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WALL STREET TREACHERY
Part One: Leading The Lambs To The Slaughter
By David Podvin
Using a televised propaganda campaign, America’s financial establishment
has deceived average investors into buying vulnerable high priced stocks of
companies with little or no earnings. This manipulation has occurred on behalf
of Wall Street insiders, who have benefited as the public has suffered from
declining stock prices over the last two years.
On January 7, 2000, the stock market analyst who is most often quoted by the
corporate media appeared on the PBS program Wall Street Week. Abby Joseph
Cohen of Goldman Sachs proclaimed that the market was headed much higher, and
that investors should be enthusiastic buyers.
One week later, the Dow Jones Industrial Average made its all time high. It
has since declined over fifteen percent. Cohen has urged the public to buy
stocks all the way down.
On March 22, 2000, she sent out an advisory stating that the NASDAQ Composite
was “undervalued” and recommended that investors aggressively purchase high
As of February 22, 2002, the NASDAQ Composite is sixty six percent lower. The
XLK index of high tech stocks is down sixty eight percent. Cohen is still
The individual stocks that Cohen recommended have done even worse than the
market as a whole. Her favorite energy stock in 2001 was Enron. She encouraged
the public to add to their losing positions as the stock and the market went
Her record is actually better than that of other high profile Wall Street
brokerage analysts like Gruntal’s Joe Battipaglia, and Jeffrey Applegate of
Investors who have followed Wall Street’s advice have been crushed.
Rather than being fired for their apparent incompetence, these analysts have
been rewarded with raises and bonuses. Instead of being shunned by the financial
media as discredited, they continue to be quoted as authorities on the future
direction of stocks.
It is not the job of Wall Street hucksters to be right about the market.
Their job is to help the companies that employ them prosper at the expense of
the investing public.
Brokerage firms earned record commissions in 2000 as their customers followed
the analysts’ advice to pile into stocks at the top of a bull market. The
brokers ingratiated themselves to the corporations with which they do lucrative
investment banking business by advising public investors to prop up the stocks
of faltering companies. The major trading firms further betrayed their average
customers’ trust by positioning themselves to financially exploit the
suffering of the small investors who followed their advice.
In 2000, the price earnings ratio of the market as a whole was higher than it
was at the top in 1929, immediately prior to the crash. Numerous initial public
offerings were rising several hundred percent in one day. Companies that had
never earned a penny, and never would, were valued at hundreds of dollars per
share. The “greater fool” theory was at work: fortunes were being made
buying the stocks of marginal and worthless companies on the theory that a
greater fool would be willing to buy them even higher.
All of the earmarks of a mania were present. The pros on Wall Street knew
that this rampant speculation had occurred at the major market tops in 1929 and
1966. They should have known to expect a major decline.
While the Wall Street propaganda machine was encouraging the public to buy
the most overvalued stock market in American history, the financial
establishment was selling:
The chart shows the level of short selling by members of the New York Stock
Exchange. The spikes above the top horizontal line indicate high levels of short
sales by insiders, and coincide with tops in the market. In January of 2000,
members of the New York Stock Exchange, which includes all of the brokerage
firms, were aggressively selling while their analysts were on TV imploring the
public to buy.
Short selling is a speculation that prices will fall. It is a procedure in
which someone sells a stock that he or she does not own, hoping to buy it back
later at a lower price. In order to sell short, the speculator must borrow the
shares from the account of the stock’s owner. It is a standard part of the
brokerage customer agreement that the firm is allowed to borrow the client’s
stock in order to sell it short. By enticing the public into purchasing the
worst, most overvalued equities, the brokerage firms can then borrow the stock
and sell it short in order to profit when it falls.
