• 25 Apr 2007 at 1:04 PM
  • legal

Overstock attempts to uncover malicious naked shorts

Overstock logo.gif Patrick Byrne, the CEO of Overstock.com, is seeking $3.5bn in damages from 10 prime brokers for intentionally manipulating Overstock’s share price through naked shorting. The big names charged are Bear Stearns, Citigroup, Credit Suisse, Goldman Sachs, Merrill Lynch, and Morgan Stanley.
Naked shorting, aside from something you shouldn’t do in cold weather, is when a brokerage “sells stock it does not own and then fails to borrow the shares to cover the position, thus artificially boosting the supply of shares and deflating their prices.” Historical cases involving malfeasance on the part of prime brokerages have usually favored the brokerages, but new SEC regulations have illuminated certain practices more than before. Some info on the situation from CFO.com:

In 2002, the same consortium of attorneys handling the Overstock case helped Jag Media file similar charges in a Texas court against 100 brokerages, only to have the claims dismissed. But this time, says one of the lead attorneys, Wes Christian of Christian Smith & Jewell, more information about the phantom shares is available, thanks in part to the Securities and Exchange Commission’s 2004 Reg SHO. “The evidence just gets better and better,” he says. Eight other companies have lodged similar complaints against brokers in state courts, Christian says, with more suits likely to follow; clearinghouses Depository Trust and The Clearing Corp. also face legal action.

Overstock (Nasdaq: OSTK) hit almost $70 back in late 2004, but has since plummeted into the teens. The company released earnings today and is up over 5%, despite a “dramatically improving” business that experienced an 11% drop in revenues but improved margins and cash burn.
Naked Hunch – [CFO.com]
Dramatic Losses at Overstock – [The Motley Fool]

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Comments (7)

  1. Posted by joe | April 25, 2007 at 2:40 PM

    You do realize the carnage you have now wrought? It won’t be long before Overstink’s minions arrive to tell you how super serious the problem of naked shorting is and how the US capital markets – and hell freedom for that matter – are at risk and how the stock is only down due to Sith Lord’s and other miscreants.
    What they won’t say is what a piece of crap their company is, how the lifetime value of a customer is negative, how Byrne bought back stock in the 40′s only to sell equity in the teens months later, etc…

  2. Posted by golfwalt | April 25, 2007 at 7:02 PM

    Joe: The quality of the issuing company isn’t the point, as you well know. The point is that there is a huge amount of evidence (starting with the Reg SHO list itself) that says there are systemic problems that allow Failures to Receive and Failures to Deliver. Every failure to settle a transaction without busting the trade effectively allows a new share to be created, which now numbers into the billions daily.
    Analyze that and get back to me.

  3. Posted by Anonymous | April 25, 2007 at 10:15 PM

    Joe sure called that one

  4. Posted by anonymous | April 26, 2007 at 7:55 AM

    Good for Joe, but you don’t need to be a mystic to know that even mentioning the word “Overstock” brings all the greebly little weirdos out of the woodwork. It’s like saying “Beetlejuice” three times.

  5. Posted by J. Satriani | April 26, 2007 at 10:19 PM

    Overstock, Overstock, Overstock

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