Is Patrick Byrne Finally Victorious in the Fight Against Naked Short Selling?

Is Patrick Byrne making progress in his fight against what he believes are fundamental flaws in the American financial markets? According to the The Register, the Overstock.com OSTK CEO might have finally caught a break. The Register cites a piece by The Economist, “America's dodgy financial plumbing,” which focuses on the same issues that Byrne has been striving to uncover. (If you missed our previous coverage, Byrne is particularly unhappy with naked short selling, Sith Lords, and turtles.) The Register quotes an e-mail from Byrne to his friends, in which he says, “Remarkably (to me), no matter how much data I had, no matter what insiders and financial experts I could present to explain how this issue was likely world-historic, the US press would not touch the story, no matter how many binders of data were held under their noses. Now, at last, The Economist has picked up the story, and gotten it exactly right." Byrne told The Register that he played no direct role in The Economist piece, nor was he involved in a subsequent Financial Times story that was said to be along the same lines. “But like squeezing a balloon, the problem has simply moved to markets where fails are not penalized,” The Economist writes. “They have, for instance, inflated for mortgage-backed securities, to the point where the TMPG has reluctantly proposed penalties similar to those introduced for Treasuries. The biggest worry, though, is exchange-traded funds (ETFs), investment vehicles that trade on stock exchanges and hold assets such as shares, bonds and commodities.” According to The Register, Overstock was a fixture of the SEC's Regulation SHO Threshold List, “which identifies companies whose stock is involved in an unusually high number of fails to deliver,” for years. Byrne fought back, saying that traders were using Overstock to feed their fortunes by creating “phantom shares” in the company. In short, The Register says that with a short sale, investors borrow shares from someone else and immediately sell them off, assuming that the price is about to drop. When the price goes down, investors buy the shares back and return them to the original owner. Technically a naked short sale is supposed to work the same way; the catch is that investors don't really borrow the shares. Thus, when it's time to deliver the shares to the buyer, the naked short seller never actually completes this transaction. Byrne's argument is that Overstock has been a victim of heavy naked shorting that, according to The Register, was “designed to push down the value of the company's stock and ultimately drive it out of business.” "You can destroy these companies, and when that happens, you don't have to pay the IOUs off," Byrne told The Register in 2007. "It's basically a system for being a serial killer of small companies."