Samuel Israel and Daniel Marino, might not have engaged in the massive fraud that caused the criminal prosecution by 

the Department of Justice. Excellent work done by the FBI and the 

Department of Justice. But the kinds of sentences in these cases, 

Bayou and— 

Chairman SPECTER. What were the sentences? 

Mr. BLUMENTHAL. Well, I don’t know that they have been sentenced yet. The prosecutions themselves, as Mr. Friedrich said, resulted in guilty pleas in December of 2005. Bayou is a Connecticut 

case, and I think that certainly the kinds of deterrent effect that 

you have discussed have much greater weight if there are criminal 

penalties. And that is true generally in the white-collar crime area, 

in my view. 

Chairman SPECTER. Well, my red light is on so I would yield now 

to Senator Hatch. 

Senator HATCH. Well, thank you, Mr. Chairman. 

Mr. Friedrich, as you know, the Sarbanes-Oxley Act defined a 

new Federal crime—securities fraud. It was designed to get past a 

patchwork set of laws under which securities fraud has previously 

been prosecuted. Now, that section codified at 18 U.S.C. Section 

1348 gave the Department of Justice a strong and important tool 

for combating illegal securities fraud, something that they did not 

have before. 

Now, what steps has the Department of Justice taken to ensure 

that hedge funds and corrupt securities analysts do not commit securities fraud in violation of Section 1348? 

12

Mr. FRIEDRICH. I would say generally, Senator, obviously this is 

an area that we are aware of. There have been prosecutions, as I 

mentioned before, against principals of hedge funds. As to the use 

of that new statute, that is a statute that we train on in our securities fraud training at the National Advocacy Center. It is a tool 

that has been used, and I think it is a tool—as I mentioned, there 

have been 53 indictments under that statute to date. I think it is 

a tool that will be used with increasing frequency in the area of 

hedge fund fraud or other types of securities fraud. 

Senator HATCH. Thank you. 

Mr. Blumenthal, in your testimony, you recommend specifically 

new regulation of hedge funds, and I agree with my colleague from 

New York, Senator Schumer, that such civil regulations would be 

the exclusive jurisdiction of the Banking Committee. 

Now, I did watch you on ‘‘60 Minutes’’ on that program a few 

weeks ago where you were addressing the relationship between 

independent analysts and various hedge funds. As I recall, you indicated that criminal investigation and prosecution of these is very, 

very difficult. Now, in your testimony, you just suggested that we 

need new tools for criminal enforcement, and that is within the jurisdiction of this Committee. 

So I have basically two questions for you, Mr. Blumenthal, and 

basically, that is, what new tools would you like us to come up with 

for criminal enforcement? And what tools would you like to see us 

investigate and come to a conclusion on with regard to all of these 

matters? 

Mr. BLUMENTHAL. I think the new tools, Senator—and I am 

happy to respond, although obviously Federal jurisdiction is not 

within my purview. New tools should include stronger penalties, 

but also stronger protections for whistleblowers, stronger penalties 

against retaliation for individuals who are doing their job honestly 

and forthrightly and who may be victims of retaliation, either as 

whistleblowers or as public officials, as staff members of any of the 

agencies involved, whether criminal or civil, and perhaps some consideration of criminal penalties for that kind of retaliation. Obviously, obstruction of justice is one possibility, but there should be 

consideration of protection for whistleblowers and deterrence 

against retaliation. 

But, also, as you are obviously very well aware, Senator, resources are key in this area. And when I mentioned before that 

these cases are very complex and challenging, they are also very 

resource intensive. And my hope is that the resources for the criminal justice prosecutions will be provided by Congress so that both 

the Department of Justice and the SEC can exercise their criminal 

jurisdiction to investigate and prosecute. 

Senator HATCH. You mentioned in your testimony that the number and financial power of hedge funds, now reportedly more than 

13,000 hedge funds—I had 11,500; it goes up all the time—with assets exceeding $24 trillion, I believe you said, provide fertile opportunity for potential fraud based on false or deliberately misleading 

stock analysts’ reports. And I have to say that this is a matter of 

great concern to me, and you mentioned at least a couple of cases 

in here where there have been real allegations of collusion between 

13

hedge funds and analysts that may be corrupt or may be cooperating or may be conspiring to do wrong here. 

My time is up, but I just want to thank both of you for the work 

that you do do, and we are concerned about this. I believe that the 

vast majority of hedge funds are honest people and doing a good 

job, but there are literally, literally thousands of them, and I am 

really concerned about if there is widespread collusion and conspiracies to knock down the price of shares in various corporations, 

that could really discombobulate our whole market. 

I think my time is up, Mr. Chairman. 

Chairman SPECTER. Thank you very much, Senator Hatch. 

Mr. Friedrich, to what extent does the Department of Justice 

monitor the civil suits which have been brought? For example, 

Biovail, a pharmaceutical company, has alleged in a suit brought 

in New Jersey State courts, alleging that several hedge funds, an 

independent stock research firm, and a research analyst had participated in market manipulation to harm Biovail’s stock. The lawsuit further contained allegations that similar executions were orchestrated on other companies, Calgene and Biowaste Technology, 

Incorporated. 

Are such lawsuits of assistance to the Department of Justice to 

followup to make a determination as to whether those allegations 

are true or whether they would support a criminal prosecution? 

Mr. FRIEDRICH. I think the best way to answer that question, 

Senator, good criminal chiefs in every district make a practice of 

reading the newspapers and looking for lawsuits of the type that 

you describe. I think the best way to put it would be that is an indication that further questions may need to be asked. That is something that can tip us off that there may be some irregularity. 

Chairman SPECTER. Well, are you following up on Biovail’s contentions? 

Mr. FRIEDRICH. Unfortunately, Senator, I cannot comment as to 

any pending matter that the Justice Department might have. I can 

comment as to closed matters, and if I may just add to what Senator Hatch asked a moment ago, as to Section 1341, I can tell you 

that there was a Section 1341 complaint that was filed recently in 

the Northern District of Georgia as against the operators of a 

hedge fund. 

Chairman SPECTER. And what is the status of that matter? 

Mr. FRIEDRICH. There has been a public complaint filed, and 

there has not been any other public actions so far as that case 

itself. 

Chairman SPECTER. Attorney General Blumenthal, have you initiated any criminal prosecutions in the State of Connecticut against 

hedge funds? 

Mr. BLUMENTHAL. We have not, Senator, and they have been, as 

Mr. Friedrich has indicated, rare at the Federal level as well. But 

I think it is an emerging area of interest, and I know that State 

criminal as well as civil authorities are monitoring and following 

closely those actions involving Biovail and Overstock.com because 

they reflect on the need for greater disclosure. If there were disclosure, for example, of the relationships between the hedge funds and 

supposedly independent analysts, it would have a very positive effect in preventing perhaps the kind of collusion or manipulation 

14

that is alleged. Again, these claims are only allegations at this 

point. So we are following them to determine whether there is evidence and whether, in fact, they will ever go to trial. 

Chairman SPECTER. Attorney General Blumenthal, do you know 

if there are any actions brought by other State Attorneys General? 

The New York Attorney General, Mr. Spitzer, has been very active 

in the market area. Do you know if his office or any other Attorneys General have initiated either criminal or civil lawsuits in this 

area? 

Mr. BLUMENTHAL. There have been none, Senator, so far as I am 

aware. But I know that there are very strong interests on the part 

of States like Connecticut, New York, and others in this potential 

area of manipulation or fraud, and certainly there is no reluctance 

to use existing State criminal authority, as we have done before. 

Chairman SPECTER. I was interested in a speech which Fed 

Chairman Ben Bernanke made recently where he says, ‘‘The primary mechanism for regulating excessive leverage and other aspects of risk-taking in a market economy, referring to hedge funds 

as the discipline provided by creditors, counterparties, and investors. And Chairman Bernanke is against regulation but looks for 

the market to handle it itself. 

Now you have the circuit court decision limiting what the SEC 

can do, and in an area where there is so much opportunity for manipulation and such enormous profits reported that two individuals 

last year made in a hedge fund market $1 billion, listen, free economy, earn what you can. But where there is such enormous public 

impact, we ought to be looking at tough enforcement matters, especially with the void which we have at the moment with the most 

recently court ruling until the Banking Committee has an opportunity to provide the answers and the Federal legislation comes up 

and whatever is done with the SEC, which needs to be done. 

So I would urge you, Mr. Friedrich, to take a close look at this 

area and tell us if the existing laws are adequate or if you need 

tougher sanctions, if you agree with Mr. Blumenthal that there 

ought to be some civil treble damage penalties. My inclination 

would be against it. I would not want to give you that option. I 

would rather have you use the criminal statutes if you have crimes, 

if you have allegations of crimes, and especially serious ones. 

Senator Hatch, before we move on to panel two, would you care 

to ask anything further? 

Senator HATCH. Well, if I could. I did not particularly want to 

make this hearing one about naked shorting, but I might have a 

question for both of you on that. 

Let me just ask you this: How does your group work? How many 

meetings do you have with your particular regulatory group, the 

CFTF? Who do you invite as U.S. Attorneys? Are they all from the 

financial districts of the country, or are they from across the country? And where do you go with that? How often do you meet? 

Mr. FRIEDRICH. It is a mix of representatives. There are representatives—the Deputy Attorney General chairs it. There are 

people from the Deputy’s office who basically administer the task 

force on a more hands-on basis. There are a range of U.S. attorneys. Some are from the major districts. Some are from smaller 

districts. There is representation by the FBI, the SEC, the CFTC, 

15

and other relevant Federal agencies. Really, there is a lot of, I 

would say, sort of strategic direction, making sure people have the 

right resources, exchanging ideas about best practices, and items of 

that nature. In terms of— 

Senator HATCH. How often do you meet? 

Mr. FRIEDRICH. I believe since Deputy Attorney General McNulty 

has been in, I believe there has been one meeting. I am not sure 

of the frequency of the meetings before he got here. 

Senator HATCH. OK. 

Mr. FRIEDRICH. And I know they are planning another. 

Senator HATCH. Is this issue on your agenda? How do issues get 

on the agenda? 

Mr. FRIEDRICH. I think really that is driven by what people—sort 

of items of current interest, either things that the regulators or the 

law enforcement folks or the Bureau want to put on the table, new 

trends that they are seeing. We are constantly looking for new 

trends and making sure that the resources that we have are 

arrayed in a logical way with respect to those trends. New types 

of corporate fraud, exchanging best practices, exchanging ideas 

about new court rulings—that type of thing. 

Senator HATCH. Maybe either or both of you could answer this 

question: As I understand it, with regard to naked short—well, 

shorting in general, naked shorting in particular, within 3 days 

after the date of sale, you have to register that with the—what is 

it called? The Depository Trust and Clearing Corporation? It is the 

DTCC, I believe. But it is my understanding that, at least last time 

I heard about it, there were about $6 billion per day in failure to 

deliver stock under the naked shorting situation. 

Are you both familiar with that? That to me is startling, and I 

have also heard from various sources that sometimes some of these 

companies will register the stock over in, say, Europe, like Germany, so that they do not have to meet that requisite of reporting 

to the DTCC. 

Mr. BLUMENTHAL. Clearly, this is an area—this area is one that 

ought to be a focus for the Securities and Exchange Commission, 

and I hope it will be. It is largely beyond the purview of State authority, but it opens new opportunities and very fertile ground for 

manipulation and fraud and is tied, again, to hedge fund activities 

and illustrates the need for the deterrent effect of strong criminal 

penalties and stronger enforcement. There is no question that the 

penalties themselves will be dead letter unless they are enforced, 

like any criminal statute. 

Senator HATCH. Are both of you aware that that is going on? 

