The Deep State Cries “Bazoomba!”

A 30 year old, delightful memory of mine involves picnicking, sitting on a rug with some true ruffians, guarded by guys with AK-47s, telling each other jokes into the night, translating back and forth from Arabic to French and English. One of the best of those I learned that night ran as follows:

A man moves to a new town and is invited to a locals’ poker game hosted by the town’s grandee. He goes, an hour into a game of stud he gets a straight. Seeing that the last man left in the hand, the host, has nothing visible, the newcomer bets big. The local calls him, and he reveals his straight. Smiling, his host flips over his last card: Jack – 9 – 6 – 5 – deuce. “Bazoomba!” And starts sweeping in the pot.

The newcomer says, “What the hell is ‘Bazoomba’? I have a straight, you’ve got a jack-high nothing!”

The people at the table explain to the newcomer, “Oh no Haj, we play here with a rule says that a Jack – 9 – 6 – 5 – deuce is the highest hand possible. It is called a “bazoomba” and it beats anything. He wins!”  The host sweeps up the pot. Smarting, the newcomer says nothing, but decides instead to bide his time for revenge.

Sure enough, three hours later, well into the night, the newcomer gets dealt Jack – 9 – 6 – 5 – deuce. Knowing he is now unbeatable, he slides all his remaining chips into the pot. Everyone else calls. The newcomer throws down his cards for all to see and cries, “Bazooomba!” He starts sweeping up their money.

The locals grab his hands and pull them off the pot. “Oh no Haj, the rule also says, “Only one ‘Bazoomba” per night.”

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What has been going on in recent days in the trading of OSTK reminds me of that joke. As you will understand if you have read about the Dole case, or are familiar with me and my work on Deep Capture, you will understand that I think our national capital market’s stock settlement system has shocking slop in it, and that this is the source of much miscreancy in America. After 15 years of study and work, I figured out a way to create a beautiful reason for 40,000 people to become customers of Overstock’s subsidiary tZERO by opening digital wallets with them, and as an ancillary benefit, exposing all that slop fully. That came down to taking advantage of the fact that Overstock had issued ≈ 37 million shares, and could generate 3.7 million blockhain-based tokens, and distributing them as follows: every 10 shares a shareholder owns gets him a dividend of 1 token (for which the recipient has to obtain one of tZERO’s new wallets that can hold such a blockchain dividend). I could teach my cat to follow that arithmetic.

There is an incredible business case for generating a reason for 40,000 people to become customers of our new blockchain capital market firm, tZERO: if each customer is worth $10,000 (which is about where some brokerages are valued, I am told), that would bring $400 million of economic value into the tZERO firm.

However, in addition, if I am correct that the national market system as overseen by the SEC has slop in it, then there are in fact people thinking they own not 37 million shares but 50 – 60 – 70 million shares, and hence, there will be expectations of 5 – 6 – 7 million tokens. After all these years of fighting, this dividend settles the question once and for all.

Of course, the Powers That Be on Wall Street do not want to let that dividend go through and expose the slop. They may point out that it also puts legitimate short sellers in a bind, to which my reply would be, “As CEO of Overstock my responsibility was to the shareholders, and not to anyone who might have shorted our stock, legitimately or otherwise.” This also is the ultimate litmus test for the SEC: are they back in the business of protecting American retail investors, or are they protecting cronies on Wall Street holding out job offers (as 2007-2008 demonstrated)?

Let me add that I did not just dream this up on a whim. I designed it carefully (and if there be any criminal liability associated with this, let me stipulate right now that I am 100% responsible for this: come after me). The Outside General Counsel of Overstock was (and still as) Cliff Stricklin, the most highly regarded figure on white collar crime in the USA. Cliff’s resume is beyond impeccable: he was a DEA agent, then a federal prosecutor, then the youngest judge in the state of Texas, then the DOJ hired him back to prosecute Enron, where he went 19-0: that is, all 19 Enron people he prosecuted were convicted (don’t confuse that record with Andy Weissman of recent Mueller Commission fame, who was the part of the team that prosecuted Arthur Anderson, took the company down, destroyed tens of thousands of professionals, all on a prosecutorial theory that, when it reached the US Supreme Court, was rejected 9-0). The design of this token and dividend were thoroughly reviewed by him and his premier securities partner at Bryan Cave, itself one of the world’s premier law firms. It is rock-solid.

