If this implication is correct, that the only logical rationale to delay delivery is because it financially benefits the seller, then any gain to the seller is an ill-gotten gain.
It is an either/or situation for the sellers that failed to deliver Overstock shares to my fund: Either they had my property in their possession and decided to keep it for awhile, or they sold the shares to me without having possession. While the first possibility is a serious infringement of the rules, the second possibility is particularly disturbing.
Selling shares without possession is known as a "naked short". That is, naked shorting is selling shares that are not owned and haven't been borrowed. While market makers are granted the flexibility to naked-short in order to maintain liquidity, that exception should not apply here. Overstock shares have plenty of liquidity. The entire float of Overstock turns over every 13 days. By comparison, it takes 50 days for the entire float of Amazon.com (AMZN - commentary - Cramer's Take) to turn over.
More importantly, the market-maker exception is not available when a company has had repeated problems in share delivery. Companies with share-delivery problems are placed on a "Threshold List" per regulation SHO, promulgated by the SEC in 2005. If a company has been on the Threshold List for 13 consecutive days, the market maker-exception is no longer available. When I bought Overstock for my fund it had been on the Threshold List for more than 200 days.
Why Is Naked Shorting A Problem?
The problem with naked shorting is that it represents an attack on the fundamental fairness of the market. At the heart of a fair market is a respect for supply and demand. Once the supply component of supply and demand is tinkered with, all bets are off as to the fairness of the marketplace. If there is no cap on the supply of shares -- because market participants are able to sell stock that they don't have -- prices are subject to manipulation.
Investing Viva Da Nang 4/13/2006 8:44 AM EDT It's early and volatile, but long-term investors should check out Vietnam.
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Investing Muddied Waters at Blue Nile 4/13/2006 12:14 PM EDT The online jeweler's questionable free cash flow accounting has led me to decide to sell the stock.
At time of publication, Alsin and/or ACM was long OSTK, although holdings can change at any time.
Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor, and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback; click here to send him an email.
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