Patrick Byrne, CEO of Overstock.com, Inc. (NASDAQ:OSTK) is very active and vocal in fighting against naked-short selling practices of market makers at Wall Street. In 2007, the company filed a complaint against Merrill Lynch, a subsidiary of Bank of America Corp (NYSE:BAC) and against Goldman Sachs Group, Inc. (NYSE:GS) of “naked-short selling” its stock from 2005 to 2007 that drove the online retailer’s stock value to go down.
In January this year, The Superior Court of the State of California in San Francisco dismissed the case due to a technicality. In his decision, Judge John Munter cited that Overstock.com “failed to raise triable issue of material fact supportive of a finding that any act by any defendant foundational to liability, causation or damages occurred in California.” In a press statement, the company said it would pursue the case in another state, and it would file a motion to unseal the pleadings in the case, to allow the public and the media to examine the facts and make their own conclusions if Goldman Sachs Group, Inc. (NYSE:GS) and Merril Lynch actually manipulated its stock. The defendants want the court to seal all records and evidences related to the case, but it was opposed by Overstock.com, Inc. (NASDAQ:OSTK) in a court filing on February 9, 2012.
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Overstock.com’s filing cited evidences, such as e-mails showing the Goldman Sach’s Clearing Unit’s “policy to fail short sales of their market maker clients by withholding inventory settlement.” Some of the evidences, such as an e-mail from Goldman Sachs to Wolverine Trading that stated, “we will let you fail”, in response to its inquiry if there are efforts of “cleaning up fails.”
The company also cited evidences disregarding SEC regulations in order to reap profits, such as the e-mail of a Merril Lynch executive to Peter Melz, former president of Merrill Lynch Professional Clearing Corp. (Merril Pro), expressing concern of their failure to comply with short sales regulations. Melz response was, “F__K the compliance area – procedures, schmecedures.”
The motion also revealed how the defendant’s tactics in manipulating public opinion by paying-off or intimidating experts in their respective fields. For example, a lobbyist from Securities Industry and Financial Markets Association (SIFMA) e-mailed an executive from Goldman Sachs Group, Inc. (NYSE:GS), regarding how to engage with its most powerful enemies such as Overstock.com. The lobbyist wrote, “He should be someone we can work with, especially if he sees that cooperation results in resources, both data and funding; while resistance results in isolation.”
In response, Goldman Sach’s and Merril Lynch said the company distorted the true meaning contained in the e-mails presented in its filing. Both defendants denied practicing naked short selling and violating securities regulations. A spokesperson for Goldman Sachs said Overstock.com wrote an advocacy piece containing selective and highly misleading references from the numerous documents related to the case. He said, “Overstock’s argumentative references omit material information and necessary context and are rife with misleading partial quotations and inaccuracies.”
On the other hand, a spokesperson from Merril Lynch emphasized in a statement to Barron’s that its transactions were legal and its employees explained the documents in their testimony. He also pointed out the court dismissed the naked short selling allegations against them by Overstock.com.
Amidst the controversy, Greg Smith, Goldman Sach’s executive director and head of United States equity derivatives business for Europe, the Middle East, and Africa resigned from the company. In a public statement, Smith explained his reasons for leaving the company after 12 years of service. According to him, the firm’s working “environment is toxic and destructive.” He said, “To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money…It makes me ill, how callously people talk about ripping their clients off. Over the last 12 months, I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail.” According to him, the integrity within the company is eroding.
The media, including Rolling Stone, the Economist, Bloomberg, and the New York Times also filed a motion asking the court to unseal the documents related to the case to know the truth. The Court ruling on the appeals is still pending. Analysts expect the litigation to last for years if the court decides to grant the appeal.
In 2008, the Securities and Exchange Commission (SEC) implemented regulations against naked short selling abuses. The commission explained, “in an abusive naked short transaction, the seller doesn’t actually borrow the stock and fails to deliver it to the buyer. For this reason, naked shorting can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions.”
In early 2005, Overstock.com’s stock price was $70 per share, but it declined significantly to less than $20 per share in the latter part of 2006. Currently, the company’s stock value is less than $9 per share. Do you think the company is a victim of naked short selling? Check out its filing to unseal the documents here. Further evidences related to the case were enumerated in the document. It is better if the court allows the unsealing of all the documents for the sake of transparency. As the saying goes, “The truth will set you free.” The truth will set Goldman Sachs and Merril Lynch free from suspicions of practicing illegal stock manipulation scheme.
In related news, Francis Chou, a famous value investor owns close to 10% of OSTK. On the other hand, Sam Antar, the former CFO of Crazzy Eddie of http://www.whitecollarfraud.com/, thinks the company is a fraud. Sam is a former felon, who now helps expose companies, he thinks are committing fraud.