Goldman, Merrill emails reveal naked short-sales

New York: Goldman Sachs Group and Merrill Lynch employees discussed helping naked short-sales by market-maker clients in emails the banks sought to keep secret, including one in which a Merrill official told another to ignore compliance rules, Overstock.com Inc said in a court filing.

The online retailer accused Merrill, now part of Bank of America Corp, and Goldman Sachs of manipulating its stock from 2005 to 2007, causing its shares to fall. Clearing operations at the banks intentionally failed to locate and deliver borrowed shares for clients shorting stocks, including two traders who were fined and suspended from the industry, Overstock's attorneys said in court filings earlier this year.

Lawyers for Overstock, whose California state court lawsuit in San Francisco was dismissed in January, asked a judge to make public emails sent in 2005 and 2006 that it said "reflect business decisions to put profits and corporate ambition over compliance" at Goldman Sachs and Merrill. The banks' decisions to intentionally fail to deliver Overstock shares caused large-scale naked short selling of the company's stock, according to the filing.

After a Merrill executive expressed concern that a colleague intentionally failed, or didn't complete, a short sale, an executive at the clearing unit responded with an expletive, telling the executive to ignore "the compliance area - procedures, schmecedures," Overstock lawyers said in the filing, citing an excerpt from a May 2005 email. The Merrill executive later told a judge the statement was a joke, Overstock said in the February 9 court document.

An undated email informed Wolverine Trading, the Goldman Sachs clearing unit's largest client, that "we will let you fail," in response to an inquiry by Wolverine about whether there was an effort "at cleaning up" fails, according to the filing.

In June 2005, Thomas Tranfaglia, then president of Merrill's clearing unit, said in an email about the possibility of failing market-maker trades, "Why would we have to borrow them? We want to fail on them," according to the filing.

"As far as I'm concerned, this is totally unacceptable — we are failing when we have over a million shares of stock available," another Merrill executive said in an email cited by Overstock in its filing. "Is there a blanket agreement that we allow every market-maker client to continue failing even if there is enough availability?" the executive asked in the e-mail. "There needs to be some assessment done here, and fails cleaned up regardless of who is causing them."

Four media organisations, including Bloomberg, New York Times, Wenner Media and The Economist, intervened in the Overstock case and joined the company's request to unseal court files.