The first of the seven “colorful” hedge funds that held Dendreon put options (right when Provenge was on the fast track to FDA approval) was Bernard L. Madoff Investment Securities, managed by the Mafia-connected criminal who orchestrated a $50 billion Ponzi scheme while helping the SEC write a naked short selling loophole that came to be known as the “Madoff Exemption.”

According to SEC filings, Madoff owned put options on 180,000 shares of Dendreon as of March 31, 2007, which was two days after the FDA’s advisory panel voted in Dendreon’s favor. That is fewer than the numbers of put options bought by the other six hedge fund managers, but again, the SEC does not require hedge funds to disclose their short selling, so we do not know whether Madoff had a larger short position in Dendreon, along with these puts.

In any case, Madoff’s bet against Dendreon was significant. Given the positive data Dendreon had released and the subsequent vote of the FDA advisory panel, the trading position was not only counterintuitive, it was also (given some strange events which occured shortly thereafter), prescient to a degree one could only describe as “improbable.”  The trade was all the more significant when you consider that only ten traders on the planet owned more than 150,000 Dendreon put options at the time, and at least seven of those traders, including Madoff, are part of a tight-knit network of people who have worked intimately with Michael Milken or his close associates.

It has been widely reported in the media that Madoff’s criminal activity was confined to his fund management business, and that this business did not execute any real trades — that Madoff merely pocketed the money of his investors, all of whom were “victims.” According to the media reports, Madoff’s market making operation was legit.

These claims may well be false. Again, the fact that Madoff was one of only ten people on the planet who owned large numbers of put options in Dendreon suggests a certain degree of foresight (especially when one understands those subsequent strange occurrences, which we will be getting to in due course).  The trade was so counterintuitive, and timed so precisely to coincide with Dendreon’s triumphant news (and the brutal naked short selling attack that accompanied it), that the claim  that Madoff was merely pocketing investors’ money and falsely reporting random trades seems unlikely, given how remarkable this one trade turned out to be.

Madoff had to have meditated on the Dendreon trade. He had to have had information – some reason to record a bet against Dendreon at a time when there was every reason to be optimistic for Dendreon. And if Madoff thought about making this long shot bet against Dendreon enough to report it in his SEC filings, it is likely that he did, in fact, place the bet. That is, he probably purchased those put options. If so, the theory that his Ponzi fund did not execute any trades is false.

A Deep Capture source who has seen some of Madoff’s records says that Madoff’s fund management business was, in fact, executing a great number of trades. According to the source, the fund would place buy orders, and these orders would be filled by Madoff’s market making operation, which would sell  stock to the fund without first borrowing or purchasing it.

In other words, it is probably correct to say that Madoff  stole a lot of his investors’ money, but he seems to have used at least some of that money to generate phantom stock. Why would he do this? There is one obvious explanation: to drive down prices, adding to his short selling profits, and contributing to the profits of his short selling friends.

It is reasonable to speculate that Madoff’s market making operation derived business from executing manipulative naked short sales for unscrupulous hedge funds. After all, remember, the SEC’s so-called “Madoff Exemption” allowed market makers, such as Madoff, to engage in naked short selling. Madoff had a reason for helping write this SEC loophole that bears his name. Perhaps he knew that the loophole would allow him to help high-paying hedge funds create married puts – the phantom stock “bullets” that market makers and hedge funds have used to obliterate stocks.

Consider also that Madoff’s prosecutors note in their case that Madoff funneled at least $250 million from his investment fund to his market making division. I can think of only three reasons for his doing so:

* the money was used to buy securities — trades that weren’t executed, according to the press; or phantom stock, according to our source;

* the money came from hedge funds who, far from being victims, were paying off the market maker for helping them generate phantom stock; or

* the money was used to buy stock that Madoff used to cover some of his open naked short positions.

The authorities have been rather slow to provide details of Madoff’s fraud, but there is other evidence to consider. For example, Madoff’s secretary recently wrote in Vanity Fair magazine that Madoff’s stock loan operations (the division of his brokerage responsible for locating and borrowing shares to be sold short – or, more likely, responsible for  not really locating or borrowing those shares) — was segregated in an area that Madoff called “the cage” – on the 17th floor of the Lipstick building.

