Tuesday, March 15, 2005

Warning: This Could Be Your CEO!

If you are, or plan to be, a shareholder of Overstock.com, make sure you read the Overstock.com message board at the following URL: http://forums.auctions.overstock.com/

You will find a message board titled "Deep Thoughts" by Overstock CEO Patrick Byrne, who posts his "Deep Thoughts" under the name Hannibal. You should read his posts.

You will find thoughts both deep and shallow, facts in the form of definitions of certain issues dear to his heart (including short-selling)...and you will also find weird tangential points, borderline-paranoid musings, and outright inanities.

For example, this from CEO Patrick Byrne:

The key is this: if given the right to create an unlimited number of new shares essentially out of thin air, not limited by the number of shares “in the borrow” as legal shorting requires, these hedge funds can always drive the price down and always cover for a profit.

To which, I would say, "Well, yeah, sure, Patrick...but nobody is given that right to create unlimited shares out of thin air, least of all hedge funds. And even if they could, no hedge fund could always drive the price down and always cover for a profit--unless the fundamentals of the company justify that price action. Otherwise, Patrick, willing buyers--who vastly outnumber the ranks of shortsellers, as your own conference calls attest--would step in and buy."

Now, before readers accuse me of exaggeration for effect, or simply of making it up--not allowed on this site--let me highlight a couple more facets of the Byrne "precis" on naked shorting (which clearly does exist, although not on the scale imagined by Bryne and his certifiables, nor is it practised by any legitimate, professional hedge fund I know--and I know a lot of them).

Byrne lays out in great detail the same bizarre scenario explicated at length on the Overstock conference call by "X-Files" O'Brien, full of paranoid delusions of market-making in "German exchanges" and the supposed "nudge and a wink" by which the DTCC supposedly gives free reign to the hedge fund Visigoths.

But that's not even the most bizarre thing about these posts.

The most bizarre thing is that the Byrne postings on "Naked Shorting" have each been edited by Byrne himself as many as 8 times.

Posted: Sun Mar 13, 2005 6:04 am
Post subject: A Concise Summary of the "Naked Shorting"
Last edited by hannibal on Mon Mar 14, 2005 6:24 pm
edited 8 times in total.

This is a CEO who really likes to write on message boards.

Yes, some unprofessional, bad guys short stocks naked. No, Overstock.com's problems are not naked shortsellers. They are, by and large, professionals who think, among other things, a man who spends part of his day alerting his auction site readers to an upcoming appearance on Charlie Rose (also on the message board), and who has taken up the banner of a bizarre, paranoid and highly delusional individual who goes by the alias "Bob O'Brien" is probably not the guy you would want running a fast-growing public company.

Especially when earnings estimates are coming down.

Jeff Matthews
I'm Not Making This Up


Its_strange said...

And to think on the last conference call Dr. Bryne said he knew little about naked shorting and now Bob seems to be his advisor on the subject ...

KC said...

Does Mr. Byrne have any connection to Senator Robert Bennett (R. Utah), whose interest in Regulation SHO & naked short selling seems to have been piqued by his "constituents" back in Utah? Interestingly, Mr. Byrne "is also the general partner of High Plains Investments LLC, an investment company located in Park City, Utah, and considers himself an investor by trade" according to Overstock.com:

From: Investrend

Of Stocks And Socks: Senator Bennett Bores In On Sec's Dismal Naked Short Sales Record