Mr. FRIEDRICH. I am aware that that is a practice which is occurring, and I agree with you in terms of your statement of what the 

legal requirements are in that area. I know that the SEC as well 

as both major exchanges have taken public positions in terms of 

naked shorting, what it means and what it does not mean. 

Senator HATCH. Well, how can we allow $6 billion a day not to 

be reported? I mean, that is a lot of money, especially over a year, 

to not be reported and accounted for. And as we all know, naked 

shorting is where there is not enough stock to cover the short. 

Mr. BLUMENTHAL. And it poses a danger to the markets, the 

health of the markets and their integrity. 

16

Senator HATCH. That is my point. It could really kill the marketplace if this is widespread. Now, I do not believe it is, but there 

may be some instances where it will. If it is $6 billion a day, which 

is what I have been told, then there have got to be a lot of instances where this is being violated, and it ought to be stopped. Do 

you both agree with that? 

Mr. FRIEDRICH. Respectfully, that is an area where I would really 

have to defer to the SEC in terms of answering a question like 

that. 

Senator HATCH. Do you agree? 

Mr. BLUMENTHAL. I agree, but I would probably also have to 

defer to the SEC. 

Senator HATCH. You would defer also. I will defer it to the SEC, 

too, and I am suggesting that they better get on the ball and start 

checking on this type of stuff. 

Thank you both. I really appreciate it. 

Chairman SPECTER. Thank you very much, Senator Hatch, and 

thank you, Mr. Friedrich and Attorney General Blumenthal. We 

very much appreciate your coming in. 

We will now turn to our second panel: Mr. Aguirre, Mr. 

Kasowitz, Mr. McLaughlin, Mr. Blickenstaff, Mr. Lamont, Mr. 

Anifantis, Mr. Schilit, and Mr. Boersma. 

Our first witness is Mr. Gary Aguirre, formerly senior counsel 

with the Division of Enforcement at the Securities and Exchange 

Commission; nearly 40 years of litigation experience, including the 

areas of construction disputes, environmental regulations, securities litigation, and criminal defense; has published a number of 

scholarly legal articles, including one on the litigation arising out 

of the Enron debacle and the application of Section 10(b) of the Securities Act related to fraud; bachelor’s degree in politics and a law 

degree from the University of California, Master of Fine Arts from 

UCLA. 

Mr. Aguirre, we very much appreciate your joining us here today. 

We have a copy of a lengthy letter which you have sent to the 

Chairman and Ranking Member of the Banking Subcommittee on 

Securities and Investment, which will be made a part of the record, 

and we look forward to your testimony. 

STATEMENT OF GARY J. AGUIRRE, FORMER INVESTIGATOR, 

SECURITIES AND EXCHANGE COMMISSION, WASHINGTON, D.C. 

Mr. AGUIRRE. Thank you, Mr. Chairman. I deeply appreciate the 

opportunity to offer some views on this critical issue. 

I would like to say preliminarily that I have forwarded your letter inviting me to testify today to the Securities and Exchange 

Commission, and yesterday I was informed by the Securities and 

Exchange Commission in a letter that it is their view that existing 

regulations prohibiting the disclosure of nonpublic information applies to my testimony today. So since there are various penalties 

that are applicable to disclosure of nonpublic information, I redrafted my testimony yesterday and submitted it so that it was intended to only disclose matters that have already been made public. Among those sanctions are criminal sanctions. 

I would like to offer this perspective: I believe that— 

17

Chairman SPECTER. Well, Mr. Aguirre, just a comment. I take 

issue with what the SEC has said to you. This is an oversight hearing on Federal criminal statutes, and there is a constitutional responsibility in this Committee, and we need to know the facts. And 

it may be that we will take some of your testimony in closed session, but I would have thought that had the SEC had some concern 

about the invitation, they would have communicated it to this Committee, to the Chairman. And this is the first that I have heard 

about it. I have just been handed a letter on the subject. 

Mr. AGUIRRE. I had actually suggested—my counsel suggested to 

them that if they did have some objections to my testimony, that 

they pass it along to this Committee. It is also my view that my 

testimony before this Committee is protected by the LloydLaFollette Act. But given the contention of the SEC, I had prepared written testimony that I submitted that merely included 

what was public. I will do the best I can to answer your questions. 

I will do the best I can. 

Chairman SPECTER. Well, that is all you can do, but I think it 

is particularly problemsome when the information which you have 

heretofore disclosed and has been in the public domain raises questions about the propriety of what the SEC has done. This is not a 

matter of some comment about some third party. This is a matter 

about the propriety of what the SEC is doing. 

Mr. AGUIRRE. I agree with you 100 percent, Senator. Chairman 

Specter. We will start your time at 5 minutes so we can give you 

the substantive on substance without talking about these collateral 

matters, not to take it out of your time. 

Thank you, Chairman. 

I think that it helps to begin any analysis of the hedge fund potential for abuse on the financial markets by discussing three classes of those types of abuses: 

First is the long-term capital risk, and I am really not going to 

discuss that. It is more the subject, I think, of someone familiar 

with several different agencies. 

The second class of hedge fund abuse is hedge fund fraud on 

their own investors, and that class of fraud has been the subject 

of most of the cases that have been brought by the SEC and the 

Department of Justice. It has been the subject of cases for approximately 10 years. It is probably the SEC’s strongest suit. And I am 

not sure to what extent it is going to require any form of regulation. 

The third area is the type of fraud that injures ever other market 

participant. The type of fraud we are talking about today or the potential type of fraud we are talking about today is one class of that. 

But there are multiple sub-classes of this type of fraud, for example, insider trading, different forms of market manipulation, the recent use of market timing and late trading by hedge funds to effectively siphon funds from the accounts of small investors. These are 

all classes of this type of fraud. 

Now, this fraud derives from the amount of trading that hedge 

funds do. We know that at this point that trading amounts to 

something in the area of 30 percent or more of the New York Stock 

Exchange and a larger percentage of the trading in other forms of 

securities. That can only be expected to significantly increase as we 

18

move from $1.3 trillion in hedge funds to $6 trillion in hedge funds 

over the next 9 years. 

I believe the impact and the cause of that is the significant funds 

that are generated in fees and commissions to the various brokerage firms and investment banks that deal with hedge funds. 

If we look at the extent of scrutiny of hedge funds in this area, 

this third class of fraud, over the last 25 years, we will find that 

there was effectively no scrutiny until 2004. And I am not quoting 

my own research. I am quoting comments in recent SEC publications. 

In 2004, the SEC did not discover any of this class of fraud; rather, it was discovered by a State Attorney General—Mr. Spitzer. 

That class of fraud, hedge fund abuse of mutual funds, was costing 

small investors somewhere in the vicinity of several billion a year 

over several years. 

Now, there has been over the last year a second class of fraud 

discovered, this second class impacting the market participants in 

general, and that is the PIPE cases. I discuss those to some extent 

in my written testimony. 

Now, aside from those two classes of fraud, you will have to 

search long and hard to find any enforcement by the Securities and 

Exchange Commission of any other class of hedge fund abuse 

against other market participants. I am talking about insider trading. I am talking about market manipulation. I am talking about 

the class of fraud that we are talking about today. The case that 

I handled, which I believe was perhaps one of the largest, if not 

the largest, or the broadest investigation of a hedge fund involved 

both market manipulation and insider trading. What I found there 

is that most of these referrals from the New York Stock Exchange 

and SROs had been coming into the SEC for years and had not 

been acted upon. 

It appears that my time has run out, Senator. 

[The prepared statement of Mr. Aguirre appears as a submission 

for the record.] 

Chairman SPECTER. Thank you very much, Mr. Aguirre. We will 

come back to you and give you an opportunity to amplify your 

statement during the question-and-answer session. 

Mr. AGUIRRE. Thank you. 

Chairman SPECTER. Our next witness is Mr. Marc Kasowitz, senior partner of Kasowitz, Benson, Torres & Friedman, representing 

large multinational corporations. ‘‘American Lawyer’’ has included 

Mr. Kasowitz on its list of the top 45 lawyers under 45. That is 

kind of precarious category to be in, Mr. Kasowitz, subject to leaving it involuntarily. 

Mr. Kasowitz. That was 9 years ago when I was 45. 

[Laughter.] 

Chairman SPECTER. You are not one of the top 54 under 55, are 

you? 

Mr. Kasowitz. Well, but today is my birthday, Mr. Chairman. 

Chairman SPECTER. Well, happy birthday. Cum laude from Yale, 

law degree from Cornell, editor of the Cornell Law Review. He is 

testifying today on behalf of the Alliance for Investment Transparency. 

19

Thank you very much for coming in today, Mr. Kasowitz, and we 

look forward to your testimony. 

STATEMENT OF MARC E. KASOWITZ, SENIOR PARTNER, 

KASOWITZ, BENSON, TORRES & FRIEDMAN LLP, ON BEHALF 

OF THE ALLIANCE FOR INVESTMENT TRANSPARENCY, NEW 

YORK, NEW YORK 

Mr. KASOWITZ. Thank you for inviting me, Mr. Chairman. 

Our firm has developed a considerable expertise and experience 

in the subject that the Committee is addressing today. We represent a number of clients who have been severely harmed by the 

market manipulation activities of certain extremely powerful hedge 

funds and certain supposedly independent securities analysts. 

Those clients have joined together to form the Alliance for Investment Transparency, on whose behalf I appear today. 

Our law firm has filed a lawsuit on behalf of one of our clients 

against some of those hedge funds and analysts, and we are currently investigating and analyzing claims on behalf of other clients. 

But I want to make clear at the outset that this is in no way a 

vendetta against hedge funds in any way. In fact, our firm represents many hedge funds in a variety of matters. The concerns I 

am addressing today have nothing to do with all those hedge funds 

which engage in perfectly legal and legitimate investment activities, and they have nothing to do with truly independent securities 

analysts. 

However, what our clients and other companies have experienced 

is truly shocking. These companies have been targets of a pattern 

of egregious collusion between certain influential hedge funds and 

certain supposedly independent analysts, including analysts at 

major Wall Street firms whose research, in effect, was bought and 

paid for by the hedge funds as part of illegal market manipulation 

schemes, typically involving short-selling. 

We are not talking about short-sellers who are making an honest 

bet that a company’s stock is about to fall. We are talking about 

short-sellers who manipulate the market to cause a drop in a company’s stock price by engaging in schemes to disseminate false and 

distorted research and other disinformation. 

The schemes those hedge funds engage in are strikingly simple 

but frighteningly destructive. They often target high-tech, biotech, 

and pharmaceutical companies. Here is one of the ways in which 

those schemes work. 

The short-selling hedge fund selects a target company. The hedge 

fund then colludes with a so-called independent stock analyst to 

prepare a false and negative research report on the target. The analyst firm agrees not to release the research report to the public 

until the hedge fund accumulates a substantial short position in 

the target company’s stock. Once the hedge fund has accumulated 

that substantial short position, the report is disseminated widely, 

causing the intended decline in the target stock price. 

The report that is disseminated—and this is also very important—contains no disclosure that the analyst was paid to prepare 

the report, no disclosure that the hedge fund participate in the 

preparation of the report, and no disclosure that the hedge fund 

had a substantial short position in the target stock. Once the false 

20

and negative research report has had its intended effect, the hedge 

fund then closes its position and makes an enormous profit, and it 

makes that profit at the expense of the proper functioning of the 

markets, at the expense of innocent investors, and at the expense 

of the target company and its employees. 

There are a number of other ways that hedge funds and analysts 

illegally manipulate the market as well. They engage in organized 

campaigns to drive down stock prices by spreading rumors and 

falsehoods in the financial press, on Internet chat boards, in investor conference calls, at analyst presentations, and at industry conferences. There are orchestrated campaigns to communicate egregiously false information directly to a target company’s board of directors, larger shareholders, principal banks, and outside auditors. 

