It was a tough quarter, with many potential winners of the coveted "Greenberg" for excellence in hatchet job dross generation in evidence. The NY Post was a close runner up, Carol delivered a masterful effort, and even the Motley Fool snuck into the top ten.
Still, there can only be one number one, and the judges have spoken - this Q's Greenberg goes to the NY Times, and Mr. Joe Nocera. Big round of applause, please. Nicely done.
Let me start off by saying that Joe is really an under-appreciated and under-utilized vessel for communicating the Wall Street perspective on things - you know, where declarative statements, obviously biased in favor of the sentiment of hedge funds and large prime brokers, are the order of the day, and twisting, or omitting, any evidence exposing that agenda to be patently false or deceptive is the rule. One wonders when Wall Street will disintermediate the press, and simply write their own pieces…oh wait, that’s what Gradient is said to be doing.
Sorry, couldn’t resist.
Today’s hard-hitting NY Times piece - or "hatchet job," as 'twere - by "Maestro" Joe is really a stunning example of this all-too-common staple of the NY financial press' arsenal.
Let's go through it, and discuss where the flaws in the thinking are - this could be a long blog, so patience, please. Here, for attribution, is the link, with excerpts selected for fair use.
"http://select.nytimes.com/2006/06/10/business/10nocera.html?pagewanted=2
June 10, 2006
New Crusade for Master of Overstock
By JOE NOCERA"
OK. Stop right there. He got the date right, but the deception begins in the headline. The NSS "crusade" has been Byrne's project for a year and a half. Is that new? Somewhat new? Nearly new? Or is it just the first in a stream of misstatements? You be the judge. I'll go with this is a big order of tripe right from the headline.
"WHEN last we looked in on our old friend Patrick M. Byrne, the conspiracy-mongering trash-talking lawsuit-filing chief executive of Overstock.com, it was late February. Mr. Byrne had sued Rocker Partners, a short selling hedge fund, and Gradient Analytics, a small equity research firm, accusing them of conspiring to drive down Overstock's stock price. And he was gloating because a handful of financial journalists, including the MarketWatch.com columnist Herb Greenberg — whom Mr. Byrne viewed as a charter member of the anti-Overstock conspiracy — had received subpoenas from the Securities
and Exchange Commission. The S.E.C. appeared to be looking into Mr. Byrne's stock-manipulation allegations, but quickly backed away from the subpoenas to the journalists."
Wow. Where do we start? First, the inaccuracies and flat-out insults commence in the first sentence. Byrne is not the friend of the NY press, and further doesn't trash-talk or conspiracy-monger. That is a rude characterization by someone who is trying to make any description of how hedge funds, prime brokers, class action attorneys, and journalists collude together to impact stock prices appear to be an outlandish fiction. But recall that just a few days ago there was another article, and a long felony indictment, against Milberg Weiss for exactly the sort of "conspiracy" that the NY financial press loves to claim doesn't take place - 20+ years of RICO violations, and one of Wall Street's favored class action law firms indicted for a conspiracy of treachery and deceit more convoluted than the most Byzantine Turow novel.
Is Mr. Nocera saying that those types of conspiracies don't exist (a la the latest Milberg bombshell, or the Bawag/Refco bombshell, or the Refco/Russian hedge fund bombshell, or the Refco naked short selling schemes, or the analyst scandal, or the mutual fund front-running scandal, or the recurring conspiracies involving guys like Milken and Boeskey and Levine, wherein a who's who of Wall Street was engaging in stock manipulation for years...), ignoring that they are in fact a staple of the way Wall Street operates? That’s odd. Every time you turn over a rock more of the Wall Street royalty is being fined for these sorts of activities, and history is littered with examples, but Joe...well, Joe does a three monkeys and hears and sees no evil.
I suppose that there is a segment of Wall Street that wants to convince the American public that all of these...er ...conspiracies....well.......aren't.
