Wednesday, October 26, 2005

The REFCO Smoking Gun?

(Note: When this was first published late at night two days ago, I had bounced the $10.5 billion liability marked Securities Sold But Not Yet Purchased off a few savvy folks, and first pass was that it was likely partially FTD's. Upon reviewing the prior filings, it became obvious that it was neither mostly FTD's, nor mostly legitimate short sales - both takes were incorrect. The prior filings articulate much of it as Treasuries, which to his credit, Alan Newman caught early on, or rather hypothesized early on, and the next day's digging confirmed it. So the column was modified to reflect the more accurate take, but still poses the very valid question: If the books are cooked and you can't believe what they represent, why won't the regulator simply tell us what is on the balance sheet so we don't all have to guess? Self-proclaimed experts on brokerage balance sheets got this wrong in the prior blog entry, as did my guys (and thus so did I), and frankly nobody easily agrees on most of what they are looking at - even to the total liabilities of the company from week to week in their declarations. So the call to action is the same - tell us what is going on, and settle the trades. Below is the newly modified piece.)

The listing for the assets and liabilities of REFCO was just made available, and guess what just happens to be hiding in the liabilities column?

A $10.5 billion liability, at TODAY's mark to market valuation, called "Securities sold, not yet purchased."$10,590,379,000 - to be precise.

Securities that have been sold. But haven't been bought. And they haven't been borrowed, either. At first I thought that this must be obvious evidence of a huge FTD position - which was reinforced by some of the early folks who offered their take on it. Upon further digging, there is a benign explanation, and yet one which itself raises troubling issues.

Most of the $10.5 billion liability are legitimate short sales and government securities. At least per their filings.

Which then begs the question at the heart of the matter: Can one believe anything in the filings of a group which routinely hid and played shell game with almost half a billion of liabilities, and whose numbers seem to shift like the wind? I'm sure there are arguments in favor of doing so, but frankly, I have a hard time swallowing many of them. If a management team is educated and larcenous enough to go down the road of outright fraud at a pretty sophisticated level, what reason would anyone have to believe that they confined their willingness to obfuscate and deceive to only one liability?

We don't know what in the 10Q we can believe, as they are now known to be a fiction - the books have been cooked. As with Enron, it becomes a game of "which part of the story would you like to believe today?" Some unknown percentage of the liability is likely FTD's, given the company's history and the reluctance of Wall Street to buy the company when it was offered to them, per the NY Times. The question is what percentage.

But why speculate?I think it's time that we find out, no? Why guess any longer - let's get it out on the table.

These guys were being sanctioned for being involved in a prior naked short selling scheme, and were known as the go to guys for questionable types desiring greater "flexibility" in their trading. They lied to their auditors, the SEC and the public about their financial condition. Their CEO has been cuffed. They've had a reputation as "loose" for a long time - consider this from tomorrow's NY Times:"In 2003, Pershing, a unit of Credit Suisse First Boston that offered clearing services for equities, was sold to Bank of New York for $2.5 billion, an indication that greater value was being placed on such services. Lee had taken a preliminary look at Pershing. That year same year, Mr. Bennett approached investment bankers about selling Refco. The bankers canvassed Wall Street, trying unsuccessfully to find an industry buyer.

A senior Wall Street executive who attended a meeting where Refco was pitched said that the biggest concern was that it cleared transactions for many small customers in the United States and overseas whose practices might pose a risk to Wall Street firms (emphasis mine)."I think there's reason to believe that REFCO is the smoking gun the industry has been dreading. Wall Street wouldn't touch REFCO with a ten foot pole a few years ago because of "risky practices" of some of their overseas and domestic customers, so the management laid off the risk on the investing public instead. Nice. And the SEC let them.

You heard about this here first. Many months ago. In March, when I was speculating about a catastrophically large level of fails in the system, being covered up by the brokers and the SEC. When I was writing about special purpose entities being used to hide the size of the problem.

And here we are.The whole BK filing can be viewed here.

I'm not going to go into the $1.25 billion of their claimed assets that are intangibles and "goodwill." Or the offsetting assets which collateralize the FTD's (cash, which is what you'd expect with FTD's). It doesn't really matter. If I'm right about the industry's use of leverage and the risk posed, covering substantial FTD's at REFCO could vaporize the leveraged customers beholden to them.

This is the systemic risk issue I've been warning about.

And this is just REFCO. One company. Only one.

I think we need to know an accurate breakdown of what the composition of the REFCO liabilities actually are, and be turning over rocks to find any other hidden liabilities. Because once a liar...The problem is now one of credibility. The SEC and DTCC's penchant for hiding all the FTD data, and refusing the vast majority of FOIA requests has to stop. There is no reason that the level of fails in a fraudulent company like REFCO justifies secrecy rivaling the Manhattan Project.

I'd like to see a list, by security, of REFCO's FTD's. There's no point in keeping them secret anymore. I'd like to see how many NFI shares, and OSTK shares, and TASR shares, and NAVR shares are in there. And I'd like to understand who is violating the rules. I think that is reasonable. The hackneyed platitudes that the SEC "doesn't want to cause volatility or give away the trading secrets of the participants" are hollow. We don't want speculations and more guesses. We deserve facts.

And guess what? We know the trading secret now. You just print shares in the back room to your heart's content. It isn't a secret. And frankly, IT NEVER SHOULD HAVE BEEN.

I'd like to see a Congressional hearing immediately, and I'd further like to hear Shelby share with us why he didn't feel that it was time yet to convene the Senate Banking Committee about the matter, when Bennett was pushing for it.

I'd like to see a special prosecutor cut through the secrecy and BS and tell us how many billions, hundreds of billions, have been stolen from us, and by whom.

And I'd like to see the system do its bare minimum job, and settle the trades.

This is going to be the biggest crisis to hit Wall Street in our generation. Mark my words. Cat's out of the bag now. And the SEC and Wall Street have some explaining to do. And some stock to buy, seems like.

The class action attorneys are going to go crazy over this. What do the other, larger brokerages have hiding in the back room? How much bigger can this get? Can anyone even guess at this point?

With REFCO, we have one of the known aggressors in the naked short selling game, now failed, its investors defrauded. We have financials that are a fiction. We have uncertainty over what their actual liabilities and assets are. We, in short, have no idea what was going on there.

If a large portion of the hidden liabilities at REFCO are FTD's, it's time to settle the trades, and make the perpetrators start paying their bills.

Settle the trades. As 17A mandates.

The law should not be selective nor preferential

Thursday, October 20, 2005

An Introduction to Naked Short Selling - Failing To Deliver

I've been asked a number of times over the last week to come up with a one-stop shop where interested readers could learn enough about the naked short selling crisis to be dangerous. It isn't an editorial so much as it is the intro to a chapter in the book I am working on, thus it has been moved to a more appropriate place than the Sanity Check op-ed blog.

The piece has been made a permanent part of the site. It can be viewed here.

Tuesday, October 18, 2005

Shadows On The Wall Of The Cave

Of late, my little commentaries and vignettes have been attracting a fair degree of attention, and I've been getting an increasing amount of email asking what I think is going to happen - how all this is likely to end.

Before I offer my cheery view, let me ask some questions, the likes of which were first asked in this column in March of 2005.

1) REFCO has significant contingent liabilities of heretofore unknown characterization. What percentage of the liability is naked short sales - failure to deliver? Specifically? (That one wasn't asked, but if you go back and read the rants, you will find it was, in a general way). REFCO has two DTC accounts, "REFCO Securities, Inc." and "REFCO Securities, LLC - Securities Lending." How big a part did the latter play in this?

2) Ex-Clearing (non-CNS settlement) is a large problem, and we know there are many hundreds of millions of FTD's from the FOIA requests. Where are those contingent liabilities booked and represented on the balance sheets of the publicly traded brokers? I've read their 10K's and can't find them. They are large enough to be material. So where are they?

3) How does the system deal with the legal risk of issuing electronic book entries that have no associated bundle of voting rights, nor any of the other rights of a genuine share, in the event of a class action lawsuit against the issuing company? Given that the FTD's are not entitled to legal redress as they aren't real, who shoulders that liability, and where is that liability represented on the books of these publicly traded entities?

4) When a clearing broker fails, like REFCO, what happens to the contingent liability of the fails? In a bankruptcy proceeding? Who is on the hook if the hedge fund client implodes (as they are doing frequently now) and then the clearing broker goes belly up? How is that handled?

5) Why are settlement failures occurring at all? Why does our system tolerate them? Rule 17A mandates that transactions be cleared and settled promptly. Why isn't that happening?

6) Who decided it would be a good idea to split clearing and settling apart, and pay all commissions and fees at clearing (the agreement to try to get shares), and require no performance in terms of delivery (settlement)? What other financial industry pays upon inking a non-binding contract to try to perform? Is that what Congress had in mind when it said both clearing AND settling had to happen promptly for there to be fair markets?