We are aware of instances in which the perpetrators of such campaigns have sought to instigate regulatory investigations based on 

disinformation in order to cause more adverse publicity about the 

targeted companies. The effects of these campaigns have been devastating to the companies, their employees, and everyday investors. 

You heard Mr. Aguirre talk about Pequot, at least in his correspondence to this Committee. Those allegations, if proven, are 

outrageous and illegal. The same is true here. The conduct that I 

have described today is egregious and illegal. 

Underlying both of these situations is the fact that this industry 

has grown so large, so powerful, and with so little transparency 

that the potential for gross fraud and abuse is stunning. In fact, 

based on the testimony of witnesses before this very Committee 

today, no one even knows within $1 trillion how large the hedge 

fund industry actually is. One witness estimates $2.4 trillion; another estimates $1.5 trillion; another says it is $1.2 trillion. The 

fact that we do not even know how big the industry is within a trillion dollars—which is real money, even in Washington, D.C.—

proves the incredible lack of transparency. 

There is a pervasive pattern of illegal conduct. Civil remedies 

exist to address it on an individual basis. But it is critical that law 

enforcement utilize all of the tools at its disposal to assure that 

that conduct is uncovered, punished, and deterred. 

Thank you. 

[The prepared statement of Mr. Kasowitz appears as a submission for the record.] 

Chairman SPECTER. Thank you very much, Mr. Kasowitz. We 

now turn to Mr. Joseph McLaughlin, a partner at Sidley Austin, 

a practice focusing on securities regulation and enforcement; had 

been a member of the New York Stock Exchange Legal Advisory 

Committee to the Board of Governors; currently a member of the 

Subcommittee on Market Structure; a law degree from Columbia 

and a bachelor’s degree also from Columbia. He is testifying today 

on behalf of the Managed Funds Association. 

Thank you for coming in, Mr. McLaughlin, and the floor is yours. 

STATEMENT OF JOSEPH MCLAUGHLIN, PARTNER, SIDLEY 

AUSTIN LLP, ON BEHALF OF THE MANAGED FUNDS ASSOCIATION, NEW YORK, NEW YORK 

Mr. MCLAUGHLIN. Thank you, Mr. Chairman. Good morning. The 

Managed Funds Association is a global membership organization 

21

based in the United States. It serves the needs of the professionals 

who specialize in the alternative investment industry. It has over 

1,000 members who include professionals in hedge funds, funds of 

hedge funds, and managed futures funds. Its members manage a 

substantial portion of the estimated $1.2 trillion or more invested 

in these vehicles. 

On behalf of its members, MFA has worked with committees of 

the House and the Senate on hedge fund matters and with the 

President’s Working Group on Financial Markets and that group’s 

constituent departments and agencies. 

As members of this Committee are aware, hedge funds are more 

easily defined in relation to what they are not. They are essentially 

investment companies that are not publicly offered. The hedge fund 

universe is characterized by a wide variety of strategies with different risk characteristics and different return expectations. 

To the extent that hedge funds engage in short-selling as part of 

their investment strategy, they tend to dampen what may be irrationally positive market perceptions. They contribute to liquidity 

and price formation. To the extent that they target companies 

whose financial positions or whose accounting may be suspect, 

short-sellers try to identify the bad actors in our marketplace. 

As for short-selling, as I am sure you are aware, Mr. Chairman, 

the SEC was given by Congress plenary authority to regulate 

short-selling. It has done so. It recently adopted Regulation SHO 

to deal with the market operational problems that short-selling can 

create and to deal with the potential manipulative effects of shortselling. 

Mr. Chairman, whether investment managers are investing on 

the short side or the long side, they have a fiduciary duty to their 

investors to consider all reasonably available information that 

might bear upon the advisability of their decisions. And where 

available information leads some investors to take significant short 

positions in a public company’s common stock, it sometimes occurs 

that the public company will allege that the short seller has been 

assisted by third parties and is seeking to profit from the short position. 

For example, companies frequently allege that investors established a short position in a company stock while feeding reports to 

the financial press, analysts, or other third parties that criticize the 

company’s accounting or financial conduct. These allegations are 

not new. In my experience, they have been around since the 1960’s 

when I started practicing law. They may well go back much more 

into the distant past. This does not involve just hedge funds, but 

other investors as well. The fact is these allegations on the part of 

public companies have seldom been substantiated. 

As discussed previously, short-sellers often turn out to be right 

in their conclusions about public companies. MFA believes it would 

be a serious policy mistake to inhibit short-sellers from continuing 

to perform the essential contrarian function I have described and 

that would raise serious constitutional issues to attempt to chill 

short-sellers’ communications with third parties. 

Mr. Chairman, if an investor knows its allegations about a company are untrue, then existing law and SEC rules provide ample 

means for dealing with this conduct. As we have seen from the 

22

pump-and-dump schemes, which essentially involve the reverse situation from what we have here, the SEC has ample and enforcement authority under Rule 10(b)(5) and other provisions of the securities laws. 

Of course, unlike the pump-and-dump schemes, it is sometimes 

difficult to identify the source of negative information, except by requiring the recipient of the information to reveal his or her sources, 

a step that enforcement authorities are often understandably reluctant to take. 

At the same time, Mr. Chairman, persons who receive adverse 

information have their own responsibility to treat it with a degree 

of healthy skepticism. We believe the financial press has been increasingly diligent over the past few years in identifying possible 

sources of bias of persons whom they quote as having positive or 

negative views on a stock. 

In this connection, independent analysts are not subject to rules 

of the New York Stock Exchange or the NASD aimed at revealing 

conflicts of interest and otherwise enhancing the integrity of an analyst’s research. The views expressed or reported by independent 

analysts are still part of the relevant mosaic, however, and users 

of independent research must make allowances for the fact that 

independent research is not subject to the same internal and external scrutiny and standards as research produced by securities 

firms. 

Mr. Chairman and Senator Hatch, MFA unequivocally condemns 

the intentional spreading of false or misleading information. At the 

same time, there will be many cases where the facts in the law are 

not clear, and MFA believes that the remedy in such cases should 

be not to chill speech but, rather, to encourage more speech. And 

we urge that the Congress and the regulators follow this principle 

in their further deliberations. 

Thank you. 

[The prepared statement of Mr. McLaughlin appears as a submission for the record.] 

Chairman SPECTER. Thank you, Mr. McLaughlin. 

Our next witness is Mr. Kim Blickenstaff, co-founder, Chairman, 

and Chief Executive Officer of Biosite, Incorporated; 25 years’ experience in health care financing, market management, sales and 

strategic planning; previously held various financial operations and 

marketing positions with Baxter Health Care, National Health 

Laboratories, and High-Tech Incorporated; a master’s degree in 

business administration from University of Chicago, and a bachelor’s degree from Loyola, a certified public accountant. 

We welcome you here, Mr. Blickenstaff, and look forward to your 

testimony. 

STATEMENT OF KIM BLICKENSTAFF, FOUNDER, CHAIRMAN, 

AND CHIEF EXECUTIVE OFFICER, BIOSITE, INCORPORATED, 

SAN DIEGO, CALIFORNIA 

Mr. BLICKENSTAFF. Thank you, Chairman Specter and Senator 

Hatch. I really appreciate you inviting me to this Committee. Obviously, my name is Kim Blickenstaff. I am a founder and Chairman 

and CEO of Biosite, Incorporated, and I think the only CEO on the 

panel today, so I think some of my perspective may be interesting. 

23

Just briefly, Biosite is a San Diego-based medical diagnostics 

company. We do utilize biotechnology techniques within our company to develop rapid diagnostic tests to improve the diagnosis of 

time-critical diseases. I should note that the company actually went 

public on the Nasdaq back in 1997. 

My testimony today is going to relate to a period in 2002 in 

which Biosite experienced a rise in its stock price accompanied by 

highly negative independent research coverage that contained inaccuracies and speculation, so I will show you a lot of details in my 

comments. Also, I should note that during this same period the 

company’s short position increased six-fold. In many cases, the distributions of these independent reports seemed to be timed to offset 

positive business developments that the company was reporting on 

a number of fronts. Due in large part to our experience during this 

period, we believe that the unregulated activities of independent 

research firms and their possible links to hedge funds merits further investigation by your Committee. 

Just to provide context, I will share some specific situations that 

influenced my perspective. 

In the spring of 2002, Biosite’s business had upward momentum 

following reports of several financial and scientific developments. 

The stock had increased from $13 a share in January of that year 

to approximately $19 in February, and by May it had reached $36 

a share on the Nasdaq. Much of the enthusiasm was fueled by the 

investment community and their believe that the market for a new 

test that we had introduced, our Triage BNP Test, which was the 

first test for congestive heart failure in the marketplace, could be 

a very substantial market opportunity. And I believe the rapid rise 

of our share price over that period of time and the opportunity to 

speculate—or negative speculation about the entry of potential 

competitors into the rapidly growing marketplace set the stage for 

what we experienced next with the independent research community. 

Just to give you background, in the 10 months from February to 

December 2002, the number of shares controlled by short-sellers increased from 690,000 shares to 7.1 million shares, which represented nearly 50 percent of our outstanding stock, and we have 

the unfortunate distinction of being the most highly shorted stock 

on any of the exchanges here in the United States. 

During this same period, Sterling Financial Investment Group, 

which is a Florida-based research firm, issued at least seven negative research reports on Biosite, each carrying a ‘‘sell’’ or ‘‘sell 

short’’ recommendation and an $11 target price in contrast to our 

$36 market price. Contrary to standard industry practices, no author was listed on the reports, and we believe these reports contain 

numerous inaccurate or false and misleading statements, which ultimately lent volatility to the stock’s performance, thereby harming 

many of our long-term, fundamentally based investors. 

Just to give you an example, in a number of reports issued in the 

summer and fall of 2002, Sterling predicted the failure of our BNP 

test due to the expected entry of a competitive test into the marketplace. In several of these reports, Sterling included outright inaccuracies regarding the competitive advantages that supposedly favored the competitive test. The reports also included inaccuracies 

24

and misstatements about our own test performance, which were 

also construed to be an advantage for our competitors. 

On September 11, 2002, the same day that Biosite announced 

positive news, a column was written by Sally Yanchus which appeared on a website called RealMoneyPro.com. The column, which 

was critical of Biosite, was posted to Yahoo’s Biosite message 

board, so it got onto the Internet. 

Ms. Yanchus previously participated on our quarterly conference 

calls under the affiliation Nightingale and Farber, and we were 

subsequently able to link Ms. Yanchus to Sterling Research 

through an NASD Disciplinary Panel Decision, dated April 15, 

2005, which refers to her admission of knowingly including inaccuracies in reports on another health care company while working 

on behalf of Sterling Financial. And I should note that this all happened during the same timeframe that she was involved in these 

postings on Biosite. 

So, on November 18, 2002, members of my management team, 

including myself, met with the analyst from Sterling Research at 

the American Heart Association meeting. During our discussion the 

Sterling analyst told us her research at the conference—she was 

doing specific research on our products—had elicited positive feedback on our BNP test. She also acknowledged that certain reports 

that they had previous released did contain inaccuracies, but indicated that what her research director wanted written was not necessarily in line with her own views from her own research. She further maintained that she felt our company would continue to do 

very well in the marketplace and expressed surprise as to why her 

managers felt the stock continued to be a good short target. When 

we asked her why she was writing negative material about the 

company, she said that her role was research and that the reports 

were, in fact, written by someone else who was at liberty to revise 

her research. She also said she was considering leaving Sterling because of the way they were operating and her discomfort about 

these operational processes on the research writing. 

So during this entire period, I should note our BNP test was, in 

fact, gaining market momentum. Sales grew from $3.4 million in 

2001 to $38 million in 2002, despite the competition. Despite all 

the progress being made by Biosite, our investors continued to see 

their investments compromised by the volatility in our stock that 

was created by the dissemination of these reports through various 

methodologies. 

