A Passion for Shorting

By Michelle Celarier
Cover story

David Rocker

If a man can be judged by the enemies he makes, short seller David Rocker
might well be considered a hero in the hedge fund community. Few people in the
investment world have a straighter moral compass than the 63-year-old Rocker,
a self-described cop of the markets whose flagship fund Rocker Partners just
celebrated its 21st birthday. Among hedge funds, that type of longevity is out of
the norm. But it's especially amazing for a short seller.
Just two years ago, Rocker funds were down to less than $400
"David is a
million in assets, having lost about half their capital after a
guy you want
disastrous performance led to significant withdrawals in 2003 in the foxhole
par for the course for short sellers. But Rocker is now coming
with you" Jeff
off a year when it netted roughly 46%, and total assets are up to
Matthews,
$1.3 billion. With net annualized returns in its funds since
founder of
inception a respectable 11.2% at the end of last year, Rocker
RAM Partners
Management is one of the few short-biased hedge fund firms
left standing. Add in the fact that six of its 12 employees have equity in the firm,
where compensation is calculated on a firmwide basis, and you begin to get an
inkling of just how different Rocker is from the herd.
"David is a guy you want in the foxhole with you," says Jeff Matthews, the sole
Rocker employee ever to choose to leave the firm. "He does have a moral side to
him that sees things that are wrong, sees companies lying and feels it's not
right." Matthews, who now runs his own hedge fund RAM Partners, recalls that
when David Rocker started his fund, Rocker's father had just died from lung
cancer. "That was the time when tobacco companies looked really cheap," he
says, "but David could never bring himself to buy them."
Scruples just might give Rocker a leg up. In recent years, Rocker Partners
exposed frauds at such companies as AremisSoft, ACLN and Lernout & Hauspie
Speech Products, all of which were later prosecuted by the U.S. Securities and

Exchange Commission. But it's his battle with Overstock.com that is coming to
define David Rocker in the public mind. The loss-ridden dot-com discount
retailer's chief executive, Patrick Byrne, has blamed the company's stock slide on
a conspiracy of short sellers, including Rocker and his longtime partner and the
firm's chief portfolio manager Marc Cohodes, several journalists, independent
research firm Gradient Analytics and others - including some who've never had
any connection to Overstock. Rocker's short position in Overstock, which he put
on in February of 2004, is not one of the top positions at the fund, according to
investors. But it looms large nonetheless.
Overstock's Byrne is now infamous for his "Sith Lord" rant, in which he laid out
his conspiracy theory, saying the group was under the control of a mysterious
individual and using the "Star Wars" villain reference. But the more outrageous
he becomes in his public statements (he later changed the analogy, saying the
alleged conspirators are more like Al Qaeda, and he's also gone on about the
Israeli mafia), the weaker he appears, especially as the company's financial
performance continues to deteriorate.
The inadvertent effect of Byrne's venom is that the image of short sellers is
suddenly shifting. Instead of unpatriotic naysayers out to destroy companies by
betting that their stock prices will fall, short sellers like Rocker appear to be
endangered defenders of similarly endangered American values - freedom of
expression and a free press. That's what happened in February when the
dragnet enveloped several journalists who received subpoenas from the SEC's
enforcement arm regarding the Overstock case. The SEC is still investigating
Gradient, but it backed off from the subpoenas after Chairman Christopher Cox
criticized the action.
The SEC's involvement has raised the stakes considerably. The normally chatty
Rocker is no longer talking to the press and declined to be interviewed for this
article. But in his affidavit to the court, made in February, Rocker said: "The
voices of independent investors who believe that stocks are overvalued including, especially, those of short sellers - are crucial for the functioning of [an
efficient] securities market. It is basic to free speech that all such persons are
able to offer their opinions."
It's hard to argue against that. While corporate activists get a lot of credit for
cleaning up companies, many investors point out that short sellers can take an
important activist role. That's clearly how Rocker sees himself - as sanitizing the
markets. "Frauds, fads and failures" are the types of companies whose stocks
Rocker shorts, according to firm documents. "Getting the bad guys off the street"
is how Rocker often puts it. Unlike activists, however, short sellers don't have a
vote; convincing others through logic and reams of research is their only tool. If
people would listen to them at an earlier stage, says one of Rocker's investors,
they would save a lot of money.