Stock loan operations are integral parts of brokerage businesses. One would normally expect Madoff’s stock loan operations to be housed in his brokerage. But Madoff’s brokerage business was on the 14th floor of the Lipstick building, separate from “the cage” on the 17th floor, which was home to Madoff’s “Ponzi” fund management business.

Multiple reports (including a recent story in Fortune magazine) state that Madoff was maniacally secretive about the activities on the 17th floor, and kept the employees who worked there strictly isolated from visitors and other employees. This is because the 17th floor was the heart of Madoff’s criminal enterprise. The secretary’s information seems to indicate that this criminal enterprise involved both the fund management business and the stock loan cage (i.e. the division that helped manufacture phantom stock by not actually borrowing shares that were sold short).

As for Madoff’s “victims,” it is clear that some of his investors and “feeders” were to a significant extent participants in his fraud. As Madoff’s chief lieutenant, Frank DiPascali, seems prepared to testify,  Madoff conspired with a few “special” clients to alter the returns that they received on their “investments.”  However much the “special” clients wanted to earn in a given month, Madoff would give it to them.

DiPascali identified one particularly “special” client:  Jeffry Picower, who seems to have  netted around $5 billion from the Madoff scam. Picower gained some renown in the 1980s. At the time, nobody had any idea who he was or where he got his money. He was a big mystery.

Then, one day, it was learned that he was the single largest limited partner in the arbitrage fund run by Ivan Boesky, who was later jailed for being a principal co-conspirator in the stock manipulation frauds of a famous criminal.

That famous criminal is now a “prominent philanthropist,” too.  And his name is Michael Milken.

* * * * * * * *

By most accounts, Madoff had just a few key “feeders”– hedge funds and individuals who raised money to “feed” his  $50 billion Ponzi scheme. For some time, the press suggested that these “feeders” were “victims” of Madoff’s fraud, but in an increasing number of cases, authorities are suggesting otherwise.

A lawsuit filed by the State of Massachusetts against “feeder” fund Fairfield Greenwich makes it clear (by supplying copious transcripts of phone conversations, etc.) that Fairfield had more than an inkling of what was going on in Madoff’s shop. And on June 22, 2009, the Securities and Exchange Commission charged several Madoff “feeders” with securities fraud related to their participation in the Madoff Ponzi. One of those charged was Robert Jaffe, who was also a partner with Madoff in a brokerage called Cohmad Securities. Earlier in his career, Jaffe was found to be running money for the Anguilo brothers, the Boston dons of the Genovese Mafia family.

Madoff’s other key “feeders” have not yet been charged with wrong-doing. Perhaps, they will never be charged. But it is interesting to note that a number of them were close associates of a famous criminal and “prominent philanthropist” named Michael Milken.

One of the most important Madoff “feeders” was Rene Thierry Magon de La Villehuchet, a French aristocrat who worked on deals in the 1980s with Drexel Burnham Lambert, which was the headquarters of Milken’s junk bond and stock manipulation empire. During this time, Monsieur Rene Thierry Magon de La Villehuchet came to know not just Milken, but also Leon Black, who was the head of Drexel’s mergers and acquisitions department.

Most every account of those days suggests that Black was Milken’s closest ally at Drexel. Black argued vehemently that Drexel should not cooperate with Milken’s prosecutors and he defended Milken to the end. Today, there are few people closer to Milken than Leon Black.

After Milken’s crimes bankrupted Drexel, Black joined forces with Monsieur Rene Thierry Magon de La Villehuchet to launch an investment fund called Apollo Management. As you will recall, a certain Apollo Medical was one of the ten hedge funds that owned large numbers of put options in Dendreon. I have not yet been able to determine whether Apollo Management is affiliated with Apollo Medical. Neither Black nor Apollo Medical manager Brandon Fradd returned my phone calls seeking comment.