Finally, I should note that in the fall of 2002, we attempted to 

independently investigate the activities of the short-sellers and 

their links to Sterling. Unfortunately, the lack of visibility into 

these trades made it impossible for our investigators to definitively 

produce a link between Sterling’s activities— 

Chairman SPECTER. Mr. Blickenstaff, how much longer would 

you need? 

Mr. BLICKENSTAFF. Just 2 seconds. It failed to produce a link between Sterling’s activities and the resulting increase in our short 

position. Nevertheless, we believe the parallels between the magnitude and the timing of Sterling’s research activity and Biosite’s 

short position increase was more than a mere coincidence. 

25

I will conclude and go to questions when you have them at the 

end of the presentations. 

[The prepared statement of Mr. Blickenstaff appears as a submission for the record.] 

Chairman SPECTER. Thank you very much, Mr. Blickenstaff. 

Our next witness is Professor Owen Lamont, Professor of Finance and Senior Associate Dean for Faculty Affairs at the Yale 

School of Management; previously had been an associate economist 

and research associate to the Boston company Economic Advisers; 

also served as assistant professor of economics at Princeton University and assistant professor of Finance at the University of Chicago 

Graduate School of Business; a bachelor’s degree with honors from 

Oberlin and a Ph.D. in Economics from MIT. 

We welcome you here, Professor Lamont, and the floor is yours. 

STATEMENT OF OWEN A. LAMONT, PROFESSOR OF FINANCE, 

YALE SCHOOL OF MANAGEMENT, NEW HAVEN, CONNECTICUT 

Mr. LAMONT. Thank you very much, Mr. Chairman. I am honored to have this opportunity to testify today. 

As an economist, I am concerned with prices, the need to get the 

prices right. When the prices are wrong, investors are hurt and resources are wasted. In order to get prices right, we need to have 

all information, both the positive information and the negative information, get into the market. Just like in the world of politics, 

free speech is essential in the world of finance. 

Unfortunately, U.S. financial markets have a substantial optimistic bias built in. The good news is accepted, but the dissemination and discovery of bad news is suppressed. This bias happened 

for two reasons. One is it can be difficult technically to short-sell, 

and short-selling is today primarily done by hedge funds and is an 

important channel for negative information to get into the market. 

A second component of this bias is retaliation through legal means 

and other means against any public criticism of the company, 

whether it be from journalists or short-sellers or analysts. 

What happens when negative information is suppressed? Stocks 

can become overpriced, and we have already mentioned an example 

of that today, which is Enron. To prevent future Enrons from occurring, we need to make sure that pessimistic voices are heard in 

the market. 

Our current financial system is not set up to encourage shortselling. We have many institutions set up to encourage people to 

go long, but few institutions set up to encourage people to go short. 

And there are technical issues with short-selling relating to our 

system of lending equities. Our system is just not designed to facilitate short-selling of equities, and for some stocks it can be just difficult or impossible to short them. 

In the case of analysts, part of the optimistic bias of our system 

comes from sell-side analysts—not independent analysts, but sellside analysts from investment banks. These analysts have an incentive to curry favor with the issuing firms in hopes of gaining future underwriting business, and there is substantial evidence that 

these analysts have in the past been corrupt and intentionally 

issued overoptimistic forecasts. 

26

The antidote to this problem is independent analysts unaffiliated 

with any investment bank, and that antidote was mandated in the 

2003 settlement between investment banks and securities firms 

and the Government. 

In the case of Enron, for example, independent analysts were 

substantially less optimistic than the analysts from investment 

banks. So independent analysts can help detect problems. Unfortunately, independent analysts also have an incentive to be overoptimistic because if they issue negative reports, they may be sued or 

otherwise harassed by the companies that they cover. And these 

lawsuits are a particular threat to independent analysts because 

they are typically small companies that lack the resources to withstand lawsuits. 

So I think there is a variety of evidence from academic studies 

that when you cannot short-sell, stocks can get overpriced. One example I have studied is battles between short-sellers and firms. 

These are cases in which firms sue short-sellers or otherwise take 

actions to prevent short-sellers from shorting their stock. And consistent with the idea that when it is hard to short a stock it gets 

overpriced, firms that are fighting with short-sellers tend to have 

their stock price decline a great deal in subsequent years, suggesting that it was overpriced to begin with, either because of excessively optimistic investor expectations, because of a problem at 

the company, or just plain fraud on the part of management. 

A notable feature of the data that I studied is that many of the 

firms that fight with short-sellers are subsequently revealed to be 

fraudulent, and a variety of other evidence suggests that short-sellers are good at detecting and publicizing fraud, not just overpricing 

but fraud on the part of firms. I think the SEC and the other regulators cannot be our only line of defense against corporate fraud. 

We also need a vibrant short-selling community. 

In the case of Enron, I think that illustrated many of the benefits 

of short-selling. Executives from Enron in their recent trial in 

Houston claimed short-sellers had caused the demise of the company, Enron. I think that claim is nonsense. The jury did not buy 

that story, and neither should you. 

So my opinion is that we need to make the system less lopsided 

and more hospitable to short selling. We might also want to consider ways of protecting independent analysts from lawsuits from 

companies. We do not want these analysts to be cheerleaders. We 

want them to be able to express their honest opinions. 

Congress and the SEC are going to continue to hear complaints 

from companies about short-sellers. An example that I think is useful about who tends to be right in these situations comes from 

hearings in 1989 when the House Committee on Government Operations had hearings about the alleged evils of short-selling, featuring testimony from supposedly victimized firms. Officials from 

three firms testified at these hearings. Subsequent to this testimony, the presidents of two out of these three firms were charged 

with fraud by the SEC. So when you hear companies complain, 

keep in mind that short-sellers are often the good guys. 

Thanks very much for this opportunity to testify. I would be 

happy to answer your questions. 

27

[The prepared statement of Mr. Lamont appears as a submission 

for the record.] 

Chairman SPECTER. Thank you, Professor Lamont. 

Our next witness is Mr. Demetrios Anifantis, manager of Small 

Business Relationships at J.P. Morgan Chase, formerly client relation manager with Camelback Research Alliance; previously held 

positions with Thompson Financial, Chase Manhattan, and Skyy 

Spirits; bachelor’s degree in economics from the University of San 

Francisco and a master’s in economics from Fordham. 

We welcome you, Mr. Anifantis, and the floor is yours. 

STATEMENT OF DEMETRIOS ANIFANTIS, FORMER CLIENT RELATIONSHIP MANAGER, CAMELBACK RESEARCH ALLIANCE, 

INC., SCOTTSDALE, ARIZONA 

Mr. ANIFANTIS. Thank you so much, Mr. Chairman, Senator 

Hatch. I am pleased to be called to testify before this Committee 

this morning. 

As you mentioned, I did work for Camelback as a client relationship manager performing services for Camelback subscribers for 

approximately 1 year. I was in the trenches, so I am basically 

speaking from experience today on exactly what took place at one 

of these independent research firms. I do work for J.P. Morgan 

Chase right now as a small business banker. 

During my tenure at Camelback, I became well acquainted with 

Camelback’s business model and its management team and staff. 

It was a relatively small operation while I was there. 

Camelback touted itself as supplying ‘‘independent research’’ for 

a fee to subscribers. It was in the business of publishing reports 

on public companies, and it also sold some software to subscribers 

that would rank public companies according to their financial performance and prospects. Basically this was a firm that touted itself 

on forensic accounting analysis, taking tax returns and financial 

statements and analyzing those tax returns and financial statements. 

I worked most closely with Donn Vickrey, who was one of Camelback’s two principals. Vickrey and the other principal, James Carr 

Bettis, were the individuals who founded Camelback and had control of Camelback’s operations. 

Vickrey was directly in charge of this independent analyst group, 

and Carr was more of a head figure of the company. Vickrey’s key 

function was to oversee the research and writing that went into the 

reports covering publicly traded companies. 

Another manager, Jeff Mindlin, had the primary responsibility of 

engineering as well as managing the financial models that ranked 

each company. 

There were approximately 18 to 20 analysts during my tenure at 

Camelback; at any given time, approximately 10. These analysts 

had responsibility to research and write reports on publicly traded 

companies. The analysts were all recent graduates of universities 

with 4-year degrees in business-related disciplines, yet management instructed employees to share with clients that the analyst 

team was comprised of CFAs and/or CPAs with advanced degrees, 

even though it appeared to me that none but Camelback’s top management had such designations. All these individuals who were anVerDate 0ct 09 2002 13:18 Dec 04, 2006 Jkt 031059 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\31059.TXT SJUD4 PsN: CMORC
28

alysts at Camelback were graduates, recent graduates, recent 

undergrad graduates, with no certifications at all. 

Camelback advertised analytical reporting services on companies 

whose securities were publicly traded on various exchanges, the 

three major exchanges here in the United States. 

At the time I worked for Camelback, Camelback’s client base 

consisted almost exclusively of large hedge funds and a couple mutual funds. My responsibilities included working with the clients to 

see that their requests were being met with a view toward keeping 

them satisfied so they would retain their subscription to Camelback’s publications. 

The price for Camelback’s subscription varied, but commonly there was an annual base subscription of approximately $25,000 to 

$30,000 per year. For this fee, the client would receive access to all 

of Camelback’s published reports and access to all historic reports 

on publicly traded companies. So all the reports that were written 

during Camelback’s tenure were available to any client, even new 

customers or new clients. 

Camelback published these reports on several websites that clients did have access to. 

Camelback’s promotional material and its actual sales practices 

included selling a yearly ‘‘Base Subscription’’ service to its research 

reports. Included in this package that I just referred to, between 

$25,00 and $30,000 a year, also came two custom reports, and 

these were reports that any of the customers could come and request from Camelback on a specific company. 

Typically, Camelback’s subscribers would call Camelback and request these reports. That was usually who they called. They usually called me, either through myself or Vickrey. All report requests 

would be drafted by an analyst and turned over to Vickrey for final 

approval. 

These reports were represented to be qualitative analysis and 

were essentially more subjective in their coverage than quantitative, which was the models I was referring to earlier. In Camelback’s qualitative reports, the company covered would receive an 

alpha score from ‘‘A’’ to ‘‘F,’’ ‘‘A’’ being a strong company, ‘‘F’’ being 

a very weak firm. 

Frequently, the subscribing client of Camelback requesting the 

custom report would actually supply Camelback with information 

on the companies that were the subject of the requested report, 

with instructions to consider and include such information in the 

report. Usually, the client would instruct Vickrey and other Camelback personnel involved in the intake of the request and the research and writing of the report to generate either a positive or 

negative report on the company that was the subject of the request. 

When a request came in to me, one of the three questions—or 

two of the three questions that I would always ask of each client 

that was requesting a report was: Do you currently hold a position 

in the stock? And if you do hold a position, is it long or short? And 

this as information that Donn Vickrey wanted prior to beginning 

the research of any one of these companies. 

Just to wrap up here, since I am running out of time, I really 

truly believe that Camelback is built on deception, corruption, and 

a complete non-independent model. Independence to me means 

29

that all opinions and interpretations are not influenced by any 

third party or outside source. Camelback also held reports for specific clients, as mentioned by Mr. Kasowitz, where a customer 

would request that a report not be disseminated to the general paying subscriber base due to the fact that that requesting client, the 

client who requested the report, could gain some form of position 

in that stock. As the panel knows, it is oftentimes difficult to build 

a sizable short position— 

Chairman SPECTER. Mr. Anifantis, how much longer will you require? 

Mr. ANIFANTIS. Just a minute, Mr. Specter. 

The other thing in regard to the deception, Camelback mentioned 

to all of its employees and professed that it did not run money or 

did not operate any hedge funds or did not co-manage any funds, 

which they did. 

