Overstock.com (NASDAQ:OSTK) CEO Patrick Byrne sounded somewhat mystified that more than 500 people were listening to his company's conference call on Friday. He called it "a first."
Oh, really? Man, I sure as heck wasn't going to miss the call. No, siree. Not miss who gets called a "lickspittle," and who needs to be "driven from the land," certain terms of endearment Byrne has for journalists and analysts who he believes are conspiring with hedge fund shorters to attack Overstock.com.
Is it just me, or is the word "lickspittle" all too infrequently used these days? This time around, I was hoping that the one-man word-rehabilitation machine that is Patrick Byrne might bring more to the table. "Scallywag?" "Ne'er-do-well?" "Port-cochere?" What would it be?
Byrne, as we have detailed here many times before, does not exactly conform to the norm as a CEO. His shareholder letters quote Mao. He doesn't care much for "beating estimates" (thankfully) but instead talks of "building the ark" as a metaphor for the process of growing an online closeout retailer. Byrne once bragged that he had shorted Amazon.com (NASDAQ:AMZN) on national TV, a nearly unimaginable breach of etiquette in the chief executive community. He is almost alone in his willingness to go after those who he believes are unfairly criticizing his company or, more directly, himself.
Last quarter, David Rocker got on the call to berate Byrne for disclosing publicly that Rocker's hedge fund had sold Overstock shares short and demanded to know the basis of Byrne's claim. Byrne responded that it wasn't he who exposed Rocker's position, but rather Jim Cramer, host of the CNBC show on which Byrne had appeared. Byrne responded by wondering aloud whether Cramer had any money with Rocker Partners, since the fund was the second-largest shareholder in TheStreet.com (NASDAQ:TSCM), the financial news and analysis company Cramer had co-founded. Cramer had recently slammed Overstock in a column. The saw goes: Rocker Partners owns TheStreet.com, Rocker shorts Overstock, TheStreet.com slams Overstock.
Obviously, Jim Cramer wasn't very happy with this characterization, and he said so when he rushed to get onto the call to explain that he had met Rocker only once, "in the supermarket."
Man, it was better entertainment than a Cagney marathon. What was going to happen this time around? Would Patrick Byrne channel the Buddha on the call? Would David Rocker call in again? Might there be blood spilled this time? OK, sorta hard to do on a conference call. Still, anything seemed possible.
The table was set for Friday's call. Earnings had come out the night before: They seemed pretty solid, but the stock was getting shellacked, opening down more than 12%. (See Jeff Hwang's coverage of Overstock's earnings here.)
And behind curtain No. 3...
The answer to "What would happen on this call?" came more than an hour into the proceedings, when a private investor calling himself "Bob O'Brien" gave Byrne a rambling lecture on how Overstock's shares are being manipulated by a conspiracy of well-placed media participants, class-action law firms, and regulators, all quarterbacked by short-sellers. Most of it sounded like some good industrial-strength crazy, as does most of the witch-hunt over short-sellers and "naked shorting." But... BUT, there was one particular element that I found extremely interesting.
It turns out that Overstock isn't just listed in the United States. You can also trade the company's shares on five separate German exchanges, as well as one in Australia, which seems to be dormant. As it turns out, these overseas listings are not sponsored by Overstock, and moreover, Patrick Byrne had no knowledge that they even existed before O'Brien pointed them out. Unsponsored listings aren't by themselves evil -- we have plenty of these here in the States, including big companies like Nestle (Pink Sheets: NSRGY) and Hennes & Mauritz (Pink Sheets: HMRZF). But why is Overstock listed five times in Germany without even its CEO being aware?
Are the Soviets involved, too?
I am, above all, a lover of truth. People who distort the market for their own advantage make me pretty angry, if for nothing else than their willingness to do so inevitably harms the trust that every market participant needs to have in the system for it to work.
But the thread that O'Brien spun on the Overstock conference call was pretty wide-ranging: a three-step process to maul a company's shares, with hedge funds, journalists (a "media machine"), class-action lawyers, and even the SEC complicit. The grand finale is a hit piece in Dow Jones' (NYSE:DJ) Wall Street Journal, or Barron's, followed by frivolous class-action suits and an SEC investigation.
O'Brien folds everybody into a sort of omnipotent "they" -- the folks who are steering a great conspiracy to bring down a company. He believes that "they" are attacking Overstock in this manner.
