AIG And Stock Manipulation

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[AIG And Stock Manipulation]

You have a pension. Your pension fund is invested in a mixture of stocks and bonds. 

A significant part of the pension is invested in indexed funds, such as the Dow Jones Industrials and the S&P 500.  Let us assume that one of those stocks has been manipulated; that is, the price of a stock has been kept at an artificially high price. 

You would be angry- you have been defrauded. Even more so if you had invested in a mutual fund, the price of which is based on the closing price of a stock.  If the closing price had been manipulated, you have been defrauded.  You might say:  This is only a few dimes- but multiply those dimes every day for fifteen years.  And the dimes become a billion dollars. Could this happen? Yes- and we shall examine one such incident—the manipulation of the price of American International Group (AIG). 

By keeping the price of AIG at an artificially high level, every pension fund that invested in equities was defrauded- in an amount exceeding $1 billion. Also pension funds, which invested in the bonds of AIG, were defrauded. In the end the American public paid for this fraud while Maurice “Hank” Greenberg, Chairman of AIG, earned billions during the period.

AIG was listed on the New York Stock Exchange in 1984.  Later, Greenberg became a member of the Board of the New York Stock Exchange upon the recommendation of Richard Grasso, Chairman of the New York Stock Exchange. As a Member of the Board of the New York Stock Exchange, Greenberg helped to determine the salary of Richard Grasso-recall the $160 million payday?

Greenberg was upset at the price of AIG.  Greenberg would telephone Grasso and vociferously complain that the specialist in AIG, Spear Leeds and Kellogg which is a subsidiary of Goldman Sachs, did not support the price of AIG.  Greenberg threatened to have AIG listed on another exchange if Goldman Sachs did not support the price of AIG. Grasso was upset; if AIG were to list on another exchange, the NYSE would lose millions of dollars per year in transaction fees.

As reported in the media on October 3, 2003 by Emily Church: On October 23, 2002 Greenberg wrote a letter to Grasso. In this letter Greenberg stated that the specialist in AIG needed to commit more of its money to purchase AIG shares. Greenberg thus left written proof of a conspiracy to manipulate the price of AIG.

Richard Grasso was upset and decided that Goldman Sachs must support the price of AIG- after all Greenberg was on the Board of the NYSE and the Board of the NYSE determined Grasso’s $160 million compensation package. Grasso met with the specialist and the senior management of the NYSE specialist unit. Grasso would also meet with senior management of Goldman Sachs, including Henry Paulson, then Chairman of Goldman Sachs and a member of the Board of the New York Stock Exchange. 

Grasso would demand that Goldman Sachs support the price of AIG. It must here be noted that the New York Stock Exchange had regulatory oversight of Goldman’s activities on the floor of the New York Stock Exchange. Henry Paulson, then Chairman of Goldman Sachs and currently Secretary of the Treasury, bowed to the pressure of Grasso and Greenberg. Goldman established a fund, separate from that of its specialist unit, to support the price of AIG. According to newspaper reports published in 2003, Goldman Sachs had lost $14 million over the preceding few years by supporting the price of AIG.

What was wrong?  Nothing.  Except that it was illegal. On December 16, 2004 the American Stock Exchange disciplined Alfred Merendino, Ronald Menello and GHM, an American Stock Exchange specialist firm, for manipulating the prices of three stocks: Thermo Ecotek, Thermo BioAnalysis, and Thermo Fibertek, in which GHM served as the specialist.

This American Stock Exchange Disciplinary Decision stated that GHM and Merendino violated Section 10(b) of the Securities Exchange Act (SEA) in that they purchased and sold shares of Thermo Ecotek (TCK) for GHM’s account during the period between June 2, 1998 and June 25, 1998 and that these transactions were not reasonably calculated to contribute to the maintenance of price continuity and manipulated the price of the security.

This Disciplinary Decision also stated that GHM and Menello (the M in GHM) violated Section 10(b) of the SEA in that they purchased and sold shares of Thermo BioAnalysis (TBA) for GHM’s account during the period June 10, 1998 and June 17, 1998 in transactions, whose purpose was to manipulate the price of TBA.

Menello and GHM were also found guilty of violating Section 10(b) of the SEA by manipulating the price of Thermo Fibertek (TFT) during the periods July 22, 1998 and July 31, 1998 and January 21, 1999 and February 2, 1999.

This is sufficient proof to establish beyond a reasonable doubt that Goldman Sachs violated Section 10(b) of the Securities Exchange Act when Goldman supported the price of AIG. 

But there is one major difference:  These violations by GHM, Menello and Merendino occurred within a specific time period lasting at most a few weeks.  Al Merendino was fined $75,000 and Ron Menello was fined $200,000.  GHM was fined $475,000.  Merendino is currently a specialist at the American Stock Exchange. 

The Black Star News was unable to contact Ronald Menello. GHM is no longer in business. When The Black Star contacted Al Merendino at the American Stock Exchange, Merendino said:  “No quote.  No nothing.  No nothing at all.” The illegal trading in AIG by Goldman Sachs’ subsidiary, Spear Leeds and Kellogg Specialists, occurred over a period of 15 years-not over a few weeks.   

But there is another more damning precedent. Baron Capital is an investment firm. Baron Capital and its affiliates owned 10% of the stock of Southern Union Company, whose stock symbol is SUG.  Baron Capital cleared its trades through Spear Leeds and Kellogg. Baron Capital comprised nearly half of Spear Leeds and Kellogg’s Direct Access business to the NYSE during this period. Baron Capital and Spear Leeds and Kellogg conspired to manipulate the price of SUG.

On June 9, 2003 the New York Stock Exchange disciplined Spear Leeds and Kellogg (Disciplinary Decision 03-108) because employees of Spear Leeds and Kellogg aided and abetted the violation of SEA Sec. 14c (1)(a) by permitting a direct access customer to manipulate the price of a listed security (SUG).  The NYSE fined Spear Leeds and Kellogg $450,000.

On April 29, 2003 the Securities and Exchange Commission (File No. 3-11096) disciplined Baron Capital for violating Sections 15(C)(1)(A) and of the Securities and Exchange Act for the manipulation of the stock of SUG.  Baron Capital was fined $2,000,000. When The Black Star contacted Tucker Hewes, the public relations firm that represents Baron Capital, concerning the manipulation of the price of SUG the response was:  “We decline to comment.”

We now have proof that over a 15 year period Spear Leeds and Kellogg and Goldman Sachs violated the Securities Exchange Act by manipulating the price of AIG. 

Furthermore, it appears that there was good reason for the price of AIG to trade at a lower price. In 2005 AIG wrote off $3.9 billion of profit from 2000 through 2004 and wrote down $2.26 billion of shareholder equity in AIG’s restatement.

But here is something that was never mentioned in connection with the illegal support of AIG by Goldman Sachs. On October 25, 2001, AIG joined Goldman Sachs and the Chubb Corporation in a new insurance venture, Allied World Insurance Holdings, which based in Bermuda.  Was there a conflict of interest in Goldman Sachs performing its function as a specialist in AIG and joining in a business venture with AIG, while simultaneously acting as specialist in AIG?  

When asked this question and other questions concerning the illegal price support of AIG, a spokesperson for Goldman Sachs replied: “I am sorry but Goldman is declining this request for an interview.” Section 32 of the Securities Exchange Act of 1934, provides that any person who willfully violates any provision of the Securities and Exchange Act of 1934 is punishable by a fine of not more than $10,000 and imprisonment of not more than two years for each violation of the Securities Exchange Act of 1934.

Why have there been no indictments of Goldman Sachs personnel? 

Manfredonia writes about Wall Street for The Black Star News


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