Overstock.com CEO Patrick Dumped Stock Ahead of Bad Earnings Report and Misled Investors About Earnings

Updated on Tuesday, August 10 at bottom of post

I have reported frequently on a range of securities law violations by Overstock.com (NASDAQ: OSTK). The company’s latest earnings report yesterday raises still new questions, concerning possible insider trading and misleading statements by the company’s CEO, Patrick Byrne.

Yesterday, Overstock.com issued its Q2 2010 10-Q (quarter ended June 30) report and surprised investors by reporting a $1.4 million loss or a loss of $0.06 per share compared to a small $319k reported profit or earnings per share of $0.01 in the previous year’s comparable quarter, despite higher revenues.

Overstock.com failed to meet consensus analyst expectations for earnings, too. Overstock.com’s reported loss of $0.06 per share was far worse than analyst expectations of a $0.04 per share loss or a 50% higher loss than expected.

A disturbing event preceded this announcement.

On May 20, 2010, Patrick Byrne's 100% controlled High Plains Investments LLC dumped 140,000 company shares and collected over $3 million in proceeds, according to SEC filings. That was the first time that Patrick Byrne had ever sold any Overstock.com shares under his control. In my blog, I noted that such a sale was “not a bullish signal to investors.”

Was Byrne aware by May 20 that the company was having a bad quarter, and did he sell having knowledge of that fact? If so, he may be guilty of insider trading, a possible criminal offense.

Nine days after Q2 2010 ended, by which time Byrne undoubtedly knew that the quarter had ended with a loss, Investor’s Business Daily reported:

But break-even might be a tough goal for the second quarter. Analysts polled by Thomson Reuters expect the company later this month will report a loss of 4 cents a share, compared with a 2-cent profit a year earlier.

Investor’s Business Daily reporter Doug Tsuruoka asked Patrick Byrne:

You predicted that Overstock would only break even in the second and third quarter, but didn't seem too concerned by that. Why?

Byrne responded:

Given that in 2009 we had close to $40 million of free cash flow (and $8 million net income), I think we should just continue building the intrinsic value of the business right now.

In other words, nine days after Q2 2010 ended, Byrne apparently led investors to believe that Overstock.com was going to break even in that quarter by citing previous year's free cash flow numbers and reported income. However, Byrne did not mention that Overstock.com's this year's free cash flow for the six months ended June 30, 2010 was negative $54.8 million compared to negative $35.8 million in the previous year's comparable period or about $19 million lower.

Written by:

Sam E. Antar

Update: Friday afternoon stock market close

Overstock.com shares dropped $3.40 to per share to close at $16.78 or a 16.85% decline in market value. In other words, Overstock.com's market capitalization dropped over $50 million as investors reacted to the company's surprise earnings announcement.

Patrick Byrne was luckier. In late May, his 100% controlled High Plains Investments LLC sold 140,000 shares and pocketed about $3.1 million in proceeds at an average selling price of $22.11 per share. That's $5.33 per share higher than Overstock.com's closing price per share.

Nice timing for Byrne! Unfortunately investors don't have his access to the company's books and records and on a daily basis.

Update: Overstock.com's earnings conference call

On Monday, August 9, 2010, Overstock.com was scheduled to a hold conference call at 3 PM ET to discuss its Q2 2010 financial reports with investors. Going Concern blogger Caleb Newquist reported that I sent CEO Patrick Byrne, company President Jonathan Johnson, Public Relations Director Kevin Moon, and audit committee member Joseph J. Tabacco the following email:

Dear Patrick Byrne and other persons from Overstock.com:

Overstock.com’s Q2 2010 conference call is scheduled for today at 3 PM ET. I will be calling in. I expect to be permitted to participate in said call and ask relevant questions about Overstock.com. As I recall, in 2005 you allowed a lay person named Phil Saunders AKA Easter Bunny to participate in the call.

Sam E. Antar

Portfolio.com and Street.com columnist Gary Weiss predicted:

I think that we can expect no impolite questions from the quaking analysts in attendance, and no questions permitted from Sam Antar

During the conference call, Jonathan Johnson asked for questions and the operator instructed all participants to dial *1 to ask questions. I dialed *1 as instructed, but the company ignored my request to ask questions and falsely claimed that there were no other questions.

Other blogs

Going Concern: Remember the $3 Million in Overstock Shares Patrick Byrne Sold? Sam Antar Does by Caleb Newquist

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 in cold-blood for fun and profit, and 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.

There is a saying, "It takes one to know one." Today, I work very closely with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify and catch white-collar criminals.

I do not seek or want forgiveness for my vicious crimes from my victims. I plan on frying in hell with other white-collar criminals for a very long time.

Recently, I exposed GAAP violations by Overstock.com (NASDAQ: OSTK) which caused the company to restate its financial reports for the third time in three years. The SEC is now investigating Overstock.com and its CEO Patrick Byrne for securities law violations (Details here, here, and here).

In addition, the SEC is now investigating possible GAAP violations by Bidz.com (NASDAQ: BIDZ) after I alerted them about the company's inventory accounting practices.

I do not own Overstock.com securities long or short. My investigation of the company is a freebie for securities regulators to get me into heavean, though I doubt I will ever get there.