The Butterfly Effect

Disclosures to media hang in balance as Boeing whistleblowers seek legal remedy

Found this very intriguing legal battle, for my Investigative Reporting class, that could lay down the rules on how far our sources feel comfortable and safe in tipping us off! Read on...

An lesser known but crucial ongoing legal wrangle between Boeing Co., world’s second largest aircraft maker and two of its activist auditors, could change the nature, and frequency, of disclosures made to the news media by whistleblowers.

 The lawsuit, currently before a federal court of appeals in California -- hearings started on April 15 -- will decide whether or not the Sarbanes-Oxley Act 2002 protects whistle-blowing to the press. If the protection is not granted, it could curtail many fraud-busting disclosures, said a lawyer for the plaintiffs.  On the other hand, shielding it will raise tricky questions of exactly what constitutes media in today’s digital age, argued the Boeing lawyer in a phone interview. 

They both, however, agree that this David-and-Goliath lawsuit was a test case of sorts and the verdict, either way, was going to have "ripple effects."

 
“There are no precedents for this. This has never been decided before and that makes it much harder to anticipate which way it will go,” said Eric B Martin, a Richmond-based employment lawyer with law firm McGuire Woods LLP who is representing Boeing.

Both Nicholas P. Tides, an export compliance specialist, and Matthew C. Neumann became Audit IT SOX auditors for Boeing in January 2007 and during their stint made several complaints to supervisors about auditing deficiencies. But over time they concluded that “Boeing’s auditing culture was unethical” and the work environment “hostile”, according to the filings with the U.S. District Court of Washington, which gave the ruling in February 2010. This ruling is currently in appeal in the Ninth Circuit court.

Eventually, these executives leaked the documents to Andrea James, a reporter from the Seattle Post-Intelligencer – an action that led to their getting suspended and later, fired. Tides and Neumann then filed whistleblower suits in the federal court.

When the District Court quashed their plea in February last year, it said the  Sarbanes Oxley did “not prohibit termination for disclosures to the media” since it was not protected by the Act and “Boeing was entitled to terminate them for leaking confidential documents” in violation of corporate policies. The court further ruled that Section 806(1)(a) of the act protected employees against retaliation from employers only when the “information or assistance” was to “a Federal regulatory or law enforcement agency; any Member of Congress…or a person with supervisory authority…”

 In September 2010, the Washington D.C-based non-profit National Whistleblowers Centre, which represents such fraud-busters across the country, pitched in. Its executive director Stephen Kohn will argue alongside the plaintiffs' attorneys.

The Center has filed an amicus curiae, or friend-of-the-court brief, for Tides and Newmann arguing that whistleblowers were “a bulwark of accountability” against corrupt government or corporations, who “should not be forced to choose between their jobs and their conscience.”

The whistleblower lawyers, David Colapinto and Richard Renner, seeking reversal of District Court’s verdict, have said in their brief that the “legislative history of SOX supports a broad scope of protection, broad enough to include media disclosures” which has supported in bringing many criminals to book.

News organizations broke stories on the Enron scandal and the ponzi scheme run for two decades by Bernie Madoffbefore SEC investigations began, the brief recounts. It also quotes a study by the Booth School at the University of Chicago that found nearly 15.5% of corporate frauds were detected by the media, compared to 14.1 % detected by industry regulators, government agencies and self-regulatory organizations.

 The lower court’s verdict would put the lid on such instances, contend NWC lawyers.

 Citing previous case laws – pertaining to the First Amendment, The Whistleblower Protection Act, Water Pollution Control Act, Occupational Safety and Health Act – the plaintiff’s brief says that a restrictive or “per se exclusion of disclosures to the media from Sarbanes Oxley's zone of Protection” “perverts the purpose of the Act.” The district court had said that since media wasn’t specifically mentioned, it was excluded from the list.

Boeing’s lawyer Martin said, “If the protection were to be granted under SOX, then yes. a lot more whistle-blowing will happen through the media.  But I’m not sure members of the media are capable of acting on that information.”

CNBC.com on February 8 wrote a story about a mushrooming “cottage industry” around whistle-blowing in the US, with lawyers actively soliciting such cases for a share in the spoils and how these truth tellers were emerging as the latest breed of “bounty hunters”.

“The content of disclosure is important, not the medium. Whether it is a journalist or a foreman, the protection should apply to everyone under SOX,” said Renner in a phone interview. He wants a blanket protection for such public service “…even in case of false alarms, even when the whistleblower is proved wrong" since "he didn’t know at the time of disclosure what the outcome of probe would be!”

There is, however, slippery ground around this argument.

 “Today we have blogs and twitter and websites reporting on news as well. So what really constitutes media? Where is the line drawn if the protection were to be extended?" asks Martin. The next real good question will then be: So is Wikileaks media too?

 

One man’s battle to fight greed -- with greed, cash and lots of gumption!

In mid-2007, a private banker working for UBS in Geneva booked a flight to US on his personal expense to meet the federal authorities. His conversation exposed one of the biggest offshore tax fraud which involved 19,000 alleged tax cheats, worth more than $19 billion. UBS paid $780 million in fines, revealed identities of 250 clients – another first for Swiss banking. Yet the banker who exposed the fraud is serving a 40-month prison term.

“All because he walked into the wrong office in Washington DC!” said Stephen M.Kohn, lawyer to this UBS banker Bradley Birkenfeld in an exasperated tone and breaking off from his usual carefully punctuated speech. “He went to the criminal division of Department of Justice and got implicated. They don’t care about tax billions saved, IRS does!”

Kohn is campaigning to get Birkenfeld out who could be the only US citizen ever to be convicted of a crime he himself provided extensively disclosures on. Yet Birkenfeld is not the only one on Kohn’s mind.

  One of US’ top experts in whistleblower protection laws, 54-year old Kohn has had 25 years to fight his battles. He has helped draft protective clauses in Sarbanes-Oxley Act and the more recent Dodd-Frank legislation and then fought cases arguing on those laws in courtrooms.

Along the way, he co-founded the non-profit National Whistleblowers Center to protect snitches from retaliatory action, wrote the first ever legal treatise on this and has sued the Federal Bureau of Investigation, Department Of Justice, nuclear power firms and drug maker Bristol-Myers Squibb for retaliating against the whistleblowers. Currently, he is taking on aircraft maker Boeing in a lawsuit that could forever change the way information is shared with the media.  

Kohn, a native of Greenbrook, New Jersey, traces his entanglement with the establishment to his early days in college when his student-run “muckraking” newspaper in Boston University called B.U Exposure, exposed irregularities in university president John Silber’s administration in 1979. A year later in a TV show, Silber labeled the newspaper staff “short pants communists."

