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Alan M. Newman, Editor - Samex Capital's Stock Market Crosscurrents
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Alan M. Newman, Editor - Samex Capital's Stock Market Crosscurrents
- December 22, 2005 -
Easy To Sell Short, "Impossible" To Buy And Deliver On Monday, December 19th, Dr. Patrick Byrne was invited to appear on CNBC's Squawk Box segment. There was only one important impression to take away from the coverage - the mainstream media is still shackled to the common wisdom. In our view, ignorant and complicit. Perfect example; when questioned about the failed deliveries of Overstock shares, Byrne opines that the entire financial system may be threatened. For a multitude of reasons that we have outlined for these many months, we believe there are genuine threats to the system and all the evidence the media has at hand is routinely shunted to the round file or just placed out of view. No one is willing to speak up. No one is willing to disturb the status quo. No one is willing to face the truth. Except Patrick Byrne.
Byrne decides to take a very courageous route to confront Wall Street's demons and CNBC anchor Joe Kernan wonders why Byrne does not just focus on the company's operations instead?! Wait a sec here, since when did CEOs stop being able to multi-task? Seems to this Editor that we very much live in a multi-tasking world and a CEO should be able to steer his own company operations plus be capable of exerting considerable efforts to right a considerable wrong that investors presently suffer. In this case, we cannot overstate the importance of the battle; if it is lost, all is lost. We have created and unleashed a financial Frankenstein that is corrupting corporate charters and stealing from shareholders. We repeat; at present, you as a shareholder cannot rely on the authorized and issued capitalization of whatever company you invest in. Simply put, if there is any short interest in your company whatsoever, the number of shares listed as "issued and outstanding" is utterly incorrect. Admittedly, if the short interest is small, this discrepancy may not be significant. However, if the short interest is large, the discrepancy cannot help but be significant. Your shares will be lower in price than they otherwise would be.
So what, you ask? Short selling is legal, right? Yes, it is. However, no one has yet addressed the fact that duplicative short sales corrupt any economic benefit ascribed to short sales. In theory, there is no limit to how many shares may eventually be owned, nor any limit to capitalization in excess of that which has been authorized. The more short sellers short the shares of Overstock, the more likely they are to drive it down in price, despite any possibility of a bright future. Given that Overstock is part of the SEC's Pilot Program wherein short sales can be executed on a downtick, the process has been made all the more easier. Despite the so-called "enforcement" of Reg. SHO, Overstock shares have remained on the Threshold list for 170 trading days since January 5th. Not only are shares being manufactured via duplicative short sales, many transactions are never even settled as the law requires. What will it take for observers to awaken from their deep sleep regarding this fundamental flaw in how Wall St. conducts its business???!
In the October 17th issue of Crosscurrents ("Opaque Transparency", page three), we wrote that Byrne's August purchase of 25,000 shares of Overstock shares for over $1 million was not settled and delivered for more than 50 days. In a follow up article on November 14th ("Screw The Shareholders," page two), we showed how similar problems occured for Jack Byrne, the new Chairman of Overstock and for Patrick Byrne's brother, who both purchased sizable stakes. Delivery of the shares did not settle as required. We can now report that at least one more transaction entered into by Byrne has gone way past the settlement date with no delivery. On November 30th, Byrne paid $1.867 million for an additional 50,000 share purchase of his own company's shares. The money was debited from his account. Byrne was given a confirmation by his broker that the transaction was settled on December 5th and the shares were in the process of being converted to paper. They were not.
As of December 20th, the trade had not settled. In the meantime, 8.8 million shares traded. The 8.8 million shares amounted to over four-fifths of Overstock's "float," yet a mere 50,000 shares could not find their way to the proper owner? In order to expose how broken the system is, Byrne has published his email exchange with his broker, which we have copied and pasted below. Read it and see for yourself.
We are obliged to repeat our lament from our November 14th issue. "....what of Wall St.? Hey, the magic is real. Sell a share, whether you have it or not. Then sell that same share again to another owner. And possibly again. And again. How good does that get for the brokerage industry? In our view, way too good. And precisely the reason why we expect it will get worse. Business is far too important, no matter the consequences. Screw the shareholders."Editor's Note: certain parties to the transaction are not named to temporarily protect their identity.