That said, the charges levied by Overstock against Rocker Partners (including
both Rocker and Cohodes) and Gradient are serious. A lawsuit, filed August 11,
the day before the "Sith Lord" conspiracy was set forth in a conference call,
accuses the defendants of "knowingly distributing false, and covertly biased,
written reports about Overstock." The most serious, but so far uncorroborated,
allegations are based on the testimony of a fired employee of Gradient,
Demetrios Anifantis. In his affidavit, Anifantis never claimed that Rocker or
Gradient said anything about Overstock that wasn't true. But he alleged that
Rocker and Cohodes instructed Gradient to emphasize "a specific negative fact"
and "downplay any positive facts" about Overstock, and not to publish its
negative reports before Rocker established its short position.
Rocker denies the charges, noting that Gradient had given its lowest rating to
Overstock at the end of 2003, when the stock was trading at $18.18 - several
months before Rocker independently shorted the company and long before it
learned of Gradient and became its client in July of 2004.
Of course, Rocker talked to Gradient and whomever else would listen, including
Wall Street analysts. "Never at any time did I ask or imply that Gradient should
subvert or compromise its own judgment by asserting opinions on Overstock . . .
that it did not hold," Rocker said in his affidavit. And it's hard to see any front
running or market manipulation - at least on the short side. During the time the
reports were being written, shares of Overstock continued to climb, reaching $77
in December of 2004 following a secondary offering and the buy
recommendations of the analysts employed by Overstock's underwriters. Last
year, as the company's financial situation deteriorated and Street analysts began
downgrading it, the stock began its descent.
Despite the expense of the lawsuit, which some believe could easily top a million
dollars, and no doubt shock that the SEC might take Overstock's claims
seriously, Rocker isn't budging. "If Patrick Byrne thinks he can intimidate David
Rocker, he's got the wrong guy," says Matthews.
And that's where the psychological makeup of the short seller comes into play.
While one can learn the financial skills, such as forensic accounting, that are
necessary to be a short seller, the psychological skill set is innate, says James
Chanos, whose firm Kynikos Associates is the largest short-biased hedge fund
firm, with $2.1 billion in assets. "You're either born with it or not."
Successful short sellers must have "an ability to disregard the drumbeat of the
crowd," says Chanos. "It's not an arrogance. It's a filter.
"Basically, human beings are hardwired for positive reinforcement," he explains.
"Early on, you're told good boy/good girl. We're coaxed and encouraged and we
operate best in an environment of positive reinforcement. Wall Street is a positive
reinforcement machine. You come in every morning, and there's some sort of

positive noise on stocks. Long investors take that for granted. It's part of the
waters that they swim in.
"If you're a short seller, that's a negative reinforcement
machine. You're being told constantly by very well-paid
people that you're wrong," continues Chanos, who was
sounding the alarm on Enron long before its failure. "It's
the rare investor who can just drown that out, and say, 'No,
I'm sticking with my guns and I've done the work and I
think the stock is overvalued.'"

"If you're a short

seller, that's a
negative
reinforcement
machine. You're
being told
constantly by very
well-paid people
Rocker's two-year battle with Overstock may be an overthat you're wrong.
the-top example, but short selling has always been tough
It's the rare
going. As one short seller puts it, "Nobody likes the guy
investor who can
who says the emperor isn't wearing any clothes."
just drown that
out, and say, 'No,
The simple reason that shorting is a difficult game is that,
I'm sticking with
over time, most stocks go up. "The math is against you,"
my guns and I've
says Enrique Abeyta, founding partner, portfolio manager
done the work and
and chief risk officer of Skadia Capital, a long/short equity
I think the stock is
hedge fund.
overvalued'"James
Chanos, Kynikos
Of course, there are many parties with a vested interest as
Associates
well - from Wall Street investment bankers hoping to make
fees from more deals and sell-side analysts looking to validate their buy
recommendations to corporate managers with stock options, companies hoping
to boost their acquisition currency and, of course, all shareholders. Only a small
percentage of mutual funds, for example, are allowed to short - a restriction, it
might be noted, that did not serve investors well in the Crash of 2000. "It's
important to understand the structural bullish bias in the market," Rocker said in a
presentation before the House Subcommittee on Capital Markets in 2003,
pointing them out.
With all these natural adversaries, short sellers are often crying in the dark.
Finding a company whose situation is precarious enough to allow a short to
succeed against such odds is a laborious, research-intensive process that
requires combing through balance sheets, talking to customers and suppliers kicking the tires.
"What makes a short seller like Rocker successful is the research. They read 10Ks; they are voracious readers and analysts in their own right," says one of the
many individuals whose short-biased hedge fund closed down recently after what
he calls "a lot of pain."
Pain is the word that comes up again and again when people talk about shorting.
And Rocker's tolerance for pain is higher than many other short sellers, says one