March 14, 2005

March 14, 2005 (FinancialWire) When U.S. Senator Robert Bennett (R-Utah), Chief Deputy Whip for Senate Republicans, questioned U.S. Securities and Exchange Commission Chair William Donaldson this past week about a naked short selling article he read from FinancialWire, he indicated he was setting the stage for a full scale inquiry into the SEC's failure so far to halt the illegal activity. Bennett read Donaldson the story about the man, Robert Simpson, who filed that he bought all of the stock of Global Links (OTCBB: GLKCE) and figuratively stored the stock in his sock drawer only to see millions of shares traded almost daily thereafter. Complaints about similar trades have been lodged regarding Overstock.com (NASDAQ: OSTK), Martha Stewart Living Omnimedia (NYSE: MSO) and Krispy Kreme (NYSE: KKD), to name a few. A video of the exchange between Bennett and Donaldson is at http://banking.senate.gov/index.cfm?Fuseaction=Hearings.Detail&HearingID =140 at the 1:19:30 mark, and also at Investrend Information at http://www.investrendinformation.com Bennett questioned Donaldson in his appearance before the US Senate Committee on Banking, Housing, and Urban Affairs. The Senator chairs the committee s Subcommittee on Financial Institutions, and serves on the Subcommittee on Securities and Investment. He also serves on the Senate Small Business Committee and is Vice Chair of the Joint Economic Committee. This article in a national publication shows that people are still selling short, Bennett told Donaldson. Regulation SHO is clearly not working. He told the SEC Chair that short sales under Regulation SHO are not settled in the 13 days allowed because one broker passes off to another, and so on, inferring that this process can go on indefinitely. Donaldson said that his staff would be glad to meet with Bennett s staff to describe what the Commission is doing to resolve these matters under Regulation SHO. The SEC Chief of Market Regulation, Annette Nazareth, in a recent interview with Floyd Norris of the New York Times (NYSE: NYT), dismissed complaints about naked short selling as people who want their stock to go up. Senator Bennett told Donaldson that he is raising the issue because of complaints received from his constituents back in Utah. It is not clear if Nazareth, if and when she meets with Bennett s staff, will use the same dismissive statement regarding the Senator s constituents. Meanwhile, Robert Simpson s sock drawer may soon have a lot of folks poking around in it. There are already disputes as to how many shares are really outstanding. For up-to-the-minute news, features and links click on http://www.financialwire.net FinancialWire is an independent, proprietary news service of Investrend Information, a division of Investrend Communications, Inc

bob obrien said...

Ahhh, now there you go again, Jeff.

Making things up.

Tell me, do you know the level of fail to delivers for Overstock? For NFI? For CALM? For ALD? For any of the 300 companies on the Reg SHO lists?


And yet you are so sure that there just can't be a problem. In spite of the fact that a year ago, the same people telling you that there wasn't a problem would have denied any naked shorting at all.

But now there's the Reg SHO list. Oh, that inconvenient data point. We always manage to leave that one out in our little missives, no?

And you conveniently ignore cases like the Compudyne case where a (gasp) hedge fund naked shorted over a third of the company's float in 975 separate failed transactions, and that not one was caught by the system. You just ignore it. Pretend it didn't happen.

You seem reasonably bright. Why does a reasonably bright guy selectively filter facts and omit material information EVERY TIME HE DISCUSSES A TOPIC? Is is stupidity? Laziness? Bad memory? Or intellectual dishonesty?

How about this - you seem to believe that the listing of hundreds of companies without their permission on the German exchanges just a few short months before rule 3370 went into effect is purely innocent, and mock any explanations offered. Yet the only explanation that would jive with your take on things is that the Germans got a sudden and overwhelming interest in trading all those companies, just a few months before the naked shorting conduit via Canada was shut down.


Imagine all those lederhosen-sporting Bavarians, going happily about their entire lives without trading OSTK or TASR, and then suddenly they all just had to have it now. Of course, not enough to actually trade many, if any, shares. But we'll all suspend disbelief and pretend that they all just had to have it. And here's the kicker: you can't get delisted voluntarily now. If you are a US company, you are now out of luck unless you sue. Isn't that neat? But it's all innocent. No ulterior profit motives there.

Hey, I have an idea: Why don't you help us all understand things, once and for all. Then we can all sleep easier. What's your explanation for the following, oh presumably knowledgeable mocking one?

1) Why won't the DTCC tell anyone how big the fail problem is? Why are they fighting tooth and nail in courts around the country to prevent that data from being known?

2) Why did the SEC pardon all fails prior to January 7, 2005?

3) Who has the legal liability to holders of those FTD's that were pardoned - the company never issued those shares, so who has the billion or trillion dollar liability for legal redress to the "shareholders?"

4) What is the purpose of listing most of the Reg SHO list companies on the German exchanges?

5) You are blithe about how small the problem is. How big is the problem of naked shorting, and what verifiable facts can you present (anecdotes, testimonials and folksy wisdoms notwithstanding) to support your view?

6) Do you have any data that would suggest that you aren't making every single opinion represented here up? Any? At all? Besides your word that no one you know would do such a thing?

I think you have an agenda to make the naked shorting thing seem like fringe kookery, and to attack anyone or anything connected to exposing it. I see plentiful data to support that opinion, and nothing to diminish its validity. Why is a matter of speculation.

But one thing is for sure. So far, Jeff is leaving a lot of things out, and making a lot of things up.

I'll wait for your responses with baited breath. I'm confident they will contain the level of analysis and rigorous factual reporting we have all come to expect from you.

