Re: 8/24/05 - [NCANS/OSTK] Overstock: A Dozen Answers From Dr. Byrne
A Dozen Answers From Dr. Byrne
By Patrick Byrne
August 24, 2005
On Aug. 18, Seth Jayson wrote an article that asked 12 questions of Overstock.com (Nasdaq: OSTK) CEO Patrick Byrne. Dr. Byrne graciously responded. The Motley Fool has edited Dr. Byrne's comments, mostly for brevity and clarity, but granted Dr. Byrne the ability to accept or reject the final article. That you see this online is evidence that Dr. Byrne has acceded to its publishing in this form. The thoughts expressed below are Patrick Byrne's and do not represent the views or positions of The Motley Fool or its authors or employees.
Dear Mr. Jayson,
Though your interrogatories came with your own preamble, you instructed me to answer without reference to larger issues. I respectfully reject your instruction. As Wittgenstein wrote, "If a lion could speak, we would not be able to understand him." He knew that frames of reference may be so dissimilar that communication is difficult. In such cases, playing junior prosecutor over details ("But isn't it true that ... ?") is fruitless.
The best way I know to proceed -- and I suggest readers do the same -- is within the construct of a three-point paradigm. First, the number of shares traded each day that constitute failures-to-deliver (FTD) is staggeringly and unacceptably high. Second, those making money off of these failures to deliver have a pecuniary interest in obfuscating issues. Third, though it is colored as such in the press, our lawsuit is not about short selling stocks.
Q. How can investors be sure that this entire drama isn't just the result of a colossal clash of egos?
A. What part of "illegal" don't you understand?
Overstock has been on the Regulation SHO fail-to-deliver list for nearly seven months with the exception of a few weeks straddling March-April, though the SEC predicted no company would be on the list for more than 13 days. The people who nightly determine that Overstock belongs on the Regulation SHO list refuse to tell me how many FTDs there are. Why? Assume there are 10 million Overstock fails scattered in the system. That means $400+ million of stock. Brokers are charging 20-30% interest to loan our stock: Thus, there is $80 to $120 million of illicit annual income generated wherever in the system those FTDs reside. And Overstock is one stock of 150 on the list: A Freedom of Information Act request forced the SEC to disclose that 6% of all shares traded daily on the major exchanges constitute failures to deliver.
Q. You alleged [on] Friday [Aug. 12] on CNBC that Herb Greenberg --- among other journalists -- is actively participating in this conspiracy in order to help Rocker and others front-run or otherwise trade illegally in your stock. What, exactly, do you claim is the motivation for the alleged conspiring journalists?
A. Captured regulators get there in various ways: laziness, flattery, bribes. In the case of financial journalists, there is a continuum:
Some work hard, are smart, and could be analysts themselves;
Some work hard but rely heavily on leads from hedgies;
Some sit by the phone and wait for it to ring with calls from hedgies;
Some just drink beer and play poker with hedgies;
Just maybe, a couple take tips in offshore bank accounts from hedgies (there are bent priests, bent cops, bent judges: Is the thought of a bent journalist incomprehensible?).
I do not know where on the continuum Herb sits, but I think it is not at the top.
Q. You said on CNBC [on] Friday [Aug. 12] that the only evidence you have in this case is affidavits given by people who claim to have previously been involved in the scheme ... you read from an affidavit which said "it appeared" that the players in the conspiracy were orchestrating attacks on you. Is that the strongest evidence you've got?
A. No, there was much more, even in that affidavit (only a few lines of which I read aloud). I also have internal company documents and emails, and material regarding other parties (I never said that all three affiants were from Camelback, did I?). I am not sure which is "the strongest."
Also, respectfully, I never said "only" or that I had "nothing" else: Readers should view this link to confirm for themselves (see minute 4:00 to 4:30).
Q. Why should anyone, in the public or the courtroom, trust the statements of people who were (or are) involved in perpetrating the very same stock scam that you're protesting?
A. Conversely, how can you impugn someone for being involved in a scheme and simultaneously deny it exists? It's like saying, "I don't believe anyone sells heroin. What, these guys said they were part of a gang that sells heroin? Well, you cannot trust anyone who was once a heroin dealer. Therefore, there is no evidence that anyone sells heroin."
These guys thought they were working in legitimate shops, learned how the game was played, and skedaddled.
Q. How much is this litigation going to cost Overstock shareholders, including the money needed to defend against the defamation suits that have already begun to come your way?