7) Why are participants given the ability to create electronic book entry shares at will, with no shares to back the electronic book entries? Why does the DTCC have an ex-clearing function that leaves the settlement up to the participants, out of view? Why wouldn't the participants abuse this as we see them doing daily? Who is stopping them?

8) The SEC and the DTCC take the position that they don't have the authority to get involved in settlement arrangements, as those are contractual. When did Congress authorize brokers to decide when, if at all, they will deliver, with no SEC oversight? That is the net effect of the ex-clearing and resultant SEC and DTCC passing of the buck.

The simple way of framing many of these is: Why won't the SEC make the system settle the trades promptly, as Congress mandates?

Those are some pretty decent questions that remain unanswered and ignored. Nobody fields them. My motives and CV are attacked regularly by anyone who is industry-based, but they don't actually answer the questions, or if a response is tendered, it is a carefully parsed non-answer, or partial answer.

Now to the big question - how do I think this will end?

My view is that it will end with a token reform of the current system that comes after the horse has bolted, at the expense of investors and taxpayers.

Here's how I think it will play out.

REFCO may well be swept under the rug - I heard a few minutes ago that Senate Hearings are to take place, and our first clue as to the direction this is likely to take will come from those hearings; by the questions that are asked, or rather aren't.

My fear is that we will have hours of acrimonious table pounding, long rants about how this is inexcusable, hangdog expressions from regulators who will make token attempts to defend their enabling these crooks to go public (we've already seen the first of this, where the SEC takes the position that they aren't in the business of verifying and double checking all the financial disclosures and such - begging the question what they are in the business of, in light of the 1933 Act) while facing sanctions for past crookery, hard line statements about how we won't tolerate this any longer, assurances that substantial parts of the business are viable, further assurances that the markets are healthy and viable, and ultimately blame being placed at the feet of the already acknowledged crooks.

What won't be done is a breakdown of the liabilities that caused the meltdown of the company. The question you won't hear asked is how much of the contingent liability arose from delivery failures. And if it is asked, expect a hubba de hubba answer, with plenty of hand waving, and assurances that it is minimal. But you won't hear a hard number, nor a commitment to make the facts known. Instead, you can expect to hear a lot of rhetoric, a fair amount of technical discussion, but the topic of naked short selling and the fact that the company was facing sanctions for participating in a massive scheme to serial kill companies will probably not come up.

This will be your signal that this will not end well.

If REFCO's failure is allowed to go through the media and the review process without any real examination of the impact that naked short selling played in bringing it down, then I would prepare for the worst.

So that begs the question, what's the worst? Total systemic collapse? Global meltdown? Hellfire and brimstone? Cats dancing with dogs, a rain of fire, locusts, Biblical-level calamity?

Nope. Unlikely. Too many asses on the line.

No, the likely end will be much more mundane. What we will see is a steadfast silence in the American media. Events like Dr. Byrne of OSTK being unable to get his shares for months will be ignored, as they have been to date. More of these clearing brokers will fail over time, and the domino effect will continue from REFCO - they are the first. There are more. Question is which one is next?

Once the next one fails, or a hedge fund implodes with significant exposure to fails, then you will start to see the cracks more obviously, and it will become clear to even the most dim that this is a significant systemic issue, not an isolated occurrence.

Consider this: There are many hundreds of millions of electronic book entries trading around in the system, treated as genuine by the participants, for which no offsetting share or parcel of voting rights exists. That wholesale stock creation machine has generated a second float for hundreds of companies, and is so large that it can never be covered without vaporizing the system - there isn't enough cash with all the folks out there that have played the game to cover all the shares. This is the systemic risk.

I don't for a second believe that the bad guys in this will be forced to do what the law requires, which is to settle the trades, and buy the shares in. Rather, I think that REFCO will provide some hints, as does the new law that quietly passed recently wherein the FDIC is empowered (read burdened) with moving "derivative contracts" from failed institutions to healthy ones. Those institutions include securities firms. The term market participants is used. I find this ominous.

One of the questions I've been asked is "what happens to the naked short obligations in a BK for a clearing broker like REFCO, assuming that the hedge fund clients have stuck them with contingent liabilities that they have been carrying on their books?" I don't know, and none of the attorneys I've talked to are sure.

I have a sneaking suspicion I know how it will play, though. I think that our regulators and elected officials will come up with some euphemistically termed workout, the "Fallen Soldiers and Grandmothers and Future Children of America, Anti-Terrorism and Drug Addiction, Good For the Environment, Protect Our Financial Futures" bill, which will come up with some sanctioned way to get the market system out of their bad trade - and the taxpayer will foot the bill. How will that work?

I envision a mandated cash return to shareholders at some premium, say $1.50 on the dollar, where the failed institutions can pay cash to shareholder owed the shares, rather than being forced to buy in the market to cover their debts. It will be lauded as a fair and decent ending to a dark period - who will be able to complain about receiving $1.50 for every dollar of stock they hold? Any ingrates will be branded as greedy opportunists who want to get rich off a national crisis, and thus reprehensible, or traitorous. Forgotten will be the fact that they bought it at $20 and that it now trades for a dime because of the hundreds of millions of fake shares the participants flooded the markets with. The cone of silence will descend on that too, and instead we will be treated to a flurry of feel good articles about the bright future of the newly sanitized markets, suitable for retirement savings, Grandma's mad money, your children's education funds.

I envision this being sanctioned "for the good of the markets, for stability, to put this bad period behind us and let us move forward, having learned our lessons." It will have to be an act of Congress, as it will be fundamentally illegal, and unethical, and will end this particular chapter of the rip off of the investor by the machine, and will require Congressional approval. But it will also be necessary, as the alternative will be the meltdown of the financial markets as desperate hedge funds and prime and clearing brokers struggle to cover a fraction of the open positions that made them hundreds of billions, and which long ago was converted into jets and mansions and ski chalets and pied a terres on Maui or Aruba or St. Baarts.

I don't see that happening.

What I see happening is the aforementioned bill, and healthy institutions taking on the contingent liabilities of the failed ones, and like Perelman in the S&L fiasco, being compensated for taking them over, likely with tax credits and concessions that will be a windfall for the new stewards of the problem - in the S&L crisis, Ron Perelman (Revlon king and a Milken adherent) took on the failed Vernon Savings and First Gibraltar, with a total of $12.2 billion in assets, and a sweetheart $5 billion FSLIC assistance package (to help cover the workouts). For this stewardship, he paid $315 million, and in return he got almost $900 million in tax deductions. Walter Fauntroy, the Washington, DC Representative, in the House Banking Committee hearings on the scandal, commented upon hearing all the pieces of the deal, asked one of my favorite questions of all time: "Why is it only white folks who get that kind of a deal?"

I fully expect that sort of a solution to a problem of Wall Street's own creation, a creature of regulatory complicity and unbridled greed triumphing over our rule of law.

I see the taxpayers ultimately bailing out Wall Street via some sort of the aforementioned mechanism, because Wall Street is too big, and too important, to be allowed to suffer the consequences of doing the time for the crime.

Wall Street is too important to be allowed to fail, even if it means shafting investors who have already been fleeced of their savings, and then shafting them again by creating a tax burden they will be forced to shoulder, so that Wall Street can keep the place in the Hamptons and the Maybach and the Gulfstream.

Most won't even know or understand what has been done to them. That will be the art of it. It will be so complex and so impossibly boring that they will doze off even as every man, woman and child is clipped for a future $3 or $4K, and investors robbed of hundreds of billions get $1 back for every $50 they lost.

That's the worst case that I can see, as the ramifications of allowing a clearing and settling system to print shares at will become clear. The wilder, destabilized markets scenarios are too fanciful. I'm far too cynical and pragmatic to believe that a worst case where the bad guys all go to jail, and the investors win as their stocks go through the roof, will ever happen. We may see covering in the larger issues, if there is liquidity. We will likely see a heating up of delisting companies, to clear maybe 30% of the problem by removing the liability at a stroke of the regulatory pen. But we won't ever see investors winning on this one.

That's now how Wall Street works.

I've spent the last 3 years studying it, and it hasn't ever worked that way.

But look at the bright side. It won't all be bad.

Just imagine how safe everyone will be in this new, improved market!

I really hope I'm wrong on this.


Monday, October 17, 2005

Ah Have Always Depended On Tha Kindness of Strangers

A Streetcar Named REFCO

(NOTE: REFCO just filed for bankruptcy protection, this evening, 12 hours after this editorial was written. No statement has been made as to the nature of the debt that caused this blowup. No indication has been made that the public will ever find out what the debt consisted of - the cone of silence has descended, apparently, and few in the mainstream media are asking "what was the debt that brought down the company in a week?" It is worth noting in passing that the assurances by the entrenched Wall Street power structure that all was well were apparently somewhat exaggerated...)

