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Patrick M. Byrne

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Patrick M. Byrne is the president, CEO and chairman of the board of Internet retailer Overstock.com. He has become well known for his allegation of a wide-ranging stock market conspiracy involving hedge funds, the media, and analysts, for which he has been widely criticized. In May 2007, it was revealed that Byrne is the subject of a subpoena and investigation by the Securities and Exchange Commission.

Background

Patrick Byrne is the son of John J. Byrne, former chairman of Berkshire Hathaway's GEICO insurance subsidiary and White Mountains Insurance Group. He has a Bachelor of Arts degree in Chinese studies from Dartmouth College, a Master's degree from Cambridge University as a Marshall Scholar, and a Ph.D. in philosophy from Stanford University. He served as Chairman, President and CEO of Centricut, LLC, a manufacturer of industrial torches, then held the same three positions at Fechheimer Brothers, Inc., a Berkshire Hathaway company manufacturing police, firefighter, and military uniforms.

"Dutch Auction" IPO

Byrne initiated a Dutch auction IPO of Overstock.com in 2002. It was one of the first companies to go public under a system advanced by W.R. Hambrecht + Co. Byrne said he believes that competing banks shorted his company's stock prior to a July 2002 Wall Street Journal article in order to sully the auction's effect. When Google later in 2004 went public via a Dutch auction IPO, Byrne commented that Wall Street firms, "had to be dragged into" participating in the Google stock offering. He contended that, "from day one, I think they set out to sabotage it." Four years after the OpenIPO, one official of Hambrecht, its now former co-CEO Clay Corbus was added to Overstock's board of directors.

'Jihad' against naked shorting

In 2005, Byrne contended that a market-wide conspiracy to commit naked short selling was targeting Overstock.com, and announced that he had commenced what he described as a "jihad" against that conspiracy. Short selling is a way for an investor to bet that the share price of a company will decline by borrowing shares from someone else, selling them, buying them back at a future date, and returning the repurchased shares to the lender. If the stock price when the shares are repurchased is lower than the price at which the shares were sold, the investor makes a profit. In naked short selling, the shares are not borrowed prior to the sale, a practice which is illegal in most situations.

Byrne said that the same people whom he has accused of perpetrating these crimes have now organized a massive disinformation campaign wherein the same elements are repeated over and over in an effort to confuse the public. For example, at the end of his webcast, Byrne mentioned that he thought there might be a figure coordinating these activities; he has referred to this person as the "Sith Lord".

Byrne made the "Sith Lord" comments in an analyst conference call in August 2005, in which he said:

"As this went on I started realizing that there was actually some more orchestration here being provided, by what I'm calling here is the Sith Lord or the mastermind. Now, can I tell you who that designated bottom feeder was who was supposed to end up with our company? Can I tell you? I can. But I'm not going to today. The Sith Lord is, can I tell you who that is? Well, I could tell you it's a name that everybody on the phone, every single person on the phone would recognize this person's name. He's one of the master criminals from the 1980s, and he's back in business. But I'm not going to. I'll just call him the master mind today."

Byrne has never identified the "Sith Lord" and he was widely derided for the comment. He repeated the conspiracy allegations several times during 2006, contending the markets were "broken." He has likened the conspiracy to Al-Qaeda, saying "There's no office, no headquarters; it's a splintered group that has learned to operate together."

In a letter to the Wall Street Journal in April 2006, Byrne contended that "blackguards have practiced 'failure to deliver'" of securities, were "destroying businesses and (probably) destabilizing our capital markets," and that "I also think that if this nation ever grasps how its savings have been looted through this mechanism, a few million Americans are going to show up at the corner of Wall and Broad with pitchforks and nooses."

Byrne's campaign against naked short selling has been widely criticized, with some critics saying it is absurd and malicious. Wall Street Journal columnist Holman W. Jenkins said Byrne "has been allowed to propound a theory whose logical corollary is that its shares are grossly undervalued -- diluted by millions of 'counterfeit' shares," whose price "should soar to its true, undiluted value" when "Mr. Byrne's jihad finally defeats those he calls 'miscreants'." Byrne denied that he connected Overstock's valuation to the naked shorting issue.

Referring to the "Sith Lord" allegation, Bethany McLean of Fortune said, "Maybe the Sith Lord is actually Patrick Byrne himself--because he has become his own worst enemy." New York Times columnist Joseph Nocera said, in reference to Byrne's contention that "grandmas are eating dog food" because of fails to deliver securities: "Except for a few fellow-traveling Web sites, where Mr. Byrne is viewed as a heroic figure, most people who understand the issue or have looked into it think it's pretty bogus."

