15 January 2010

Getting even with New Jersey

In the middle of his new piece in The Observer, Max Abelson throws in a quote from Patrick Byrne about the Sith Lord.

For those who don't know what I'm talking about, the Sith Lord is a figure in the trio of Star Wars prequels. He is also a figure in Byrne's imagination -- an important fact chiefly because Byrne is the CEO of Overstock.com. If you still don't know what I'm talking about and don't care, you are of course free to hit that little "x" on the top of your browser now. If you don't know what I'm talking about and do care, here is some background.

Anyway, Abelson has a profile in The New York Observer about Judd Bagley, who is working as Byrne's lieutenant on a cause dear to them both, the crusade against naked short selling -- well explained in the following 2006 column by a writer for the grey lady. Abelson seems to think that the crusaders have a point in a general sort of way, but are off-base in some important particulars.

Here's the bit, though, that caught my attention, and that seems to represent some score settling involving the state of New Jersey and its judicial system. Actually, I owe a tug of the forelock here to uberblogger Felix Salmon for noticing this passage before I did: But the juiciest part of the lore is that there’s a “Sith Lord,” like in Star Wars, at the center of the evil. The Sith Lord turns out to be Sith Lords. “It’s Steven Cohen and Mike Milken, though I’ve never said that to a reporter,” says Patrick Byrne, Overstock’s CEO.

Milken was an easy pick. Cohen is the unexpected name here. The speculation for 4 years now has been that Byrne meant Milken, hence the use of expressions like 'The Miscreant's Ball'. In the grand old days of HedgeWorld, my colleague Chris Clair wrote a column soon after Byrne's news conference discussing the speculation about who the Sith Lord was supposed to be, and Clair focused on Milken. Besides, the Milken/Byrne thing is an old family quarrel.

But why now make the Sith Lord a two-headed beast? And why Cohen? My first guess was that Cohen was just thrown in there to make this seem less anti-climactic than it would have been. Cohen's life is certainly not without ongoing drama.

But after thinking it over for a couple of days I developed a new hunch. I think Cohen became part of the Sithness because his corporate alter ego, SAC, in Byrne's eyes, beat the rap. And the New Jersey court system is the forum wherein SAC beat said rap.

In August 2009 the New Jersey Superior Court threw out claims that S.A.C. Capital Advisors (SAC) conspired with other firms, including the independent research firm Gradient Analytics, Inc. (formerly known as Camelback Research Alliance, Inc.) (Gradient) to drive down the stock price of Canada’s largest publicly-traded pharmaceutical company, Biovail Corporation (Biovail). The court dismissed the suit after it determined that Biovail failed to prove it was entitled to damages and that, in any event, the court lacked jurisdiction over all but one of the defendants. Most notably, the court stated that it did not evaluate the merits of Biovail’s claims against SAC or Gradient.

The Gradient case had significance beyond its particularity. Sixty Minutes, in a broadcast segment in March 2006, elevated Biovail into the single highest-profile case of the theory that short sellers conspire with Beg Media (like CBS News, for example?) and with allegedly independent researchers to bring down otherwise impeccable companies. That program didn't focus on the "nakedness" of the shorting involved, but the anti-nakedness crusaders seemed to be very happy about Leslie Stahl's work.

The New Jersey decision effectively debunked that story. The beneficiary of the New Jersey decision -- SAC, the hedge fund run by Steve Cohen. Who now turns out to be half of the Sith Lord. Take THAT, Garden State!

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