Monday, February 28, 2005

Dr. Patrick Bryne and the Certifiables

I have a friend who enjoys shaking up dinner conversations and cocktail parties by saying something inflammatory--"So I'm thinking of buying a gun," he'll say; "What do you think?"--then he sits back and watches the fireworks.

Thus it has been with this blog: a discussion about CEO Patrick Byrne's obsession with short-sellers, his relation to an oddball Conspiracy Theorist calling himself Bob O'Brien, and the vacuity of "X-Files" O'Brien's conspiracy case has given way to an intense shouting match leading to precisely no conclusion.

Although it does lead somewhere very interesting.

We know, for example, that "X-Files" and his cohorts have taken the threads of established cases of illegal naked shorting in stocks that hardly merit serious discussion, and woven a broad Conspiracy encompassing professional short-sellers in general and shorts in, in particular.

Unfortunately, for his case, "X-Files" ignores the fact that professional short sellers view naked shorting the same way he does: illegal. But pros go further: it is not only illegal, it is amateurish and also stupid. Hence, whatever's problems are, they come not from naked shortsellers.


"X-Files" not only refuses to believe this, he goes off the deep end by making very bizarre claims, including one that the hedge fund industry has been "linked to organized crime" and another that hedge funds such as those involved in violate the Patriot Act by accepting funds from terrorist groups.

These are serious charges and might be seriously considered, except that Mr. O'Brien practically declares himself certifiable by stating, and I quote:

I have contacted the FBI. My attorneys feel that given the players involved, only a madman would reveal his identity and strap a bulls-eye on his chest at this juncture. I thought they were being paranoid two years ago, but now I believe they are just being prudent.

What we're dealing with here, I think, is a crackpot. A certifiable crackpot.

Now, that's my opinion. Others might say he is merely eccentric, or a whack-job, or a harmless nut. The correct adjective is not important, what is important is this: why would the CEO of a large, widely owned, publicly traded company give over a significant portion of his earnings call to an individual who is so misguided as to the facts, and, apparently, a certifiable crackpot?

That's a question that merits a serious answer, because real public companies--and I had included Overstock in that category until "X-Files" more fully revealed himself here--do not allow their earnings calls to be hijacked by crackpots.

Note: This blog is not an blog, nor is it a Patrick Byrne blog, nor an "X-Files" O'Brien blog. I will be moving on to other topics. But I'm still looking for answers to the fundamental questions already raised about operating issues from Overstock's last quarter. Anyone who knows--and who is not making it up--is welcome to respond. Certifiables are not.


Its_strange said...

crackpot ? eccentric ? Whack-job ? Don't know but it looks to me like Bob and Dr. Bryne ( recall the 3rd conference call where he suggested Mr. Rocker should short more OSTK ?) are part a organization devoted to causing squeeezes ....

tiddman said...

JM wrote:

>>> Unfortunately, for his case, "X-Files" ignores the fact that professional short sellers view naked shorting the same way he does: illegal. But pros go further: it is not only illegal, it is amateurish and also stupid. <<<

Jeff I've been watching this dialog with some amusement and interest, and I am not totally convinced of O'Brien's sanity, though he does occasionally make a decent point.

But regarding your comment. Do you purport to represent ALL professional short sellers? Are you suggesting that ALL pros view naked short selling as illegal and stupid?

My guess is "no" -- you evidently hold yourself to a high standard, but you really have no idea what standard other professional shorts hold themselves to, if any. I would certainly be comfortable making claims about what I think about a particular activity but I would not feel comfortable speaking for the vast group of all other investors.

While I don't necessarily believe that naked short selling is the mother of all conspiracies, I do think that in a segment of the market where you have very little regulation (both hedge funds and short selling) and very high profit incentives, the potential is there for bending or breaking the rules, human nature being what it is.

Cody Willard said...

Tiddman, I'd just note that despite the common misconception that hedge funds "have little regulation" -- they are heavily regulated, indeed.

PS. In the interest of full disclosure, I own longer term OSTK puts.

tiddman said...

>>> I'd just note that despite the common misconception that hedge funds "have little regulation" -- they are heavily regulated, indeed <<<

Well it is hard to generalize, but if a hedge fund meets certain requirements (private placement only, only accredited investors, less than 100 investors, no advertising, etc) they can avoid pretty much all of the significant SEC regulations that apply to, for example, mutual funds, institutional investors, broker/dealers, and registered investment advisors.

