Friday, February 18, 2005

When CEOs Obsess is a high-flying company whose CEO, Patrick Byrne, has a problem with success. His problem, specifically, is that the success of his company has attracted short-sellers of's stock.

While I do short stocks occasionally as part of my investment strategy, I am not one of the short-sellers Mr. Byrne--actually, Doctor Byrne--goes after on his earnings calls and in his erudite shareholder letters. The shorts he goes after are so-called "naked" shorts, meaning they have not actually borrowed the shares of Overstock which they have sold short.

Not only is naked selling short illegal, it is, from my vantage point: a) stupid; and b) not the way any professional short sellers I know go about their business.

So I think Doctor Byrne is identifying a problem that doesn't exist. And if it does exist in the case of, then those so-called naked shorts, whoever they are, will eventually have to buy back the shares of Overstock they have shorted--a good thing for the Doctor and other shareholders of Overstock, should they ever need an exit strategy. He should be thanking the idiots doing the illegal deed--not obsessing about them.

Why write about Overstock without having a dog in this fight? Simple: I have found in my 25 years' investment experience a very high correlation between companies whose CEOs obsess about short-sellers and the eventual self-destruction of those companies.

CEOs who obsess about a non-operating issue such as short-sellers usually have a very fragile business model--otherwise, they would not waste a second of their time on such useless speculation. Or they simply have something to hide--sometimes fraud, sometimes not. In general, what comes to mind when CEOs obsess about shorts are the words of Queen Gertrude--from Shakespeare, with whose work I'm sure Doc Byrne is very familiar: "The lady doth protest too much, methinks."

And Patrick Bryne protests way too much.

Bill Gates, as one example of a CEO whose stock has, in the past, been heavily shorted, never bothered to get worked up about any short-seller on any Microsoft conference call, ever: he just ran the business and let the stock take care of itself, and take care of the shorts along the way. In fact, when I am short a stock, I get very nervous if the CEO does not obsess about the shorts. It usually means he's playing a very strong hand.

But don't try to tell this to Patrick Byrne, because today he's whining to Floyd Norris in the New York Times that "someone is manipulating our stock," and blaming the shorts for the recent 15-point drop following an earnings call that disappointed investors expecting positive surprises. (Bryne does not, by the same token, thank the shorts for facilitating the 60-point rise in the prior twelve months, nor does he grasp the fact that he and he alone is to blame for raising ridiculous expectations and then failing to meet those expectations during the company's earnings call.)

Speaking of that call, you should listen to it. The whole replay. Especially the last twenty minutes, when Doctor Byrne fields a call from a man identifying himself as Bob O'Brien. "The name is not familiar," O'Brien says to Byrne, "let me start out by introducing myself."

The "not familiar" Bob O'Brien then delivers a paranoid and wholly ignorant fantasy regarding the supposed short-selling conspiracy driving Overstock and other small cap companies into the ground, including factual errors regarding the mechanics of stock delivery and ramblings of an individual with far too much time on his hands and who probably has a difficulty distinguishing reality from The X-files.

You will hear Doctor Byrne patiently let the man ramble, expressing surpise and interest in the caller's fantasy, and you will hear Doctor Byrne act wholly ignorant of where this Mr. O'Brien came from. "I don't know any of the stuff you are talking about but it is interesting stuff," Bryne says.

Patently false.

Turns out Patrick Byrne helped an organization called "National Coalition Against Naked Short Selling" pay for two Washington Post ads attacking naked short sale tactics. Turns out this so-called coalition is run by none other than the paranoid X-Filian Bob O'Brien.

But don't take my word for it. It's all there in the interviews Byrne and O'Brien give to Floyd Norris in today's New York Times. Read the article and listen to the Overstock conference call, and tell me what you think.

If a CEO will fib to Wall Street the way Patrick Byrne appears to be fibbing on his earnings call by hosting an orchestrated short-bashing rant from his "not familiar" friend Bob O'Brien, you never know what he might do when it comes to running a business.

I am not making this up.


Jake said...
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Jake said...

So I think Doctor Byrne is identifying a problem that doesn't exist.Funny how you don't mention the existence of the Reg SHO threshold lists, updated daily by the NASDAQ and the NYSE, filled will dozens of companies (including Overstock), whose shares have been subject to large numbers of "failure to delivers" (i.e. naked shorts). Odd, too, why the NYSE and NASDAQ refuse to reveal the number of such FTDs. Guess we should just take on faith the soothing assurances of the SEC. "Nothing wrong here; just trust us."

bobobrien said...
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bobobrien said...

Jeff may not be making this up, but he's certainly reading a lot into it that isn't there.

1) The Reg SHO Threshold list is a list of companies that have been abusively naked shorted - to the point where they made it onto the list. No belief from Jeff is required.