REFCO continues to melt down, and our regulators are simultaneously sending the signal that all of this is nothing to worry about, while carefully guarding the true nature of the $430 million of liability, for which REFCO used special purpose entities in order to conceal that debt from investors.

Of note is that the loan made to Bennet to cover the payback of the funds to REFCO was made by an Austrian bank, for which the collateral was REFCO shares, which are now worthless. Is the bank calling in the loan to Bennet? If not, why not? Starting to get the feeling that the intersection between international entities of questionable motives and character and the US financial system isn't as far-fetched as one might have believed a week ago?

There is some media speculation that the commodities side of the business may be sold off (although O'Quinn, the attorney suing Rocker and Gradient in OSTK, has a multi-billion dollar claim against REFCO, and is unlikely to allow the sale of the only asset that has value following proof of fraud), but the real story is that the SEC allowed the company to do an IPO even though their books were in disarray, and their management was facing serious sanctions for participating in past stock manipulations - and the SEC now continues to treat the details of the debt that caused the implosion as top secret. That raises some interesting questions:

1) Why is the nature of the contingent liability a secret? Who benefits by that secrecy? Don’t the investors who have lost billions of market cap in the last week deserve to know what caused the meltdown of their investment? Why can’t we get a straight answer as to what the debt consists of? Is it because the SEC doesn't want us to know that it is naked short positions that they grandfathered, facilitating this fraud?

2) Why does the SEC continue to protect lawbreakers and felons at the expense of the investing public? In their Q&A at the online SEC site, they admit that the reason they keep the FTD info secret is to protect the trading secrets of the participants who are using FTD’s as part of their trading strategy. Newsflash, folks: If you allow larceny to be conducted in secret, and are more interested in protecting the bad guys than the investors, you wind up with REFCO fiascoes. Lots of REFCO fiascoes. Can we afford any further secrecy and opacity? Haven't they learned anything? Hint: If you can't tell people simple info, there is probably something bad going on.

3) Why was REFCO allowed to go public in the first place, given what we know about their past, their books, and their history of stock manipulation related charges - was this really that tough a call?

4) Who at the SEC greenlit this brilliant decision, and more importantly, who is going to take the blame for allowing known stock fraudsters to do an IPO, when by their own admission they couldn’t get their financials to add up, and were being run by known manipulators and cheats?

5) REFCO is only one company. There are many more that do the same thing as REFCO – naked shorting is big business, and if the speculations are correct, most or all of the contingent liability that blew up REFCO are naked short shares which have remained open for as many as 7 year. How many more REFCO’s are waiting to blow up, and how many more shocks to the system can the financial markets stand before there is a systemic collapse?

If the speculations are correct, and REFCO’s debt is in reality naked short shares that were never covered, then the mark to market value of $430 million is way off. Wayyyyy off. Which probably explains why the loan from the Austrians hasn't been called in - that $430 million is starting to look increasingly like an investment in keeping the debt from exploding to its true, obscene level. The first shares that will be covered may go for ten cents, but the second shares will go for a quarter, and the third for a buck, and the fiftieth for ten dollars. That $430 million was likely never covered because to do so would exceed the total NAV of the company – many tens of billions of dollars. Because it is a one for one exchange – tens of billions of market cap were lost due to naked shorting by REFCO, per my sources, thus in order to cover the shares used to cause that loss, it would require the tens of billions be re-patriated into the stocks.

That’s the problem with allowing illegal naked shorting, and grandfathering in past fails – it creates a scenario wherein a systemic collapse becomes likely once the dominoes start to fall, as it allows a bad problem to get to the point where it is a catastrophic problem. Kind of like melanoma - if you don't deal with it early, and aggressively, it can kill you.

6) Now that we are starting to see the systemic risk posed by this series of fatally flawed decisions by our regulators, is it going to be business as usual, or are our elected officials finally going to act, and force the SEC to do its job?

Rule 17A clearly states that, in order for us to have safe and fair markets, there has to be, “The prompt and accurate clearance and settlement of securities transactions.” Grandfathering past fails violates that Congressional mandate, and is likely illegal, and would collapse under any legal challenge. So why is the SEC passing rules which violate its own Congressional mandate? Some believe it was done by compromised factions within the Commission to protect the participants who'd so badly abused the system that they created a situation where they were “too important” and “too big” to be allowed to collapse – hence the grandfathering clause.

And now for my stint on the soapbox:

Folks, when you start breaking the law in order to protect lawbreakers, because they are “too important,” you wind up with REFCO, which is likely the tip of a very, very large and scary iceberg, IMO. This has to stop. The guard has to be changed, without delay -it's gone on long enough. The Senate Banking Committee has to hold hearings on this, now, and there needs to be a sea change in the policy of allowing investors to be fleeced by a lawless clique on Wall Street.

My next Sanity Check will address what I believe is this systemic risk in the market, and will have more questions, uncomfortable questions for the entrenched power base on Wall Street. But the questions need to be asked, and they need to be asked in a loud voice, so that the answers can be heard by one and all.

So far we have gotten no answers, but rather secrecy and doubletalk. The time for that is over.

We've all seen what happens when the questions are stonewalled. Hiding the ball so that the crooks can rob the general public cannot continue to be the SEC’s modus operandi – it is shocking that our securities regulator, chartered with protecting investors, seems to facilitate more fraud than it catches.

That is unacceptable.

The 1934 Act is direct at its core, and requires no contortions to comprehend. I'm quite sure that there are many at the SEC who would love to be allowed to do their job.

It's about time they did so.

Settle the trades, put the crooks in jail, and stop the participants from ripping us off.


Now do it. Or get someone that will.

Is that too much to ask?

Friday, October 14, 2005

Herb Fires Back at Byrne - Sort Of

(NOTE: See the comments section for this piece for Dr. Byrne's correspondence with Herb. Very genuinely funny stuff. Speaks for itself. If only we could get Herb and Matthews into a wrestling ring, maybe some mud, and have them take on Patrick and Patch in a tag that would be something you could sell seats to. There would of course have to be rules against inappropriate touching and the like, given their fascination with Dr. Byrne, but still, it would be a hoot. "And in this corrrrrnerrrrrr, Lickspittle and Wormlips....")

(SECOND NOTE: I've gotten a few angry emails, and I want to apologize. I meant no disrespect, it was supposed to be funny. I have nothing against honest invertebrates, and didn't mean to denigrate the Annelida phylum. I also understand that worms don't technically possess lips, and thus my comment was inaccurate. I hope that this clears the air, and again, shall keep my comments vis a vis anything remotely labile or Lumbricidae-centric to a minimum. Thank you for your patience.)

Now it is getting interesting. Herb just fired back at Dr. Byrne over the affidavits that are part of the OSTK lawsuit. I'm tired, so very tired, so instead of going into a long exploration of all the nuance of Herb's retort, and without wanting to get into trouble by copying it here, I'll offer the Reader's Digest version of the response:

1) The claims that Harris worked at Gradient in the Fall of 2004 are true. So data point number one to test the affidavits for truthfulness came back a strong positive. He did work there, while working for, and further did share editorial credits with Herb at StreetInsights, the subscription site published by TSCM for short sellers and other interested speculators.

2) There is a longwinded explanation as to why it is all innocent, and Herb and Harris and Rocker are all being persecuted as part of a delusional conspiracy theory cult involvement.

That's about it, along with some expected name calling and catty snipes. There is a convoluted timeline attempt wherein Herb claims that even though Harris did work for TSCM at the time that he was working for Gradient and at the time that Herb was commencing his bashes of OSTK, and further about the time that OSTK was being treated to Gradient's renewed attentions, that it is all a big mistake, and that he essentially doesn't have any idea about any of that, and that it all just HAPPENS to look ugly and bad, made so by ugly and bad people with ugly bad little minds.

As I mentioned in the very recent commentary on the OSTK suit, we should keep an open mind, and require that the affidavits be tested for truthfulness by collecting data. Our first data point has now come back affirmative, and we now know that Harris did work for Gradient at the time the affidavits claim, and did work at TSCM as the affidavits claim. The rest is he said, she said, with a lengthy rationalization as to why you can't believe the affidavits. It will be another good data point if Gradient did pay someone in Seattle for office space/expenses, as that would again corroborate the affidavits. No doubt that will come out in discovery.

But on the first test, we have the truthfullness of the facts confirmed by Herb, but with a disclaimer that it isn't what it seems.

Sort of predicted.

REFCO, or Why I Learned to Love The Bomb

REFCO is apparently shuttering its offshore operations, obviously because now that it has had to fess up to its massive contingent liability, which it had shunted off to a special purpose entity to get the liability off-balance-sheet, it is essentially insolvent. That's my bet.

From a Newsday article today comes a hint of things to come: "In addition, the company's credit ratings were slashed, with Standard & Poor's warning that there was "substantial doubt" about the entire company's liquidity. And analysts said that although its other subsidiaries appear to be running normally, Refco's customers may decide to move their accounts elsewhere."

