Thursday, October 14, 2010

Does Overstock.com CEO Patrick Byrne Know When to Shut Up, Especially While the SEC Investigates his Company?

During an ongoing SEC investigation into financial reporting violations by a public company, competent lawyers will advise management that the wisest course of action is to simply shut up. Not so, with Overstock.com (NASDAQ: OSTK) CEO Patrick Byrne. He does not know when to stop blabbing away, misleading investors, and lying to the media – even during an ongoing SEC investigation of his antics.

For example, in 2009, I correctly reported in my blog that Overstock.com violated Generally Accepted Accounting Principles (GAAP) in accounting for its recoveries of certain offsetting costs and reimbursements amounts due to the company from its fulfillment partners (suppliers) who were under-billed in previous reporting periods, from Q1 2007 to Q 2 2008. Overstock.com should have restated its financial reports to recognize income when those offsetting costs and reimbursements were actually earned by the company in those previous reporting periods.

Instead, the company improperly recognized income as those amounts were collected in future accounting periods (Q4 2008 to Q3 2009) on a non-GAAP cash basis. In one instance, Overstock.com improperly reported Q4 2008 profits, even though the company should have reported a loss under accounting rules.

Despite many emails from me, Patrick Byrne stubbornly refused to correct his company's GAAP violations and even fired Grant Thornton as its auditor for agreeing with my recommendations. Instead, Byrne opened up his big mouth and attacked me on a stock market chat board and during various earnings calls in an effort to discredit me. Byrne even hired internet stalker Judd Bagley to interfere with my divorce and pretext my children and relatives on Facebook after I pointed out the company's accounting violations.

Patrick Byrne while intoxicated
The company's pretexting operation also targeted dozens of other journalists, bloggers, critics, and their minor children, too. Big Picture (over 140,000 subscribers) blogger Barry Rithholtz called Judd Bagley a "possible pedarast." His family was spied on, too. Eventually, Facebook booted Bagley.

Eventually, the SEC started investigating Overstock.com and the company was forced to restate its financial reports. Patrick Byrne will have a difficult time explaining to SEC investigators why they should not find that Overstock.com’s GAAP violations were a deliberate scheme to manipulate earnings. At the very least, it seems that the company was reckless in continuing to issue reports that violated accounting rules after being notified by me numerous times in emails which were also cc'd to the SEC.

Patrick Byrne’s more recent antics

More recently, Patrick Byrne gave a series of interviews which raise serious questions of possible illegal insider trading and misleading hype about the company’s financial performance to investors. In trying to explain his actions, Byrne raised more questions than answers about troubling issues concerning his recent sale of stock in late May 2010.

On May 6, 2010, the Salt Lake Tribune interviewed Byrne for an article headlined “Salt Lake City-based Overstock expects to break even in the next two quarters” and reported:
… Byrne anticipates the online discount retailer will just break even during the next two quarters -- and he isn't too concerned.

"If we can break even through September then we can then go on to make tens of millions of dollars during the fourth quarter," Byrne said, pointing to Overstock.com's busiest time of the year.
From May 20 to May 24, 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.

On July 9, 2010, nine days after Q2 2010 ended, but before Overstock.com reported earnings, Byrne continued to hype Overstock.com’s prospects despite concerns expressed by Investor’s Business Daily that the company would not meet analysts’ forecasts:
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.
Apparently, Byrne still led investors to believe that Overstock.com was going to report break even earnings and beat analysts’ estimates, by citing the previous year’s free cash flow numbers and reported income.

Judd Bagley pretexted minor children
However, Patrick Byrne did not tell Investor’s Daily that Overstock.com's free cash flow for the most recent 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. He made no effort to explain that Overstock.com was going to report a Q2 2010 loss, instead of break-even earnings.

Later, I will detail how Information Week interviewed Byrne and reported that Overstock.com's management "can roll up its profit-and-loss position in two hours, giving executives accurate, up-to-date insight for fast decision-making."

Overstock.com reports a dismal Q2 2010 loss and fails to meet Wall Street analysts' expectations

On August 5, 2010, 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 $319,000 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.

