Dear Allison H. Abraham and Clay Corbus, Audit Committee Members:
When the Securities and Exchange Commission investigated Crazy Eddie, I found them to be tenacious in pursuing an investigation of my criminal activities. Class action plaintiff lawyers are an equally persistent bunch of people, too. Crazy Eddie’s Audit Committee members spent years during the government investigations and class action law suits directed at Crazy Eddie, defending their actions using extensive amounts of time, resources, and funds.
As you know, Securities and Exchange Commission is now investigating Overstock.com and its CEO, Patrick Byrne. A subpoena was sent to the company on May 9, 2006 and a few days later on May 17, 2006, to its CEO Patrick Byrne. The Securities and Exchange Commission is concerned about possible securities law violations by Overstock.com, its CEO Patrick Byrne, and others.
An issue of concern to you as Audit Committee members is compliance with Overstock.com’s Code of Business Conduct and Ethics and reporting any amendments to, and waivers from, its ethics codes as required by the Securities and Exchange Commission.
It is possible that actions by certain employees of Overstock.com violate the company's Code of Business Conduct and Ethics. It appears that such possible violations of Overstock.com’s Code of Business Conduct and Ethics may have been executed with the approval and/or endorsement of one or more of the company's Senior Financial Officers (as defined by its Code) and may be construed by the Securities and Exchange Commission as an ethics violation by such officers. If it is determined that you failed to act on possible material ethics violations by Senior Financial Officers of the company, there may be disclosure issues with the Securities and Exchange Commission.
In the addendum at the end of this letter, I provide you with sources of information that have raised issues about activities of Patrick Byrne, Judd Bagley, and other employees of Overstock.com.
Patrick Byrne, Judd Bagley, and all other Overstock.com employees are subject to Overstock.com’s Code of Business Conduct and Ethics
Overstock.com’s Code of Business Conduct and Ethics states:
This Code of Business Conduct and Ethics covers a wide range of business practices and procedures. It applies to all our directors, officers, employees, except for Section 14, which applies only to our Senior Financial Officers. It does not cover every issue that may arise, but it sets out basic principles to guide all employees of the Company.
You should investigate Patrick Byrne, Judd Bagley, and possibly other Overstock.com employees for possible improper behavior under the company's Code of Business Conduct and Ethics.
The introduction of Overstock.com’s Code of Business Conduct and Ethics states in part:
All of our employees must conduct themselves accordingly and seek to avoid even the appearance of improper behavior.
Item 5 of Overstock.com’s Code of Business Conduct and Ethics states in part:
No employee should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other intentional unfair-dealing practice.
Item 8 of Overstock.com’s Code of Business Conduct and Ethics states in part:
Business records and communications often become public, and we should avoid exaggeration, derogatory remarks, guess work, or inappropriate characterizations of people and companies that can be misunderstood. This applies equally to e-mail, internal memos, and formal reports….
In accordance with these policies, in the event of litigation or governmental investigation please consult with the company’s General Counsel.
Additional item to consider
On May 17, 2007, Patrick Byrne received a subpoena from the Securities and Exchange Commission. Patrick Byrne’s subpoena was not disclosed until almost a year later on May 9, 2007, in the company's 10 - Q report filed with the Securities and Exchange Commission, for the quarter ended March 31, 2007.
Some questions to consider asking
When did Patrick Byrne disclose his Securities and Exchange Commission subpoena to the company’s General Counsel?
If Overstock.com’s General Counsel was informed about the subpoena by Patrick Byrne, did he promptly inform the Audit Committee?
When did the Audit Committee learn about Patrick Byrne’s subpoena?
If the Audit Committee was promptly informed about Patrick Byrne’s subpoena, why was the disclosure delayed?
When were the auditors informed about Patrick Byrne’s subpoena?
Item 12 of Overstock.com’s Code of Business Conduct and Ethics states in part:
Any waiver of this Code for executive officers or directors may be made only by the Board or Audit Committee and will be promptly disclosed on Form 8–K within five days or otherwise required by law or stock exchange regulation. Any waiver of this Code for any other employee may be made only by (i) the President (ii) the General Counsel, or (iii) the Board or Audit Committee.
Additional item to consider
Since Patrick Byrne is the CEO and not the President, General Counsel, or Audit Committee member of Overstock.com, you should consider who had the authority to approve of Judd Bagley’s activities that possibly violated the company's Code of Business Conduct and Ethics, whether it may be Jason C. Lindsey (President) or Jonathan Johnson (General Counsel).