longtime Rocker investor, adding that the firm is more aggressive than most short
sellers. "They are very good at understanding when businesses are likely to go
into more structural declines and identifying and understanding aggressive
accounting, including potential frauds. And they are extremely passionate in their
quest for the truth."
Still, all short sellers face numerous impediments. First, of course, is the uptick
rule: shorts can be put on only at a price above the prior trading price. Second,
shorting can get awfully expensive: "When a stock gets hot and the supply
dwindles, the brokers lending the stock are forced to recall it," says one prime
broker. If a short seller can't find more stock to borrow and replace the short, he
closes the position. "And then there's the other side, short squeezes, when the
stock reaches a certain short interest and people are starting to buy it back. It
makes it difficult to stay in." During a short squeeze, investors who sold short buy
stock to cover their positions in order to cut their losses.
While short sellers can earn interest on the cash proceeds of their short sales
when their trade is out of favor, it gets costly when the short becomes popular, as
is the case now with Overstock, which brokers are now charging 24% to borrow.
One way short sellers can guarantee a supply of shares to borrow is to buy the
shares themselves in what's called a boxed position, where they have both
shorts and longs. But that ties up capital. Rocker, for example, owned 691,603
shares, or 3.58% of Overstock's float as of the end of December, according to
Rocker's most recent 13F. (Shorts aren't listed, but the firm had puts on 791,300
Overstock shares.) Rocker is presumably still net short on Overstock.
Of course, timing is everything. "In order for the trade to work best, there has to
be some catalyst you think is going to break your way," says Joel Katzman, who
until early last year was president and chief executive of JPMorgan Alternative
Asset Management, a $9 billion fund of funds that invested in Rocker in 1995 and
still is in the fund. "You can scream publicly that the company is a fraud, but if the
market is in a frenzy, it will just ignore you, and you can get to a point where you
can't take the pain anymore, so you get out. That's happened to Rocker in the
past," he says. "I remember him shorting America Online and producing this
brilliant analysis on why it was ridiculously overvalued, but he got hurt." A look at
some of the articles Rocker wrote for Barron's during the bubble era shows just
how far ahead of the curve he was - criticizing option accounting and blaming the
Federal Reserve for letting the market run wild, for example.
The market is much less forgiving these days of unprofitable enterprises in
general and dot-com hype in particular. But the Overstock saga is far from over.
In mid-March it rallied from the low $20s, hitting $30 after news surfaced that
Citadel had amassed a 4.97% stake.
It's impossible for an outsider to know whether Rocker has profited from its
position or by how much, but when the fund started shorting Overstock, it was