Encouraging the public to buy the worst stocks is exactly what Wall Street
did. Cohen released a list of
“best equities” to purchase. Included in that list were Veritas Software and
I2 Technologies, two companies without earnings. Since she touted them, Veritas
has declined from 106 to 34.32, and I2 has fallen from 56.59 to 5.44. The advice
has been a disaster, except for those who went short to take advantage of the naïve
public that bought based on her recommendations. Since Cohen advocated that
investors buy the stocks of these two unprofitable companies, those who used the
opportunity to sell Veritas short have made 68% on their money, and short
sellers of I2 have made 90%.
On March 28, 2000, six days after recommending that the public buy high tech,
Cohen said she continued to advise investors to purchase the group, but added, "For
the first time in a decade, our model portfolio is no longer recommending an
overweighted position in technology." The financial media reported
Cohen’s pronouncement as a bombshell. The NASDAQ Composite plunged more than
thirty four percent in the next fifteen trading days.
On April 17, 2000, the bloodletting stopped when Cohen stated that the
decline had nothing to do with changing
fundamentals, such as earnings, inflation and Federal Reserve policy. The
NYSE Member Trading Indicator chart shows that her statement coincided with
insiders taking profits on their short positions. CNN reported that Cohen blamed
the rout on "market factors”, a reference to psychology and momentum. She
urged investors back into the market to hold for the long term, and over the
next month she made frequent televised appearances to provide the public with
reassurances that everything was fine. The market rallied into September, which
provided another wonderful short selling opportunity for Wall Street
professionals. The NYSE Member Trading Indicator chart documents that they took
full advantage of the chance.
From the time Cohen reiterated her
long term bullishness on April 17, 2000, to the time the market put in a low on
September 21, 2001, the NASDAQ Composite fell by sixty percent. Cohen never
stopped recommending that investors continue to buy, and the financial media
trumpeted each of her statements as an important bullish signal. When the public
sold in panic after the terrorist attack on September 11, Wall Street insiders
covered their short sales for huge profits right at the low:
Since the bull market ended in 2000, the New York Stock Exchange insiders
have sold the highs and bought the lows, which has been made possible by the
cynical manipulation of the public lambs who have followed their advice and have
Goldman Sachs Chairman Henry Paulson
lavishes praise on Cohen, saying that she is doing a wonderful job for the
company. Since 2000, many Goldman customers have seen the value of their
portfolios plummet as Enron, the high techs, and other Cohen recommendations
have been annihilated. Meanwhile, the firm’s own trading revenues are higher
than they were before the bear market started.
This is quite an accomplishment.
Brokerage firms carry large inventories of equities, and the index against which
they judge themselves, the S&P 500, is down about thirty percent during that
time. Additionally, the stocks that have been recommended by Goldman’s own
chief market analyst are down more than fifty percent.
New York Stock Exchange members who
have been shorting stocks and making a lot of money doing it are obviously not
taking Abby Joseph Cohen’s advice for their own accounts. Her forecasts are
not directed at them. The intended audience for Cohen’s predictions are Wall
Street’s targeted victims, the investing public.
Joe Battipaglia is a frequent guest on all of the financial shows. For the
last two years, his advice to investors has been: “BUY! If it goes down, BUY
MORE!” The devastation that he has wrought to portfolios is breathtaking:
On October 8, 2000: Buy Yahoo! At 81.25.
On February 22, 2002, Yahoo! Closed at 14.46. minus 82.2%
On July 17, 2000: Buy Worldcom at 46.5.
On February 22, 2002, Worldcom closed at 7.09. minus 84.7%
On August 28, 2000: Buy Sun Microsystems at 63.91.
On February 22, 2002, Sun Micro closed at 8.07. minus 87.3%
On July 18, 2000: Buy PMC Sierra at 225.13.
As of February 22, 2002, PMCS closed at 16. minus 92.9%
On August 16, 2000: Buy Juniper Systems at 171.
On February 22, 2002, Juniper closed at 9.46. minus 94.5%
On July 17, 2000: Buy JDS Uniphase at 115.93.
