On Friday, Overstock.com (NASDAQ: OSTK) announced that the Securities and Exchange Commission issued the company two no-action letters. In those no-action letters the SEC office in Utah recommended no enforcement action against Overstock.com and its executives after slightly more than two years of investigating the company. According to Overstock.com’s press release, Patrick Byrne, CEO, was ecstatic and self-congratulating in claiming that:
"I know that the SEC has an obligation to look into allegations it receives about any company -- even when those allegations are false," said Patrick Byrne, Overstock.com's chairman and chief executive officer. "I believe that this inquiry was initiated, and persisted, because of false allegations made by a cohesive group of short sellers and a few financial journalists who dutifully serve them. In this case, I believe these folks fomented the SEC investigation against Overstock.com then tried to claim that the existence of an SEC investigation was evidence of wrong doing. We knew that was false."
Byrne added, "Yipikaye."
Unfortunately for Patrick Byrne, it is not “Yipikaye,” just yet. The Securities and Exchange Commission’s no-action letters do not preclude them from re-examining Overstock.com’s financial disclosures and taking possible future action against the company and him despite the SEC’s recent actions. In other words, the SEC no-action letters do not close the book on Overstock.com’s misdeeds as Patrick Byrne has would like investors to believe.
The SEC has not endorsed Overstock.com accounting practices and financial disclosures. The SEC has not “sprinkled holy water” on Overstock.com’s accounting practices and disclosures as claimed by Byrne. Any representation by Overstock.com, Patrick Byrne, and its management to the contrary is unlawful and in violation of Section 23 of the Securities Act of 1933 and Section 26 of the Securities Exchange Act of 1934.
I respectfully disagree with the SEC’s no-action letters
I have great respect for the Securities and Exchange Commission, based both on working closely with them in recent years and as an adversary during my criminal Crazy Eddie years. However, my respect for the SEC does not preclude me from disagreeing with their actions and conclusions from time-to-time. In the specific case of Overstock.com, I respectfully disagree with the SEC’s no-action letters and I still adamantly believe that Overstock.com has violated many securities laws as carefully detailed and documented in my blog. Therefore, I plan on continuing my research and exposure of the false and misleading statements, inconsistent and contradictory disclosures, lies and misconduct by Overstock.com and its unprincipled management team.
SEC issued a no-action letter to Gradient Analytics
Patrick Byrne disagrees with the February 2007 SEC no-action letter sent to Gradient Analytics, which also recommended no enforcement action regarding Gradient. Therefore, Byrne should have no issue with my disagreement with the SEC no-action letters issued to Overstock.com and certain executives, especially in light of the issues carefully detailed and documented in my blog. Unlike Byrne, I agree with the SEC’s no-action letter regarding Gradient and I respectfully disagree with their no-action letters regarding Overstock.com and its executives. Overstock.com’s lawsuit alleging wrongdoing by independent research firm Gradient Analytics and short seller Copper River Partners, formerly Rocker Partners, still continues despite the SEC no-action letter issued to Gradient recommending no enforcement action against Gradient. Both Gradient and Copper River have filed countersuits alleging misconduct by Overstock.com, its executives, and directors.
Patrick Byrne does not seem to understand is that even well meaning and hard working people at the SEC can make mistakes from time-to-time. Unlike me, Patrick Byrne has wrongfully disparaged the SEC and its personnel, for example, by questioning their motives and calling them a “captured regulator.” However, unlike Patrick Byrne’s irrational ranting about a “captured” SEC and corrupt regulators, I will not unreasonably question the SEC’s motives and I will not disparage them with false accusations and innuendos. Instead, I respectfully disagree with their actions based on my documentation of Overstock.com's misdeeds as carefully detailed in my blog.
David Einhorn’s new book
As you read, you may ask the same questions I ask myself: Where are the regulators? Where is the Securities and Exchange Commission (SEC)? Who works at these government agencies that are so uncaring about the misuse of taxpayer money? What is Congress doing? What are the prosecutors doing? And finally, where are the investigative reporters and their editors who are incapable of digging into a tough story and blowing the whistle?
Einhorn goes on to detail the failings of investment banks and Wall Street analysts, too.
While I agree with many of David Einhorn’s conclusions and I recommend that everyone read his fascinating and informative book, I respectfully disagree with Einhorn on one key point in regards to the SEC. The SEC, in general, is overwhelmed with investor complaints and has too few resources to appropriately and fully investigate all cases of wrongdoing, especially in complicated cases. It is the duty of our President and Congress to provide the SEC with enough resources to thoroughly and fully investigate all cases of wrongdoing. Without adequate resources, the SEC cannot be expected to appropriately investigate all complicated securities fraud cases, despite their best efforts.
