“Two and a half years ago, Overstock.com CEO Patrick Byrne penned an editorial for The Wall Street Journal, warning that widespread stock manipulation schemes – including abusive naked short selling – were threatening the health of America’s financial markets. But it wasn’t published. “An editor at The Journal asked me to write it, and I told him he wouldn’t be allowed to publish it,” Byrne says. “He insisted that only he controlled what was printed on the editorial page, so I wrote it. Then, after a few days, he got back to me and said ‘It appears I can’t run this or anything else you write.'”
The Journal never changed its stance. But last week, the editorial finally saw the light of day at Forbes – after Byrne added a few paragraphs explaining that naked shorting had hastened what could turn out to be the biggest financial crisis since The Great Depression. “With a traditional short sale, traders borrow shares and sell them in the hope that prices will drop. A naked short works much the same way – except the shares aren’t actually borrowed. They’re sold but not delivered. By the middle of the summer, these unresolved “stock IOUs” – as Byrne calls them – were pilling up in four Wall Street giants already struggling to stay afloat: investment banks Lehman Brothers and Merrill Lynch and mortgage finance companies Fannie Mae and Freddie Mac. On July 12, the Securities and Exchange Commission issued an emergency order banning naked shorts in a host of major stocks, and all four of those names were on the list.
The order expired in mid-August, and in the weeks since, Lehman Brothers has filed for bankruptcy, Merrill Lynch has swallowed into Bank of America, and Fannie and Freddie were seized by the US government. Then, on September 17, the SEC issued a new order meant to curb naked shorting of all stocks. “These several actions today make it crystal clear that the SEC has zero tolerance for abusive naked short selling,” read a statement from SEC chairman Christopher Cox. “The Enforcement Division, the Office of Compliance Inspections and Examinations, and the Division of Trading and Markets will now have these weapons in their arsenal in their continuing battle to stop unlawful manipulation.”
In the wake of the SEC’s crackdown, the mainstream financial press has acknowledged that widespread and deliberate naked shorting can artificially deflate stock prices, flooding the market with what amounts to counterfeit shares. But for years, The Journal and so many other news outlets ignored Byrne’s warnings, with some journalists – most notably a Forbes.com columnist and former BusinessWeek reporter named Gary Weiss painting the Overstock CEO as a raving madman. Byrne has long argued that the press dismissed his views at least in part because Weiss – hiding behind various anonymous accounts – spent years controlling the relevant articles on Wikipedia, the “free online encyclopedia anyone can edit.” “At some level, you can control the public discourse from Wikipedia,” Byrne says. “No matter what journalists say about the reliability of Wikipedia, they still use it as a resource. I have no doubt that journalists who I discussed [naked shorting] with decided not to do stories after reading Wikipedia – whose treatment [of naked short selling] was completely divorced from reality.”
(via Investigate The SEC)
(Many people believe that the current financial crisis is mainly due to the domino effect of the sub-prime mortgage collapse. This is just a part of the equation. The illegal practice of naked short selling has been going on for years under the radar of the SEC. It’s a complicated practice to explain, let alone uncover. This is why the SEC has a temporary ban on ALL short selling (some financial experts disagree with this). “Naked short selling” and “short selling” are two different things. For good definitions on short selling and naked short selling read the excellent articles provided by Investopedia.com.)
