[quote=AK]I’d take the businessjive.com presentation with a grain of salt as the site is run and hosted by the CEO of Overstock.com, a perenially unprofitable business that blames its problems on naked short sellers.
[/quote]
Lol….Patrick Byrne (Overstock.com CEO) long declared war on short sellers awhile ago. A trip down memory lane.
Lesson learned: everyone has an agenda….everyone….
In 2005, Byrne contended that numerous hedge funds, analysts and journalists were colluding in an attempt to profit through illegal naked short selling aimed at various companies. Byrne has argued that the practice, which involves selling shares of a stock short without arranging to borrow the shares, has been used in concerted efforts to drive down the share price of certain companies much further than is possible with ordinary short selling, despite SEC regulations that generally prohibit the practice. Byrne said this has caused the failure of a number of small or financially troubled companies, which then becomes highly profitable for the naked short sellers.[21] In a letter to the Wall Street Journal in April 2006, Byrne contended that “blackguards have practiced ‘failure to deliver'” of securities, were “destroying businesses and (probably) destabilizing our capital markets.”[22][23] Since 2005, Overstock has filed two lawsuits relating to the matters under Byrne’s direction.[24]
In the first lawsuit, filed 2005, Overstock.com sued hedge fund Rocker Partners and the equities research firm, Gradient Analytics (formerly Camelback Research Alliance), saying they illegally colluded in short-selling the company while paying for negative reports to drive down share prices.[25] The defendant (i.e. Gradient Analytics et al.) moved to have the case dismissed, however the California court ruled in August 2006 that the suit should be allowed to proceed.[26] Gradient filed a counter-complaint against Byrne for libel.[27] A portion of this suit was settled out of court on October 13, 2008, when Overstock.com and Gradient dropped the claims against each other after Gradient retracted allegations that Overstock’s reporting methods did not comply with rules established by the FASB, stated they believed Overstock.com complied with GAAP standards, and that three directors were independent, and apologized. [28][29]
Overstock.com filed a second lawsuit in 2007 against a number of large investment banks relating directly to alleged illegal naked short selling.[30] Both cases remain in litigation.[31]
Byrne’s campaign against naked short selling has attracted controversy, including criticism from a number of journalists. In a column in the New York Times in February 2006, journalist Joseph Nocera described Byrne’s actions as a “campaign of menace” and as an attempt to silence Overstock.com’s critics.[32][33] MarketWatch’s Herb Greenberg has called Byrne the runner-up for Worst CEO of the Year two years running.[34] One of Byrne’s claims, that naked shorting can cause heavy dilution of a company’s stock by creating sales untied to any specific shares, has been criticized by Wall Street Journal columnist Holman W. Jenkins. Byrne has cited Overstock.com as an example of a company whose shares have been more than 100% sold short in one quarter, but Jenkins suggests that this merely reflects Overstock.com’s heavy trading volume and relatively small public float. Jenkins further argues that brokers are inherently cautious in using the practice, due to the high risk of trading shares that are not guaranteed to be available.[35] Byrne has denied that his campaign is primarily about Overstock.com, but others contend that it is an attempt to divert attention from Overstock.com’s financial performance, noting that the company has not turned a profit in several years.[36] However, Byrne has also received favorable coverage, and was featured in a Bloomberg Television show on Naked Short Selling, “Phantom Shares”[37], in March 2007.
In March 2006, John (Jack) Byrne, chairman of Overstock.com and father of Patrick Byrne, said that he was thinking of stepping down in disagreement over the campaign against naked shorting.[38] In April 2006, John Byrne stepped down to become vice-chairman, and in July of that year he resigned from Overstock’s board of directors. In August 2008, Jack Byrne said that after “much initial skepticism” he believed his son was “right all along” about the battle and lawsuits with short-sellers and analysts.[39]
Byrne was instrumental in Utah’s passage of a law aimed at curbing naked short selling. The legislation was repealed in February 2007, after state representatives were advised that it probably would not withstand judicial scrutiny due to federal preemption.[40] Byrne criticized the repeal,[41] but Senate Majority Leader Curtis Bramble said that legal advisers believed that the state would lose any litigation over the law.[41]
The campaign has also involved the Securities and Exchange Commission to varying extents. An SEC investigation of Gradient was initiated but then dropped in February 2007.[42][43] In July 2007, two American Stock Exchange options market makers were fined and suspended for using Regulation SHO exemptions to “impermissibly engage in naked short selling” in trades involving options and stocks for their own account. Overstock shares were believed to be among the stocks traded. The market makers settled without admitting or denying the allegations. None of the defendants sued by Overstock were named in the decision, but the Dow Jones News Service said that the decision was likely to be used by Byrne in pursuing his case.[44][45][46]
After the crisis in the North American markets in 2008, Byrne has received mainly positive press. A Salt Lake Tribune article reported that “These days, when people talk of Byrne, the word “vindication” comes up a lot.”[47]
[edit] Awards and Media attention
Since Byrne launched Overstock.com in 1999, he and his company have garnered attention from numerous national media outlets. Among them are the Wall Street Journal, ABC News with Peter Jennings, Fortune, CBS Marketwatch, and BusinessWeek, among others. He has also appeared on Bloomberg TV, CNBC, and Fox News shows such as Your World with Neil Cavuto. In 2002, Byrne was named to BusinessWeek’s list of the 25 most influential people in e-Business in 2002: the magazine cited survival strength and vision as qualities that qualified Byrne for the list.[2] and Ernst & Young awarded Byrne the “2002 Milestone Award Winner Utah Region.”[3][16] Also in 2003 Overstock came no.1 in MountainWest Capital Network (MWCN) Utah100 award for the fastest growing company in Utah. Fastest Growing category are based on percentage revenue increases in the five preceding years.[48] Byrne also won the first-ever Utah Best of State Awards for Community Development in 2003.[49]
Overstock’s phantom menace
The online retail liquidator’s CEO is waging an extraordinary campaign against short-sellers.
