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Monthly Archives: September 2008

It seems inevitable in this little exercise in the macabre that anyone operating under a veil of anonymity will soon have his or her identity sought after.  And so, as you can see from the comments, it has begun here.  I’m really not sure what, if anything I plan to do about it, but I do believe it will be an entirely useless clue to my identity when I admit to having crossed swords, so to speak, with the subject of this week’s section.

Meet David Patch, self-styled evangelist of the gospel of the anti-naked shorting movement.  His primary accomplishment, as far as I can tell, is getting himself banned from more blogs and message board websites than any other individual I am aware of.  He almost seems to make it a goal to get banned, in order to be able to tie the blogger/admin in to the grand conspiracy against him.

He does this by effectively “taking over” a discussion, and driving it in the direction he wants it to go, irrespective of what anyone else was or wanted to talk about.  And if the person in charge tries to tolerate him, he’ll just ramp things up until he finds the breaking point and wins himself a one-way ticket out of that forum.

Mind you, it’s been a while since he has (to my knowledge) pulled that off, so either he’s gone away or found a place where his “style” is actually appreciated.  Either way, I don’t necessarily anticipate him showing up here.

Anyway, the gist of this week’s relatively short tale is of how Dave Patch found the “smoking gun” via a Freedom of Information Act request, that “proved” that shares of were being sold and never delivered.

I put “proved” in quotes because his actual reasoning has always been scattershot at best and at some times just plain absurd.  At one point, for example, he thought the figures provided were cumulative, meaning each day’s total represented brand new “phantom shares” being created.  After being disabused of that, he charted the data and picked out a segment that “proved” that delivery failures were on an uptrend, even though the data he excluded showed that the levels had been substantially higher in earlier months.  And all the while, the data does nothing to indicate whether these are the “same” shares being undelivered for weeks on end, or a transient condition where delivery get backlogged but fulfilled in due course.  No points for guessing which of these options Patch has arbitrarily decided must be the case.

Meanwhile, OSTK has been off and on the Reg SHO list of companies with significant failures to deliver, and as of this writing is currently off it.  Yet the lack of “phantom shares”, as Mitchell keeps calling them, has failed to return the stock to anywhere near its highs of a little less than four years ago.

It’s probably coincidence that at the same time the current leadership of the SEC has decided to “take seriously” the complaints of David Patch and others, that the markets have plunged into what some pundits call their gravest crisis since the Great Depression.*

Still, it was probably an inopportune time for him to be taking over the discussion there.

It’s something of a darkly humourous irony that as Patch, Byrne and others of their mindset are trying today to take credit for something or other, nobody else has any time for them.  I guess they’ll just have to settle for being prophets in their own minds.

Next week, Patrick Byrne and his impression of a moth.

(* Mind you, other pundits are a little less on the panicky side, so all I can advise is to go with whomever you decide to trust.)


So apparently I’ve gotten noticed?  In that case, welcome, actual readers.  So, what’s new, anything interesting happen last week?

Oh, and I really do appreciate the implicit compliment that my writing style could be mistaken for someone who actually writes for a living, like Gary Weiss.

Late update: What in the world was this supposed to be all about?  The bankruptcy court seems to have quietly ignored them and gone on with their job.  I suppose that this will turn into another piece of the conspiracy puzzle somehow, but still… just weird.

Interestingly enough, right about the same time as Byrne’s infamous interview with Kudlow and Cramer, the NASD passed a rule effectively closing the overseas exemption from finding a borrow prior to executing a short sale.  Prior to this, it was something of an open secret in the USA that if a stock was tightly held and hard to borrow, and you really wanted to bet against it, the answer was to open an account at a brokerage in Canada and trade from there, where shorting restrictions were much more lenient.  Mitchell’s piece describes the advantages of this tactic, but common sense should tell you that if a stock could be shorted to nothing at will via this method, we’d have seen more, or for that matter, any instances of this happening.  Instead the cases of stocks being “shorted to zero”  invariably came from debt offerings foisted upon naive company managements by shady brokers, which, all things considered, seems a lot more trouble to go through.