The part about the listings on German exchanges intrigues me. I've seen it with dozens of companies, some of which I own or have owned. And certainly, we have seen journalists accused by the authorities and, in some cases, convicted of fraud and insider trading. Foster Winans at The Wall Street Journal spent several months behind bars for tipping off some funds on stories that he had yet to release. More recently, the SEC fined former CBS MarketWatch (NASDAQ:MKTW) writer Thom Calandra for using his newsletter to pump up stocks that he owned before selling them. The possibility of further fraud going on is not zero, of course.
Here's my question: What's the difference between an opinion and a "hit piece"? If I had a nickel for every time I'd been accused of working at the behest of some hedge fund or short seller, I'd have at least $0.85. Most recently, irate shareholders from a company called Research Frontiers (NASDAQ:REFR), with its three decades of futility in marketing its product, have done so. I think the company's fundamentals are awful, and I freely used publicly available research from a short seller. There's nothing illegal or even morally wrong about it, and there's no "short conspiracy." Are journalists who write positively on companies based upon the (almost always) effervescent opinions from Wall Street analysts part of a "long conspiracy?"
The component of the "they" bringing all sorts of frivolous class-action suits misses something obvious: In any situation where a company's shares drop precipitously, numerous class-action lawsuits are a nearly inevitable by-product. There doesn't need to be a "they." The suits come because of the self-interest of the plaintiff's bar. They are cookie-cutter in nature, and in the end, they will either be thrown out or consolidated into a single case. The number of class-action suits is unimportant: They're advertising for law firms, and nothing more. There is no need whatsoever to coordinate with class-action firms -- if there's blood in the water, they will certainly be nearby.
Ditto the SEC, only more so. O'Brien claimed that part of the conspiracy was a "bogus regulatory probe." So, my question is, what is the difference between a "bogus" probe and a real one? The SEC never, ever comments once its inquiries or investigations are announced, until the point when it finds something actionable. The SEC's Enforcement Division is phenomenally overworked. Doesn't it strain credulity just a wee bit that the division would launch inquiries on the word of a short-selling hedge fund without making some effort to verify the basic facts and problems themselves before spending another second of agency time chasing rainbows?
Something's not right. But how deep does it go?
You know what? There's something to this thing -- the unsponsored listings in Germany are a dead tipoff that something is not right. But does it really take a full-fledged conspiracy to achieve this? Though I hold out the possibility that there is just such a thing, I don't find it plausible. Journalists who specialize in finding companies with problems will follow their self-interest to stories they are made aware of. Ones who depend a great deal on sources who are short will come up with a heck of a lot of stories that are critical of companies.
Should we say that every story that shows up in The Wall Street Journal that's negative about any company is part of a conspiracy? Are we supposed to wonder who pays off Chris Byron at the New York Post for the simply fantastic stories he does, based on his hard-nosed research? We shouldn't, because doing so means that we give investors an excuse to ignore what may be some real problems at companies?
As an investor, you should always treat any information source with due skepticism: journalists, analysts, even (and maybe especially) companies themselves. But the market is pretty good at taking care of inequalities in the long run. Overstock shares have been knocked down 30% in the past month, to a price not seen since, well, October. If there is a conspiracy going on, if there has been since the October conference call, the conspiracists have generated absolutely lousy results. And if Overstock is a bargain now, it's a company with a high enough profile that people are going to step into the fray and buy the bargain. And buying interest has a pretty close correlation with rising stock prices over the long term. That's kind of why David Gardner recommended the company in the November issue of his Motley Fool Rule Breakers newsletter service.
That doesn't mean that there isn't something nefarious going on, and it doesn't mean that Patrick Byrne has to like it. I'm glad to see him taking on what he considers to be unscrupulous attacks on his company with information to the contrary. As I've said before, the level of information and disclosure Overstock gives shareholders, to my mind, is nearly unparalleled, and Byrne is on record in the past as having gone so far as to tell analysts covering the firm that their expectations were too aggressive. I approve. Deeply. And inasmuch as he believes that people are lying about his company, or shading the truth, a response on the facts is appropriate. And I'd expect that he will take action to get Overstock delisted overseas, and again, he absolutely should.
But calling to question the motive of any negative sentiment about a company that may run in a major news service, even if written by a journalist whose stock in trade is negative articles, should not be done lightly. Journalists rely on sources. And in investing, more times than not, those sources are self-interested and conflicted. Does that mean the journalist is complicit every time he or she uses a source? Man, I hope that's not the standard that's being suggested.
Perhaps I'll find out on the next Overstock conference call. Maybe the real Chairman Mao will call in next time.
This morning, Bill Mann followed a van from the "U.S. Governmen Printing Office." Not exactly reassuring. Bill has beneficial interest in Hennes & Mauritz, but he has no pecuniary interest whatsoever in any other company mentioned in this story. The Motley Fool is "Investors writing for investors."