2) The problem is big enough so that the SEC "grandfathered" all prior fails - illegal since 1933 - which occurred up until January 7. If these weren't taking place (per Jeff's naive view), why grandfather them in?

3) The price drop that occured took place in AH - $10 - before Piper or Ham came out with their reports. So the arrow of time does not support the notion that the price drop took place as a result of these reports, unless investors are gifted with prcognition.

4) NCANS was formed after the conference call, so again the arrow of time poses some difficulties for Jeff. NCANS wasn't even in the apple of my eye at the time of the CC. Dr. Byrne was surprised that I called in. Floyd doesn't say otherwise. He uses smarmy innuendo, but he's bright enough to couch it so that it isn't libel. Jeff hasn't got as much finesse, clearly.

5) My incoherent rant actually sets out a very specific set of manipulations. It can be read in its entirety at:

It is neither rambling nor incoherent. It sets out the anatomy of an illegal stock manipulation. Jeff pretends shock that such a thing is even possible - I would direct him to the Elgindy conviction, and some other recent events that are showing how hedge funds and shorts actually operate.

What my discussion with Dr. Byrne does do is predict a number of things, so far with 100% accuracy. It predicts listings on foreign exchanges. Check. It predicts massive naked shorting. Check. It predicts a bogus regulatory probe. Check. It predicts nasty articles by lapdog herb, and the usual army of apologists and quislings. Check.

I would suggest that Jeff take some time to educate himself, as the ability to form words and string them into sentences does not automatically bestow unto them the gift of accuracy.

The information is available. He needs to read it.

Sooner rather than later, if he is going to continue to grace us all with his views.

Jeff Matthews said...

Here's some education for "X-Files O'Brien."

On the Overstock conference call he says this: "I think your float is what? 4 million shares?" He then notes the stock is "probably going to trade that in the first hour today."

Thus, a 4 million share float in Overstock is the basis for X-Files O'Brien's claim that the short selling conspiracy involves naked short-sales--otherwise, how else could the stock trade in greater volume than the "4 million share" float?

However, Overstock has sold 6.9 million shares to the public in four different offerings since 2002. Therefore, the 4 million share float figure is wrong.

Second, anybody who knows anything about the NASDAQ market knows that trading volume figures are inflated when two market-makers trade a block, so the average daily volume looks larger than it would appear on a specialist-controlled exchange such as the NYSE.

Third, the borrowing mechanics described by X-Files O'Brien in his hallucinogenic rant--particularly the role of DTC--is simply wrong. The DTC is a clearinghouse. It does not talk to short-sellers, it does not say "well we know how that goes," as X-Files O'Brien would have it do when a short fails to deliver a stock. DTC deals with the broker dealers. If a short-seller is failing to deliver, it's the broker-dealer that allows it, not the DTC.

So, he's wrong on the facts.

Anyone wanting to know the facts can go to http://www.dtc.orgn/dtcpublic/html/ and get them.

Anyone wanting to get a window into Mr. O'Brien's paranoid fantasies can visit one of the X-Files blogs, and dream away.

Jeff Matthews
And I Am Not Making This Up

pistachio said...

This makes your rant look pretty silly, Jeff. Can you admit to an error or are you going to just make a few excuses?
“…. when market participants enter into naked short sales on a massive scale, they could have an endless supply of shares and "could drive down the price in an abusive or manipulative way."
- James Brigagliano, Assistant Director, SEC Division of Market Regulation.

bobobrien said...

Well now Jeff, I notice you studiously avoid the topic of the one fact in this whole thing - the Reg SHO list.

Why don't you stop the bully pulpit tirade, and focus on the FACT that OSTK is on the reg SHO list, which IS a list of companies whose stock has been abusively "failed to deliver" - i.e. naked shorted?

Reg SHO Threshold list.

I'll grant you that the DTCC doesn't talk to brokers - that was a simplification for the call. The problem is that the DTCC allows the broker dealers to fail with an excuse, thus the "stock borrow program's" very existence.

Again, all the words don't make your central point, which it that there's no naked shorting going on (or rather that you don't believe there's any going on) valid. The Reg SHO demonstrates the lie in that. An eskimo may not believe that a 747 can fly, but his lack of cognitive capabilities doesn't stop the 747 from lifting off. Either there is a failure to comprehend here, or an agenda - it doesn't actually matter which to me, as the statement that there's no naked shorting going on is patently and provably false.

Reg SHO List.

Deal with it.

Jeff Matthews said...

Far from "studiously avoiding" the Reg SHO list, as "X-Files O'Brien" says, I merely find it misunderstood and irrelevant.

I urge X-Files to re-read "When CEOs Obsess." If he does, he'll see I state that having been in this business 25 years, I don't know any professional running a short fund who "enters into naked short sales on a massive scale," as "Pistachio" quotes the SEC man theorizing.