SSSS is the selling broker and XXXX is the buying broker
Patrick,
Today I have been informed by Bob at XXXX, that the 50,000 shares of Ostk originally confirmed to have settled on Dec 5th and in the process of being converted from DTC shares to paper, have in actuality not settled and no shares have been received by XXXX from SSSS. The $1.8mm for the purchase of the shares has been debited from your XXXX account, but XXXX has not distributed any money to SSSS and the funds are being held in a XXXX holding account. I am in contact with Bob on a daily basis and we will continue to push SSSS to deliver the shares.
Please let me know if you have any questions.
Thanks, Ted
Subject: RE: Ostk purchase
Thanks.
Ted or Samson,
Can you confirm for me:
SSSS was the counterparty to this trade?
When the trade is done, what is the process by which the trade is "confirmed to have settled"?
Please describe this process normally works. No more than 50 words. For example:
The trade: "Ted talks to a broker on the SSSS side and agree on the deal, they each write a ticket with a trade number on it." Or... "Ted does the deal through a computer screen, which tells him that the counterparty was SSSS, and give him a trade number."
The confirmation: "Three days later the DTCC sends an electronic confirmation that 50,000 shares have been debited from SSSS's DTCC account and credited to XXXX'."
Or whatever the truth is. I just made those up, but it is what I imagine. Can you just write for me the correct sentences so i understand?
Patrick
Patrick,
In answer to your questions below;
Yes we purchased the shares through SSSS.
I will try to explain the process as best I know and keep it short. I enter the trade when it comes in. My back office brokers pick up the trade and then call the "reps"/brokers that move the stock. In this instance they contacted SSSS. The SSSS broker then goes and tries to fill the order by breaking it down and going to the street. His back office accumulates the shares and then lets him know that the trade is now good. He then calls my back office broker to let them know the trade is good. Usually this would be an electronic confirmation. The selling broker then has three days to collect those shares from where ever he got them and deliver them to XXXX. So on the day of the trade or by the next morning we have a confirmation and a detailed report that the shares are good. That report is the same I provided to Sam (Your rep). When the stocks arrive at XXXX the money is then credited to the SSSS account and the transaction is complete.
I hope this helps or is the information that you need.
Ted
Ted,
I have been thinking.
Doesn't this mean that SSSS sold these without having them?
If they sold it, then have to go out and "accumulate the shares"? That is, it was a short sale?
Was it identified as a short sale during the trade?
Can you buy them in?
Patrick
Patrick,
It would seem that SSSS did not have the shares when they sold them to us. They are a market mover for overstock.com and so are both placing sells and buys throughout the day. There is no way for us to tell how short they were at what time, I don't think the broker at SSSS even knows the total position of shares when they complete the trade. It never is disclosed as a short sale, all we see is a confirmation that they accepted the trade which means that typically they will deliver the shares in three days. My understanding is that traders and brokerage houses will often on securities borrow the shares if they come up short at the end of the day. Since Overstock is a "hot" stock they are finding it just about impossible to find shares to borrow or buy (emphasis added).
As far as your question about buying them in, yes we could buy them in in this situation. However, if we try I don't know that we will be successful. Talking with my traders they feel that we will run into the same problem, no one seems to have enough of the shares to deliver.
I have talked with SSSS again today and they are at the same position right now.
Thanks Ted.
I assume you mean "market maker" and not "market mover"? (Freudian slip?)
Can you do me a favor and ask SSSS: "Whom did SSSS buy the short sold stock from?"
Patrick
Patrick,I talked with SSSS and they said that as far as where they get the shares they execute the buy for us knowing that typically for stocks they can get the shares with in the three days. With Overstock shares they were not able.
They have, as of the 13th, issued buy ins on all shares owed them and are pursuing those shares to complete our purchase.
Ted
AUGUST 24th COMMENTARY "CAVEAT VENDITOR" (.PDF FILE) HOME /// SUBSCRIBER MENU
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