Something funny happened to me over the weekend over here in Asia: I started receiving detailed messages saying that since last Friday (13^th) morning, major prime brokers on Wall Street (e.g., JP Morgan, Morgan, and Goldman) were telling clients that the SEC had let them know last Thursday night and Friday morning that they going to do something special to let short-sellers off the hook (and incidentally, I can easily trace back the names of the people at the primes saying that). These prime brokers were, in short, promising that the SEC would call a “Bazoomba!” for them.

In addition, an article has just appeared in the New York Post (again, for people who move their lips when the read Entertainment Weekly) that ignores the entire business case for doing this (enticing 40,000 new customers to tZERO), and attributing a lot of intentionality to me about which they never even contacted me (is that good journalism?). One quote in the article reads: “…thanks to brokerage firms JPMorgan and Morgan Stanley agreeing to take cash of an equivalent value to the digital dividend when short sellers return their borrowed shares, sources said.”

I am not a lawyer, but this doesn’t sound right to me in three ways:

1. I do not think the timing of a dividend payment or a “Payment in Lieu” cannot be left to the short seller whenever they want to close out their position. The timing is governed by tax law and/or the beneficial owner. There are IRS implications here, and so it is bizarre that tax rules can be trumped by short sellers just choosing when they pay their dividend.
2. I am pretty sure the SEC should not be making regulatory decisions (such as creating a new “Bazoomba!” rule) to protect prime brokers, they should be making regulatory decisions to protect the American investor. Short sellers are sophisticated investors who received all the information they needed to understand this in an 8K from Overstock in the last week of July. If two months later it has caught them off-guard, that’s life in the Big City. A decade ago the SEC was exposed as having protected the prime brokers and those with “too much juice” at the expense of the public, which happened as a result of something economists call “the problem of dispersed costs and concentrated benefits”, but I had reason to hope the SEC had gone straight.
3. Even if the SEC did suddenly and inappropriately make up a “Bazoomba!” rule, I am really sure they are not supposed to be first leaking it five days in advance to a few preferred brokers on Wall Street, so those brokers and their clients can trade on inside information coming from the SEC about their regulatory intentions. I’m really sure the SEC is not supposed to do that (by the way, it is going to be easy for some folks at the DOJ to trace that leak back through the primes to the SEC, as I will be giving them a phone number to call to get those names of the employees at the primes brokers in five minutes).

I’ll keep this short and simple.  Message to SEC: Apparently the shorts were asleep at the switch and got caught in a jam. We Overstock shareholders won this hand fair and square. I have a red line, and that is, you calling a “Bazoomba!” for the shorts now. And my “red line” is not an Obama kind of red line. It is not a Hillary kind of red line. It is a Jack Vessey kind of red line. More than Buffett, more than my Pop, Vessey is the guy who taught me about moments like this. You are referees, not players, and are supposed to be making honest calls. For 15 years you allowed manipulation against OSTK, harming our shareholders and crippling our ability to compete in an industry where everyone we faced had access to capital on outrageously generous terms, but not us (before 2008 happened we were on your “three day Reg SHO list” for 998 straight trading days, and are on it again now). Now, after 15 years of it, the shorts are crying because they fell into a trap they created for themselves. If you call “Bazoomba!” for them now, this website will vaporize you with information I give the public, not the DOJ. I am confident some of you know to what I am referring.

This story was first published on Deep Capture. Deep Capture features original investigative reporting on the all-too-cozy relationship Wall Street has with regulators, media, government and the intellectual establishment.