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Commentary Too - Nov 4, 2005 - Printable Version
- Has Overstock.com become --- Overstocked by Wall Street?
by Dave Patch
Overstock.com is described as an on-line retailer dealing in the sale and auction of excess inventory from the manufacturers. Consumers can go to their web site and bid on this excess inventory at prices that are typically below normal retail prices. According to Yahoo.com, the competitors of Overstock.com could be similar on-line retailers Amazon.com, Buy.com, and SmartBargains Inc. Missing from the Competitor listings is probably their most dangerous competitor – Wall Street.
In an almost eerie parallel twist, it now appears that the online retailer known for discounting prices on excess supply is having issues with the manner in which the stock trades on Wall Street due to an excess supply created by the Institutions of Wall Street. Overstock.com’s shares are being sold in the open market through an auction like process of excess inventory. Unlike the real Overstock.com business of delivering the inventory, Wall Street does not make good on delivery of the goods being peddled into the market place. Wall Street has been selling Overstock.com shares like a pirated version of the Grateful Dead.
Today, Wall Street is auctioning off shares that don’t exist, as registered with the Securities and Exchange Commission, at discounted market prices. The Street then denies the buyer the right to delivery of the merchandise.
The way Wall Street does it is they sell you shares, debit your account of the cash, and send you a notice of shares being placed in your account. That part is similar to the way Overstock.com would take an order and debit your credit card for the cost of the merchandise plus shipping. But here is where the business models differ.
When ordering through Overstock.com, you will get a notification of a shipment being made and a package arrives at your doorstep. Overstock.com being allowed to book revenues on that order once the order is shipped. An order through Wall Street gets you a ‘receipt’ of a purchase called a “book-entry” into your account. A debit is made from that account to pay for the ‘receipt’ plus the cost of commission. The commission on the trade is Wall Street’s version of a shipping fee only much higher. Wall Street Institutions have now booked revenue based on a “book entry.”
Unfortunately the ‘receipt’ is not the same as delivery on Wall Street. A Wall Street receipt is only similar to that notice of purchase you get when you order from Overstock.com. The equivalent notice of shipment and the ultimate delivery of the purchased goods never actually happen. Wall Street created the excess inventory without paying the product fee to the merchandiser. Wall Street pirated and sold bootlegged versions of the real thing. The modern day version of Counterfeiting!
For a company such as Overstock.com to fail to make good on delivery, complaints from customers would be brought to the Better Business Bureau and State Agencies for investigation. These agencies are responsible for monitoring and enforcing fair business practices. If a pattern of repeated acts to deceive were identified fines and/or prison sentences would be handed out. If Overstock.com were found to have sold pirated or ‘counterfeit’ goods for the sake of depressing market values, additional legal ramifications would take place.
Selling a fake Rolex watch and claiming it is the real thing is counterfeiting and the State Agencies would be shutting down Overstock.com should they try such a scheme.
It is different on Wall Street. When Federal Regulators of Wall Street catch the Institutions doing exactly that, selling counterfeit securities, they look the other way. Audits of shares held aggregately by Investors run to multiples of shares manufactured by the companies and yet no accountability is created. Repeated clients complaints filed against the Institutions are dismissed without cause. The Regulators are in on the scheme.
Presently Jack Byrne, Chairman of Overstock.com is due 70,000 shares of Overstock.com (NASDAQ: OSTK) that he purchased in August of 2005. The 70,000 shares being the last of the delinquent deliveries from the 199,900 shares purchased between August 30 and August 31, 2005.
When Jack Byrne purchased these shares he did so at a price averaging slightly more than $40/share [$8 Million in purchases]. Since that time the price of the stock has fallen to as low as $32.00/share. The trading volume since August is reported at 22 Million shares with most if not all effectively sell-side volume. The Auction of excessive shares [economic imbalance of supply and demand] has been lucrative for the Institutions as Commissions Booked as Revenues on 22 Million shares sold is rather substantial. Hundreds of thousands of dollars in commissions would have been generated from that volume.
For Jack Byrne, the 70,000 shares have now depreciated $560,000 yet he still does not own them. The Auction on the pirated shares continues as new batches of shares are printed up daily making it more and more difficult for Jack Byrne to get the real thing.
Unfortunately, the Auctioning off of excess shares in Overstock.com is not limited to Jack Byrne and the 70,000 shares. There was also a significant delay in the 129,900 shares purchased as part of the 199,900 share order [almost 2 months] and a 2-month delay in 25,000 shares purchased by Dr. Patrick Byrne, CEO of Overstock.com.
