Overstock Celebrates New Spirit of Glasnost at DTCC

Jun 30, 2006, 01:00 ET from Overstock.com

    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.
     Dear DTCC,
     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
         Act response
         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
     CEO, Overstock.com
     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
 at http://www.overstock.com.
     Overstock.com is a registered trademark of Overstock.com, Inc.
     (Logo: http://www.newscom.com/cgi-bin/prnh/20030520/LATU020LOGO-a )

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