But we do know that Monsieur Rene Thierry Magon de La Villehuchet provided the initial capital to Leon Black’s Apollo Management. And in its early years, the French aristocrat was Apollo’s biggest fundraiser. Indeed, it is correct to say that in addition to being one of Madoff’s most important “feeders,” Monsieur Rene Thierry Magon de La Villehuchet was Milken crony Leon Black’s single most important business partner.

Unfortunately, in December 2008, soon after the Mafia-connected Madoff turned himself in to the authorities, Monsieur Rene Thierry Magon de La Villehuchet was found in his Madison Avenue office – dead.

They said it was a suicide.

* * * * * * * *

Another of Madoff’s most important “feeders” was J. Ezra Merkin, who managed the Ariel Fund, which seems to have been designed specifically to raise money for Madoff’s fraudulent investment business. In this regard, the New York attorney general has described “Merkin’s deceit, recklessness, and breaches of fiduciary duty…”

While Merkin was “deceitfully” feeding the Madoff Ponzi, he was also a co-owner, along with Steve Feinberg, of Cerberus Capital Management, a fund named after the mythological three-headed dog that guards the gates of Hell.

Previously, Feinberg was a top trader for Michael Milken at Drexel Burnham Lambert. After Drexel, Mr. Feinberg moved (on Milken’s recommendation) to a brokerage called Gruntal & Company.

Gruntal owed its existence to the generous junk bond finance that its parent company, the Home Group, received from Michael Milken. Its options department was founded by Carl Icahn, who later became a “prominent” billionaire owing to the junk bond finance that he received from Michael Milken.

When Icahn left Gruntal, he was replaced by a Milken crony named Ron Aizer, who proceeded, on the recommendation of Milken, to hire two traders.

The first trader hired by Aizer was, according to a reliable source, investigated by the SEC for trading on inside information that he received from Milken’s operation at Drexel Burnham Lambert. This trader is now a “prominent” billionaire and the manager of a well-known hedge fund. The second trader hired by Aizer is now also a “prominent” hedge fund manager, though he is not quite a billionaire. Both of these traders play important roles in the story of Dendreon. Carl Icahn, the founder of Gruntal’s options department, has a cameo role, too.

So I will return to all three – the two former Gruntal traders and Icahn – in upcoming chapters.

* * * * * * * *

I know people who used to work at Gruntal. They are honest people who have gone beyond the call of duty to contribute to Deep Capture’s reporting. They also confirm that Gruntal’s New York operation (as opposed to some of its offices in other states) was among the more disreputable brokerages in America. As Fortune magazine once put it, Gruntal was firmly situated on the “shabby side of the Street.”

Gruntal’s senior vice president, Maurice B. Gross, was found to be running money for Thomas Gambino, a capo in the Gambino Mafia family. Another New York Gruntal trader, Samuel Israel III, later launched his own hedge fund, and in 2008, it emerged that this hedge fund was the largest Ponzi scheme in history. Israel was charged on multiple counts of fraud, and briefly faked his own suicide before handing himself over to the authorities.

Soon after, the Mafia-connected Bernard Madoff admitted to running a $50 billion Ponzi scheme, so Israel’s Ponzi scheme was no longer the largest in history. It was the second largest. The third largest Ponzi scheme, remember, was orchestrated by Reed Slatkin, the criminal who was a limited partner in Apollo Management, which was one of those ten hedge funds that owned large numbers of put options in Dendreon.

It has been reported that Israel ran his Ponzi scheme with help from “feeders” who had ties to the Genovese Mafia family. So it is perhaps noteworthy that after he left Gruntal, and before he started his own criminal operation, Israel worked for JGM Management, a hedge fund owned by “prominent” investor Michael Steinhardt. As Steinhardt belatedly admitted a few years ago, his father, Sol “Red” Steinhardt, once worked for the Genovese Mafia family. Steinhardt Sr. spent a number of years in Sing-Sing prison after a New York state prosecutor pegged him as the “biggest Mafia fence in America.”

* * * * * * * *

The key limited partners in Steinhardt Jr.’s first hedge fund, Steinhardt Partners, were the Genovese Mafia family, Ivan Boesky, Marc Rich, and Marty Peretz.

