The Good, The Bad, and The Just Weird
I finally got to see the OSTK lawsuit and affidavits today, and while I will freely admit that I know little to nothing about the law from an attorney or law enforcement perspective, I can read at a reasonable level, and can make inferences that seem logically consistent, at least to me. So here's a quick summary of what I see as the main take-aways:
1) Ex-employees of Gradient/Camelback have given sworn testimony as to the operating procedures of that company. Those procedures allegedly include everything from allowing hedge funds to modify supposedly independent research, to misleading customers as to the credentials of the research analysts (that should be an easy one to verify) employed by the firm, to running money from within the same offices and taking positions that were favorably impacted by the "independent" research, to generating reports that amounted to nothing more than libel, to enabling hedge funds to front run their reports by providing advance copies and holding off on publishing. And there's more. Much more. I would suggest you read them yourself, at OSTK's website, or linked through the www.ncans.net/news.htm website.
2) The credibility of the ex-employees will be called into question, I'm sure, as attacking the messenger is the only viable defense here, besides denying everything. The question is whether there are ways to empirically test whether the ex-employees are telling the truth. I would guess that web logs of the referenced website are available to see who was looking at what and how often, and that phone records and emails would show how much contact was had, and by whom. If there is a regular pattern of contact that corroborates the sworn testimony, that is an important data point. If the customers indicate that 22-year olds were indeed represented to them as CPA's and CFA's, that is an important data point. If the body of evidence of the hedge fund's trades indicate suspiciously favorably timed accumulations of puts or short positions within a few days or so of major negative reports being issued that is important data.
We can predict that the veracity of the ex-employees will likely be assaulted by the quisling hedge fund helpers in the press and on the few blogs that spew their agenda, but in the end the question will be two-fold: Are ex-employees, presumably disgruntled, adequately motivated to be credible whistle-blowers, and well-informed enough to have the knowledge of which they claim? And would several relatively low level employees lie, and embroil themselves in what they had to know would be an ugly, ugly conflict - and if so, why? To what end?
My very limited experience has been that when you have a group of people who all tell approximately the same story, that seems more credible than not. But the data will ultimately tell the full story, and either vindicate the hedge fund and Camelback, or damn them. That's why I expect the emphasis to be on the personalities rather than the data, at least in the press, at first. You can't argue the data, but you can savage the people - we've seen that in the approach to Byrne.
3) The real question in my mind is whether law enforcement will now get involved. I don't know how RICO statutes work, but if a disparate group of entities and individuals are working in a repetitive manner to break laws in order to damage companies, for profit, I would think that might fall into the RICO basket. This isn't a stock case, it is a libel and business damage case. Although it might well develop into a stock case down the road, as that is indubitably the mechanism that was used to monetize the larceny, if larceny indeed went on. Again, I'm being very careful to say that I don't know for sure whether it did or didn't, nor am I taking the position that the hedge fund and research organization are guilty of anything. But if they did do what the affidavits and the lawsuit claim that they did, isn't that against the law? I don't know whether it is, or specifically what laws would be violated, but doesn't the activity described in the affidavits seem, well, just wrong, even to a layman?
4) The fact that Herb Greenberg's associate editor Harris is mentioned in the affidavits seems particularly damaging. Now, I'm sure that there is some plausible explanation for why a TSCM associate editor who works closely with a financial journalist known to invariably take the hedge fund's perspective to heart in his articles (witness the 30-something he penned in one year on an obscure MREIT in the boonies called NFI) would be penning research reports for an independent research firm - that seems to stink to high heavens as well, if true. Which again, we don't know, but which is the allegation made in the affidavit. Should be simple enough to check as well, although I'm sure that if true, there will be an elaborate explanation as to why it isn't what it appears to be. Because it never is, now is it?
5) I actually like Donn Vickrey of Gradient. We have had a number of discussions over the years, and he seems smart, friendly, and open. At one point he even asked me if I would be interested in doing work for Camelback, which I declined, although it sounded interesting to me to be a more formal market commentator. He was good natured about me eviscerating some of his reports on NFI, and overall didn't strike me as particularly malevolent or as a bad person, so there is a part of me that hopes that these charges are unfounded. It is difficult to reconcile the guy I've chatted with and the deliberately larcenous and ethically compromised guy described in the affidavits, so one could say I'm conflicted on this one. Again, I suspend judgment until all the facts of the case are known.
