Investing 101 - Dec 29, 2005 - Printable Version
- Regulation SHO; Results Leave Questions More than Answers
by Dave Patch On January 7, 2005 the first Regulation SHO threshold lists were published representing companies with excessive oversold securities into the markets. Each company published achieving a threshold greater than 0.5% of the issues outstanding in trade settlement failures. On the first published lists were companies such as Taser (NASDAQ: TASR), Allied Capital Corp. (NYSE: ALD), Novastar Financial (NYSE: NFI) , and Travelzoo (Nasdaq: TZOO).
But what made Taser, Novastar, Travelzoo, and Allied Capital somewhat unique is that while each company was from a separate business sector, each held a common trail of similarities. For example, each of the three companies had a mysterious Federal Investigation initiated into the accounting records or representations made by Company executives. Investigations that eventually closed without cause. And, each had David Rocker and Hedge Fund Rocker Partners reportedly short the stock.
David Rockers short positions were not limited to just these three Regulation SHO threshold stocks however.
Rocker was also reportedly holding short aaiPharma (NASDAQ: AAII), Overstock.com (NASDAQ: OSTK), Krispy Kreme (NYSE: KKD); and Take-Two Interactive (TTWO) among those we know of. For each of these stocks all but Take-Two interactive has staunchly held a position on the Regulation SHO threshold security publication for excessive trade settlement failures. As for Take-Two Interactive, they just concluded the ordeal of an SEC Investigation into accounting practices. No action taken by the SEC.
When the SEC released Regulation SHO in June of 2004 a special “grandfather clause” was drafted into the regulation allowing for all outstanding settlement failures to be immune from the mandatory closeout provisions of the new rule. While this contradicts the bylaws passed down by Congress in the Exchange Act of 1934, the SEC claimed this clause would prevent any possible buy-side volatility associated with the covering of large blocks of fails. The SEC never considered nor addressed sell side volatility in the rule-making provisions.
This past week Wall Street Journal reporter Karen Richardson discussed the stellar performance turned in by Hedge Fund Manager David Rocker in 2005. The article identified a near 50% return, after fees, in the fund managed by Rocker. The article unknowingly also brought insight into Regulation SHO.
According to Richardson, Rocker Partners started 2005 with a net short position of 60%. By my calculations that equates to an 80% short position 20% long position in the fund. Richardson also reports that Rocker will close out this year at a net 10% short position, 55% short 45% long. This represents a significant buy-side investing strategy that Rocker undertook in 2005. Was it timed with the release of Regulation SHO?
Richardson reports that Rockers major profits came from covering some of his short holdings in issuers such as Krispy Kreme, Take-Two, and Tempur-Pedic for example.
Looking back on the investments Rocker reportedly held, the SEC Investigations and results, and the Regulation SHO list, I would say that Rocker was not only smart, he was extremely lucky.
Federal Investigations announced against Rocker Shorts Allied Capital, Taser, Take-Two Interactive, Travelzoo, and Novastar yielded ‘no cause’ actions by the authorities by years end. The damage was already done. Allied Capital went so far as to publicly identify that the investigation into the Company was initiated based on repeated complaints by short sellers over accounting practices. As for the performances, Taser is down 75%, Take-Two is down 50%, NFI is down 42%, Travelzoo is down 76%, and Allied Capital is up 20% for 2005. Travelzoo actually being honored by Forbes Magazine, as with being one of the top 200 small businesses in America but it is still down 76%.
Rockers other reported SHO shorts also had horrendous years as aaiPharma wound up losing 99.6% in 2005 after filing for Chapter 11 Bankruptcy, Krispy Kreme is down 52%, and Overstock has had an abysmal 57% loss since January 2005.
As all these companies have David Rocker being short in common each has also resided primarily on the Regulation SHO threshold list for greater than 90% of this trading year. Only Allied Capital and Take-Two have not been on the list for that window of time. Ironically, Allied Capital is the only company within the entire bunch that has yielded an investor profit on the year with all others exceeding 40% in losses. All others!
Talk about your stock pickings.
I asked Ms. Richardson about this complicated but circumstantial picture and whether she had any opinion as to whether settlement failures could any way relate to the performance Rocker Partners returned to it’s client base. Ms. Richardson either became confused over the data or wanted to ignore it as she failed to respond thereafter. She has not been alone.