Some questions to consider
If Patrick Byrne has endorsed and encouraged Judd Bagley’s activities on his antisocialmedia.net smear web site, did Lindsey or Johnson approve of it?
If Patrick Byrne has endorsed and encouraged Judd Bagley’s activities on internet message boards, sometimes using anonymous or misleading aliases, did Lindsey or Johnson approve of it?
Did Patrick Byrne exceed his authority, if he approved of possible waivers from Overstock.com's Code of Business Conduct and Ethics for Judd Bagley?
Item 14 of Overstock.com’s Code of Business Conduct and Ethics states:
As used in this Section 14, the term “Senior Financial Officer” means the Company’s President, Principal Financial Officer, Principal Accounting Officer and Controller, or persons performing similar functions. The Senior Financial Officers are subject to the entire Code of Business Conduct and Ethics. In addition, however, the Senior Financial Officers are subject to this Section 14, which has been adopted by the Board of Directors to deter wrongdoing and promote honest and ethical conduct, proper disclosure of financial information in the Company’s reports and documents that the Company files with, or submits to, the Securities and Exchange Commission and in other public communications, and compliance with applicable laws, rules, and regulations by the Company’s Senior Financial Officers.
In performing his or her duties, each of the Senior Financial Officers must:
- maintain high standards of honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interests between personal and professional relationships;
- report to the Audit Committee of the Board of Directors any conflict of interest that may arise and any material transaction or relationship that reasonably could be expected to rise to a conflict;
- provide, or cause to be provided, full, fair, accurate, timely, and understandable disclosure in reports and documents that the Company files with or submits to the Securities and Exchange Commission and in other public communications made by the Company;
- comply and take all reasonable actions to cause others in the Company to comply with applicable government laws, rules, and regulations; and
- promptly report violations of this Section 14 to the Audit Committee
Any request for a waiver of any portion of this Section 14 must in writing and addressed to the Audit Committee. Any waiver of any portion of this Section 14 will be promptly disclosed on Form 8-K or by other means specified by the Securities and Exchange Commission.
The Audit Committee will assess compliance with this Section 14, and shall determine appropriate actions to be taken in the event of a violation of this Section 14 by any Senior Financial Officer.
Some questions you should consider
Did Patrick Byrne (CEO of Overstock.com), Judd Bagley (Director of Communications at Overstock.com) and possibly other employees violate Overstock.com’s Code of Business Conduct and Ethics?
Do possible ethics violations by employees of Overstock.com such as Judd Bagley with the tacit endorsement of Patrick Byrne constitute an ethics violation by Patrick Byrne?
Has Patrick Byrne directed employees of Overstock.com to commit certain acts in possible violation of Overstock.com's Code of Business Conduct and Ethics?
Can a "Senior Financial Officer" of Overstock.com shield himself from ethics violations by purposely enabling and vocally supporting actions by company employees that may violate its Code of Business Conduct and Ethics (e.g. providing links to the antisocialmedia.net smear web site on his message board posts and directing people to antisocialmedia.net on Overstock.com’s web site)?
Can a "Senior Financial Officer" of Overstock.com shield himself from ethics violations by knowingly permitting certain other employees of Overstock.com to commit possible violations of the company's Code of Business Conduct and Ethics?
If any "Senior Financial Officer" such as Patrick Byrne did violate Overstock.com’s Code of Business Conduct and Ethics, what actions should the company and in particular the Audit Committee consider regarding any possible securities law issues?
Do possible violations of Overstock.com’s Code of Business Conduct and Ethics by Patrick Byrne and others possibly acting in collusion with him such as Judd Bagley, require disclosure to the Securities and Exchange Commission?
Do possible violations of Overstock.com’s Code of Business Conduct and Ethics by employees that are endorsed and/or encouraged by Patrick Byrne require disclosure to the Securities and Exchange Commission?
Do certain deceptive and/or inconsistent statements by Patrick Byrne and other Overstock.com officers about the company during earnings conference calls and other means of communication constitute ethics violations?
Are deceptive statements by Patrick Byrne about the company on internet message boards, on blogs, and in other media a violation of Overstock.com’s Code of Business Conduct and Ethics?
Does inaction by Overstock.com on possible non-compliance with its Code of Business Conduct and Ethics create serious issues under the securities laws?