They would offer joint attacks with media personnel. Within 

days, even hours of releasing a report, a journalist individual would 

publish a report that was negative on the same firm. 

To wrap up, I believe that this type of thing I saw at Camelback 

is more common in the industry than regulators believe. The independent analysts feel it is virtually unregulated and lacks meaningful disclosure. I hope my testimony here today results in change 

in this area, both in enforcement and regulation, that will benefit 

America’s public companies and their shareholders. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Anifantis appears as a submission for the record.] 

Chairman SPECTER. Thank you, Mr. Anifantis. Has Camelback 

changed its name? 

Mr. ANIFANTIS. Yes, it has. It is now Gradient Analytics. 

Chairman SPECTER. Thank you. 

We now turn to Mr. Howard Schilit, founder and Chairman of 

Center for Financial Research and Analysis; previously an accounting professor at American University; author of the book ‘‘Financial 

Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports;’’ a Ph.D. and MBA in accounting and finance from 

the University of Maryland, master’s in accounting from 

Binghampton, and bachelor’s degree from Queens. 

Thank you very much for coming in today, Mr. Schilit, and we 

look forward to your testimony. 

STATEMENT OF HOWARD SCHILIT, CPA, FOUNDER AND NONEXECUTIVE CHAIR, CENTER FOR FINANCIAL RESEARCH 

AND ANALYSIS (CFRA, LLC), ROCKVILLE, MARYLAND 

Mr. SCHILIT. Thank you, Senator Specter and other esteemed 

members on the Committee. I am grateful to have this opportunity 

to participate in this important hearing. 

The perspective that I would like to share based upon the background first as a professor and author about topics on ethics and 

a founder of an independent research firm is about the independent 

research industry itself. I was one of the pioneers in the industry 

back in 1994 and observing the behavior of research firms and our 

clients, and I will have a series of recommendations on how to improve the behavior and eliminate some conflicts. 

30

I would first like to mention briefly one or two things about the 

investment management profession, and then I will move on to the 

research side. 

Investment managers can be segmented into two groups; those 

that own stocks on the long side only, and those that can short 

stocks. And it is important to recognize good or bad behavior can 

and does occur in both of those groups. I think in terms of the focus 

of this Committee, look more broadly, not just at a subset of investment managers, the hedge fund community, but more broadly at 

the behavior of investment managers in general. 

Moving to what is referred to as the independent research profession or organizations, perhaps as many as 500 investment research 

organizations are now selling a wide variety of products and services to investment managers. While most are still one- or two-person ‘‘mom-and-pop’’ operations, some have grown to generate tens 

of millions of dollars in revenue. 

Some research firms have well-thought-out conflict-of-interest 

policies while others may demonstrate little or no scruples. 

I believe the most important result of this Committee’s work 

would be to move the investment research profession to establish 

policies and procedures to eliminate both real and perceived conflicts of interest. 

I have half a dozen specific recommendations that perhaps you 

would like to consider. 

For firms selling a prescription product, all subscribers should 

receive the product at the same time and in the same form. No 

subscribers should be given advance copies, nor should they ever 

be tipped off of an upcoming report. 

Second, research firms should refrain from using nonpublic information to trade in their own accounts, particularly in advance of 

disseminating a report to subscribers. 

Third, research firms that make recommendations for stock purchase or sale should not be permitted to also manage an investment fund. While this may sound self-evident, today some research 

firms are also investment firms, either long-only or hedge funds. 

Four, fees received from investment management clients should 

never contain a percentage of profits earned from the research. Becoming a partner with a client would immediately strain the objectivity and independence of the research analyst. 

Five, research firms that also provide investment banking services should be prohibited from ever using the label ‘‘independent.’’ 

Six, company-sponsored research creates a special conflict-of-interest problem and should generally render the research firm as 

‘‘not independent.’’ 

And, finally, just as an oversight board exists for auditors, the 

Public Company Accounting Oversight Board, and many other professionals, such a board is needed to review policies, procedures, 

and practices of independent research firms. 

While this list is far from complete, I think it may be a good 

starting point. 

A few words about the relationship between the independent research firm and the investment managers. 

Today, pressure can be brought to bear on research firms by investment managers, such as hedge fund professionals, to write or 

31

not write on certain companies, and perhaps even to provide nonpublic information to a high-paying client. My experience in running a large research center for over a decade is that by establishing transparent and verifiable rules for both clients and employees, rarely will clients push the research firm to act 

unethically. It is critical that at the beginning of a relationship 

with a client, he or she knows the rules of the game and also 

knows that they will always be enforced. That means occasionally 

firing a client who is unwilling to play by the ethical rules established by the research firm. 

A few concluding thoughts. While there may be only isolated 

cases of bad behavior by investment managers or research providers, the need exists for a careful review of the practices of each 

group and how they interact. For sure, from time to time investment managers will act badly and try to pressure research providers to act unethically, to the detriment of clients and investors 

in general. This problem is not too different than the one we all 

face as parents, as our usually wonderful children sometimes act 

badly and try to pressure us to do things we later regret doing. The 

absence of rules or failure to enforce them not only emboldens children to misbehave, but also investment managers. 

I hope these thoughts and recommendations were helpful. I look 

forward to answering any questions. 

[The prepared statement of Mr. Schilit appears as a submission 

for the record.] 

Chairman SPECTER. Thank you, Mr. Schilit. 

Our final witness today is Mr. Jonathan Boersma, Director of 

Standards of Practice, Centre for Financial Market Integrity, CFA 

Institute; responsible for managing and directing the development 

of the institute’s Code of Ethics and Standards of Professional Conduct; previously worked in the investment management industry; 

bachelor’s degree in economics from the University of Wisconsin. 

We appreciate your coming in, Mr. Boersma, and the floor is 

yours. 

STATEMENT OF JONATHAN A. BOERSMA, DIRECTOR, STANDARDS OF PRACTICE, CFA CENTRE FOR FINANCIAL MARKET 

INTEGRITY, CHARLOTTESVILLE, VIRGINIA 

Mr. BOERSMA. Thank you, Mr. Chairman, and thank you for the 

opportunity to speak with you today. 

For more than 40 years, CFA Institute has administered the 

Chartered Financial Analyst, or CFA, examination and awarded 

the CFA charter, a designation I share with nearly 70,000 investment professionals worldwide. 

The hallmark of membership in CFA Institute is adherence to 

our Code of Ethics and Standards of Professional Conduct. Each of 

our members, as well as more than 100,000 candidates in the CFA 

program, must abide by and annually attest to their adherence to 

our Code and Standards. Among other things, our Code and Standards require our members to maintain their independence and objectivity, prohibit them from engaging in market manipulation, require that they perform their research with diligence and rigor, 

and require that they disclose any conflicts of interest. 

32

The term ‘‘independent research’’ can have different meanings. It 

is not simply the product of a firm lacking an investment banking 

department. Research can be influenced internally, through investment banking, or externally, by the company the analyst is covering or by an investor. Client-sponsored or even issuer-paid research, whereby a company with little or no research coverage 

hires a firm to write a report on their company, is certainly not 

independent. 

The key question is whether this research is objective. Research 

that is by its very nature dependent can still be objective. Our 

Code and Standards mandate all research must be conducted with 

integrity, thorough analysis, and care. There must be a reasonable 

and adequate basis to support and substantiate recommendations. 

This applies to positive and negative ratings. Analysts must not 

rely on hearsay or rumors, but must conduct careful investigations 

and rigorously test their hypotheses. 

Conflicts of interest are often present and must be managed appropriately—all with the mandate that investors’ interests must 

come first. In order to maintain trust and confidence in our capital 

markets, it is critical that such conflicts are minimized to ensure 

that investors’ interests are protected. Thorough disclosure is key 

here. This means, for example, letting investors know whether the 

research report has been funded by a third party. 

Another conflict that has been raised is whether analysts should 

be allowed to own, or short, shares in the companies that they 

cover. While some argue that analysts should be prohibited from 

taking such positions, others maintain that analysts should be required to because it aligns their interests with those of their clients. Our view is that this is indeed a conflict of interest and, like 

any other conflict, needs to be managed carefully—through blackout periods, pre-approval of trades, or other means. Further, this 

conflict must be disclosed in order to help investors fully evaluate 

analysts’ recommendations. 

Last year, CFA institute issues the Asset Manager Code of Professional Conduct. This voluntary code is to be used by asset managers, and hedge funds in particular, as a template for developing 

procedures that protect investors and promote ethical behavior. We 

believe that asset managers have a responsibility to act with integrity and, relevant to our discussion here today, refrain from market 

manipulation. Under the code, asset managers must not knowingly 

spread false rumors or attempt to influence analysts to rate or recommend a security in a way that benefits the asset manager or 

their clients. 

Asset managers are not prohibited from hiring outside research 

firms to supplement or validate their own research. Such research 

may be positive or negative, and asset managers should be free to 

take investment actions as a result of their own negative views or 

as otherwise confirmed by an outside research provider. 

Finally, let me say a word about corporate issuers, because they 

also have a role to play here. In December 2004, CFA Institute and 

the National Investor Relations Institute issued joint best practice 

guidelines dealing with the relationship between analysts and corporate issuers. These guidelines, which have been endorsed by the 

New York Stock Exchange and Nasdaq, outline the duties and reVerDate 0ct 09 2002 13:18 Dec 04, 2006 Jkt 031059 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\31059.TXT SJUD4 PsN: CMORC
33

sponsibilities of analysts and corporate issuers with the goal of reducing retaliation and improving the integrity of research. 

As I stated at the beginning, all analysts have a responsibility 

to act with integrity and to publish only honest, thorough research. 

Market manipulation of any kind must be dealt with appropriately. 

Yet analysts must be free to state their opinions and be protected 

from pressures or threats from the companies when they do so. Not 

every stock is a ‘‘buy,’’ and analysts must have the freedom to say 

so. Corporate issuers must refrain from trying to influence analysts 

because that is market manipulation as well. 

In closing, I would like to thank you, Senator Specter, for the opportunity to speak with you, and we offer our assistance as you examine these issues further. 

[The prepared statement of Mr. Boersma appears as a submission for the record.] 

Chairman SPECTER. Thank you very much, Mr. Boersma. 

For the record, I want it noted that a number of key prospective 

witnesses declined to participate or cooperate with the Committee. 

We had sought representatives from SAC Capital, from Rockner 

Partners, and from Camelback Alliance. And we had sought the 

testimony of Mr. James Chanice. It was the thought of the Committee that they all had important testimony to add. We have compulsory process, as you know, if necessary, and we may call upon 

those people in the absence of coming in today to respond for the 

record. So let the record show that those matters are under consideration by the Committee. 

Beginning with Mr. Aguirre, to what extent did your work with 

the SEC involve referrals to the Department of Justice on any matters which might have had criminal overtones, such as those we 

are discussing today with hedge funds and so-called independent 

analysts? 

Mr. AGUIRRE. No, it did not. It did not involve independent analysts. We did— 

Chairman SPECTER. How about hedge funds? 

Mr. AGUIRRE. Well, yes. The case that I was investigating when 

I was discharged was referred to the U.S. Attorney’s Office in New 

York, and I met with the U.S. Attorney and the FBI on the case 

in June— 

Chairman SPECTER. Well, that matter is under active investigation by the U.S. Attorney and the FBI? 

Mr. AGUIRRE. I understand that it is not. But that information 

has been—I picked that up from the media, which I understand 

was passed along to them by the SEC. 

Chairman SPECTER. I did not follow that. You say it is not under 

active investigation, but you had consulted with the U.S. Attorney 

and the FBI? 

Mr. AGUIRRE. I did, in June of 2005. 

Chairman SPECTER. And what happened after that? 

Mr. AGUIRRE. Well, in June of 2005, we basically presented the 

facts of the G.E.-Heller investigation to the U.S. Attorney. 

