A CEO’s battle against business journalists

Posted By Spring Eselgroth

By Tori Stilwell

Ethical journalists have always known they must walk a fine line when it comes to source relations. Some say business journalists have to toe an even tighter line because the stories they write can move markets.

But to one CEO, business journalists aren’t walking the line. They’re crossing it.

Patrick Byrne, CEO of Overstock.com Inc., claims that some business journalists and their sources—specifically hedge fund managers and short sellers—are colluding to financially ruin companies and the entire market. But his target journalists, some of the most famous in the profession, say Byrne is simply on a witchhunt to intimidate his critics into silence, and his claims of collusion are unfounded.

Byrne created a website, DeepCapture.com, to publicly criticize business journalists he believes are conspiring with short sellers. Byrne and a team of contributors regularly post articles to draw attention to journalists they think have become pawns of their sources, a situation the team dubs “deep capture.”

“If ever the government begins to slip, there’s always a free press that can bring attention to these problems,” said Judd Bagley, a former manager of the website who has returned to work at Overstock. “But if you get a situation where the media also becomes cheerleaders or promoters of these regulated entities, then you’ve got a real problem.”

Byrne and his team have publicly — and explicitly — denounced journalists such as Bethany McLean, Roddy Boyd, Joe Nocera and Herb Greenberg, claiming the journalists are carrying water for their short selling sources in order to bring huge financial gain to hedge funds.

The journalists have responded that Byrne’s claims of conspiracy are blatantly false. They say Byrne’s crusade is the result of his frustration with hedge funds shorting Overstock shares and an effort to chill investigative journalism.

“I don’t think it has anything to do with whether we’re too close to our sources,” said Joe Nocera, a business columnist for the New York Times, in an interview. “I think it’s a convenient excuse to try to silence us. No one really writes about Overstock anymore.”

The Miscreants’ Ball

As the story of Deep Capture goes, Byrne was warned by a man who calls himself “Bob O’Brien” that Wall Street financiers were working with journalists to send the American financial system crashing. O’Brien said Overstock would come close to financial ruin as the result of a dispute Byrne had with short selling hedge fund manager David Rocker of Rocker Partners LP, now Copper River Management LLC. Byrne alleged Rocker disseminated false information about public companies as part of a scheme to manipulate stock prices.

Byrne held a webcast titled “The Miscreants’ Ball” on Aug. 12, 2005, the day after he filed a lawsuit against Rocker’s entities and Gradient Analytics, an independent investment forecaster. In the webcast, he described a conspiracy to wreck Overstock and other companies through naked short selling. The ringleader of the operation was a person Byrne dubbed the “Sith Lord,” describing him only as a master criminal from the 1980s.

Much of Byrne’s campaign against naked short sellers has been aimed at what some would consider unlikely targets: some of the most renowned business journalists in America.

In an interview, Byrne said a whole different set of journalism ethics was created during the rising popularity of networks like CNBC, where he said journalists try to present themselves as players of the financial system they’re supposed to be covering.

“And then by the middle of the last decade, that left them, because of their appetite for presenting themselves and being perceived as players, it left them open to manipulation,” Byrne said. “In their eagerness to become players, they became pawns.”

On DeepCapture.com, Byrne has lambasted journalists for using sources like short sellers, who he says feed journalists stories about a company with the hope they’ll write negative stories and send the stock price falling. Because the business journalists don’t do their homework, Byrne said, the stories they write are usually based on false or inaccurate information concocted to drive down the stock price so short sellers can profit.

Overstock itself was heavily targeted by short sellers, who Byrne said were engaging in naked shorting of the company’s stock. Naked shorting occurs when a short seller shorts stock without ever having access to the securities. Although the buyer doesn’t have to pay until the short seller hands over the securities, the sale is still registered. Thus, naked short selling can artificially drive down the stock price of a company.

“I’m a concerned citizen. I saw illegal behavior going on in our capital markets, and I attacked it,” Byrne said. “I have over and over and over said, ‘Look, this isn’t about me, it’s not about Overstock.’ I may not have heard about it or understood about it in the absence of Overstock being shorted, but I would have done exactly what I did if Overstock had never had been shorted.”

Spin, or valid criticism?

Critics have said Byrne should focus less on his campaign against market manipulation and more on running his company, but Byrne dismisses the allegation as “spin.”