Substantial doubt. About the entire company's liquidity. Got it.

That's Wall Street's way of saying run for the hills, turn off the lights, it's all over but the lawuits. At least that is how I interpret it in my current pessimistic mood.

There are a couple of noteworthy observations to make here. The first is that *supposedly* everyone involved in the IPO missed looking for special purpose entities used to hide contingent liabilities, now turning out to be mainly naked short sales.

They could have read this editorial blog, where it was hypothesized repeatedly that exactly that is going on, at ALL the publicly traded investment banks and prime brokers, to hide the ex-clearing nightmare.

In fact, I recently had a chit chat with a regulator wherein my message was that I would bet a dollar that the ex-clearing larceny would make the S&L fiasco look like a trip to Club Med. I opined that special purpose entities were being used to hide the billions of dollars of failed shares being kited back and forth in the brokerage community outside of the DTC system, just ledgered back and forth, creating countless effective counterfeit shares for which the contingent liability, should the brokers ever have to cover them or deliver them, could easily outstrip the resources and NAV of that august community, in toto.

And then REFCO blows up, a week or so after that chat. And it turns out that their NAV is inadequate to cover the contingent liability, by all accounts.


My question is, how did the accountants and the investment bankers all miss what the Easter Bunny felt was clear as the whiskers on his face? Aren't these really smart guys? It's the same question I had when Enron and Worldcom and Adelphia were blowing up. Is it possible for accountants and Wall Street MBA's to completely miss fraud and larceny on a panoramic scale?

I don't think so.

I think that REFCO was taken public so that the investment bankers who were invested in REFCO, one way or another, either via equity, or relationships, or credit lines, could foist their bad bet off on the investing public. They laid it off on the rubes that bought the stock, and by the time the smoke cleared, they were whole and the investors were holding the bag.

I think that the investment bank that took them public had to understand what a lovable holiday rodent who specializes as a delivery system for chocolaty treats intuited the first time he got a good look at the system's true outline.

I think that the accountants had to know that there was a systemic, long term problem at the firm that was key in the Rhino/Operation Bermuda Shorts sting, that did Hilary Clinton's questionable commodity trades, that worked hand in hand with Laderman on so many PIPE deals.

I think that REFCO will mark the true end of innocence for many who believe that the financial markets are safe, and that regulators, accountants and investment bankers are any sort of a protection against wholesale fraud. I believe that this will signal the commencement of a run on the stock bank, as confidence in the system is deservedly adjusted to a realistic level - i.e. none at all.

There is no assurance that any of the shares traded today in your favorite company are actually shares. There is no assurance that you will ever receive what you are paying your hard earned money for. There is no assurance that you aren't being lied to, regularly and fluently, by a system that lies habitually and then pretends that it doesn't have any idea what you are talking about.

Witness that the folks being brought in to consult on how to manage the explosion at REFCO are the same folks who took them public, supposedly missing the entire scandal. Doesn't this look a trifle like they are being brought in so that they can cover their tracks and the tracks of the rest of the gang? I mean, you bring in someone else and they might pull the fire alarm within an hour and demand that everyone be arrested - at least if you are managing the process you can apply the same awe-inspiring skill set that cost investors everything, and likely find no fault in your own actions.

The fact that the SEC is allowing this farce to continue for even one more day is more shocking than the depth of the betrayal by the company and their underwriters and accountants. It signals that at all costs, the interests of criminals on Wall Street will be protected, even if it costs the investors (and ultimately taxpayers, if I'm right) hundreds and hundreds of billions, before this is all over.

If you think that's inflammatory, here's the math. REFCO has about half a billion of contingent liabilities largely in the form of naked shorted shares that they have never covered, as far as I can tell. As their liquidation takes place those shares will get bought, and the first shares will be bought for a dollar, the next for two, the next for five, the next for ten. Half a billion could easily go to tens of billions, and REFCO is just one small company.

Now imagine if I am correct, and this type of problem exists on a massive scale throughout the Wall Street community, as the FTD's and ex-clearing problem suggests. Let's say that it is a $25 billion problem today, marked to market. So then the first shares have to get bought in, and it becomes a $50 billion dollar problem. Then the next shares get bought in and it becomes a $100 billion dollar problem. And only 5% of the liability has been covered.

Starting to catch on to how the math works against the market pretty quickly, and how the interests of that market are in ensuring that certain "hot" stocks never go up very far?

Dr. Byrne couldn't get a lousy 25K shares he bought on August 8th delivered for two months because his OSTK shares were "hot". His dad, who bought 200K or so, still hasn't seen any, also because they are "hot".

There is an entire list of "hot" stocks, called the Reg SHO Threshold list. A lot of heat there.

So who deals with the fallout once this blows wide open? Guess what - it will be you, the taxpayer. The bad guys using offshore hedge funds won't be there to cover - their capital will be expended in the first few rounds of covering. The huge insurance companies that use those hedge funds to re-repatriate cash from their offshore subsidiaries sure as hell aren't going to step up to the plate. The dirty money being laundered through them isn't going to double and triple down to cover the cost of their past flim-flams. And Wall Street will quickly run out of NAV to cover the bill - all that money has already departed for accounts in places unknown, and it isn't about to come back to pay the piper.

No, what I see happening is some "Federal Investor Protection" boondoggle wherein the American taxpayer covers the cost of years of rampant larceny, to "protect the interests of American free markets" or some such horseshit. No doubt it will feature a grandmother holding a puppy baking an apple pie while singing the national anthem to a newborn draped in a flag. Fists will be shaken by "outraged" Senators who will ignore that the Senate Banking Committee had for years elected to sidestep holding hearings to find out WTF is up. The reason is because they know WTF is up, and it isn't good, and they are hoping to be gone by the time it all goes south. That's my opinion.

Alternatively, we the shareholders will get the pork put to us, and instead of forcing the community to make good on its liabilities, the elected officials will do some sort of back room workout, wherein they don't have to pay the bills - for the good of God and Country.

Either scenario, we, the investing and taxpaying public, lose big, and the bad guys walk away with our money.

Mark my words. REFCO and Dr. Byrne's lawsuit mark the beginning of an ugly period of revelation for an industry run badly amok.

Now you can ask yourself, or better yet, send Shelby on the Senate Banking Committee an email, and ask what it is going to take to get them to hold the hearings they should have a year ago, and that Bennett lobbied for? How many more REFCO's and OSTK's?

And where is the special prosecutor to go after the miscreants that have engineered this national fiasco in the first place?

Get your shares in paper form. If you are on margin, transfer your account, including margin, to another broker, forcing your old one to come up with shares. This isn't a game anymore, and you have been warned of what the future holds.

And try to have a nice day.

Thursday, October 13, 2005

The Good, The Bad, and The Just Weird

[NOTE: I hit the wrong setting for replies when publishing this, and it prevented anyone from using that function. That has been fixed, and registered users can comment away. I have limited it to registered users as I've had to delete a few nuisance posts from trolls, and life is too short to have to deal with that. To register, all you have to do is go through the 45 second process - painless, and ensures that the 14-year olds will have to stay at home on this one...]

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 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...

You know.

Tuesday, October 11, 2005

A Hole In My Head...

What if the US market system was so badly broken, so wildly compromised, that the very basic premise of an auction system was shown to be a hollow farce, an artifice designed to lure investors into a system wherein wholesale larceny, counterfeiting, fraud, collusion, corruption at a scale so pervasive that it jeopardizes the entire premise of the markets, was the reality and the norm, not some delusional construct of a cerebrum badly compromised by paranoia?

What if the worst case scenario, wherein the participants in their ex-clearing system created unknown levels of counterfeit shares which traded in the system and were treated as genuine, was not only reality, but was in fact the norm?

What if the participants had decided that instead of buying shares in the market to settle trades, they would just represent to buyers on their statements that they had gotten their shares, without ever bothering with the costly hassle of actually buying the shares? Doesn't that sound like a neat way to generate untold billions without any cost of goods sold, without any product cost at all?

What if, when caught doing it, they simply pointed at the other broker and said "it's his fault for not delivering", instead of buying in the failed trade, as mandated by the rules?

And what if the vast majority, possibly 100% of some of the trading in Reg SHO stocks, was nothing more than these bogus trades being conducted in order to damage the companies and the shareholders?

And what if, on the rare occasion that someone with enough clout to conduct a conclusive test did so, these "what if's" were demonstrated as unassailable fact? That trades didn't even settle electronically until the brokerage system was GD good and ready, and had made millions by not performing its most essential and basic function, and had allowed these "cyber-counterfeits" to depress the value of the underlying stock to the point where the shares could be bought for $10 less than the buyer paid for them? And what if the only reason that they had even done that, and bothered with settling the trades at all, was because the buyers were the owners of a billion dollar market cap company who were visibly involved in questioning the system's capability of performing at a basic level?

