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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]