Patrick Byrne, as the Chief Executive Officer of Overstock.com, is considered by the Securities and Exchange Commission to be a “principal executive officer” and Overstock.com’s Code of Business Conduct and Ethics to be a “senior financial officer” of Overstock.com.
You should consider certain disclosure requirements under Section 406 of Sarbanes-Oxley regarding possible ethics violations by Patrick Byrne and others.
For example, according to the Securities and Exchange Commission:
Companies must comply with the code of ethics disclosure requirements promulgated under Section 406 of the Sarbanes-Oxley Act in their annual reports for fiscal years ending on or after July 15, 2003. They also must comply with the requirements regarding disclosure of amendments to, and waivers from, their ethics codes on or after the date on which they file their first annual report in which the code of ethics disclosure is required.
Some questions to consider asking
Has Overstock.com made “immediate disclosure” of “any change to, or waiver from, the company's code of ethics” for its senior financial officers?
Does the Board of Directors of Overstock.com ignore actions by Patrick Byrne that possibly violate Overstock.com’s Code of Business Conduct and Ethics?
The Securities and Exchange Commission instructions for Form 8–K states:
Item 5.05 Amendments to the Registrant’s Code of Ethics, or Waiver of a Provision of the Code of Ethics.
(a) Briefly describe the date and nature of any amendment to a provision of the registrant’s code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions and that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulations S-K and S-B (17 CFR 229.406(b) and 228.406(b), respectively).
(b) If the registrant has granted a waiver, including an implicit waiver, from a provision of the code of ethics to an officer or person described in paragraph (a) of this Item 5.05, and the waiver relates to one or more of the elements of the code of ethics definition referred to in paragraph (a) of this Item 5.05, briefly describe the nature of the waiver, the name of the person to whom the waiver was granted, and the date of the waiver.
The Securities and Exchange Commission defines the term “code of ethics” as:
- … written standards that are reasonably designed to deter wrongdoing and to promote:
- Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
- Full, fair, accurate, timely, and understandable disclosure in reports and documents that a registrant files with, or submits to, the Commission and in other public communications made by the registrant;
- Compliance with applicable governmental laws, rules and regulations;
- The prompt internal reporting to an appropriate person or persons identified in the code of violations of the code; and
- Accountability for adherence to the code.
An article entitled “Corporate Ethics and Sarbanes-Oxley” (article first appeared in Wall Street Lawyer – July 2003) by Frank Navran and Edward L. Pittman, published on Ethics.org, states:
Of the five elements of the Commission's code, the only one that is specific to public companies relates to accuracy and timeliness of disclosure in public filings and other public communications. A more general statement of the requirement may be expressed as the value of "honesty." Honesty, for example, includes being candid, open, truthful, and free from deception and deceit--telling the truth, even when doing so may be difficult, and being forthcoming with all relevant facts and information. The core principle of telling the truth and coming forward with information in internal discussions is important.
Some questions to consider
Has Patrick Byrne been "candid, open, truthful, and free from deception and deceit--telling the truth, even when doing so may be difficult, and being forthcoming with all relevant facts and information" in his public communications about the company, his actions, and/or the actions of certain employees of Overstock.com?
Has Patrick Byrne been "candid, open, truthful, and free from deception and deceit--telling the truth, even when doing so may be difficult, and being forthcoming with all relevant facts and information" in his internal discussions with the company?
If the company failed to take prompt action regarding any possible material departures from its Code of Business Conduct and Ethics by Patrick Byrne and other Senior Financial Officers, it may be considered as giving Mr. Byrne and possibly others an “implicit waiver” from its Code of Business Conduct and Ethics.
An “implicit waiver” must be disclosed in Form 8–K filed with the Securities and Exchange Commission. The instructions to Form 8-K state:
2. For purposes of this Item 5.05:
(i) The term waiver means the approval by the registrant of a material departure from a provision of the code of ethics; and
(ii) The term implicit waiver means the registrant’s failure to take action within a reasonable period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer, as defined in Rule 3b-7 (17 CFR 240.3b-7) of the registrant.
