But back in the summer of 2004, Patrick Byrne doesn’t know Judd Bagley or Gary Weiss, he hasn’t yet been contacted by the Easter Bunny, and he certainly doesn’t know anything about a coordinated effort to pollute America’s public discourse. All he knows, really, is that he’s become the target of some hedge fund guy named David Rocker.
During a visit he and a colleague make to a Minneapolis-based money manager, the money manager asks Patrick who is shorting his stock.
“I hear some guy named Rocker has it in for me,” Patrick says.
The money manager goes ash white, and tells Patrick about a colleague at Piper Jaffray who once had a “buy” rating on a stock that Rocker had shorted. Rocker called the analyst and said, “You don’t understand. I will have you killed, I will have you killed, if you do not take your ‘buy’ rating off this stock.”
Clearly it was hyperbole, but even in the context of Wall Street Speak, it was over the line. An executive in Piper Jaffray’s research department used a speaker phone to call Rocker and demand an apology.
Another hedge fund manager says to Patrick: “Do you know who Rocker is? Do you know who you are locking horns with?”
When Patrick says he does not, the hedge fund manager says, “You better look into who Rocker is connected to.”
So Patrick starts calling around in the New York hedge fund community. The story he is given is, “Rocker is Mob. Or at least, he spent the last 20 years on Wall Street insinuating to people that he is Mob.”
Now, again, let us be clear that the stories people tell on Wall Street sometimes carry a whiff of hyperbole. We mean here only to convey the sorts of tales that are very regularly told about David Rocker. We are not asserting that Rocker is in the Mafia.Young men like to act like rock stars. Maybe David Rocker is just an older guy who saw too many episodes of the Sopranos, and goes around acting like he is Mob. That’s probably it.
* * * * * * * *
On July 18, 2004, Cramer (probably right after sniffing melons with Rocker in the grocery store) went on CNBC to serve as proxy for Rocker’s opinions. He said, “David Rocker, who says that he would - that you chose not to take his call on the conference call, so I’ll ask the question he wanted to ask, which is [Cramer picks up a piece of paper and quotes Rocker directly]: `Is there a business model that works here? With all the excitement regarding better sales, the net net is that revenues have tripled from last year’s second quarter, yet operating losses have doubled.’ That doesn’t seem to be good.”
Nobody prohibited Rocker from asking his question on the Overstock conference call. And the truth is, in the summer of 2004, Overstock had tripled its revenues, while spending a total of only $70 million. At a similar point in its development, Amazon had burned through $3.5 billion. Rocker had a right to his opinion, but it was the media’s job to present the other side of the story. It’s called “balance.”
Instead, Rocker’s stable of journalists lined up behind him. First, TheStreet.com gave Rocker a column in which he presented his biased interpretation of Overstock’s prospects. Then, Cramer wrote his own column, mimicking Rocker’s views, on TheStreet.com. Other reporters for the website followed suit. And by August, 2004, Patrick was getting calls from a number of journalists affiliated with Cramer who all repeated the same questions, always premised on the same misinformation, supplied to them by Rocker and Gradient Analytics, the firm that is employing Herb’s friend from TheStreet.com to run a dodgy hedge fund out of its back office - the firm that had at least one manager with strange habits regarding aliases and ID’s.
One reporter who called with Gradient’s information was Karen Richardson of The Wall Street Journal. She had been working in New York for only a few weeks, after a long stint in Asia, so she was probably unaware that her boss, David Kansas, formerly of TheStreet.com and now editor of the Journal’s “Money & Investing” section, had a strangely cozy relationship with David Rocker and Gradient.
Halfway through the interview, Patrick interrupted the reporter.
“Karen,” he said, “you don’t really understand what you are asking, do you?”
“No,” she admitted, “not really.”
“Let me guess, Dave Kansas gave you these questions.”
“Yes,” she giggled, “Just twenty minutes ago.”
When, in August 2004, Richardson’s story appeared in The Wall Street Journal, it noted that “analysts have been comparing Overstock’s lack of earnings against Byrne’s rosy projections…earlier Byrne had forecast revenue of $2 billion by 2006.”
Patrick had made that “rosy projection” on Overstock’s most recent
quarterly conference call - the one from which Rocker had supposedly
been barred. On that conference call, Rocker’s minion, Carr Bettis of
Gradient Analytics, had the following exchange with Patrick:
Bettis:…looking at the $2 billion sales mark…
Patrick:…that is, if we’re at $2 billion, I
can tell you what my income is going to be…
Bettis:…$2 billion, I think, is the mark you guys
have set…
Patrick…the question is, even if we do get to $2 billion , three years out the decision will then be what - what do you want us to do four years out. It’s going to change what I tell you if you want us to do $4 billion four years out.. ..
Bettis:…Do you think you can do $4 billion?…That’s
great… you fire away.
Patrick:…Ok, I think we’re on different wavelengths.
Gradient went ahead and told The Wall Street Journal that Patrick was making “rosy predictions” of $2 billion. As the damage from the story spread, Patrick wrote to Richardson, wondering whether her source “might not be entirely trustworthy on every matter.”
Richardson replied that she had contacted her sources again and they had confirmed the $2 billion number.”This is what the analysts said,” she wrote, “according to their notes, anyway.”