Ivan Boesky, was, of course, the famous co-conspirator in many of Michael Milken’s stock manipulation schemes. As noted, Boesky’s biggest investor and limited partner was Jeffry Picower, the mysterious “special” client of the Mafia-connected Bernard Madoff — who authored one of the SEC’s naked short selling loopholes, orchestrated the largest Ponzi scheme in history, and held 180,000 put options in Dendreon.

Steinhardt’s other key limited partner, Marc Rich, was eventually indicted for tax evasion and trading with Iran and Libya. He fled to Switzerland, where he has ever since lived as a fugitive from U.S. law. Rich later received a pardon from Bill Clinton for some of his crimes, but he remains in Switzerland, from where he now runs a securities and commodities trading empire.

According to the Vanity Fair article written by Bernard Madoff’s secretary, Rich was one of the last people with whom Madoff met before handing himself over to the FBI. Given that Rich avoids travel to the U.S. for fear of certain arrest (for those crimes  not covered by Bill Clinton’s generous pardon), it would appear that Madoff, in the days immediately preceding turning himself over to U.S. law enforcement, made time to visit Rich in Europe. Apparently, before going away for what he likely knew would be the rest of his life, Bernie Madoff had something vitally important to discuss with Rich.

Steinhardt’s third key limited partner, Marty Peretz, was later a co-founder, along with CNBC’s Jim Cramer and a certain hedge fund (which I will soon name), of TheStreet.com, a financial news website. Cramer, a former hedge fund manager, once planned to run his business out of the offices of Milken co-conspirator Ivan Boesky. When Boesky was indicted, Cramer instead ran his hedge fund out of the offices of Michael Steinhardt.

A lot of names have been thrown at the reader. But stick with me, for I think you will come to see that these relationships matter. And I think you will come to agree that most of these people –Bernard Madoff, those two Gruntal traders (whom I will soon name), Jim Cramer, Michael Steinhardt, Carl Icahn, Marty Peretz, that hedge fund manager who co-founded TheStreet.com, Michael Milken, and some folks who are tied to the Mafia – deserve prominent mention in the story of Dendreon.

* * * * * * * *

So, again, as far as we can ascertain from public records, there were ten hedge fund managers on the planet who were betting heavily against Dendreon as of March 31, 2007, shortly after the FDA advisory panel put Provenge on the fast track to approval, and during the time that Dendreon was under an unprecedented, illegal naked short selling attack, and right before Dendreon would be derailed by some strange occurrences. Seven of those ten hedge fund managers are quite “colorful,” all are part of the same network, and one of them was Bernard Madoff.

The second of the seven “colorful” hedge fund managers was…as a prelude to introducing the second “colorful” hedge fund manager, it helps to understand some things about a man named Felix Sater, who is alleged (by a former business partner and other reports) to be affiliated with the world’s most murderous organized crime outfit – the Russian Mafia.

In the early 1990s, Sater (who has since changed the spelling of his name to Satter) was charged with aggravated assault after he stabbed a fellow broker in the face with the broken stem of a wine glass. Soon after, he founded, along with a man named Salvatore Lauria, a brokerage called White Rock Partners.

Lauria had previously worked as a trader for Gruntal & Company, the brokerage that owed its existence to generous junk bond financing from Michael Milken – the same brokerage whose options department was founded by Milken crony Carl Icahn, later replaced by Milken crony Ron Aizer, who quickly hired two Milken cronies, both of whom, we will see, figure prominently in the story of Dendreon.

In the mid-1990s, several of Gruntal’s top managers were accused of embezzling millions of dollars. The managers were indicted and Gruntal agreed to pay $6.5 million in fines – one of the stiffest penalties that had ever been levied by the Securities and Exchange Commission. Around this time, many of Gruntal’s traders moved to White Rock Partners, the firm run by Salvatore Lauria and Felix Sater. According to Lauria, former Gruntal employees accounted for much of White Rock’s staff, and became White Rock’s top-earning traders.