November 1, 2005: 8:04 AM EST
By Bethany McLean, Fortune senior writer and Corey Hajim, Fortune reporter
NEW YORK (Fortune) – Patrick Byrne, the 42-year-old CEO of online retail liquidator Overstock.com, is under growing pressure to deliver numbers that prove his business will make money.
Certainly the third-quarter results, announced on Friday, Oct. 28, did not help his cause. Once again Overstock.com (Research) lost far more than analysts were expecting.
“Q3 was rough. My bad,” Byrne said. He added, “Some will criticize me for taking my eye off the ball to pursue a jihad.” The story of his jihad is one that is full of passion and includes heroes of the little guy, evil doers, conspiracy and accusations of illegal activity.
Even hardened denizens of Wall Street were shocked by a conference call that Byrne held on Aug. 12. “I want to get something off my chest,” Byrne announced. Then he launched into a rant about a “miscreants ball” in which he mentioned hedge funds, journalists, investigators, trial lawyers, the SEC, Eliot Spitzer, and a conspiracy led by a character he calls the “Sith Lord.”
The day before that August conference call, his company and one of its shareholders filed a lawsuit against a well-known hedge fund and short-selling firm called Rocker Partners; its two top executives, David Rocker and Marc Cohodes; and a research firm called Gradient Analytics, along with its two founders.
In the lawsuit, Overstock alleges that the defendants “orchestrated a wide-scale predatory campaign of knowingly distributing false, and covertly biased, written reports about Overstock in order to disparage Overstock and enrich themselves.” All the parties named in the lawsuit deny any wrongdoing, and David Rocker says he is preparing a dismissal motion and countersuit.
Perhaps nothing illuminates the growing strangeness surrounding Overstock better than an incident involving an Overstock senior vice president named Stormy Simon. Through the gossip mill, David Rocker heard that she was unhappy. So he got word to her that she should call him. She wasn’t planning on complaining, but Byrne wanted to see what Simon could learn — he had heard that former employees were being paid to divulge information about Overstock.
Simon’s phone rang while she was in her office in Salt Lake City with Byrne. She put Rocker on the speakerphone so that Byrne could listen and told Rocker that she was in Philadelphia, close to his New Jersey office.
They agreed to meet the following morning — she had to take the redeye to Newark to make the appointment. Simon told Rocker that she could “sink Byrne, I can sink his ship today.” (“She showed him some thigh,” Byrne says.)
Rocker wasn’t sure whether to believe her. He told her that if she had valid concerns, she should get a lawyer and should take them to the SEC.
While some disparage Byrne’s campaign against his perceived enemies, it has made him something of a hero to those who believe that short-sellers are predators who destroy companies through innuendo, bullying, political connections — and sometimes through a practice known as “naked shorting,” which involves a truly black-box part of the market.
Ordinarily, when someone wants to short a stock, he is required by law to borrow actual securities first. In naked shorting a short-seller registers a trade without actually borrowing the shares. In theory this means that there is no limit on the pressure a short-seller could apply to a stock. The practice is illegal in most cases.
Byrne says he’s not out to save just himself, or even his company, but the entire system. As he wrote on a Motley Fool message board: “For many months I have gone to bed knowing somewhere in America there is a grandmother eating dog food tonight so that some ass … on Wall Street can drive a new Porsche.” (You can follow the story by logging on to Motley Fool’s Overstock message board, and the blogs by Mark Cuban, Bob O’Brien and Jeff Matthews.)
Byrne’s support comes from various fronts. His board does not waver. “He is a business genius,” says John Fisher. “The board loves Patrick,” says his father who is also chairman. A group called the National Coalition Against Naked Shorting, or NCANS (www.ncans.net), has rallied around him.
Attorney John O’Quinn, who made his name winning billions for the state of Texas from the tobacco companies, claims that naked shorting has bankrupted many companies. His firm has filed more than two dozen lawsuits against Wall Street firms in seven states.
Naked short-selling makes for great conspiracy theories because it is so difficult to disprove — in fact, many on Wall Street agree that it happens to some degree.
But there are two old maxims on the Street: One, you can’t destroy a fundamentally healthy company through market manipulation — push the stock low enough, and someone will step in and buy it. And two, if a company begins to complain about short-sellers, watch out, because something else is very wrong.
Whatever the result of the lawsuits and accusations, the fourth quarter, which includes the all-important holiday season, will be another moment of proof.