Chairman SPECTER. And what were those basic facts? 

Mr. AGUIRRE. That the CEO of Pequot had appeared to obtain a 

tip from the CEO of an investment bank. 

Chairman SPECTER. And would you define what a ‘‘skip’’ means? 

34

Mr. AGUIRRE. Pardon? 

Chairman SPECTER. Would you define what a ‘‘skip’’ means? 

Mr. AGUIRRE. I said ‘‘tip,’’ sir. 

Chairman SPECTER. Tip, oh. Well, I know what a tip means. 

Mr. AGUIRRE. Yes. 

Chairman SPECTER. Go ahead. 

Mr. AGUIRRE. We provided that information to the U.S. Attorney 

and the FBI. 

Chairman SPECTER. I know what a tip means, but you mean a 

tip which would be relevant to some inside information? 

Mr. AGUIRRE. Yes, regarding the pending acquisition. I had done 

a good deal of the background research through millions of e-mails, 

searching through calendars, credit card receipts, telephone 

records, and had basically come up with one significant lead as the 

possible tipper. We provided that information—after meeting with 

my supervisors and getting their approval, I provided that information to the U.S. Attorney and the FBI. 

Nine days later, I believe that investigation was essentially 

stopped when the investment banker—there was a newspaper article in the Wall Street Journal on June 23, 2005. That newspaper 

article announced that Morgan Stanley was considering rehiring 

Mr. Mack. And until that point, June 23rd, this investigation had 

the solid approval of my supervisors. I had received accolades for 

it. I was told by my assistant director that he had given me a personal award, said that he was not sure he had ever given this 

award to anyone else. It was the highest one of his personal 

awards. And 9 days later, the investigation was stopped. 

Chairman SPECTER. Do you know why the investigation was 

stopped? 

Mr. AGUIRRE. Well, I can tell you my conclusion from all of the 

evidence. I received a phone call from Morgan Stanley on June 

23rd, from the head of their compliance. He had this question: Are 

you going to proceed against Mr. Mack? Because if you proceed 

against Mr. Mack, we are going to have problems in having him 

step in as CEO. We do not want him to step in as CEO if there 

is going to be a securities case brought against him by the SEC. 

Until that point, this case was, as I said, supported by everyone. 

Over the next 7 days, I saw the investigation come to a grinding 

halt. Essentially I was left out of meetings. High-powered attorneys 

contacted my supervisors. I was present when my assistant director spoke with the person who had called me from Morgan Stanley. 

Chairman SPECTER. You were present during that conversation? 

Mr. AGUIRRE. The assistant director, after I informed him of the 

question from Morgan Stanley, called the compliance attorney from 

Morgan Stanley to corroborate what he had told me. 

Chairman SPECTER. Well, are you talking about a conversation 

which you overheard? 

Mr. AGUIRRE. Yes, I am. He was on speakerphone. 

Chairman SPECTER. And who were the participants in the conversation? 

Mr. AGUIRRE. Mark Kreitman, Assistant Director Mark 

Kreitman; Eric Darnell, who was the head of compliance at Morgan 

Stanley. Also in the room were Robert Hanson, my branch chief. 

Chairman SPECTER. Those were all the people present? 

35

Mr. AGUIRRE. Yes. 

Chairman SPECTER. And what was said? 

Mr. AGUIRRE. Assistant Director Kreitman asked Mr. Darnell to 

confirm his question that he had addressed to me, which was, essentially, Are you guys going to go on Mr. Mack? Because we have 

got a problem if you do, and we want simply want to know if you 

are serious about proceeding against him. 

At the end of the phone conversation, Mr. Kreitman said, ‘‘I 

think we have got to let them know that we probably will.’’ And 

then he said, ‘‘But, first, I am going to call Associate Director Paul 

Berger and let him know.’’ 

So Mr. Kreitman called Associate Director Paul Berger, and the 

conversation went something like this— 

Chairman SPECTER. Were you a party—you overheard the conversation? 

Mr. AGUIRRE. It was on speakerphone. 

Chairman SPECTER. Go ahead. 

Mr. AGUIRRE. Mr. Kreitman said to Mr. Berger, ‘‘Paul, this case 

is coming along pretty well now. We got this phone call from Morgan Stanley, and I think they want to know whether we are serious 

about it. I think we are going to go on this, and I think we ought 

to say something now.’’ 

Mr. Kreitman was cutoff in mid-sentence by Mr. Berger, and it 

was rather sharp. Mr. Berger said, ‘‘I don’t think we are, and we 

shouldn’t say anything.’’ 

Now, the problem was that Mr. Berger knew very, very little 

about the investigation that I had conducted. 

Chairman SPECTER. How do you know he knew very little about 

the investigation? 

Mr. AGUIRRE. Well, the information that I passed along—customarily, when Mr. Berger was apprised, I would be asked to prepare 

something. Mr. Berger had not participated in any meetings. Most 

of the conversations I had were verbal. And I think he said something during the phone conversation that implied that he was not 

that familiar with the facts of the case. And the facts that I am 

talking about had been developed in the last, oh, 3 or 4 weeks. 

After the conversation with Mr. Berger, there was an abrupt reversal by my supervisors in their support for this investigation. I 

wrote two extensive e-mails to Mr. Kreitman outlining for him the 

facts suggesting that Pequot had acted on insider information and 

the facts at that point that suggested that Mr. Mack was the most 

likely—I shouldn’t say ‘‘most likely.’’ At that point I gave several 

possibilities, and I put Mr. Mack at the top of the possibilities. 

Chairman SPECTER. Top possibility for what? 

Mr. AGUIRRE. Being the tipper. 

Now, Mr. Kreitman would not discuss the case with me. He was 

angry. He refused my request that we take Mr. Mack’s testimony. 

Chairman SPECTER. You say he was angry. That is conclusory. 

What evidentiary base do you have to say that? 

Mr. AGUIRRE. I had provided him with two e-mails and two 

spread sheets. The tone of his voice. He threw one of the spread 

sheets at me physically. He was unwilling to discuss the case. 

I walked out of his office. I sent him an e-mail confirming what 

had just happened. Now, that was— 

36

Chairman SPECTER. You sent an e-mail contemporaneously with 

the event? 

Mr. AGUIRRE. Yes. 

Chairman SPECTER. Could you provide that to this Committee, 

please? 

Mr. AGUIRRE. I will, sir. 

Chairman SPECTER. Thank you. 

Mr. AGUIRRE. That e-mail essentially stated that what he was 

doing in stopping the issuance of the subpoenas was frustrating the 

investigation. I did not receive a response from that for almost 4 

weeks, and I did not—in fact, I provided him with two e-mails, two 

spread sheets supporting what I saw as the next logical step in the 

investigation. 

Chairman SPECTER. Could you provide this Committee with 

those spread sheets? 

Mr. AGUIRRE. I will, sir. 

Chairman SPECTER. Thank you. 

Mr. AGUIRRE. Now, there was no response to any of these emails—the nine-page e-mail, the six-page e-mail, the spread sheets, 

or the e-mail confirming his refusal to allow these subpoenas to be 

issued. 

Now, before this, I probably issued something between 90 and 

100 subpoenas in the case. On one occasion, I sent an e-mail recommending that we take 27 different—we use 27 subpoenas for 27 different witnesses. And it was unquestioned. Most of the discussions 

would be fairly brief. In this case, there were no discussions. 

On approximately June 23rd, my branch chief—now, this is just 

about the same time that the newspaper article came out. When 

I brought up the possibility of issuing a subpoena with him, he told 

me that Mr. Mack—that this would be very difficult, Mr. Mack had 

very powerful political connections. He would not authorize it and 

I would have to speak with Mr. Kreitman. 

In July, I sent an e-mail to Associate Director Berger informing 

him that my branch chief had told me that it would be very difficult to take Mr. Mack’s testimony because of his political connections. 

Chairman SPECTER. Will you supply us a copy of that e-mail as 

well? 

Mr. AGUIRRE. I will. 

Chairman SPECTER. Thank you. 

Mr. AGUIRRE. Mr. Berger did not respond. I had a similar conversation with him shortly before I sent him the e-mail. When I did 

not get a response from Mr. Berger, I sent an e-mail to the Director 

of Enforcement, and I told her that—I reminded her that she had 

been present at a going-away party for a senior SEC official who 

had worked with me on the case. He was probably the most experienced person at the SEC in conducting investigations of insider 

trading. He taught insider trading to new enforcement staff. He 

taught insider trading to foreign officials. 

At his going-away party, he had told Director Thomsen that the 

most important case that he had worked on in his 30 years with 

the SEC was the case that I was heading. He told her that in my 

presence. 

37

In the e-mail I sent to Director Thomsen on August 4th, I informed her that—or reminded her of the statement that this senior 

staff person had made, and told her that the case was not moving 

in circles and could I speak with her about it. I did receive an email and she did say, ‘‘Well, bring in the team.’’ 

The next day, August 5th, in an e-mail and a face-to-face discussion, my branch chief advised me that they were going to reconsider my request, that they would vet my facts and then make a 

decision. He suggested that we would do this after we were both 

back from vacation. He was going on vacation the next day. As 

soon as he got back, I would be on vacation. So that meant the 

facts would be vetted in September. 

I notified the Director of Enforcement that it would not be necessary to meet with her because the matter had—the facts had 

changed. They were going to reconsider this issue. 

I went on vacation, and on approximately August 30th I received 

a phone call to call the office. I called the office and spoke with Associate Director Mark Kreitman, Branch Chief Hanson, and they 

told me that I was being discharged. 

Chairman SPECTER. Anything to report after that? Before you do, 

I have asked you specifically for a number of e-mails, but I did not 

interrupt you on some of the others. But please provide all the emails you have referenced, or any others which are relevant. 

Mr. AGUIRRE. I have provided a sworn statement— 

Chairman SPECTER. Will you provide those e-mails? 

Mr. AGUIRRE.—and 46 exhibits to the Finance and to the Banking Committee and to the Office of Special Counsel. Are you asking 

for those e-mails, Mr. Chairman? 

Chairman SPECTER. With the Banking Committee of the Senate? 

Mr. AGUIRRE. Yes. 

Chairman SPECTER. Oh, no, that is fine. They are in the jurisdiction of the Senate. You need not provide anything which would be 

duplicate. We can access those. 

Anything further to say on this subject, Mr. Aguirre? 

Mr. AGUIRRE. Well, all of my evaluations through the moment 

that I was discharged were positive. My pay raise went into effect 

11 days before I was fired. After I was fired—I think I have said 

enough. 

Chairman SPECTER. Well, I have gone considerably over the 5-

minute limit here because I did not want to interrupt your testimony on this matter. And we will work with the Banking Committee, and all the documents which you have provided them we 

will have access to. And we may discuss this with you further. 

We are running late so I will not pursue the matter now, but we 

will review the documents, as I say, and doubtless have questions 

for you at the staff level beyond today. 

Mr. AGUIRRE. Sure. 

Chairman SPECTER. Thank you. 

Mr. AGUIRRE. Thank you. 

Chairman SPECTER. Senator Hatch? 

Senator HATCH. Well, this has been an interesting hearing, and 

I think it is an important hearing because if some of the allegations 

are true—and I presume you are all testifying truthfully, and your 

38

statements are pretty dramatic—then we have got some work to do 

up here on Capitol Hill. 

Mr. Anifantis—am I pronouncing that right? 

Mr. ANIFANTIS. Yes. 

Senator HATCH. When did Camelback change its name? 

Mr. ANIFANTIS. Camelback changed its name I believe in—it was 

shortly before I was actually let go, I believe October. 

Senator HATCH. Was it before or after the ‘‘60 Minutes’’— 

Mr. ANIFANTIS. Much before that. 

Senator HATCH. Before that. 

Mr. ANIFANTIS. Yes, about a year and a half before that. 