Another part of the article entitled “Corporate Ethics and Sarbanes-Oxley” by Frank Navran and Edward L. Pittman, published on Ethics.org, states:
An "implicit waiver" is the company's failure to take action within a reasonable period of time regarding a "material departure" from a provision of the code of ethics that "has been made known to an executive officer."Later in the article, the authors' state:
…companies must disclose any amendments to their codes of ethics as they relate to the principal executive officer or senior financial officers. Presumably, this measure was designed to ensure that changes in a company's policies are not made for improper purposes and that an accurate code is available to the investing public at all times.
Later in the article, they continue:
A code of ethics and ethical values are important elements of the internal control process of public companies…. The failure of a company (and its employees) to observe the values published in its code of ethics is not, in itself, a violation of the federal securities laws. However, the recent Commission actions may trigger disclosure requirements. More importantly, failure to observe the values set forth in the code may lead to violations of the law.
Therefore, any failure to take action within a “reasonable period of time” against Patrick Byrne or certain other officers for possible material violations of Overstock.com’s Code of Business Conduct and Ethics raises serious disclosure issues with the Securities and Exchange Commission.
From my experience, the Securities and Exchange Commission considers specific individual acts separately, collectively, and in the aggregate to determine compliance with securities laws. In addition, they may consider the pattern of a person's actions and the pattern of acts by other persons acting in concert with a certain person. Therefore, I urge you to examine the totality of Patrick Byrne’s actions and others acting in possible concert with him.
Consider guidance from PriceWaterhouseCoopers (PWC), Overstock.com’s auditors
PriceWaterhouseCoopers, Overstock.com's auditors, has provided certain guidance regarding your role as Audit Committee members relating to oversight of ethical conduct and compliance.
In a publication entitled, “Audit Committee Effectiveness Taking the initiative: High-quality audit committees should present a full picture of their effectiveness,” PWC advises:
CEOs and CFOs make inherently subjective assessments and judgements every time a company produces external reports. Audit committees have a valuable role to play in overseeing this process, helping to inject objectivity and independence into CEO/CFO decision-making. By ensuring that management forms a disclosure committee (as has been the practice for SEC registrants as a result of the Sarbanes-Oxley legislation), with members drawn from the senior executive (including risk, internal audit, legal and compliance), assurance can be provided that everything that should be considered for disclosure has, indeed, been considered objectively.
According to a PriceWaterhouseCoopers white paper entitled “The Sarbanes-Oxley Act of 2002 And Current Proposals by NYSE, Amex, and NASDAQ: Board and Audit Committee Roles in an Era of Corporate Reform” about ethics compliance:
It is increasingly expected that a board will provide oversight of a company’s ethical conduct. Notably, in the Caremark case, the Delaware Chancery Court also articulated the responsibility of boards of directors for overseeing ethics and compliance.
Overstock.com’s auditors suggest certain “Key Points to Consider” for ethics compliance:
Oversight of Ethical Conduct and Compliance
Review the board’s oversight practices in this area with reference to statutory and regulatory obligations – as well as shareholder interests and expectations.
Seek to have one or more board members who understand the sensitive ethical issues within the company’s industry.
Oversee that the company is:
- Setting a strong “tone at the top” regarding corporate responsibility for ethical practices.
- Committed to business integrity.
- Living its values.
- Demonstrating that it has ethics and compliance processes in place.
- In compliance with the new code of conduct or ethics requirements.
Take a proactive approach to ethics:
- Ask questions about sensitive ethics situations.
- Follow through to confirm that the situations are resolved with fair-mindedness.
- Determine that the resolution reflects the accountability and integrity of the company and its employees, as well as compliance with legal requirements.
- Convey to company employees the board’s commitment to having a strong ethical environment.
- Establish a process for reviewing code waiver requests involving directors and executive officers, and others as may be desired.
Remember that perception is sometimes as important as fact and reality when dealing with ethical issues – to employees as well as outsiders.
Consider guidance from the American Institute of Certified Public Accountants (AICPA) to the accounting profession regarding auditor’s client’s compliance with their code of ethics
An article on the AICPA web site entitled, "What Does New Audit Standard SAS No. 99, Consideration of Fraud in a Financial Statement Audit, Mean for Business and Industry Members?" states:
The ethical culture needs to be set by management through their daily words, but more importantly, their actions. Therefore, the organizations value system requires not so much a written code of conduct (which is important as well) but a daily, consistent adherence to these values. Companies should also clearly communicate their ethical values, decision-making processes and codes of conduct to all employees so they may be empowered to make appropriate ethical decisions even when they are far from headquarters or confronted with a new dilemma.