6) As this case and the threatened counter-suit go forward, I'm confident that relevant discovery will show whether or not the affidavits are consistent with the trading and the emails and calls and whatnot. It is no secret that I have long suspected that there is a coordinated group of manipulators who target specific stocks, and use their contacts in the media and with research firms to make the trades go their way. I've also been vocal about the idea that these predators use illegal trading practices which constitute market manipulation, a la Elgindy. I've further been known to opine that naked short selling is a critical tool in their arsenal. And I've even gone as far as to say that foreign arbitrage, of options and abuse of foreign market maker status, plays a pivotal role, as does abuse of the class action attorney card, and abusive targeting of regulators at the victim companies. Now I have no idea if this particular group does any of that, but as discovery goes forward it seems like we might get a glimpse as to how delusional I am -which I'm quite sure that I am much of the time.
I mean, how credible is it that a coordinated group of disparate entities could abuse the markets to destroy dozens of companies, in plain view of the regulators, and using the media, research firms, television commentators, related party offshore trading accounts, illegal naked short selling, collusion, paid message board attacks, etc. etc. etc.? I've been told countless times that is crazy talk, and it well may just be.
Equally interesting as the affidavits was the final paragraph of the OSTK press release, wherein Dr. Byrne indicated that it had taken almost two months for him to get the shares he purchased in the market on August 8 - this after doing a conference call and presentation where he explicitly announced that there couldn't be many legitimate shares being traded, as most were owned by Byrnes, or friends of Byrnes, or institutions. He was roundly mocked and derided for that call, as he was when he described the suspected hedge fund conspiracy in a later call. He was told he was a kook, that he didn't understand how the system worked, that there were plenty of legitimate shares, it was all in his head, etc.
And then he and his dad went into the market and bought 250K or so shares, pragmatically having the impact of testing the system, and Dr. Byrne's wild-eyed beliefs.
It took two months for 25K shares to be delivered, and his dad is still waiting for the hundreds of thousands of shares he bought to appear - they still haven't been delivered. Turns out that this time, when the zany belief was tested, it accurately predicted that no real shares would be available for delivery.
Which is exactly what happened.
You haven't really read a lot about that in the media today, huh? All the "financial journalists" who made much hay out of deriding Dr. Byrne's statements are strangely silent now - not a lot of chit chat from any of them. The smirking blogster hasn't chimed in yet, nor has the lapdog, nor Carol, nor the "was Byrne drunk or stoned" guy, nor Alpo at Barron's, nor the twenty questions guy at the Fool. Not a peep out of them.
Who could have predicted that?
As an aside in the weird department, I got a little chill today, as one of my intellectual diversions, my guilty pleasures and passions, is writing Grisham/DeMille-esque fiction novels, something I started doing about a year and a half ago. My second novel is a creation of implausible invention. So is my first.
My first is about a rogue hedge fund with dirty money ties whose fund is used as a conduit for black ops money by clandestine segments of our intelligence apparatus, a la Iran Contra, and whose ruthless fund manager targets the protagonist for persecution as our hero's efforts in exposing the fund's misbehavior threatens its ability to remain viable. We all can read that synopsis and go "that's clearly fiction, a titillating invention, couldn't possibly be true, too elaborate a conspiracy, too many disparate entities acting in concert."
Now here's where it gets weird.
My second novel is also a creation of implausible invention.
I wanted to do a breakneck paced suspense/intrigue book that read like the TV show 24 plays - a multitude of disparate stories and characters reconciling the seeming divergence by solidifying into one coherent conclusion. To make it more challenging, I conjured up parallel story lines involving a serial killer and a multi-national conspiracy.
This one is my favorite for sheer pace, albeit a wildly implausible central premise.
You see, it's predicated on the fanciful fiction that the government of North Korea is counterfeiting US hundred dollar bills.
And then I saw the news today.
Sometimes truth is stranger than fiction. At least it's supposed to be.
Both are obviously hugely timely and topical given just this week's headlines - REFCO's implosion, Hilary Clinton's commodity trades having been done via REFCO, hidden half billion dollar liabilities representing naked short shares, hundreds of thousands of OSTK shares naked shorted and continuingly undelivered to Byrne, larcenous hedge funds imploding (Bayou being the latest), revelations of Elgindy's connections to arms dealers and organized crime...that market segment is rich with possibilities to mine for a fictional construct.
But one has to wonder at the North Korean thing. I mean, that is a little too weird for words.
On that note I will sign off, and simply caution that we need to see the data before we will know anything for sure on the OSTK suit, but that the stakes appear very high here, and thus caution and prudence should be exercised before jumping to any conclusions. But it is odd that the media has largely ignored what is developing into the market story of the year. Must just be one of those days.
Because some days are just kind of weird, you know?
This is probably just one of those...well...