Byrne's filing of a lawsuit wherein the sworn testimony of a group of insiders involved in the scheme was determined by a judge to be solid enough to have a likelihood of prevailing - i.e., of being true and compelling - is ignored. To Joe this is all smoke and mirrors. Why? Well.....we don't know why. We don't have any reason for why it is that he has prejudged the merits of the case, and determined that Patrick is a trash-talking conspiracy theorist, and yet Herb, who is on CNBC daily discussing his particular conspiracy theories, or Rocker, whose trash-talking includes a promise of a counter-suit that has never materialized, are honorable men.
I guess Herb's flop-sweat-stained rants on Mad Money are not trash-talking conspiracy allegations (even thought he uses the words conspiracy about a dozen times) but Patrick's lawsuit is.
As to the SEC backing off from the subpoenas, it is worth noting that a political appointee got into the mix with the professional investigators in enforcement, and made a political decision to back off from the subpoenas – bowing to the pressure of the NY press corps.
What does this prove? Well, first, that political appointees are sensitive to appearances, and will bend over backwards to suck up to those who write about their performance while in office. If that creates a new pseudo-untouchable group above the law, hey, whatever, it’s only the Constitution and the Bill of Rights. Cramer can write Bull across his subpoena, and that is celebrated. Herb is taking the noisy, yapping and completely unconvincing position that his subpoena is persecution. The NY press takes the position that this is a Jihad against free speech, and thus an outrage. All good. Gary Weiss then writes that those exercising their freedom of speech, such as this site, should be investigated and effectively silenced – so it isn’t freedom of speech that is sacred; it's NEW YORK’s freedom of speech that enjoys such sanctity.
Forget about the fact that the only folks who actually know the story, and are trained investigators, issued the subpoenas in the first place, deeming them necessary and a requirement for their investigation into allegations of stock manipulation to go forward.
Tut tut. No, better to take the moral high ground, proclaim simultaneously that your free speech is sacred but dissenting voices should be restricted, and pre-judge the case in the papers.
Nicely done, Joe. Nobody notices the hypocrisy or factual inaccuracies. We are all convinced. Really.
More Joe:
“Here we are four months later, and all I can say is that Mr. Byrne certainly has been keeping himself busy! He assumed the post of chairman when his father, the former Geico boss John J. Byrne, stepped down as Overstock's chairman, after saying publicly that he wished his son would spend less time crusading and more time running the
business. He announced a quarterly loss of $15.9 million, blaming himself for the disappointing results, as he usually does. It's becoming something of a quarterly ritual.”
That’s called running a company, sweetie. Given that you have no experience at it, having never run one, the trials and tribulations would seem alien to you. Some quarters are better than others, and fathers don’t always agree with sons. Shocking stuff.
”Overstock received its own subpoena from the S.E.C., leading Mr. Byrne to issue one of the odder news releases in modern times, which included this statement from him: "I may be the first C.E.O. in history to celebrate receiving an S.E.C. subpoena." The day before, Overstock announced that it had raised $16.8 million by issuing stock to a big purchaser. The day after, Overstock announced that the transaction had been withdrawn.”
Actually, I believe they raised more, and one of two tranches was cancelled when Patrick graciously enabled the investor to have an out once he received the subpoena. Not necessary, but decent. I suppose he could have kept it secret, like Cramer did, and begun a “planned sale” of a boatload of stock – and that would have met with applause from Wall Street and Joe, who apparently celebrate, or at least condone. that behavior.
”And then, a few short weeks ago, in Overstock's home state of Utah, the state Legislature passed a bill — which Gov. Jon Huntsman Jr. quickly signed into law — that took aim at a practice that Mr. Byrne has been crusading against for months, but which few other chief executives in the country seems to think is much of a problem: naked
short selling.”