And what if the entire scheme was nothing more than an elaborate ponzi scheme wherein ever more fake shares have to be sold in order to buy shares to deliver at ever more depressed prices? Sound fanciful? Crazy? Impossible in today's modern world of Six Sigma nanosecond trading capability?

Wrong. It is apparently the accurate description of the norm.

Folks, I'll make this very simple. The reason that stocks like OSTK and NFI and many of the rest of the Reg SHO list stocks are selling for fractions of what they should be is because a literally unlimited number of bogus shares are being created and sold, with undiminished levels of aggression, by predators who financially benefit from the stocks going down.

And the entire market system, from the clearing system that keeps all information secret from the public, to the regulators who fail the most basic test of their congressional mandate in 17A (SETTLE THE TRADES PROMPTLY) and are uninterested in meeting this simple requirement for a fair market, to the brokers who financially benefit by treating failed trades as genuine transactions, to the hedge funds that use this capability to sell unlimited numbers of shares and manipulate stocks accordingly, all actively participate in what can only be described as a fraud against investors of such mammoth proportions that it defies credible description.

And that is now the tame version.

The test of any theory is how well it predicts future events. If the Fail To Deliver (FTD) problem was just a matter of a few rogue hedge funds gaming a loophole in the system, and of a regulator who was simply too overloaded to clamp down on what was a minor problem, then it would predict that when tested, there might be a small glitch in a few deliveries, but that within a reasonable time frame the system would function as expected and the trades would settle.

If the FTD problem was a widespread systemic problem where few if any shares of Reg SHO list stocks trading in the system are genuine, and where the system understood that, and perpetrated a massive fraud requiring secrecy, opacity of actual deliveries, and active collusion by its participants, one could predict that when tested, even by someone known to be testing it, it would be forced to defraud the buyer in plain view - blatantly, without remorse nor excuse, and with impunity - the latter is a prediction from the piece of the theory that says that the regulators are either compromised and thus in on it, or so fearful of destroying the financial system that they are rendered toothless (no other explanation satisfies the "with impunity" prediction).

That is what happened with Dr. Byrne and his father, who purchased roughly a quarter million shares of OSTK in the market two months ago in a series of extremely visible transactions, and were unable to even get the electronic shares delivered for two months.

Two months.

During which time the stock price was run down by almost $10, presumably by the same selling pressure generated by the sale of the same "non-shares" as were sold to the Byrnes.


Day after day after day of non-shares being sold, with limitless availability, a steady stream of counterfeit transactions treated by the system as genuine sales for the purposes of generating commissions, and for affecting the price on the auction market.

And none of the buying brokers doing their fiduciary and legal duty of protecting their customers by buying in the FTDs - rather, simply perpetrating the fraud for profit, secure in the knowledge that most investors will never check to verify delivery, nor have the means to test the delivery claims of the brokers when presented as genuine and believable.

Oh, and did I mention that Dr. Byrne finally got his 25K shares, but that his father STILL hasn't gotten his 200K delivered? Today, as we speak, over 60 days later, no shares, and no forced buy in. So what did Jack Byrne pay for when the money was debited out of his account? Why did the sale go through, and yet no shares get delivered to this very day, on a billion dollar market cap company? And what kind of treatment do you think small individual shareholders receive if billionaire insiders are sold non-shares and then told to pound sand on the legally mandated delivery thereof? I'll tell you what kind of treatment: they get defrauded as a standard daily business practice by an industry out of control.

Think this is the wild, crazy version of the theory? So did I, for many months. But as I researched my book, Symphony of Greed, about the markets and the current state of the union, I noticed something odd. Every time I tested the tame version and used it as an explanation for past events, and to predict future events, it failed, or at best was incomplete. Every time I used the wild version, it accurately predicted what would happen, and completely explained past events.

Now, I'm not saying that there aren't innocent explanations for most conspiracy-driven controversies, but I will say that there doesn't appear to be any for this particular controversy.

Again, we have a total failure by the participants to perform their most basic part of the transaction, we have a company whose value has been materially harmed by that knowing and willful failure (the buying broker could have just bought in the selling broker's position at any point, as mandated by Reg SHO and by Congress in 17A - in fact, the treatment of the two month failure to deliver as some act of nature wherein the buyer's broker is powerless to do anything but hope for delivery, or berate the selling broker, is hogwash - the buyer's broker could have and should have bought the seller in after T+3 days, and chose not to, for unknown reasons), we have proof positive of a major NASDAQ company receiving the same treatment as a penny stock whose shares have zero liquidity, and we have a complete failure by any regulator to take action, define the size of the problem, and put a stop to the abuse.

The truly astounding part about all of this is that in the penny stock world and OTCBB world the failure to deliver shares for months is not unheard of, but the conceit was that it couldn't or didn't happen in the "real", legitimate, big cap market.

Tell Jack Byrne that as he waits for his shares that he paid $10 more for than they are worth today, and the sale of which presumably was a sham, as are all of the shares being sold to drive the price down . Why not? Who's going to do anything about it? Who is going to stop it? Does anyone think this is atypical? It isn't. It is simply confimation of our most dark and ugly suspicions.

I couldn't make this up. We will likely see no coverage of it in the media. Regulators will likely ignore it or explain it away. Senate banking committees, chartered with overseeing the system, will pretend that this doesn't represent a crisis that impacts the credibility of the entire US market system.

The question is will we stand for that anymore, given this definitive proof?

And if this isn't enough hard evidence of a major systemic problem, what precisely would qualify?

I would propose that you do the following things: Send a copy of this article to Ralph Lambiaste in Connecticut, who is heading up the state task force exploring this issue. Send a copy to the Senate banking committee, to both Bennett, and to Shelby, who has shelved any examination of this settlement problem. And send a copy to every financial reporter you can think of. And send a copy to the SEC, just for giggles - not because they will do anything about it.

If the CEO of a major company can't get his electronic shares delivered (NOT the paper certificates, just the electronic ticks that can be exchanged in nanoseconds - a feature of the improvement known as de-materialization, wherein paper certificates are eliminated and we are all supposed to trust the system to verify that we are receiving genuine shares) for two months, how can anyone buy any stock on any exchange with any confidence that they aren't simply being swindled?

The answer is you can't. And that makes for a genuine, systemic crisis in confidence in the US market system - a justified crisis given the failure at every level of the system to do its basic job, of exchanging money for genuine shares in a timely manner.

And it further raises the very real questions, "how do I know that any of the shares I am buying aren't frauds? How do I know my broker isn't lying to me when he represents my account as possessing shares? How do I know that the entire trading and valuation in the market of the company I own a piece of isn't a fiction determined by manipulators who can peg the price to whatever they feel like on any given day, and thus what is the point of investing in the markets at all? If large NYSE and NASDAQ companies can be counterfeited to the point where none of the shares bought on a given day are genuine nor delivered in anything approaching a binding reasonable non-fraudulent contract, how can I invest in the market? And how have the regulators chartered with protecting me let it get this bad, and why aren't they doing anything about it?"

So regulators, what now? What is the next move? Do you continue to allow NFI, and OSTK, and all the rest of the Reg SHO list stocks to be driven down by 30, 40, 50+% using non-shares? Do you continue to ignore what can only be described as massive stock manipulation? Do you continue to pretend that overt fraud isn't exactly what it appears to be?

Read this with alarm, and concern, and great care, and consider the implications. This is not a minor event. This is the smoking gun everyone has claimed doesn't exist, when they make the statement that "no company is really harmed by naked shorting if it is viable and legitimate".

Wrong. The value of OSTK has been eviscerated by the practice, as has NFI and a host of others, and we have proof of massive failures on the very first test of the system. And the participants are in on it. And no amount of hand waving and facile tonics will alter that conclusion.

So now the question is, "what are you going to do about it?"

Here is the exchange from the Motley Fool board, from Dr. Patrick Byrne:


"Here is something odd for those following this story: Back on August 8th I bought some 25,000 shares (I think the filing ended up showing 50,000 shares because I bought the rest that day or the day before). Oddly, I could not get delivery of them for weeks and weeks. I am not talking about, "paper certificates". I am talking about simply seeing the trade clear. All along, my broker was saying that Morgan Stanley could not deliver on their side of the transaction. I will now relay an email between myself and my Broker Dealer (whom I will call, "BD") that occurred when it finally cleared, after weeks of unhappy phone calls.

