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!
Showing posts with label Sith Lord. Show all posts
Showing posts with label Sith Lord. Show all posts
15 January 2010
09 June 2007
Overstock: What About the Losses?
The big news for Overstock in the final days of May this year was victory in an appellate court of the state of California regarding its "Sith Lord" lawsuit.
(I haven't written about this matter since I moved over from blog-city, so if you know Pragmatism Refreshed only in its blogspot variant you may not know about the Overstock imbroglio. I'll remedy that today.)
On Aug. 11, 2005, Overstock.com, a web-based discount retailer, (known for the sultry woman who says "it's all about the O" on television) and one of its investors, Mary Helburn, filed a lawsuit in Marin County (Calif.) alleging that David Rocker and various associates and vehicles under his control had conspired to drive down Overstock's stock price in order to profit from short sales.
It alleged in particular that (1) Overstock was in cahoots with a purportedly independent stock analyst firm called Gradient Analytics, (2) Gradient allowed Rocker to write reports blasting Overstock, which Gradient then distributed as its own, (3) the fact that they were coming from an 'independent' source gave the charges credibility and did lower the price, enriching Rocker at the expense of such "long side" investors as Ms Helburn. And of course at the expense of the company itself, since (4) a lower stock price creates capital-raising difficulties going forward.
Rocker and Gradient have denied the charges.
On August 17, Mr. Byrne appeared on the program "Street Signs" on CNBC, with Ron Insana. Byrne gave a jaw-dropper of a performance. He spoke of a conspiracy among journalists, hedge funds, research firms, all headed by a mysterious "Sith Lord" whom Mr. Byrne refused to name.
The Sith Lord, in the terms original significance, is the evil mastermind of the recent Star Wars movie, who seduced Anakin Skywalker, turning him into the Darth Vader we all knew and feared in the 1980s when we watched the good Star Wars movies. Byrne seems to be casting himself as Yoda, the implacable enemy of the Sith Lord.
This would be just an amusing cat fight between Messrs Rocker and Byrne, were it not for the fact that it has tapped into broader animosities about (a) short selling as a practice and (b) "naked shorting" as an abuse of that practice.
Very briefly: most short selling involves borrowing stock certificates. Suppose I borrow a certificate of Overstock from a broker, and then "short sell," i.e. promise delivery of the stock to someone who believes in the company's prospects, (let's call her Mary) in 60 days, at today's price. Between now and then, I have to buy it outright from the folks I had borrowed it from, and then make the delivery. So my profit requires that the price of the stock fall after I make the deal. I buy it at the lower price, sell it to Mary at the higher earlier price, and use some of that profit to cover the cost of borrowing the share in the first place.
The significance of borrowing the share is enormous. (Or, as Yoda would say, "significant, this is.") It ensures that the share exists -- I'm not trading on imaginary stock. The fact that I've borrowed and am in possession of a share of the stock protects Mary against a fail-to-deliver. It also limits the amount of shorting that would net a profit, because I'm not just betting on a fall, but on enough of a fall to cover the securities-borrowing cost.
The controversy over shorting, and over the spreading of rumors or biased analyses for which shorters are always blamed, gets intertwined then with another controversy, over how much "naked shorting" takes place -- i.e. how many shorts don't borrow the stock before selling it. Resolution of those issues apparently will have to wait for the various lawsuits to wind their way through the courts. In the interim, pitched battles involving complex conspiracy theories, name-calling and the occasional rational argument are being fought online.
As for the independent research firm that was allegedly bribed to badmouth Overstock, it of course denies the accusation. Fortunately for those of us who've been trying to cover the story, although the short sellers themselves have been very closed-mouthed about the lawsuit, the researchers, as alleged co-conspirators, have been quite vocal. A typical press release from there side put it thus: "Gradient researches, draws conclusions and issues reports based on work conducted by highly-trained analysts who report to Gradient and Gradient alone. We will continue to do so, despite efforts like these to discredit the valuable and insightful analysis we provide to investors and shareholders.”
Anyway, in late May 2007, one year and three quarters after the lawsuit was filed, Overstock won a victory in a state appellate court that may end Gradient's and Rocker's hopes of bringing an early end to the lawsuit on procedural motions. This may have to go through the process of "discovery" and to a finding on the facts.
Still, I have to ask: what about the fact that Overstock keeps losing money? Doesn't that make it a bad idea for an investment, alleged conspiracies notwithstanding???
In the first quarter of this year, Overstock lost more than $17 million. That might be tolerable if Overstock were moving in the right direction, "you have to lose money to make money" and that sort of thing. But its moving the other way. Its first quarter losses for 2007 are $3.5 million greater than its first-quarter losses for 2006. "You have to lose money in order to lose larger amounts later," seems the implicit motto here.
There may, for all I know, be problems and abuses among short sellers. It would be surprising if there were none, since they're made of the same fallible human flesh as the rest of us. But that isn't the problem with the Overstock stock price. Its problem is that it has a business model that works like a yard sale. Overstock's only real reason for existing at this point is as a vehicle for its lawsuits. Its remaining investors might reasonably hope for a decent "go away" settlement down the line -- if not from the Rocker/Gradient defendants, perhaps from those in another of its lawsuits, notably one against most of the brokerage firms on Wall Street.