 “The university came after us. ACLU had to represent us in court. I had a good go at it then,” said Kohn in a telephonic interview. “From faculty to students to support staff all the way down, we had our sources. I was with whistleblowers and I didn’t even know it.” Those events cemented his beliefs in what would eventually morph into a lifelong cause.

After graduating in political sciences from Brown University, he went to study law at Northeastern University and was drawn towards First Amendment issues while working as a clerk in the Institute of Policy Studies in 1984.

“It was like the wild, wild west back then. All the laws that now exist for whistleblowers weren’t around then. It was a very wide, new and exciting field,” he said.

Nearly 30 years on, one Enron, WorldCom, Madoff and a scalding financial meltdown later, a lot has changed on the legislative landscape for those willing to speak up, out loud. What has not changed, however, is Kohn’s relentless pursuit to protect these whistleblowers, in what are essentially David-meets-Goliath sort of lawsuits.

Richard Renner, an attorney and a member of the board at Kohn’s non-profit has known him for over 15 years. “To try and sample Stephen Kohn’s personality is like taking a sip out of a fire hose,” said Renner, calling him “indefatigably energetic” who was “constantly spinning out ideas on how to advance the law.”

Kohn has represented whistleblowers in the O.J Simpson murder case, World Trade Center bombing cases, Oklahoma City bombing case and Linda Tripp in her privacy case after the Clinton-Lewinsky scandal. He represented FBI whistleblower Frederic Whitehurst, who exposed fraud and fabrication of evidence in the forensic testing in the FBI lab in Washington D.C and subjected it to outside oversight for the first time. He also represented Aaron Westrick, another corporate whistleblower who pointed out that the bulletproof jackets for the police officers, supplied by US’ largest body armor company, whose weren’t exactly bulletproof.

On April 15, he argued as amicus curie or friend-of-the-court before the Ninth Circuit for Boeing’s former auditors who were fired after blowing the whistle on severe auditing deficiencies -- to the media. While SOX clearly covers disclosures made to federal agencies, there is ambiguity over whether it throws the same protection over disclosures made directly to the media. Kohn’s ability to fight this ground will not just decide the fate of these auditors but also the future of how much information is shared with journalists.

The lower court ruled against the auditors last year and “chipped away at the existing protection”—something he is trying to fix.

“My clients get the worst whack. They do significant public service but get left out in the cold. And they battle severe psychological repercussions for a lifetime. Who’s going to hire you after you are tagged a whistleblower?” asks Kohn, pointing to the heavy handed bargaining position companies come with, in these lawsuits and the personal ruin most whistleblowers are left with in the aftermath. “I have some clients who landed on their feet but it is extremely hard.”

But these people remain the most effective way of busting wrongdoing. In 2007, the National Business Ethics Survey found that 56 percent of employees, who witnessed fraud or misconduct at work, took at least one step in reporting it. A 2010 Global Fraud Study Association of Certified Fraud Examiners found that employee “tips were by far the most common detection method” catching thrice as many frauds.

For that reason, Kohn argues for financial incentives in every whistleblower law. And the lawmakers are slowly swaying on his side, creating what has now become the phenomenon’s biggest criticism. These fraud-busters have now hit paydirt. A February 8 story by CNBC said that the government received $2 million in settlements from 43 whistleblower cases in 1988– called ‘qui tam’ in legal speak -- and paid over $97,000 to the whistleblowers for their service in uncovering it. By 2010, this number has risen 13 times to 573 cases that garnered $2.3 billion for the government with a payout of over $385 million for the tipsters. SEC estimates it will receive 30,000 tips this year as a result of new provisions and more stringent protection under Dodd-Frank.

Such dogged whistle-blowing are making critics question if Kohn is really a do-gooder or is he systematically spawning a cottage industry of bounty hunters?

“I hope I do!” said Kohn. “Greed is good. What’s wrong with that? If they help in catching corporate frauds and save lives and billions in taxpayers’ money, then hail the bounty hunters…,” he says in his no-mincing-the-words, slow but authoritative tone that would serve him well in a courtroom.

He is now seeking a wider audience for his unapologetic, borderline-activist, stance on taking down big corporations and exposing government departments. In his recently published book, The Whistleblowers Handbook – the first-ever step-by-step consumer guide on blowing the lid – he dishes out a cookbook-style receipe detailing 21 rules on how and who to blow the whistle to. It even has “beware” sections that warn you against trusting corporate hotlines and taking “hush money”. 

 

Even though stiff laws were created after economic catastrophes – SOX came after Enron, Dodd-Frank after the 2008 financial meltdown – the cases of these tipsters could be navigating muddy moral waters. Sometimes, it could just be a false alarm that could jar a smooth running, efficient corporation.  

 On March 14, French automaker Renault SA’s chief executive Carlos Ghosn had to publicly apologize for firing three executives after an anonymous tip accused them of negotiating a bribe. The hurried investigation eventually produced no evidence – a telling sign of how whistleblower activism can tip to the other end, prosecute innocents and possibly encourage corporate espionage. Now that is a long journey from the time they were called “skunks at the picnic”.

These tax snitches are today viewed as gatekeepers of corporate conscience. The mindset and trend has already gone viral across corporate America. That is a job well done. And with a body of work that spans a quarter of century in this, Kohn can lay claim to a somewhat largish piece of it.

 

Shredders make hay as changing laws,thefts, bankruptcies force cos to clean up

An 18-tonne shredder truck roared and convulsed in a dusty dump yard-cum-warehouse in a quiet neighbourhood of Long Island. Needles on its speedometer-like dials flickered as it noisily chewed on 300 pounds of paper a minute – financial data, hospital records and personal letters -- to keep it all from prying eyes.

 A small screen in between the dials, on the truck’s side, was alternately flashing images from the two strategically placed cameras inside the truck that caught the masticating machine in action. “See, that’s how we know what is going on inside,” said Sean Frederick, co-founder of Valley Stream, NY-based Code Shred, as he punches a red button to switch from one webcam view to another, in the shredding station right next to the six year old firm’s office.

Quite literally, this tiny firm is tearing down Wall Street, most of the Federal Reserve of New York and parts of Internal Revenue Service to bits and making big money off it -- building its business on the demand for document destruction from both corporate and government clients.

 Fuelled by laws that tighten information security, soaring identity thefts and companies that imploded in the aftermath of financial meltdown, Code Shred with its vulture-like scavenging business, turned in 1055% growth between 2005 and 2008, ranked 157 on Inc’s 500 list last year and ended 2010 with over $3 million in revenues.

 As individuals wake up to pervasive identity thefts – billed as the fastest growing crime in US --and corporations scurry to protect their data better, there will be a lot of shredding and cleaning up to do. And that is good news for Code Shred and its ilk.