This information can be found in a book called “The Scorpion and the Frog,” which was co-authored by Salvatore Lauria himself. Also in this book, Lauria states that Sater – to whom Lauria gives a pseudonym, “Lex Tersa” – is the son of a high level boss in the Russian Mafia. The name of Sater’s father is Mikhail Sater.

Lauria also writes about the time when he believed that Felix Sater might murder a man named Alain Chalem, who was the boss of Toluca Pacific, a Mafia-controlled brokerage that was then one of the most notorious naked short selling outfits on the Street. Toluca and White Rock and previously worked together, but Sater was angry that Chalem had begun to sell short a stock that Sater was trying to pump.

Fortunately, says Lauria, Sater didn’t end up killing Chalem.

But not long after, several men arrived at Chalem’s New Jersey mansion. The men told Chalem to kneel down on the floor. Then the men fired several rounds of bullets – one bullet into Chalem’s chest, one bullet into Chalem’s forehead, one into Chalem’s face, and a number of bullets into each of Chalem’s ears. According to a man who was with Chalem just hours before his death, the murder was the work of the Russian Mafia.

And it involved a dispute over naked short selling.

* * * * * * * *

In the late 1990s, the FBI launched Operation Uptick, which resulted in the arrest of more than 120 Wall Street stock manipulators linked to organized crime – the biggest Mafia bust in FBI history. That effort led to other operations and many more cases that collectively came to be known at the FBI as the “Mob on Wall Street” campaign. In one such case, prosecutors charged that Felix Sater’s White Rock Partners was tied to Russian mobsters and the Italian Mafia and had engaged in multiple stock manipulation schemes.

According to the prosecution’s case (in which Sater was named as an “unindicted co-conspirator”), the Mafia thugs who worked with White Rock included Frank Coppa, who was a capo in the Bonanno Mafia family; Edward Garafola, a soldier in the Gambino Mafia family; and Ernest Montevecchi, a soldier for the Genovese Mafia family. The prosecutors described White Rock as employing threats of physical violence and other forms of thuggery.

Nowadays, Sater is the behind-the-scenes owner of the Bayrock Group, a real estate development company. Among his 11 partners in this venture are a number of  investment fund managers who are tied to Michael Milken. Most notable of Sater’s business partners is Apollo Real Estate Advisors, which is run by Leon Black.

As you will recall, Black was Milken’s closest ally at Drexel Burnham Lambert, and started Apollo Management with considerable help from Monsieur Rene Thierry Magon de La Villehuchet, who was one of the most important “feeders” to the Ponzi scheme run by the Mafia-connected Bernard Madoff (who authored the SEC’s naked short selling loophole and owned 180,000 put options in Dendreon).

In 2005, Deep Capture reporter Patrick Byrne began a crusade against the crime of naked short selling. A few months later, while working as an editor for the Columbia Journalism Review, I began work on a story about the naked short selling scandal, and started asking a lot of questions about the ties that bind various hedge funds to Michael Milken and his famous co-conspirator, Ivan Boesky.

In the fall of 2006, I received several threats and was once ambushed by three men, punched out, deposited on my doorstep, and told to stay away from Patrick Byrne. Soon after, Deep Capture reporter Patrick Byrne met with an off-shore businessman who had once worked in the world of Mafia-controlled brokerages, but had since reformed himself and begun to help with our investigation.

This businessman told Patrick that he had received a message. And the message was that the Russian Mafia was going to murder Patrick, and possibly those close to him, if Patrick did not end his crusade against naked short selling.

According to the off-shore businessman, this threat was conveyed by Felix Sater – alleged son of a top Russian Mob boss; former co-owner of the Mafia-infested White Rock Partners; and business partner of Michael Milken’s closest crony, Leon Black.

* * * * * * * *

In their case against Felix Sater’s White Rock Partners, prosecutors noted that the firm not only employed threats and had ties to the Mafia, but also manipulated stocks in close cooperation with other Mafia-affiliated brokerages. According to the prosecutors, White Rock was tied directly to two specific Mafia-affiliated brokerages – A.R. Baron and D.H. Blair.

Again, I apologize for throwing so many names at the reader, but it is worth remembering this name: D.H. Blair.

