Monday, April 05, 2010

Open Letter to the Securities and Exchange Commission (Part 8): Bring Enforcement Action Against Overstock.com for False and Misleading Disclosures

The SEC must get Patrick Byrne sober
Updated at 9:42 PM Eastern

To Mary Schapiro (Chairperson of the Securities and Exchange Commission):

I respectfully recommend that the Securities and Exchange Commission bring an enforcement action against Overstock.com (NASDAQ: OSTK) for violations of securities laws and retaliation against its critics. Otherwise, the SEC will send a clear message that violations of Generally Accepted Accounting Principles (GAAP), making false and misleading statements to investors, and retaliation against critics who uncover financial reporting irregularities will be tolerated and go unpunished.

On January 29, 2010, Overstock.com disclosed that the company was restating its financial reports for the third time in three years. In Overstock.com's recently filed 2009 10-K report, the company falsely tried to place the entire blame for its recent restatement of financial reports on the following:
We lacked a sufficient number of accounting professionals with the necessary knowledge, experience and training to adequately account for and perform adequate supervisory reviews of significant transactions that resulted in misapplications of GAAP.
Information technology program change and program development controls were inadequately designed to prevent changes in our accounting systems which led to the failure to appropriately capture and accurately process data.
I doubt that Overstock.com, led by CEO Patrick M. Byrne, will ever come clean with investors and admit that they deliberately violated GAAP and other SEC disclosure rules. As I will summarize below, the above disclosure omits material information in violation of Rule 10-5.

In addition, Overstock.com made false disclosures and certain corporate officers made false claims in violation of Rule 10b-5 to support the company's improper accounting for recoveries from underbilled and overpaid fulfillment partners. The company deliberately failed to correct those GAAP violations, after being notified by me.

Instead, CEO Patrick Byrne orchestrated a vicious retaliation campaign against me by smearing me, interfering in my divorce, and pretexting me, my family, and other critics. Overstock.com fired Grant Thornton as its auditors after they recommended that the company restate its financial reports to comply with GAAP, as I recommended.

If anyone at Overstock.com should be held fully responsible for the company's GAAP violations, it is the Audit Committee, CEO Patrick Byrne, and company President Jonathan E. Johnson. They all kept their positions at Overstock.com, while apparently scapegoating former CFO David Chidester and former Treasurer Rich Paongo, both who are no longer employed by the company.

From its inception in 1999 to date, each and every initial financial report for every reporting period has violated GAAP or some other SEC disclosure rule. Overstock.com even increased bonuses in 2009, while KPMG, its auditors, cited the company for material weaknesses in internal controls over financial reporting.

Brief Background

Starting on February 4, 2009, I correctly reported in my blog that Overstock.com violated Generally Accepted Accounting Principles (GAAP) in its accounting for recoveries of amounts due from underbilled fulfillment partners. Overstock.com should have restated its financial reports to reflect income when it was actually earned from those fulfillment partners, less a reasonable estimate for uncollectable amounts (See SFAS No. 154 and SFAS No. 5).

Instead, Overstock.com improperly deferred income that it earned but underbilled its fulfillment partners during prior reporting periods (Q3 2008 and before) by moving such income to future reporting periods (Q4 2008, Q1 2009, Q2 2009, and Q3 2009). In other words, Overstock.com took income that should have been reported in prior reporting periods (Q3 2008 and before) and moved it to future reporting periods (Q4 2008 and later) to materially overstate its financial performance in those later reporting periods. In effect, Overstock.com created an illegal "cookie jar" reserve to inflate its future financial performance.

I correctly reported that Overstock.com ridiculously claimed that the collection of the entire amount of its underbillings (every single penny) “was not assured” and instead falsely claimed that a "gain contingency" existed, rather than make a reasonable estimate of uncollectable amounts as required under SFAS No. 5.

I correctly reported that Overstock.com's improper accounting for recoveries from underbilled fulfillment partners resulted in the company reporting Q4 2008 profit, rather than a properly reported Q4 2008 loss.

Starting in February 2009, I sent emails to Overstock.com that were cc'd to the Securities and Exchange Commission, expressing my concerns about the company's GAAP violations. Instead of listening to me in February 2009, Overstock.com continued to violate GAAP in its Q1, Q2, and Q3 2009 financial reports.

Note: More details in: 08/05/09: Open Letter to the Securities and Exchange Commission: Stop Overstock.com GAAP Violations Now!

In September 2009, the SEC Enforcement Division re-opened its investigation of Overstock.com followed by a parallel probe by the SEC Division of Corporation Finance.