And, indeed, there were downsides to the Canadian method.  For one thing, since you don’t have the borrowed shares in place, if you do have to cover, now you have to go locate the stock to buy back.  If the market is moving rapidly against you, you may be hit with a harsh penalty by the markets due to this delay.  Furthermore, you have to keep track of your own captial gains and carefully report them on your taxes, lest you end up committing tax fraud out of nothing more than neglect.

Overall, the basic premise that this blog disagrees sharply with is that, in the open market, the short-seller holds all the cards.  In years like 2008 has been, that can certainly seem to be the case, but just try asking anyone who tried to short a tech or Internet stock ten years ago just how “easy” the money is on the short side.

With that as prologue, let’s get to what this section is actually about: an article by Dow Jones writer and soon-to-be Carl Loeb Award winner Carol S. Remond, documenting the NASD (now FINRA)’s change in policy and the reaction of market participants to it.  It’s pretty much a to-the-point, straight-down-the-middle piece, getting comments from various points of view and otherwise sticking to stating the facts.

But Mitchell doesn’t see it this way.  Mitchell highlights the fact that Remond quoted people bemoaning the loss of a short-selling tool, and ignores the fact that she states that others want short-selling done away with altogether.

But Remond’s worst sin of all in this article, in Mitchell’s eyes, is this pargraph — and I quote it in full:

“It’s taken us by surprise,” said Richard Thomas, head of compliance at Canadian brokerage firm Pacific International.

From here, Mitchell goes on to recount the rather substantial number of scandals and other nastiness that subsequently occurred at Pacific International.  I haven’t personally bothered verifying any of them one way or another, because Mitchell’s point isn’t so much to attack Pacific International as it is to attack Remond, who in more recent days has stood out as one of Overstock’s most vocal critics.

Now you might think that a four word quote that basically states the obvious is a pretty flimsy linkage.  I might well think that too.  But in conspiracy land, there is no line too thin if it will connect a pair of dots someone wants connected badly enough.

And so we have the spectacle of Mitchell slamming Remond for citing this brokerage as a “credible source” in regard their own state of surprise.

So, with all this media conspiracy to allow dodgy sources to scurrilously cop to having been caught unawares, are there no heroes to look to anymore?  Is there no one out there still willing to speak the truth to power?

Well, yes, but next week we’re going to meet a stupid message board troll instead.

This week’s section is rather short (oops, sorry), but contains within it some of the most implausible narrative yet.

We pick up the action from last week with the immediate aftermath of Byrne’s January 2004 Kudlow & Cramer interview.  And Byrne is on the phone to a Wall Street broker (unnamed of course).  I guess in Utah it must be customary, after a stressful experience, to dial up a stockbroker for some commiseration.  At any rate, Mitchell portrays Byrne as being entirely unaware of vile underbelly of Wall Street and its ongoing conspiracy with the financial media, and this anonymous broker is basically giving him the run down.  So basically, the wellspring of all of Byrne’s subsequent paranoia?  This guy.

Then, “just recently” (as of the time of Mitchell’s writing?  as of the interview?), two hedge fund managers, yes, those embodiments of all that is evil about Wall Street, just up and call Byrne to tell him they were naked shorting Overstock.  No, really, Mitchell actually writes that.  The narrative even implies the hedgie guys went out of their way to carefully explain to Byrne what they were doing to his company’s stock.  Mitchell goes on to say that that the broker executing the naked short sale was also spreading some kind of false rumor about Overstock (and, again, apparently telling Byrne all about it!) to further depress the share price.  And then he went home to beat up his wife and children, one supposes.  Honestly, I’ve seen villains in kids’ movies written deeper than this.

And then, just to throw a touch of nausea into the proceedings, Mitchell goes back and contrasts this with Byrne, who is portrayed as somehow still unaffected by all this and blissfully unaware of the dark conspiracy forming to take him and his company down.

At this point I have to wonder: Is Mitchell having us on here?  Are we going to go another ten sections in and he’ll say, “Just kidding!  Now here’s my real exposé piece”?  Because we’re really at the point where this isn’t even good fiction, much less something to be taken seriously as investigative journalism.

Next week: Another journalist in the spotlight, and this one isn’t even a alum!