Source: http://www.allstarshredding.com/images/tour-shedclaw.jpg (another shredding firm in the same business space as Code Shred)

 The firm -- currently owned by Cintas Corporation after the Cincinnati-based firm bought it in mid-November -- was conceived, quite literally, mid-air when its co-founders Frederick and Micheal Milillio met on a Frankfurt to New York flight in 1998. They instantly hit it off and after six years of brainstorming, decided to go into the shredding business because “the prices here were all over the place” without any specialized firm providing a quality service.

 “We moved from door to door in Manhattan moving boxes in our cars and taking it to an offsite of a recycler who didn’t care about shredding. He just wanted the volume (for recycling),” recalls Frederick of the initial months. They bought their first mobile shredding truck for $240,000 in October 2005. By the time the founders sold out to Cintas, the firm had 30 employees, seven shredding trucks, two box trucks and a van.

 Future growth beyond their current scale, he explains, could only have come with a nationwide operation. It helped that Cintas, present in 74 locations and better known for making uniforms, was hungry at the same time. “We have been focussing on document destruction business for a while,” said Matt Peloso, Cintas’ point man in Code Shred’s office. “People can shred themselves too but they prefer calling us in who can shred and give a certificate of destruction. It’s kind of an insurance,” explained Peloso.

 Identity theft is a big factor buoying this business. It hit 22,000 people in New York alone and nine million all over US, said Abigail Lootens, spokeswoman in NYC’s Department of Consumer Affairs, underscoring the need – and prospects – for shredding firms.

 A report by California-based non-profit’s Identity Theft Resource Centre showed there were 662 security breaches in 2010 alone that exposed 16.167 million records. Of this, 42% breaches happened in the ‘business’ segment that left 6.626 million records vulnerable, followed by 4.854 million records compromised in the ‘banking/financial’ sector and 1.874 million in healthcare.

JP Morgan Chase – Circuit City(office) slipped up on 2.6 million records while Educational Credit Management Corp about 3.3 million, added the study. We know the numbers of exposed records laid in just half of the incidents, indicating the actual data leak could be exponentially higher.

NY’s consumer affairs department is fighting this menace through its annual ‘shred fest’. In 2010, Shred Fest’s third year, 40.02 tons of documents were shredded at Shred Fest, said Lootens.

But that’s not where Code Shred hit pay dirt. Residential clients are loose change. Its biggest customers are “the government departments, healthcare companies, law firms and then the financial institutions….in that order,” says Frederick. Federal Reserve Bank of New York and Internal Revenue Service are particularly the big ones.

With laws prohibiting “dumpster diving” – or scavenging trash for valuable information – and some such as HIPAA, Gram Leach Bliley Act, The Fair and Accurate Credit Transactions Act,  The Economic Espionage and the recently enforced ‘Red Flag Rule’, it has become imperative for corporations across sectors to clean up and protect information. 

 Shredding has had a long checkered history. G.Gordon Liddy’s shredder-happy ways are well documented. So are the stories of Arthur Anderson auditors when they cleaned up Enron trails even after SEC probe had caught the scent of wrong doing. It is corporate folklore that Enron’s shredders worked overtime on Christmas and continued doing that well after the Congress and SEC had begun probe.

 Oliver L. North saw John M. Poindexter tearing up a potentially embarrassing order signed by President Ronald Reagan authorization US participation in secret arms sales, according to NYT 1999 archives. Coca Cola executives shredded documents as they battled accusations of racial discrimination against blacks in 1990 and Johnson & Johnson destroyed documents that showed it marketed an acne medicine as a wrinkle cream.

Did Code Shred find some skeletons too? “We shred so much that we don’t think what it is. We just shred it,” Frederick shrugs. The client decides what goes in the shredder.

 “We have shredded for a lot of mortgage companies. We lost money on most of them. They would just shut down (before paying us),” said Frederick. “We also shredded for a lot of bankrupt companies where the lawyers would just call us and say “hey, this is the location. It needs to be cleaned up. Just come and shred the stuff here!””

 He doesn’t know what his trucks pulverize or whether any of it became subject of a lawsuit or federal enquiry later on.

 “I pitched for Bear Stearns’ account in 2007 when there still was a Bears Stearns. They wanted 30,000 pounds of paper shredded everyday…and this was just from their Manhattan, Brooklyn and New Jersey locations!” said Frederick. The account went to a national firm – evidence that the recent Cintas buy-out positions it better.

 The sector requires an upfront investment of $240,000-$260,000 a truck – a sizeable entry barrier to mount -- the bigger risk is from fluctuating recycled paper prices which yields a third of the revenues.

 “In 2008, paper prices crashed from $240 a tonne to $40 a tonne,” he recalls. Margins were squeezed as shredding firms had been charging very small service costs and making it up with higher recycled paper revenues. That tap had ran dry in 2008.

 Besides the initial investment, integrity of the employees is a critical issue. Every employee in Cintas-Code Shred is background checked for the last 12 years before being employed and half of them are checked yearly by rotation besides the random drug tests.

 So what was Lehman Brothers was crushing in September, 2008?, I ask Frederick as we sidestep a huge conveyor belt in the warehouse behind the still convulsing truck. The shredded debris is now being punched and tied into gigantic square cubes using metal wires before being stacked atop each other. “Yeah..I would like to know that too. And who was shredding for them?” he muses.

Road to perdition and back

On a nippy Friday morning, a Q100 bus cautiously whirred its way on a narrow 4,200-feet bridge, unnamed and unmarked, mounted on the East river across Astoria, packed with women and children. Unlike any other journey, all its passengers are going to the same place and for the same reason – visiting inmates at Rikers Island, the largest penal colony in the world and once considered to be the most violent.

With all its dubious distinctions, Rikers Island is merely 11 miles from the raised torch of Lady Liberty and six from the Empire State Building but could have been light years away. It soaks in nearly $860 million a year from state revenues and yet most people who pay to run it, can’t even place it on a map. May be, they aren’t meant to. The 415-acre island that can house up to 17,000 inmates across its 10 jails, is just a white patch on Google Maps with zilch details.

Sitting across the aisle in the MTA bus, is an Afro-American girl with large golden loops for earrings and a tattoo on her neck that reads “billion dollar bitch.” She would only give me her first name Valerie and says this is her second visit to her father. Another black girl, on the seat right behind us with a blonde Mohawk mane on her head and an “R.I.P” tattoo on her neck, hastened to explain that most of the inmates were either awaiting trial or arranging the bail sum.

 
Source: www.bridgeandtunnelclub.com

A 35-minute ride later, the bus parks next to a sidewalk and the passengers –only Afro-Americans and Hispanics, no exceptions – hasten to queue up for the lockers at the prison entrance to stow away their cell phones, cigarette lighters and “anything sharp, anything inflammable” as Valerie explains. Nearly 90% of the visitors are women.