=============================================================== September 29 9:11 AM
Good Morning Patrick: The 25,000 shares of OSTK originally transacted for on August 8th, came in during the night and we have initiated the process of converting to paper. Settlement is taking place today. Please call with any questions or concerns, and have a wonderful day! XXXXXX

1:47 PM
Dear XXXXX, I would like to hear from you or someone on your trading desk what exactly is the meaning of, "The 25,000 shares of OSTK originally transacted for on August 8th, came in during the night". What does "come in" mean (since they clearly are not mailed pieces of paper)? How did they manage to keep from "coming in" for 50 days? From whom did they come in? Respectfully, Patrick

2:15 PM
Patrick: To the best of my knowledge it means that the incoming shares appear in the electronic system (SEI) which displays the stock trade transactions via PC, and this evidently takes place , like bank processing, as an overnight transaction. The August 8th date is the date I have recorded in my notes as the date of your second purchase of shares of OSTK, the date ZZZZZZZ entered into the transaction with Morgan Stanley to purchase the 25,000 shares. I am going to ask some of our professionals from the trade area to respond, and hopefully give you a better explanation of how the shares move to BD from another brokerage house. As to the 50 days the shares did not come in, the only answer we have obtained from the Morgan Stanley people when we repeatedly pressured them is this: "you have to understand that this is an extremely hot stock". Obviously not an answer that makes any sense; but an answer that was repeated time and time again as we made calls to the management at Morgan Stanley. I will forward additional information to you as soon as I am able to obtain it from the BDBDBD group. Thank you!

================================================================== Now Fools, I don't know about you, but I find this pretty weird. Let them post more photos of me with UFO's flying out of my head, but something seems messed up in a system that allows this. (By the way, Morgan Stanley lawyers, when you read this you are going to get ticked off and want to fire off a letter threatening to sue me. Better check with your stock loan desk first to see if you want discovery. Go ahead: make my day.)

Here is the punch line: my Pop bought 200,000 shares right at the end of August. He still has not gotten delivery. Again, I am not speaking of certs. I speak simply of the settlement of the trade. His broker is saying that the other brokerage house is unable to settle the transaction. Any guesses as to who that brokerage house is? I'll give you three guesses. It is one of the big ones.

Does this strike anyone else here as odd? I mean, I can understand the fellow Tiddman who was writing, more or less, "Byrne, just focus on the business." Ironically, I am entirely from the value school and agree that in almost any circumstance one should just focus on the business. But given that simple stock purchases seem to be cracking the system, and given that I believe we have somewhere between 5 and 20 million electronically counterfeited shares in the market, and given that I suspect there is some relation between these two facts, and given that I think this situation may well be endemic in the market, I think at some point I am supposed to do something about it. Well, someone is, anyway.

I could be wrong, though: when it takes 50 days to get 25,000 shares of stock to clear, Lord knows I'm not in Kansas anymore.

Respect, Patrick

Saturday, October 08, 2005

Dr. Patrick Byrne's Message to the Motley Fool Board

Usually Sanity Check is my bully pulpit, from which I pontificate, complain, berate, and mock.

Especially mock. Nothing drives powerful forces up to no good crazier than being mocked. It is almost as though once you have the tens or hundreds of millions of dollars, the next must have is the awe and respect of a breathless public. And when a fun-filled rodent mocks you, or shines a light on your ugly hypocrisy, that apparently doesn't go over very well.

Which is part of the joy in doing it.

This segment of our regular broadcast will be devoted to the enormously erudite and insightful words of a man I have grown to respect, both intellectually, as well as for intestinal fortitude and true moral integrity. As one goes down the road of life it is all to often that our actions seem small and pointless, and our will to excel or attempt the daunting diminishes over time. Dr. Byrne has a way of demanding more out of himself, as well as those fortunate enough to share his company, and by doing so, leads by example. That is rare. Rarer still is a guy who does the right thing, even when he knows doing so will be invite character assassination, will subject him to enormous hardship, and will gain him little or nothing personally from doing it. Dr. Byrne is without question one of the rare ones.

This was posted by Dr. Byrne on the Motley Fool message board today, and represents his capsule summary of the latest rounds of slanderous charges against him, as well as his responses. It should be required reading for anyone that questions his character, his abilities, his commitment, or his honesty.

Without further ado, here is the content of that post:

" Dear Fools (Motley and Otherwise),

Bill has written an excellent piece on the battle we are waging. In that article he quite fairly suggests that something about the news coverage so far seems strangely misguided, but that also, my own over-the-top behavior my be hurting my cause. Again, it is fair to say that, but I would politely respond that my behavior is not so over-the-top is many would pretend, as should be clear when all the truths are known. However, Mr. Mann has given me an idea: I am going to answer some of the flak that gets shot at me by various parties, and then ignore it in the future. I do this both to give the general reader a more detailed look at my arguably over-the-top behavior, and also so that, when folks come back and post and repost the criticisms, perhaps some friendlies can answer for me by copying and pasting from what appears below.

Why do I do this? Because I feel that this is how conversations with SOME (unnamed people) go:

Me: I went out last night to see a movie.

Hostiles: But you were seen at midnight in Howard Johnson's having an ice cream!

Me: That's right, on the way home I stopped at Howard Johnson's to have an ice cream.

Hostiles: But why'd you say you went out to see a movie when you had an ice cream?!? Why didn't you say you had ice cream the first time? And besides, how could you have had an ice cream at the movies? I've been going to movies for 25 years and they don't serve ice cream there. Well, they do in some, but which movie theater were you in having ice cream anyway? I bet it does not serve ice cream and besides, you were wearing a blue shirt, but three years on a conference call you said you prefer red to blue, so were you lying then or now? And what about the ice cream?

In other words, sometimes sincere, sometimes trivial, sometimes self-contradictory stuff which I generally ignore for three reasons:

1) I suspect it is transparent to most adults, and so they don't need me to answer it anyway;

2) When I assume the best and answer it anyway, the person just goes on and on anyway as though I have not answered to drown out my response, or finds something else in my answer to jump on, which leads me to...;

3) I suspect at times that the writer is just trying to waste my time and obfuscate any informative discussion. Thus he does not really believe what he writes anyway, and thus I should not waste time answering points that are not sincerely being asserted. That said, I will, for the record answer all the things that have been bandied about that I can remember at the moment. I will do so clearly, and then I will ignore further discussion on them: again, I ask of readers who follow these matters, when they see the kind of behavior described above, just cut and paste from below and answer for me, to save me answering the same (often trivial or harassing) questions over and over:

A) The SPE for the diamond: we have a great relationship with some folks in the diamond industry who wish to remain in the background. We need their expertise, they need our channel. The SPE gave us a way to compartmentalize our work together and get the economics extremely clean and auditable.

B) Press release: We release news when we have it. We had a 5 week hiatus in uploading products, but as we got that part of the system nearly working it occurred to us to do a marketing blitz about it. We send emails Monday, Wednesday, and Friday, and so decided to devote one of them to pound a "largest inventory upload in our history!" theme, along with a bunch of messaging on our home page, along with some messages to our affiliate marketing partners (who focus a lot on new inventory), along with a press release that we hoped would get picked up in a few newspapers and drive some consumers to the site.

I reviewed the marketing email theme and the home page messaging, and wrote the bones of a press release over the weekend. But the inventory upload was not working by Sunday (though we hoped it might be), so scratched it for the Monday email. IT kept working away on the program and we hoped we could upload Tuesday, but the program kept clogging, so we scratched Wednesday. Thursday it began working in fits and starts, but did not get out of test mode until around 11 PM Thursday night. They began uploading products through the night, saying it would take until sometime Friday for all to be complete (I believe there were tens of thousands of products). Someone in marketing made the (correct) decision to release the Friday marketing email to about 6 million people, but set it to go later in the morning than our normal email, I believe, to give time for more products to be populating the site. The product loader continued running at full blast until noon on Friday. We knew we had uploaded somewhere between $16 million and $40 million of inventory, depending on what one counted and how one counted it, and asked for IT to run a query to get an answer. They came back at 1:40 PM with the number (I think it was $30 million). We are in Utah: 1:40 PM is 3:40 PM in New York. Our guys put out a press release twenty minutes later.

Somewhere late in that process it occurred to us to add to the end of the press release a section for the benefit of shareholders, filling them in on internal events, as is my habit with quarterly earnings letters. Also, somewhere late in that process when it became clear when we would be hitting the "Go" button it occurred to some among us: "Wait! If you release news on a Friday afternoon people say you are trying to bury it." I gave that objection somewhere less than 10 seconds of consideration before deciding to ignore it for the following reasons:

i) It is a dumb convention:_____a) It dates from the days of print journalism;_____b) The rest of the world works on Friday afternoon until 5: so can Wall Street.

i) I don't care about Wall Street conventions anyway (anyone notice how we went public, or our earnings letters, or our earnings calls, etc.?)

iii) It seems right to release news when we have it, and to ignore all such considerations anyway (with the exception of not releasing news on weekends, and the possible exception of placing important news at the beginning or end of a trading day);

iv) If we did not release it Friday we had to wait until Monday, but the whole point was to get it to coincide as closely as possible with the 6 million recipient marketing blast and the home page announcement.Now among my colleagues there may have been some whose reaction was, "Perception is reality." The mere fact that some will perceive it as objectionable means that it IS objectionable!” To which my internal response was, “Above nearly any expression I can think of, I detest 'Perception is reality' above all. Reality is reality, perception is perception: get that neo-Kantian drivel out of here (Immanuel Kant is the enemy of the human race, but that is for another day). I deal in reality, not perception. Etc.” Well, my response was not so philosophical, but that is about what I was thinking. (If you had a choice between doing A and B, and you knew A was the right thing to do and B the wrong, but you knew that the arrangement of facts was such that the world was going to see A as being wrong and B right, which would you do? You do the right thing and take your lumps.)

