This CEO is fighting madBy Greg Sandoval, CNET News.com
Published on ZDNet News: March 7, 2006, 11:45 AM PT
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A former boxer, Overstock.com CEO Patrick Byrne has picked the ultimate (Wall) street fight.
Byrne sparked enormous controversy last summer by accusing a number of investment bankers, financial journalists and hedge fund managers of collaborating to ruin the reputations of companies in order to profit when the stock price of those companies tumbles. Byrne claims that his online store has been victimized by such a scheme.
In a now infamous summer conference call, he seethed over an alleged conspiracy--going so far as to say that it involved a mastermind he compared to a "Sith Lord," as well as people who had once trafficked in stinger missiles.
Last August, Salt Lake City, Utah-based Overstock filed suit against Rocker Partners, a short-selling hedge fund, and Gradient Analytics, a research firm. Both companies are bearish on Overstock, which is profitless. In the wake of his lawsuit, the U.S. Securities and Exchange Commission has reportedly opened an investigation into the two companies. Critics have accused Byrne of orchestrating the SEC's probe.
"I don't pull any strings over at the SEC," Byrne told CNET News.com. "The SEC didn't need me to develop this case, and my sense is that this has to do with far more than Overstock.com. We're the tip of the iceberg."
But the ranks of Byrne supporters shrank by one last week, when his own father and company chairman, John "Jack" Byrne, publicly came out against his son's campaign to clean up Wall Street practices. The elder Byrne told The Wall Street Journal last week that he considers his son's holy war with the financial community a distraction and that he may resign his chairmanship over it.
"You know, when you're 74, you feel differently every day, based on what you have for breakfast that morning," the younger Byrne said of his father. "I never really expected him to get this fight."
Byrne elaborated on the current controversy in an extended interview last Thursday with CNET News.com.
Q: You seem to relish the role of the outsider or naysayer. What makes you that way?
Byrne: I guess by nature I'm a contrarian. I remember when I was about 11, my parents gave me a blanket with a white sheep on it facing one way and one little black sheep facing the other. I had sort of figured out by that point I was going to see things differently.
How did your fight with Wall Street start?
Byrne: First thing, you cannot believe anything being said about this battle by the financial community, by the East Coast financial press. There has been an urban myth for some years that there's a financial technique that hedge funds can use to make money but in the process destroy smaller-cap companies--small, maybe midcap companies. It's known by many names. I think of it as "failures to deliver"--one flavor of which is naked shorting. But there are other flavors of this problem.
The collective intelligence of the bloggers can actually be pretty good. They started getting in contact with me. When I first heard from them, I thought they were a bunch of wackos. I thought they lined their hats with tinfoil. It was really like that movie "Conspiracy Theory." But the success of any theory is its ability to make accurate predictions. They started making predictions about the things I was going to see.
They were really far out, strange predictions--and they all started coming true. So I started paying them some attention. The big picture is this: What the war is really about is this technique, or this urban myth, that this financial community has a method of profiting virtually risk-free but at the cost of destroying small companies. There is certainly a technique of orchestrating a bear raid on a company to hurt it.
I think there is a group of miscreants in the market that have to be flushed out of the market. No financial reporters from the East Coast financial media will report that that's what the fight is about--that's what the lawsuit is about--other than to just paint it as, "Oh! This is a CEO who is cheesed off because his stock went down, but if he only paid more attention to his company, maybe it wouldn't go down." That's the party line. They're a bunch of party hacks.
Can you tell me who they are? Is this a conspiracy?
Byrne: "Conspiracy" isn't the right word; it's an ideology. Remember I lived in Communist China; I know what it's like to witness party hacks developing a party line. So, yeah, I definitely think that among the reporters, there is a spectrum.
I think that there are fine, smart reporters who report the news fairly. They want to get at the truth, and they are people who could work as analysts themselves. The next level down are reporters that maybe get a little lazy: They get very close to some elements in the Wall Street community, they take a lot of tips from them, and maybe they rely a little bit too heavily on the tips.
The next level down includes some reporters who sit and wait for the phone to ring from their buddy at the hedge fund, who takes them out to the mansion in Long Island. And I wouldn't be surprised if there are some--a very small number of reporters--who actually are on the take. They have displayed such impenetrable stupidity. They've actually gone out of their way to let me know that they have an agenda and that they're not going to report fairly. They seem to gloat in the sense of power that they get by letting me know that.
What about Herb Greenberg?
Byrne: Well, Herb Greenberg (of Dow Jones' MarketWatch) would certainly be at the lower end of that spectrum. You know, I'm not saying he is on the take, but I think he is nothing more than a lapdog for certain powerful hedge funds.
(The San Francisco office of the SEC issued subpoenas to Greenberg and another financial journalist that required them to turn over phone and e-mail communications with sources. In an interview last week with The San Francisco Chronicle, Greenberg, who has been critical of Overstock in his columns, said: "The subpoenas were not about an investigation of me. They were about an investigation of Gradient Analytics." )
There are some people who have accused you of just blowing smoke to cover a profitless company, and there are others who say you've gone crazy. Has this hurt your business?
Byrne: Well, I could say just as easily that these guys are blaming Overstock for now being the target of federal subpoenas and investigations. But the truth is, you can see I was speaking about this when our company was blowing through its numbers and blowing everyone's expectations as well. This has nothing to do with Overstock; that's just a party line.
The SEC issued subpoenas, including one to Greenberg. Is this SEC investigation a result of your accusations?
Byrne: I'm glad you asked me that. When we filed our suit, we heard from several federal and state authorities and law enforcement agencies. We had developed an awful lot of good data, including e-mail, computer files, witnesses, affidavits...much more than what we've made public.
Being good, concerned, law-abiding citizens, we of course provided this to all these law enforcement agencies. I would say the reaction of different agencies has been different. Until yesterday, I had never acknowledged that I even met with the SEC. But yes, the SEC was one of those agencies. What became clear in our communication and meeting was that the agency was far down this path before we got here. I can't ask them questions, but it became very clear to me that they had to develop an extensive understanding on their own, and I just took the opportunity to fill in a few tiny squares for them.
It's kind of funny. The role is reversed. These guys have turned into a bunch of conspiracy nuts. They're saying these SEC investigations and subpoenas were orchestrated by somebody else and that they're innocent and how awful this is. Well, that's exactly what most companies say when they come under a bear raid. They say, "Hey, we've got some short seller who has dug up phony evidence, pasted it together, and they've tried to get some investigations launched."
I saw a clip where Herb Greenberg used the word "conspiracy" six times in 7 seconds. So, the irony of this situation is not lost. I'm anything but the guy behind the SEC investigation. I don't pull any strings at the SEC. The SEC didn't need me to develop this case, and my sense is that this has to do with far more than Overstock.com. We're the tip of the iceberg.
Continued ...
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