Few execs are willing to speak out against Wall Street, which controls their destinies, and thus fortunes, as public companies. How unlike human nature to want to avoid angering the hand that feeds one. Astounding. Few spoke out about genocide in Africa, Europe, Central America and Cambodia, either. Is that some sort of evidence that millions weren’t killed? It seems as though this puerile, “10,000,000 flies can’t be wrong” argument is what passes for reasoning at the Times these days. Again, bravo. Really building a head of steam here. Nobody complained about Milberg, except blogs like mine. Are they also innocent, then? Does a lack of willingness to tackle the financial powers that be in this country equate to some sort of proof no problem exists? The non-sequitor is obvious.
”Huh?
WHAT is naked short selling? So glad you asked. Typically, when someone wants to sell a stock short — that is, make a bet that the price will go down — he is required to borrow the stock from someone else, usually a brokerage firm. Assuming the price drops as the short seller hopes, he then buys the stock at the lower price and pockets the difference as his profit. Here, by contrast, is how the S.E.C. describes naked short selling on its Web site: "In a 'naked' short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard three-day settlement period. As a result, the seller fails to deliver securities to the buyer when delivery is due (known as a 'failure to deliver' or 'fail')."
Sounds pretty technical, right?”
Actually it doesn’t Joe. It sounds like fraud. You take the buyer’s money, and then don’t deliver what they paid for. Fraud. Not terribly technical or difficult to grasp, even though part of the Wall Street agenda is to make it all seem really complex, hoping the sheep out in the fields will lose interest or won’t grasp it.
“And for the most part, it is. The S.E.C. goes on to say that there are often legitimate reasons for a "failure to deliver" and that in some circumstances naked short selling isn't even necessarily a violation of the agency's rules. But it can be an abusive practice. Witness, for instance, the news Thursday that the New York Stock Exchange was investigating the possibility that naked short selling contributed to the decline in the shares of Vonage, the Internet phone company that went public last month.”
Huh indeed. To take an extreme example of this logic, killing people isn’t necessarily against the law – for instance, in times of war, or when executing criminals, or in the case of self-defense. This is the classic, “Killing isn’t necessarily illegal” argument that some of the brightest folks in the country advance, hoping I suppose that nobody figures out that while narrow instances of killing people “can” be legal, that for the most part it is illegal, for good reason. It isn’t “necessarily” illegal, and in some circumstances there are legitimate reasons to do so (in battle, etc.), but in the broad sense in which most people use the word/concept, they are defining an illegal, reprehensible act – not the exceptions that it “could” be.
Now, many dislike comparing this sort of stock fraud to murder, or rape. Those that claim this is a disturbing comparison are invariably involved in arguing that NSS isn’t “necessarily” fraud, thus the comparisons are over the top – of course, they also have a financial incentive to argue that, as they are usually members of Wall Street, or the groups beholden to Wall Street. Of course they don’t want to call a dog a dog or a cat a cat. Their job is to trivialize stealing billions through institutionalized fraud. They would like to compare it to getting the change wrong in calculating a tip, or going a few miles over the speed limit. After all, they can’t have the nation thinking that stealing the national retirement by taking money and failing to deliver the product that was paid for is actually fraud. Instead, euphemisms are created, and the party line, that “it’s all just some technical blip”, is advanced with sincerity from those whose bread is buttered by Wall Street.
Want an example of this sort of duplicity, and the road to ruin it represents? How about Grandfathering all fails, and the dilution/defrauding of buyers of those failed trades their paid-for voting rights? You paid for a percentage of a company’s shares, including the right to vote, and yet Wall Street, and the regulators, have said, “It’s OK to never deliver those shares/rights to vote – you know, just because. The buyers have been defrauded out of the cash, and received no right to vote or slice of equity, but that’s fine, as otherwise Wall Street would have to acknowledge that it just committed fraud, and we can’t have that. So instead, Wall Street gets to take and keep your money, you get nothing, and that’s just the way it is.” Technical, my ass.
