Tuesday, November 01, 2005

Bethany, Bethany, I've nurtured a viper at my breast...

Bethany McLean of Fortune wrote a nice Type "B" piece on Monday about Dr. Byrne of Overstock.com.

For those who haven't been following this, there are two types of basic articles which appear in the financial press about OSTK and Dr. Byrne - Type "A", and Type "B".

Type "A" articles are balanced, fair pieces which examine the evidence in the OSTK lawsuit -sworn statements alleging illegal misconduct by a research firm and hedge fund - and consider the charges leveled in the suit with serious consideration. They also acknowledge that there is growing reason for concern about the practice of naked short selling, and attempt to explain to the layman the risks of this illegal predation. Motley Fool is one example of this sort of article.

Type "B" pieces generally emanate from New York, and are biased, omit critical facts, and take the tack that Dr. Byrne is crazy, or a crook, that naked short selling is a belief akin to alien abduction, and that those concerned about it are as crazy as sh*thouse rats. They are the tired product of a small circle of journalists who are always particularly sympathetic to the hedge fund spin, and seem blissfully ignorant of both the longer term, as well as short term history of Wall Street. They ignore the weekly implosion of larcenous hedge funds, the mountain of facts regarding naked short selling, the sworn testimony of 4 former employees of the research firm in question, scholarly tomes and reports by name economists and authorities, and instead repeat their agenda with credulous and vindictive sincerity, and a certain perseverance usually only seen in vocational spin doctoring.

In this little nugget, Bethany uses words like "rant" with facile abandon, coloring her rhetoric with negative innuendo whilst ignoring a mountain of easily obtainable and now well circulated information which demonstrates many of her points to be erroneous or ignorant. She also launches into what seems suspiciously like a personal attack, castigating Byrne for being thin-skinned, and further drags my pseudonym through the cyber-mud with everything from second-hand speculations as to my identity, to backhanded twisting of my statements.

Not exactly journalism's finest hour, but then again, a classic Type "B" job. Soft on facts and figures, long on smarmy innuendo and personal jabs, written from the perspective that Byrne's lawsuit is based on fantasy, and that it is an attack upon honest critics rather than a meritorious accusation based upon a host of sworn testimony, and other as-yet-to-be-released evidence.

Admittedly, Fortune has all of the gravitas of cotton candy, and thus has received the attention one would imagine it would deserve for this piece. Pity, as I could use the press in something anyone serious actually reads - Fortune quoting from the NY Post isn't precisely the New York Times, now is it? Oh well, always a bridesmaid...

I won't bore the readers with the whole saga as portrayed by Bethany, however I will say that for an upright biped, she certainly has managed to miss the biggest pieces of evidence available in the naked short selling controversy.

Now, I know how hard it can be to work on a deadline. Things can slip through the cracks.

You know.

Starting with the title of her piece: "Overstock.com CEO Patrick Byrne is waging an extraordinary campaign against short-sellers."

Actually not, darlin'.

He is suing a hedge fund and a research firm for allegedly colluding to tarnish his business reputation. And he is waging a battle against illegal naked short selling. He isn't waging any campaign against short sellers. Just against those he alleges are illegally involved in a scheme to harm his company's rep, and against those who are illegally failing to deliver shares they sold.

Details, details. Who's got the time? There's no article if you print all the facts, or even most of them. Instead, just assert convincingly that something false is true, and maybe through repetition it will become ingrained in the public psyche.

But only the segment of the public that are dullards, which apparently Bethany believes comprise her readership.


There are other gems contained in this important work, carved from the fabric of creative writing and offered up like pearls before swine. Take this Jeff Matthews-ism ( a homage to that august person's CNBC and blog performances in which he denies everything, claims sincere ignorance of mainstays of the public markets, and simply recites repetitively that the naked short selling critics are wackos, Byne is unbalanced and incoherent/a crook, and conveniently omits or so distorts the truth that his appearances have assumed a sort of amusement value, to be savored like fine wine or a rare Cubano cigar):

"Everything about Bob O'Brien's performance was odd. First, you don't often hear outsiders spouting off about conspiracy theories on company conference calls. Second, Byrne and O'Brien seemed not to know each other, but Byrne himself would later say that "O'Brien contacted me in October" and began laying out his thesis. (Byrne explained in a Motley Fool post that when O'Brien said his name might not be familiar, Patrick "assumed" he meant that his name might not be familiar "to your audience.") And third, Bob O'Brien's name is not actually Bob O'Brien."