The media has vilified CEO Patrick Byrne of Overstock.com over his battle with the illegal short selling that has nested his company on Reg SHO’s threshold list for much of this trading year and for what he has identified as a systemic problem in the markets.
Instead of investigating such concerns over possible systemic abuse CNBC’s Joe Kernen, earlier this month, asked Byrne why he didn’t simply leave the shorts alone claiming ‘they can go after any stock they want in America’. I am not sure that is something good but have at it Joe.
Kernen having access to communications between Byrne and his Broker whereby Byrne’s broker admits they can’t settle the trades because there are no shares available in the market avoided the conversation on the evidence. As expected, Kernen has never asked the Institutions that frequent his show why they do not simply settle the trades and leave Overstock.com and other Issuers alone. Be done with this mess and settle the trades.
Likewise Jim Cramer, CNBC’s Host of Mad Money and the largest shareholder of theStreet.com, found time to fodder Byrne in a Realmoney.com article over Byrne’s management skills citing too much of the CEO’s efforts have been against abusive short sellers. Byrne’s focus on the short sellers has become a detriment to insuring profitable business operations according to Cramer.
Ironically Cramer, a self-proclaimed short seller extraordinaire, brought his own company public in 1999 at an offering price of $70.00/share. Since 1999 theStreet.com (NASDAQ: TSCM) has had a performance others would term “a pig”. While TSCM is presently trading at $7.00 on takeover rumors, it was not that long ago that TSCM was trading sub $1.00 levels. Cramer’s profits in the IPO far exceed the return he has provided to his shareholders. Cramer should be CEO of the year just for that.
Who is the second largest single shareholder in this “pig” called theStreet.com? None other than…you guessed it…David Rocker.
Oh the irony.
It is no wonder Kernen, Cramer, and others fail to understand the nature of the beast we have before us. Laziness, conflicts, and a desire to keep the mainstream sponsors appeased have resulted in media coverage that is sanitized for a certain investing class. The wealthy buy the subscriptions, not the average Joe. The media must keep subscriptions up and to do so media must avoid confrontation with the readers.
As for the Securities and Exchange Commission and Regulation SHO, more questions have come from 2005 than answers. While the Commission remains silent in confusion and purposeful avoidance, the manipulation on concerted stocks remain and remain at a detriment to our global economy. Small businesses are being destroyed as are those investors not connected enough to be protected from the abuses.
Who has financially benefited from these issuers and others nestled dormant on the threshold lists with excessive settlement failures while the market capitalizations in the securities listed get trashed? How is it that with new rules that require closeouts in settlement failures [buy-side pressure] are put in place, and major short positions are being closed out [buy-side pressure] the stocks still tank on convenient sell side volumes?
All these forced buyers and everybody is a seller.
I personally would like to know how much profit went into the hands of David Rocker and the wealthy clients of Rocker Partners because of short positions that knowingly or unknowingly may have resided as excessive settlement failures in localized securities. Settlement failures the SEC themselves admit create the added leverage to drive down the value in a security.
How much of the SEC’s actions to protect those that conducted trading strategies, including heavily selling securities into settlement fail, resulted in investor financial ruin? How much of that financial ruin was merely a means to divert the wealth of the average investor into the wealthy Hedge Fund pools and the greedy clientele they administer to?
Whether smart or just plain lucky, it was awfully convenient for this Hedge Fund to have found the pot at the end of the rainbow that was filled with aiding SEC investigations, free passes handed out by the Federal Government to settlement failures, and mainstream media so eager to overlook the obvious questions.
Someday maybe somebody of importance will look into who owned the fails that hold these companies on the SHO list forever. When they do look maybe they can focus on who is ‘working the stocks’ to insure that those fails are closed for a profit and not a loss.
Maybe, just maybe, the two are interrelated.
Editor's note: This article is reprinted by permission from investigatethesec.com. For more information on this issue, visit our archives or go to http://www.investigatethesec.com/
It's vital that we keep the pressure on Senator Richard Shelby, who sold America 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.
And every shareholder in America needs to call you broker and demand physical deliver of your stock certificates. Force the brokerage firms to deliver what you paid for.
Voice your opinion on our message board (you don't have to sign up to post), or post in our guestbook.
Investing 101 Archives:
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The Year of the Investor (Mark Faulk, Jan 5, 2005)
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