But now we have the usual apologist boilerplate from Joe, wherein even being on the SHO list for over a year is no big deal – one could justifiably ask what would be, but I suspect there wouldn’t be any answers forthcoming.
”To better monitor naked short selling — and try to lower the number of "failures to deliver" — early last year the S.E.C. instituted something called Regulation SHO, which compiles what the agency calls a "threshold" list of companies in which there are more than 10,000 shares that have "failed to deliver" in the allotted time. Overstock has been on the threshold list pretty much ever since Reg SHO came into being. Which, to Mr. Byrne — though to virtually no one else — means that shadowy, bad people, who lurk in the darkest corners of Wall Street, are breaking the law and creating "phantom shares" of the stock through the practice of naked shorting.”
Uh, Joe, many folks who aren’t making money from the practice of naked short selling do in fact believe that being on the Threshold list for a year or longer is prima facie evidence of a huge problem. The recent FOIA data in NFI shows that some days 40% of the trading was FTDs, and that at one point over 12.5% of the total shares outstanding were “phantom shares.” Those are facts. Not Mr. Byrne’s crazed imagination. Convenient that you simply ignore all facts that would effectively counter your agenda.
”Actually, Mr. Byrne doesn't really characterize his naked shorting crusade as an Overstock issue — the Overstock situation, he told me yesterday, merely brought the whole situation to light. Indeed, his lawsuit against Rocker Partners has nothing at all to do with naked short selling. (Rocker Partners and Gradient are aggressively defending against the Overstock lawsuit.) Rather, he portrays himself as a Don Quixote-like figure, fighting to rid Wall Street of "criminals" — a word he used frequently during our short interview. (He asked if he could tape our conversation, so I'm confident you'll be able to read it soon on the Internet. That has become one of Mr. Byrne's favorite tactics.)”
Hey Joe – if by aggressively defending, you mean stalling on every pretext they can think of, then you nailed it. Just as Byrne predicted they would do – stall discovery for as long as possible, as once it occurs, they will be shown to be guilty as sin, per Byrne. So far that prediction has been accurate. Weird that he got that so right, ain’t it? And imagine the impropriety of detailing what journalists actually said on the web! Why, that's almost like full disclosure or something. I say, less transparency, not more, should be the order of the day. Actually, so does Joe:
"Right now," he said, "people in certain hedge funds are being scofflaws and the S.E.C. is giving hall passes to criminals" — by not making public the names of the institutions that have persistent "fails" beyond the allotted time frame, information he believes should be in the public domain. In fact, the S.E.C. has no intention of releasing such information, precisely because the agency fears that it might cause the companies on the list to seek retribution.”
Yes. The SEC doesn’t want companies or investors to be able to sue Wall Street and get the money that was stolen from them back. That is why it fines while the perpetrators NEVER admit or deny guilt. The SEC is not in the business of justice for Wall Street – otherwise they would be forced to admit guilt, and have to pay the pipers: those defrauded through their schemes and swindles. That is not what the SEC does, and Wall Street is happy that things are set up that way – works great for everyone except the rest of the country.
”Mr. Byrne says that firms and hedge funds that consistently fail to deliver are in violation of the law and that the rampant abuses are creating "systemic risk," generating millions of "phantom shares," destroying small-cap companies and robbing small investors who are getting, as he puts it, "I.O.U.'s" instead of real shares. Before our conversation ended, he tossed me one of his favorite lines: "Somewhere in America, a grandma is eating dog food tonight because these people are looting the savings of America."
Again, the only ones that are claiming this is hard to take seriously is Wall Street, which has painted anyone who exposes systemic larceny as kooks or nut-cases. This is standard procedure: Milken ran a whole campaign on how he was a national treasure, not a chiseling sociopath. Wall Street declared that allegations about it’s analysts being crooked were all baloney, that those claiming the mutual fund front-running were kooky, that critics who blew the whistle over specialists ripping them off were disgruntled loons. When the S&L scandal was breaking big, the regulator in charge of reining in the industry was portrayed as a dangerous nut - who was cheating on his expense account, had a chip on his shoulder, was unstable and hearing voices. This is Wall Street’s accepted strategy – deny everything, demand unavailable proofs (largely because the proofs are unavailable due to Wall Street’s own policies), and claim you critics are lunatics. It’s transparent, but clearly the NY press gladly does their part to support the party line – always has.