In one corner, two women are loudly protesting bringing along infants and babies for prison visits. “A child should stay as far away from Rikers as possible. It is bad enough that I have to be here…but definitely not them,” grumbled one while the other nodded in agreement as a bunch of tiny tots played on the gravel.

It was going to be a busy day. Friday, in Rikers lingo, is “everyone’s day” – implying every inmate is allowed visits. On all other days in a month, visits are rationed. Inmates with A-L family names can be visited on December 1, 4, 9 and 12 and so on while M-Z names can have visitors on December 2, 5, 8 and so forth, according to a copy of the jail calendar.

Bought in 1884 for $180,000 by New York City, the original island of 87.5 acres, was expanded by landfill to its current size between the late 19th century to the mid-20^th. Besides its 10 facilities – two of these are floating jails or old-time Staten Island ferries that are docked off the northern tip of the island -- the so-called ‘Gotham city’ has numerous support operations such as a central laundry, central bakery, K-9 and Marine units.

The island lock-up, which has morphed into a city on the inside, has also fostered a full economy on the outside. In unintended ways, an economy has sprung up to leech onto the benefits of a captive market of 10,000 correction officers at any given time, about 1500 visitors a day and an inmate population that hovers around 15,000.

Society’s dump

 “This is a dumping ground for society’s waste. You clean up New York and turn your face away from this. Most people just refuse to be in any skin other their own,” said Keisha, a 26 year old city-based social worker who has been working with “at-risk children” for six years and was on one of her dozen trips so far to Rikers.

Choosing to be identified by only her first name, she was guarding her colleague’s wallet and cell phone as the latter was inside to counsel a 16-year old girl arrested for felony. “The locker situation here is ridiculous. Isn’t it ironical that the biggest jail should have such easy-to-break-in lockers?” she says, shouting to be heard above the roar of a plane taking off from the LaGuardia airport, which seems just a giant hop away from the island.

According to the New York City Department of Correction, the average daily inmate population in the city fluctuates between 13,000 and 18,000 across its facilities – a figure that exceeds the prison population of many state correctional systems.

Department’s spokesman Stephen Morello refused to accommodate the request to visit the facility as they “simply receive too many journalism student requests to be able to accommodate them.”

Jennifer R Wynn, author of “Inside Rikers” and Assistant Professor of Criminal Justice at LaGuardia Community College, wrote in her book: “Rikers performs an expert magic trick: it disappears people, keeping in those who want to get out and keeping out those who want to get in.” Wynn, who has visited the place for seven years, says that the 10,000 correction officers who make a living off it, were “doing time” in there too.

The memories of Cormac McEnery, a City Island-based lawyer for elder care and estate planning, of Rikers are in stark contrast: his grandfather was the jail warden in 1950s and he has spent his Christmas vacations there, for several years. “I remember running around the grounds with my dog. I used to play on a wooden bench there with my toy trucks and go for Christmas mass in the chapel there,” says McEnery. Other times, he would be learning how to pick locks with some of the inmates just to amuse himself.

He says he wouldn’t be running around on the island today. “It is a different time, different mentality. It is a substantially more violent population,” he said “When you have more people bumping up against each other, there is bound to be more violence.” Many new facilities have been added at Rikers over the years to accommodate a growing influx of inmates and it now has separate prisons for adult males, females, adolescents, AIDS-infected and those requiring psychiatric observation.

With a school, medical clinic, ball fields which holds in-house tournaments, chapels, a gym and a barber shop – they only provide hair cuts and no styling or dyeing -- a power plant, a tailor shop and a bakery inside it, the prison island is virtually a city of its own.

“You need greater compassion, a greater desire to help and a completely non-judgemental outlook when you step into Rikers,” says 77-year old Sister Marian who was the Catholic chaplain for female inmates for 23 years and retired two years back. She campaigned for nearly 17 years to reform the Rockefeller drug laws that imposed stringent imprisonment sentences for selling as little as two ounces of narcotics. “The law was brutal. These women would just languish there for years,” she said.

“Most of them are poor and abused and eager to connect to God. There was no crisis of faith,” she added. Above the prison chapel door hangs sign that simply says 'All Paths to God' and allows inmates to connect with their specific faith. Every facility has four chaplains – one from Protestant church, a Jewish Rabbi, a Muslim clergyman and a Catholic priest. Occasionally, a Buddhist monk or a Hindu priest would be called in if an inmate asked for it.

‘Perverse economy’

Even as Rikers breeds a city within, it has a prison-centric economy on the outside. Keisha said a “perverse economy” was “quietly gaining root around the whole business of incarcerating people” and pointed to a beeline of blue and white mini-vans parked along the sidewalks. 

J&J Van Service Inc. is one such private shuttle operator to Rikers which ferries relatives of the inmates from Bronx five days a week for a round trip of $15. It has been in business for 22 years. “3 Travel’s in the same week, the third fare is $9,” advertises its pamphlet. “The higher the crime rate, the better my business does,” said Dennis Cruz, driver of one of the shuttles, “After all, somebody is always getting arrested from spitting in the wrong place to committing homicides.”

Cruz makes 10-12 trips in a day – sometimes more, especially on Fridays -- packing in 5-6 people per trip. “From where I see it, it is a good business to be in. No recession, no lay offs,” he grinned.

There are many others looking at more sophisticated ways to profit from it. Commissioner Schriro’s office panes at the entrance are plastered with fliers from The Fortune Society that is trying to “build people, not prison” and offers courses in Asbestos handling, food safety certification and commercial driver license along with interview and job placement assistance.

Right at the foot of the bridge that leads to Rikers, at the cross of Hazen Street and 19^th Avenue, is Ben Hacem Halal food cart that is deftly dishing out meat wraps. “I was told this is the safest place to do business and there is no competition. But the cars just whiz by. I will give it a shot for few more weeks, then decide,” said the truck’s owner Sanchez Drez who moved into this location just 3 days back.

Across the road stands a police depot that sells belts, dresses, knives, pistol cleaning kits and other things that are bought by the correction officers. A pepper spray sale is on with two bottles going for $20. While most items require a valid cop id., there is other stuff for civilians such as teddy bears in NYPD uniforms, baby shoes and bibs with “I love NYDC” logos and t-shirts stamped with “Rikers Island Survivor” motifs.

The block-long line of businesses here includes a cheque cashing facility, a Western Union outlet, an office of Prison Health Services that provides inmate healthcare services and a bevy of warehouses such as a pharmacy and a food catering business that contracts with airlines plying from LaGuardia.

