Shooting the Naked Messengers

He met Mr. Byrne for two more hours of interviews, learning about naked short selling: Mr. Bagley, who’d been a Mormon missionary in Chile; a sidekick called Judd the Stunt Boy on a Salt Lake radio morning show; and a spokesperson for Jeb Bush’s gubernatorial administration, had never heard of it. “I’m a pretty spiritual person, and I have this belief that if you educate your conscience, it will tell you when you’re hearing the truth,” he said recently. “I thought, ‘I don’t understand this thing, but I know he’s telling the truth.’”

If above-board investors short a stock by borrowing shares and immediately selling them off, hoping to later buy and return them again after prices have fallen, naked shorts sell shares without borrowing in the first place. It’s what hedge fund managers have used, Mr. Bryne believes, to bring down companies like his, working with journalists but also government officials, international mobsters and one another. At least, that’s the theory.

Last Wednesday, Mr. Bagley arrived at The Observer wearing a high-school teacher’s blue blazer, green socks, sensible khakis and a band-aid on a pointer finger, raw from being rubbed against his thumb nervously. “I actually kind of wrecked my nail, and this one will snag on things easily, so I just keep a band-aid on there.” It has to do with anxiety about naked shorts. At one point he thought he’d stopped, but his wife told him he was doing it in his sleep.

He is not nervous about tangling with sworn enemies like the former Business Week writer Gary Weiss, or the ex-MarketWatch columnist Herb Greenberg. The night before, he had eaten dinner with Mr. Taibbi, the rabble-rousing Rolling Stone reporter who wrote a seething piece against shorting in October. Afterward, he was looking on a map to get his bearings. “And I saw this little cul-de-sac. I thought, ‘I know I’ve heard of that before.’ And I remembered, ‘That’s right! Gary Weiss lives there. So I just kind of walked down it.”

His movement has near-religious fervor—a vividly particular sense of right and wrong, a passion for spreading the message “and a charismatic leader, frankly,” he said about Mr. Byrne.

In 2006, he left public relations to join Overstock: He became the director of social media and of communications, working at night on a site called Antisocialmedia. Like Dick Fuld, who essentially spent more time complaining about the investors who were betting against Lehman Brothers than fixing his grossly leveraged firm as it failed, Overstock does not enjoy getting into why it’s never recorded an annual profit in its history. (Mr. Byrne, though, said at deadline that the company is about to report its first annual profit. “I’m probably going to get a lot of shit for having said this,” he offered.)

Mr. Bagley takes the fight against Overstock’s critics seriously. “I thought I should tell you that I’ve have known your real identity for a while now,” he wrote one anonymous critic in June 2007. “I don’t want to cause anybody unnecessary harm, but I’m beyond tired of the lies.” That year, Wikipedia blocked 1,000 homes in the Salt Lake area on account of Mr. Bagley, who, an encyclopedia spokesman said, had been trying to promote his business furtively.

In March 2008, Mr. Bagley left Overstock to start Deep Capture. “I put in about $500,000, and I think I made one additional smaller infusion,” Mr. Byrne said. “I give a lot of money away to social causes.”


PUTTING ASIDE THE question of whether naked short selling causes damage, the number of companies whose stocks have a serious amount of so-called failed trades, the clearest sign of naked shorting, has plummeted since reforms enacted in September by the S.E.C. Before then, Overstock had spent more than 650 consecutive days on the government’s list of stocks with the most failed trades. Afterward, it was gone.

As it happens, only one of the four main goals from the early days of Mr. Byrne’s anti-naked fight, forcing short-sellers to actually locate the shares they’ll be borrowing, has yet to be met. It’s likely that it, or something like it, will happen.

Mr. Byrne, meanwhile, soldiers on: In a conversation this week, for example, he offhandedly compared his enemies to Nazis. Overstock, which is dealing with long-standing auditing problems, faces an S.E.C. investigation into its financial disclosures.

“It’s like a guy leaping off the Empire State Building, and he hits the pavement, and it turns out he also has high cholesterol,” Mr. Ritholtz said. “When they do the autopsy, I don’t think they’ll give a fuck about the high cholesterol. Naked shorting is the high cholesterol.”

Shooting the Naked Messengers