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Tag Archives: naked shorting

This entry may just be a one-off, given that it was entirely unplanned, but Jeff Matthews posted in his blog today about a frankly sickening display on the Deep Capture site accusing hedge funds of effectively killing US soldiers in Iraq, and I felt very strongly the need to link it up.

The logic, if you can call it that, is that because a certain defense contractor appeared on the Reg SHO list at one point, its subsequent demise was caused by naked shorting, which meant that our soldiers were prevented from getting vital lifesaving equipment by hedge funds.

Not content to point out the post hoc ergo propter hoc fallacy, Jeff busts the the whole thing from beginning to end, far more thoroughly than I ever could, so I’ll just defer to him.

Now, I don’t currently intend this as a new direction for this blog, as I have no interest in scouring the Deep Capture website on any kind of regular basis for latest on whatever they’ve decided to puke up.  But, you know, if I hear things…


(So, Gradient is off the enemies list now?  Does this mean Mitchell will be redacting all the nasty things he said about them?  For his part, of course, Byrne is naturally chalking this up as a win, but given the lengths to which Gradient tried to make this all go away, it’s hard to think they’re not happy.  Furthermore, Joe Nocera had a very interesting article suggesting that Gradient’s statement was something of a non-retraction retraction.)

Mitchell picks up from last time by talking about information the “mole” on Anthony Elgindy’s chat room gave him.  (I should point out that the chat room shut down sometime in 2002, and Mitchell only began work on this piece in 2005, so whoever this fellow was, he had to have been peddling his story for some time before anyone bit on it.)  He reiterates how the chatters gushed over the work of certain journalists, and mused whether they were “merely paying off journalists”, or instead something “beyond normal”.  Because apparently Mitchell considers paying off journalists to be within the bounds of “normal”.

Mitchell then asserts that the reporters should have disregarded any information sent to them by anyone from Elgindy’s group on the basis that they shorted without a borrow in Canadian brokerages, thus continuing the overarching theme of Mitchell’s work, that being a short-seller should cause you to forfeit speech rights.  I might also add that, as Mitchell himself has already noted, there was nothing whatsoever illegal about this tactic.  Furthermore, in many cases, especially involving stocks listed not listed on the major exchanges but rather on the OTC bulletin board, this was the only method by which establishing a short position was even possible.  So just in case anyone’s wondering what an permanent, exchange-wide ban on short-selling would look like… there you go.

Back to Mitchell, who introduces his next subject, a “former SEC official”, who is — surprise! — anonymous.  The suggestion is basically made that the SEC, at the beck and call of Elgindy’s group, opened investigations into certain companies with the sole and direct intent of damaging those companies, noting that actual charges were very seldom filed as a result of these investigations.

Even worse, the anonymous SEC guy goes on to say “these were good companies”, many in the pharmaceutical space, and that the SEC investigations, quote, “stopped cures”.  And of course as former SEC official he is obviously an authority on the potential of development-stage pharmaceuticals.

But okay, these are pretty damning charges, so how about an example or two so the reader can judge for themselves? What’s that, Mark?  No examples, just unspecific innuendo?  Well okay then.  Non-specific accusations made by an anonymous individual.  Pulitzer-quality journalism to be sure.

At any rate, Elgindy’s imprisonment did not stop short-sellers from selling short.  I think that’s Mitchell’s next point, anyway.  Oh, and the companies they short sell are all “innocent”.  Of course.  I’m sure the guys at Lehman and Bear Stearns and all have nothing to worry about.

But never mind that, let’s shift in mid-paragraph to the tale of one John Fiero, who apparently fell afoul of NASD (now FINRA, and, mind you, not SEC) regulations regarding short-selling, and was fined $1 million.  Heavy stuff, seemingly, yet there’s a funny thing about those NASD fines: you can simply resign from the group and avoid paying them.  And that is precisely what Fiero did, yet Mitchell simply seems to scratch his head and not understand how the fine goes unpaid to this day.

Separately, Mitchell quotes someone stating that Fiero had been supplied with an office and “trading computers” by that same NASD body.  That would admittedly be all kinds of mixed-up if it happened after the $1 million fine had been levied but nowhere does Mitchell assert that.

Finally Mitchell returns to the subject of Dan Loeb, aka Mr. Pink.  But frankly it’s really hard to understand what he actually has to do with anything else in this piece, or what Mitchell’s point is in even mentioning him, other than to get a quote about “war” on an unrelated issue, to segue into a summation that it’s “war” between Overstock and short-sellers.  Which we kind of already knew.

