GAGGING THE MARKET

By Christopher Byron
New York Post
October 4, 2004

JURY selection for an unusual and potenti ally far- reaching white-collar crime case begins this week in a Brooklyn federal court. In it, prosecutors are charging that an Egyptian-born Wall Street investor named Amr Elgindy, along with two of his associates as well as two ex-FBI Special Agents, ran an illegal investment ring based on confidential information stolen for Elgindy by the agents from the Bureau's own computers.

But there is an unseen co-defendant standing trial in this case along with Elgindy and the others, and prosecutors plainly intend to keep mentioning his presence whenever possible.

We speak, of course, of the convenient Wall Street whipping boy known as the Short Seller, who gets dragged into the town square for a ritual thrashing every time bear markets bring inflated stock prices tumbling back to earth.

We'll get into the particulars of all that in a minute, as Elgindy — already demonized by prosecutors in open court for allegedly having had advance knowledge of the terrorist attacks of 9/11 — gets smeared all over again at trial. Last time around, the FBI subsequently disavowed the 9/11 claim. This time he's reemerging as Wall Street's poster boy for the evil Dr. No: the stock market short-seller.

In one sense, prosecutors are doing the Lord's work in pursuing Elgindy, who seems as bad a character as any law-abiding person in the stock market is likely ever to encounter.

Over the course of his brief but notorious career, the colossally self-admiring Elgindy has managed to promote himself to the media as a friend and protector of the Wall Street little guy, and at one point a few years ago succeeded in getting himself profiled on ABC's 20/20 news magazine.

Yet in the shadows of that reputation lurked another man entirely. Now 36, Elgindy emigrated from Egypt to the U.S. with his family at the age of three, and eventually wound up dropping out of high school and becoming a used car salesman. According to published reports, he was arrested in Los Angeles at the age of 18 on a charge, later dropped, of assault with a deadly weapon.

THEREAFTER, he drifted into the crime- soaked world of penny stocks, landing a job as a broker at the notoriously corrupt firm of Blinder Robinson & Co., where he became involved in a penny-stock promotion kickback scheme.

When the feds began investigating, Elgindy saved himself by becoming a government informant. Thereafter he got in trouble all over again and wound up serving four months in prison on a guilty plea to insurance fraud charges. By then, Elgindy had opened his own brokerage firm and begun marketing himself on the internet as a wizard at spotting over-priced stocks that were riding for a fall.

On Wall Street, a person can profit from such knowledge by "selling the stock short." In a so-called "short sale," an investor bets, in effect, that the stock in question is about to take a tumble, so he tells his broker to sell it even though he doesn't actually even own it.

IN so doing, the investor is betting that by the time he actually has to hand over the shares he's already "sold," their price will have fallen and he'll be able to buy them for cheap on the open market and make a quick killing.

Though selling something you don't even own sounds as fishy as claiming to "find" something that isn't yet even lost, short-selling is both entirely legal and universally practiced throughout Wall Street, adding stability and liquidity to the market while preventing over-hyped stocks from spinning totally out of control.

As a group, short-sellers also develop what is far and away the best and most accurate stock research on Wall Street, which is hardly surprising when you consider the size of the risk they run if their research turns out to be faulty. Unlike an investor who is "long" a stock and can lose no more than 100 percent of his investment no matter how far a stock falls, a short-seller who bets wrong can be financially wiped out since there are no limits to how high a stock's price can ultimately soar.

Nonetheless, it is easy to view short-selling as being somehow disreputable, and Elgindy's oily reputation only bolsters that impression, which is further strengthened by the remarkable allegations in the indictment.

According to that document, in the year 2000 Elgindy began secretly paying bribes to an FBI Special Agent named Jeffrey Royer who responded by passing along classified information from the FBI's National Crime Information Center database.

ELGINDY allegedly used this information to pick short-sale tar gets from the thousands of companies then trading in the market. Having placed his own short-sale bets, Elgindy then spread the information to other short-sellers to induce them to place short-sale bets of their own, putting further downward pressure on the shares.

According to the indictment, Royer eventually entangled an FBI Special Agent named Lynn Wingate in the matter, persuading her to obtain still more information from government computers. In fact, when it began to seem that federal investigators had opened a probe of Elgindy's activities, Wingate allegedly began roaming through the computers looking for information on the progress of the investigation.

That alone would seem to be enough of a basis to convict Elgindy and his entire network. But the indictment goes further, alleging that Elgindy used the information to commit crimes like extortion and market manipulation, when the supporting evidence seems flimsy at best. In fact, at least some of the information fished from the FBI computers by Royer and Wingate and passed along to Elgindy wasn't confidential at all but was available to the public at large via the Internet.

Yet instead of stopping with the argument that Elgindy had schemed to acquire the information illegally, the government went further and in a pretrial memorandum in the case argued that Elgindy had no right to publicize the information in order to drive down the price.

But why not? Where does it say in any statute or case book of securities law that the public dissemination of accurate and truthful, but negative, information about a stock is illegal? What if the information had caused the stock price to go up instead of down? Would it still have been illegal to distribute it to the public?

Gratuitous overreaching got the feds in trouble in the Martha Stewart case, when they foolishly attempted to extend the concept of insider trading at the expense of Martha's First Amendment right to speak publicly in her own defense. And something similar may be about to unfold in the Elgindy matter, as prosecutors set out to prove that his crimes went beyond the specific and provable things he did and enveloped the more general issue of what he was: a Wall Street short-seller.

Being such a person isn't automatically a crime yet, but the case of the United States v. Amr I. Elgindy seems bent on making it one.

 

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