In October 2009, the SEC Division of Corporation Finance discovered that Overstock.com overpaid a fulfillment partner $785,000 during 2008. The company recovered that overpayment in Q1 2009 and improperly reported the overpayment recovery as income in that same quarter, rather than properly restate its 2008 financial reports to correct that error. Overstock.com used the same false "gain contingency" excuse again to justify the company's improper accounting treatment for its recovery of the overpayment.

Overstock.com improperly concealed the recovery of the overpayment by including that amount in recoveries from underbilled fulfillment partners in Q1 2009 instead of separately disclosing the overpayment recovery in its financial reports.

In November 2009, Overstock.com even fired Grant Thornton as its auditors and both Patrick Byrne and Jonathan Johnson publicly vilified them when they recommended that the company restate its financial reports to comply with GAAP, as I recommended in my blog and emails to Overstock.com that were cc'd to the Securities and Exchange Commission.

On January 29, 2010, Overstock.com finally admitted that its accounting for recoveries from underbilled and overpaid fulfillment partners was "inappropriate" and that no gain contingency existed, as I previously reported in my blog.

On March 31, 2010, Overstock.com's 2009 10-K report restated the company's Q4 2008 financial report to show a properly reported net loss rather than an improper net profit, as I correctly said it should in my blog more than a year earlier.

In other words, this convicted felon, who Patrick Byrne has called on many occasions "Sam the crook", was right about Overstock.com's GAAP violations and the company's former auditors PricewaterhouseCoopers, its Audit Committee, and its management team were all wrong.

Overstock.com Corporate Sponsored Campaign to Intimidate Me and Family Members

Soon after I started exposing Overstock.com's recent GAAP violations in my blog, Patrick Byrne responded by escalating his vindictive corporate sponsored retaliation campaign against me, other critics who agreed with my correct analysis, and others he perceived as being part of his deluded conspiracy theory involving the "Sith Lord."

In April 2009, Patrick Byrne sent his paid cyberstalker Judd Bagley to interfere with my divorce proceeding and attempted to blackmail me into settling that case and even tried to contact my ex-spouse in an attempt to intimidate me.

Starting around May or June 2009 Judd Bagley "Facebook friended" me, journalists, bloggers, and other critics on Facebook to collect personal information on them and their family members and violated their terms of service by using a false identity. Bagley even attempted to "Facebook friend" my son and family members of other critics, too.

In December 2009, Judd Bagley posted the names of over 7,000 critics and their "Facebook friends" which included family members under age 18 (including my minor relatives) on Byrne's funded and controlled Deep Capture website as part of his pretexting scheme to harass and intimidate Overstock.com's critics.

Note: More details provided in: How Patrick Byrne Stalked Critics and the Media on Facebook by Gary Weiss

I tried to call into Overstock.com's quarterly conference calls to ask relevant questions about accounting issues, only to be refused access and ridiculed by Byrne on those same calls.

False Statements and Innuendo Made by Certain Corporate Officers to Justify Overstock.com's Improper Accounting

Soon after I correctly indentified certain GAAP violations by Overstock.com, Patrick Byrne and Jonathan Johnson made certain false statements to investors, as described below.

On February 6, 2009, Patrick Byrne responded to my original February 4 blog post identifying the GAAP violations described above on the InvestorVillage message board by claiming that:
Antar's ramblings are gibberish. Show them to any accountant and they will confirm. He has no clue what he is talking about.
A September 25, 2009, Salt Lake Tribune article quoted Patrick Byrne as saying:
"Gary Weiss and Sam Antar are goniffs," Byrne declared, using a yiddish term that he says means "a con man, a hustler and a scoundrel."
If the SEC is listening to them, their next step is to let Bernie Madoff write their indictment of me." Byrne was referring to the mastermind, now in prison, of a multibillion-dollar fraud whose case helped show how laissez faire Wall Street regulators had become.
On November 18, 2009, during a conference call with analysts and investors, Patrick Byrne falsely claimed:
In fact, we as I understand it, this doesn't change any positive quarter to a negative quarter or any negative quarter to a positive quarter.
In a November 25, 2009 Salt Lake Tribune article, company President Jonathan Johnson was quoted as saying:
None of these changes that they [Grant Thornton] are talking about, or that people at the SEC are now asking about, make any of our quarters go from negative to positive or from positive to negative.
As it turns out, all of the above explanations claimed by Patrick Byrne and Jonathan Johnson were false, misled investors into believing that Overstock.com properly complied with GAAP, and violated Rule 10b-5. The company actually lost money in Q4 2008 rather than make a profit as previously claimed. Overstock.com deliberately violated GAAP and as evidenced by its ridiculous "gain contingency" claim, its retaliation against me and other critics, and false statements made by Byrne and Johnson to support the company's improper accounting treatment for recoveries from underbilled and overpaid fulfillment partners.