Of course, the usual suspects showed up on blogs and message boards within a few days: "Can you believe that they ignored a convention of Wall Street and put out news on a Friday afternoon?!?!?!? Oh my God!!!!!!!!!! Don't they know that there is a convention of Wall Street that says you don't do that?!?!?! And they ignored it?!?!?! Oh my God!!!!!!!!!! How could anyone ignore a convention of Wall Street?!?!?!”

C) Moles and disinformation: this is one of those things that I explained on the Miscreants' Ball conference call, knowing full well that the bad guys would twist it all around and make hoo-hah about it. But consider: in Bill Mann's excellent piece on our three affidavits one of his most telling points is something he puts quite subtly. "Unlike a lot of the silliness in the media relating to Overstock, this complaint is not frivolous on its face, and although Overstock will need to prove its allegations, the case must be taken seriously. The question to us is why the atmosphere around this lawsuit has, from the beginning, been comical."

I told this story with care on my Miscreants' Ball call, and will tell it again with greater care here. I ask the reader to consider it against how it was treated by a few members of the "press". Compare this story to what they wrote, for it perhaps gives a road map to who the bent journalists are.

Sometime last autumn I came to suspect I was being bugged because in a phone call to my girlfriend (Gina, the woman in New York who runs a restaurant whom I have mentioned in a conference call or two) a figure of speech I used showed up on the message boards in a posting from a basher. I do not remember the expression, but I recall it was neither a common one nor a really arcane one. I think it was something along the lines of, "Such-and-such an idea of mine really sh-t the bed." A few days later, an attacker on Yahoo (the message board was not so clogged then that I could spend 20 minutes once or twice a week and catch up on it) then wrote something like, "Byrne's idea on such-and-such really sh-ts the bed." I don't recall the idea or if this was the precise expression, so I am just trying to give a feel for it: the expression was just odd enough and the Yahoo post just dead on enough that it piqued my suspicion.

About this same time, as you will understand when the whole story gets told someday (I hope Brad Pitt plays me in the movie!), I began to get a lot clearer picture of the players involved in the Miscreant's Ball, including certain professionals who have a reputation for being as crooked as the day is long and who are quite capable of bugging phones and apartments (and whose modus operandi includes placing moles).

In any case, when next I saw Gina, we agreed that we would test this occasionally and try to confirm or falsify it. I considered using financial information, but decided against it for two reasons. First, it gets stale within months, and if I lied one time ("Gina, we are having a terrible Christmas!") and then later came out with a good one, the miscreants would know I was on to them. Secondly, if I did it and people (even miscreants and blackguards) started trading on it in the marketplace, then it would be like poisoning a town well supply to get at a few hooligans. So if I could not use financial information, I had to use personal information: thus, we agreed on "cocaine" for the cell phone and "gay" for the landline, that periodically we would put that information down those channels and see if it bubbled up anywhere. Again I apologize to anyone offended by appearing to equate the two: I just needed two things that, if they appeared, I would have no question about where they came from nor would I care if they appeared. (Incidentally, it was in that context that I mentioned on the Miscreants Ball conference call that with the exception of one evening I have never even seen coke in my life, so if the rumor appeared I would have no doubt where it came from: in the hands of the miscreants that turns into "Why is Byrne denying he is a cokehead? He must be a cokehead!").

Within a few weeks I did start noticing occasional message board posts along the lines of, "Byrne is such a f-g." But nothing decisive, and for all I know it was some 15 year old. Then I got a call from my old dissertation advisor from Stanford, who now lives in England. He told me that a woman had called him claiming to be an investor doing due diligence, and wanted to ask about me. She had asked him a lot of personal questions about me, including was I into drugs, especially cocaine. Again, nothing conclusive (although such due diligence is common with privately held companies, and not the kind of thing that mutual funds or legitimate investors do when considering buying stock in a public company, in my experience).

Then in this July's conference call I described how tightly held OSTK is by myself and my parents, my brothers and cousins ("folks I had taken a bath with" when I was a toddler), a few friends, and 10 institutions. Almost immediately a reporter named Carol Remond, whom is widely thought to be in league with the same hedge funds I am battling (look for companies that David Rocker is short that Carol has written stories on), starting calling people to tell them that the phrase "folks I had taken a bath with" was a reference to (I kid thee not) a gay bathhouse cabal which I run. Again, I kid thee not.

Now is any of that decisive? No. As I say in my conference calls, "You now know everything I do." Well, not actually, but you know a lot.

I also began hunting for a mole within the company. There are various ways to do this that I cannot go into (except to say that we considered using financial misinformation within the company and then tracking where it leaked, but discarded it for the same reason mentioned above). Also, I do not want to identify the individuals at this time so I must be circumspect in how I tell this story. In any case, the hunt was on and went nowhere for some time. Then a funny thing happened: after a lot of negatives, suddenly one indicator went strongly, strongly positive for a couple people. These alarms concerned apparent regular contact with certain elements in New York, along with unusual and ultimately inexplicable financial matters. Fill in the blanks yourself (but please know that "elements in New York" refers to people other than David Rocker).

At roughly the same time, one of those people requested a very odd transfer within the company. I do not want to identify this person, so all I will say is that the request was as strange as if someone working in the inbound trucking department suddenly wanted to work in the department that creates art for the home page. Except that the arena this person wanted to work in was one that would provide detailed information on all the workings in the company. Behind the scenes I made arrangements for the request to be approved. The person assumed the new position and began acting in ways that mystified and alarmed colleagues. Within Overstock, only two people besides myself knew of my suspicions, yet the four people close to this person began sounding the alarm that some extremely odd behavior was occurring.

I repeat, this is a person who had access to our daily financial information, as well as a weekly packet that covers everything going on within the company. Who was having, I believe, regular contact with a certain hedge fund and related party in New York, through a channel they had disguised only with some effort. And who had some quite strange personal financial dealings. In a perfect world or in different settings we could have played various games for a long time to sting the miscreants. However, I could not use financial information (for the reasons given above), and was cognizant of the responsibility to put an end to a leak that I believe probably existed since January (that is, I suspect a hedge fund has been receiving all our financial and operational details since January, on a weekly basis). Also, I was tired of dancing with these folks. So I confronted the person. Again, I do not wish to disclose identifying details, so I will recount the conversation in the framework of Charlie Brown.

"Charlie, do you know Linus, Snoopy, or Lucy?"
"No, I never met Linus, Snoopy, or Lucy."
"OK, here is a photo of you with Linus."
"Oh that's right, I do know Linus, but I don't know Snoopy or Lucy."
"OK, here is information that you and Snoopy own this bank account together."
"Oh that's right, I do have a bank account with Snoopy. But I don't know Lucy."
"OK, here is where you and Lucy have a dummy corporation together."
"Ah, yes we do. I forgot."
"OK, what does the company do?"
"I don't really know."

Seriously, it was that bizarre a conversation. With three witnesses. Obviously, the person is no longer employed here.

Incidentally, we alerted authorities, who have tried to question this person: the person has refused to be questioned and instructed the authorities to contact a certain lawyer (the call from the law seems to have been expected). Even that is relatively strange and sophisticated behavior in such circumstances for a person who had been working in the job equivalent of inbound trucking.

D) IT? Stuff happens. Shawn is awesome, and got us through a massive re-architecture over the last two years. First, he got us through a period when our then current systems were redlining so badly we were in danger of imploding. Second, he got us onto a set of systems that scale horizontally and vertically for the foreseeable future (see my Q2 conference call for greater detail). Third, we had reached the point where our code writing was log-jammed: it was taking longer and longer to add new features besides so much of the code was just hard-wired patches. This is not completely fixed yet, incidentally: still, large elements of our code base have gotten transformed, made modular, upgraded, or been replaced by professional third party packages. Not bad for two years' work. And not bad for a tiny fraction of the cost of our competitors.

That said, Shawn has been begging to step down for a year, either to go back into business development or take a leave of absence. I described in my Q2 call that there was one more large package to be delivered, probably in August: he delivered it and left for a vacation that might have stretched out to a couple of months. At that time I appointed Sam Peterson Acting CIO, thinking we would sort it all out when Shawn returned. In fact, however, the last package did not really spin up as well as we had hoped, and after a few weeks Shawn canceled his leave to come back and help. He has been here a few weeks, things are much better (albeit not completely resolved), and so he has taken a leave of absence. Sam is CIO (although, since we eschew "C" titles here, officially it is "SVP Technology").