She added: “I hope this doesn’t keep you awake at night!”
* * * * * * * *
Keep him awake at night!? Well, it did of course. Especially when more reporters called with lists of questions supplied to them by Rocker and Gradient. And these reporters-they were different from the others. They were exceedingly smug. They sneered. They snarled. They were altogether exasperating, like Soviet interrogators, weirdly oblivious to all expurgatory evidence, completely unmoving, always waving those gosh-darn-friggin’-half-witted-imperious-little denunciations — Do you deny that you are an American spy? What, he dares to deny it? Ah-ha! Proof that the American spy is hiding something! –over and over until, finally, Patrick came to that brittle point of utter torment when it was, God forgive, time to stand up and pimp-slap these people.
That’s when the Easter Bunny called.
* * * * * * * *
It was in October 2004, and the Easter Bunny sounded like a wack-job, he really did, but he made some predictions. He said that Gradient would continue to publish outrageous information at Rocker’s behest. He said the same information that had ended up in The Wall Street Journal, would soon get into the hands of specific reporters at Fortune, Forbes, MarketWatch.com, Barron’s magazine, and TheStreet.com - all of whom would call in the coming weeks. And he said that Overstock would soon become the target of a nonsensical federal investigation.
The Easter Bunny also laid out the mechanics of something called “naked short selling.” He predicted that Overstock would suddenly be listed, without its authorization, on a bunch of foreign stock exchanges-making it easier for hedge funds to sell phantom stock. And he predicted that Overstock would appear on the SEC’s Reg SHO list of victim companies, scheduled to appear for the first time in January, 2005.
Over the next two weeks, Patrick received calls from precisely the predicted journalists at Forbes magazine, Barron’s, The Wall Street Journal, The New York Post, and Fortune magazine - all of them reading the same list of questions supplied to them by Gradient. (To her great credit, the Forbes reporter spent a week investigating Gradient’s information, and determined it lacked credibility; the other journalists merely transcribed the information into their stories.)
Within a few weeks, the Federal Trade Commission in San Francisco began a bizarre investigation into Overstock that went nowhere. Within a couple of months, Overstock had mysteriously appeared on exchanges in Stuttgart, Munich, Frankfurt, Berlin, and Australia. And come January, the company was indeed on the SEC’s victim list (along with three other companies that Rocker had just hammered in a column for Barron’s magazine).
“The power of any theory is its ability to make predictions,” Patrick later says in his “Miscreants’ Ball” presentation. “It doesn’t matter how wacky a theory sounds, if it makes predictions that are confirmed, you’ve got to pay attention to it.”
* * * * * * * *
The day after the Miscreants’ Ball presentation, there is a photo in The New York Post showing Patrick with a flying saucer over his head. A clique of journalists with ties to short-sellers write multiple stories that are no less flattering. They all say that phantom stock is not a real problem. Only bad CEOs of bad companies complain about short-sellers. Only crazy people believe that hedge funds sell phantom stock.
* * * * * * * *
Four days before wacky-Patty’s “Miscreants’ Ball” presentation, officials arrived at an elegant apartment building in the heart of the embassy quarter in Vienna, Austria. It had taken two years, but they had finally located Thomas Badian, a hedge fund manager who fled the United States after criminal charges were filed against him in New York.
Federal prosecutors place Badian at the center of a scheme to sell massive amounts of phantom stock while trying to destroy a Pennsylvania-based software developer called Sedona. Their case describes Badian at one point standing on his office desk and ordering his traders to sell Sedona’s stock with “unbridled aggression” - even though they had not borrowed or purchased any stock to sell. When the stock price collapsed, he said “good job,” and instructed the traders to be “merciless” about selling fake stock on the following day.
While Badian was living life as a fugitive, a big, swaggering Texan named John O’Quinn was preparing cases on behalf of more than a dozen companies that had been similarly victimized. O’Quinn is one of the lawyers who took on the big tobacco companies - and won. He is a billionaire several times over. He’s not in this for the money. He’s battling the phantom stock problem because he thinks it’s the biggest scandal going. He tells his clients that they don’t have to pay him if they don’t win their cases.
At the time of Patrick’s “Miscreants’ Ball” presentation, O’Quinn has learned that Badian conducted his phantom stock trades through a brokerage called Refco. The lawyer says that he has identified more than fifty companies that have been driven into the ground by Badian and other hedge funds who sold phantom stock through this brokerage. Indeed, on Refco’s last balance sheet, filed with the SEC in May 2005, there is a line item, “securities sold, not yet purchased.” The declared value of those securities is $10.5 billion, and it is safe to assume that a large chunk of that stock was never delivered.
On October 10, 2005, news emerges that Refco has fraudulently hidden $430 million in bad debt. Much of this debt, it turns out, relates to Refco’s relationship with Badian, the phantom stock seller, and an Austrian bank called Bawag. The scandal leads to Refco’s demise–the largest brokerage collapse in history.
So selling phantom stock is implicated in one of Wall Street’s greatest-ever cataclysms.
And where is the media?
Russian Mafia Conspiracy on Wall Street in Media and Government - 2 - 3 - 4 - 5 - 6 - 7 - 8 - 9 - 10 - 11 - 12- 13 - 14 - 15 - 16 - 17