For the first time, Mitchell actually manages to put together a reasonably coherent section, in that it basically starts on one topic and more-or-less stays on it to the end.  So rather than do a paragraph by paragraph breakdown as I’ve tended to do so far, I’m going to stick to addressing the overall premise Mitchell puts forward, at least until the big finish.

In brief, Mitchell notes that back in 2002, when Overstock first rose to prominence, it was something of a media darling, hailed as the next big challenger to Amazon, and so on and so forth.  But even by the time of Byrne’s Sith Lord presentation, Overstock was no longer getting the favorable press it once enjoyed.  Even in 2004, as long as six months after the fateful interview relived later in this section, Jim Cramer was penning optimistic articles on Overstock’s prospects.  But a year after that, not so much.

Mitchell asserts that this change of heart on the part of so many in the financial media can only be due to some outside influence, i.e. David Rocker, ordering them to go negative.

This is a point of interest because it really speaks to what I feel is one of the biggest misconceptions when it comes to investing in individual stocks.  Far too many people, I find, confuse investing in stocks with rooting for sports teams.

Sports fans almost invariably value loyalty to teams.  Even as the actual personnel of a given team changes over time, it’s where they play (half of) their games that, in general, establishes a connection to the local populace.  Thus there is virtue attributed to being a “die-hard” Cubs fan even as they find new and innovative ways to fail, and the agony of being a lifelong Red Sox fan is deemed to be worth it all when the team finally breaks through and wins the long-sought championship.

And, in a way, public companies bear a superficial resemblance to sports teams, in that they have variable personnel, they have a headquarters/home field, they have victories and defeats, and you can even keep score by following the share price.

But there’s a big difference.  Let me give you an example.  If you’re a Patriots fan, you probably expected your team to win the Super Bowl last season.  But the fact that they didn’t probably didn’t cost them very many, if any, fans.  That’s team loyalty and as I said, it’s highly valued, expected really, of those who call themselves sports fans.  But with stocks, it just doesn’t work that way.  There is no virtue seen by successful investors in going down with a sinking ship; furthermore, each person that ceases to be a “fan” of a company you’re invested in, hurts those that remain.

I also think the phenomenon of loyalty to an investment is something of a corruption of the “buy and hold” strategy espoused for so many years by the famous Motley Fool website (which, incidentally, will be getting its turn in the smearlight before Mitchell is through here).  “Buy and hold” was basically a warning against overtrading, running up large amounts of commissions, and having a big impact on your returns.  It’s not an entirely unsound principle on its face, but it has the undesirable side effect of discouraging regular re-evaluation of investments.  Indeed, the Motley Fools’ iconic home run, buying AOL stock in 1994 and riding it all the way to the big merger with Time Warner seven years later, actually made people afraid to sell positions, be they winners or losers, for fear of missing out on the next great score.

I think I’ve gone a bit far afield, so let me get to the point as it applies here, and that is: there is nothing inconsistent with being a “fan” of a company in 2002, then changing one’s mind a couple of years later, especially if the company fails to meet your expectations.  This is precisely what changed Cramer’s mind: he expected full-year profitability in 2004 and Overstock did not deliver.  Nor has it done so in 2005, 2006 or 2007, which would only seem to exonerate Cramer’s reversal.

And even then, Cramer liked the idea behind Overstock enough that he wanted to give it another chance, which brings us to the closing part of this section, where Cramer brought Patrick Byrne onto his show (this was when Cramer shared a show with Larry Kudlow) for a hot-seat interview.  At the time, Byrne, looking around, as many CEOs of struggling companies do, for something positive to accentuate about Overstock’s performance, had settled on “gross profit” as one of Overstock’s successes in 2004.  Gross profit basically means the difference between the acquisition and sales prices of goods sold, specifically excluding any expenses incurred in actually running the company, such as employee salaries.  To put it mildly, it’s a highly incomplete picture of a company’s finances, and not normally highlighted as a key metric.  Yet Byrne was doing just that, and people were raising eyebrows at this.

Even from Mitchell’s Byrne-friendly account of the interview, it’s clear that Byrne simply did not understand why anyone would ask such a question.  It’s his company and he’ll emphasize what we wants to, dammit, and nobody gets to tell him what to say or how to act!  (And boy did that ever prove true.)  You even see Cramer — of all people! — trying to defuse things by rephrasing the question more sympathetically, but Byrne was well and truly off tilt and would have nothing of it.

