For years, Overstock.com has been in a legal battle with Goldman Sachs, Bank of America, Merrill Lynch and more. The online retailer accuses the banks of naked short-selling its stock.
Overstock.com lost that battle, but they're still trying to get the banks to unseal documents that would prove their case.
According to Rolling Stone's Matt Taibbi, who posted the Plaintiff's motion on his blog, his publication, as well as The Economist, Bloomberg, and the New York Times, have been fighting to see the documents too.
Fighting the banks is not easy, we know, but then recently, something magic happened. The Defendants' law firm, Morgan Lewis, committed a colossal screw up. During the discovery period, they neglected to redact sensitive e-mails from their clients. Then they sent them off to Overstock.com's legal team.
Morgan Lewis could not be reached for comment.
Overstock.com put excerpts of these e-mails in its motion to oppose the banks' motion to seal documents from the case. The online retailer alleges that these documents prove that the banks were not only engaged in short selling, but also leaking short positions (including Overstock.com) to hedge fund clients.
When Taibbi e-mailed Goldman about the allegation that the banks were leaking short positions, their response was as follows:
Among other services it provides, Securities Lending at Goldman provides market color information to clients regarding various activity in the securities lending marketplace on a security specific or sector specific basis. In accordance with the group's guidelines concerning the provision of market color, Mr. Masterson provided a client with certain aggregate information regarding short balances in certain securities. The information did not contain reference to any particular clients' short positions.
That shouldn't be very comforting to smaller clients.
And neither should these unredacted documents, because they're embarrassing. There's one e-mail a Merrill exec sent to his secretary that reads, "I have a meeting at 2 with Tom T, tell him I want an update on how we're going to fix fails and make 369 market makers fail."
Or there's the one where a Merrill President e-mailed "F*ck the compliance area, procedures schemcedures."
Overstock.com's motion says that, in many instances, bankers referred to the stock as the "enemy" and planned on "neutralizing" and "failing" the stock. They also explicitly told their clients they would allow them to do the same.
So what is failing the stock?
Briefly: Naked short selling (also known as 'failing' a stock) is super illegal. It's the practice of shorting a stock you've never actually borrowed. As you know, short-sellers pay to borrow stocks and then sell them back when the price drops. That's how they make a profit. If there's not enough supply to borrow a stock, or the borrowing is too expensive (like, 35% in some cases) the short won't work.
An expensive stock to borrow is called a negative rebate stock, and that is what Overstock.com allegedly was.
That's why it's especially bad that in Overstock.com's motion, one Merrill exec e-mails: "We are NOT borrowing negatives... I have made that clear from the beginning. Why would we want to borrow them? We want to fail them..."
Back to naked short-selling. When you don't actually locate a stock to borrow it, the short is "not a genuine expression of genuine market sentiment," says Overstock.com's motion. This act manipulates the market, creating false supply and depressing the value of the stock.
In Overstock.com's, case, they allege that fails created six times the supply of Overstock.com stock in 2005 and 2006.
One Goldman e-mail acknowledged that a lot of Overstock.com's increasing stocks were "trading at negative rebate with non-paying customers," according to Overstock.com's motion. The exact definition of a naked short.
We cannot wait to see what the Judge has to say in response to this tiff. Until then, check out excerpts from Overstock.com's motion below.
"F*ck compliance", allowing clients to fail stocks, and recognition of illegality:
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