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Overstock 0 for 1

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February 15, 2007 – Comments (4)

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So, by my count, Overstock.com (Nasdaq: OSTK) loses round one. According to Gradient Analytics, the SEC has dropped its investigation into whether Gradient was manipulating Overstock. Though this was technically an SEC gig, the investigation was very clearly a reaction to Byrne's original Rocker/Gradient lawsuit and his now-legendary "Sith Lord" media blitz.

The New York Post story even claims that the SEC offered to send Gradient a "rare 'No Action' letter."

This is good news. But it's not enough.

If you'll recall, a few months back, according to an article in the Wall Street Journal, yours truly allegedly made it onto an SEC subpoena sent to Gradient, which was pretty odd given that I'd never had any contact with the company and the one attempt I did try to make after all heck broke loose -- "Can I get a copy of the research reports that the lawsuit cites?" -- didn't even merit a response.

The only explanation for why I made it onto an SEC subpoena, if I did, seems to be that I'd made it onto Patrick Byrne's enemies list for the high crime of being skeptical of Patrick Byrne and Overstock.com.

This is a prime example of why this entire affair needs more attention than it's getting. It's pretty obvious to me that what Byrne wants is to muzzle his critics, and one of the best ways to do that is get them dragged into legal battles he wages on company time and dime. Another way is to simply smear them publicly, betting that they won't have the money or the energy to fight back.

Because these suits are expensive to fight even when you know you've got nothing to hide, they encourage skeptics to simply keep their mouths shut. And even if you don't get sued, who want the hassle of raising Byrne's hackles?

I submit that if you take a look at the coverage of Overstock on Fool.com before and after Patrick's crusade against "captive" journalists, you'll see all the evidence you need of the chilling effect it had here. How many others clammed up rather than risk the wrath of Byrne?

Overstock is a former selection of both the Rule Breakers and Hidden Gems newsletters.

Comments? Bring them here.

At the time of publication, Seth Jayson had no positions in any company mentioned here. See his latest blog commentary here. View his stock holdings and Fool profile here. Fool rules are here.

4 Comments – Post Your Own

#1) On February 15, 2007 at 11:17 PM, Parsad (< 20) wrote:

Hi Seth,

Could you clarify for me if the subpoenas against the journalists were exercised? If they were, obviously there was no evidence of anything compromising. If they weren't, why would the SEC not exercise them if they are conducting an investigation? I suppose if you don't bother looking, you probably aren't going to find anything. Is the logic correct in what occured here? If so, could there be fraudulent activity occuring, but the perpetrators are hiding behind the First Amendment.

It's interesting that Herb Greenberg used to run a fee-based subscription service commenting on specific stocks. Yet, he's considered a journalist, and not a fee-based financial advisor. The line seems extraordinarily thin!

Sanjeev Parsad

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#2) On February 16, 2007 at 10:44 AM, TMFBent (99.82) wrote:

The logic is completely flawed.

First off, it assmes that there were subpeonas issued to journalists. Those were killed by the SEC right away, and rightly so. If the SEC serves as the hammer for underpermorming complainers who draw criticism, there would be a huge chilling effect on the information on markets, and that would be bad for everyone. Only the baloney brigade disputes this.

Next, the SEC doesn't divulge its investigative process. All we know is that the SEC allegedly tried an end-run investigation by issueing journalist-specific subpoenas to Gradient, but that investigation is now closed with no action recommended at all.

Your previous comments here and on the OSTK board (where, IIRC, you fell for that old "confessions of a paid basher" post), seem to indicate that you're an O partisan and believe in these conspiracy theories. So I have little hope that these comments will sway you. But others out there will see the real logic.

Byrne is a lousy CEO. Byrne is upset that people criticise him and that his stock is a short magnet. Byrne wants to punish those who criticize him and was loud enough that the SEC responded. The SEC found nothing it deemed worth following up on.

Byrne zero. Good guys one.

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#3) On February 16, 2007 at 10:53 AM, TMFBent (99.82) wrote:

IF you want to see just how Byrne's childish attempts to bully the press can get, read this little beauty, hat tip to Eurotrash...

http://blogs...tml#comments

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#4) On February 16, 2007 at 2:58 PM, Parsad (< 20) wrote:

Hi there Seth,

First of all, I've never posted on the OSTK board at the Motley Fool. I've been trolling around it for the last week, trying to understand why TMF moderators and journalists are behaving so childishly. Frankly, I don't think you should be allowed to post such things as a moderator, or someone who actually writes articles for the Fool.

Second, Byrne is irrelevant to the question I posed to you. Could illegal activities in trading be occurring by perpetrators utilizing the First Amendment? Are there relationships between journalists and certain hedge-funds that are creating artifical downward pressure on some companies? How do you account for the failed to delivers, and the fact that at one point, short positions outnumbered the total float available?

I was at the very first VIC in New York, and I clearly remember Jim Chanos and Herb Greenberg speaking to a packed house of hedge-fund managers. In their convoluted presentation, they in very simple terms stated that "Fairfax was a zero!" Should someone in such a position, be allowed to tout investments they have a position in? Isn't there a conflict of interest?

I remember asking Herb after his presentation, exactly how he developed his hypothesis on Fairfax and if he did alot of research? He said that he had two very good sources, but did not do alot of his own research. Is this due diligence? Is this journalism?

How do you reconcile the fact that Herb is considered a journalist, but like many other writers in his position, he also ran a fee-based subscription advising on stocks he wrote about? Is this kosher for journalists to do? How is this different than many fee-based advisors? Should there not be a clear delineation of acceptable behaviour, if they are afforded certain constitutional freedoms that limit prosecution for illegal activity?

Finally, the SEC investigates consumer complaints, and all criminal and fraudulent trading activity that is brought to their attention. They chose not to exercise subpoenas that may or may not have shown collusion between specific journalists, analysts and hedge funds. But of course, subpoenas for emails and files at mutual fund companies, brokerages, banks and insurance companies is perfectly fine.

As you mentioned, the SEC doesn't disclose their methodology, especially in a circumstance like this, where considerable evidence has been excluded. It's been all nicely vacuumed up or swept under the rug.

Sanjeev Parsad

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