By Lucy Komisar
Sept 27, 2021
Former hedge fund CEO Marc Cohodes discusses in this one-hour interview:
- Overstock’s charges that Cohodes and associates faked reports to drive down the price of Overstock they were shorting,
- Overstock’s case against Goldman Sachs that it (and Merrill Lynch) used naked shorting to drive down its price,
- Cohodes’ testimony in that case about Goldman creating shares out of options trades, and
- Why he thinks the Citadel empire should be broken up.
- Also see the infamous confession by Jim Cramer about how he fed lies to financial reporters to move share prices.
Here are links to key documents and citations.
Charges in Overstock legal case against Rocker, Gradient, Cohodes
Filed Oct 12, 2005 Case No, CV053693, Marin County, California. https://www.thekomisarscoop.com/wp-content/uploads/2021/09/Overstock-2005.11.12-OSTK1-First-Amended-Complaint.pdf
Plaintiff Overstock.com (“Overstock”) alleges that Defendants have orchestrated a wide-scale predatory campaign of knowingly distributing false, and covertly biased, written reports about Overstock in order to disparage Overstock and enrich themselves.
Not only was the content of these reports not the result of objective analysis, but the Defendant stock analysts worked together with the Defendant hedge funds, without disclosing the unscrupulous collaboration. Defendant hedge funds conspired in creating these defamatory reports because they stood to gain huge financial benefit from the inevitable harm to Overstock.
As intended, Defendants’ actions caused substantial harm to Overstock, in the form of decreased market capitalization, tarnished reputation and unwarranted disruption of its relationships with its customers, investors and vendors. Overstock’s loss was Defendants’ gain – Defendants reaped substantial illegal profits from their attack on Overstock.
Far from being what Gradient represented to be objective and independent analyses, these reports were previewed, edited, and controlled by at least the Rocker Defendants, Rocker, and Cohodes, Indeed, upon information and belief, Vickrey routinely provided Gradient’s reports on Overstock to the Rocker Defendants, Rocker and Cohodes, prior to publication,
From their Marin County office, Cohodes, Rocker Partners and Rocker Management routinely made requests to Gradient to alter the reports….Cohodes, Rocker Partners and Rocker Management routinely edited Defendant Gradient’s reports to insert specific negative input and false information.
Overstock legal case against Goldman and the other big banks/prime dealers.
Marc Cohodes comments in his Overstock case deposition on market makers using option conversion trades to create fake shares.
Deposition of Marc Cohodes Nov 18, 2011
Questions BY MR. SOMMER (lawyer for Overstock):
Q. Could you tell me what your understanding of a conversion trade is?
A. Roughly because I’m — I haven’t practiced this business in a while. You know, a firm or a market maker would synthetically create a short position by doing option trades in it, buying the stock, selling a call or buying a put or this, that and the other. And by buying the stock, they could create a borrow off an option trade. It would leave them essentially market neutral, but it would create long stock to them so they could lend out the shares.
Q. Did you ever talk to anyone at Goldman about conversion trades?
A. I’m sure. I don’t specifically recall who, what, when, why or where, but I’m sure I did.
Q. Do you recall anyone at Goldman generally informing you that Goldman was acquiring stock through conversion trades to lend out?
MR. FLOREN: Vague and ambiguous.
THE WITNESS: No, not specifically, no.
BY MR. SOMMER:
Q. Do you remember talking to Mr. Conley about conversion trades?
A. Quite possibly, sure.
Q. But you don’t recall anything specific?
A. Specific over —
Q. Let me ask it generally. Did he ever suggest to you that he could get you hard-to-borrow stock by doing conversion trades?
A. Not that I recall in those specific
Q. Do you recall something more generally on that topic?
A. I really don’t as to specifics for this matter.
MR. SOMMER: Exhibit 7.
(Deposition Exhibit 7
marked for identification.)
THE WITNESS: So you found these emails without me. I knew you would.
The full Cohodes deposition.
Name = the stock, ie the name of the stock.
Call options are financial contracts that give the buyer the right, but not the obligation, to buy a stock, bond, commodity, or other asset or instrument at a specified (“strike”) price within a specific time period. The stock, bond, or commodity is called the underlying asset. A call buyer profits when the underlying asset increases in price.
Put options are financial contracts that give the buyer the right, but not the obligation, to sell–or sell short–a specified amount of an underlying asset at a pre-determined (“strike”) price within a specified time period. The buyer profits when the underlying asset decreases in price.
Market Maker Exception aka the Madoff Exception was invented by Bernie Madoff to allow his hedge fund to naked short stocks in which he “made a market,” ie accepted all offers to buy and sell. A change in 2008 allowed market makers to short without borrowing shares, but did not exempt them from the duty to settle shorts. They are not allowed to fail. But they evade this rule by rolling over trades. The SEC appears not to notice. See this: https://www.sec.gov/divisions/marketreg/tmcompliance/rule203b3-secg.htm
Amendment to Eliminate the Options Market Maker Exception in Exchange Act Rule 203(b)(3) of Regulation SHO
The Securities and Exchange Commission (“Commission”), to further reduce fails to deliver in certain equity securities eliminated the “options market maker” exception to Regulation SHO’s close-out requirements under Exchange Act Rule 203(b)(3).
Prior to this amendment, Regulation SHO contained an exception to the rule’s close-out requirement under Rule 203(b)(3)(iii) that excepted from the close-out requirement fails to deliver resulting from short sales by registered options market makers effected to establish or maintain a hedge on certain options positions. The Commission amended Regulation SHO to eliminate the options market maker exception to the rule’s close-out requirement.