“The rentals are great. The place is safe with so many officers around all the time. These officers are also my biggest customers. They cash their cheques and come right in here,” said Mitchell Williams, a shop owner who sells a variety of fragrances, organic soaps, lamps and clothes in a shop next to cheque cashing counter.

Not all businesses take off though. Williams lucked in when a jewellery store in the same space closed down six months back. Above his shop is an old rusted board of another business that shuttered, called

‘Bad Apple Bail Bonds’ with a tagline “Tired of coming to Rikers? We will get your loved ones out.” If they had money for bail, they wouldn’t be in Rikers, right?

But the place has character. And it will remind you once in a while, in the midst of teeming commerce, of what it essentially is – a place for incarcerates, those reviled and feared by the society.

Even as I turn to leave the shop, a cop enters the shop to buy a special concoction perfume called ‘Desire’ and gets chatty with Williams. I can hear the officer telling the shop owner that a cop at Rikers had his thumb bitten off earlier that day.

“Not just bitten into, it’s bitten off! The thumb of the right hand, the shooting hand! Imagine….and this is the thing that makes us human,” he exclaimed before paying $50 for his bottle of perfume and rushing out. He dashes off in his car across the bridge. He had to report in the same facility where the thumb-biting had happened in another 20 minutes.

 That is business at Rikers and there is nothing usual about it.

Tale of two companies: part 2: Minting money off the Meltdown

This is the second part in the series profiling a small Wall Street firm that profited from the carnage of the 2008 financial meltdown. As the biggest financial institutions imploded, this tiny start-up bloomed...read on:

By August, 2007, two hedge funds of the fifth-largest investment bank Bear Stearns had melted as news spread that their bets on mortgage-backed securities went awry and French bank BNP Paribus suspended investor withdrawals from three funds saying it couldn't value their assets anymore -- setting off what many experts say the beginning of the most financial meltdown since the Great Depression.

 This story, however, is not about those got decimated. Tucked away on the 12^th floor of an imposing building on 26 Broadway in downtown New York, a small firm then called ‘Restricted Stock Partners’, with just $2.5 million in profits, had begun to smell blood.

By end of 2008, Bear Stearns had been sold to J.P.Morgan for a paltry $2 per share; mortgage giants Freddie Mac and Fannie Mae had imploded; Lehmann Brothers had filed for bankruptcy; AIG was nationalized as were the Big three – Ford Motors, General Motors and Chrysler – of the auto sector and a $787 billion stimulus package had been prepared to kickstart the economy.

 That year, our small firm, now rechristened as ‘Second Market’ made a ten-fold increase in profits to $20 million, expanded its employee base, added new categories of business and was struggling to keep pace with a spectacular surge in business. In 2008 and much of 2009 as the US economy was haemorrhaging, this tiny firm’s profits swelled to $35 million.

 So what business was it that nourished Second Market even as others crumbled around it?

 Founded in 2004 by entrepreneur Garry Silbert and born-again in the 2008 financial crisis, Second Market has created an online trading platform for buying and selling the most toxic and illiquid of assets that many financial institutions were choking on two years back.

An e-bay kind auction format, this has created markets for categories such as asset-backed securities, mortgage-backed securities, bankruptcy claims and collateralized debt obligations – categories that fund managers didn’t want to touch with a barge-pole after the housing bubble burst.

So are they traders of misfortune? “We are just a market maker. We provide liquidity to assets that would otherwise be stuck on firms’ balance sheets for years,” said Second Market’s head of public affairs Mark Murphy. “We give these investors an exit route.”

 The firm claims that it brings transparency to these opaque assets on sale by specifying about what’s inside these asset-backed securities -- information that is vetted by its legal department. “People can decide what level of risk they want to buy into. Earlier, they didn’t know, not even the cleverest of bankers who designed them, what was inside these securities,” said Murphy. referring to all the multiple layers of leveraging that had created so many derivatives that it was hard to know what could lay claim on which physical asset at what value anymore.

 In April 2009, it launched a market for trading stock of private companies – a division that will clearly emerge as Second Market’s cash cow in the coming years. Transactions on its hottest private stock, Facebook peg its valuation at $30 billion, topping the market capitalization of the publicly-listed internet giant Yahoo. Trading on the social network firm has already gone past $150 million with an average transaction size of $2 million.

  The working is simple: sellers list their wares and buyers go shopping for the deals. Sometimes, buyers list what they are looking for and sellers emerge. Private company stock is usually sold by either big private equity investors or employees who want out. Second Market makes a cut on every transaction – there is no subscription fee but the spread varies from a few basis points to 4-5% in case of private company stock.

 The sellers could be any bank, financial institution or pension fund that is stuck with a white elephant asset – too hard to sell, too costly to keep but was once deemed valuable – while the buyers are usually vulture funds and hedge funds which are looking for rich pickings at a huge discount. Sellers either put a stagnant price, a la Craigslist, follow a Dutch auction model where prices are marked down until a buyer emerges.

 The firm is regulated by Financial Industry Regulatory Authority and Securities Markets Commission.

In 2000, the average incubation timeline from a start-up to public listing was 4.5-5 years. As investors took flight and the IPO market dehydrated post 2008, it has increased to 10-11 years, explains Murphy. People need to cash out sooner than that. Moreover, if promoters like Facebook’s Mark Zuckerberg are dragging their feet over going public, likelihood of smaller, weaker firms going out is even smaller.

 Besides, such private exchange trade helps in price discovery – a sort of book building process – in the pre-IPO stage, gives a valuation benchmark for mergers and PE deals and helps in branding. Second Market also allows companies to exercise significant control over how often their shares will be traded, what disclosures will accompany and if they want to keep certain activist shareholders out, by using their ‘right of first refusal’.

Second Market’s counter-cyclical business model -- Murphy disagrees with the description -- will keep getting traction as long as the economy crawls to a slow recovery. US is expected to turn in 2.1% growth over the next 2-3 years even its banks fail in record numbers and unemployment is at 9.6%.

Second Market this year will likely continue its rally. It had about 23,000 market participants in October up from 6,500 in January this year. In 2005, they had merely 2,500 when Murphy says they "were hustling to get deals." Now they have to hustle their IT and legal departments to keep up with the swelling business.

 Bring nimble-footed has served the firm well.  In February 2008, $330 billion worth of ‘auction rate securities’ market went illiquid in a matter of days as banks shuttered desks. The e-trading platform firm leapt on the opportunity and created a market – tiding over financial, technological and legal issues – within 10 days. Since then, every few months it has launched new markets and is now considering launching trading in 363 bankruptcy sales, condo-hotels, private REITS and Trust Preferred Securities.

But how will the firm run when the economy runs out of toxic assets?