Yes Bethany, very odd. How shockingly odd. Throw in a smirk, a nervous tick and a stuttered "that's incoherent" or "it's unbelievable" and you can go on CNBC. Bravo for Fortune getting all of this into their busy schedule 9 months after every other pub covered it. Kudos. Hey, I hear Greenspan may start raising interest rates soon, too. A breaking news tidbit, just entre-nous....

How about this:

"A critical part of the conspiracy O'Brien outlined is something called "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. Bob O'Brien—and many others in his camp—claim that naked short-selling is rampant, and that it destroys both small companies and small investors. "Welcome, welcome to the greatest transfer of wealth from legitimate shareholders to the system set up for stock trading that's ever occurred," he writes in his blog.

Accusations of rampant naked shorting have been around for some time, although in the past three years they have gotten more exposure thanks to the Internet. O'Brien helped create a site called the National Coalition Against Naked Shorting, or NCANS (www.ncans.net), whose executive director is a woman named Mary Helburn. Senator Bob Bennett of Utah, at a March 9, 2005, hearing of the Senate Banking Committee, told the panel that his constituents "feel victimized" by naked short-selling. 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. "

Bethany. Sweetie.

A tip.

If you see something published called the Reg SHO list, which confirms and commemorates the existence of massive naked short selling, it's not a claim. Neither is it a claim when the Pipe's Report publishes a FOIA request with an average of 150 million FTD's a day. Those aren't claims. They are documented facts. It isn't like I am claiming that Jim Morrison hangs out on my porch smoking reefer with Elvis. The problem, documented, is that Wall Street trades markers good for delivery of shares - NOT actual shares. Oftentimes they aren't delivered, but the transactions are already cleared and all the commissions have been paid, so the non-delivery doesn't really impact most of the players - what do they care? They already got the money for the trade - the delivery is an afterthought.

The problem with de-coupling clearing and settling is that Wall Street pays itself upon clearing the trade (taking the order and executing it) rather than upon settlement (delivery of the shares). This means that the financial motivation is to do more trades, rather than ensure delivery.

Now, that isn't so hard to wrap one's noggin' around, is it? Ya pay the salesman when he takes the order rather than when he delivers the product, and he's going to be financially motivated to take many more orders, and leave the deliveries to fall where they may - hell, if the SEC isn't going to enforce their own rules, why should Wall Street miss out on billions of easy money? Delivery is for pansies. There's money to be made, all the markers are treated as genuine until they fail, and by then, it's too late - damage done, price depressed, commissions paid, so solly, no shares available with which to deliver. It happens.

I do so enjoy when he financial press both pretends that easily available info isn't available, and that simple-to-understand concepts like the one I just explained in a few sentences are unfathomable.

Almost as though they had an agenda to pretend that something simple is really complex and thus too hard for anyone to really want to bother with, and secondarily to repeat the NY Post's speculations without actually knowing whether they are correct or not.

Bethany, in her best Jeff Matthews "it's all just too wacky and incomprehensible" manner, delivers the expected goods. Here's the reader's digest version:

Pat Byrne is a loon and a lying crook, and always has been - what a nut. Bob O'Brien is another kook, who thinks that the mothership will be by at any moment to beam them all up. Together they have hatched this krazee theory, and you are an A-hole if you believe any of it.

There. Pretty succinct. And wrong, but who's counting?

Sure there's a Reg SHO list that proves naked shorting is taking place, in volume, as we speak. Tut tut, we won't mention any of that. Sure there's articles citing FOIA requests that show the FTD problem is large - why bore the readers with those niggling facts? Yeah, Compudyne and Sedona and Jag and CMKX and REFCO are proof positive that naked short selling in fact is actively going on. Professor Boni's paper indicates that the average failure lasts 56 days - deliberately. But why clutter your pages with all of that when you can do the 27th "Byrne's loco" and "Who's Bob O'Brien" articles?

If it wasn't so transparent and so immensely predictable and sad, it would be funny.

Instead it is the bloated, tired thrashing of a large system trying to pretend that all is well, and that its critics are crazy or stupid or deceitful.

But the SEC won't tell anyone how big the problem is, or how many fails OSTK has, or any of the rest of it.

Just because.