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

Concerns of possible insider trading and misleading statements

On August 6, 2010, I reported that:
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.
In his respective interviews with the Salt Lake Tribune before he dumped his stock and Investor's Daily after he dumped his stock, Patrick Byrne led investors to believe that Overstock.com would beat analysts' consensus estimates of a $.04 per share loss and report breakeven earnings.


Patrick Byrne attempts to refute possible insider trading claims in Forbes interview

On August 19, 2010, Forbes published a blog headlined “Overstock.com’s CEO Refutes Insider Trading Claims” and reported that:
He said during today’s interview, “I said we’d break even in the first 9 months and would come out ahead full-year. I don’t worry about each quarter and worry about what Wall Street’s estimates are. I believe we’re right on track.”
Note: Bold print and italics added by me.
That claim contradicts what the Salt Lake Tribune reported in May, as I detailed above:
… Byrne anticipates the online discount retailer will just break even during the next two quarters -- and he isn't too concerned.

Note: Bold print and italics added by me.
This time, Byrne tried deceive Forbes by claiming that Overstock.com was going to breakeven in the first three quarters of 2010 as a whole, rather than the second and third quarters separately.

In addition, Investor’s Daily had expressed reservations about Overstock.com beating analysts’ estimates, but Byrne continued to lead them to believe that the company would breakeven and beat analysts’ estimates by not reporting losses.

In a follow up video interview with Forbes, Patrick Byrne went on claim that:
I don’t, we don’t pay any attention to the stock price. I have no idea what Wall Street’s earnings consensus are, anything like that. We pay zero attention.
Forbes asked:
Knowing what you know now, would you have done it differently, would you have waited?
Patrick Byrne responded:
We don’t pay too much attention to the stock market, what people say, what people say on Wall Street. My sale had nothing to do with what I was thinking five weeks into the quarter. It’s all nonsense.
Oh really? Over the years, Overstock.com has authorized numerous stock repurchase programs buying back over $80 million in stock. In addition, the company has an ongoing repurchase program to buy back its convertible debt. Overstock.com’s recent 2009 10-K report contradicts Byrne’s claim that “I don’t, we don’t pay any attention to the stock price” by disclosing that:
We made the repurchases because we believed that the stock was trading at attractively low prices, that we had sufficient cash on hand for all reasonably possible contingencies, and that the use of the cash to repurchase shares was in the best interest of the Company and the stockholders.
Note: Bold print and italics added by me.
In addition, the issue is what Byrne knew or should have known 7 1/2 weeks into the quarter when he sold his stock and not what he "was thinking five weeks into the quarter."

What did Patrick Byrne know when he dumped his stock?

On October 13, 2010, Information Week published another interview with Patrick Byrne and reported:
Online discount retailer Overstock.com is recognized as a world-class technology organization. Using advanced information management technology, for instance, it can roll up its profit-and-loss position in two hours, giving executives accurate, up-to-date insight for fast decision-making.

Note: Bold print and italics added by me.
A world-class technology organization? So far, from 1999 to Q3 2009, every single financial report issued by Overstock.com had to be restated at least once, sometimes twice or even three times to correct material accounting errors. The company claimed that its last two restatements were caused by technology problems.

In its 2009 10-K report, Overstock.com claimed:
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.
In its latest Q2 2010 10-Q report, Overstock.com still claimed material weaknesses in internal controls because it still had not finished "implementing improvements to our information system."

If it is true that Overstock.com “can roll up its profit-and-loss position in two hours” why did Byrne lead the Salt Lake Tribune and Investors Daily into believing that Overstock.com would breakeven and beat forecasts, when it was already losing money during Q2 2010? What did Patrick Byrne really know about Overstock.com's numbers when he dumped his stock last May?

In any case, Patrick Byrne's inconsistent and contradictory claims will give the SEC plenty more issues to investigate. For them, I am sure that Patrick Byrne is a gift that keeps on giving.

Written by:

Sam E. Antar

Blog note:

New contributor Eva Ogonowska will soon be blogging here about other white-collar crime topics not previously covered in this blog. She has a graduate degree in Criminal Justice from John Jay College of Criminal Justice.

Disclosure:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped my cousin 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 heroic 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. Often, I refer cases to them.

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.

I do not own any Overstock.com securities long or short. My investigation of that company is a freebie for securities regulators to get me into heaven, though I doubt I will ever get there. My past sins are unforgivable.

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