Overstock.com and Naked Short Selling

Pat Byrne, CEO of Overstock.com O.co

An article on the Industry Standard by managing editor Ian Lamont, “Overstock.com CEO: I’m not vindictive.”, explores a recent blog post made by Patrick Byrne on his site that attempts to expose corruption on Wall Street. Byrne is the completely inept CEO of Overstock.com (NASDAQ:OSTK), the man who has run it into the ground and racked up almost a quarter billion dollars in losses since 2000.

Byrne has been ranting for a while that naked short selling of stocks (an illegal act, by which a stock is sold short before actually securing/borrowing shares to short) is rampant on Wall Street and that something must be done about it. He claims that naked short selling is responsible for his company’s stock price experiencing a serious downward trend since 2005.

Critics of Byrne and Overstock.com have long said that his little fight against naked short selling is nothing more than a smokescreen. That the company is a bad company, run by someone who would be a contender for worst public company CEO of all time. Even Byrne’s father thinks he sounds a little wacky:

Even Overstock.com Chairman John “Jack” Byrne, the father of CEO Patrick Byrne, wants his son to give up his fight against bankers, investors and journalists who the younger Byrne claims are trying to purposely deflate his company’s stock price.

I’ve never claimed that naked short selling doesn’t exist. I just am not convinced that it is the reason Overstock.com sucks. If Byrne wants to fight this fight, so be it. But he’s wasted time and resources belonging to Overstock.com shareholders to cover up for his ineptitude, and that’s not cool.

Of course, there are plenty of people who agree with this line of thinking, not withstanding the attempts of Patrick Byrne, Judd Bagley, Evren Karpak, and their allies to intimidate and silence critics of Overstock.com. I found this comment on the Industry Standard in response to the above article:

In fact, there are no companies, anywhere, that have ever been harmed by “naked short selling”. The phenomena itself is used as a tool by inept and/or corrupt managements and their promoters to distract investors from flawed fundamental performance or, in many egregious cases, outright fraud on the part of managements.

Until recently, most of this activity was confined to the arena of the pinksheets and the OTCBB where gullible investors are the norm and penny-stock scam promotions run rampant. Some of the more famous scams that demonstrate this tactic of using the issue of “naked short selling” to divert attention away from managerial misbehavior would be CMKM Diamonds, Universal Express, Nanopierce Technologies, Jag Media, Global Links, and Eagletech, to name just a few.

Overstock.com is unique in bringing this diversionary tactic into the mainstream. However, one glance at Overstock.com’s financials should immediately confirm that the firm is no victim of “naked short selling”. Rather, they are a victim of an inept management team that has racked up over $200 million worth of operating losses, foolishly engaged in stock buy-backs while the core business was cash flow negative, and run their common equity perilously close to zero. (Their tangible net common equity is now in the range of $5 million.)

With a market cap of $450 million, Overstock.com remains ridiculously over-valued by any reasonable financial metric.

And this comment:

Overstock.com only gets this kind of attention because its CEO has so vocally and obnoxiously used the “naked short seller” shtick to distract attention from his company’s hideous financial performance.

There’s no sin in being an inept business manager. The corporate world is full of CEO’s, like Patrick Byrne, who aren’t fit to run 7/11’s. However, that this inept business manager would use a scam like the “naked short seller” story in an attempt to distract attention from his actions, and inactions, is especially despicable. He deserves to be called on it.

And this:

And you continue to deceive people with your assertion that naked short selling has put companies out of business. That is a lie that people like you, Bud Burrell, Mark Faulk, and “Bob O’Brien” tell over and over and over again. And yet there are no companies, anywhere, at any time, that have EVER been put out of business by naked short selling.

And yet the lot of you continues to repeat that lie.

Naked short selling can not destroy the car makers, the airlines, the drug manufacturers, or, for that matter, Overstock.com. Only the managements of those companies have the ability to run them into the ground. The only thing naked short sellers can do is recognize when a management team is wrecking a company, take their short positions, and enjoy the ride down.

I don’t make this issue about Overstock. It is Byrne who has made this about Overstock. If he weren’t intent upon using the “naked short seller” scam in an attempt to cover his tracks and distract attention from what he’s done to that company, no one would even bother with him. It is his unwillingness to accept responsibility for his actions as the head of Overstock that draws so much attention to his company and how he’s imposed so much damage upon it.