The stink is stronger by the day. Wonder when the other shoe drops on REFCO? You know, the known conspirators in the naked short selling scandal involving Rhino Advisors? The one the SEC was sanctioning even as they went public, duping investors out of billions?

Nice work Bethany. Really. We need more hard hitting, unbiased journalism of the sort this classic Type "B" represents. Maybe Kim Jong-Il needs a puff piece about his human rights work penned. You never know.

It's a living, right?

Nice work, Bethany. Well played. Bravo.


Anonymous Anonymous said...

Nicely done and carry on!

5:17 AM  
Anonymous Anonymous said...

This comment has been removed by a blog administrator.

8:17 AM  
Blogger canceled111111 said...

We'll see who's crazy in a Marin Court, Bethany...

9:29 AM  
Anonymous Anonymous said...

I'm sure this has been brought up a number of times, but Bethany is shall we say, an accomplished journalist. Ask Mr. Skilling about it.

And surely Bob, a man of your high minded morality, one who is risking his very safety to make sure grandmothers aren't eating dog food anymore, takes umbrage at Dr. Byrne's lewd email to Bethany. Or are oral sex jokes by CEO's exempted from your jihad?

Seriously, both sides are talking right past each other here. Those long OSTK and fighting the naked shorting fight refuse to acknowledge the abysmal operating and financial performance of the Company of late. Those who are either short OSTK or who find the NCANS crowd two floats short of a parade fail to acknowledge that yes, there is a Reg SHO list, and yes companies are being naked shorted and yes the FOIA document provided empirical evidence.

The truth is both sides are correct. But let's look at two hypotheticals. (1) Suppose there is no naked shorting going on in OSTK, or that it is so deminimus that it has basically no impact on the share price. Would the longs then admit OSTK has had "decrapitating" performance and that the stock price today is far more reflective of the Company's true value than the asinine level it reached during Q4 04's melt up of high beta stocks. (2) Assume that there is massive naked shorting going on in OSTK. Isn't it reasonable to assume that in light of the "my bad" worthy performance of the Company that rather than the stock finding support at around $32, a level where many bears still find it to be overvalued, the price would continue to fall further and further.

Just asking...

10:16 AM  
Anonymous Anonymous said...

The last post is of the sort that drives me nuts. We naked short because the company doesn't deserve the current valuation.


It is either an auction market or it isn't. If more people are willing to buy at current price then want to sell, it rises.

Just because you think a stock should trade lower, doesn't give you the right to sell the rest of us counterfeit shares with no voting or dividend rights.

If someone opens a margin account knowing their shares can be lent out in exchange for easy credit, that's one thing. At least the buyer gets a real share and the margin account owner gets some value for the loan.

But if you sell worthless scraps of IOU's to my retirement account, I am peeved.

Guess what - the value of a company is not always buried in the PE that the hedge funds seem so obsessed with.

Where a hedge fund might see a biotech company that is losing money, the public may see the cure to spinal cord injury.

To the last poster, we're not going to let up. If you're naked short, you should consider covering as it will be a game of musical chairs.

11:00 AM  
Blogger bob obrien said...

Anonymous, you miss the point. I'm not now, nor have I ever argued that OSTK is fairly or unfairly valued, not a good nor a bad company.

That is a valuation argument that simply elects to change the subject.

I don't like just changing the subject.

OSTK's fundamentals and valuation have nothing to do with whether the hedge fund and research firm were colluding to commit character assassination against OSTK. They also have zip to do with whether there is a naked short selling problem.

I find it fascinating that the defenders of the short faith can never seem to actually tackle the issues at hand, and always have to try to move the target.

Again, slowly, this has nothing to do with the quality of the companies on the SHO list, nor OSTK's quality, nor whether Byrne is bugfuck crazy or the savviest guy on the street.

It has to do with whether there is an illegal trading technique at work wherein the participants are creating transactions, and then simply failing to settle.

That is question one.

If they are, question two is why are they being allowed to do so, and collect commissions on transactions for which there are no genuine shares available for delivery.

Question three is of course, do the allegations against Gradient and Rocker have merit.

None of those have squat to do with whether OSTK is a good or bad internet retailer. Or whether Byrne is a liar and a cheat or a sainted genius.

