Even Short-Sellers Get Screwed These Days

NEW YORK ( TheStreet) -- One of the more curious legal battles under way in Corporate America involves two companies, Goldman Sachs and Overstock.com, which score close to 10 on the Enron-Halliburton Generally Obnoxious Scale.

The suit concerns one of my favorite Wall Street conspiracy theories: that naked short-selling has destroyed untold thousands of innocent, sweet little companies.

This suit was filed back in 2007 against a dozen Wall Street prime brokers (now just Goldman and Bank of America's Merrill Lynch subsidiary), and in the past I've viewed it with disgust. I mean, if you're going to sue bankers, how about suing them over something they actually do, and not to shift blame for your share price being in the commode?

Well, folks, I'm here to tell you that I've changed my mind. I like this lawsuit, and even though it's been dismissed -- surely no obstacle to continued publicity -- I'd like to see it continue to make waves. The reason is that discovery in the suit is beginning to emerge, and I think we may actually get to the truth behind naked shorting. And from what I've seen, it's not going to make either Goldman or Overstock (or any other naked shorting crybaby) look very good.

Mind you, the facts certainly won't put an end to the conspiracy theories that have swirled around naked shorting -- the truth is useless against paranoia -- but perhaps it will have some effect on the regulators who have wasted untold resources dealing with crackpots and charlatans over this issue.

What changed my mind was a column by Gretchen Morgenson that appeared Monday in the New York Times, which was swiftly followed by an informative rejoinder by Reuters blogger Felix Salmon later in the day. With all due respect to these two fine journalists, I suggest that both of them are missing the point. I'll be coming to that in a moment.

Morgenson's column focuses on a deposition in the case from Marc Cohodes, who was manager of the now-defunct Copper River Partners hedge fund. Copper River, formerly known as Rocker Partners, had been short Overstock shares, and had previously been sued by Overstock for supposed "stock manipulation," in a case that struck me and quite a few other observers as an effort by Overstock's CEO, Patrick Byrne, to intimidate critics of his famously erratic management of the company.

What's interesting about his deposition, the full text of which is appended to the online version of Morgenson's column, is that Cohodes was considerably harder on Goldman than he was on Overstock.

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