D.H. Blair was perhaps the dirtiest operator on Wall Street. In various indictments and investigations, the SEC and the U.S. Attorney’s Office in Manhattan determined that D.H. Blair was at the center of a network of Mafia-affiliated brokerages that included not only Felix Sater’s White Rock Partners, but also Toluca Pacific (the brokerage run by the naked short seller who had bullets shot into both of his ears) and notorious Mafia outfits such as A.S. Goldmen, J.W. Barclay, F.N. Wolf, Stratton Oakmont, Parliament Hill Capital, J.T. Moran, and R.H. Damon.

The founder of D.H. Blair was a man named J. Morton Davis. In his heyday, Davis was known as a “prominent” investor and the “king of penny stocks.” He has yet to be convicted of a crime. But given the subsequent revelations about his firm, it is not surprising that some people now call him the “king of stock fraud.” D.H. Blair was eventually indicted on 173 counts of securities fraud.

Until 1995, the president of D.H. Blair was a man named Richard A. Maio. Prior to joining the Mafia-affiliated D.H. Blair, Maio was a top employee of Michael Milken, the famous criminal and future “philanthropist.” Maio’s deputy at D.H. Blair, Eric Siber, was also a former employee of Milken. At various times both Maio and Siber had been national sales managers for Milken’s operation at Drexel Burnham Lambert.

In 1998, as the FBI was closing in, D.H. Blair went out of business. In 2000, not only was the firm itself indicted on 173 counts, but some of its top executives pled guilty to additional counts of securities fraud. These included two D.H. Blair vice chairmen — Alan Stahler and Kalman Renov — both of whom were sons-in-law of Davis, the founder.

But by then, the Milken boys had scooted. Another top executive of D.H. Blair also avoided prosecution. His name was Lindsay Rosenwald.

Rosenwald was the third son-in-law of D.H. Blair’s founder, J. Morton Davis – the so-called “king of stock fraud.”

Rosenwald was also the third vice chairman and director of finance of D.H. Blair – that is, the third vice chairman of the dirtiest Mafia-affiliated brokerage on Wall Street.

And in March 2007, Rosenwald was the second of those seven “colorful” fund managers who were positioned to profit from the demise of Dendreon, a little company with a promising treatment for prostate cancer.

* * * * * * * *

Lindsay Rosenwald may be the son-in-law of “the king of stock fraud.” And he was once the vice chairman of D.H. Blair, a firm affiliated with the Mafia – a firm that was run by two former top lieutenants of Michael Milken before it found itself at the center of one of the biggest Mafia investigations in the history of the FBI and on the business end of a 173-count federal indictment.

But never mind — Mr. Rosenwald is now a “prominent investor.” In fact, he is not just a “prominent investor”— he is one of America’s biggest biotech investors, if not the biggest biotech investor.

D.H. Blair was known for investing in biotech companies, pumping their stocks, and then short selling them out of existence. Many of those companies were frauds that were nowhere close to producing any medicines.

Rosenwald is more sophisticated. He invests in companies that have real scientists experimenting with real drugs. But in an overwhelming number of cases, these companies prove to have nothing to bring to market. The companies churn out lots of press releases heralding medical breakthroughs, and their stock prices soar. But ultimately they announce that, in fact, their experiments have failed. By the time the bad news hits, Rosenwald will typically have sold all of his stock.

While Rosenwald promotes medical companies that are nowhere near delivering real medicines, hedge funds affiliated with Rosenwald sometimes bet heavily against competing companies that do have medicines. The hope seems to be that the demise of competing companies with promising treatments will increase the market value of Rosenwald’s not-so-promising companies.

That may partly explain Dendreon’s tribulations.

With the exception of big pharma, there are only a few biotech firms that have received significant publicity for developing treatments for prostate cancer. One of these companies, Cougar Biotechnology, was, until last month, controlled by this Lindsay Rosenwald, who aside from running D.H. Blair in cahoots with people tied to the Mafia and Milken’s former national sales managers, is also a close friend of Milken himself. While Rosenwald was in control, Cougar Biotechnology’s scientific advisory board also included four individuals affiliated with Milken’s Prostate Cancer Foundation – Dr. Eric Small, Dr. Michael Carducci, Dr. Philip Kantoff, and Dr. Howard Scher.

