Here's Bob O'Brien's reply to Bill Mann at the Motley Fool...
My Letter to Bill Mann at the Motley Fool on 2/1/05:
Bill Mann:
I read with considerable interest your article on the Overstock.com conference call.
It was with mixed feelings, as I was a bit confused by some of your characterizations and more importantly, by what you didn’t remark on.
First to what you did. I am described as delivering a somewhat zany, rambling diatribe on short selling. I suppose that’s where the art comes in. Where you hear “…Most of it sounded like some good industrial-strength crazy,” I hear a step-by-step description of the anatomy of an illegal stock manipulation scheme. I actually said that – if you read the transcript of the call, you’ll find the following statement towards the beginning:
“Let me start off by just saying that legitimate shorting, what we keep hearing about on the message boards, etc, the short short short is - legitimate shorting is fine, and I’ve got nothing against shorting. It’s a perfectly legitimate way to bet against a Company or a sector. What I’m going to describe doesn't really have a lot to do with legitimate shorting.
What I am going to describe is what I call a systematic serial killing of small cap companies. And I think you guys are a victim of it. I’m talking more along the lines of criminal manipulation, collusion, fraud, libel, naked shorting - basically, every violation of 10(b)5 that you can probably imagine, and some you probably couldn't.”
Now I can understand how much fun it is to compare that with Elvis and the Russians coming over the hill wielding ray guns – we all enjoy a chuckle. Perhaps some part of the distinction I make between legitimate shorting and an illegal stock manipulation was lost in translation. It happens. But as I read that, I don’t get a lot of difficult to comprehend vagueness or rambling. Perhaps I am just more adept at making out what the voices are telling me. See? I can do it too. It is kind of fun.
But consider this account from the 9th circuit court in the matter of Terayon and Cardinal Partners, where a class action was filed by the short sellers who were looking at financial ruin if a catastrophe couldn’t be engineered:
“On a January 2000 day in Dallas, with Cardinal and its clients facing tens of millions of dollars in potential losses and Rose demanding action, firm analyst Kent McGaughy scratched the words "GAME PLAN" at the top of a legal pad. "What are the key levers we can pull?" McGaughy wrote before listing CableLabs, the Securities and Exchange Commission, federal prosecutors, financial journalists and others capable of flooding the market with negative information about Terayon.”
Starting to sound a little less rambling and more like a blow-by-blow description pulled from court records? The full account can be found here.
Then we have your observation “What's the difference between an opinion and a "hit piece"?” Well, I think I can help you out there. When AP completely omits the record dividend from a company’s “Q4 Dividend Press Release” and instead focuses on an adjustment to GAAP that doesn’t impact the dividend nor the taxable income that the dividend is based on, and simply pretends that it was an earnings “warning” press release vs. what it is titled as and which the lion’s share of the release is devoted to, as with NFI (NYSE) recently – that’s a hit piece. It materially omits the meat of the release and focuses on one negative to create “news”. If someone writes an op-ed piece that opines that the company will have issues with X if Y happens, that isn’t. I appreciate the distinction. Do you see it? One omits info vital to the release to paint a distorted view of reality, whereas the other offers the author’s opinion. This isn’t difficult. If the mayor of a small town dives into freezing water to save a baby one morning, and then the EMT’s give him some brandy as he fights off hypothermia, a hit piece might read “Mayor seen hitting bottle first thing in AM” and simply omit the rest of the story. If a reporter offers the view that “Lax safety reinforcement by river almost results in tragedy” then it probably isn’t a hit piece, just a critical piece written from a less than positive slant. As an accomplished writer, I trust you can appreciate the difference.
I then see that you commented on my view that class action attorneys have in fact worked with short sellers to manipulate share prices. Not a whacky theory. Fact. Here’s a nugget from the Washington Legal Foundation to the Committee On Financial Services of The U.S. House Of Representatives:
"As we will explain in greater detail, evidence suggests that trial attorneys who file class action lawsuits may be selectively providing short sellers and others with information as to when the lawsuit against a publicly traded company will be filed in court. The stock in the company is sold short before the suit is filed, and profits are
realized when the price of the stock falls after the suit is filed and made public. Other questionable devices have been used by trial attorneys, such as encouraging analysts to downgrade the stock of a targeted company to spur the company to quickly settle the underlying suit, regardless of its merits."
If more was required, I would again direct you to the aforementioned 9th circuit debacle involving Terayon and Cardinal Partners, where:
“As the company recently discovered, Rose and his associates sought profit by bad-mouthing Terayon until its stock dropped. They then sought damages through a shareholder class-action filed because, in essence, the stock had dropped.”