This is I believe one of the primary reasons why certain types of money managers want to run hedge funds, so they are not restricted in any way in what they do.

Additionally, while buyers of publicly traded stocks and insiders must conform to various regulations (i.e. report ownership if it reaches 5%, and if you are an insider, report all transactions, and be subject to quiet periods and lockout periods, etc), short sellers are subject to no such regulations.

Put the two together, and you can create a hedge fund that specializes in shorts that need not report much of anything about what it does, while playing the same game as people that do.

Now add to this the fact that hedge funds can use leverage far in excess of most investors large and small, through repo agreements, offshore financing, private arrangements with investment banks, etc. and you have a tremendous amount of selling that can be enacted by a hedge fund that is not reported to any regulatory body.

Jeff Matthews said...

Well, "tiddman," my fund is less than 100 investors, has accredited investors, and does no advertising. But I couldn't short naked for any more than a couple of days even if I wanted to.

The prime broker requires a borrow; the trader you're shorting through needs to know where you've borrowed; and if the borrow fails, the stock will be bought back anyway.

Contrary to your other suggestion, I do have an idea what standards other professional short sellers hold themselves to. And they simply don't run around naked shorting.

As for the clowns who do it, let them do it. It's a bad way to make a living, if a living can be made. And so far I haven't seen too many naked short sellers in the Forbes 400.

Jeff Matthews
I'm Not Making This Up

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CarterWho said...

Tiddman, I don't know what you do for a living but like Jeff, I run a fund as well. I can't even enter a trade until my desk has verified the borrow to be a solid borrow. Naked short selling has definitely been a problem, some of the most eggregious have been broker dealers. Reg SHO could be a bit more transparent but it certainly created a pretty big short squeeze. Just ask any short biased fund how their 4th quarter was like.

Its_strange said...

OSTK thinks it will get " preferential " treatment when it offers hotels and flights on its travel site. Dr. Bryne also spoke of a major Latin America airline wanting OSTK to liquidate all of its inventory ..Once again , how does OSTK get these deals ? Why would someone offer OSTK "preferential" treatment when the business isn't even open for businesss yet ? ....Why am i paying 60 times forward earnings for this when i can get a BJ or COST for 1/3 the price ? ...Look guys i am no pro at this but something seems pretty damn goofy here. Perhaps Bob can explain ?

Its_strange said...

And on the recent call Dr. Bryne said OSTK had trademarked " Earths Biggest Discounter " i guess we are about to learn of a Chinese language site soon. Just imagine the "deals of a lifetime" you could get over there ....

Its_strange said...

Jeff's blog , Cuban's Blog , the message boards and websites....Yahoo turns 10 years old today.

Is CNBC becoming irrelevent ?

razor said...

Article about OSTK shorts in today's WSJ , money and investing section. 3/2/05

Hayseed said...

Now I may not know as much as anyone here, but seems to me that naked short selling by itself is difficult to do in this day. As Jeff said, NASD requires the broker to ask/prove the borrow on behalf of the account... and for individuals to naked short is essentially impossible. So then who is naked shorting and how the heck are they doing it? Is it Osama Capital Management??? Who are where are all these awful people. Bring'em out, let's put'em in the blocks! For any hedge fund to naked short is essentially asking the SEC to materially fine you and/or shut you down. Can't imagine anyone with half a brain would want to risk such a valuable asset on one small and stupid investment vehicle.

Besides, last time I checked, you could only short on an uptick, so it can't be the shorts whacking OSTK - it has to be that dastardly group of evil incarnate, those field generals of Operation Enduring Bubble.... the LONGS!

razor said...

Well put Hayseed. I was thinking the same thing.

razor said...

Well put Hayseed. I was thinking the same thing.

mfairview said...

Here are the FTD companies on nasdaq

Here are the ones on the NYSE

The list is updated daily. Obviously Naked Shorting is not too difficult because, as you'll notice, there are a lot of companies on the list. To your point about who, that's what precisely is being asked (and also how much). The information is not available publicly. Isn't that strange?

tiddman said...

>>> KL Financial, a hedge fund manager that catered to wealthy investors and held as much as $300 million of clients' money, unexpectedly closed after visits from investigators with the Securities and Exchange Commission and FBI on Friday and Monday, according to sources familiar with the investment firm.

"My life savings are essentially gone," said one KL Financial client who asked not to be identified.