”If you find this all a little hard to take seriously, join the crowd. Grandmas are eating dog food because of a "failure to deliver?" Really? Except for a few fellow-traveling Web sites, where Mr. Byrne is viewed as a heroic figure, most people who understand the issue or have looked into it think it's pretty bogus. Apparently, though, that doesn't bother Utah's legislators and its governor.”
Actually, Joe, NASAA had a panel of experts, all of whom agreed that this was a significant problem that needed a meaningful solution. Again, these included former cabinet members, academicians, DTC employees. But I guess what you mean is that most people ON WALL STREET who understand the issue are telling people it is bogus – how else can they continue to book record profits from stock lending and their proprietary trading desks in lackluster markets? If this wasn’t bogus, but instead was how much of the profit was being generated….why, in that case, is it possible that there’s a financial reason for all the denials? As in every other example where Wall Street proclaimed innocence? Now, I understand that for Joe that’s a stretch. Again, hear no evil is tough to maintain if you have to counter and grapple with disturbing facts and history. Better to simply cite unnamed “everyone knows” kinds of sources. Much better reporting.
”Here's something else Mr. Byrne told me: he really wasn't that involved in the Utah bill. Not exactly. The state senator who sponsored the bill, Curtis Bramble, said that it was first brought to his attention by a Utah lobbyist named Douglas Foxley. As it happens, one of Mr. Foxley's clients is Overstock.com. According to The Deseret News, Mr. Byrne is also the largest individual political donor in the state, whose contributions include $75,000 toward the 2004 gubernatorial campaign of Governor Huntsman. (Mr. Huntsman denies that the contributions were the reason he supported the bill.) When it passed the Legislature, the bill had virtually no opposition, though I suspect that is largely because most legislators had little idea what it was about.
So what will the new law do? According to The Deseret News, it will require sellers involved in "failure to deliver" transactions "to report to the Utah Division of Securities and reveal the identities of all parties, including dates, locations and prices involved in the sales." In other words, Mr. Byrne is hoping to use the state regulatory apparatus to pry out the information the S.E.C. won't supply.”
Joe, fess up. It passed virtually unanimously, only one “no” vote, and that is because everyone on the floor was able to figure out that taking money and not delivering the product is bad – and those doing it for a trading strategy should face the wrath of those they defraud. Simple to understand. I have it on good authority that there was impassioned discussion about the bill on the floor, and that everyone had a very clear idea of what they were signing, and why it was significant. So why do I know this, and you, a big time NY journalist, don’t? Maybe you do, but chose to spin things differently. I bet they have a word for that in Utah, too.
I know your position is that these dumb rubes out in the sticks were tricked by evil Patrick, but it doesn’t wash – they get it, and they are putting a stop to Wall Street ripping off their citizenry – what’s so hard to understand?
”The state will also have the ability to set daily fines starting at $10,000 a day for brokers that don't comply with the new state rules about disclosure, and companies will also be able to sue for damages. I should add that the law applies only to the stocks of Utah-based companies — but every broker-dealer in the country would have to comply with it.
When I spoke to Governor Huntsman, he heralded the new law as a way to attract entrepreneurs to the state of Utah. "Our future as a state consists of companies that are just getting off the ground," he said. "For me, this was a means of enhancing our attractiveness to these kinds of companies, by making the playing field a little more transparent, a little more fair. This is an issue that is important to many of them."