A. It has been costly to date. Now it is in the hands of O'Quinn, Christian, Voyles, and others. They took this (along with all countersuits) on contingency.
Remember, on my Aug. 11 conference call I detailed a lawsuit, but it is not about shorting. We discovered evidence of a "research" firm that was providing information to some clients before others, permitting those preferred clients to edit that research and trade ahead of its publication, and were themselves secretly running a hedge fund front-running that same research. All of this is, I believe, improper, so I filed a lawsuit alleging unfair business practices among these blackguards.
In the course of that investigation I kept coming across the same several hedge funds and journalists and with a little research discovered a set of relationships among them. In my conference call I explored relationships within that circle, folks about whom I stipulated I had no knowledge of anything improper. What's David Einhorn going to do, sue me for mentioning he is married to Cheryl Einhorn? Or that he knows Jules Kroll? Is Kroll going to sue me for saying they investigate companies for hedge funds? Let them. I just talked about relationships: Why, did they look like a conspiracy to you?
It is true that I disclosed that I had detected signs of a background player whose role remains murky, but who may not give instructions so much as set priorities. Because his involvement remains unclear, I chose to identify him only as "the Sith Lord." But our lawsuit has nothing to do with these other players, shorting, naked shorting, or Sith Lords. The financial journalists' mantra-like repetition of the claim that it does cannot change that fact.
I have explained the slop in the settlement system and the financial rewards it generates at the expense of small companies, the incentives that exist to use blue smoke and mirrors to confuse the facts, my decision to make a difference by grabbing one thread of the tapestry and pulling hard, and the profoundly degenerate intellectual and moral level of those engaged in the obfuscation. What's in it for me? Criticism and derision, but that's OK: When you stand for things, you get used to it.
Q. Let's be honest. You know more than one billionaire, and you say that you, family, and friends already own an enormous piece of Overstock. Why not just avoid the hassles of the public market, give shareholders the $77-ish per share that your lawsuit suggests the stock is worth, and take it private?
A. We did. About 100% of the shares are owned by family, friends, and a handful of institutions (I don't know for sure). The problem is, there exists an additional 3%-70% of the company in electronically counterfeited shares scattered throughout the system. Why pay to buy up counterfeit shares?
Q. You claim there is a "Sith Lord" controlling your stock price. It would seem to me that rather than trying to short Overstock straight into the ground, a clever Sith Lord would do better to let the stock rise at some point, and play both sides of the action. Have you any evidence that your stock's big rise in late 2004, or any subsequent pop, could have been orchestrated by the Sith Lord, prior to taking his short position?
A. False. First, stock prices are not "controlled" deterministically. Second, I said the Sith Lord's role is murky to me: If it exists, it seems less about control than about priorities (like Osama bin Laden to al-Qaida). Respectfully, the rest of your statement/question is unsound and, as it concerns Sith Lords and stock prices, is blue smoke and mirrors.
Q. Your lawsuit claims that the Sith Lord's conspiracy is directly responsible for the fall in your stock's price. Yet other heavily shorted stocks that appear on the Reg SHO list, such as Netflix (Nasdaq: NFLX), NetEase (Nasdaq: NTES), True Religion (Nasdaq: TRLG), and Shanda (Nasdaq: SNDA) are doing just fine, as you can see from this chart. How do these companies resist the power of the Sith, and why can't Overstock do the same?
A. Again, I do not know that the Sith Lord is "directly" responsible for anything. Remember, the only "conspiracy" I alleged is between Rocker, Cohodes, and Camelback. Other than that I just talked about relationships: Again, did they look like a conspiracy to you?
Q. For better or worse, you have become a controversial figure because of the naked short issue. Would Overstock shareholders be better served if you stepped down as CEO but remained as chairman of the board?
A. My father will be chairman shortly. I would love to step down as CEO. But I am hearing from so many dozens if not hundreds of investors, essentially all of whom support this fight; I cannot let them down.
Truth is, I want to go walkabout. But Stormy [Simon] does not want to be CEO (and given what she did to Meade, as is described below, I think Rocker is better off with me here).
Q. What do your many family members, friends, and mentors like Warren Buffett -- who have achieved business success in their own right -- think of this effort?
A. Mr. Buffett is off limits. Of the others: One knows the players well, says they are truly bad people and to make sure I don't wind up face down in a ditch.