On February 22, 2002, JDSU closed at 4.98. minus 95.7%
Battipaglia is the Chairman of Investment Policy at Gruntal, which presumably
means that he is the most skillful stock picker at the entire firm. His record
is actually better than some others, including highly paid Internet maven Mary
Meeker of Morgan Stanley Dean Witter, whose specialty is riding stocks down to
While it might seem that Battipaglia’s performance is just mindless idiocy,
there is a logical pattern to his wreckage. All of the stocks had experienced
spectacular rises. Five of the six equities listed above represent companies
without earnings. The combination of high prices and no profits made them
extremely vulnerable to a major decline. The stocks are high tech. This was the
sexy group of the moment and made it easy to sell the shares to the public.
Importantly, these recommended stocks all traded on huge volume, which is a
crucial component in short selling. Big volume makes it easy for short sellers
to buy back their positions when they want to close them out.
Battipaglia never called himself wrong or advised investors to limit their
losses. To the contrary, he implored the public to buy more as they lost more.
This violates the two primary rules of investing. Rule number one is to never
take a big loss. Rule number two is never to forget rule number one.
Battipaglia is an experienced Wall Street professional. He knew that his
irresponsible advice put investors who followed it in great financial danger. By
enticing naïve people to recklessly buy the stock market equivalent of snake
oil, he made it possible for privately held Gruntal and other insiders to sell
short more overvalued stock. There is no way to know how many people have been
financially destroyed by acting on Battipaglia’s advice, but investors who
followed his recommendations are much poorer than they used to be.
If Joseph Battipaglia were paid based on his investment acumen, he would now
be unemployed. Yet after demonstrating what on the surface is abject
incompetence, he has received an increase in pay. Gruntal Chairman Robert
Rittereiser calls him “one of our firm’s most valuable assets”.
Battipaglia’s value to Gruntal has nothing to do with providing accurate
investment advice. His job has been to sucker the public into buying bad
This swindle includes customers of the firm that employs him. While many
investors trust brokers with their life savings, Wall Street brokerages view
their relationships with most customers as being adversarial. There has been a
vast transfer of wealth as the market has declined, with the general investing
public losing while short sellers have prospered. The vast majority of short
selling is done by Wall Street professionals. They have profited by borrowing
and then selling the grossly inflated stocks of brokerage firm clients who have
taken horrible advice.
Joseph Battipaglia is still an honored guest on financial programs.
Tom Brown is not. Brown was a widely respected banking analyst for Donaldson
Lufkin and Jenrette. When he refused to issue buy recommendations on the stocks
of banks that did business with DLJ because he could not in good conscience
deceive the public into purchasing overvalued securities, the brokerage fired
him for not being a team player.
The same fate befell Marvin Roffman of Janney Montgomery Scott. When he
alerted investors to the financial instability of Donald Trump’s Taj Mahal
Casino, he provided a great service by warning the public to steer clear of an
enterprise that ultimately filed for bankruptcy. Like Brown, Roffman’s concern
for the average investor resulted in his dismissal.
It is crucial to the financial health of investors that they understand the
harsh Darwinian reality of Wall Street. The species of analysts who were
unwilling to help their brokerage firms cheat the public has become extinct, as
people who have shown integrity have either been banished or intimidated into
obedience. Investors who take advice from the experts on television do so at
their own peril.
Next - Part Two: Alan Greenspan’s Irrational Exuberance
Sachs Recommends Technology Stocks At The Top
Joseph Cohen Trading Record
Reduces Market Weighting
Urges The Public To Continue To Buy
Battipaglia Trading Record
Bullish At The Top, National Investor
Bullish At The Top, thestreet.com
Street’s Self-Serving Advice
How Brokerage Firms View Their Clients
NYSE: A Street Scandal That May Not Die
Sweet House Brands
Think Enron’s Big? It Still May Not Top Oakford
Harper : License to Steal
and Dump: The Inside Story of D.H. Blair
to pay $100 million over IPOs
Information Highway (Bottom of
Member Trading Indicator
Jones Industrial Average
Wall Street Treachery Series
Podvin, the Series