Your first hypothetical ignores the reality of the SHO list presence of OSTK - why would you want to frame hypotheticals that ignore one of the few facts we actually know? That seems oddly counter-productive to any sort of reasoned discourse. "Imagine you could breath water". Why? We know there is naked shorting in OSTK, from the SHO list info and the inability of Byrne to get any shares for months. Why ignore that? To what useful purpose?

Your second is basically a variation of "why won't naked shorted stocks go to zero?"

The answer is many will. Or near zero. OSTK has institutions buying, and Byrne buying, and nervous bankers supporting the naked short sellers - they aren't complete idiots, and there are now solid rumors about formal investigations into the "miscreants". That has to be cutting into their enthusiasm to bite off more risk.

I know you want to start a straw man argument along the lines of "OSTK/Byrne are bad, thus X or Y is the reason the price is down." That may well be. Or not. It isn't however consistent with what we know about the Reg SHO listing and the inability of the CEO and his dad to get hundreds of thousands of his own shares delivered.

So let's stick with those items, shall we? Jeff Matthews has a blog devoted to discussing how evil the company is, and he is more than willing to ignore reality of the SHO list and the FOIA requests and everything else, and pretend that there is no naked short selling - in the face of overwhelming evidence to the contrary. Perhaps you will find a more sympathetic ear there. Dunno.

But here, the hypotheticals have to explain observable known phenomenon, not ignore it.

11:25 AM  
Anonymous Anonymous said...

I'm curious about the differences between the settlement and clearing procedures between the stock market and the commodities market. Could you detail in next blog perhaps?

It seems the longer the settlement time,

1) The less immediate impact my purchase/sale will have on the market.

2) The more likely it is for a broker to take the other side of my trade up to the settlement date.

Could this settlement delay really be a chief mechanism by which profits are captured by brokers regardless of whether or not they use naked shorting or not? A.k.a. "settlement arbitrage"

Is this electronic age, what keeps clearing and settling from happening within a day anyway? That is unless someone is making a profit by the delay.

3:12 PM  
Anonymous Anonymous said...

Bob, valuing your writing skills as you do, the phrase is not "take the tact that" but "take the tack that"... Regards and good work.

4:06 PM  
Blogger bob obrien said...

The settlement arbitrage you refer to is actually far worse than anything you could imagine.

It is a mechanism for massive institutionalized fraud, wherein everyone gets paid on clearing day, and settlement day is an annoyance that they would do away with altogether, if it was possible.

The problem is that on a stock like OSTK, delivery can never occur, and the system still gladly creates transactions, resulting in price depression. It is illegal, it is a violation of 17A, and it is a 10(b)5 violation if it can be shown that it is being done as part of a stock manipulation, which I believe is the case, and which I further believe the trading records will show.

My next Sanity Check will blow your mind. It is on this topic, and is literally unbelievable.

4:08 PM  
Blogger bob obrien said...

Thanks. Change made. Sometimes I write too fast, and make silly errors. That was one.

4:12 PM  
Anonymous Anonymous said...

Again I am inspired by your work. 1 thing go for the throat with Patriot act sec 356 all involved should fry.


(a) DEADLINE FOR SUSPICIOUS ACTIVITY REPORTING REQUIREMENTS FOR REGISTERED BROKERS AND DEALERS- The Secretary, after consultation with the Securities and Exchange Commission and the Board of Governors of the Federal Reserve System, shall publish proposed regulations in the Federal Register before January 1, 2002, requiring brokers and dealers registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 to submit suspicious activity reports under section 5318(g) of title 31, United States Code. Such regulations shall be published in final form not later than July 1, 2002.

(b) SUSPICIOUS ACTIVITY REPORTING REQUIREMENTS FOR FUTURES COMMISSION MERCHANTS, COMMODITY TRADING ADVISORS, AND COMMODITY POOL OPERATORS- The Secretary, in consultation with the Commodity Futures Trading Commission, may prescribe regulations requiring futures commission merchants, commodity trading advisors, and commodity pool operators registered under the Commodity Exchange Act to submit suspicious activity reports under section 5318(g) of title 31, United States Code.


(1) IN GENERAL- Not later than 1 year after the date of enactment of this Act, the Secretary, the Board of Governors of the Federal Reserve System, and the Securities and Exchange Commission shall jointly submit a report to the Congress on recommendations for effective regulations to apply the requirements of subchapter II of chapter 53 of title 31, United States Code, to investment companies pursuant to section 5312(a)(2)(I) of title 31, United States Code.

