SALT LAKE CITY, June 30 /PRNewswire-FirstCall/ -- Overstock.com(R)
(Nasdaq: OSTK) ( www.overstock.com ) CEO Patrick M. Byrne issued the
following statement today in response to a Depository Trust & Clearing
Corporation press release about its "failure to deliver" data.
On Wednesday you issued a clarification regarding a statistic about
which you feel there has been, "a conscious attempt to mislead the
investing public and undermine the confidence in the workings of our
capital markets." For the last year a handful of lawyers and economists
(who think that your firm is "engaged in a conscious attempt to mislead the
investing public and inflate the confidence in the workings of our capital
market"), have repeatedly asked for clarification concerning the $6 billion
"fails" number which you have yourself publicized (Former Undersecretary of
Commerce Dr. Robert Shapiro asked about it point blank in his public
letters to "Euromoney" magazine and to Jill Considine, CEO of the DTCC).
If it is true that your $6 billion figure counts the value of the fail
separately on both sides, it's unique in financial reporting: all other
trades as reported by the DTCC and the stock exchanges -- daily trading
volume, or the value of all daily, monthly or annual trades -- count values
or costs once, not twice. Moreover, if that is the system you use to come
up with the $6 billion figure, you have taken a long time to clarify the
record (you might mention it to the SEC, which uses "fails" and "fails to
deliver" synonymously in their Freedom of Information Act responses). So I
suspect I speak for all of us when I say that I am touched by the new
spirit of glasnost that animates your communications.
While I applaud this new spirit of transparency from DTCC, I wish to
take advantage of it by requesting additional clarifications that will go
far to allay any remaining skepticism of the investing public.
1. I want to know the difference between the number of shares a company
has issued and the total number of long positions of everyone in the
world in that stock. I believe the difference is the sum of the short
position, failed to deliver short sales, failed to deliver long sales,
failed to receive long and short sales, open positions, desked trades,
and ex-clearing balances. My questions here are: Did I miss any nook
or cranny? Do market-making and ex-clearing balances always fall into
one of these categories? Do failed to receive long and short sales
double-count precisely the failed to deliver ones precisely (and if
so, should not be counted)?
2. Ex-clearing seems like a fascinating and unfairly maligned practice.
Together we can clear up the suspicions that linger concerning this no
doubt honorable activity. Your General Counsel Larry Thompson gave a
kind of self-interview
( www.dtcc.com/Publications/dtcc/mar05/naked_short_selling.html )
where he asserted that 18% of fails are addressed by the DTCC's Stock
Borrow Program (SBP). I think that means that 82% aren't, but feel
free to correct my math on that. In any case, presumably this 82%
resides in ex-clearing. This would suggest that the total number of
fails in a stock should equal (100/18) = 5.55 X the number that reside
within the DTCC. Many DTCC skeptics believe that these items and
practices expand exponentially the number of shares in a company's
float, though the shares represented are "manufactured" by the
brokerage community and were never issued by the company: market
participants in the Caribbean privately suggest, however, that the
real ratio is 10-20 to 1. Which is correct, 5.55 or 20? Are you aware
of the practice of "bed & breakfasting shares" and could you describe
its impact on ex-clearing balances? Most respectfully, are you aware
of all ex-clearing balances?
3. I'd like to work through one example in an effort to dispel the
aspersions cast on your fine firm. A recent SEC Freedom of Information
shows that in 2005, during a period when Regulation SHO was in full
operation, "fails" (as the SEC calls them) in OSTK were 36,681 shares
at the start of the January, then rose steadily to end 2005 at
2,062,328 shares (and actually topped 2.3 million once in the fourth
quarter of 2005). If the number of OSTK's fails track Mr. Thompson's
statistic, Mr. Thompson's math suggests that the true fails thus
reached 2.3 million X 5.55 equals approximately 13 million fails. If
I believe the Caribbean ratio, then fails reached 2.3 million X 20 =
46 million fails. Of the roughly 20 million shares issued and
outstanding of OSTK, 12 million are closely held (mostly in paper),
and only 8 million see their settlement entrusted to the DTCC. What I
think this means is that the total fails position in OSTK as a
percentage of the float reached either 25% (if I believe the SEC) or
163% (if I believe DTCC General Counsel Larry Thompson) or 675% (if I
believe some Caribbean wise-guys). Since I would never want to be one
of those making, "a conscious attempt to mislead the investing public
and undermine the confidence in the workings of our capital markets,"
I wonder if you might (in the spirit of glasnost) indulge me an
additional "clarification" on this detail.
With regret, I must inform you that some cynics continue to doubt you.
For example, you note that you settle $266.5 billion of trades per trading
day but only $3 billion, or 1.1%, remain unsettled at the end of each day,
and 15% of these are bonds. Skeptics, however, indicate that if one
consistently leaves bonds out of the count, then 85% X $3 billion equals
approximately $2.5 billion equities fail are unsettled at the end of every
day, and since you only settle $82 billion of equity trades per day it
means that 3% of trades remain failed. In addition, as your website boasts
that 96% of trades are settled through your Continuous Net Settlement
system, it would appear that the accumulated fails are somewhere between
1/3 and 1/2 of a day's trading. These skeptics note also that these numbers
count the current value of the failed stocks, not the value of stocks at
the time the failures occurred, nor the value of stocks that have been
delisted or represent ownership in companies that have gone bankrupt.
Finally, they believe that you have glossed over the issue of the huge
numbers of protracted fails documented in the Boni report (which indicates
that fails persist for an average of 56 days) and attested to indirectly at
least by the Regulation SHO Threshold Securities lists and the SEC FOIA
responses on total numbers of outstanding fails. Such cynics argue that
real disclosure would include percent of value, percent of trades and
percent of shares alongside dollar value, number of trades and number of
But I, for one, am convinced that you will continue your efforts to
keep America's capital markets as transparent as they are today.
Patrick M. Byrne
Overstock.com, Inc. is an online "closeout" retailer offering discount,
brand-name merchandise for sale over the Internet. The company offers its
customers an opportunity to shop for bargains conveniently, while offering
its suppliers an alternative inventory liquidation distribution channel.
Overstock.com, headquartered in Salt Lake City, is a publicly traded
company listed on the NASDAQ National Market System and can be found online
Overstock.com is a registered trademark of Overstock.com, Inc.
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