(I haven't written about this matter since I moved over from blog-city, so if you know Pragmatism Refreshed only in its blogspot variant you may not know about the Overstock imbroglio. I'll remedy that today.)
On Aug. 11, 2005, Overstock.com, a web-based discount retailer, (known for the sultry woman who says "it's all about the O" on television) and one of its investors, Mary Helburn, filed a lawsuit in Marin County (Calif.) alleging that David Rocker and various associates and vehicles under his control had conspired to drive down Overstock's stock price in order to profit from short sales.
It alleged in particular that (1) Overstock was in cahoots with a purportedly independent stock analyst firm called Gradient Analytics, (2) Gradient allowed Rocker to write reports blasting Overstock, which Gradient then distributed as its own, (3) the fact that they were coming from an 'independent' source gave the charges credibility and did lower the price, enriching Rocker at the expense of such "long side" investors as Ms Helburn. And of course at the expense of the company itself, since (4) a lower stock price creates capital-raising difficulties going forward.
Rocker and Gradient have denied the charges.
On August 17, Mr. Byrne appeared on the program "Street Signs" on CNBC, with Ron Insana. Byrne gave a jaw-dropper of a performance. He spoke of a conspiracy among journalists, hedge funds, research firms, all headed by a mysterious "Sith Lord" whom Mr. Byrne refused to name.
The Sith Lord, in the terms original significance, is the evil mastermind of the recent Star Wars movie, who seduced Anakin Skywalker, turning him into the Darth Vader we all knew and feared in the 1980s when we watched the good Star Wars movies. Byrne seems to be casting himself as Yoda, the implacable enemy of the Sith Lord.
This would be just an amusing cat fight between Messrs Rocker and Byrne, were it not for the fact that it has tapped into broader animosities about (a) short selling as a practice and (b) "naked shorting" as an abuse of that practice.
Very briefly: most short selling involves borrowing stock certificates. Suppose I borrow a certificate of Overstock from a broker, and then "short sell," i.e. promise delivery of the stock to someone who believes in the company's prospects, (let's call her Mary) in 60 days, at today's price. Between now and then, I have to buy it outright from the folks I had borrowed it from, and then make the delivery. So my profit requires that the price of the stock fall after I make the deal. I buy it at the lower price, sell it to Mary at the higher earlier price, and use some of that profit to cover the cost of borrowing the share in the first place.
The significance of borrowing the share is enormous. (Or, as Yoda would say, "significant, this is.") It ensures that the share exists -- I'm not trading on imaginary stock. The fact that I've borrowed and am in possession of a share of the stock protects Mary against a fail-to-deliver. It also limits the amount of shorting that would net a profit, because I'm not just betting on a fall, but on enough of a fall to cover the securities-borrowing cost.
The controversy over shorting, and over the spreading of rumors or biased analyses for which shorters are always blamed, gets intertwined then with another controversy, over how much "naked shorting" takes place -- i.e. how many shorts don't borrow the stock before selling it. Resolution of those issues apparently will have to wait for the various lawsuits to wind their way through the courts. In the interim, pitched battles involving complex conspiracy theories, name-calling and the occasional rational argument are being fought online.
As for the independent research firm that was allegedly bribed to badmouth Overstock, it of course denies the accusation. Fortunately for those of us who've been trying to cover the story, although the short sellers themselves have been very closed-mouthed about the lawsuit, the researchers, as alleged co-conspirators, have been quite vocal. A typical press release from there side put it thus: "Gradient researches, draws conclusions and issues reports based on work conducted by highly-trained analysts who report to Gradient and Gradient alone. We will continue to do so, despite efforts like these to discredit the valuable and insightful analysis we provide to investors and shareholders.”
Anyway, in late May 2007, one year and three quarters after the lawsuit was filed, Overstock won a victory in a state appellate court that may end Gradient's and Rocker's hopes of bringing an early end to the lawsuit on procedural motions. This may have to go through the process of "discovery" and to a finding on the facts.
Still, I have to ask: what about the fact that Overstock keeps losing money? Doesn't that make it a bad idea for an investment, alleged conspiracies notwithstanding???
In the first quarter of this year, Overstock lost more than $17 million. That might be tolerable if Overstock were moving in the right direction, "you have to lose money to make money" and that sort of thing. But its moving the other way. Its first quarter losses for 2007 are $3.5 million greater than its first-quarter losses for 2006. "You have to lose money in order to lose larger amounts later," seems the implicit motto here.
There may, for all I know, be problems and abuses among short sellers. It would be surprising if there were none, since they're made of the same fallible human flesh as the rest of us. But that isn't the problem with the Overstock stock price. Its problem is that it has a business model that works like a yard sale. Overstock's only real reason for existing at this point is as a vehicle for its lawsuits. Its remaining investors might reasonably hope for a decent "go away" settlement down the line -- if not from the Rocker/Gradient defendants, perhaps from those in another of its lawsuits, notably one against most of the brokerage firms on Wall Street.
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