I don't really think the practical effect of the new law is going to lead to a surge of hungry, shackled entrepreneurs moving to Provo, though. The Securities Industry Association, the big Wall Street lobby, is up in arms about the new law, and will undoubtedly sue on the grounds that Utah is trying to pre-empt federal securities law and impose an operational requirement that it simply doesn't have the right to impose. I'm putting my money on the association.”
Pure horsehit, Joe. The law does not impose a right the states don’t have to impose. It is merely an additional transparency measure; that Wall Street – which collects and knows that data anyway – will now have to tell who is violating the delivery rules. Simple. Wall Street has long been accustomed to the SEC running interference for them, and it is important to note that every major Wall Street scandal of the last 20 years had a state going after the practice before the SEC got involved. The states are usually at the forefront of going after Wall Street, and the SEC the last to the party. In the NSS crisis, this is proving to be a familiar pattern – Wall Street declares its innocence while castigating critics, the states go after them, the SEC steps in once it becomes obvious that it can’t stop the action, so at least can step in and limit the damage to the miscreants. Nothing new here.
As to undoubtedly suing, the SIA hasn’t so far, and will have some fun discovery if it does – not to mention that the argument lacks merit. I’ll go with there is plenty of saber rattling, but no actual action – exactly like Rocker and his threats to sue.
”Another possibility, which the securities lobby pointed out in a letter to the governor, is that Wall Street firms would just stop trading in the stocks of Utah-based companies. "Limiting interaction with Utah companies could make trading in such companies illiquid and negatively impact the ability of companies to raise capital necessary to grow and prosper," it said in the letter.”
Yeah. I’ll bet. So if you can’t use reason try blackmail. How will Wall Street cover its many millions of fails in OSTK if trading slows in these companies? What happens when its value is based on true supply and demand, and zero supply meets considerable demand – does anyone believe for a second that the street will allow it to go through the roof? Please. More saber rattling.
”Twenty-five years ago, the state of Utah made a concerted — and quite foolish — legislative effort to impose its will on Wall Street. Back then, the issue was money market funds, a new financial product that was helping middle-class Americans keep pace with raging inflation at a time when bank interest rates were fixed by law at 5 ¼ percent. Egged on by the banking industry, the Utah Legislature tried to outlaw money market funds. But in that case, the state was saved from embarrassment when a crucial opponent of money market funds made a procedural error that could not be reversed. Because of that mistake, money market funds were saved for the citizens of Utah.
This time, the state wasn't so lucky. There wasn't one small mistake this time. Just one big one.”
So there we have it. Joe Nocera, who apparently is much smarter and better informed than the entire Utah legislature, as well as the governor, has decided that the state has made a big mistake by, get this, get this, requiring that the names of the miscreants abusing the delivery rules are made known. That’s in, in a nutshell. Tell us who is doing the damage, and how large that damage is.
I could go on about the ignorance and obvious bias displayed throughout this piece. It will serve no purpose, as any thinking adult can read it, and arrive at their own conclusions. To me, what is most interesting is that even as Wall Street’s most brazen scofflaws are now being examined for their role in the latest Vonage IPO disaster, Wall Street continues to pretend there is nothing bad going on. And yet it also frets that more companies are choosing to move to offshore exchanges.
Why would anyone in their right mind expose their company and shareholders to the snakepit that our markets have become? And why would they allow their stock to be a currency that can be created at will – counterfeited – by multiple stages of the system?
The more articles I see like this one, where nothing new is said, and it is essentially a position paper (Patrick bad, Utah crazy, Wall Street good, nothing bad going on here) for Wall Street’s biased agenda, the more I have to believe that someone somewhere is really, really worried now. Last week’s gems from the NY Post and Carol, then this – so many of the same names here to assure us that nothing is going on. How completely, utterly unexpected. Joe, Carol, Herb, Bill, Seth, Roddy, Bethany, Gary, Tim, Jim….a baker’s dozen of concerned folks just trying to make America safe for Wall Street. And all of them doing so out of a sense of altruism and civic responsibility.
How nice for us.