Friday, November 18, 2005

Act 1, Scene 3, OSTK Suit, In Which The Defendant Is Invited To “Assist The Authorities With Their Inquiries…"

The big news today is that Gradient Analytics is apparently being investigated by the SEC, in conjunction with the OSTK lawsuit, and the associated affidavits (available for perusal at the OSTK website).

As an aside, Rocker Partners’ attorney has indicate that the statements contained in those affidavits and the suit itself are vicious smears against his clients’ allegedly good name, and as such are transparently baseless and without merit. Apparently not that transparent, though, as the SEC doesn’t launch these on a whim – there's a lot of heavy lifting that goes into initiating an SEC investigation, especially if it is a formal investigation.

For those unfamiliar with the vagaries of the terminology, there are two types of SEC probes:

1) Informal Inquiries, in which the SEC requests information about a company or situation, and which can be initiated relatively easily (although many hedge funds will ply their media quislings with dire and shrill cries that an SEC inquiry is a sign of the sky falling, many are nothing more than requests for clarification to establish the status of a given set of circumstances) by an SEC attorney. Informal Inquiries are relatively common at the Commission. Although publicly traded stocks beset upon by hedge funds will plummet on the well-publicized news of an informal inquiry, it is really the SEC’s mechanism to say, “hey, we’ve seen these articles or heard all this buzz, and we want to get some info about what the hell is going on.”

2) Formal Investigations, which signal that the SEC requires subpoena power, and that they have a fair-to-good idea as to what is going on (and that the interrogative is likely to be met with resistance, hence the subpoenas), and are suiting up and loading the riot guns. This is difficult to construe as positive (or even benign), just as an IRS audit is difficult to spin in the affirmative – one can always declare that one celebrates the opportunity that an audit can provide to clear one’s good name, but the truth is that they seldom end well for the celebrant. Formal Investigations are relatively rare, and signal a serious situation. In their reports, Gradient actually cites the danger of an Informal Inquiry escalating into a Formal Investigation as a primary reason for giving companies an F grade. It is a serious as a heart attack.

After contacting several folks who are in a position to know these things, I am of the opinion that Gradient is the subject of a Formal Investigation. I might be wrong, but I suspect not, and the SEC won't corfirm nor deny it, so we will have to use our best judgement in parsing this. But it has a case number, is active, and sworn testimony is being taken. Figure it out.

Now, in order to be fair, I have cautioned against pre-judging any of the evidence in this case, and further expressed a certain disdain for those who would act as judge and jury ahead of a full presentation of the facts in a court of law. I still maintain that is the rational approach to this story.

It is inevitable that opposing counsel will gnash their teeth and shake their fists at each other for the cameras – that’s their role in the media circus, after all. The defendants will predictably declare themselves to be free of any guilt, and decry the action as persecution.

No adult should be swayed by this theater – it is expected, predictable, and not particularly interesting. Criminals and innocents alike will insist that “I didn’t do it” or "I don't know anything about any of that", and we as spectators are left with parsing the available data for clues as to who is lying, and who is telling the truth.

Unlike some unscrupulous short sellers and their cronies in the media, who regularly cut a company’s stock price in half whenever an SEC investigation is launched, I believe that we shouldn’t interpret the commencement of such on its face as evidence that the defendants are in deep water that is now moving against them.

It is undeniable that if the hedge fund and research firm involved in the suit were publicly traded, notice of an SEC investigation would cause a rush for the exits by concerned investors, and a justifiable cooling of their business and banking relationships – for some companies, it can be a death blow.

But they aren’t publicly traded. So that isn’t something we can monitor.

It is also true that Gradient and the hedge fund are linked in the OSTK action - named jointly as perpetrators (alleged, of course), and that as such an investigation by the SEC into one equates to an investigation into both, at least to my amateur eye. Now, that could well be incorrect, but for us layman, if my buddy and I are sued in civil court by the owners of Booze Heaven for robbing their liquor store, and then my buddy is arrested in an investigation of the same “unfounded and baseless accusations”, most would correctly interpret that as meaning that the cops are looking at the totality of the “event”, and that I probably shouldn’t be planning a trip anytime soon.

But what do I know? That is only one fuzzy holiday bunny’s opinion. And anyone that would take a rabbit seriously is, well, you know….

It will be interesting to see how the quisling media brigade treats this latest bit of news. If the theories that they are compromised - bought and paid for (in a manner of speaking) - are accurate, this will either be completely ignored, or will be declared to be an outrage, or perhaps a welcome opportunity to clear the air, or an abuse of the system by evil CEOs and class action attorneys - anything besides what it clearly is.

