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Even Short-Sellers Get Screwed These Days

For one thing, he alleges that Goldman effectively put his hedge fund out of business. Cohodes maintains that at the time of the 2008 stock market meltdown, Goldman crushed his hedge fund by imposing "house calls" -- margin calls not required by federal rules. The reason is that some of the shares that he was shorting (none of which were Overstock) had inexplicably climbed in value despite the general stock market disaster.

Cohodes testified that "someone was running in front of the shares." He then goes on to muse that Goldman was engaged in the front-running, saying that "the guys at Goldman are common criminals, just common criminals." (A Goldman spokesman has said that the front-running allegations were investigated and found to be not true.)

But the real dynamite pertains to naked shorting. And this is where neither naked shorting conspiracists nor Goldman are likely to be very happy.

In an ordinary short sale, a stock has to be borrowed before it can be sold. In a naked short sale, the stock is not borrowed. Although stock market conspiracy theorists have long pointed the finger at hedge funds for engaging in that practice, in fact that's pretty much impossible unless the broker that makes a market in the stock is in cahoots with the firm. And that's where the stock market conspiracy theories fall apart. Why would a Goldman or a Merrill give a hoot about the share price of a company like Overstock or any of the other grimy companies targeted by short-sellers?

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Nothing in Cohodes' deposition supports the conspiracy theory. He maintains that he not only borrowed the stock of every company he shorted, but paid hundreds of millions of dollars to Goldman for the privilege of doing so. Indeed, in the Overstock suit, Overstock never alleged that he naked-shorted the stock. But his deposition raises an intriguing question: Did Goldman naked-short the shares, not to screw Overstock but to rip off Copper River -- collecting fees for stock borrowing that never actually happened?

Cohodes testified that when he first began shorting Overstock's shares in early 2004, the stock was easy to borrow. But later, as the company attracted shorts like bees to an open honey jar, the stock became harder and harder to borrow, making it more costly for Copper River to short. Cohodes never comes out and says so -- he refers to it as just "speculation" -- but he raises the possibility that Goldman naked-shorted the stock while charging unjustified fees, which, in turn, was amplified in the Times column on Monday.

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