Re: 2/18/05 - Int'l Herald Tribune: If a stock falls, blame the SEC
Floyd Norris: If a stock falls, blame the SEC
Floyd Norris International Herald Tribune
Friday, February 18, 2005
It is a criminal conspiracy when stocks move the wrong way, and the government should do something about it.
That is the cry these days of some American investors in stocks that have been heavily shorted even after a new rule from the U.S. Securities and Exchange Commission took effect.
Patrick Byrne, chief executive of Overstock.com, an Internet retailer, has no doubt why his company's stock took a sudden $13 plunge late last month, just after releasing what he viewed as fantastic earnings.
"Someone is manipulating our stock," he said in an interview by telephone this week. He says that is proven by the fact that Overstock has shown up on the new list of securities mandated by the SEC. That list shows stocks in which a substantial number of shares were not delivered by sellers.
To him that proves that "naked short-selling" is going on. That term refers to selling shares without owning or borrowing them and he wants it stopped: "I don't think grandmothers should be eating dog food so a couple of hundred guys on Wall Street can be driving Mercedeses."
There may not be too many such poverty-stricken investors at Overstock. This is a stock that now trades at three times what it fetched a year ago, and that had run up $9, to about $66, in the three days before earnings were released, on speculation about a "blowout" quarter. An analyst from Piper Jaffray removed his "buy" recommendation, saying that while he still expected sales to soar, it appeared that costs would also rise more rapidly than he had previously expected. When I asked about that report, Byrne said he had not read it.
The SEC rule makes it harder to sell short securities on what is called the threshold list. But two advertisements run in The Washington Post by the National Coalition Against Naked Stock Shorting have denounced the SEC for not forcing brokerage firms to buy stock to cover trades that failed to settle before the rule took effect. The ads view naked shorting as clearly illegal, but in fact it is sometimes permitted in the name of orderly markets.
Byrne said he helped to pay for those ads, and during a conference call he introduced the man who runs the coalition, who describes himself as a 44-year-old retired businessman from Las Vegas and uses the name Robert O'Brien. Byrne said the man had warned him that short-sellers were going to smear his company.
In an interview by telephone this week, the man told me he dared not disclose his real name because of security concerns. He said he became involved in the effort because he had lost money in another stock, Novastar Financial, and concluded that short-sellers caused its decline.
At the SEC, Annette Nazareth, the head of the division of market regulation, said the rule was aimed at assuring that new naked shorts will be cleaned up relatively quickly. Some people, she said, "are very disappointed that the impact of this rule was not to make these stocks go up."
She may be right about that. Another campaigner against the SEC, a Massachusetts aircraft engineer named David Patch, who also cites security concerns in not giving his home town, points to the decline in the price of Krispy Kreme Doughnuts as evidence of such short-selling. He says the company's myriad problems, including plunging sales, cannot explain the high share volume as it fell.
There are 47 common stocks on the Nasdaq national market system or the New York Stock Exchange that have been on the lists for more than two-thirds of the days since it was introduced in early January. Most have declined this year, and as a group they have underperformed the market by a significant margin, although some, like Martha Stewart Omnimedia, have rallied nicely.
Those same stocks did very well late last year. I suspect that some speculators piled into them in hopes of profiting as short-sellers were forced to buy, and then bailed out when that did not happen.
Too many investors are like students who think good grades reflect their brilliance and bad grades show unfair teachers. It is too early to reach conclusions, but it may be that the new threshold lists will have the opposite effect of what some expected. Rather than containing stocks that are sure to rise as shorts are squeezed, they may show stocks whose valuations are questionable.
Investors who own such shares might do better to try to understand the bear case, rather than simply rail about unfair short selling.
Floyd Norris can be reached at fnorris@iht.com
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