The Latest Naked Shorting Conspiracy Hoax

Byrne's hatchet man Judd Bagley goofs up

As I've detailed in various blog posts, Overstock.com CEO Patrick Byrne spends gobs of his inherited wealth on behalf of his lifelong goal: investor impoverishment. He has cooked the books of his company, lied at investor conference calls, and hired a former Florida Republican go-fer named Judd Bagley to harass his critics and spread "naked shorting" conspiracy theories.

Bagley's latest venture is a video purporting to show $10.5 billion in "naked shorting" at Refco, entitled "Naked short selling - redefining systemic risk"

It is a slick, expensively produced video, replete with musical score and sophisticated graphics that took considerable time to produce. "It's hard to believe that something that took up so much of my life will only take up 18 minutes of yours," Bagley said in a message board post. He then proceeded to spread it like ragweed across the web, spamming everywhere, including here.

Take a look at that video. Convincing, right? The "smoking gun" is a financial statement (below) showing $10.5 billion in shares "sold but not delivered."



Hey, there it is, in black and white. The problem is that the "securities" in that line item don't signify naked shorting, or even ordinary shorting, but rather Treasuries. Bagley could have figured out for himself what that line item meant by spending a few minutes on Google.

To be sure, a great deal of what Bagley puts out there is based on misunderstandings, extrapolations on stuff he picks up off the web and just plain lying. What makes this one different is that it is such an elementary misunderstanding that a fellow conspiracy theorist pointed it out back in 2005, after making the identical goof in a blog post:

Note: When this was first published late at night two days ago, I had bounced the $10.5 billion liability marked Securities Sold But Not Yet Purchased off a few savvy folks, and first pass was that it was likely partially FTD's. Upon reviewing the prior filings, it became obvious that it was neither mostly FTD's, nor mostly legitimate short sales - both takes were incorrect. The prior filings articulate much of it as Treasuries, which to his credit, Alan Newman caught early on, or rather hypothesized early on, and the next day's digging confirmed it. [emphasis added]

I have no idea how much money Byrne lavishes on Bagley, the ex-CJR editor Mark Mitchell and the other idiots he has put on his payroll to put out lies on the web. Evidently he gets the same return on his money as Overstock's long-suffering shareholders, so I guess there's a kind of rough justice in that.

(One of the few remaining Overstock critics who has not been purged from the Investor Village message board, "rashomonusa," points out that he raised this issue on that board. I was remiss in not crediting him in this item, though I must point out that Bagley's goof was brought to my attention over the weekend by someone else.)

UPDATE: Bagley later revised downward his original mythical number to $450 million, saying:

The keystone to the argument is the $450-million mystery liability. The $10.5-billion line item, and the concern expressed by "investigators" that there might have been a lot of naked shorting going on at Refco, merely underscores the high liklihood that the $450-million was a barrell full of failed trades.

In fact, there is no "mystery liability." According to the SEC, the $450 million referred to the shifting of receivables to a third party (hat tip: the ever-vigilant investor activist Floyd Schneider).

I usually don't take the time to respond to Bagley's fairy tales, but this is a particularly well-documented example of how he and his employer spread lies on the Internet.

© 2009 Gary Weiss. All rights reserved.