Naked Short-Selling Lawsuits Destined to go to Trial
The NYT reports: Heather Hunt, a Citigroup analyst and longtime fan of MBIA and Ambac, is out with a report today dowgrading the shares to hold, after they have lost most of their value. She says she is “throwing in the towel.”
“Valuations suggest financial distress but financials do not. In the face of worsening credit market conditions and volatility, it is difficult to maintain buy ratings, despite extraordinarily low valuations,” she explains.
I seldom criticize analysts who have been wrong, in part because I’ve been wrong plenty of times in the quarter century I’ve been opining on stocks and markets. In this case, I tend to agree with the markets that the monoline insurers guaranteed some very bad paper, and are in deep trouble. But I could end up being wrong, and Ms. Hunt could be proved right.
But what got to me about the report was when she veered off to explain why the stocks have plunged. It’s those horrible naked short sellers:
“Short interest is quite high — We would note that both Ambac and MBIA shares have failed to meet threshold tests on the New York Stock Exchange. This suggests there may be “naked short selling,” whereby short sellers are unable to find shares to borrow in their short sale. This could be placing artificial downward pressure on the shares. In the article at the following link, the Houston Law review cites the example of Overstock.com. While more than 90 percent of the shares were held by insiders, massive volumes of stock were sold short, driving down the stock. Yet these owners had not lent their shares. We do not know if ‘naked short selling’ is occurring with Ambac and MBIA shares, but if it were, it might help explain the significant volume and downward pressure.”
She does not note, although the article does, that the lead author is none other than Overstock’s lawyer, James Christian. He once told me that he hoped to file suits against brokers on behalf of Overstock shareholders who had not received delivery of shares. The idea was that the brokers should refund their money — not a bad idea given the declining price of Overstock shares at the time. (Or now. The shares hit a four-year low today.)
As I quoted Mr. Christian in that 2006 column:
‘’It is really a pretty simple action,'’ he said. ‘’You agreed to sell me something. But you never bought the stock because you never got delivery'’ of the actual shares. ‘’I want to rescind the transaction because you lied, and I want my money back.'’
I never heard of any such suits that were filed. But Overstock has sued analysts, hedge fund managers and brokers, and those suits seem destined to go to trial. Citi, Ms. Hunt may or may not know, is one of the defendants.
Overstock’s best hope of producing money for its shareholders may be to win one of these suits. Who knows? Similar suits might turn out to be the best hope for those who followed Ms. Hunt’s advice and bought Ambac.
Full Story: norris.blogs.nytimes.com
pcyhuang |
