IN THE MONEY: Lawyers Mount Naked Short Claims Campaign
31 March 2006
12:45
Dow Jones News Service
English
(c) 2006 Dow Jones & Company, Inc.
By Carol S. Remond
A Dow Jones Newswires Column
NEW YORK (Dow Jones)--All of a sudden the idea of a massive short-selling conspiracy involving hedge funds and Wall Street firms is pin-balling around the nation.
But as it turns out, seemingly disjointed cases alleging rampant market manipulation are actually the masterwork of a group of aggressive class action law firms led by Houston lawyer John O'Quinn.
The stakes are high. O'Quinn was a member of a high-profile group of plaintiffs lawyers who sued the tobacco industry on behalf of Texas and won a $17 billion settlement in 1998. Now, he's hoping that Wall Street firms will be the source of his next bounty. O'Quinn told NBC Dateline last year that he's prepared to spend $100 million to prove a conspiracy of manipulation in the stock market.
Last year, the law firms found a powerful ally in Patrick Byrne, the controversial president of Salt Lake City Internet retailer Overstock.com (OSTK).
Companies represented by O'Quinn and his legal consortium generally claim that their stocks have been illegally depressed by short sellers through chronic and widespread failures to timely deliver stock to close out securities transactions.
Since 2001, the legal consortium has had two recurring members - O'Quinn, of O'Quinn, Laminack & Pirtle, and Wes Christian, of Christian Smith & Jewell. A third firm, Heard, Robins, Cloud, Lubel & Greenwood LLP joined the group in 2004. Other firms over the years have jumped in as local counsels to about a dozen penny-stock companies which have claimed that their stocks had been manipulated by short sellers.
The O'Quinn consortium is represented by Koerner Kronenfeld Partners LLC., a PR firm that shares an address and a principal with Koerner Silberberg & Weiner LLP, one of the law firms representing Overstock in its lawsuit against research firm Gradient Analytics and hedge fund Rocker Partners LLC. Overstock alleges in a complaint filed with the Superior Court of the State of California in Marin County that Rocker and Gradient colluded to produce negative reports.
Death Spiral Allegations
On its Web site, the PR firm takes credit for an NBC Dateline segment last July featuring O'Quinn and his client Eagletech Communications Inc.'s (EATC) claims of market manipulation at the hands of Salomon Smith Barney bankers and others.
The PR firm also represents Robert Shapiro, one of several consultants who has helped O'Quinn and his consortium articulate its allegations of market manipulation and naked short-selling. Eagletech stock has since been de-registered by the Securities and Exchange Commission because it failed to file required financial reports. The company is appealing the decision.
Over the last four years, market manipulation cases brought by O'Quinn and his legal consortium have evolved from allegations involving so-called "death spiral" financing and illegal short-selling to more complex accusations that brokerage firms and the entire securities clearing system managed by the Depository Trust and Clearing Corporation are complicit in bear raids on unsuspecting companies.
Short sellers typically borrow shares to sell them, hoping that they will be able to replace them with stock bought at a lower price later. Trading without a borrowing agreement is called naked short-selling. It's illegal for most investors, but legal for firms that make markets in stocks and bring liquidity to the market.
Believers in the short selling conspiracy alleged by O'Quinn and his clients have become increasingly organized, with a number of Web sites and blogs surfacing in the last year. These blogs and Web sites have become very adept at quickly addressing related news and trying to influence media coverage of the issue.
The campaign to turn alleged short-selling abuses into a mainstream media story took on political overtones last year when Overstock's Byrne helped finance newspaper ads to alert President Bush about the issue. Byrne also reached out to Senator Robert Bennett, R-Utah, who publicly confronted former SEC Chairman William Donaldson about the alleged problem posed by naked short-selling last March. Overstock has since hired a Washington lobby firm.
Cases Thrown Out
So far, the law firms and their corporate clients haven't been very successful. Most cases have been thrown out of court by judges who ruled either that the firms were unable to prove their allegations or rejected the lawsuits on jurisdictional grounds. Others are lingering in courts.
Last year, a Nevada state court judge dismissed a lawsuit filed by Nanopierce Technologies Inc. (NPCT) against DTCC. The company had argued that DTCC's stock borrow program resulted in the creation of non-existent stock and contributed to naked short-selling of the company's shares. The case is now on appeal. The SEC in February took the unusual step of filing an Amicus Brief in support of DTCC, saying that Nanopierce's "lawsuit threatens to disrupt or to impose substantial and unwarranted costs on this system by seeking damages against registered clearing agencies...pursuant to Commission-approved rules."
Meanwhile, a case brought by another O'Quinn client, called Jag Media Holdings Inc. (JAGH), was dismissed by a federal judge in the U.S. District Court for the Southern District of Texas, Houston Division in 2004. Jag had sued more than 100 financial institutions in July 2002, alleging that they engaged in concerted action to short sell the company's stock. The judge found that Jag didn't have a viable claim against the defendants. Jag's former CEO Gary Valinoti has in the past acted as a consultant for O'Quinn.
Despite these setbacks, the organized brouhaha over naked short-selling gained momentum last year when Overstock announced it retained O'Quinn and his consortium to sue Rocker Partners and Gradient. Overstock claims that the hedge fund conspired with the research firm to denigrate the company's business for profit. A judge recently ruled against motions to dismiss, filed by Rocker and Gradient. They are appealing the ruling.
Although the Overstock case doesn't allege complicity on the part of Wall Street firms and DTCC, Byrne has been very vocal in accusing brokerage firms of being slow in delivering stock, including shares he and his father bought in the open market. He recently presented data about failures to deliver at a J.P. Morgan conference.
Despite their ever changing wrappers, O'Quinn's market manipulation cases appear to share a common goal: Try to get discovery and hope that ballooning legal costs will lead to a settlement.
Subpoenas sent out by Overstock's lawyers to about 70 firms show that they are seeking otherwise non-public information about all trades, long and short and regardless of who made them, in the company's stock. That information in turn could help the law firms identify potential new plaintiffs and could be used to build new cases.
A case similar to the Overstock complaint has already been filed by Canadian pharmaceutical company Biovail Corp. (BVF) in February. That case alleges that hedge fund SAC Capital conspired with Gradient to produce a negative report about Biovail. Both the Overstock and Biovail cases share three witnesses, former Gradient employees who claim to have witnessed improper conduct and collusion.
Biovail lawyer Marc Kasowitz said his client's lawsuit is completely independent from the suit brought by Overstock.
(Carol S. Remond is an award-winning columnist and one of four who write the "In The Money" feature. Most recently, she won a 2005 Gerald Loeb Award for best news service content with "Exposing Small-Cap fraud," a series of articles that described how three small companies unscrupulously pumped up their stocks.)
-By Carol S. Remond; Dow Jones Newswires; 201 938 2074; carol.remond@dowjones.com [ 03-31-06 1245ET ] |