SEC Chairman Christopher Cox has called abusive naked short selling “a fraud that the commission is bound to prevent and to punish.” However, the SEC has said that naked shorting does not create counterfeit shares, and that "fails to deliver" securities, which have been targeted by Byrne, "are not evidence of abusive short selling or 'naked' short selling."

In March 2006, John Byrne, chairman of Overstock.com and father of Patrick Byrne, said that he was thinking of stepping down in disagreement over his son's "jihad" over naked short-selling. The elder Byrne said "I can't tell whether this jihad adds to the value of the stock or subtracts from it, but what it does is take from Patrick's time." He said his "headstrong" son has ignored his pleas to drop the fight. Byrne said, “I'd rather keep my relationship with my son than be the chairman of the board.” In April 2006, John Byrne stepped down to become vice-chairman, and was replaced by Patrick Byrne. In July 2006, the elder Byrne resigned from Overstock's board of directors.

Byrne was instrumental in Utah's passage of a law aimed at curbing naked short selling. The legislation was repealed in February 2007. In March 2007, New York Times columnist Joseph Nocera reported that Byrne had an angry confrontation with legislative leaders in his state. Nocera said "Though no one will say so publicly, the word is that Utah officials now feel they were snookered by the Overstock C.E.O. And that his behavior at that meeting further damaged his credibility. And that, even though he is one of the state’s largest political donors, he is going to have a hard time ever getting the Legislature to take him seriously again."

In February 2007, Overstock.com launched a $3.5 billion lawsuit against Morgan Stanley, Goldman Sachs Group Inc. and other large Wall Street firms, saying the firms "have and continue to participate in a massive illegal stock market manipulation scheme" involving naked short selling. Nocera described the lawsuit as "ridiculous." John Coffee, director of the Center on Corporate Governance at Columbia University Law School, described it as "an extremely unpromising litigation," and said that Overstock "may quickly find out they bit off more than they can chew." Kerry Fields, associate professor of law and business ethics at the University of Southern California, said "Byrne may be able to help set new law if he handles this right." However, Fields said, Byrne's "best approach now is probably to persuade the SEC, which continues to wander around the issue, or the government to serve subpoenas and let them decide whether or not his company was wronged."

Two members of the Overstock.com board of directors, John Fisher and Ray Groves, resigned in protest against the lawsuit.

Media attention

In a column in the New York Times in February 2006, journalist Joseph Nocera condemned Byrne's attacks on analysts and the press as a "campaign of menace." CBS MarketWatch's Herb Greenberg has named Byrne the runner-up for Worst CEO of the Year two years running. Nocera renewed his criticism of Byrne in his March 2007 column, referring to him as "dangerous" and saying, "It has always seemed to me that Mr. Byrne's primary mission had less to do with the supposed evils of naked short sellers, and more to do with making life miserable for anyone who dared to criticize his company."

Byrne was prominently featured in a Bloomberg Television show on Naked Short Selling, "Phantom Shares", in March 2007.

Out of 18 AMEX regulation disciplinary decisions for the year 2007, two involved brokers with violations of REG SHO by manipulating unnamed stocks with "fails to deliver".

SEC investigation

In May 2007, it was revealed that Byrne is the subject of a Securities and Exchange Commission investigation, and that he had waited a year before disclosing that he was served with an SEC subpoena in May 2006, stemming from the probe. The investigation related to his company, Overstock.com, which disclosed in May 2006 that it was the subject of an SEC investigation.

The SEC's subpoenas of Overstock.com and Byrne sought, among other things, "documents relating to the company's accounting policies, the company's targets, projections or estimates related to financial performance, the company's recent restatement of its financial statements." The New York Post reported that the delayed disclosure was "eye-opening in that most companies tend to promptly disclose material information such as when a chief executive is the subject of an informal investigation."

Overstock.com said in an SEC filing that Byrne and the company "have responded to these subpoenas and each continues to cooperate with the Securities and Exchange Commission on this matter."

Education lobbying

Byrne is head of First Class Education, an education lobbying organization. The organization's primary goal is known as "65 cent solution", which would require 65% of all education spending to be spent on "in the classroom education". There is controversy regarding how this category is defined, such as the inclusion of athletics programs and exclusion of libraries and librarians. The plan has been criticized by the National Education Association and other groups.The NEA cites a study by Standard and Poor's, which indicated "no significant positive correlation between the percentage of funds that districts spend on instruction and the percentage of students who score proficient or higher on state reading and math tests." According to First Class Education, as of July 2006, 2 states had implemented the 65% plan, Missouri and Oklahoma, while Colorado rejected 2006 ballot issues 39 and J, both implementations of the 65 cent solution.

Byrne also serves on the board of directors of the Milton and Rose Friedman Foundation.