Senator HATCH. And they changed the name to Gradient Analytics? 

Mr. ANIFANTIS. That is correct. 

Senator HATCH. OK. Mr. Kasowitz, a few years back, we saw successful prosecutions in what are called pump-and-dump cases, as I 

understand it. In my view, what you are describing, it seems to me, 

in your testimony is a slam-and dam case, if the allegations are 

true. To me, talking down a good stock in order to benefit a hedge 

fund’s short position is just as damaging to the markets as almost 

anything you could do if the talking-down is false. 

Now, if this activity is widespread, it certainly has the potential 

to destroy investor confidence. I would like you to flesh out for us 

what the full ramifications of these alleged assaults on your clients 

really were. 

Mr. KASOWITZ. Well, the ramifications are that there is damage 

at almost every level. There certainly is damage for the process of 

orderly markets because in the circumstances that I have described 

that our clients have experienced, clearly the hedge fund that is engaged in an improper manipulation, according to the way I have 

described it, is gaining a significant benefit not only in knowing 

about and being able to analyze a particular company and its operations, but, in fact, in damaging the company, damaging the value 

of its stock through the dissemination of false information, which 

the hedge fund controls. It writes the false information. It controls 

when that false information is disseminated. It controls the dissemination of that false information through an analyst firm that 

is supposed to be independent but, in fact, is not. And then it reaps 

great benefits from it. The shareholders of the company that is attacked in that way are damaged dramatically because the value of 

their equity holdings are substantially diminished. The employees 

of that company and the management of the company are damaged 

dramatically because the company, being under such attack, then 

faces business problems. The kinds of problems that it faces are 

problems with business partners, problems with its own banks and 

lending institutions who either terminate or redo the financing vehicles and the like. 

It is just problems up and down the spectrum, both on a macro 

level with respect to the market and on a micro level with respect 

to this particular company and its investors. 

Senator HATCH. Mr. Anifantis, how did Camelback make its 

money? I mean, did they have people subscribe to their analytical 

monthly letters or weekly letters, whatever it is? How did they 

make their money? 

39

Mr. ANIFANTIS. Senator Hatch, thanks for the question. Camelback predominantly made their money through the qualitative 

service, which is the research service, which is the analyst reports. 

They were priced, as mentioned, between $25,000 and $30,000. 

Also, there were— 

Senator HATCH. They would pay $25,000 or $35,000 for the report or for all of the reports that they did? 

Mr. ANIFANTIS. For an annual subscription to all of the pieces 

that would be published by the firm during that year, by Camelback during that calendar year, or during that contract year. 

The other way they made money, there were a couple customers 

that did only have packages that were based on custom reports. 

For example, a customer would sign up to the service to receive six 

custom reports, and six custom reports only. 

There was another set of customers that used what they sold, 

which was a quantitative model. It was basically a mathematically 

driven model which spat out scores based on accounting statistics. 

Senator HATCH. Was this a subscriber list or did you have salespeople go out and get these customers or how— 

Mr. ANIFANTIS. The customers were predominantly acquired via 

outgoing calls by a staff of sales folks. 

Senator HATCH. OK. Mr. Blickenstaff—Mr. Chairman, I am a little bit over. Could I have a few more questions? 

Chairman SPECTER. Go ahead. 

Senator HATCH. Mr. Blickenstaff, you described Sterling’s approach to you and how it really affected your company detrimentally. How did they charge for their services? Do you have any 

idea? 

Mr. BLICKENSTAFF. No. In fact, I was just looking at the disclosure. There is a fine print at the bottom of this research report. 

The one thing they did disclose is that they had no shares of 

Biosite’s stock, so nobody owned our shares. It also said they never 

had a banking relationship, so we never paid them. And then it 

went on to say that we were not paying them for this research. I 

mean, of course we would not pay them for this kind of negative 

research. So who actually paid for the research is not disclosed in 

this sort of letterhead, and I think that is one key thing. If you 

could tell who actually was financing this, what firms were involved, that would be a big step toward saying this is paid advertisement. 

Senator HATCH. It would seem to me that ethically, Mr. 

Boersma, that there should be a disclosure of who is financing the 

research and whether or not there is a connection between the financing and the actual outcome of the research. 

Mr. BLICKENSTAFF. I would agree. On the sell side, sell-side analysts have to disclose whether there is a banking relationship with 

the firm, and obviously, you know, all the sell-siders that were covering us had not done underwriting, so there was not a banking relationship. 

Senator HATCH. You felt, though, even though your product was 

proving to be very beneficial and that you had gone up from, what 

$13 million to $38 million in just a short period of time, that here 

were all these negative reports that kept stultifying your stock. 

40

Mr. BLICKENSTAFF. Absolutely. In fact, to give you a good example of the kind of research report, we actually had—in the third 

quarter of 2002, we beat expectations on our guidance on the ramp 

of BNP, and yet the headline is we beat expectation, but all the 

BNP risk remained of competition and—so it seems to turn good 

news into bad news, and all the reports then turn bad news into 

even worse news. So there is— 

Senator HATCH. We in the Congress fully understand that. 

[Laughter.] 

Mr. BLICKENSTAFF. Believe me, I know what a negative campaign is all about. I have lived through it. 

Senator HATCH. I think we understand it maybe even better than 

you do. 

Mr. BLICKENSTAFF. I think you might. 

Senator HATCH. Mr. McLaughlin, you are a very important person and I have a lot of respect for you, and I am sure you have 

heard this story before. Hedge funds get access and they get information because the number of trades they order in a given day is 

so lucrative, or at least they want it to be lucrative. What do you 

make of this assessment? Just how much power do these funds 

have over the marketplace? If there are 11,500 of them, or more, 

what kind of power is that in the marketplace? I am not finding 

fault with the hedge fund business because I know there are a lot 

of honest, decent hedge funds out there, but it is a tremendous 

amount of power, isn’t it? And I have heard that up to 30 percent 

of the marketplace happens to be short-selling, which I believe is 

essential to keep the marketplace honest. But what about that? 

Mr. MCLAUGHLIN. Well, Senator Hatch, I cannot confirm whether 30 percent of the volume on a given day is short or not. I am 

sure there is someone who can do that. 

Senator HATCH. Sure. 

Mr. MCLAUGHLIN. Any large customer or group of large customers tend to have some influence with the firms that execute 

their orders. It would be suicide, however, for a broker-dealer firm, 

because of the importance of the order flow from one or a group of 

hedge funds, to jeopardize its standing with its customers, clients, 

and with the enforcement agencies to step over the line and provide information, for example, where there was a duty of trust and 

confidence not to provide that information. 

Senator HATCH. I agree that is true with regard to broker-dealers. What about analytical firms? 

Mr. MCLAUGHLIN. Well, independent firms, as I stated earlier, 

may not be subject to the same considerations, the same controls 

as firms that are members of the NASD or the New York Stock Exchange. I notice that the firm that Mr. Blickenstaff is referring to 

here is a member of the NASD and, therefore, of course, is subject 

to that organization’s rules about having a reasonable basis for research and disclosing sources of bias. So when a report like this is 

published, it would be subject to that full range of controls and 

safeguards designed to promote the integrity of research. 

At the same time, there are many other firms providing information that would be relevant to investment decisions. And I hasten 

to add, as I stated earlier, it is very hard to draw the line here between independent analysts who are not subject to the same safeVerDate 0ct 09 2002 13:18 Dec 04, 2006 Jkt 031059 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\31059.TXT SJUD4 PsN: CMORC
41

guards, sell-side analysts who are, and then you have the financial 

press, bloggers, and other people who publish information as well. 

And to deal with this problem, to the extent it is a problem, you 

have to consider what you might be doing that would have the effect of chilling communication, legitimate debate about companies 

and their prospects. 

Senator HATCH. Well, let me ask you this: I have no doubt that 

most of these funds, these hedge funds, are operating within the 

law. But would you agree—at least I assume that hedge funds are 

equally subject to the anti-fraud provisions of the Federal law. 

Mr. MCLAUGHLIN. Of course. 

Senator HATCH. And I assume that hedge funds worry that the 

accusations that we have been hearing today could spoil the industry’s reputation if they are true. So I wonder if you could provide 

us with some examples of self-regulatory steps that the hedge fund 

industry has taken to make sure that we do not have fraud or insider trading through short-selling like some have described here 

today. 

Mr. MCLAUGHLIN. Well, each hedge fund is required by—each investment adviser, at least registered investment adviser, is required by law to have procedures in place to prevent violations of 

law arising from that type of activity. In addition, the MFA, on 

whose behalf I am appearing here today, recently published a set 

of best practices in this area. To the extent that hedge funds on the 

trading side and analysts on the analyst side are members of organizations—and, of course, the CFA Institute does in its area just 

what the MFA does in its, to try to raise the standards of conducts 

of its members. Neither organization has the ability to require people to become members or to follow these best practices. 

Senator HATCH. Can research that is paid for by a hedge fund 

with a large short or long position in a particular stock be later 

published as ‘‘independent’’ research without some kind of disclosure? 

Mr. MCLAUGHLIN. Under the 1933 Act—and this has been true 

since 1933—if research is paid for by a company, it must be disclosed. If research is paid for by a client, in my view it ought to 

be disclosed, but it would depend on the reliance of a particular analyst’s customers and the marketplace’s reliance on that analyst 

whether there would be a fraud violation if it were not disclosed. 

Senator HATCH. What is your estimation of how well the industry 

is complying across the board with reporting on especially naked 

shorts to the Depository Trust and Clearance Corporation? The 

DTCC, I guess it is. 

Mr. MCLAUGHLIN. The hedge fund industry? 

Senator HATCH. Yes, let’s limit it to that. 

Mr. MCLAUGHLIN. Again, I have no statistics on that subject, but 

I would like to point out that the SEC did adopt Regulation SHO 

just 2 years ago. 

Senator HATCH. They have regulations, but they are not enforced. Wouldn’t you agree? 

Mr. MCLAUGHLIN. I think the SEC understood when it adopted 

SHO that it is impossible to prevent every short sale from taking 

place without a borrow. 

42

Senator HATCH. Well, it is my understanding that the SEC responded to the problem of naked short-selling by enacting SHO, 

and that was enacted in, if I recall, January 2005. And that was 

to limit—SHO was enacted to limit market distortion caused by 

naked short-selling. But I think you would have to admit it falls 

pretty short of the goals that they set. 

Mr. MCLAUGHLIN. I don’t know whether I am in a position to 

admit that, but I think the SEC is certainly concerned about trying 

to further reduce the extent of naked short-selling. 

Senator HATCH. I would think so. First, the Regulation SHO 

grandfathers in all failures to deliver that occurred prior to January 3, 2005, exempting a large portion of liabilities that will never 

be delivered. And, second, while Regulation SHO requires that the 

SEC publish a list of companies that have been targets of predatory short-selling, those for which brokerage firms have failed to 

deliver a large number of stocks, this seems only to have served as 

an identification list for further targeting of those firms. And, you 

know, I think that Regulation SHO also has failed to require either 

the disclosure or the aggregate failures to deliver in the marketplace or a number of failures to deliver of a particular company’s 

stock. And, finally, despite the apparent widespread continuation of 

naked short-selling in the marketplace, there are no serious regulatory or criminal consequences for brokers repeatedly failing to deliver. Are you aware of all that? 

Mr. MCLAUGHLIN. Yes, I am, Senator Hatch. I go back on the 

regulation of short-selling for a good many years. I do not mean 

here to defend the practice of naked short-selling— 

Senator HATCH. I have not interpreted you as defending it. I 

think your testimony has been very straightforward and good. 

Are you aware that some of these companies actually go and register over in, say, Germany? 

Mr. MCLAUGHLIN. I have to say, Senator Hatch, that remark confused me when you said that earlier. I really— 

Senator HATCH. That is what my understanding is. I may be 

wrong on that. I would be happy to be corrected. 