trading at $30 per share. The stock continued to climb during 2004, hitting its
high of $77, which was caused by a short squeeze, as even Patrick Byrne has
publicly acknowledged. During that period, in what seems almost a replay of tech
bubble practices, analysts at Piper Jaffray and Legg Mason recommended the
stock, and soon thereafter Overstock did a secondary offering, using those
underwriters as part of its syndicate along with Lehman Brothers and W. R.
Hambrecht. (Hambrecht had previously been its sole underwriter.) Lehman soon
initiated coverage, with a buy recommendation. As the company weakened last
year, however, the views of those analysts and others grew more negative, and
the stock began to slide. Now not a single Street analyst is rating Overstock a
buy.
When short sellers do get it right, the payoff can be big, especially for a company
that goes bankrupt and no shares ever need to be repurchased. On the flip side,
the potential losses are infinite. And while a move against a short seller makes
the position larger, when the stock does move in the short seller's favor, the
position becomes a smaller portion of the portfolio. And unless the company
shorted goes under, there's a tax disadvantage to earning money by short
selling, because all the capital gains are short-term ones. In contrast, holding
onto a stock that keeps going up is the best way to bolster reported returns while
never taking a tax hit.
Is it any surprise that while there were maybe 50 firms specializing in short
selling a decade ago, the number has dwindled to about a dozen today? Of the
208 hedge funds in Absolute Return's Billion Dollar Club as of January 1, 2006,
only two are short-biased funds, Rocker and Kynikos. It's clearly an endangered
species; even Kynikos' Chanos says that "whether there's a future for dedicated
short-selling funds remains to be seen."
The bubble is certainly one reason many short sellers bit the
dust. But the more recent economic environment also is playing
its part. Says Skadia's Abeyta: "Guys have been hit in the face
by a 2- by-4 in regards to short selling." Credit has been so
plentiful that even the weakest companies with the highest
leverage - which might have looked like a good cyclical short have been able to survive much longer than many shorts could
hold out, becoming value plays as the economy strengthened.

Rocker's
criticisms of
companies
aren't
personal
attacks. He
doesn't suffer
fools gladly,
but the
analysis is
always based
on the
numbers

Instead of looking to short selling as a way to add alpha, a

number of long/short funds often consider it merely a hedge. As
a result, some have turned to ETFs. Though more expensive,
ETFs are more liquid and convenient and can be shorted on
downticks. And while shorting has long been part of the DNA of
hedge funds, some notable ones, like Lone Pine Capital, have introduced longonly funds.

Only a few brave souls are left out there. They are a tough bunch who know that
"if you're not in there feeling the pain, you're going to miss the big break," says
Katzman. "They have to develop more scar tissue than managers in other
strategies."
Katzman thinks short sellers are an underappreciated segment of the hedge fund
world that can add alpha to a diversified portfolio. That's the argument Rocker
Partners makes. Since 1994, Rocker has been net short an average of 36%
annually. During that time, the S&P 500 was up an annualized 12.2%. An
investor looking to hedge by shorting the S&P 500 by that same amount using,
say, an ETF, would have had an annualized loss of 4.8%. But Rocker did far
better than that, grossing an annualized 12.6% during that time, giving what the
firm calculates is an annualized alpha of 17.4%.
Moreover, the documents point out that during declining markets, Rocker has
outperformed (8.8% vs. -14.4% for the average of the S&P 500 with dividends
reinvested), as it has in moderately rising markets (35.9% vs. 3.1% for the S&P),
though it underperforms in sharply rising markets (1.5% vs. 26.2%). And Rocker
has had some surprising years. In 1999, the last full year of the bull market, it
managed a 31.7% net return by not shorting the large-cap names that were
driving the market's surge. (Rocker focuses on small and mid-cap companies.)
But in 2003, Rocker was down 35.6%, and 20% of the remaining capital was
redeemed by the end of the year. In retrospect, that was a short-sighted move by
investors, given the firm's performance since then. Moreover, those who have
stayed with the firm since inception have been rewarded with a 1% management
fee and 20% incentive fee. Last year, fees were raised to 1.5% and 20% for new
investors, while this year new investors are paying 2% and 20%.
Most of 2005's stunning 46% performance came from the short side. However,
while it has been net short since 1990, the firm also goes long. According to its
most recent 13F, at the end of 2005, its biggest long position was Lexar Media,
which is now the subject of a takeover, followed by PowerWave Technologies,
Gartner, C-Cor and Interwoven. While shorts aren't listed, the 13F revealed puts
on Digital River, Fairfax Financial Holdings, Harley Davidson, Jos. A Bank
Clothiers, Navarre, Novastar Financial, Tasel International, Tempur-Pecic
International, Thor Industries and Yankee Candle, in addition to Overstock. The
total portfolio comprises 40 to 60 stocks, in both shorts and longs, according to
firm documents.
Rocker Partners has gone to pains to remind investors that 2005 was an
exceptional year - a smart move since it has attracted a lot of fresh capital
recently. In a January letter, it noted that the "very nature of most successful
shorts - extended periods of gradual advance coupled with sharp sell-offs over
short periods - precludes any short seller, on its own, from providing the stable
month-to-month returns which investors crave." On the long side, it added, "we