Its_strange said...

Why isn't Dr. Bryne concerned about his safety while Bob is ? Certainly with Bryne lastest post the bad guys have equal reason to be angry .

Bob, what exactly do you want ? A list of those doing a naked short selling ? Has the SEC said they plan on getting a list ?

bob obrien said...

Maybe being a prominent CEO affords you better visibility than a private citizen, along with better security. I don't want a member of my family to find out the hard way that when billions are in the balance some may decide to take matters into their own hands.

As to what I want, it's really pretty simple.

1) Publish the number of fails for each company on the SHO list, daily.

2) Buy in any trade at T+4. Period.

3) Eliminate the market maker loopholes. If prices have to increase because they can't get inventory, that's too bad - it's called an auction market.

4) Publish the OS daily.

5) Rescind the pardons of past fails, and start buying them in, 8% per month, starting June 1.

That would be called being fair and having a level playing field. If there were a real danger of a complete meltdown of the financial system, there's workouts that could be done via a slower buy-in process. But eliminating any further fails seems like a reasonable place to start given that there shouldn't be any in the first place, and then cleaning up the SHO problem should be a secondary objective, with a tertiary priority being the clean-up of the huge contingent legal liability the regulators created by grandfathering the fails in.


And the reason it's not happening is because those abusing the system to make ill-gotten gains are convinced they can keep sucking at the milk tit a little longer and squeeze another few billion loose.

jay-b says said...

haha.... "billions"!!

o'brien says:

" I don't want a member of my family to find out the hard way that when billions are in the balance some may decide to take matters into their own hands."


Listen O'brien: Even if you are correct in your conspiracy theories... remember one thing ... the market always..., yes always, corrects its short term mistakes.

What about Tivo? ... look at the stock chart and you'll see what I mean.... Thanks Tivo!

Value, by the markets measure, is always a great deal! Need me to explain Obrien??

I'm sure there are "tivo bulls" who went long at $10 and then seen the stock drop to below $4 and thought... must be those darn hedge funds beatin me outa my hard earned money...

But some might have said that on Monday of this week you could have bought a great brand (that being Tivo) for around $300 million. What a deal! Oh, and obviously the market agreed. And that is all that matters.

mfairview said...

"Listen O'brien: Even if you are correct in your conspiracy theories... remember one thing ... the market always..., yes always, corrects its short term mistakes."

So you go to Best Buy and purchase the latest whizbang digital camera for $1000 bucks. The next day, Best Buy realizes it overcharged $x dollars more then it should and proceeds to "correct itself". Well that's great for those purchasing the camera after you but where does that leave you?

mfairview said...

I seriously wished more CEO's were like him...

From the worldstock.com pages:

Since 1983 I have spent a fair bit of my life in China, Thailand, Cambodia, Vietnam, and the Levant. Like many visiting such places, I was overwhelmed by the destitution I saw there. Perhaps as a result, my graduate studies centered on philosophy and development theory, yet over time I grew skeptical of the advice the West has offered the world’s poor for the past fifty years, and of the bromides of the World Bank, the IMF, NGOs, and charities.

Years after I left such academic matters behind me to become an investor, the opportunity arose to create an Internet outlet store. From the start we designed Overstock with one mission: to create an e-retailer optimized for liquidation: that is, to work within fractured supply channels of numerous, scattered vendors, scooping up products in lots too small to be moved efficiently through mass retail.

In 2001 I took a break from Overstock to visit India and Southeast Asia. Unlike an earlier visit to Cambodia in the 1980s, this time I was able to travel widely by motorcycle. As I went from village to village, I came across small groups of artisans making first-rate silver and woodwork, table settings, silks, and home d├ęcor products. Some of these cooperatives included the disabled, many of whom had lost limbs to landmines, or women with no legitimate job opportunities at all. One afternoon I crashed my motorcycle on a dirt path and lay tolerably banged up in the tropical sun, watching farmers work their fields. Some children took me to their village, and that night, sitting on a cot in the dark, perhaps under the influence of too much of their painkiller, I reflected on what I had seen. I remembered a Hanoi nail factory I had visited in 1988, staffed and managed almost entirely by the blind (to this day, one of the most incredible things I ever witnessed). I thought about the famous Grameen Bank of Bangladesh, a pioneer in micro-credit for village entrepreneurs (often women) who take loans to buy small capital goods, such as sewing machines, to support themselves. I thought about similar small cooperatives of artisans in Lebanon, Palestine, and Peru, which I had either seen or read about.