Don't worry, Seth: I am bulletproof and invisible.
Q. There's been a lot of controversy regarding your relationship with "Bob O'Brien," a man who hides behind a pseudonym ...
A. Not to me. I know who he is (and he is not James Davidson). But the test of any theory (or theorist) is its ability to make accurate predictions. Bob made far-out but, in the end, accurate predictions about journalists, David Rocker, and our trading. Why get hung up on personalities?
... and issues vicious, unsupported attacks against anyone who disagrees with him.
A. False. O'Brien's vicious attacks are generally heavily supported.
Yes, his writing is acerbic (and he is more sarcastic in person!), but I think it is the whole vox clementis in deserto thing. To the extent that I have any input with Bob, I have asked him to be kinder and gentler. But I'll take "right" over "kinder and gentler."
Q. Do you think your shareholders would be better served if you distanced yourself from him and his organization, which you have helped to fund?
A. I helped fund Bob and also tried to rein him when he went overboard. On balance he has done our shareholders a favor. Incidentally, does the vindictiveness of Herb, Jesse [Eisinger, of The Wall Street Journal], and Jeff Matthews concern you equally, or is your outrage selective?
I'll give you an example that speaks to the obfuscation I spoke of above. Several years ago my friend and colleague, Stormy Simon, put a killer (David Meade) behind bars. For four years the police had searched for a witness of whom they knew only a name, "Stormy" (which they mistakenly assumed to be a stripper's nom du stage: They thus confined their searches to Intermountain strip joints). They never found her. At the end of Meade's trial it seemed certain he would walk out of court a free man, but in a John Grisham-like twist, Stormy surprised everyone by showing up in the courtroom (though Meade had told her that if she did she would end up face down in a field with a bullet in her head). Her testimony put Meade away for life. She is a hero to the Salt Lake City homicide detectives and prosecutors, one of whom just wrote a book, "Death in a Fish Pond," the climax of which is Stormy's out-of-the-blue heroism (the other witness, incidentally, did end up face down in a field).
A second example concerns a story I told on my conference call concerning how, when I came to suspect there were leaks in my environment, I created two pieces of disinformation to which I gave controlled release. I watched for blowback and, when it came, used it to trace the problem.
How does this play in the hands of Jeff Matthews, whose "blog" (he disallows dissenting opinions so it is not a real blog) lets him be the most vocal of the hedge fund-journalists? Jeff omits the context of my story and the crux of the Stormy story (that she was never a dancer, which is why the police never tracked her down), so he could write lengthy pieces about how Byrne is a whacko, he talks about cocaine and gays and has senior vice president strippers, etc.
Q. Fast-forward a year. You've won damages of $500 million in this case. Do you track down all past shareholders from the period of the alleged damages and pay them for their losses? Do you pay it to current shareholders as a special dividend?
A. Maybe I donate it to the people whose lives and companies were ruined by financial thuggery. Maybe I pay for real regulators who won't hide under their desks. But it will take more than a year.
In closing, I must mention that we recently fired someone we believe was a mole passing information to hedge funds. Just before getting canned, the mole's primary focus was asking around the office, "What is the special relationship between The Fool and Patrick?" (For the record, I hope Bill Mann and the Gardners would agree that we have a cordial but distant relationship: The principles The Fool espouses are simply the same ones I learned as a kid and from which I now operate. Excluding interviews, we probably talk once per year, if that. But to outsiders it may look like we coordinate like, well, a bunch of reporters and hedge funds who play poker and talk three times per week.) [Editor's note: We agree.]
Thus, I now think that the miscreants understand the threat that an uncaptured financial news source like The Fool represents to them. They will seek to capture it. So you guys should be on the lookout for any journalist who suddenly shows up at The Fool trying to further the hedgies' agenda (by, say, bashing their shorts, spinning our lawsuit as being about Sith Lords and naked shorting, etc.).
Warm regards,
Patrick
P.S.: Jeff Matthews' smears against Stormy notwithstanding, I do have a couple good friends who were wigglers (and another who was a call girl). All three are finer human beings than the average Wall Street hedgie, journalist, etc. To have a hedge fund quisling like Matthews denigrate the way they make their living is hilarious.
Overstock.com is a Motley Fool Rule Breakers recommendation.
Patrick Byrne is founder and CEO of Overstock.com and owns a substantial number of shares in the company. The Motley Fool has a disclosure policy.
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