Consequently, I do not dwell on the SHO Threshold because anybody who actually knows anything about this business knows it has too low a "threshold"--10,000 shares of stock failing to deliver--to indicate anything like a conspiracy.

By obsessing about the SHO list, "X-Files O'Brien" and his X-Filian Conspiracy Theorists, including the erudite CEO and Doctor, Patrick Byrnes, are missing the whole point: if a stock is heavily shorted, and if the company is a good, well-managed enterprise, the shorts will lose in the end, without any need for blistering ads in the Washington Post, or the self-serving bluster Doctor Patrick Bryne exhibits on his conference calls and in his shareholder letters.

Indeed, in my view, the fact that Bryne wastes so much time and effort going after the shorts is a very good indicator that he has something to be worried about at

So here's an invitation: if there are any employees or ex-employees who would like to weigh in on this last point, I'd love to hear it. This site is, after all, about the reality behind the curtain.

For future reference, "X-Files O'Brien" and his pals should not take my word that the SHO Threshold is a joke. They should do themselves a favor and actually read the actual definition of a "threshold security" on the NASDAQ web site.

10,000 shares of a failed deliver is hardly the "massive scale" of naked short-selling imaginged by "X-Files O'Brien" and Pistachio and Doc Byrnes and the rest of the paranoid bunch.

Jeff Matthews
I'm Not Making This Up.

P.S. "Pistachio" needs a new handle. He should try "Peanut."

Its_strange said...

How did OSTK , a new diamond retailor, get a "steal of a lifetime " just before xmas and Valentines day ? What did the vendors other customers say ?

pistachio said...

Jmatt's rejoinder suggests re-reading "When CEOs Obsess," an article that only articulates his ignorance of the circumstances in the first place. Why go over such shallow thinking again?

Jmatt also states, "....that having been in this business 25 years, I don't know any professional running a short fund who 'enters into naked short sales on a massive scale,' which only highlights that his experience may not be all he supposes.

If you re-read the SEC quote, the individual was stating fact, not theory. This has already occurred on a massive scale with microcaps. That Jmatt doesn't know of the entities that were able to accomplish these rapes doesn't mean they didn't happen. I could care less about microcaps, that's not the point.

Naked short selling is the equivalent of counterfeiting shares of stock.

The people who are upset that this has happened to companies they are shareholders of have every right to be angry. Counterfeiting is a class B felony of federal law. What part of illegal does Jmatt not understand?Regarding the shares that Mr. O'Brien and Dr. Byrne refer to, the naked short positions are a lot heftier than the 10,000 shares posited by Jmatt. In the case of Dr. Byrne's company, the naked short position is at least 92,000 shares. In the case of Mr. O'Brien's company, the naked short position is at least 127,000. Perhaps Jmatt should read up on SHO one more time.Regarding O'Brien and Byrne "missing the whole point" that if a company is okay, the short sellers will lose, Jmatt ignores that it is possible to successfully target companies for destruction by the purposeful spread of misinformation,
bogus regulatory issues, class action suits and finally, manipulative trading.

Why is it so difficult to comprehend that frauds, like those we saw in the last few years, are as easy to perpetrate on the downside as they were on the upside?! The frauds that afforded Enron & Worldcom stemmed from greed. The same greed applies to those who wish to destroy companies by any means at their disposal - including diluting capitalization via naked shorts. Since profits may never wind up as a taxable event, the incentive for such frauds is enormous.I'm not making this stuff up.But this is Jmatt's blog, so we can pretty much assume his vested interest in so many exchanges will not permit a change in perspective. I'd bet on it.

a/k/a pistachio

BIGINK said...

I'm not sure I follow all of this , but still find it interesting .

Did the CEO of KKD have a problem with success , that made him try to look more successful than he really was by buying a jet plane and opening to many stores to soon , draining all of their cash , or didn't that problem really exist ?

randomnospam said...

I have an issue with your math Jeff. I could be mistaken, but according to the site, the Reg SHO qualifications are:

"1) There are aggregate fails to deliver at a registered clearing agency of 10,000 shares or more per security;
2) The level of fails is equal to at least one-half of one percent of the issuer’s total shares outstanding; and
3) The security is included on a list published by a self-regulatory organization (SRO).

A security ceases to be a threshold security if it does not exceed the specified level of fails for five consecutive settlement days."

There are FOUR conditions that MUST be met to be put on the list.

Am I wrong in assuming this means that OSTK has been naked shorted AT LEAST 34,500 shares/day for AT LEAST 5 consecutive days? Doesnt that give the potential for AT LEAST 172,500 failed shares or can the same outstanding shares be counted day after day?

Regardless... your assumption of 10k is terribly low isnt it?