“what does that say of the trade that destroys market value?”

That presupposes that a short sale destroys market value, which is something I don’t agree with in any blanket fashion. I actively disagree in the case of large-cap equities (such as pharma) – it’s hideously expensive to short meaningful amounts of such stock, and is therefore quite risky. It’s never done on a whim, but instead because of a conviction. George Soros, for instance, would never had bet against the pound had he not been convinced he was right. He wasn’t trying to drive the pound down; he knew where it belonged, and placed his bets accordingly.

As to the naked short issue, I’m pleased to agree with you on that. Chanos’ reputation today isn’t as toxic as it has been in the past, but his asserting (explicitly or de facto) that naked short rules don’t apply or don’t matter is self-serving in the extreme.

Consider the Op-Ed in the WSJ by James Chanos today “The vast majority of equity short sales are market neutral; the short seller has no fundamental view of a company’s outlook”

If a short seller has no fundamental view of teh company they short, and they are using this trade as a hedge for another, what does that say of the trade that destroys market value? To me this speaks of manipulation as the short seller would not have necessarily considered these small illiquid companies overvalued yet they drove the market down anyway.

As to your comment about “borrowed beforehand” I agree. I believe that the recent movement by the SEC was wrong because it threw out the baby with the bath water. The legitimate investors was harmed alongside the nefarious. Unfortunately this had to come because individuals like Mr. Chanos lobbied very hard that a pre-borrow not exist in our marketplace. Mr. Chanos would rather risk a settlement failure and expect the system to cleanse itself of that failure later than to become a more efficient marketplace by insuring the failure won’t exist initially.

Since 2005 the level of failures in the system have near tripled in aggregate dollar value. The biggest short sellers do not think this is a problem – can you guess why not? Short sellers have failed to police themselves and so we now have “martial law”.

Dave: I’m still comfortable asserting that in any large company, short selling’s effect on stock price follows fundamentals, and doesn’t lead them. Of course, that’s easily true in GE’s case.

For small-cap companies, the theory of large numbers can swamp business reality, and I understand those who offer sympathy when the small-caps complain of being shorted to oblivion.

However, in a past life, I was with a company subjected to just such an assault. And the shorts were right about the fundamentals. But if they’d been wrong, and we could have proved this by “operating our way” out of it, those shorts would have been squeezed hard, as small-caps’ prices can jump more violently than large, based on fundamentals.

Speculative short-selling is never risk free, and market based mechanisms exist to ensure that risk applies to shorts of large and small companies alike. As a result, I remain distinctly queasy about limitations on short-selling beyond the existing requirement that the stock be properly borrowed beforehand.

Today GE is added to the list of companies that can’t be shorted at the request (begging) of Jeff Immelt. CNBC is afraid to report much on this because it would point out the hypocricy. Is Immelt hiding something about the company that CNBC does not want to uncover or…can short sellers destroy good companies.

We will never fully know the answer but what we do know, predatory short sellers were about to drive our national economy into the abyss and some here are unwilling to understand that.

The date of this prospectus is May 29, 2002

OVERSTOCK.com, Inc.
3,000,000 Shares
of Common Stock

In connection with the offering, the underwriters may purchase and sell shares of common stock in
the open market. These transactions may include SHORT sales, stabilizing transactions and purchases to
cover positions created by SHORT sales. SHORT sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. ‘‘Covered’’ SHORT sales are sales
made in an amount not greater than the underwriters’ option to purchase additional shares from us in
the offering. The underwriters may close out any covered SHORT position by either exercising its option
to purchase additional shares or purchasing shares in the open market. In determining the source of
shares to close out the covered SHORT position, the underwriters will consider, among other things, the
price of shares available for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option. ‘‘Naked’’ SHORT sales are any sales in excess of such
option. The underwriters must close out any naked SHORT position by purchasing shares in the open
market. A naked SHORT position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common stock in the open market after pricing
that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of
various bids for or purchases of common stock made by the underwriters in the open market prior to
the completion of the offering.