There's little paper trail on the company, mainly because as a hedge fund it falls outside the purview of state and federal securities regulators. <<<

razor said...

Just came across the tape. Do not kill the messenger. I have zero position and never will.

13:04 OSTK Follow-up: OSTK reiterated overweight at Lehman; reduces EPS estimates (52.78 +0.78)
Firm cites access to suppliers and a market that seems ready to migrate online. Lehman does raise Q1 revs. to $138... more 13:04 OSTK Follow-up: OSTK reiterated overweight at Lehman; reduces EPS estimates (52.78 +0.78)
Firm cites access to suppliers and a market that seems ready to migrate online. Lehman does raise Q1 revs. to $138M from $134M, though reduces Q1 to ($0.08) from ($0.04). F05 raised to $786M from $780M; no change to f05 EPS $0.20.

12:58 OSTK OSTK mentioned positively at Lehman, we're hearing (52.44 +0.44)

The Unknown Broker said...

Well-known hedge fund manager Doug Kass was on TV earlier discussing Martha Stewart (MSO) and saying that he would love to short it. HOWEVER he can't -- because he can't borrow the stock.Doesn't he know anything? Doesn't he know how simple is to do a naked short? I mean, it must be a piece of cake since according to our resident crackpot Mr. "X-Files" O'Brien it's so rampant.

Want to short MSO? Can't get the borrow? Just short it naked! Happens all the time. Easy as pie.


mfairview said...

From Cuban's Blog:

32. Posted Mar 3, 2005, 11:29 PM ET by dennis louw

I feel ungratious posting in Mark's thread - I hope he doesn't mind as there is no where else to discuss this anonymously.

Most CEO's keep their mouths shut.

Mark has brought up intelligent points and I agree that most companies that complain about shorting deserve it.

I am in high tech and I short all the time when I think a play is overvalued. I've made a lot of money both long and short based on my understanding of technology.

I've also been bought in on short plays where I was right including one on the SRO list. I lose money even though I am right and the stock goes down to nothing. It's annoying. I asked my broker why I couldn't naked short and he said that's left to the big boys.

It is a bit inaccurate to use the term naked shorting as it brings up naked puts, naked calls, etc. which are legal and which I also do all the time.

Instead, this issue should be referred to as "unsettled trading" which means the buyer doesn't get what he paid for which should be guaranteed to settle in three days. Definitely illegal.

When a broker sends a confirmation slip, I think it could constitute fraud as they are confirming delivery of something that hasn't been delivered.

Believe it or not, there are a vanishingly small minority of genuine OTC companies that are laying off staff and failing because they are being manipulated.

Imagine a scenario where a Microsoft type company is shorted into the pennies because it is in R&D with no revenue and the shorts believe it will dilute at ever lower levels to stay alive.

Instead of going to the market, I've treated it as a private company - I donated salary without taking shares, mortgaged my holdings to buy stock in the pennies and pulled the cert., lent the company money, etc. because I want the investors that believed in us to be rewarded. If someone bets on me and we win, they should get the pay off.

We originally went public through a reverse takeover of a mining shell and most of the initial money came from family and friends (and their family and friends) who I don't want to screw.

To be honest, I thought that by drying up the float, the shorts would have to cover. I didn't understand the game was fixed.

It took several years, but we've turned the corner and are getting huge contracts, we're profitable and we don't need to go to Wallstreet and will never do another financing unless it is our choice.

We announced our biggest deal in our existence and I was astonished to see the stock fall 50% the day we announced it (even though the trading volume exceeded the float).

My phone was off the hook with investors calling to say they were buying but wanted to know why the stock was plummeting.

Now the SEC is asking us weird questions about revenue recognition.

We announced another huge deal and the stock traded huge volume without going up a penny even though no one with a position above 100,000 shares was selling.

Some days, I get 20 hedge funds calling looking for a placement or to loan insiders money securitized by their stock. "Don't worry, we can lend you x millions of dollars and you don't have to file insider trading. It doesn't matter if you never pay us back, the loan is below prime and non recourse".

Then I had friends and relatives calling telling me their brokers were telling them we were a scam, we were going bankrupt, etc and begging them to sell.

Or, never buy OTC companies even if they are good because the shorts will drive the price down and you can't fight the OTC conspiracy. Brokers actually told that to my investors.

The coup de gras was when my grandma was distraught because her broker told her that I was a scammer and she needed to sell before the stock went to zero. She didn't know what to tell the other old ladies in her complex as she had bragged about our huge successes and hadn't realised I was a stock scammer and I had been lying to her.

