Overstock diversionary tactic?
By Herb Greenberg, MarketWatch
Last Update: 2:33 PM ET Aug. 12, 2005
(Editor's note: This is a free version of Herb Greenberg's RealityCheck. Click here for information on how to subscribe.)
SAN DIEGO (MarketWatch) -- You could see this one coming a mile away: On Thursday Overstock and Mary Helburn -- executive director of a group formed to fight illegal naked short selling -- filed a lawsuit claiming Rocker Partners and Gradient Analytics conspired "to denigrate" Overstock's business "for personal profit."
Rocker is a hedge fund that sometimes shorts stocks; Gradient provides forensic research to hedge funds. From time to time both have served as sources for this column. Both have been vocal critics of Overstock (OSTK: news, chart, profile) , an online closeout retailer -- as has yours truly in my subscription newsletter, Herb Greenberg's RealityCheck.
Overstock CEO Patrick Byrne hasn't taken the criticism lightly, especially the rising short interest in his company. He has claimed much of it is the work of illegal "naked" short sellers. Conventional short sellers borrow shares and sell them, hoping to buy them back at a cheaper price in the future and pocket the difference. Naked shorts sell stock that doesn't exist! In most instances, that's against the law.
Putting his money where his mouth is, Byrne has helped bankroll ads by Helburn's group.
Not surprisingly, as has been the case in recent quarters, short selling was prominently discussed last week on Overstock's second-quarter earnings call, with Byrne saying, "I've got no grudge against the shorts."
Then, on a surreal, rambling conference call Friday to discuss the lawsuit, Byrne said that "CEOs who spend time worrying about shorts or obsessing about shorts are fools and most CEOs who tangle with shorts are crooks. Shorting plays a healthy role in a normal market."
Which gets us to the lawsuit, which (oddity of oddities) had nothing to do with naked short selling.
Instead the suit alleges that Rocker and Gradient were involved in a scheme that violates unfair business-practice laws.
That's where Helburn comes in. The suit says she bought 500 Overstock shares on January 28 at $57.08 a share; they were sold for a loss at $41.83 on August 5.
The suit claims the alleged Rocker/Gradient scheme led to the stock's price slide.
Just one problem with that claim: The stock started falling in early January along with the market and then stumbled nearly 20% on January 28 to $52.87 -- the day Helburn bought and the day after Byrne wrote a letter to shareholders as part of the company's earnings release suggesting margins had peaked. After the stock fell, Byrne told attendees at an investor presentation that his comments had been misinterpreted and that he was merely trying to keep prices low to build customer loyalty.
Loyalty, as I wrote at the time, "is something Overstock needs." The company has been under pressure from plenty of other competitors up and down the food chain in an industry where there are no barriers to entry.
That hasn't gone unnoticed by analysts. At least four have responded in recent months with downgrades and reduced earnings estimates. Among them: Derek Brown of Pacific Growth Equities, who recently wrote, "...We have grown increasingly concerned with the company's inconsistent performance through the years, continual shifts in guidance/direction, meandering path to sustained profitability and medium-term margin potential."
And he's not a short seller.
(Full disclosure, the charts and comments presented by Byrne on the call made multiple references to yours truly.)
It all makes you wonder if the lawsuit and all of the short selling nonsense is really nothing more than an effort to silence critics and divert attention from the real story: Overstock.
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