Market Manipulation: Wall Street Braces to Be Wiki-Leaked


The controversial group WikiLeaks has been leading the news of late, infuriating many around the world with its release of government documents and, at least by extension, disabling corporate Websites, among other things.

Last week, it rattled bankers and investors when it turned its focus toward Wall Street, warning it may be next on the hook and unleashing a new set of worries on an already-burdened sector.

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But observers say it’s not necessarily the information the group has about US banks but the internal threats, potential for mass market manipulation and anticipation and speculation surrounding the leaks that have many on the Street scrambling to find answers.

“WikiLeaks, like them or not, clearly have access to information that is going to be potentially embarrassing,” said Bill Bartmann, chief executive of Bartmann Enterprises and author of Bailout Riches. “Whether it would rise to criminal, no one knows.”

The group has already released hundreds of thousands of secret documents on US wars and foreign policy, including some 500,000 classified US military files regarding wars in Iraq and Afghanistan and about 250,000 cables from US embassies around the world, the largest of its kind in history.

The latest leak spawned outrage from US officials and led US companies such as MasterCard (NYSE:MA), eBay's (NASDAQ:EBAY) PayPal, Visa (NYSE:V) and (NASDAQ:AMZN) to cut ties with controversial site, a move that has since been retaliated by anonymous WikiLeaks supporters in a new hacking group called Operation:Payback.

While the three-year-old organization has declared transparency as its primary goal, bringing “unvarnished truth out to the public” via a secure and cryptographic system that allows sources to anonymously leak information to its journalists, its leaks have proved embarrassing for the parties involved, and its looming threat over the Street offers little reprieve to post-recessional corporate America.

Worries on Wall Street

WikiLeaks founder Julian Assange hinted at a massive Wall Street leak in a recent interview with Forbes, though he offered no details except that it could come in the form of tens of thousands of documents.

Bartmann said Wall Street risks a “severe impact” from the WikiLeaks exposure, mostly through fear and paranoia over what those documents entail, and what they could mean for individual companies, industries or the overall economy.

Damage has “in fact been sustained,” he said. Americans are sitting back at this point in the economic downturn hoping nothing else detrimental shakes the markets, but until the information is released, he said, it remains a potentially dangerous unknown.

Phillip Swagel, former Treasury Department assistant secretary, recently told FOX Business that the information could reflect foundations of the credit crisis, though much of that data has already been dispersed and subsequently absorbed by the markets, he noted.

“Maybe there’s a bomb in there but it’s just hard to imagine any problem we didn’t already know about,” he said.

David Weidner, Wall Street columnist for MarketWatch, recently echoed similar sentiment in an interview with FOX Business, noting the leaks are not going to be a “game changer,” but will most likely cause some embarrassment.

They could “color in our suspicions, indicate our worse fears about what really happened” during the credit crisis, he said.

Dick Bove, an influential banking analyst at Rochdale Securities, said whatever's contained in the release it will have to be relevant to the time to cause any substantial damage to the markets. If the leaks deal with certain loan portfolios that have already been written off or legal issues that have been resolved, for instance, the market could escape virtually unscathed. But if the issues hit current court cases or new legal violations, a bank’s stock could feel the repercussions, he said.

Speculation alone about WikiLeaks caused Bank of America’s (NYSE:BAC) stock to tumble more than 3% on Nov 30.

“Bank of America’s stock is taking the brunt of whatever these fears are, and by 2011, I doubt it’s going to have a significant impact, if it has any,” Bove said.

The recent speculation surrounding BofA as a possible WikiLeaks target follows a published interview in October 2009, where Assange told Computerworld that the company was sitting on five gigabytes of data from a BofA executive’s hard drive.

The bank originally denied any potential involvement with the leaks, but has since taken a preemptive stance and assembled a virtual legal swat team and war room, sources told FOX Business, bracing for leaks involving its messy $50 billion purchase of Merrill Lynch and potential activities involving mortgage lender Countrywide.

While some of the larger banks with juicy cash flows like BofA may be able to sustain a hit, others with tighter margins risk succumbing to the woes of market speculation and selloffs, according to some sources.

“What if it’s not Bank of America, what if it’s a more vulnerable bank,” Bartmann said.

Still, positives could stem from the leaks, which may “scare people straight,” Bartmann said, leading executives to trash potentially unethical behavior and revamp internal security.

“Maybe something positive could come out of it, some deterrence, out of fear,” he said.

Market manipulation

Others, meanwhile, have far worse, longer-term concerns over WikiLeaks’ new spotlight on Wall Street.

Bove says he is worried about the implications of disgruntled former employees or insider traders using WikiLeaks as a way to “easily manipulate the market,” leaking secret documents and shorting stocks in advance.

“This is a bombshell for the markets; forget the impact on Bank of America,” Bove said. “Because now we’ve opened up an unregulated, uncontrolled source of illegal activities, potentially, that cannot be touched by the SEC.”

Since its inception, the nonprofit has kept a tight lid on its operations. WikiLeaks is based outside the US, and its undisclosed location has been known to change.

“Based on what the SEC is doing now, one would assume that they’d be all over his offices grabbing data, hard disks, and other information, which would be in an attempt to determine whether they’re profiting from this activity,” Bove said.

Companies have spent a lot of time and effort protecting themselves from outside threats, however they are now realizing those coming from within could be just as dangerous, Francis deSouza, senior vice president at Symantec told FOX Business.

“This is a big deal, not just the incident with political implication but also for companies around the world because they are realizing how vulnerable they are to loss of their information and how damaging that could be,” he said.

At the very least, Bove said, it has changed the way Wall Street is operating, and WikiLeaks-connected insider trading and internal risks are issues that have to be considered.

“What we’re dealing with is potential massive market manipulation; it has raised the specter of future harm that will be done,” he said.

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