She only owned $1000 worth of stock, but it created a huge emotional issue for her in a company I've built up for many years privately before going public.

It was this incident that made my blood boil.

I've intentionally not used my own name because Mark is right - companies shouldn't complain about being shorted because it brings negative attention.

I know we are naked short because I had my own control position in electronic form. I fought for six months to get my certificate, hearing everything from you can't pull it without filing insider trading to the company or transfer agent is holding it up. I could see my broker didn't have even a fraction of my position when I looked at the sheets.

The SEC will not intervene as they consider certificate issues to be controlled by state law of the state where the company was incorporated. Unfortunately, the states don't have authority over a brokerage out of their state. In other words, if you own an IOU instead of a cert., you have no way of getting your cert.

Mark says to borrow money to go private, but R&D and minimally profitable companies can't borrow money to go private.

I'm not worried about our case as I see it as an opportunity. Through luck and hard work, we are past the dark times and we are 1 of 100 good companies that were able to survive the attack of Wallstreet without going under.

When our profits grow, we will buy back shares and cancel them. We plan to go to a senior exchange this year and we should show up on the SRO list (it doesn't seem to list OTC companies).

We were able to get over the hurdle.

What about the other R&D companies that thought the OTC public markets would provide financing to only discover they bankrupt most start ups. How much human progress and economic success has been killed? How many investors were right at picking the next Microsoft only to lose everything?

Anyway, a word of advise to anyone reading this.

If you are investing rather than trading, ask for your certificate.

You get 100% voting rights and your vote isn't scaled down, you get full dividends (even if the dividend is a private sub instead of cash) and you aren't at risk if your broker goes bankrupt.

And Mark - ask yourself why the SEC banned certificate only trading that protected companies from the DTC if there was no problem. Even if you agree with naked shorting, there is a huge opportunity for you as this issue comes to light.

I don't know who O'Brien is and it shouldn't matter. This issue is bigger than any one person.

For my company, I am worried about derivative lawsuits because of lack of disclosure about naked shorting even though I have no proof. I had a DTC report where a house came up with a negative position. I called the DTC for an explanation and they said "that doesn't happen very often, but it should be gone by next report as it is expensive to go negative". I asked for a further explanation and I got referred from person to person until no one called me back.

The DTC's nominee is Cede and Co. Look up the word "cede" in a dictionary...

mfairview said...

Can't make this stuff up...


Friday , March 04, 2005 07:14 ET

(financialwire.n e t via COMTEX) --March 4, 2005 (FinancialWire) A Michigan man, Robert C. Simpson, who claims to have acquired 100% of the issued and outstanding stock of Global Links Corp. (OTC: GLKCE), if true, is likely to become the poster boy for those opposed to illegal naked short sales.

Illegal naked short sales have mostly victimized small companies such as Global Links, but has also been cited as problematic for large companies such as Martha Stewart Living OmniMedia (NYSE: MSO), Krispy Kreme Doughnuts (NYSE: KKD) and Overstock (NASDAQ: OSTK), whose CEO is said to have helped write a national ad on the subject in the Washington Post directed to President George Bush.

Simpson filed a U.S. Securities and Exchange Commission Schedulce 13D ( on February 3, showing his purchase of and sole voting power for 1,158,209 shares of the corporation.

Yet, here's the rub:

The day after Simpson purportedly stuck every last corporate certificate for Global Links in his sock drawer, the company traded 37,044,500 shares. The next day it traded 22,471,600 share. Thursday it traded 199,616.

Simpson is said to have gone back to his sock drawer, and despite the fact that a sock or two, as is always the case, were missing, all 1,158,209 Global Links certificates were still there.

Observers are asking where those other millions and millions of certificates are therefore coming from.


The San Antonio Express-News raised the question this week as to how Congress could seriously consider placing Social Security into what it inferred is a "mess

Richard Wilson said...

The level of x-files like accusations seems to be growing. If the SEC or another regulatory group doesn't find dirt than some people believe they aren't doing their job. What a waste of money and time. There is no reason why there should be any additional crack downs in a bear market than a bull, except for the expectation of finding a scapegoat or two.

- Richard

p.s. Jeff - let me know if you would ever want to contribute a few guest articles to my hedge fund blog - I know you probably can't because of regulations that you have mentioned before...but let me know if that has changed -