Allegations of a great “naked shorting” conspiracy have become ever more byzantine over time. They were bound to attract defamation litigation, as indeed they have. It is important to take note of this – whatever one thinks about the proper shape of defamation law – because to the extent they receive public credence such allegations represent a stigmatization of the search for alpha, a stigmatization of the legitimacy of speculation itself.

That in October Altaf Nazerali filed a lawsuit in Canada against Deep Capture and related individuals and entities was perhaps one of the least-remarked-upon important financial stories of 2011. The quick early result of his move was a court order that closed the offending website. As a later fruit, this may provide a chance for well-heeled parties to “go a few rounds” on these questions.

Patrick Byrne, the CEO of online retailer Overstock.com, has long supported Deep Capture, a website designed to promote a sort of Unified Field Theory of financial chicanery. Not just financial chicanery really, the working hypothesis of Deep Capture for years now has been that all the troubles of the world fit together, and that at the bottom of them all lies a single “Sith Lord.”

Vulnerabilities

At the bottom of the hypothetical conspiracy that incorporates all bad people, including the late Osama bin Laden, stands an equally hypothetical collusion between short sellers and friendly journalists. The latter are said to write false stories that drive down the price of the stock of companies that are actually productive and meritorious..Hence the name of the nowadays silent site: the world of financial journalists is said to have been captured – deeply so – by Wall Street finaglers. Only Deep Capture, in its own self-serving mythology, has escaped capture.

What is Nazerali’s part in this tangled web? A dramatic one: Deep Capture said that Nazerali is affiliated with “an impressive number of securities traders who are also narco-traffickers (such as Paul Combs, until Combs was whacked by Nazerali’s mobster friend Egor Chernov” and saying that he has “working relationships with … members of Al Qaeda’s Golden Chain, the regime in Iran, Pakistan’s ISI, the chief of Saudi intelligence, the ruler of Dubai, the royals of Abu Dhabi, La Cosa Nostra, the Russian Mafia, and others in the Milken network.”

His day job, anti-climactically, is as the president of Multivision Communications Corp.

Let us note here three facts about this October order. On the one hand, it was obtained simultaneous with the filing of the complaint. On the other hand, that order was on its face temporary and expired in early December. On the third hand, if you click on www.deepcapture.com you’ll find no active site, only a ‘down for maintenance’ notice.

This point is clear: Byrne and the other defendants in Nazerali’s lawsuit (they include Deep Capture LLC itself, GoDaddy Inc., registrar of the deepcapture.com domain name, NoZone Inc., website host, Google Inc., and Google’s Canadian subsidiary) have vulnerabilities that they wouldn’t have on the sunnier side of the Niagara Falls.

Happy to Oblige

Byrne isn’t the front man at Deep Capture. That role belongs to Mark Mitchell, another of the defendants in the lawsuit, who actually takes credit for writing the disputed statements. But Byrne has put no distance between himself and the allegations that have led to this suit. Indeed, he responded in the InvestorVillage bulletin board site thus: “It looks like Ali Nazerali wants to go a few rounds. Happy to oblige.”

That sounds like Byrne was interested in using the lawsuit as an opportunity for contesting the substantive merits, that is, providing evidence that the conspiracy exists as described and that Nazerali’s part in it was accurately portrayed in the various webpages (called “chapters” for some reason) of Deep Capture. That may prove healthy, if it happens. It may not. The parties are now litigating jurisdiction.

The significance of all this, from the alpha-seeking perspective, is that powerful elements in our culture don’t really believe in speculation. They may say that they do, and Byrne sometimes talks a libertarian game, but their conspiracy theories aren’t about liberty and aren’t about finding the truth, they are about stigmatizing speculators who are betting against – ooh, say, Overstock.com – in the marketplace.

The managers of a competent business have a simple response to short sellers: produce a good product, sell it, and show a profit. The stock price will take care of itself, and that in turn will discourage shorts, of any degree of dress or undress. If you were a lion, would you chase after the strongest zebra, or the weakest?