“It seems to me to have been part of the cover-up for them to come back and say, ‘Well, Byrne should just focus on his business,’” he said. “What’s that have to do with this data and this evidence that this was occurring?”

The data Byrne is referring to is a collection of emails, voicemails, taped conversations and other documents and information he and his team have obtained through methods ranging from lawsuit discoveries to body wires and moles.

Byrne and Bagley both pointed to one collection of evidence in particular: a lawsuit filed in 2006 by Fairfax Financial Holdings Ltd. against SAC Capital Management LLC and a group of other hedge funds, including Third Point LLC, Kynikos Associates Ltd. and Exis Capital Management Inc. Fairfax claims that beginning in December 2002, the hedge funds launched a massive attack on the Canadian insurer with the aim of destroying Fairfax and its business so that the short selling defendants could profit. To do this, Fairfax claims the hedge funds disseminated false information to the public through analyst reports and statements to the financial press.

Bagley posted on DeepCapture.com that he had received about 1,000 pages from the discovery process for this lawsuit in December 2008. Included in the documents, Bagley wrote, were hundreds of emails and instant message threads between hedge fund managers and journalists such as Bethany McLean, Herb Greenberg and Roddy Boyd.

Bagley’s article posts some of the emails between former Fortune magazine writer Bethany McLean and Marc Cohodes, a short seller and general manager of Copper River Management. In the emails, Cohodes sends McLean a tip about Fairfax Financial in December 2006, and McLean asks for more information and documents. In March 2007, days after the article’s publication, Cohodes expresses discontent with Fairfax’s rising stock price. McLean replies that she’s unsure of what’s going on as well. Bagley sites these emails as evidence that McLean and Cohodes had teamed up with the intent of wrecking the company and were disappointed when it didn’t happen.

“I don’t believe she was paid, I don’t think she got anything materialized,” Bagley said in an interview. “I think she endears herself to these short sellers.”

Byrne, however, takes a different approach toward criticizing McLean and other journalists. In an email exchange between Byrne and McLean after she had written an article about Overstock, Byrne wrote McLean: “Fair. And balanced.” Two days later, she received a follow-up email: “I actually thought it was crap…. So, why exactly did you become a reporter? Giving Goldman traders blowjobs didn’t work out?”

In a DeepCapture.com article titled “Roddy Boyd Sucks It Like He’s Paying the Rent,” Byrne describes Boyd, an investigative financial journalist who has worked for Fortune Magazine and the New York Post, as a “mop-and-spooge bucket boy.” He went on to accuse Boyd and other reporters of giving “reportorial lotion-jobs” to Rocker Partners.

Byrne, who has a Ph.D. in philosophy from Cambridge University, defended the explicit language by saying the journalists don’t deserve intellectual disputes.

“When I’m dealing with serious people, I’ll write serious stuff that I think stands up to anybody. But when I have to deal with what I think are basically criminal riff raff, I can’t give them the dignity of treating them like a serious opponent, so I slip into Hunter S. Thompson mode,” Byrne said, referencing the personal journalist and known drug abuser who committed suicide.

Byrne and Bagley maintain they aren’t targeting all journalists. They claim that a select few who have personal relationships with their sources don’t do their homework and “poison” the press, creating a media storm of undue negative publicity for a company in the sights of a short seller. To remedy this, Byrne said financial reporters need to learn the basics of accounting or go to independent accountants who can help reporters sift through the numbers.

“There’s no shortcut to understanding the underlying issues, and if you’re not willing to put in the time to do that, you’re leaving yourself open to being a pawn to manipulators,” Byrne said. “I feel about weak journalism the way I feel about a pedophile priest.”

Built on reputation

The career of a journalist is largely built on reputation — a reputation for being fair and balanced, a reputation for being accurate and a reputation for being aggressive. Therefore it’s no surprise the journalists targeted by Byrne have taken severe offense to the allegations made by the DeepCapture.com team.

Former Fortune magazine writer and financial investigative journalist Roddy Boyd said in an interview that Byrne’s claim that journalists would work with each other and with short sellers to go after companies is logically unfounded. He said Byrne and his team don’t understand the passion financial journalists have for their craft, and journalists have been put on the defense due to the nature of their profession.

“They can’t understand why a guy like me would come in and spend hours and hours of his time studying financial documents, talking to sources, talking to a company that’s putting up a royal fight,” Boyd said. “They can’t understand that, so to them, there must be wrong-doing.”