And where the judge made the observation:
"It disturbs me," declared Judge Marilyn Hall Patel during a hearing in September, "that the people who are going to drive the litigation are in fact the people who are betting on the stock going down."
I could go on – but do you take my point that what you glibly dismiss as the gibbering of a delusional paranoid is actually documented as the modus operendi of at least one prominent short seller? You also make the comment “Doesn't it strain credulity just a wee bit that the division would launch inquiries on the word of a short-selling hedge fund without making some effort to verify the basic facts and problems themselves before spending another second of agency time chasing rainbows?” Fair enough. You could position it that way, I suppose. Or you could ponder this gem from the same Terayon suit, as well as the gone nowhere SEC inquiries at heavily shorted companies like ACAS and NFI:
“-- On Feb. 11, Cardinal sent the first of at least 10 letters to the SEC and the National Association of Securities Dealers accusing Terayon of "blatantly" lying "in every SEC document it has filed since it went public." The SEC asked Terayon about its public statements but did not pursue the matter further, according to the company's lawyers.”
So in fact attempting to get regulators to launch inquiries does happen as part of the “game plan” – sometimes it isn’t successful, but sometimes we can presume that it is.
To your reasonable question, at least on the surface: “Should we say that every story that shows up in The Wall Street Journal that's negative about any company is part of a conspiracy?” I would reply that I never said that EVERY story is. I said that the one that is followed by the class actions and the regulatory probes usually is. There is a middle ground between always and never. Again, I understand the distinction. Do you?
I do note with some approval that it registered with you that the German exchanges are routinely used as straw men for plausible deniability when unscrupulous manipulators gaming the system using their offshore hedge funds fail to deliver the shares that they sold “naked.” It should make you pause. There is no legitimate reason for the company to be registered on those exchanges without their knowledge, unless one is to believe that 5 exchanges are sought by Germans intent upon trading OSTK – and then hardly any shares trade. It strains credulity to the breaking point. As it should.
The last thing that caught my attention was that you completely omitted the real show-stopper of my discussion with Dr. Byrne – a true gentleman, BTW. Namely, that one hedge fund was documented as being short 25% of the US companies on the NYSE Reg SHO Threshold list, and an additional 3 on the NASDAQ list. The documentation of those short positions is available if you are interested. I found that to be an astounding coincidence if it can be positioned as one – literally off the charts statistically. The significance of that was that the Reg SHO Threshold list is a documented, material list of companies that have in fact been naked shorted – or “fail to deliver” – beyond the “threshold” of 10,000 shares or 0.5% of their total shares outstanding. So those companies actually have been victimized by that practice – nobody is in disagreement as to what the Reg SHO list means. And yet you found it in your wisdom to omit that observation. I think you do your readers a disservice in not giving them the whole story, and I can’t imagine why you wouldn’t include that, especially given that OSTK appeared on that list immediately following the conference call (actually the night before, but nobody had checked.)
So we have the ultimate test of any theory, namely its predictive value. And lo and behold, there’s OSTK appearing on the Reg SHO list of abusively naked shorted companies. Does that make you go hmmmm? If not, why not?
And here’s a tidbit for you: The Nasdaq and the DTCC won’t tell you how big the fail to deliver issue is with OSTK. You can call and try to find out. They won’t. Just won’t.
And if you ask them for the rule or regulation they are using to justify their refusal to make the data available so that you, as an investor, or as the company itself, can appreciate the significance and scope of the problem – they can’t cite one.
There isn’t one.
They just aren’t talking. They can’t give you a reason why. But mums the word.
So the question is, why won’t they tell anyone how big the problem is once you’ve landed on a list that says that there are bad things going on? I think that’s a good question. Aren’t you curious?
In summary, I think that often when you view the world, you filter the things that you dislike, instinctively. We want to believe, desperately, that there are nothing but honest reporters and good bureaucrats and fair systems. We want to believe that someone is protecting us from the predations of bad and destructive people. We want to believe that things like that could never happen here. And our instinct is to mock or dismiss anything that challenges our belief and predisposition to hope for the best.
I think it’s time to consider that all is not well, and stop focusing on shooting or discrediting the messenger and start focusing on the actual evidence at hand.
Arthur Conan Doyle’s Sherlock Holmes said it best: “When you dismiss the impossible, whatever you have left, however improbable, is the truth.”
Smart man, Mr. Holmes.
Regards,
Bob O’Brien
www.nfi-info.net
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