Patrick M. Byrne is the controversial CEO of Internet retailer Overstock.com. He has 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. [1].^[1] In May 2007, it was revealed that Byrne is the subject of a subpoena and investigation by the Securities and Exchange Commission.^[2]

Background

Patrick Byrne received a bachelor’s degree from Dartmouth College (Asian Studies & Philosophy), a certification from Beijing Teachers University, a master’s degree in philosophy from Cambridge University as a Marshall scholar, and a doctorate in philosophy from Stanford University. He has served as a visiting lecturer at both Dartmouth and the Beijing Normal University.

Byrne 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. Currently Byrne is CEO and Chairman of Utah-based internet retailer Overstock.com.

"Dutch Auction" IPO

Byrne's first fight against alleged Wall Street unfairness started with his 2002 dutch auction of IPO of Overstock.com, one of the first companies to go public under a system advanced by W.R. Hambrecht & Co. "A lot of pressure was brought to bear by going with Hambrecht," says Byrne, who believes that competing banks shorted his company's stock prior to a July 31, 2002, Wall Street Journal article in order to sully the auction's effect.[2] Officials of Hambrecht, including its co-CEO Clay Corbus and chairman Gordon Macklin, were named to the Overstock board of directors. [3]

When Google also later went public via a Dutch Auction IPO, "That's when I smelled a skunk," said Byrne. "It was an orchestrated campaign by the banks that just didn't want to see it succeed." [4]

'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 claims 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 told an analyst conference call in August 2005 that the Sith Lord is "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."[5] Byrne has never identified the "Sith Lord." 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."[6]

Byrne's campaign against naked short selling has been widely criticized, with New York Times columnist Joseph Nocera saying: "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." [7]. Numerous other writers and commentators have criticized what they believe to be Byrne's excessive zeal and overblown hyperbole in discussing this issue, while a similarly vocal group of advocates has taken Byrne's part.

In an effort to deal with whatever level of naked shorting may exist, the SEC has enacted Reg SHO, which is intended to help control Failures to Deliver. [8]. Its effectiveness to date is the subject of much debate.

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. This development contributed to the controversy over Byrne's activities. [9] 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."[10]

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." [11] 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."[12]

Media attention

Since Byrne launched Overstock.com in 1999, he and his company have garnered attention from numerous national media outlets. Among them are the Wall Street Journal, ABC News with Peter Jennings, Fortune, CBS Marketwatch, and Business Week, among others. He has also appeared on Bloomberg TV, CNBC, and Fox News shows such as Your World with Neil Cavuto. In 2002, Byrne was named to Business Week’s list of the 25 most influential people in e-Business: the magazine cited survival strength and vision as qualities that qualified Byrne for the list. In 2003 Ernst & Young awarded Byrne an "Entrepreneur of the Year" award in the category of Lifetime Achievement.

Much of the media attention has been negative. 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."[13], while CBS MarketWatch's Herb Greenberg has named Byrne the runner-up for Worst CEO of the Year two years running. [14] Nocera renewed his criticism of Byrne in his March 2007 column, referring to him as "dangerous" and condemning him for his tactics in attacking critics.[15]

Byrne was prominently featured in a Bloomberg Television show on Naked Short Selling, "Phantom Shares",^[3] in March 2007.

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 had 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."^[4]

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."[16]

Education lobbying

Byrne is head of an education lobbying organization called First Class Education. The organization's primary goal is what they call the "65 cent solution", which would require 65% of all education spending to be spent on what is considered "in the classroom education". There is a 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. [17] 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." [18] According to First Class Education, as of July 2006, 2 states have implemented their plan so far— Missouri and Oklahoma. (Colorado rejected 2006 ballot issues 39 and J, both implementations of the 65 cent solution.) [19]

References

External links and sources

• Overstock.com
• "Overstock's Campaign of Menace," by Joe Nocera, The New York Times, Feb. 25, 2006
• "More on Overstock,com and Utah," by Joe Nocera, The New York Times, Mar. 10, 2007
• Fortune Magazine article on short-selling crusade
• CNET interview with Byrne
• First Class Education website
• "The bizarre world of Patrick Byrne's Overstock" - The Register