IN THE MONEY: CFA Group Postpones Panel On Naked Shorting
5 June 2006
Dow Jones News Service
By Carol S. Remond
A Dow Jones Newswires Column
NEW YORK (Dow Jones)--Disclosure is everything, or at least it does provide context that can hopefully help investors make better decisions.
Take a press release by the CFA Society of Los Angeles last week. Apparently the professional association of analysts is so worried about long delays in the settlement of stock transactions that it put together a three-person panel to discuss the matter.
According to the June 1 release, the panel plans to dwell on some pretty serious questions including: Whether hedge funds, bankers and brokers are conspiring to swindle ordinary investors by failing to deliver shares sold short; whether NASD and other market regulatory organizations are complicit in the abuse; and whether the problem is so massive that the Securities and Exchange Commission is unable to act?
The panel discussion, which was scheduled for June 6, has now been postponed and no new date has been set.
But regardless of whether the panel ever takes place, the press release announcing the event left out one key piece of information: Wayne Jett, the economist who put together the panel for CFA LA, manages a private investment firm with an equity investment in Utah online closeout retailer Overstock.com (OSTK).
Why does this matter?
Well, this tidbit of information goes a long way to explain the composition of the panel and its tilt towards proponents of a wide-ranging conspiracy involving hedge funds, regulators and members of the media.
The panel includes Patrick Byrne, Overstock's chief executive, who last year began to allege that his company is under attack by hedge funds and brokerage firms that fail to deliver shares on time after the settlement of a transaction.
Byrne's conspiracy theory isn't new. Several small-cap companies, most without a real business, have made similar claims over the last five years. Like Byrne, these companies generally argue that their stocks had been illegally depressed by short sellers who failed to properly borrow shares before making their negative bets. That practice is known as naked short selling. It is illegal for most investors but legal for firms that make a market in a company's stock and provide liquidity to the market.
Also part of three-person panel is Susanne Trimbath, a consultant who has worked for a consortium of law firms which has brought - so far mostly unsuccessfully - several lawsuits against brokerage firms and the Depository Trust and Clearing Corp. DTCC manages a global electronic clearing and settlement system. The consortium, led by Texas lawyers John O'Quinn and James Christian, happens to represent Overstock in a lawsuit against hedge fund Rocker Partners and research firm Gradient Analytics. (Overstock sued Rocker and Gradient in Superior Court of the State of California in Marin County in August 2005 alleging that the hedge fund engaged in unfair practices and colluded with Gradient to produce negative reports with the aim of pressuring Overstock's stock price for profit. Rocker and Gradient have denied any wrongdoing.)
The third member of the panel is Arne Alsin, a portfolio manager who has written extensively about his belief that Overstock's shares are illegally depressed by short sellers.
Asked about the composition of his panel for CFA LA, Jett said the event was postponed because DTCC asked to be included after the release announcing the event was disseminated. Jett said in a telephone interview that he emailed an invitation to DTCC in March but got no response. Jett also said that he invited the SEC, the NASD and the NYSE to participate and that they all declined.
A similar panel put together by the North American Securities Administrators Association, or NASAA, last November included representatives from the SEC, NYSE and NASD. The SEC said at the time that, while there may be instances of abusive short selling, 99% of all trades in dollar value settle on time without incident.
DTCC, in an email statement, said it contacted CFA LA on Thursday to inquire about the press release. DTCC said the society decided on its own to delay the panel discussion and asked DTCC to participate and help arrange for the participation of speakers from other agencies including the NYSE, NASD and SEC. DTCC, which has been the target of several lawsuits alleging that the corporation facilitates illegal short selling, said it "welcome(s) the opportunity to shed light on the misinformation and distortions of fact, which have been made about DTCC."
Spokespeople for NASD and the SEC weren't immediately available to comment.
Berkeley Harrison, treasurer of CFA LA, declined to comment on the make-up of the society's panel or its rescheduling.
Jett, who is managing principal of Classical Capital LLC, said he has a small investment in Overstock and no investment in other companies that have made similar claims of short-sale abuses. According to data available on www.SEC.gov , Classical Capital manages $2.93 million in investments.
Whatever the outcome of the CFA LA panel, the stakes are high as powerful law firms and their clients try to weigh in on the topic and influence ongoing litigations.
Last month, the 'Get Shorty' campaign suffered a set back when a federal judge dismissed a lawsuit alleging that DTCC was complicit in bear raids on unsuspecting companies. The judge ruled that DTCC's operations are authorized by the federal law and can't be challenged in state courts.
It is still early in the game but that finding may become key to the outcome of Wall Street's likely challenge to a new Utah law which will begin in October to impose added requirements on brokerage firms registered to do business in that state.
The law, backed by Overstock's Byrne, allows Utah-domiciled companies to collect $10,000 a day from brokers that fail to alert the state's securities commission within 24 hours about how many shares on designated lists of short stocks they won't be able to deliver on time.
A spokesman for the Securities Industry Association, Wall Street's principal trade group, told Dow Jones that the group is "reviewing all our options, including the possibility of taking legal action."
Central to any legal challenge to the state law would the constitutional issues of federal preemption and the First Amendment commerce clause which gives the federal government the power to regulate commerce among states.
(Disclosure: Two columnists for Dow Jones & Co. (DJ), this columnist and Herb Greenberg, have received subpoenas from the Securities and Exchange Commission requesting information in connection with an SEC investigation. Dow Jones, publisher of this newswire, objected to the subpoenas. The subpoenas were put on hold and the SEC recently announced new guidelines for requesting information from journalists.)
(Carol S. Remond is an award-winning columnist who won a Gerald Loeb Award in 2005 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 [ 06-05-06 1725ET ] |