look for dynamic situations where Wall Street's conventional wisdom is slow to
recognize a significant change." Whether long or short, it noted, "this is rarely a
smooth investment path."
Perhaps it's due to the rocky road it takes, but Rocker Partners appears to inspire
devotion both in the firm and outside it. "I think the world of David, both as a
human being and as an investor," says Katzman, who is impressed by Rocker's
ability to attract and retain a talented team of people. "That's been an important
factor in his success."
The public face of the firm is David Rocker, but the letter to investors was signed
by all six members of the management team, most of whom have been together
more than a decade. For several years, Rocker's role has been primarily as the
firm's business manager - raising capital, handling relationships with clients and
dealing with litigation, like the current Overstock situation. Both he and Cohodes
are managing general partners, and they've been together more than 20 years.
Cohodes, who runs Rocker's office in Larkspur, Calif., took over as chief portfolio
manager several years ago.
Much credit for last year's strong performance clearly goes to the analyst team.
The other partners include analysts and portfolio managers Mark Montgomery,
who joined in 1995 and works in California with Cohodes, and Terrence
Warzecha, who joined in 1999 and works out of Boston. Montgomery became a
general partner in 2000, and Warzecha was named general partner in 2002. Also
working out of California is analyst Russell Lynde.
Based in New Jersey are partners Philip Renna, the firm's chief financial officer
who joined in 1990, and Cathy Ann Longinotti, who has been general
administrator since the firm began. Renna became a general partner in 1995,
and Longinotta became a general partner in 2000.
"It's a very tight group. Everyone who works there is like family," says Matthews,
who remains close to Rocker and says leaving the firm to run his own fund,
which is long biased, was one of the hardest personal decisions he's ever made.
Rocker Partners' stability is unusual for a hedge fund, but it's not odd for such
strong bonding to occur when you're part of a group that's different from
everyone else. And short sellers are different - they're classic outsiders. "They
have a very strange view of the world," says Katzman. While people in general
are optimistic, short sellers "always have got to look for bad things and things
that can go wrong," he says, adding that Rocker "sees the glass as half empty,
not half full."
This year, for example, the firm's letter warns that "while market pundits almost
universally predict strong appreciation for the indices again in 2006, we see a
number of reasons to be concerned." It ticks off the housing bubble, a flattening

yield curve, rising energy costs, and healthcare and pension liabilities on
corporate balance sheets as things to worry about. In other words, it could be a
good year for a short seller.
Whether one considers him more realist than cynic, David Rocker is probably a
pretty normal guy - "a straight arrow" is how Matthews describes him. An
occasional curse word - punctuating his considerable passion - appears to be his
main vice.
The grandson of Austrian and Russian immigrants and the son of an accountant,
Rocker grew up in West Orange, N.J. He now spends an increasing amount of
his time in Key Biscayne, Fla., but his main residence has been in Short Hills,
close to the office in Millburn, N.J. Rocker and his wife Marian, who was his high
school sweetheart and grew up in Newark, are active in civic affairs in that city,
contributing to the current mayoral candidacy of progressive Democrat Cory
Booker and to the N.J. Performing Arts Center, where Rocker is on the
investment committee.
Rocker is known for his love of sailing. After graduating from Harvard College, he
did a two-year stint as a Naval officer before returning to Harvard Business
School for an MBA. His career in finance began in 1969 as a research analyst
and investment banker with Mitchell Hutchins, and his first hedge fund job was at
Steinhardt, Fine, Berkowitz & Co., where he worked for nine years until joining
Century Capital Associates. When Century was sold, Rocker started his own
firm.
The Rockers have two sons and four grandchildren. One son, Daniel, is the head
trader at hedge fund Zimmer Lucas Partners, and the other, Joshua, is an
emergency room pediatrician.
While Rocker has faced disgruntled companies before, and endured much
harassment, he has been sued only once, by AremisSoft. Rocker was vindicated
in that case, and one of the investors in the company, financier Irwin Jacobs,
personally apologized to him. The Overstock situation has been a "bizarre
nightmare," according to a source close to the firm, given that Rocker thinks that
the charges are so easily disproved.
Unlike some activists gunning for management these days, Rocker's public
criticisms of companies aren't personal attacks. He doesn't suffer fools gladly, but
the analysis is always based on the numbers. Rocker believes that he became
Byrne's enemy during a June 2004 Overstock roadshow in New York City.
"During a question-and-answer session, I asked Dr. Byrne to explain why
Overstock had failed to attain the revenue and profitability goals he had projected
in 2001, despite the infusions of capital which he claimed not to have needed,"
he wrote in his affidavit.