Boyd said Byrne’s allegations that journalists don’t use documents to support their research and the information they receive from sources are untrue. Boyd knows accounting practices, and he uses them for every story in which they are necessary, he said.

He also cited journalists Rebecca Smith and John Emshwiller, who helped unravel Enron’s financial meltdown through the use of SEC documents, chronicled in their book “24 Days.” The pair of journalists relied heavily on internal documents and SEC filings in addition to using tips from anonymous sources and other financial players like short sellers.

While Smith and Emshwiller may have dominated Enron coverage while the scandal unfolded, McLean questioned the company’s finances months in advance thanks to a tip from one short seller: Jim Chanos, manager of the Kynikos Associates hedge fund.

“(McLean) called our firm,” Chanos said in an interview. “I spent some time on the phone with her walking her through the financial statements. I sent her a copy of the 10K with some notes on it, and she followed up with a phone call I think with more questions. That was all over the January time frame 2001, and that was the last I heard from her.”

McLean and Chanos

McLean wrote what is considered the first story that raised a red flag about Enron’s finances, published in March 2001. She did not mention Chanos in the piece, but she did ask some questions no other journalist had: “How does Enron make its money?” and “Is Enron overpriced?”

Chanos said he does occasionally email journalists information the company finds interesting, though he never seeks out a specific journalist. When he is approached for information, Chanos said he almost always keeps it to hard evidence, like a company disclosure or a financial memo his hedge fund has prepared.

Chanos said his right to share an opinion on a stock is protected by the Constitution. Spreading rumors isn’t a crime, as long as he doesn’t know those rumors are false.

“People do it on the long side all the time. They talk to reporters about stocks they think are great, stocks that are undervalued, stocks you should look at, but when it’s done on the short side, people suddenly put a much lower barrier to what they believe is criminality,” Chanos said. “It’s a double standard that the short side has had to exist with, and reputable journalists are well aware of this. They’re well aware of who their sources are and what their vested interests are.”

Nocera said he talks to short sellers because they are the anti-thesis of a company’s CEO. Short sellers can provide a perspective that other sources may not have, and they often have good stories to tell because they’re looking for negative things in a company. Nocera is accused by Byrne of conspiring to cover up naked short selling, with Byrne alleging that he also encouraged other journalists not to write about the topic.

“Just for the record, I think they’re all crazy,” Nocera said. “The notion that we’re not supposed to talk to (short sellers) is lunatic,” Nocera said. “The notion that we’re actively conspiring to bring down the market is equally lunatic.”

Nocera has written several columns involving Byrne, two of which looked at his role in a Utah bill that aimed to curb illegal naked short selling. The bill drew fire after it quickly passed the Utah legislature in 2006, and officials from the Securities Industry Association threatened to sue the state on the grounds that Utah was stepping into federal territory.

The bill’s sponsor, state Sen. Curtis Bramble, R-Utah, later met with SEC officials and attended a U.S. Senate finance hearing. A few months afterward, the SEC introduced marginal changes to its rules on illegal naked short selling, and as a result, the Utah legislature repealed its law in March 2007.

Bramble said in an interview he had a good working relationship with Byrne throughout the first phase of the law’s passage. Throughout the repeal process, however, Bramble said Byrne became “frustrated” with him.

“I believe there is legitimacy to some of his claim,” Bramble said. “The question is, ‘Does his claim goes farther than where that legitimacy ends?’”

Larry Ingrassia, business and financial editor of the New York Times, said in an interview he has never heard of DeepCapture.com. He said the idea of journalists doing the bidding of short sellers was “a little bit of a card,” but the digital age has changed the way reporters interact with their sources. It’s also changed the way media critics can launch an attack against journalists.

“Woodward and Bernstein, they weren’t tweeting with Deep Throat, but they were meeting with Deep Throat,” Ingrassia said. “You’re close to your source because you’re interacting with your sources. If they see that you’re doing good work, and they see a good story, will they pass it on to you? Sure.”

However, Ingrassia warned that journalists should be careful about buying into world views, as their skepticism is their greatest asset.

“One of the ways you can lose that skepticism is by being too close to sources, which makes you believe them without carefully examining what they’re saying,” he said. “I don’t think (journalists are) carrying water for a particular source. Most reporters aren’t going to do anything like that.”

Tori Stilwell is a junior business journalism student at UNC-Chapel Hill. She will intern at Bloomberg News in New York this summer.

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