Byrne and his family contributed most of the funds in support of House Bill 148 in Utah - a bill that would allow the state to provide funding vouchers for students who decide to leave public schools for private schools. In January 2008, it was reported that Byrne and his parents contributed about $4 million to the pro-voucher campaign, or three-quarters of its $5.4 million funding. Opponents of vouchers spent $4 million. When that bill was soundly defeated in a statewide referendum (62% opposing vs. 38% favoring), the Salt Lake Tribune reported that Byrne "called the referendum a 'statewide IQ test' that Utahns failed." He said, "They don't care enough about their kids. They care an awful lot about this system, this bureaucracy, but they don't care enough about their kids to think outside the box."

Byrne criticized Utah governor Jon Huntsman for not sufficiently supporting the voucher campaign, and told the Associated Press that he would bankroll anyone who could defeat him at the polls, even a communist.

During the school voucher debate, Byrne said of high school dropouts, "You may as well burn those kids." He was criticized for the comment by the Utah NAACP, but refused to apologize.

References

  1. "Overstock President, COO steps down," Bloomberg News, Jan. 3, 2008
  2. "A Boxer and Drug Baron's Unlikely Alliance," The Globe and Mail, March 2, 2006
  3. ^ New York Post (May 11,2007). "Company Byrne-d on Probe Report". {{cite web}}: Check date values in: |date= (help)
  4. ^ "Patrick Byrne: Off-Price Power," Business Week, Oct. 1, 2002
  5. Patrick Byrne biography, Forbes.com
  6. “IPO Dutch Auctions Vs. Traditional Allocation,” Forbes, May 10, 2004
  7. Google Not the First to Go Dutch,” by Jerry Knight, The Washington Post, Aug. 23, 2004
  8. “Overstock.com elects Clay Corbus, Hambrecht`s co-CEO, to its board,” Internet Retailer, March 12, 2007
  9. ^ "The Phantom Menace," by Bethany McLean, Fortune Magazine, Nov. 15, 2005
  10. “The Five Dumbest Things on Wall Street This Week,” by Colin Barr, TheStreet.com, Aug. 19, 2005
  11. Patrick Byrne letter to Wall Street Journal, April 21, 2006
  12. "Do Nudists Run Wall Street," The Wall Street Journal, April 12, 2006
  13. Letter, Wall Street Journal, April 21, 2006}
  14. New Crusade For Master of Overstock,” by Joe Nocera, The New York Times, June 10, 2006
  15. Floyd Norris, The New York Times (June 14,2007). "S.E.C. Ends Decades-Old Price Limits on Short Selling". {{cite web}}: Check date values in: |date= (help)
  16. U.S. SEC (April 11, 2005). "Division of Market Regulation: Key Points About Regulation SHO".
  17. "Fails-to-Deliver Data," Securities and Exchange Commission
  18. “Overstock.com chairman mulls stepping down,” the Associated Press, March 3, 2006
  19. “Revisiting Overstock.com and Utah,” by Joe Nocera, the New York Times, March 10, 2007
  20. Overstock sues brokers Feb. 3, 2007
  21. Overstock CEO reflects on Cramer debacle March 28, 2007
  22. ”Overstock’s Suit Spurs Board Exit,” Bloomberg News Service, Feb. 24, 2007
  23. “Overstock Director Groves Resigns Because of Broker Lawsuit,” Bloomberg News Service, Bloomberg News Service, May 25, 2007
  24. “Overstock's Campaign Of Menace” by Joe Nocera, The New York Times, Feb. 25, 2006
  25. Worst CEO of 2006 goes to Ilia Lekach of Parlux: Commentary: Overstock's Byrne is runner up for the second straight year Dec 6, 2006
  26. Nocera, “Revisiting Overstock.com and Utah.”
  27. Bloomberg Television (March 12,2007). "Phantom Shares". {{cite web}}: Check date values in: |date= (help)
  28. AMEX 2007 Disciplinary Decisions
  29. SEC Form 10Q filed by Overstock.com, dated May 9, 2007
  30. NEA: 65 Percent Solution -- Questions and Answers 2002
  31. The Issues and Implications of the "65 Percent Solution" Fall 2005
  32. The Colorado Cumulative Report December 13, 2006
  33. Friedman Foundation Board of Directors
  34. The Salt Lake Tribune November 1, 2007
  35. "Voucher battle costs both sides total of $9.3M," Salt Lake Tribune, Jan. 8, 2008,
  37. The Salt Lake Tribune, November 7, 2007
  38. "Overstock chief blasts Huntsman over vouchers," the Associated Press, Nov. 8, 2007
  39. "Overstock.com Founder Refuses to Apologize for Comments About Minority Dropouts," Fox News, Oct. 27, 2007, http://www.foxnews.com/story/0,2933,305600,00.html

See also

External links

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