Murphy disagrees that his firm’s business is “counter-cyclical” and said that even when tap runs dry on toxic assets, private firm stocks will be the main revenue earner especially as they expand to Asian markets of Singapore and Hong Kong.

Counter-party risk, or the risk of someone reneging on a trade, is another aspect but Murphy says that has never happened in any of their transactions so far.

Another pitfall is that it could be harder to keep employees motivated to stick around if they can cash out early. These are all problems companies usually faced when they went public. Now they will face them earlier.

Until any of these problems hit home, Second Market, often counted among the hottest start-ups in US, is on a trot. It has devised and trademarked their ‘Manhattan auction model’ under which the seller sets aside a portion of the sale proceeds, called participation award, that is distributed say the top three or five bidders after the transaction settles. This incentivizes investors to look at illiquid assets and submit an informed bid.

So will Second Market ever list on Second Market? “In this new year, in 2011, we will allow trading in our shares on our website and let the employees cash out,” said Murphy. More importantly, it'll value a company whose business model has no precedent at all...

 

Tale of two companies: part 1: College students to the rescue of NYC busy bees

This is the first of this two-part series on innovative start-up business ideas in the city of New York that carry the smell of crisp entrepreneurship. Both these firms identified a very basic missing link for smooth functioning of life, in one instance; financial markets in the another and plugged it. Here's their story: 

A tiny web start-up called Agent Anything Inc., is plugging New Yorkers with “100 hour work weeks” with college students who are willing to finish their chores and run their errands in return for for petty cash.

Balancing the classic trade-off between either having time or money – but never both together – busy New Yorkers can “create missions” on www.agentanything.com and it is completed by a student “agent” in a jiffy.

Its 23-year old founder Harry Schiff describes the venture as an “eBay of services”. Started in September this year, the platform in its first two months alone has roped in roughly 800 clients with “missions” to dish out –a glorified term for sometimes whacky but mostly drab chores -- and 1000 agents willing to run them.

 Source: www.agentanything.com
“I realized there are senior citizens, mothers with babies or merchant bankers with 100-hour work weeks who have a to-do list that rolls over everyday. They will gladly pay $10-20-or-30 just to get rid of these jobs. On the other hand, there are these college students who are notoriously low on cash with time to spare,” said Schiff, who hit upon the idea about a year and a half ago when he was a psychology graduate student in the Princeton University.  

The tasks run from the mundane – pick up curtains for $20, distribute flyers, walk the pet, unpack and clean for $100 – to more esoteric projects – creating a Wikipedia entry for $30, helping on ‘managerial economics’ homework – and sometimes plain hilarious ones. A lady put up $15 for any one to help find “at least 3 live and healthy land (garden) snails” for her daughter's school project. Someone once posted for an agent “to help convince my friend that Bon Jovi is cool.”

Some of these are “virtual missions” and can be done by any student anywhere in US working out of his laptop or phone – such as data entry or $10 for “finding an unemployed person on government benefits” – while others need to be done in person.

 Shawn Hughey, a small business owner in downtown Manhattan who posted a mission on Thanksgiving last week, wants someone to “check on project installation in midtown several times over the next six weeks.” His request for “recurring missions as distinct from one-off requests” is one of the new features that Schiff says they are working on to introduce soon.

 In what is essentially the new-age, grown-up and tech-savvy version of going over to your next door neighbour and offering to mow their lawn for small money, this disarmingly simple business concept is catching on, with nearly 260 finished missions at last count.

 Competition is sprouting up. TaskRabbit Inc., a firm that currently operates in Boston and San Francisco, is now looking to enter New York City, Chicago and Los Angeles. So far, the territory has virgin, divided and there has been more work that needs to be done in urban lives than runners available.

 Screening and filtering , however, is a kill-joy but essential part of the venture. Schiff recalls how they had to pull down a request for “washing and grooming my 392 ferocious dogs.” Another time, the web team ran into an awkwardly-worded request: “I need to someone to come to my house and change a light bulb. Please come, it is very dark in here. If there is food in the fridge, you can have it too.” “You know when someone is messing with you. You just have to take it down,” said Schiff.

 The clients pay with their credit card for the finished tasks and a $2.5-$6 service fee. The agents are hired after they show a valid university id since Schiff believes the “university would have done the entire background check and would have their all details.” Ask him about foreign students running missions without a valid work visa and he turns defensive: “The contract is between the client and the agent. We just tell the students that they should have all the documents that they need to do any other usual job here.”

The service is available only in New York currently but is looking to expand to New Jersey, Long Island and Connecticut. “Any big-sized city with a good public transport system (for the students), massive internet penetration (for the clients) will be a good fit,” explained Schiff.

Agent Anything was financed so far with a “few thousand dollars” investment from Schiff’s personal resources and he is in the process of tying in the second round of finances, details of which he declined.

Expanding too fast and tripping on execution is something that Schiff is specifically keen to avoid. “We are always asked why not hire any unemployed person to run these missions? I tell him background checks are costly and we need to resist the temptation of adding agents just to take on more missions,” he said, “We have to make sure we don’t become a Craigslist. Sketchy, opaque and no one knows for sure what’s on offer.”

 

The great American diplomacy blow out

Hmmm….this could well be the worse diplomatic blow out that US government has ever been pitted against. The New York Times and Wikileaks’ uncloaking of the US diplomacy, its manner of negotiating for favors and brutal views on world leaders, is going to haunt the White House longer than they may be willing to  admit right now.

First a quick snap shot of what’s in the 3 million leaked state cables that will rock boats in the world community:

• “Gaming out an eventual collapse of North Korea: American and South Korean officials have discussed the prospects for a unified Korea, should the North’s economic troubles and political transition lead the state to implode. The South Koreans even considered commercial inducements to China….. the American ambassador to Seoul…told Washington in February that South Korean officials believe that the right business deals would “help salve” China’s “concerns about living with a reunified Korea”.”

 

•  “Bargaining to empty the Guantánamo Bay prison: ….American diplomats pressed other countries to resettle detainees…Slovenia was told to take a prisoner if it wanted to meet with President Obama, while the island nation of Kiribati was offered incentives worth millions of dollars to take in Chinese Muslim detainees…. The Americans (also) suggested that accepting more prisoners would be “a low-cost way for Belgium to attain prominence in Europe.”

 

• “An intriguing alliance: American diplomats in Rome reported in 2009 on ….an extraordinarily close relationship between Vladimir V. Putin, the Russian prime minister, and Silvio Berlusconi, the Italian prime minister and business magnate, including “lavish gifts,” lucrative energy contracts and a “shadowy” Russian-speaking Italian go-between. They wrote that Mr. Berlusconi “appears increasingly to be the mouthpiece of Putin” in Europe.”

