Why are people distancing themselves from Overstock.com CEO Patrick Byrne?

My experience

In late 1988, the government investigators were closing in on Eddie and me. Many former friends, colleagues, and co-workers distanced themselves from us. Eventually, I would learn that Eddie’s father (Sam M. Antar), brothers (Allen Antar and Mitchell Antar), and his brother-in-law Ben Kuszer had set us up to take the fall. Later, even my cousin "Crazy" Eddie Antar left me out to hang. Is a similar situation, going on at Overstock.com?

Overstock.com delays reporting a Securities and Exchange Commission subpoena to its CEO, Patrick Byrne, for almost a year

On May 9, 2007, Overstock.com disclosed in its 10-Q that Patrick Byrne (CEO of Overstock.com) received a subpoena from the Securities and Exchange Commission almost a year earlier on May 17, 2006.

Overstock.com’s two Audit Committee Financial Experts – One resigns, the other cashes out most of her holdings

Last night, Overstock.com announced the resignation of Ray J. Groves. Mr. Groves was a member of Overstock.com’s, so-called “independent” Audit Committee. He was one of the two audit committee financial experts on Overstock.com’s Audit Committee.

The other “audit committee financial expert” is Allison H. Abraham. Shortly after Overstock.com disclosed Patrick Byrne’s subpoena, she cashed out most of her position in Overstock.com’s common stock by selling 15,000 shares at $17.2175 each for gross proceeds of $258,262.50.

Patrick Byrne’s relationship with Randy Groves

During an earnings conference call for the third quarter of fiscal year 2005, Patrick Byrne, described his relationship with Ray J. Groves:

Ray Groves is a former managing partner of Ernst & Young -- Ernst & Whinney, then Ernst & Young. I worked with him in the mid '90s on a number of acquisitions, and sat on a couple of boards with him, and in fact, he made me the money that was the origin of Overstock. We did about four deals together, and two of them worked out just spectacularly. And we had a great relationship. We haven't done anything for five or six years together, but literally, the funding from Overstock, when I think of it, when we were still private -- my piece of it all came from deals that I did with Ray. We were in a printing company and a fixed base operator company and a mulch company that we just sold. He has a tremendous business mind as well as, of course, a great financial mind. I think he's going to sit on the audit committee…. [Emphasis added.]

Ray Groves continues to serve on other company Board of Directors

According to Herb Greenberg’s Market Blog:

Groves remains a director of EDS (eds), where he chairs the audit committee, and Boston Scientific (bsx). Neither company has issued a press release announcing his departure.

Other resignations by Board members


On February 23, 2007, John A. Fisher resigned from the Board of Directors purportedly over a “disagreement with the Company’s pursuit of the lawsuit against the Prime Brokers.”

On July 31, 2006, Patrick Byrne’s father, John J. Byrne, resigned from the Board of Directors. According to Overstock.com’s form 8–K, filed with the Securities and Exchange Commission:

…John J. Byrne announced his retirement from the Board of Directors of the Company due to his new role as Chairman of White Mountains Insurance Group. The resignation did not result from a disagreement with the Company on any matter relating to the Company’s operations, policies or practices.

However, according to an article in c/net news entitled, “Overstock ‘jihad' divides father and son” published on March 2, 2006, and written by Greg Sandoval:

Even Overstock.com Chairman John "Jack" Byrne, the father of CEO Patrick Byrne, wants his son to give up his fight against bankers, investors and journalists who the younger Byrne claims are trying to purposely deflate his company's stock price.

In an interview with CNET News.com, Patrick Byrne acknowledged that taking up the issue, which has made him one of the nation's most controversial executives, has prompted his father to consider stepping down as chairman.

"I've never expected him to (understand) this fight," said Patrick Byrne of his father. "He's been making noise about stepping down."

Jack Byrne was quoted on the Wall Street Journal's Web site on Thursday as saying that "Patrick and I have had some wonderful times together on Overstock, but we've also had some stormy times. I'd rather keep my relationship with my son than be the chairman of the board...I don't think it's a wise idea to be chairman with a headstrong son." [Emphasis added.]

What is going on at Overstock.com?

According to Overstock.com’s Code of Business Conduct and Ethics, Patrick Byrne is required to:

Report to the Audit Committee of the Board of Directors any conflict of interest that may arise and any material transaction or relationship that could reasonably be expected to give rise to a conflict...

Did Patrick Byrne promptly report his Securities and Exchange Commission subpoena to Overstock.com’s Audit Committee of the Board of Directors?

Did he deliberately hide information about his subpoena from the Audit Committee?

If Patrick Byrne had reported his Securities and Exchange Commission subpoena to the Audit Committee shortly after receiving it, why did the company wait almost a year to disclose it?

Did Patrick Byrne have any disagreements with members of the Audit Committee concerning disclosure of his Securities and Exchange Commission subpoena?

Another provision of Overstock.com’s Code of Business Conduct and Ethics states:

Business records and communications often become public, and we should avoid exaggeration, derogatory remarks, guess work, or inappropriate characterizations of people and companies that can be misunderstood. This applies equally to e-mail, internal memos, and formal reports….

In accordance with these policies, in the event of litigation or governmental investigation please consult with the company’s General Counsel.

Patrick Byrne has not avoided “exaggeration, derogatory remarks, guess work, or inappropriate characterizations of people and companies that can be misunderstood.” His well documented actions have been at odds with Overstock.com’s Code of Business Conduct and Ethics.

Another question is whether Patrick Byrne promptly consulted with Overstock.com’s General Counsel after receiving his subpoena on May 17, 2006?

If Patrick Byrne had promptly consulted with the Company’s General Counsel about his subpoena, did the General Counsel advise him against disclosing the subpoena to the Audit Committee?

Waivers

According to the Securities and Exchange Commission:

Companies must comply with the code of ethics disclosure requirements promulgated under Section 406 of the Sarbanes-Oxley Act in their annual reports for fiscal years ending on or after July 15, 2003. They also must comply with the requirements regarding disclosure of amendments to, and waivers from, their ethics codes on or after the date on which they file their first annual report in which the code of ethics disclosure is required.

Did Overstock.com make any disclosures "of amendments to, and waivers from" its Code of Business Conduct and Ethics?

If the Company’s Board of Directors permitted actions by Patrick Byrne that were contrary to its Code of Business Conduct and Ethics without disclosing any waiver to the Securities and Exchange Commission, they may be afoul of securities laws.

The Securities and Exchange Commission investigation of Overstock.com and Patrick Byrne continues.

Written by:

Sam E. Antar (former Crazy Eddie CFO & convicted felon)

Update:

In Form 8–K, filed with the Securities and Exchange Commission, Ray J. Groves gave his purported reason for resigning:

Please accept my resignation from the board of directors of Overstock.com, Inc. effective immediately. My resignation relates to the Company’s prime broker suit.

Why did Ray J. Groves resign now?

Another Director, John A. Fisher, resigned on February 27, 2007, purportedly for the same reason.

Is it coincidental that Ray J. Groves finally decides to resign after Overstock.com's disclosure of Patrick Byrne’s Securities and Exchange Commission subpoena almost a year after he was subpoenaed?