The CEO of OverStock.com - Patrick Bryne - is one of two things - crazy or criminal. And one thing is for sure, he keeps getting weirder and weirder. As I will detail out below, he has accused a "Sith Lord" of bringing down the stock of his company through an illegal trading process called Naked Short Selling (no, this is not what you'd hoped it would be).
In order to really understand what Naked Short Selling is, let's take a quick look at the process of short selling a stock:
Typically, investors buy stock in hopes that its share price will increase and then sell the stock for a profit. However, a practice called short selling has long been in-play and allows for investors to make a profit if the share price of the stock goes down. Now, one thing to remember is that just as an investor who buys a stock can lose money when it goes down, an investor who sells short a stock can lose money if the price of the stock goes up. Theoretically, an investor's loss is limitless if they are short a stock and its price continues to rise. The functional process behind short selling a stock is as follows:
- You, being a savvy investor, think that the computer manufacturer DELL's stock price is going to drop because of a potential mechanical flaw in their latest computer. You want to make money off of your hypothesis.
- You call your broker and tell him that you'd like to sell short 100 shares of DELL at the price of $21.00.
- Your broker then lends you 100 shares of DELL at $21.00 and then sells those 100 shares on your behalf to another buyer within the market.
- You wait 2 months as the price of DELL's shares drops to $18.00 per share.
- At that point, you buy back the 100 shares of DELL for $18.00 per share and return the shares to your broker.
- You keep the $3.00 per share difference and make a $300 profit.
- You do the money dance.
Ok, yes, a tad confusing, but basically it makes sense and it is nothing new to Wall Street. Now, naked short selling is the same process accept it totally cuts out the whole "borrowing shares from your broker" process. Therefore, you end up selling something that you never owned. Now, that doesn't make sense. But, even regulators at the SEC have stated that the practice of naked short selling rarely has an effect on the price of a stock.
Crazy Patrick Byrne would disagree (as would many other CEOs who have failed to deliver results would as well).
First, let's take a look and diagnose the beginning of Crazy Pat's decline:
In the 3rd fiscal quarter of 2004, Crazy Pat had the following to say in their earnings press release:
The elephant in the room during our conference calls and other meetings is the fact that out there there are a bunch of short-sellers and their sycophants who bad-mouth every thing I do or say. Eventually the nasty things they write make their way to my desk. It is OK with me. I practice Buddhist non-attachment on such matters. I "walk past the barking dog." They could be right: I don't know how things are going to work out, and never meant to imply otherwise. It's business. Some of their criticism even seems honest: some have done their homework, concluded I was tangled up in my underwear, and for much of our history have recommended selling us. More power to them. I get no satisfaction out of all the money I've cost the clients who trusted these diligent analysts. I promise.
That almost says it all right there. Again, this is within a professional earnings PRESS RELEASE that Crazy Pat started acting, well, CRAZY. To me, the above statement is a green flag to the short Overstock.com (OSTK) because obviously Crazy Pat is concerned about those who would think his stock is going down. The fact that he said, "I get no satisfaction out of all the money I've cost the clients who trusted these diligent analysts" means that he pretty much just through the gauntlet down for every stock analyst to take apart their earnings and look for any signs of negativity. And negativity they found and money the shorts made.
Ok, so during the companies 3rd Quarter Earnings Conference Call (which has mysteriously been removed from their website) Crazy Pat got even more, well, CRAZY and stated that someone from CamelBack Research (now Gradient Analytics) should call in and pretty much explain why they had given OSTK an "F" rating. Well, Donn Vickrey tried to call in but did not have his call accepted. So, after the conference call, Vickrey sent Crazy Pat an email saying that he tried to get onto the call to clarify his position. Well, here is how Crazy Pat responded to Donn (Hat Tip: Herb Greenberg at MarketWatch.com):
Donn, you make a living toadying to bully hedge funds. In this role, you insulted Mr. Macklin, a friend, a lifelong mentor and a decent and wonderful man. You deserve to be whipped, f*cked and driven from the land. Little punctilious submissive rejoinders such as your letter cannot change this or recalibrate our relationship on other terms. You drew first blood: own it.