And finally this:

The core of my argument is that “naked short seller” does not harm companies, that it is nothing more than a tool to divert attention from companies with deeply flawed financials, inept management teams, and, in some especially obnoxious cases, fraud. We’ve already gone through some of the highlights with Overstock… a quarter of a billion worth of operating losses, net tangible assets on the books of ~$5 million, a manager who has lied about their EBITDA and who has lied in the past about their working capital situation, a misguided stock buy-back that wasted precious capital while the operations where still cash flow negative, and a management team that is indisciplined when it comes to sticking to a stated operations goal. This is all information that’s been drawn from their 10-Q’s, their 10-K’s, and transcripts from their conference calls. Do you have a problem with this data? How much more detail would you like?

“Naked short selling” has absolutely nothing to do with the damage that has been inflicted upon this company. All of this damage has been inflicted from her executive suites. And despite all of this damage, Overstock still sports a market cap in excess of $450 million, a number that no sane securities analyst would ever apply to a company with those financials. (And, no, Arne Alsin does not count as a “sane securities analyst”.) Clearly, “naked short selling” is not hurting this company, or her investors, in any way.

We’ve touched upon this with another “naked short seller” darling as well: “Bob O’Brien”‘s scam with Novastar. If you go and examine the 8-K’s from all of their securitizations, you’ll find that they always retained the lowest rated (or unrated) tranches along with all the “pre-pay”. These were the riskiest residuals for Novastar to have retained from their securitizations. Furthermore, if you’ll examine their 10-K’s and 10-Q’s, you’ll find that for several years Novastar was unable (or unwilling) to finance their dividends out of operating cash flow. They dumped stock, or raised debt, in order to pay those dividends until the game unwound and left them with a bunch of worthless paper. This is hardly the work of “naked short sellers”.

Again, in defense of Novastar’s management, they never embraced “Bob O’Brien”‘s scam. All they did was pursue a very risky real estate strategy. It was “Bob O’Brien” who mischaracterized the risks they were taking and burned a bunch of gullible investors along the way.

There is no shortage of data out there to support my contention that the cry “naked short selling!” is nothing more than a red herring. We could likewise dig up similar data on another stock that used the “naked short seller” scam to divert attention away from rotten financials and managerial misconduct.

Have you ever heard of Jag Media?

These comments were all posted by someone with a screen name of “James Brownfield.” I don’t know if that’s a real name or not, and I don’t know who the person is. But I do agree substantively with his comments, and think that they are very educational for those who wish to research the issue of naked short selling.

I’ve yet to see anyone prove that naked short selling has destroyed even one company. If there’s evidence of that, I’m sure the world would love to see it. For now, all we have are rantings and “Patrick Byrne says so.” I guess when you have lots of money, it’s easy to make people listen to you. But they don’t have to believe you, no matter how much money you have.


  1. Tracy Coenen

    And you missed these very important comments from daddy in the same article…

    How Patrick Byrne has ruined Overstock.com:

    “It really went into a ditch,”

    How Patrick ought to spend his time trying to run Overstock.com:

    “Naked shorting is Patrick’s deal,” his father replied. “I give him credit for pursuing evil. I think that’s wonderful – but that’s his fight. I would rather him spend his time on getting things right with the company, not on that jihad.”

    You missed my point, but apparently Jack has not. Whether or not naked shorting exists is really secondary to the what’s important at Overstock.com… Huge losses that continue, a completely incompetent CEO, and wasting of shareholder resources on an issue that hasn’t affected the company.

    Patrick can’t prove that naked short selling has damaged Overstock. But we have all the proof we need that Patrick has run the company into the ground. Even his dad agrees.

  2. Peter Landis

    Tracy, I continue to find your articles here troubling. You claim to be a forensic accountant but none of this has to do with facts or figures and none has to do with an economic analysis of the naked short sale issue. Instead this seems to be yet another mean spirited blog.

    Mr. Brownfield, by his own admission in the blog you referenced, is a fund manager who shorts stocks. That makes him biased and as such you should be clear about that if you are to be considered neutral in all this. I personally have found little truth in the comments made by this indiviual. The opinions formulated by Mr. Brownfield are based solely on financial filings without any analysis of market trade or price discovery.

  3. Tracy Coenen

    LOL Peter – You’re complaining because I’m being MEAN by pointing out (again) what a horrible company Overstock is? This is hilarious.

    Newflash for you… My career as a forensic accountant does not dictate that I can only post about economic analysis on my own blog.

    You should also know that being a short seller doesn’t make someone else biased. There is no requirement that I be “neutral” on this topic. I am free to express my opinion however and whenever I want, no matter what that opinion might be.

    Quit crying like a little girl!

  4. Pingback: Evidence of Naked Short Selling? Hardly. | Sequence Inc. Fraud Files Blog

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