Then, in October of that year, Rocker called into a conference call and, "in
addition to asking questions about Overstock's performance, [I] asked Byrne
what his basis was for his statements regarding our stock positions made on
'Kudlow & Cramer' [the TV show]. Byrne responded that analyst Jim Cramer of
CNBC had read Byrne an e-mail from me purportedly describing Rocker
Partners' short position. When I challenged his answer (because no such e-mail
ever existed), Byrne refused to answer the question and falsely accused Rocker
Partners of having financial relationships with Cramer that motivated Cramer to
criticize Overstock in an article he had written." (Rocker has a less-than 5% stake
in Thestreet.com, and no editorial control. Cramer, who was also subpoenaed in
the aborted SEC probe of journalists, is the largest single shareholder.)
Shortly after that call, Rocker stated that Byrne sent him an e-mail that said: "I
don't like you . . . I think you are dishonest and slimy . . . I am indeed insulting
you, I am not wasting time 'answering to you' because I don't answer to you,"
according to Rocker's affidavit.
At least until what Byrne calls his "jihad" began, the Overstock CEO had
considerable financial resources. Patrick Byrne is the scion of billionaire
insurance tycoon Jack Byrne, who is a friend of Warren Buffett. The family owns
about 40% of Overstock shares, some of them through an investment concern
called High Plains Investment. Scion Capital, a California hedge fund that had an
8.23% stake at the end of 2005, also has a family connection. One of its owners
is White Mountains Insurance, a company the elder Byrne once owned.
But fissures are appearing. During the last half of 2005, Byrne was buying
Overstock in the open market, at prices starting as high as $48 per share. But by
early March, High Plains and Patrick Byrne were pledging 1.5 million shares to
secure a line of credit. Coincidentally, that happened the day after the elder
Byrne was quoted in the Wall Street Journal as saying he would likely resign as
the chairman of the board, indicating that he disagrees with his son's handling of
the company and his campaign against short sellers. Several days later, when
asked about the loan at a JPMorgan Internet conference, Patrick Byrne said that
"I owe a bunch of taxes and I have to borrow money for that."
In the same conference, Byrne was somewhat sheepish with investors,
apologizing for last year's performance and saying they were due to his "screwups." While putting a positive spin on the company's prospects, he proceeded to
project losses of $15 million per quarter for the first two quarters of this year. As
he turned to the alleged conspiracy, he added: "People think I have flying
saucers coming out of my head . . . I know people think I'm nuts, but I'm telling
you the system is broken in our stock."
"Being right is
certainly more
fun than

The self-deprecating crazy act may be humorous to outsiders,

but it's deadly serious to Rocker and others, many of whom
view the whole thing as a charade. "The civil suit by Overstock
against Gradient and Rocker is really in my opinion an effort to
divert attention from Overstock's own problems," says Chanos.
That's not an uncommon tactic, but in the end it is a waste of
shareholder's money. An analysis by Owen Lamont, financial
professor at the Yale School of Management, looked at 266
public companies that mounted a defense against short sellers
or accused short sellers of wrongdoing from 1977 to 2002.
Lamont found that the companies' stock returns suffered, falling
about 2% per month in the year following the action.