Like David Einhorn, I agree that too many investment bankers, Wall Street analysts, accounting firms, audit committees, and journalists have dropped the ball by missing out and failing to adequately address many red flags. Worst yet, particularly in the case of Overstock.com, many brave people who dig deep enough and find possible wrongdoing are subject to brutal reprisals, harassment, intimidation, and humiliation. Recently, Gary Weiss observed in his blog, "Byrne, issuing a typically gloating press release, can now be expected to redouble his efforts to deceive investors and lie and stalk his critics, thanks to the SEC." I agree with both David Einhorn and Gary Weiss that the SEC has utterly failed to address the issue of reprisals by issuers against analysts, journalists, and others who take great personal risks to expose many red flags by public companies. The SEC seems to be unwilling or unable to protect such whistleblowers from retaliation.
Overstock.com’s recent press release and previous action by the SEC
Overstock’s press release paints a picture of a company unfairly subjected to the wrath of false allegations that caused the SEC to begin investigating Overstock in May 2006; which investigation finally ended with the SEC’s decision not to recommend any enforcement action against Overstock.
However, the press release does not tell the whole story of the SEC’s investigation of Overstock.com. As detailed in this blog and elsewhere, I believe that Patrick Byrne’s erratic and utterly despicable behavior, his outright lies, misinformation, and false and misleading statements drew the initial attention of the SEC. In addition, I believe that the SEC was concerned about Overstock.com’s contradictory, inconsistent, and false and misleading disclosures in its financial reports filed with the SEC, too. The SEC Division of Corporation Finance has at least forced Overstock.com to comply with GAAP in certain revenue accounting practices, revise some of the company’s confusing financial disclosures, and correct other false and misleading financial disclosures that were relied upon by investors and analysts.
Overstock.com’s self-congratulatory press release does not disclose that during the SEC investigation, a separate review by the SEC Division of Corporation Finance discovered that the company was intentionally not presenting its revenues and related financial disclosures in compliance with federal securities law, including Generally Accepted Accounting Principles (“GAAP”). The correspondence that the SEC Division of Corporation Finance sent to Overstock.com revealed that the company was, as correctly alleged by some individuals, presenting some of its financial information and metrics in violation of GAAP. Upon notice by the SEC of the above, Overstock had to either address the SEC’s findings and change the prohibited accounting practices or the SEC would bring a formal action against Overstock. In order to disagree with the above, we would have to accept, as true, the proposition that Overstock is permitted (under federal securities law) to accept or reject, solely at Overstock’s discretion, the SEC’s directed changes.
If the SEC is in possession of information that leads it to believe that an issuer is operating in violation of federal securities law, the SEC has two initial options: (1) It can communicate with the issuer detailing its findings (violations) and give the issuer the opportunity to correct the violations or (2) the SEC can bring a formal action against the issuer in an effort to force its compliance with federal securities law.
The SEC’s duty is to protect the investing public by causing issuers to present information in regulatory filings in compliance with federal securities law. The SEC can communicate with the issuer and give such issuer the opportunity to correct the violations discovered by the SEC. This often used course of action utilizes considerably less of the SEC’s limited resources than bringing a formal action. In Overstock.com’s case, the SEC found violations of federal securities law and the company was faced with the decision to either make the changes necessary to comply with the law or wait for notice from the SEC that a formal action has been commenced against it.
Patrick Byrne admits that the SEC was only doing its job only after it forced certain disclosures in Overstock.com’s regulatory reports to be reported in compliance with federal securities law. However, as detailed above, Overstock.com omits any mention of the SEC’s actions from its press release. Additionally, Patrick Byrne was so ecstatic only after the SEC forced Overstock.com to correct some of its false and misleading information in financial reports in order to settle this matter for now as he pounded his chest with a triumphant “Yipikaye”.
Not yet “Yipikaye”
Contrary to claims espoused by Byrne in the past, at least some of the allegations made to the SEC have so far been proven to be true. Many other allegations, such as Gradient’s reports from 2003 to 2005 detailing certain troubling accounting practices and financial disclosures by Overstock.com were probably correct and will likely be adjudicated in Gradient’s favor, if Overstock.com’s litigation against Gradient and Copper River continues to trial. More recent new details of what I believe are securities law violations by Overstock.com, as carefully detailed in my blog, were not the initial subject and focus of the original SEC’s subpoenas to the company and Byrne way back in May 2006. In any case, the SEC is not precluded from re-examining any of Overstock.com’s older disclosures or investigating any of the company’s more recent disclosures and taking any future action against the company.
This blog will continue to inform investors, Wall Street, the SEC, and others about what I continue to believe are Overstock.com’s violations of securities laws. I stand behind the accuracy of my blog and I see no reason to question the integrity and hard work of the SEC, even while I disagree with them at times. It is not “Yipikaye” yet for Patrick Byrne. Stay tuned.
Sam E. Antar (former Crazy Eddie CFO and a convicted felon)
Disclosure: Not long or short Overstock.com and no affiliation with Gradient Analytics and Copper River Management.
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