Conclusion

As the criminal CFO of Crazy Eddie, I respected the SEC as an adversary, even as it brought me to my knees. Unfortunately, the public has lost confidence in the SEC because of its failure to listen to Harry Markopolos about Bernie Madoff and David Einhorn about Lehman Brothers and Allied Capital. The SEC has an excellent chance on its second investigation of Overstock.com to regain that lost public confidence by bringing a successful enforcement action against Overstock.com, its Audit Committee, and its management team for securities law violations, including Rule 10b-5.

In addition, you have an excellent opportunity to show that issuer retaliation by public companies against critics will not be tolerated. If you fail to address that issue, you are warned that America will be deprived of future independent whistleblowers like Ralph Nader and books like "Unsafe at Any Speed."

From a former adversary and respectfully,

Sam E. Antar

Update: Associated Press reporter Paul Foy permitted Patrick Byrne to continue lying to investors in an article published today about Overstock.com's GAAP violations, even though I documented Byrne's lies when interviewed by Foy and in our emails. The article states:
Byrne, who owns nearly 30 percent of the company's shares, says Overstock's accounting errors were generally conservative. The latest involved 0.1 percent of revenue and gave the company no advantage, he said.
"No advantage," he says? That is a flat out lie and Foy permitted Byrne to say it unchallenged in the article, even though he had information from Overstock.com's own SEC filings and from me showing that Byrne lied.

Nowhere does the article mention that Overstock.com's GAAP violations enabled the company to improperly report a Q4 2008 net profit, rather than a properly reported net loss. The article fails to mention that Overstock.com restated its Q4 2008 financial report to correct those GAAP violations and changed its previously reported net profit to a properly reported net loss.

Patrick Byrne went on to personally attack me. The AP article quotes Byrne as saying:
Byrne responds that "it's like hearing Bernie Madoff say I'm a bad guy."
No matter what Patrick Byrne calls me whether it is "Sam the crook" or "Bernie Madoff", this convicted felon was right about Overstock.com's GAAP violations and the company, its Audit Committee, its management including Byrne, and its auditors were all dead wrong.

At the very least, Overstock.com should immediately retract Byrne's false remarks so that investors reading the Associated Press article will not be misled about the real scope of the company's accounting errors.

Patrick Byrne will continue lying to investors unless the SEC puts a stop to his shenanigans and holds him accountable for his actions.

For additional information, please read Gary Weiss blog here and Going Concern blog here.

Note to Readers: Please order "Selling America Short: The SEC and Market Contrarians in the Age of Absurdity" by Richard Saurer and especially read Chapter Twelve: The Overstock Flame Wars.

My previous open letters to the SEC (please note that each letter is based on Overstock.com's deliberately vague, incoherent, and inconsistent, and often contradictory disclosures at the time each one was issued):

08/05/09: Open Letter to the Securities and Exchange Commission: Stop Overstock.com GAAP Violations Now!

11/22/09: Open Letter to the Securities and Exchange Commission Part 2: New Information on Overstock.com's GAAP and SEC Disclosure Violations

11/23/09: Open Letter to the Securities and Exchange Commission Part 3: Overstock.com Lied About Grant Thornton and Concealed Error

11/26/09: Open Letter to the Securities and Exchange Commission Part 4: Patrick Byrne Ignores Real Issues As He Vilifies Grant Thornton

12/14/09: Open Letter to the Securities and Exchange Commission Part 5: Issuer Retaliation Complaint Against Overstock.com

01/03/10: Open Letter to the Securities and Exchange Commission Part 6: Conflicting Disclosures by Overstock.com Reveal Improper Audit Opinion Shopping

02/02/10: Open Letter to the Securities and Exchange Commission Part 7: Why Overstock.com and David Chidester Parted Ways

Disclosure

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes, simply because I could.

If it weren't for the efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.

I do not own Overstock.com securities short or long. My research on Overstock.com and in particular its lying CEO Patrick Byrne is a freebie for securities regulators and the public in order to help me get into heaven, though I doubt that I will ever get there anyway. I will probably end up joining corporate miscreants such as fifth rate crooks like Patrick Byrne in hell.

In any case, exposing Overstock.com's financial reporting violations is a lot of fun and analyzing the company's financial reporting is a forensic accountant's wet dream.

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