Next week: Cramer again, and this time there’s video!

Overstock’s head counsel as its new president?  I’ve heard worse.  Like the public company that elected the top contributor to its message boards to its board of directors.  But that’s another story…

Strap in, this one’s a biggie.

For this section, Mitchell starts by complying with the journalistic code that requires any discussion of short-selling to include a fifth-grade-level explanation of what short-selling is, including that short-selling is, in and of itself, not illegal.  You know, just so long as you keep it completely to yourself and let those taking the opposite position monopolize any discourse about the company.

And sure enough, Mitchell then proceeds into a comically long list of dirty tactics he attributes to short sellers, such as extortion, collusion, theft, off-shore money laundering and nice red uniforms.  Wait, sorry, I meant “libelous blogs”.  (Hmm, wonder if he’d consider this one libelous?)  Mitchell does not, as it happens, include any examples of any of these.  But then again, this bit is already long enough, so I won’t complain too hard.

But the worst dirty trick of all, says Mitchell, is the selling of what they like to call “phantom shares”, i.e. short-selling without a borrow, also known as “naked shorting”.  Mitchell claims it is enabled by a “glitch” in the electronic trading system (exactly what that is or why nobody is trying to fix it, he doesn’t say), and of course that it is “blatantly illegal”.  One wonders then, what Mitchell must make of Cox’s emergency order banning naked shorting on selected financial stocks.  Why the need to ban something that was already “blatantly illegal”?

Mitchell does go on to cite some sources, including first and foremost his boss, Patrick Byrne.  I won’t go into those here, except to note that it’s a pretty serious stylistic faux-pas to say “here, here, here, here and here” to give the reader a list of hypertext links.

Perhaps sensing that the reader will likely not be inspired to follow those anonymous links, Mitchell sums up with an “all you need to know” is that there are 300 companies on a list (here referring to the SEC’s SHO list, which companies enter into and drop off of on a daily basis) that he claims have “excessive” stock sold but “never” delivered (again, except that they do drop off the list).  In effect, he says that the SEC is saying with the list “here are a list of crimes in progress that we are doing nothing about”.  This despite SEC statements that there are numerous ways that a stock can appear on said list without any malfeasance on anyone’s part.

Mitchell now goes for the scare tactic, saying that if you own a stock on that list, you may not actually own the stock you paid for, irrespective of what the computer tells you!  The computer lies!  Of course, should you ask to sell these “phantom” shares, assuming that the market is open and the stock isn’t suspended or revoked, the computer, every time, will happily say okey-dokey and credit your cash balance by the appropriate amount.  Hmm, maybe the cash is “phantom” too!  Better pull it out just to be sure!

At this point I should remind you that this is all by way of accusing others of undermining faith in the financial system.

Mitchell goes on to cite “some experts” (unnamed as ever) who claim that as many as 1,000 companies have been “wiped off the map” by naked shorting.

Perhaps conscious that such a wild claim might need an example to have credibility, Mitchell provides one that he says is “probably” a victim, not necessarily of naked shorting, but “collusive behavior and dubious tactics”.  But — and speaking of dubious — his choice of martyrs to the cause?  Bear Stearns.

You may have heard a little bit about subprime mortgages and defaults and a general trashing of much of the US banking system in recent months.  But no, apparently Mitchell wants you to forget about and join him in championing the likes of Bear Stearns as an example of a company who might well have pulled through its issues just fine had it not been for those God-forsaken short sellers.  Who, again, are doing nothing wrong by shorting just so long as they are doing absolutely nothing else, like breathing.

Never mind such minor details as the fact that, until the infamous $2-a-share buyout offer from JP Morgan, the shorts had only managed to drive (even assuming for argument’s sake that it was the shorts driving) Bear’s stock down to $30 a share themselves.  Even using the revised buyout price of $10, the shorts were “victimizing” Bear by panicking people into selling its shares for as little as 300% of what Bear was about be valued at.

Oh, but I’m sure we’ll find out that the buyout was all part of the collusion, too.  After all, there’s no conspiracy theory that can’t be propped up by just making the conspiracy a little larger.

At any rate, Mitchell finally sums up by saying the behavior of short-sellers is “clearly” “a scandal of epic proportions”, and rhetorically asks “Where the hell is our media?”  By which he means, “Why the hell can’t I get anyone in the media to agree with me?”

Next week: Booyah!