being long. If
you take the
intellectual
challenge of
this seriously,
when you're
going against
95% of the
people and
you prevail,
there's a
psychic
reward far
Overstock's decline is worse: The legal battle is now more than
greater than
seven months old, and the stock has fallen about 35% in that
being on the
time. And there's no telling how long it will go on. Last month, a 95% side and
California judge ruled against Rocker and Gradient in their effort you prevail"
to dismiss the complaint. Both defendants Gradient and Rocker David Rocker,
are appealing that decision, and Rocker has said it will likely
Rocker
countersue Overstock for defamation.
Partners
"David is a very intense, intelligent man who is as ethical as the day is long,"
says Chanos. "What's being said [in the suit] is ridiculous. He has a strong sense
of right and wrong. Generally, when companies have picked fights with David, it's
the companies that should be worried."
Rocker Partners is reckoned to have lost tens of millions of dollars covering its
short on Lernout & Hauspie, which collapsed in an accounting scandal in 2000,
long after David Rocker and Cohodes began a very public campaign criticizing it.
Last summer, a New Jersey court ruled that Rocker could sue for damages in
connection with those losses. Prior to that decision, it was an open question
whether short sellers could sue for damages related to securities fraud. The court
recognized that a short seller could also be injured by stock fraud and recognized
a short seller's right to sue for redress. And while Lernout is bankrupt, its bankers
and accountants are still there to pick up the tab.
Should Rocker triumph against Overstock, victory will be particularly sweet.
"Being right is certainly more fun than being long," Rocker said recently. "If you
take the intellectual challenge of this seriously, when you're going against 95% of
the people and you prevail, there's a psychic reward far greater than prevailing if
you're on the 95% side."
FACT FILE: ROCKER MANAGEMENT
Founded: 1985 (as Rocker Partners)
Co-general managers: David Rocker and Marc Cohodes
Assets under management: $1.3 billion

Flagship funds: Rocker Partners, Compass Holdings

Performance: 11.2% net annualized through December 2005
Offices: Millburn, N.J., Larkspur, Calif., Boston, Mass.

Note to SEC: Everyone has an agenda

Michelle Celarier
Writing a profile on Rocker Partners, you can't ignore the
controversy about the relationship between short sellers,
research firms and journalists. The allegation that several
journalists have conspired with short sellers and research
firm Gradient Analytics to torpedo the shares of Overstock
and Biovail has raised something everyone - including the
Securities and Exchange Commission - should know by now.
Journalists cannot write stories without interviewing
people, and here's the news flash: Everyone we talk to has
an agenda.
Short sellers like Rocker rightly point out that no one
complains much about all the pumping up of stocks that goes
on - by analysts, reporters, companies and investors - but
everyone screams bloody murder when it's the other way
around. If journalists listen to short sellers, it's
because they offer a different point of view, one that is
usually backed up with facts - and one that can often
uncover corporate wrongdoing. We need more of that type of
journalism, not less.
Fortunately, the SEC rescinded its ill-conceived subpoenas
of journalists who have a right not only to talk to critics
like Rocker or Gradient - but also to keep that information
from the government's prying eyes.
Unfortunately, the SEC's actions will continue to have a
chilling effect on that communication, whether or not
journalists are subpoenaed again.
no one complains much about all the pumping up of stocks
that goes on - by analysts, reporters, companies and
investors - but everyone screams bloody murder when it's
the other way around
The recent events have led to more grumbling from hedge
funds about the SEC. Yes, there are flaws in the system,
but with total hedge fund assets now at $1.5 trillion,
according to the latest HedgeFund Intelligence
calculations, the SEC needs to closely watch hedge funds,
whose role in the capital markets grows more powerful every
day.

Given the charges leveled against Gradient, the SEC really

had no choice but to investigate the firm's relationship to
its hedge fund clients. The allegations made by some
disgruntled, fired Gradient employees - that research was
distorted and timed to benefit the funds shorting Overstock
and Biovail (Rocker and SAC Capital respectively) - may be
totally off base. The SEC should easily be able to get to
the bottom of this.
But with the SEC's obsession with hedge funds, it seems to
be ignoring other players. Why isn't it looking into
possible insider trading by Overstock's former IT director,
who sold shares last September just before announcing
problems with the system that led the company to miss its
numbers for the quarter? And why isn't the SEC looking into
the 2004 short squeeze in Overstock that appears to revolve
around a few Wall Street underwriters and their research
analysts?
In recent years, the SEC has been quick to investigate any
complaints about hedge funds, only to realize later that it
should be listening to them instead. Rocker, of course, has
helped the SEC uncover several frauds in the past. It just
might happen again.