As you read the follow-on coverage, I would invite you to consider the long list of companies the columnists and reporters in question have written about, when those unfortunate companies were hit with SEC investigations, and consider carefully their treatment of those companies’ situations, and further consider whether their treatment of this investigation is consistent with the others they’ve commented on. If not, ask yourself why not, without jumping to any conclusions. Remember, it is possible that there are innocent reasons for the media blackout on anything positive about OSTK/the suit/Byrne's inability to get his shares - although it is hard to comprehend why Rocker's denial of any wrongdoing got carried by 5 or 6 NY-based news outlets, whereas OSTK's filing of the amended complaint was ignored. Who knows how the NY financial press decides what stories are newsworthy? I'm sure it is innocent, and not a circling of the wagons.

I will say that this is nothing if not interesting. With the blowup of REFCO, and Dr. Byrne’s revelations about his inability to get his stock delivered, and now an SEC Investigation into Gradient, the last weeks have been eventful, to say the least.

Another day, another data point.

Most would agree that this one is a doozey.

8 Comments:

Anonymous Anonymous said...

Bob, I hope this is okay.

I want to have a place where people can anonymously upload files, so I've started a new naked shorting site. I want to use it to drive new members to NCANS.

I've seeded it with a number of documents that are on other naked short sites that I think are the important ones and also some new ones that I haven't seen elsewhere.

I'm going to be adding new info this week and encourage others to do the same as we continue our momentum against this problem.

http://finance.groups.yahoo.com/group/unsettled_trades/

5:41 PM  
Blogger mfairview said...

"although it is hard to comprehend why Rocker's denial of any wrongdoing got carried by 5 or 6 NY-based news outlets, whereas OSTK's filing of the amended complaint was ignored. Who knows how the NY financial press decides what stories are newsworthy? I'm sure it is innocent, and not a circling of the wagons."

Not to mention why a small Utah paper is able to preempt the press on the SEC/Gradient investigation. I'm thankful the internet is levelling the playing field even if just a little bit.

5:48 PM  
Anonymous CorwinPOA said...

Bob, I am hoping you delve into this a bit before the event. Seems like it has the potential to be a good thing:

http://tinyurl.com/7lefx

7:25 PM  
Anonymous Anonymous said...

This comment has been removed by a blog administrator.

12:41 AM  
Blogger Its_strange said...

Once again. Those reporters will identify themselves. You will not. But i believe the NY Post story is correct. Bring on the trial . Lets get to te facts .

4:17 AM  
Blogger mfairview said...

Strange, I'm unsure facts will settle you given that much exists in affidavits, Reg-SHO, etc. and you've turned a blind eye to it all. While much mischief has occurred in or stock market, you seem to be more enthralled with Bob's identity (are you no longer convinced he's Phil?)

BTW- you and credibility must have a get-out-of-jail free card with Jeff, dragging in OSTK slams in each of his recent (non OSTK) blogs. He has often stated that he will delete any off topic posts but has allowed you two to sail on through (even though no one else acknowledges them). Not that I'm surprised, just making the observation of his self-proclaimed unbiasness.

8:03 AM  
Blogger bob obrien said...

It's_Strange:

What does my identity have to do with anything that has been written here?

Answer: Nothing. The information is either correct or it is not. Just as your identity is unimportant to me, and doesn't change the validity of the content of your message.

I think that the reason that my identity is such a hot button for the bad guys is that they really, really want to launch a full scale "shoot the messenger" campaign, or more ominously, wish me less than well. Sorry if I have made that difficult. Nobody is forcing you to read the Easter Bunny's blog, and if you have a problem with a large, furry, chocolate-treat delivering rodent opining about inequities in our market system, I would propose that it's about time for Jeff to slam OSTK again, and your presence is no doubt required there. You will note that I have not censored your, nor limited your ability to express yourself here as long as you stay on point, which is far more than can be said for Mathews. So whoever I am, at least my sense of fair play and ethics is better developed than some 25 year veterans of Wall Street.

If Gradient and Rocker are getting a proctology exam by the SEC, that is news, and you know it.

Who I am doesn't matter. And you know that as well. I'll give you some ammo. I'm not an ex-stripper.

9:15 AM  
Anonymous Anonymous said...

Off topic for this post but...

I just dumped most of the NASDAQ SHO lists into a spreadsheet and sorted them to find unique issues. There are a few duplicates due to name changes and various classes of stock which would need to be scrubbed by hand, but I came up with 1764 different victims since January.

2:41 PM  

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