Consider the Caremark case
From an article written by Rebecca Walker, entitled “Board Oversight of a Compliance Program,” I quote:
In Caremark, the Delaware Chancery Court stated that it would be a mistake to conclude that corporate boards can
... satisfy their obligation to be reasonably informed concerning the corporation, without assuring themselves that information and reporting systems exist in the organization that are reasonably designed to provide to senior management and to the board itself timely, accurate information sufficient to allow management and the board, each within its scope, to reach informed judgments concerning both the corporation's compliance with law and its business performance.
I respectfully urge you to research the issues that I have raised in this letter and in my blog posts and issues raised by others (see Addendum)
You have been notified in this letter to examine the actions of Patrick Byrne (CEO of Overstock.com), Judd Bagley (Director of Communications at Overstock.com), and possibly other Overstock.com officers and employees who may be acting in concert and in collusion with them for possible violations of Overstock.com’s Code of Business Conduct and Ethics. You should consider possible disclosure issues with the Securities and Exchange Commission. Disclosure issues with the Securities and Exchange Commission can lead to charges of violating securities laws.
Your failure to investigate these issues may subject you to certain legal consequences with the Securities and Exchange Commission and possibly with other Overstock.com shareholders. You should examine any obligation and representations made to Overstock.com's Directors and Officers insurer (assuming you are insured) as it relates to compliance with such policies.
Sam E. Antar (former Crazy Eddie CFO & convicted felon)
To gain a better understanding as to whether there have been violations to Overstock.com’s Code of Business Conduct and Ethics, I urge you to read the following posts from my blog:
January 15, 2007: Overstock.com: An Arsenal of Intimidation and Fear
January 17, 2007: Sam E. Antar and Judd Bagley form Overstock.com Communicate on Dealbreaker Blog
April 4, 2007: Don't Mess with Overstock.com CEO Patrick Byrne
April 16, 2007: The Deceptions of Patrick Byrne (CEO of Overstock.com) and Judd Bagley (Director of Social Media at Overstock.com)
April 25, 2007: Questions the Securities and Exchange Commission may a`sk Patrick Byrne (CEO of Overstock.com) in its investigation of (not “on”) Overstock.com
May 3, 2007: Is Patrick Byrne, Overstock.com CEO, making false, misleading, and/or deceptive statements about the company’s financial issues?
May 9, 2007: Patrick Byrne, CEO of Overstock.com, receives SEC subpoena
May 12, 2007: To Patrick Byrne, CEO of Overstock.com: Stop Deflecting and Start Answering Questions
May 13, 2007: Patrick Byrne, CEO of Overstock.com Cannot Answer a Simple Question
May 14, 2007: Overstock.com and Patrick Byrne: The Deception Continues
May 15, 2007: Overstock.com: A Copy of its Code of Business Conduct and Ethics
May 16, 2007: To Patrick Byrne, CEO of Overstock.com - Did you comply with the Company's Code of Business Conduct and Ethics
May 17, 2007: To Patrick Byrne, CEO of Overstock.com: More Questions about the Company's Code of Business Conduct and Ethics
May 25, 2007: Why are people distancing themselves from Overstock.com CEO Patrick Byrne?
In addition, I urge to you read the following posts in other blogs:
O-Smear (Exposing online smear campaigns for what they really are)
Gary Weiss Blog – Posts about Overstock.com
Tracy Coenen: Fraudfiles Blog – Posts about Patrick Byrne
Jeff Matthews Is Not Making This Up Blog – Posts about Patrick Byrne
Herb Greenberg’s Market Blog – Posts about Patrick Byrne
Floyd Norris: Notions on High and Low Finance – Posts on Overstock.com (subscription required)
DealBreaker Blog - Posts on Overstock.com
Lee Distad’s Professional Opinion – Posts on Overstock.com
Please read these columns, too:
Joe Nocera: New York Times – Overstock.com’s Campaign of Menace (subscription required)
Joe Nocera: New York Times – Revisiting Overstock and Utah (subscription required)
Ashlee Vance: The Register – The Bizarre World of Patrick Byrne’s Overstock
Roddy Boyd: The New York Post – Overstock.com Lashes Out At Critics on Web
Finally, you should carefully examine the content of statements made by Patrick Byrne, Judd Bagley, and other Overstock.com employees on:
Earnings conference calls
Overstock.com’s web site
Internet message boards and blogs