I lay there speculating from the economic and business perspectives I lacked as a youth, and saw a common thread running through these communities, a thread I had previously missed. They have in common, of course, their poverty, coupled with a desire for work, self-respect, and the chance to provide for their families. Yet beyond their disabilities, obstacles, and lack of capital, a larger problem confronts them all: their output comes into the world through highly fractured supply channels of numerous, scattered producers, in lots too small to be moved efficiently through the mechanisms of mass retail.

Finally it was too obvious even for me to miss! The central problem of artisan production and liquidation are indistinguishable: How does one marry scattered small-lot production to mass demand? Because their central problem is the same, the structure of the liquidation market is precisely that of the market for artisans’ goods. And by one of those weird coincidences that seem to govern my life, I had spent two years building the most effective mechanism ever created for marrying scattered supply to mass demand: Overstock.com.
Internet Retailing Meets Artisans: Missions and Dilemmas

Upon returning to the States from Cambodia, I formulated plans for Worldstock, a store within Overstock devoted solely to carrying the works of artisans, especially disadvantaged artisans, and selling them as inexpensively as possible so as to maximize the amount of return for them. The first questions that needed to be addressed were, of course, ethical.

One obvious question concerns child labor. The essence of trade is that it is conducted by free and rational agents, yet children are not “free and rational” in any relevant sense. Children working in factories cannot meaningfully choose the condition of their employment, and so their output is morally tainted. (I decided, however, that children might legitimately help their parents in informal, cottage-industry settings, if their work were limited and they go to school.)

Beyond this, however, I found that I was stepping onto a battlefield strewn with landmines. For example, how can an American liquidator negotiate fairly with a supplier from a poor country in a context of asymmetric power, information, and capital? Would providing new economic opportunities to traditional cultures reinforce entrenched patterns of the oppression of women? Should trade be conducted with people working in countries whose governments are guilty of human rights violations, or would that support tyranny?

Over time I arrived at the best set of principles I could formulate, based on my own personal observations, education, and experience. I chose them by reflecting on the products with which I hope to build Worldstock: goods whose purchase would support women, disabled people, and traditional artisans such as Native Americans, or other disadvantaged people, goods produced through micro-credit, and goods whose production or consumption is carried out in an environmentally sound manner. The common denominator of all our Worldstock products, I decided, would be sustainability: the businesses we will support are those that sustain rather than use up people, cultures, and natural resources.
Economic Sustainability

One way goods can be socially responsible is by offering sustainable livelihoods to disadvantaged people: for example, casualties of war (such as land-mine victims and widows); aboriginals and traditional peoples bypassed by over-centralized development; and women with no viable job opportunities who have fallen on hard times. Through trade we seek to provide stable employment which is healthful enough that it does not “use up” workers in the short term, and with which people can build a life for themselves in the long term. By purchasing their products, our customers are in effect bypassing a top-heavy, hand-out approach to poverty, opting instead for an organic approach that nurtures local cultures and practices.
Cultural Sustainability

Development often causes massive cultural dislocations. For example, efforts to stimulate job creation in cities can lead to increasing urban unemployment as stimulatory effects get washed out by waves of workers forsaking traditional crafts for urban jobs. By buying the products of artisans working in traditional settings, we aim to support traditional practices while ameliorating the cultural disruptions that often accompany development.
Environmental Sustainability

Goods can contribute to environmental sustainability. For example, organizations such as the Worldwatch Institute and One World Products, Inc., aim to save the Brazilian rain forest by researching and selling replenishable products from it rather than burning it for pasture. Moreover, some goods are surrogates for commercial goods, but are produced in nonindustrial, eco-friendly ways.
Worldstock Adoptive Principles

Corporations are often accused of disingenuousness concerning the socially responsible practices of which they boast, so suspicion haunts any firm making claims such as those outlined above. Consequently, along with the foregoing principles governing what products we acquire, we are also committed to the following principles governing our pricing, negotiations, and disclosure.

Razor-thin margin pricing

Some retailers buy goods that contribute to economic, cultural, or environmental sustainability, but then mark them up 300 or more, with the result that only a small fraction of the sales proceeds actually gets to the producers. We have decided on a radically different course. While a small profit is necessary to afford the ever larger inventories that growth requires, my dream is to price our Worldstock goods inexpensively so as to grow the department rapidly and spread the model to as many people as possible. So while the answer to the question, “What percentage of the price actually goes to the producers?” varies by product, in general, it runs in the range of 60 - 70 of your purchase price goes to the producers. The remainder is pretty much entirely consumed in our own costs of importing, duties, handling, shipping, credit card fees and marketing.

