From January 2005 to January 2007, Overstock share prices dropped nearly 70 percent.BYRNE: It's a really simple concept, and when you get to it, you think, what's all the hullabaloo about?It's really basic. There are people selling things and not delivering.SCHNEIDER: The 43-year-old Byrne, who counts Warren Buffett among his friends, says his troublesbegan after Overstock reported a profit for the second time in its history, in the fourth quarter of 2004.UNIDENTIFIED: It is my privilege to welcome Overstock.com to NASDAQ this morning as we honor theiraccomplishment as one of the most innovative and successful Internet companies in recent history.SCHNEIDER: In 2004, Overstock's sales had more than doubled, to nearly $500 million. Its stock hadtripled.But the high fives and champagne soon gave way to disbelief. From a high of $77.18 in December 2004,Overstock shares began tumbling. By December 2005, they collapsed to a low of $28.02.Byrne become convinced his shares were being manipulated, a conclusion also reached by Tom Ronk,the President of Buyins.net. Ronk sells data on short sales to companies and investors.RONK: Overstock is a - is the poster boy of naked short selling. What's interesting is that, from January1st, 2005, Overstock.com has been on the naked short list for 91 percent of the trading days. In thatexact same period of time, over 86 million shares have been shorted in Overstock.How is that possible? It shouldn't be.SCHNEIDER: Ronk says naked short selling explains the huge decline in Overstock shares that January,when the stock fell 20 percent in just one month.RONK: We have found very large drops in U.S. stocks in one- month trading periods. So, we're seeingthat, when they first come in and attack, they hit it hard. They really hit it hard, because they can getaway with it. And they cause the largest damage to the stock usually in the first wave of selling.SCHNEIDER: Overstock is just one of hundreds of companies considered at risk for manipulation bynaked short sellers. They appear on stock exchange lists mandated by the Securities and ExchangeCommission's Regulation Short Sales, or Reg SHO. These threshold lists consist of companies with toomany trades that can't be settled because stock is not delivered to the buyer, so- called failures todeliver.ANGEL: I mean, some people use the phrase counterfeit stock to describe the phenomenon, that if youcan sell stock and you never have to deliver, it's going to have the same impact as selling, selling andselling. It's going to push the price down.What is naked short sell?SCHNEIDER: Angel says not all failures are the result of traders trying to manipulate stock prices. Somemay be caused by clerical errors.Overstock was on the list of failed deliveries that U.S. Exchanges released in January 2005. Along withOverstock were more than 240 other companies on NASDAQ's list, among them some familiar names -Trump Hotels and Casino Resorts, Global Crossing, Netflix, TASER and, U.S. Airways.The New York Stock Exchange had nearly 60 companies on its list, including Delta Airlines, MarthaStewart Living Omnimedia, Krispy Kreme Doughnuts, and Winn-Dixie Stores.And the problem is not going away. Since Reg SHO took effect, more than 4,500 companies have beenaffected by stock delivery failures severe enough to qualify them as threshold securities. That's roughlyone in three companies traded on U.S. exchanges, the majority of them with small or very small marketcaps.BYRNE: I don't opposed hedge funds. I don't oppose short selling. I object to the accumulation of unsettled trades in our financial system.
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