I don’t know if this was the first incidence of Byrne being faced with the words of his critics and reacting poorly, but I have to think that this day went a long way towards fueling Byrne’s animosity, towards Cramer, towards CNBC, towards the financial press in general, towards critics of his company, and ultimately towards critics of any company.

Next week: Fallout from the interview.

The shock and outrage in the wake of Cramer’s subpoena-ripping is quick.  Not by the media or the public at Cramer for the stunt, mind you, but by Mitchell at the rest of the media for circling the wagons around America’s favorite bald Wall Street gnome. Jesse Eisinger, another alum (DUN!) is specifically cited as claiming the subpoena is an attack on free speech, although Mitchell’s argument for (presumably) disagreeing, if he has one, isn’t included.  I guess he’s counting on the reader to reject First Amendment arguments on their face, if they might cause share prices to fall.

Mitchell goes on to note that Gradient Analytics provides the data for automated stock evaluation tools on both the MSN website as well as that of CNBC; MSN, for one, has been using them as a data source from 2001 to this day.  I suppose the goal here is to frame Gradient as the powerful bad guy and the likes of Byrne and Overstock as the scrappy underdog.  Otherwise I can’t imagine why Mitchell would choose to highlight the fact that Gradient’s prestige has hardly been diminished by any of the past couple of years of proceedings.

Wait, Mitchell actually does have another revelation: Gradient is just a puppet of David Rocker, and apparently every single stock rating is personally dictated by the man.  That’s… an interesting take.  He also goes on to cite the “serious” accusations made against Gradient, and, for no apparent reason other than to mention his name again, Herb Greenberg.

Mitchell seems to be out of gas on this topic, though, so he switches gears and goes into a bullet-point recitations of “facts”.  Most notable among those is Cramer’s claim to have never even heard of Gradient.  Now obviously, after the subpoena, Cramer had most certainly heard of them.  Yet Mitchell only speaks in the present tense of what Cramer and his associates have to say about them.  Did he actually interview Ms. Quick prior to the February subpoenas?  Or is he just trying to confuse the reader about timelines?

Another point is devoted to Jon Markman, who’s been around quite a bit on Wall Street.  Mitchell claims that Markman ran a hedge fund (in other narratives he uses the adjective “dodgy”, for no other reason than to add an extra touch of nastiness) out of the “back office” of Gradient, although the only documented connection was Markman co-developing the MSN StockScouter, cited above, back in 2001, a year before he started his hedge fund.  Still, even if there was some time overlap, that hardly constitutes Gradient running Markman’s hedge fund, as Mitchell asserts was the case.

At any rate, most of the rest of the “points” Mitchell makes amount to a bunch of “if” assertions to allege-without-alleging more misdeeds on Markman’s part.

The bottom line appears to be that Gradient today is an extremely well-respected research firm, whose reputation has only flourished since Byrne’s flashy accusations against them, and Mitchell hates every bit of it.  So much so that he concludes the section with a complete change of direction, claiming that “a Gradient manager” has used “multiple aliases and IDs” to somehow mask unspecified “activities”.

I can only presume that this refers to message forums on the Internet.  It’s a popular myth that it’s somehow a key part of hedge fund activity to trash-talk stocks the fund is short on message boards; so much so that it’s become practically cliché to ask a message board poster who voices a bearish opinion on a stock, which hedge fund he or she works for.  It’s a weird dichotomy in a way, as the accusers assert, often simultaneously, that the bearish opinions (regardless of how well-supported or not) have no effect on the stock, yet that it is still vital that the negative opinions be discouraged.  And yes, this brings us right back to the overarching theme of this movement, the denial of speech to anyone holding a negative opinion (much less a position) in a stock.

And it should go without saying that bullish posters can be and are equally “guilty” of multiple-alias usage.  Indeed, Mitchell knows full well of the activities of one of his closest allies on that score, which actually take that activity to another, far more insidious, level.  But as we will not be introduced to him for some time yet, I will leave it there for now.

Next week: A trip back to happier times.