Mr. MCLAUGHLIN. I certainly have clients that are going to public abroad these days instead of in the United States. 

Senator HATCH. My understanding is they do that in order to 

avoid having to report within the 3 days required here. Now, I may 

be wrong on that, but I would sure like to—would you mind looking 

at that and helping us understand— 

Mr. MCLAUGHLIN. I would like to look at that. I am very curious 

about it. I have not heard about that happening. 

Senator HATCH. If that is so, then that is a very serious charge 

that I know has been made to me personally and to others here on 

the Committee. 

Mr. Chairman, I have taken too much time, I understand, and 

I certainly appreciate your forbearance and your kindness in allowing me to do so. 

This has been a very important hearing. We acknowledge that 

the Banking Committee has the vast majority of control and jurisdiction here, but we do have the Justice Department jurisdiction, 

and that is pretty significant. And some of the things that I have 

heard here today really have alarmed me, especially from you, Mr. 

43

Aguirre. I have to say that I am very concerned, because if we do 

not get to the bottom of some of these things and make sure that 

things are straight, honest, and decent, we could have some really, 

really serious difficulties in our society. 

So I just want to thank you all for being willing to come in and 

testify and to help us to understand this better, and hopefully we 

can get through it and figure out what needs to be done. We appreciate your suggestions as well. 

Chairman SPECTER. Well, thank you, Senator Hatch, for the 

work you did while you were Chairman of the Committee and for 

your suggestion on holding this hearing today. It is past noon, and 

we have run way over time, but I want to ask just a few more 

questions. 

Mr. Kasowitz, you have outlined in some pretty strong language 

factual matters suggesting criminal conduct. have you relayed 

those to the Department of Justice? 

Mr. KASOWITZ. That was directed to me, Mr. Chairman? 

Chairman SPECTER. Yes. Mr. Kasowitz. 

Mr. KASOWITZ. We have included certain of the matters that I 

have discussed today within a civil lawsuit brought under a State 

RICO statute in New Jersey. That complaint is a matter of public 

record. Our focus has been with respect to that, and we certainly 

are here in cooperation with the Committee and stand prepared to 

cooperate with all regulators. 

Chairman SPECTER. Well, the allegations in your lawsuit are allegations of fraud? 

Mr. KASOWITZ. That is right. 

Chairman SPECTER. Wouldn’t they fit within the statute which I 

cited earlier, knowingly executes a scheme or artifice to defraud a 

person in connection with any security, et cetera? 

Mr. KASOWITZ. Section 1348? 

Chairman SPECTER. Yes. 

Mr. KASOWITZ. I believe they would. 

Chairman SPECTER. Well, why don’t you report it to the U.S. Department of Justice? 

Mr. KASOWITZ. Well, we certainly— 

Chairman SPECTER. Let me make a suggestion to you, instead of 

asking you why you have not, make a suggestion to you that you 

do. They have investigative resources, but not unlimited. You have 

factual materials. Tell them about that. 

I would also like you to take a look at the statute and give the 

Committee your judgment as to whether it ought to be expanded, 

whether the penalties are sufficient, what you think of Attorney 

General Blumental’s testimony about civil penalties as well. 

And, Mr. Blickenstaff, you have testified about an employee of a 

so-called independent analytical firm telling you that the information published was false and erroneous, but she had no power or 

recourse but to let it stand. Correct? 

Mr. BLICKENSTAFF. That is correct. 

Chairman SPECTER. Did you consider reporting that to the Department of Justice? 

Mr. BLICKENSTAFF. Well, given the fact that we could not actually tie the hedge funds to these activities by the research firms, 

44

we came to the conclusion that it was a very small matter that, you 

know, probably was not reportable to a higher level. 

Chairman SPECTER. Well, it was a matter which seriously prejudiced your firm. Didn’t it? 

Mr. BLICKENSTAFF. Yes, it did, sure. 

Chairman SPECTER. It sounds to me like it comes within the context of the statute as scheme or artifice to defraud in connection 

with the sale of a security. 

You are a citizen. You are a businessman. You do not have the 

resources to conduct a criminal investigation. 

Mr. BLICKENSTAFF. That was part of the problem. I think we 

spent several hundred thousand dollars trying to investigate this 

whole matter, and that was the only piece of this that really we 

could point to that we felt was, you know, borderline. But— 

Chairman SPECTER. Well, that is why we have a Department of 

Justice. I used to be a district attorney. People brought me information of this sort. If it sounded to me like a violation of law, we 

had detectives to go out and investigate. 

Mr. BLICKENSTAFF. Well, at the time there was not a lot of focus 

on this whole hedge fund activity and these research firms that we 

are talking about today, and, you know, we were advised by Kroll 

& Associates that there just was not a groundswell in any of the 

major Justice Departments or the SEC that really would, you 

know, look at this matter. So we just sort of— 

Chairman SPECTER. Well, maybe we are creating a groundswell. 

Mr. BLICKENSTAFF. We would be willing to cooperate. 

Chairman SPECTER. How long ago did this conversation occur? 

Mr. BLICKENSTAFF. That conversation was in 2002. I think we do 

still know where that person is located. 

Chairman SPECTER. Well, I think you probably have a 5-year 

statute of limitations here, so consider making an official report on 

it and let the Committee know if you do, and we will pursue it and 

followup. OK? 

Mr. BLICKENSTAFF. We will do that. Chairman Specter. Professor 

Lamont, you talk about 

investment bankers who like to secure favoritism with their customers and may exaggerate their report about their customers’ 

stock. Does that come within the kind of language here, knowingly 

executes a scheme or artifice to defraud with the sale of a security, 

do you think? 

Mr. LAMONT. I could not— 

Chairman SPECTER. I know you are a professor of economics. 

Mr. LAMONT. Yes. 

Chairman SPECTER. How does that sound to you? 

Mr. LAMONT. I could not give you any legal advice. I can tell you 

that in 2003 the SEC and other regulators had a settlement with 

the underwriters and the securities firms, a $1.5 billion settlement, 

so there must have been some legal basis for that settlement. 

Chairman SPECTER. Well, I am always suspect on civil settlements which are designed to go halfway. They are usually accompanied by a statement that there is no admission of liability or responsibility, disclaimers of every sort, but it has the effect of terminating a matter. And that does not really utilize the real power of 

45

criminal prosecution on white-collar crime, which I described earlier. 

Mr. Schilit and Mr. Boersma, you have testified about and we 

have heard other testimony about the lack of professionalism 

among so-called independent analysts and lack of training. Mr. 

Anifantis went into some detail on that. Where you have a real estate broker, there are State laws which require the real estate brokers to take tests and to maintain certain standards, and a real estate broker deals with very small sums—relatively small sums of 

money for limited clients. Is this a matter which ought to be the 

subject of State laws? If you practice law without a license in Pennsylvania, you are subject to a criminal prosecution. What of that, 

Mr. Schilit? How about some sanctions which would be analogous 

to those considerations? 

Mr. SCHILIT. Well, the recommendation I was making is you have 

an industry, the investment and research industry, which has 

grown dramatically, and there are not standards. So if you wanted 

to leave your position in the Senate and form a research company, 

there are no prohibitions for you to do that and label yourself as 

an independent research company. 

Chairman SPECTER. Well, I could not become a real estate 

broker. 

Mr. SCHILIT. Correct. And so, you know— 

Chairman SPECTER. Maybe it is more— 

Mr. SCHILIT. Well, the recommendation— 

Chairman SPECTER. Maybe I can do more harm as a real estate 

broker than as a research analyst. I doubt it. 

Mr. SCHILIT. But I think the spirit of what you are suggesting 

I certainly would agree with, that there has to be standards before 

you enter that field. 

Chairman SPECTER. Mr. Boersma, what do you think about that? 

I am trying to get a few more opinions here and draw this hearing 

to a close? 

Mr. BOERSMA. There is an examination for— 

Chairman SPECTER. We are about to interfere with tomorrow’s 

hearing. 

Mr. SCHILIT. There is an examination for those that work in a 

broker-dealer setting, but there is not any certification required for 

independent analysts, and we certainly think the CFA program 

and designation is a mark of good standing for analysts. But they 

are not required to do that. 

Chairman SPECTER. Well, after listening to the testimony today 

and after reviewing a lot of documents in this field, it is my judgment that we are dealing with a matter of enormous importance, 

$1.2 trillion, maybe more, as Mr. Kasowitz says, maybe double, and 

it is on its way to a lot more than that. And although it is only 

5 percent of the market from the statistics I have seen, it has 30 

percent of the transactions. And you had the case in 1998 where 

the company with assets of $3 to $4 billion leveraged it to $80 to 

$100 billion. And had they collapsed, it would have had enormous 

repercussions. And you have potential for $1 billion a year, which 

is fine if it is done legally, but with only limiting it, as the Chairman of the Fed says, to pressures within the industry, it has enormous potential for abuse. And regulation is fine. That is up to the 

46

SEC and up to the Congress generally and the Banking Committee. 

But the Department of Justice and State prosecutors have a very 

important role to play here. And prosecutions for white-collar crime 

and jail sentences have a tremendous deterrent effect. And this 

Committee intends to push the Department of Justice to do that. 

If you have information, Mr. Kasowitz, Mr. Blickenstaff, others, 

pass it on. 

Senator HATCH. Mr. Chairman, can I just ask one more question? 

Chairman SPECTER. Are you serious? 

[Laughter.] 

Senator HATCH. Yes, I am serious. 

Chairman SPECTER. I know you are serious, but I mean about 

one more question. 

Senator HATCH. It might be more than one. But I will try and 

keep it to one. I just want to ask Mr. Kasowitz, I mentioned to Mr. 

McLaughlin—and this is something I understand is done, but I 

may be wrong on it. I would just like to know. 

These folks on these naked shorts are supposed to file with the 

Depository Trust and Clearing Corporation within 3 days. SHO 

was to try and make sure that they do that. But it is my understanding that some of these companies, to avoid doing that, go and 

register a stock in a foreign country. I will use Germany as an illustration. And then they can avoid it for months on end. Where 

there is not any stock to go get, which is the definition of ‘‘naked 

shorting.’’ 

Are you aware of that? 

Mr. KASOWITZ. The case that we have filed for our client, Biovail, 

does not involve that situation. I have heard reports similar to the 

ones that you have read about, Senator. 

Senator HATCH. Well, I would appreciate—Mr. Aguirre, have you 

heard about this? 

Mr. AGUIRRE. No, I have not. 

Senator HATCH. OK. Well, I would appreciate any information 

anybody on this panel, or otherwise, can give us on that, because 

if that is true, that I think may be very well constitute fraud. It 

may not, but it may very well constitute fraud that we are concerned about here under this particular statutory section, in order 

to evade reporting because they know that they are naked shorting 

and they cannot cover the stock. 

These are matters that I think are very important. Mr. Schilit, 

do you have any awareness of that? 

Mr. SCHILIT. I do not. 

Senator HATCH. Anybody else have any awareness of that? 

[No response.] 

Senator HATCH. OK. Well, then, I just wanted to ask that, and 

I would appreciate, Mr. McLaughlin, Mr. Kasowitz, if you can help 

us to understand that process. And if we are wrong, I would like 

to know. I would just like to know what is right here. I don’t have 

any axes to grind here. I would just like to do what is right, and 

I am real concerned, as you can see the Chairman is, about some 

of the things we have heard here today and that we have been 

studying. We do not want to hurt anybody. We just want to make 

sure that our markets are not ruined because of the fraud. 

47

Chairman SPECTER. Thank you, Senator Hatch and thank you 

all. 

[Whereupon, at 12:15 p.m., the Committee was adjourned.] 

[Questions and answers and submissions for the record follow.] 

[Additional material is being retained in the Committee files.]

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