Cougar’s prostate cancer treatment was and is in the early stages of development. It is nowhere close to receiving FDA approval. I believe that the scientists and doctors whom Cougar hired to conduct trials into its treatment are earnest about their work. But judging from Rosenwald’s record, it is possible that Cougar’s business model was not to bring a treatment to market – but rather to exaggerate the importance of data obtained in trials, pump the stock, then sell before the trials proved that the drug did not work.

This plan would benefit from forming a scientific advisory board comprised, with help from Milken’s “philanthropy,” of illustrious medical scientists who might not understand how the stock market game is played.

In any case, Cougar has been promoted (by Milken’s Prostate Cancer Foundation and Cougar) as having a treatment that is a preferred alternative to Dendreon’s. Any Dendreon achievement would negatively affect Cougar’s stock price. Which might explain why a Rosenwald-affiliated hedge fund mauled Dendreon in the days before and after the FDA’s advisory panel voted that Dendreon’s promising treatment should be administered to patients.

As of the end of March, 2007, a hedge fund called Perceptive Advisors held more than 600,000 put options in Dendreon. Perceptive Advisors is run by a man named Joseph Edelman. As of 2008, Edelman was still identifying himself (when donating to political campaigns, for example) as an employee of Paramount Capital, which was founded by Rosenwald. To summarize: Lindsay Rosenwald founded Paramount Capital, which had an employee named Joseph Edelman, who was simultaneously managing Perceptive Advisors, so we can reasonably surmise that Perceptive Advisors is an adjunct of  the Rosenwald biotech trading empire.

SEC filings show that at the end of March, 2007, Perceptive Advisors held not just puts, but he also held call options on a whopping 6.2 million shares of  Dendreon. Call options are usually a bet that a stock will increase in value. But don’t let this fool you.

According to brokers familiar with his strategy, Edelman worked like this: He bought massive numbers of call options at rock-bottom strike prices. When Dendreon’s stock began to soar in value, Edelman exercised the calls, at which point his broker had to sell him an equally massive number of shares at the rock bottom price. These Edelman would quickly dump, flooding the market with massive selling volume and putting downward pressure on the stock. Meanwhile, according to the brokers, Edelman sold short massive amounts of Dendreon’s stock, profiting from all the selling volume.

I called Edelman and asked him if he was short selling Dendreon while flooding the market with stock from his call options. He did not deny that he was short selling the company, but he hung up on me before I could ask any more questions.

In any case, the strategy I describe above is technically legal. It’s legal so long as Edelman was not colluding with other hedge fund managers, all of whom happened to be generating massive selling volume at precisely the same time. And it’s legal as long as he was not engaged in naked short selling, or, equivalently, conspiring with a market maker to create married puts to synthesize those phantom stock “bullets” that unscrupulous hedge funds spray into the market to drive down stock prices.

As to whether Edelman was in fact either directly naked short selling, or indirectly generating phantom stock by colluding with his option market maker, the brokers are staying mum. The SEC is unlikely to say much either.

As far as the SEC is concerned, remember, illegal naked short selling is a big secret – a “proprietary trading strategy.”

* * * * * * * *

This is part 3 of a 15-part series. The remaining installments will appear on Deep Capture over the next several weeks, after which point the story will be published in its entirety at DeepCapture.com. It is a story about the travails of just one small company, but it describes market machinations that have affected hundreds of other companies, and it contains a larger message for anyone concerned about the “deep capture” of our nation’s media and regulatory bodies.

Mark Mitchell is a reporter for DeepCapture.com. He previously worked as an editorial page writer for The Wall Street Journal in Europe, a business correspondent for Time magazine in Asia, and as an assistant managing editor responsible for the Columbia Journalism Review’s online critique of business journalism. He holds an MBA from the Kellogg Graduate School of Management at Northwestern University. Email: mitch0033@gmail.com