Patrick Byrne Pockets $3.1 Million from Dumping Overstock.com Shares While Trying to Stave Off Possible SEC Enforcement Action

Patrick Byrne intoxicated after drinking too much alcohol

Amidst an ongoing Securities and Exchange Commission investigation into financial reporting violations by Overstock.com (NASDAQ: OSTK), CEO Patrick Byrne's 100% controlled High Plains Investments LLC dumped 140,000 company shares and collected over $3 million in proceeds during the last several days, according to SEC filings. This marks the first time that Patrick Byrne has ever sold any Overstock.com shares under his control, not a bullish signal to investors.

Meanwhile, the company is desperately trying to stave off an enforcement action by the SEC. Before I discuss that issue, let's review some recent history.

Why the SEC is Investigating Overstock.com

So far, each and every initial financial report for every reporting period issued by Overstock.com from the company's inception in 1999 to Q3 2009 violated GAAP or some other SEC disclosure rules. Likewise, every single audit report issued by PricewaterhouseCoopers, Overstock.com's former auditors, from 1999 to 2008 was wrong turned out to be false, too. In addition, information uncovered by investigative journalist Roddy Boyd shows that managment deliberately concealed material weaknesses in internal controls over financial reporting as far back as 2005.

More recently, during 2009, I detailed how Overstock.com deliberately violated Generally Accepted Accounting Principles (GAAP) in recognizing income for recoveries from underbilled and overpaid fulfillment partners by improperly claiming that a “gain contingency” existed when it did not actually exist under accounting rules.

Under GAAP, Overstock.com is required to recognize income from underbilling and overpaying its fulfillment partners when such income was actually earned (before Q3 2008). By improperly claiming that a “gain contingency” existed, Overstock.com improperly recognized income as monies were recovered from the underbilled and overpaid fulfillment partners in future reporting periods on a non-GAAP cash basis. Therefore, Overstock.com improperly shifted income earned before Q3 2008 to future accounting periods (Q4 2008 to Q3 2009). In Q4 2008, Overstock.com improperly reported a $1.014 profit, instead of a $750k because of GAAP violations.

Creepy Judd Bagley

I notified both the company and the SEC of Overstock.com's improper accounting for recoveries from underbilled fulfillment partners and later on, for overpaid fulfillment partners. Instead of properly complying with GAAP, Overstock.com CEO Patrick Byrne defamed me in various quarterly conference calls with analysts and investors, sent his paid internet stalker Judd Bagley to interfere in my divorce proceedings, and even had Bagley and spy on my family and other company critics (including our minor family members) using a fake Facebook name.

In September 2009, the SEC re-opened a previously closed investigation of Overstock.com after I notified them of violations of Generally Accepted Accounting Principles (GAAP) in the company's reporting of recoveries from previously underbilled fulfillment partners.

In November 2009, Overstock.com fired Grant Thornton as its auditors after they recommended that the company restate its financial reports to correct GAAP violations, as I previously called for in my blog. In December 2009, KPMG replaced Grant Thornton as Overstock.com's auditors.

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. However, a few days later, Patrick Byrne falsely claimed to AP reporter Paul Foy that "Overstock's accounting errors were generally conservative...and gave the company no advantage."

In its Q1 2010 10-Q report, Overstock.com reported continuing material weaknesses in internal controls.

Overstock.com's Current Discussions with SEC

According to certain sources, Overstock.com is currently trying to stave off an enforcement action from the Securities and Exchange Commission by claiming that management had no "intent" to violate GAAP and other SEC disclosure rules and that its history of financial reporting problems was a result of incompetent staffing. I find it hard to believe that any rational person the SEC could be so stupid as to believe such nonsense from company paid lawyers.

How can Overstock.com claim a "lack of intent" when its management defiantly failed to promptly correct GAAP violations when notified by me and later fired Grant Thornton as its auditors, rather than correct those GAAP violations? Worse yet, the company engaged in a vicious campaign to stalk, harass, and intimidate me and other media critics. The company even spied on me, other critics, and our families.

If the SEC fails to take action against Overstock.com, it will send a clear message that whistleblowers who correctly point out securities law violations are still not welcome despite the regulator's widely publicized bungled investigation of Bernie Madoff, after they ignored whistleblower Harry Markopolos.

As I said in my last open letter to Chairperson Mary Schapiro, "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."

Written by:

Sam E. Antar

Recommended Reading (Especially for the SEC Commissioners, Lawyers, and Investigators)

Gary Weiss - Patrick Byrne Dumps His Overstocked Overstock Shares by Gary Weiss

The Big Picture - Long OSTK, Short Byrne by Barry Ritholtz
May 26, 2010: Going Concern - Why Did Patrick Byrne Sell $3 million in Overstock.com Shares? by Caleb Newquist

May 26, 2010: Jr Deputy Accountant - It's Not at All Suspicious That Patrick Byrne Just Unloaded a Bunch of Overstock Shares by Adrienne Gonzalez

Selling America Short: The SEC and Market Contrarians in the Age of Absurdity by Richard Sauer (Wiley 2010) - Chapter 12: The Overstock Flame Wars

Stockwatch - Overstock.com faces another shoddy accounting challenge by Lee M. Webb

Crain's New York Business - Crazy Like a Fox by Aaron Elstein (Download)

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. However, I doubt that I will ever get into heaven anyway, because my sins are unforgivable. 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.