I do have a non-IT mission for Shawn that will keep until he returns, if he decides to return: he has put in 5 hard years working for Overstock and is due a rest. Since our executives rarely if ever sell stock, and since I keep buying it, the miscreants claim that there is some kind of "blood oath" among us not to sell stock. Shawn in fact has only bought stock, except for the time he exercises options to buy a car, and the time he exercised some to get $50k to fund a small restaurant in his hometown.

Yet Shawn met a girl in Europe and wanted her to come back with him to the USA when he was done his vacation. He needed money to move out of the Marriott Residence Inn (where has lived for 5 years) to buy a home and her a car. So he sold 2,700 shares, some or all of which were shares that he had personally bought in the open market at $11 a couple years ago. This leaves him with about 60,000 options (if memory serves), at least half of which have vested and which he could have cashed in for half a million to a million, but which he choose not to do. He got off the plane and placed an order to sell some shares because our blackout period was about to go into effect (September 15), so he could have the funds to move out of the Marriott and find a home when his gal showed up. He placed the order before even being back in the office, and before he was aware of any inventory uploads or marketing blitz the following Friday.

The reason Shawn sold when he did, then, was that we have about the most restrictive blackout period in corporate America, and if he did not do it then he would not have been able to sell a share until late October or early November; he had a gal moving over from England, and did not want to start off with her in the same Marriott room he has been living for five years; and he was not aware of quite what was going on in the office.

That said, Shawn has now split again, and does not expect to come back. When Shawn left he reminded me of what Jason said when he left. Jason Lindsey, you may remember, was my partner in getting Overstock off the ground: he started as CFO but became President to my CEO, but resigned almost immediately, giving the miscreants opportunity to rail about that, of course. What actually happened was that (as Jason has given me permission to disclose) his wife turned out to have a hole in her heart and he needed to take care of her and his family, and when he came and asked for a few weeks off I suggested he feel free to leave and attend to her full-time. Before he left he said, "Dude, I feel like there is some wild bull that no one else has ever ridden. All these fancy cowboys show up with million-dollar diamond studded saddles and get thrown in seconds. There is some fat slob in the corner who has wasted billions and the crowd fawns over him saying, 'Look at gracefully he sailed into the pile of manure! Look at how quickly he good he looks as the clowns carry him out of the arena.' But here we are, we show up like Mike Tyson wearing a pair of black shorts and some sneakers, and we ride this bull like no one ever rode it. We go like a few years ago no one thought it could be ridden. But all the knuckleheads in the stands say, 'Oh but you said you were going to smile over your right shoulder when you rounded and you smiled over your left, you were supposed to hold that wave a little longer than you did.' Why do you want to work for these jerks another day?" That pretty much sums up Shawn's attitude as well.

The quarter we are in (q4 2005), I expect to reach an interesting mark: we should be somewhere between 1/4 and 1/3 the size of Amazon in North America (in about half their lifespan). We have been growing since we went public at a rate of near 100%: hypothetically, if we continue at 75% we catch Amazon North America in size in about two more years (q4 2007). Our gross margin is quite close to theirs, and has even passed it in at least one recent quarter (put their fulfillment back into COGS to get an apples-to-apples comparison with ours). We have done this on about 1/15th of their corporate G&A, 1/25th of their technology spending, and 1/30th their losses. And we have done it while being true the whole way to the principles of fairness to the common investor: from the way we went public through a Hambrecht Dutch auction (though we were warned that we would be a Wall Street pariah for doing so), to the degree with which we treat shareholders like true owners (though every securities lawyer we knew warned of the high exposure in doing so), to my decision to risk fortune and reputation to start a barroom brawl against a group of folks who for years have used Wall Street machinations to suck the blood of small companies, though most think suicidal of me to do so (wait until you read the affidavits before you make up your mind on that one).

So a bunch of quisling bloggers, lapdog journalists, and hedge fund shills vilify me, lie about what I say, smear my colleagues as strippers and what-not, and try to spew as much mirth, mockery, venom and distortion as they can to prevent any discussion of the claims, which as Bill Mann says, are really quite straightforward. Well, boo-freaking-hoo. Go figure. Never saw that one coming.

Anyway, I hope that this gives folks who want to understand what is going here the psychic inoculation they will need for what the future holds. And I am not saying that everyone who criticizes me on these boards is a shill, but the way: some may be quite sincere. It is hard for me to tell at this point. But if anyone wants to use any of this material to answer either the the Yahoo jackanapes on my behalf, or the putatively sincere ones, I'd be much obliged.



Tuesday, October 04, 2005

The OSTK Affidavits - Nuclear Detonation in Hedgeland

I just got finished reading the October 1, 2005 edition of the PIPEs Report, and its summary and dissection of the infamous OSTK affidavits, which are apparently a big part of the evidence against Gradient Analytics and Rocker Partners.

Now, I may not know much about SEC regs or even fair business practices, but I do know that if the charges being leveled in the sworn testimony are true, that some very bad behavior has been going on for some time, and that the company has indeed been harmed, as have its shareholders, by a group that cynically manipulated research, as well as the press, for their own enrichment. Everything from Gradient running hedge funds that invested in the stocks that were being "researched" to enabling hedge fund clients to write their own research and publish it as Gradient's, to misrepresenting their staff as CPA's and CFA's when they were in reality college kids, to holding reports to allow the hedge funds to take short positions - what seem like, if true, an awful lot of 10(b)5 violations, not to mention good old racketeering, to this admitedly untutored opinion. So when do our brave regulators get on this and start doing their jobs? Or do they just pretend that the allegations haven't been made, and keep trying to find a way to hang Dr. Byrne for having the temerity to shine a light on the cockroaches? What's it going to take for them to do their GD jobs?

I particularly liked where Gradient is claimed to have given Herb's editor office space, paid for by that firm - and ostensibly while he was busy writing nasty reports that went on Gradient letterhead. Now, is that bad? I mean, if you have a financial journalist who is bashing the company relentlessly, who is known to be a friend of the biggest short in the company's stock, would it cross any lines to have his editor working out of Gradient's offices?

Help me out here.

I get this odd feeling that the reason the messengers have been shot by all of the financial pundits who are friendly with this group is because they know that there is no way to explain away the charges, no facile aphorisms which will trivialize the charges of frontrunning customized reports designed to negatively impact the company's stock, and slandering companies for profit, and all the rest. And there is always Herb's editor working out of Gradient's offices. Or Gradient ostensibly running money out of their offices while issuing "independent research". And the list goes on, and on, and on.

No wonder they want to make Byrne look like a kook and spend a lot of time on the Easter Bunny's favorite color.

Who would want to have to confront the charges in the affidavits? They are wildly damaging, obviously ethically over every line one can think of, and likely criminal (I don't know, not being an attorney, but they seem criminal to me - and if what they are accused of isn't against the law, my question is, why isn't it?).

So it will be interesting to see what the spin squad comes out with now that the affidavits are out there in the public domain, to see how they explain Herb's editor working out of Gradient's offices, to see how they rationalize frontrunning the reports, allowing the hedge fund to write the reports, etc. - whether that is all OK, and acceptable behavior - particularly from the WSJ, who seemed way more interested in the ex-employees and any dirty laundry they could dig up on them rather than on the actual charges. The WSJ and the Post both seem to be shocked that whistleblowers tend to be disgruntled ex-employees rather than the CEO's of the companies who have been up to no good. What a surprise. How unusual. I guess they never saw Norma Rae, or followed the Deep Throat thing, or paid attention to the mutual fund frontrunning scandal - you know, little things like that.

I just can't wait to see how long it takes the AG's of the relevant states to haul some asses into court and demand some explanations. But that is just me. Maybe enough money and power buys you immunity from the long arm of the law.

Again, I have no way of knowing if the charges in the sworn statements are true, but I do have to wonder that anyone would go out on a limb and go on the record making these allegations if they weren't.

So have at it, guys. I'm sure Jeff Matthews will have a smirking retort - although it is noteworthy that Herb, who is always game for snide snipes at Dr. Byrne, didn't comment when contacted by the PIPEs Report. Neither did his "editor". Suddenly the whole glib gang has lockjaw.

I guess the strategy now moves to the timeworn "deny everything, keep quiet, demand proof, and blame everyone else" strategy that has been the modus operandi of every perp ever accused of anything on Wall Street. They've had months to attack the messengers and claim that everyone connected with the case is a nut or a fraud, and that hasn't altered the contents of the affidavits nor the damage of the information contained therein, so one wonders what is next - you just know that the fabled countersuits will claim that all the perps are victims, innocent babes being tormented by the bad old lawyers and the demon company with the nutty CEO.

Let's see how that plays before a jury. I'm going to bet that a Marin jury can see through all the bombast to simple right and wrong.

It's pretty clear to me.

But then what do I know?