With these delays we know took place, the entire 22 Million shares auctioned off by Wall Street now come into question.
If Morgan Stanley could not get the shares to make available on these trades because – none were available – what pedigree did those 22 Million shares traded have? What exactly was it Morgan Stanley and the other Institutions dumping shares into the market were selling?
It is reported by the Broker-Dealers of Patrick Byrne that Morgan Stanley was the seller delinquent in the delivery of 25,000 of Dr. Patrick Byrne’s shares. The firm went into the auction house with inventory they did not have available to sell and sold the inventory any way. The firm had subsequently waited until they could go back to the auction site and re-purchase cheaper inventory to make good on delivery. There is no hurry. Or is there?
In all this hoopla over delivery of shares, Overstock.com has been placed at the head table of overstocked shares up for auction. Overstock.com is listed daily on the SEC’s Regulation SHO threshold security list for having greater than 0.5% of their shares outstanding in a perpetual state of settlement failure. A state this stock has traded in since April 2005 when it was trading at near $50/share.
Under Securities Law (Rule 203), since Overstock.com qualified for the threshold list when Jack and Dr. Patrick Byrne purchased their shares, these shares would require mandatory closeout should a fail transpire. The law requires that the close out be immediate and that the closeout could not result in a secondary fail. A guaranteed buy-in for delivery was required.
Until these firms with continued fails settle up they are to be restricted from selling any additional shares without guaranteeing delivery within 3-days. That was the guidelines the SEC set forth under Regulation SHO. The firms are reportedly claiming a guaranteed buy-in cannot take place because no seller in the market will make such a guarantee.
So who then is selling stock as it appears nobody firm selling guaranteed delivery.
Imagine Overstock.com making such a claim to their clients? Sorry I can’t make good on delivery. I can’t yet deliver your merchandise because I don’t have it and don’t know when I will get it. Maybe next year, it should be profitable for me to deliver then. Thanks for your money.
Other Securities laws such as Rule 15c3-3 require prompt control and custody for all fully paid for securities. Apparently prompt to Wall Street comes with a different meaning. The next time my boss informs me that we need this job completed promptly; I will finish up 3 months later and see what happens. Then again, the SEC’s prompt responses to schemes of fraud are typically a decade after the fact so 3 months may in fact be prompt under those Wall Street standards.
When Dr. Patrick Byrne created Overstock.com he did so with the belief that he could make margins off excess inventory generated by manufacturers. If manufacturers created an excessive supply, he could sell off that excess inventory at discounted rates to retail customers and make profit in doing so. Dr. Byrne’s company was making profit on the poor inventory projections of the manufacturers. Dr. Byrne understood the well-traveled concept of supply and demand.
Wall Street has also found profit in selling off inventory. The Inventory Wall Street sells is not excess inventory created by the manufacturers (public companies), it is inventory they themselves manufactured in their ‘counterfeiting print shop’ located in the back offices responsible for trade settlements. Wall Street Institutions have their own version of Kinko’s located in house and every so often the Federal Regulators come in and check the ink to make sure it is full.
Wall Street has become a direct competitor of Overstock.com and this time they bought off the Regulators to insure the counterfeiting operation will not be exposed. We need to continue to divert our hard earned capital to the wealthy of this nation.
I still wonder about how Commissions get booked as Revenues when a trade is never actually settled. Seems like a little accounting problem – cooking the books. Retail stores can not book revenues for inventory they expect to sell; they can only take revenue on inventory they moved. A stock settlement failure is not moved inventory so how is it revenue?
It’s time a higher authority started checking this out.
This article is reprinted by permission from the author. For more information go to:
http://www.investigatethesec.com/
To see Dave Patch on "Street Signs" with Ron Insana, go to:
http://www.vmsdigital.com/MyFiles.aspx?Onum=8FD88353-D1CF-49AB-96FB-F5B3D748534D
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It's vital that we keep the pressure on Senator Richard Shelby, who sold us down the river when he cancelled a pending Senate Banking Subcommittee hearing on naked short selling and stock counterfeiting. Email him or call him, and tell everyone you know to do the same. Post this information EVERYWHERE:
Call Senator Shelby at (202) 224-5744, or email him at senator@shelby.senate.gov
Tell him how simple this issue really is....you pay for your stock, your broker goes out and buys it, and delivers it to you. The end.
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