Naked shorts: Philly firm's' 'incredibly embarrassing' exposure
"A rare slip-up by lawyers" at Morgan Lewis.
Naked shorts: Philly firm's' 'incredibly embarrassing' exposure
Joseph N. DiStefano
An accident in the long legal fight between Overstock.com boss Patrick Byrne and the Wall Street brokerages he contends conspired to drive down his company's stock price has exposed cynical traders' strategizing that Merrill Lynch and Goldman Sachs had wanted to keep secret.
"A rare slip-up by lawyers has helped to shed some rather interesting light on a high-profile legal battle," writes the Economist here. The lawsuit, filed by Overstock in 2007, alleges Merrill Lynch and Goldman Sachs engaged in "naked short selling." - In regular short-selling an investor or broker who thinks a stock will go down arranges to borrow someone else's shares and bet on the difference between the current price and a future price; he'll keep (or eat) the difference.
- In "naked" short selling the bettor is bluffing about having shares to short; he may walk away if the price moves against him.
The Securities and Exchange Commission tends to consider naked shorting a kind of manipulation that interferes with honest markets. Byrne calls Overstock the victim of unfair, illegal naked shorting.
Overstock has collected five years of testimony and records it says back its position. The brokerages, says the Economist, have "argued that virtually everything should remain sealed, in part because the documents contained 'trade secrets'." The Economist, Bloomberg and Rolling Stone asked the court to make it public. The fight ground on.
And then last week, the brokerages' lawyers "presumably inadvertently" (says the Economist) attached an unedited six-page transcript of facts the brokerages want sealed to a court motion, exposing emails Goldman and Merrill hoped to keep secret. Writes the Economist: "In a number of these, they discuss deliberately failing to settle client trades. One Merrill executive suggests the firm 'might want to consider allowing ... customers to fail,' to which a colleague replies: 'We are going to look into that.' Another asks: 'How and when can we prevent the delivery [of shares]?' ... In response to a question from a large client about efforts at 'cleaning up' fails, a Goldman man says that 'we will let you fail.' "
The brokerage's own "compliance officers repeatedly questioned this behaviour, according to the filing. A Merrill compliance person is quoted describing it as 'totally unacceptable — we are failing when we have over a million shares of stock available ... Is there a blanket agreement that we allow every market maker client to continue failing even if there is enough availability?' "
"The e-mails also suggest close commercial links between the two firms and at least one trading outfit that was a target of regulatory probes into shorting violations...
"Other missives suggest a cavalier attitude to the rules. In a 2005 e-mail, the president of one of Merrill’s stock-clearing businesses responds to internal concerns about the intentional failing of short sales thus: 'F[---] the compliance area—procedures, schmecedures.' He has since assured the court that this statement was a joke, according to the filing.
"Goldman and Merrill have denied throughout that they participated in any sort of naked-shorting conspiracy." Bloomberg ran this version of the story. Rolling Stone ran its own here - and noted the defense firm that "accidentally released" the "incredibly embarrassing" documents was Philadelphia-based Morgan Lewis.
Byrne went further, identifying the attorney who posted the confidential information as Joseph E. Floren. Floren so far hasn't returned my call to his San Francisco office. UPDATE: Morgan Lewis has no comment, spokeswoman Frances Marine Bravo told me.
Well, not often you get an F bomb printed in the business section...
At any rate, this just goes to show what soulless vultures the vast majority of brokers are. Who cares if we are ripping off pension funds and the 401(k)s of hard-working, decent people? We're Wall Street, dammit!
The Occupation is coming fellahs, better hide your women and lock your doors....— 1972bline- Kind of ironic, the story is about an inadvertent disclosure due to sloppy proofreading, and apparently the philly.com editors didn't proofread this posting for R-rated language, either... — J H
- I know what will fix this. Less regulation and less taxes for the rich.
— Bush Destroyed America - No, the only thing that will fix this is to arrest the people who published the leaked material for being traitors to their class. How dare they publish private material. How dare they!!!
- Good people, this is a blog, not an edited story. But I have stricken the offending word. Joe D.— Joe D
- Naked short selling is "capitalism" like the Philly Diocese is a religious organization.— CiceroSpuriousDeodatus
- Crooks, most of them.— aNutter1inDgutter
- like JP morgan is naked short selling the silver market??— Tageman
Dang, I thought this was going to be a photo essay on a new Philadelphia fashion trend.— verve
obama's SEC, asleep at the switch again— hoegaarden- is anyone shocked by this? Will anyone be shocked that nothing will be done to prevent a repeat of this in the future?— Yoda117
- hoegaarden - the lawsuit was filed in 2007, which would make it Bush's SEC that was asleep at the switch.— freesamuel
- It's settled, then. Goldman Sachs is the worst company in the world. Well, them and Morgan Lewis.— buddy100