Fair negotiation

I am a capitalist. As you read this, I’m doing everything I can to edge out the competition. That's how we sell TVs, jewelry, and computers at the prices we do. But that hypercompetitive mentality is not appropriate for Worldstock. When disparities in wealth, options, and information between two parties go beyond a certain level, negotiations can no longer be fair. We do not want to chisel Peruvian widows in order to “get the goods,” and I have no doubt that socially conscious consumers don’t want us doing that on their behalf. Consequently, for this department, we do not negotiate roughly with suppliers, but rather remind them that if they charge us too much, we will not be able to sell their products or place reorders; lower prices to me will create higher volume for them. In effect, the buying behavior of our customers dictates how hard the producers themselves face pushback. I could think of no fairer system.


Principled disagreement exists among proponents of fair trade.

For example, some Worldstock products are purchased from development organizations, NGOs, nonprofits and micro-credit banks, which organize producer associations and in some cases (landmine survivors, for example) provide training for producers. Some believe that socially responsible goods should be acquired only through such agencies to ensure credibility.

Others claim that limiting purchases to such agencies perpetuates a mindset of dependency, which says, “An agency, not individual initiative, offers the only way to get ahead.” For example, imagine that in my own travels I find (as I have) a small workshop in a village in the Bekka Valley of eastern Lebanon, where a few women work together, making exquisite shawls. Their products do not carry the imprimatur of any UN organization or development agency, but in my view their wares are appropriate for Worldstock. Should I forgo the shawls because they lack the certification of an NGO, or should I trade in them to reward their initiative?

My answer to this dilemma is simple: transparency. We buy socially responsible products from reputable fair-trade importers, NGOs, micro-credit facilities, humanitarian organizations, and directly from artisans themselves. All producers sign a statement of principles concerning the manner in which the goods are produced, and we conduct our own investigation of such suppliers and their reputations. Therefore, a customer who trusts my claim that buying a given shawl contributes to the well-being of a village in eastern Lebanon can buy the shawl knowing where it came from. On the other hand, that customer might choose to buy only those products we acquire through formal channels, such as Rehab Craft Cambodia (an NGO building a self-sufficient business channel for Cambodians with disabilities). By providing sourcing information in our product descriptions, we minimize dilemmas about social responsibility: we are honest and transparent and let the customer decide.

Artisans around the world have trouble reaching their natural markets due to poverty, poor information, and the disadvantage of being small-lot producers in an age of high technology and mass distribution. Yet they are capable of making exquisite centerpiece products. These artisans could feed their families, vaccinate their babies, and send their children to school, if we in the developed world were to purchase the high-quality goods they know how to make. We realized that Overstock could bridge this global gap. The result is Worldstock, a store emphasizing sustainability, fairness, and transparency while empowering artisans to achieve their dreams for themselves and their families.

Patrick M. Byrne

bob obrien said...


Perhaps you'd like to give this a shot while promulgating your facile little aphorisms. Just answer the questions to the best of your limited abilities:

1) Why won't the DTCC tell anyone how big the fail problem is? Why are they fighting tooth and nail in courts around the country to prevent that data from being known?

2) Why did the SEC pardon all fails prior to January 7, 2005?

3) Who has the legal liability to holders of those FTD's that were pardoned - the company never issued those shares, so who has the billion or trillion dollar liability for legal redress to the "shareholders?"

4) What is the purpose of listing most of the Reg SHO list companies on the German exchanges?

5) You are blithe about how small the problem is. How big is the problem of naked shorting, and what verifiable facts can you present (anecdotes, testimonials and folksy wisdoms notwithstanding) to support your view?

6) Do you have any data that would suggest that you aren't making every single opinion represented here up? Any? At all? Besides your word that no one you know would do such a thing?

I'm sure all the folks that lost everything in the Crash of '29, which naked shorting contributed to, are happy to find that decades later the market found its footing and corrected itself.

How nice.

In the meantime, if you would be kind enough to stop changing the subject to value discussions of individual companies, and stick to the broader point - illegal sales of shares unregistered and unauthorized by the company and the devastating consequences it can have W/R/T the markets in general and Reg SHO companies specifically - it would help us understand what Jeff and his ilk believe, and what support they have for their beliefs.