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When short selling gets naked

Judd Bagley is the head of communications at Overstock.com, the web clearance house based in Salt Lake City, and his boss is the irrepressible Patrick Byrne. Since early 2005, Byrne has waged a very public crusade against a Wall Street trick known as naked short selling. This controversial campaign came to a head in February when Overstock filed a $3.48bn lawsuit against 12 New York brokerage firms, alleging a "massive, illegal stock market manipulation scheme."

For those of you who slept through your school lessons, a short sale is a way of making money when the price of a stock goes down. Anticipating a price drop, you borrow shares from someone else and promptly sell them off. Then, once that drop kicks in, you buy the shares back and return them to the original owner.

A naked short sale works much the same way – except you don’t really borrow the shares. Three days after the sale, when it’s time to actually deliver shares to the buyer, you fail to do so. Naked shorting isn’t always illegal under Securities and Exchange Commission rules, but it is if you’re attempting to manipulate stock prices. And Patrick Byrne is sure that such manipulation occurs on a grand scale.

Patrick Byrne, Overstock.com CEO

Patrick Byrne

Using this scheme, Byrne claims, nefarious Wall Streeters can eventually drive entire companies out of business. "You can destroy these companies, and when that happens, you don't have to pay the IOUs off," he says. "It's basically a system for being a serial killer of small companies."

In March, Bloomberg Television aired a mini-documentary on naked shorting, and Byrne's views were prominently featured. But for the most part, the mainstream press has painted the Overstock CEO as a raving madman.

"The New York Post ran a picture of me with UFOs coming out of my head," he says. "And CNBC became the I-hate-Patrick-Byrne channel." In fact, he's received much the same treatment from The Register.

One of his most vociferous - and unrelenting - critics is a Forbes.com columnist, book author, and former BusinessWeek reporter named Gary Weiss. If you visit Weiss's blog, you'll see that he spends much of his bandwidth badmouthing Byrne, Overstock.com, and its crusade against naked shorting.

Enter Wikipedia

In late 2005, before he was officially hired by Overstock, Judd Bagley joined Patrick Byrne's crusade. He was working as an online journalist at the time, and that November, he interviewed Byrne for a website he was running called Businessjive.com.

"I started doing a podcast series interviewing entrepreneurial figures," Bagley says, "and Patrick was the first person I approached."

During the interview, naked shorting was discussed, and Bagley soon agreed to host a PowerPoint presentation that Byrne had put together detailing his views on the subject. "The information he gave me [about naked short selling] sounded kinda implausible," Bagley explains. "But the journalist in me started digging a little bit to learn more about this thing, and I managed to bump into all the things he predicted I would see."

A few days later, on January 28, 2006, while checking his site's server logs, Bagley noticed that at least one person had accessed this presentation by way of Wikipedia. Visiting the online encyclopedia for the first time, he found that someone had linked to Businessjive from Wikipedia's article on naked shorting - and that someone else had removed the link.

Bagley soon discovered that this person - identified only by the IP address 70.23.85.112 - had made multiple edits to Wikipedia's naked shorting article, and in his opinion, these edits were patently biased. He believed that someone was preventing the article from telling the whole story.

Judd Bagley, Director of Communications

Judd Bagley

"It didn't take long to realize that this was a part of the 'anybody can edit' nature of Wikipedia, which I recalled having heard about," Bagley explains. "A little digging revealed that the user...who removed the links to my site did so as part of a rather sweeping series of edits that greatly skewed the article against what I had learned to be the truth."

Bagley restored the link to Businessjive. A few hours later, the same person removed it. So Bagley restored it again. And it was removed again.

Clearly, someone didn't want Wikipedia referencing Patrick Byrne's rather extensive PowerPoint presentation on naked shorting. So Bagley decided to figure out who was doing this. And why.

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