And that started Round One.
Throughout the year, Crazy Pat had various things to say about analysts who downgraded his company. At one point he called a reporter a liar on a conference call. Then, about a year ago, Crazy Pat had another crazy Novastar investor talk on his conference call for 10 minutes about naked shorting. After the "anonymous investor" was finished, Crazy Pat said, "I don't have a dog in that fight. I don't pay it a whole lot of mind." Now, keep that comment in mind as we continue down crazy street.
April, 2005: Crazy Pat's company reports horrible numbers. During the conference call he says, "I am not sure if the slowdown is because of tax day or The Pope." This only get weirder, folks.
Now comes the really interesting part. In August of 2005, Crazy Pat aligned with Mary Helbum (someone who fights illegal naked short selling) filed a lawsuit against Gradient Analytics claiming that it conspired "to denigrate" OSTK for "personal profit." Now come the days of the CRAZY. Crazy Pat also started giving money to Mrs Helbum to support her lawsuits against naked short sellers. So much for his previous comments. THEN, on a later conference call Crazy Pat said this:
CEOs who spend time worrying about shorts or obsessing about shorts are fools and most CEOs who tangle with shorts are crooks. Shorting plays a healthy role in a normal market.
Who is this guy trying to kid. And probably the better question is what in the world is he trying to hide? What is he trying to prove? The lawsuit claims that Gradient Analytics conspired with Rocker Partners (a hedge fund) to drive down the price of OSTK so that Rocker Partners could profit off of their short positions. Only problem is that OSTKs stock price started failing way before Rocker Partners ever had a position in the stock and even before Gradient Analytics ever made a comment about the stock. After the stupid lawsuit was filed, many more financial analysts and professionals came out with downgrades on the stock because it was so clear that Crazy Pat was using OH-POOR-ME tactics to explain the decline of his company and shares.
Let's add an episode of Star Wars to the story, shall we? This is no joke. On August 12, 2005, Crazy Pat appears on CNBC to discuss his lawsuit against the aforementioned companies. At the end of the rant, Crazy Pat claimed he had evidence of a conspiracy by a SITH LORD to bring down the price of his stock. The audio is here. It is because of this that I have changed my official trading name to SithLord over at the Shark Tank I frequently visit for trading advice, etc. I love illustrating absurdity by being absurd. The smokescreen continued as Crazy Pat decided to hand out affidavits to every single reporter/analyst that had ever said anything bad about his company. I kid you not. Most of the affidavits even had the basics screwed up like who worked for who and who did what. They seemed to indicate that Herb Greenberg (an amazing perma-skeptic financial journalist) was out to get him as well as Jim Cramer and many other well known analysts and market commentators. Herb sums up alot of the falsehoods here. Crazy Pat even found a former emloyee of Gradient Anaytics who was willing to testify that the company was writing research reports to help out Rocker Partners. He sees this as the smoking gun. But if I had an android-clone for everytime a disgruntled employee took advantage of a lawsuit against their former employer I could create my own episode of Attack of the Clones. Crazy Pat is, well, CRAZY ...and STUPID.
Now, OSTK has subpoenaed Herb Greenberg for all of his research related to his articles at Dow Jones' MarketWatch. In my opinion, Crazy Pat is becoming Dangerous Pat by attempting to get financial journalists to reveal their sources. You'd think he was trying to find a nuclear bomb. Let the journalists do their job so that they can protect us from people like Crazy Pat who want to pull the wool over our eyes as their company fails miserably. OSTKs latest quarter was a disaster and Crazy Pat has "stepped down" from the board to pursue his lawsuits. Of all of the shares of OSTK available, 80% of those shares are being held short. 80%. If that doesn't say what type of company OSTK is, I don't know what will. Other than maybe that when all of the short-sellers decided to take profits it moved the stock UP about 30% in a few short hours. Now that is, well, CRAZY.
On a side note, I sent Herb Greenberg an email stating that Crazy Pat is making him look good by actually trying to subpoena his research and making himself look like a Wookiee. Herb replied with the following:
Doesn’t get wilder than this, Shaun. Thanks! herb
His reply sums up this whole post.
SithLord out!