 

• A “cable’s fly-on-the-wall account of a January meeting between the Yemeni president, Ali Abdullah Saleh, and Gen. David H. Petraeus, then the American commander in the Middle East, (on Yemen covering up for American missile strikes on a local Al Qaeda branch)….. is nonetheless breathtaking. “We’ll continue saying the bombs are ours, not yours,” Mr. Saleh said, according to the cable sent by the American ambassador, prompting Yemen’s deputy prime minister to “joke that he had just ‘lied’ by telling Parliament” that Yemeni forces had carried out the strikes.

Phewww…if there is one job I wouldn’t envy right now, it is US Secretary of State Hilliary R Clinton’s. This is the classic case, as I see it, of a butterfly flapping its wings --- a small-time disgruntled US intelligence officer here who took advantage of a security breach – and causing diplomatic tsunamis across the world. Why do I say so?

¯      US will find it increasingly harder, if it wasn’t hard enough already, to clinch global agreements on policy and military issues with other nations across a bargaining table. With so much dirty laundry out there, it may not find many vociferous allies.

And I don’t even want to imagine how unbending China, with its increasing assertiveness in the world order, is going to get hereafter. The country clamped down on Google and Facebook, paranoiad as they are on security breaches and information crossing borders. This is a whole different level even for them to react to!!

¯      US’ diplomatic and state officials are bound to be under greater suspicion, hence scrutiny, may risk expulsion and will certainly be blocked from carrying out their duties smoothly. I wonder why these officials were looped in when they have had no training or expertise in clandestine methods of “Humint”, a spy-world jargon for human intelligence collection, NYT explains.

¯      There will be a rise in counter-intelligence on US, its agencies and its officials by other nations. Intrusion and heavy handedness by one country is invariably a slippery downward spiral; if one goes down, many others will likely follow it.

On the extreme: this is the kind of stuff that can pull down governments – in some instances, it should -- or stoke violent backlash from a surging ‘anti-American’ sentiment globally.

The US government machinery is in full fire-fighting mode with Clinton reportedly on stand by for any damage control. She had spoken to leaders in China, Germany, Saudi Arabia, the United Arab Emirates, Britain, France and Afghanistan on Friday pre-empting the Sunday release of documents. India, Canada, Denmark, Norway and Poland too had been warned.

 But forewarning may not blunt the edge of the actual content. Especially such scathing, personal content…and compromising ways of governance globally.

 Philip J Crowley, assistant secretary to the US Department of State in a November 24 briefing had told reporters that this was “harmful to our national security”, it put countless “lives at risk” and was “going to create tension in our relationships between our diplomats and our friends around the world.”

 “We wish that this would not happen,” said Crowley.

 I wonder if ‘wishing’ was for the leaks to not happen or for the US government to have been more discreet, less intrusive and hence less vulnerable to Wikileaks.

NYT’s Note to readers : why they published what they did and how they balanced the conflicting interests of informing the readers but not over-educating the terrorist outfits to the point of disserving the country.

How come everybody and everything other than the domestic US economy is reacting to QE-2?

  The US Federal Reserve will sooner than later be in need for a crisis communication team. No matter what they do or don’t do, there is someone out there to ready to bite them for having done too much or too little.

 

Their latest round of buying bonds and pushing money in people’s hands called ‘quantitative easing’ and nicknamed QE-2, lays out this premise perfectly. Let’s take a quick look at all the unintended outcomes that the Fed did not sign up for:

 1. Protectionist sentiments globally are leading to non-tariff walls. The backlash from international community has been storied to death by now but that is not the end of it. Once these countries are done ranting, they are going to begin acting, take compensatory measures and that’s when the protectionist tone of this backlash will begin to bite. Brazil, which saw a massive appreciation in its real in 2009, has already a transactions tax on capital inflows in place. It raised this tax recently. Thailand has also imposed a tax on foreign holders of domestic securities while Philippines and Indonesia are believed to be considering imposition of capital inflow controls. Such walls will block off some of the hot money that is washing up their shores but create barriers.

 More than that, it led to arguably the worst snub for President Barack Obama and Treasury Secretary Timothy Geithner in recent diplomatic history in the November G-20 summit. This blog has argued in the past that US will find it very hard to convince other nations to allow currency appreciation if its own monetary policy was causing dollar devaluation.

 2. Fresh from their victory paint in the November mid-term elections, the Republican’s whipping of the monetary policy, to the extent of clipping the central bank’s three-decade old dual mandate (http://www.washingtonpost.com/wp-dyn/content/article/2010/11/16/AR2010111606151.html ) to merely inflation management and staying off efforts at employment generation, is stinging and unprecedented. Hard to believe either Fed chairman Ben Bernanke nor his officials would have pencilled that in as a consequence while chalking out QE-2.

 3. There are possible winners too but they are as unintended recipients as they could be. While the governments and their central banks are crying hoarse about possible asset bubbles – dollar pumping by the Fed is increasing capital inflows to the high yield developing countries and stoking asset prices – it is giving companies in these countries to lock in huge capital at good rates.

 A string of mega-IPOs – Petronas Chemicals’ $4 billion, Malaysia’s largest; Coal India’s $3.5 billion offering which would be India’s largest; Global Logistic Properties’ $3 billion in Singapore and AIA’s planned IPO of $21 billion in Hong Kong – that have just hit the market or are in the fray stand to benefit hugely from Fed’s gravy train especially if it ends up spilling the dollar curry outside US. And that seems like a very real possibility.

   And the worse part: Fed’s own officials admit that the impact of QE-2 on what it’s actually aimed at – the only intended consequence of spurring growth in the economy – may not fly too far. New York Fed President William Dudley in a recent interview to CNBC said the critics were “off-base” but agreed that that the asset purchases would not have "a huge powerful effect on the U.S. economy."

Hmm…okay, so how come QE2 is doing everything else except what it is supposed to do!??

JPMorgan and HSBC under fire for rigging silver prices

A slew of anti-trust lawsuits against JPMorgan Chase & Co and HSBC Holdings Plc questioning their role in manipulating the futures market for silver, is stoking debate -- and investigation -- on the extent of influence these big global banks exert in commodity markets and if that constitutes unfair advantage.

The outcome of these lawsuits and a probe by the US’ Commodity Futures Trading Commission (CFTC) is expected to nail reasons behind huge volatility in the futures and options market for silver as well as shape regulatory oversight in the trading of commodities.

Although “naked short selling” has been a serious issue for long on the Wall street, Steve Berman, managing partner at Hagens Berman Sobol Shapiro LLP, one of the firms that has filed a lawsuit, said it was the “the scope and intent of JP Morgan and HSBC's actions in this short-selling scheme (that) dwarfs any other similar attempt to manipulate a commodities market."