(2) DEFINITION- For purposes of this subsection, the term `investment company'--

(A) has the same meaning as in section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3); and

(B) includes any person that, but for the exceptions provided for in paragraph (1) or (7) of section 3(c) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)), would be an investment company.

(3) ADDITIONAL RECOMMENDATIONS- The report required by paragraph (1) may make different recommendations for different types of entities covered by this subsection.

(4) BENEFICIAL OWNERSHIP OF PERSONAL HOLDING COMPANIES- The report described in paragraph (1) shall also include recommendations as to whether the Secretary should promulgate regulations to treat any corporation or business or other grantor trust whose assets are predominantly securities, bank certificates of deposit, or other securities or investment instruments (other than such as relate to operating subsidiaries of such corporation or trust) and that has 5 or fewer common shareholders or holders of beneficial or other equity interest, as a financial institution within the meaning of that phrase in section 5312(a)(2)(I) and whether to require such corporations or trusts to disclose their beneficial owners when opening accounts or initiating funds transfers at any domestic financial institution.

large aggrigate fails are suspicious no?

CMKX 800Mill fail in April 2005 alone?

8:39 PM  
Blogger canceled111111 said...

re: your appearance on the OSTK call.

Funny how now of these fine folks have anything to say about the Rev JimBob Cramer's sudden appearance on the Oct 2004 OSTK call, after being alerted by the usual Rocker-TSCM cohorts, when he rushed in to proclaim he only knew Rocker from meeting him at a supermarket and is "an independent operator".

I shit you not.

Rocker had appeared on Jim's TV shows several times before Oct 2004...and...oh yeah...is the largest investor in the Rev. Booyah's Baby and largest holding, TSCM.

Which is were Greenberg used to work, Matthews and Cohodes, former and present Rocker Partners, used to play, well, you get the picture.

A GD Tammany Hall of a Hedgefund/CNBC/TheStreetCom/Marketwatch conflict of interest.

10:38 PM  
Blogger mfairview said...

Or that Rocker himself called in to argue with the CEO. For some reason, everyone loves to write about the story starting half way through and all have writers block about little things like Reg SHO, the officers getting delivery of their shares, and collusion between agents betting against the company. Perhaps they're drinking the same water. Time to find a different fountain guys.

3:27 AM  
Anonymous Anonymous said...

I don't know if any of the alleged offenses are illegal or not; however, I do know that OSTK and Bryne have hired one of the most scumbag plaintiff attorneys to prove his charge. John O'Quinn has gotten much press time lately not for OSTK but for his part in the biggest plaintiff scams as of late - silicosis. As has been widely reported, the plaintiff attorneys manufactured diagnoses and the whole scam came tumbling down when a judge realized what they were doing. Here is a quote from a Bloomberg article -

"The judge has said she'll fine the Houston firm O'Quinn, Laminack & Pirtle, led by attorney John O'Quinn, which represents about 2,000 silicosis plaintiffs. It's likely more firms will get punished.

Federal prosecutors in Manhattan have launched an investigation to see whether crimes were committed, whether by lawyers or doctors or screeners, according to court documents."

Isn't it ironic that the attorney representing OSTK and Bryne might be found to have committed criminal offenses in his own lawsuits?????

2:10 PM  
Blogger mfairview said...

And then there's the story of squeaky clean Millberg Weiss


1:53 AM  
Anonymous Anonymous said...

emailed to Bethany:
In glibly writing Byrne off as a crackpot, you whore (unwittingly?) for truly despicable interests which have callously trampled the hopes and dreams of tens of thousands of individual investors, stealing many trillions in the process via naked shorting and a long menu of other financial industry "shenanigans." These vermin, when rarely nailed, cop a "neither admit nor deny wrongdoing" plea, pay a fine that bears no relation to the magnitude of their theft, and laugh all the way to their offshore holidays and banks where they write their next political campaign contribution checks.
The Washington - Wall Street axis of greed has, with the complicity of certain Congressmen, the SEC and the DTCC, managed to institutionalize corruption, screwing individual investors every step of the way on the road to enriching their coffers while they set the stage for the destruction of global confidence in US capital and securities markets. You should be ashamed at yourself for snidely and ignorantly attacking someone for standing up to the huge, all powerful forces of evil that control the system and who, in the words of Gretchen Morgenstern, regard individual investors as "the dumb money," there to absorb all the risk.

5:36 PM  
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