New York-based JPMorgan and London-based HSBC have not commented on this issue so far. The Seattle-based class action litigation firm has filed the case on behalf of an individual investor Carl Loeb.

‘Naked short selling’ refers to the practice of selling a financial instrument without owning it and without making arrangements to borrow it later to settle the transaction. Traders in such scenarios bet that they will buy the instrument later when the price crashes and pocket the profits.

“The extent of damage depends on how wide you cast your net since there are concentric circles of liability. One estimate pegs it at $100 million,” said Sean Matt, a partner at Hagens Berman over a call.

The two banks, in this case, are under fire for having amassed huge short positions with an intent to allegedly depress its prices and book profits as they controlled more than 85 percent of the commercial net short position in silver futures contracts. JP Morgan built on its silver short positions even more after its March 2008 acquisition of investment bank Bear Stearns. Another lawsuit by Kaplan Fox & Kilsheimer LLP on behalf of an unnamed individual investor claimed that the manipulation was on as recently as March 2010 when a whistleblower, a metals trader based in London, reported the scheme to the CFTC.

Matt said that as many as 20 class action complaints had been filed against the two banks but explained that most of them were anti-trust claims while his firm was charging them with “violation of the Commodity Exchange Act and the Racketeering Influenced and Corrupt Organizations (RICO) Act.” “We have no direct legal precedent per se for so many shorts in one market,” he added.

Bill O'Neill, managing partner at New Jersey investment firm Logic Advisors, said that silver market has a history of very high volatility – in 1980s when the Hunt Brothers’ case was probed -- and rallies along with gold since the same fundamentals apply to both the metals.

 Silver, however, “doesn’t have a huge and global cash market unlike gold,” making it a “speculative playground” suitable only for the big boys, he explains.

CFTC has already proposed regulations for greater power to thwart price manipulators in October-end. When asked about its probe on silver futures, its spokesperson Scott Schneider declined to comment on any impending investigation.

One of the CFTC commissioners Bart Chilton, however, had spoken publicly in October on how “the public deserves some answers to their concerns that silver markets are being, and have been, manipulated.” If the government oversight body has to nail these banks, it will have to prove their ability to influence prices, specific intent to do so and that artificial prices existed.

Not everyone is buying the conspiracy theory though. “Silver is volatile and that leads people to believe it must be rigged. Lawsuits by these individuals against two big corporations is really jumping the gun,” said O’Neill.

An analyst tracking JPMorgan with a New York-based brokerage, who did  not wish to be named, said he hadn’t been following the lawsuits much. This hardly seems an outlier amongst the analyst community since most of them seem to be overlooking this for now. No report on either JPMorgan or HSBC has been published by brokerages since the outbreak of these class action lawsuits nearly three weeks back, according to New York University library databases.

"Silver lawsuits will have no impact in short-term, if ever. Most likely they will be thrown out,” said Ned Schmidt in his Value View Gold Report explaining that “the CFTC tests for manipulation are well established, and extremely hard to prove."

He may have a point. Only once in its entire 36-year history has the regulator successfully concluded a manipulation prosecution, in a 1998 probe on prices for electricity futures.

Canine detectives sniffing out the spreading bedbug menace in New York

 ‘Canine detectives’ are increasingly being called in to bust bed bugs in New York City hotels, theatres and even upmarket residential buildings, as the infestation becomes a pandemic and threatens home owners with depreciating real estate values and stigma.

These trained dogs can swiftly go under covers, around the tiniest of corners and search houses in a fraction of the time taken by human inspectors – making them the most effective search parties, said experts in an early morning conference on Thursday to discuss way to contain and guard against this spreading menace in the city.

“A dog basically does an MRI of your house with a nose. While human inspectors often take days to look through a house and can still miss some bugs, dogs can sniff a house inside out in seven seconds and with give no false alerts,” said Pepe Peruyero, founder of Bed Bug Super Dogs, as he spoke to a packed hall of journalists, house owners, tenants and retail managers.

  source: Care Pest & Wildlife Control

Peruyero has spent three years devising a proprietory method for training dogs to detect live bugs and viable eggs and finds it curious when people quiz him about dogs’ abilities to sniff out these bugs. “Well, we knew they can detect narcotics and explosives all along, right? Bed bugs are no different. A dog just needs to be imprinted with the principal smell,” he explained. His firm has already conducted 100,000 inspections this year.

“I had not heard of bed bugs even once in my office in the first 25 years of practicing my profession. In the last 2 years, I have heard it at least a few hundred times,” said Jeffery Turkel, partner in real estate law firm Rosenberg & Estis P.C who specializes in landlord tenant litigation which he says are increasingly being triggered by these bugs.

Bedbugs, that were once nearly eradicated, have now spread across the city in part because of the decline in the use of DDT and increased movement of humans and goods.  

These pesky critters can jump onto your shoes, clothes, books, office drawers, old mattresses and as Peruyero recalls, “were even been found in an X-box once.” They travel long distances – sometimes dubbed the best hitchhikers – surviving up to a year without food and can live in colder climates as well, explained entomologist Louis Sorkin.

Found in the best of homes and most public of places -- from creeping in the basement of the Empire Estate building to AMC’s movie theater in Times Square, around a Victoria’s Secret store in mid-Manhattan and even into the Brooklyn district attorney’s office -- these blood suckers even in one remote apartment can drive down rentals in entire buildings and are causing unusual landlord-tenant lawsuits.

In these litigations, both parties are fighting over who got these insects in the house and by implication, should pay for the clean-up. A New York State law now requires home owners to disclose to prospective tenants any infestation incident in the lat 12 months.

According to the city’s Department of Housing and Preservation cited by a New York Times story, bedbug violations have risen 67 % in the last two years. For the year ended June 30, the city’s 311 help line recorded 12,768 bedbug complaints, 16 % more than the previous year and 39 % more the year before. A New York City community health survey showed that in 2009, 1 in 15 New Yorkers had bedbugs in their home.

The silver lining: the bugs do not spread diseases or impose a health risk.

 But they cause something worse – massive stigma and ostracization in communities and among friends. “I was going through the cases in this area and was surprised to find the names of landlords and tenants blacked out. I had only see that happen in family law, assault, abuse and divorce cases,” said Turkel who said he suggested his clients get the clean-up done “at nights and as quietly as possible.”

 The sniffer dogs in most cases who map these infestations have been seen to achieve as high as 97% accuracy rate compared to a 30% visual, human detection rate.

 But the dogs can only spot the bugs, they can’t contain the menace. “For a city that spends and trades in billions of dollars and has hundred of architects, interior designers and health workers, we have dogs as our first line of defense? That surely can’t be good news,” said Turkel.