Cooper River Partners accuses Overstock.com, Patrick Byrne, and others of securities fraud
The countersuit suit filed last Friday by Copper River Partners (formerly Rocker Partners) describes Overstock.com as a business, much like Crazy Eddie, built on deceit. The Copper River countersuit seeks both compensatory and punitive damages from the defendants including Patrick Byrne, his father Jack Byrne (former Board member), Jason C. Lindsey (President), Allison H. Abraham (Director and Audit Committee member), John A. Fisher (former Director), and unnamed "Roes" or yet to be identified defendants. Cooper River's countersuit details false, misleading, and deceptive disclosures by Patrick Byrne dating before Overstock.com's initial public offering in June 2002. The countersuit further alleges a conspiracy to inflate the value of Overstock.com's stock to finance the company's perennially money losing operations, after it went public.
Overstock.com, which was founded in 1997, has never had a profitable year, and has accumulated losses to date of over $230 million. According to the countersuit:
Overstock and its chief executive officer, Patrick Byrne, with the active and knowing participation, approval, and ratification of the company's Board of Directors, have made false claims that the company was profitable when it was not; false projections that it would become profitable when it could not; baseless projections of future revenues that were not attained; false statements that the company did not require additional capital; false predictions of success of new business ventures; and misleading mischaracterizations of the operation of the company's business and of its business prospects. They have tried to distract from Overstock's persistent failure to attain the results the company itself projected through accounting gimmicks that present a deceptive picture of the company's results of operations and, in some instances, represent highly questionable treatments under Generally Accepted Accounting Practices ("GAAP"). [Emphasis added.]
Many of Overstock.com's deceptive financial disclosures have been outlined in this blog, such as Copper River's charge that Patrick Byrne made "false claims that the company was profitable when it was not; false projections that it would become profitable when it could not; baseless projections of future revenues that were not attained; false statements that the company did not require additional capital...." For details, read my blog item entitled, "Patrick Byrne, the CEO of Overstock.com: A history of deception, deceit, and distortion - Part 1: The Early Days."
Cooper River's countersuit alleges that Overstock.com's management deliberately manipulated inventory reserves during the first three quarters of fiscal year 2006 in an effort to reduce net losses and increase financial results reported by the company prior to selling new common stock to raise capital in December 2006. This blog examined Overstock.com's misleading disclosures about its financial performance in a series entitled, "Did Overstock.com CEO Patrick Byrne cook the company's numbers and mislead investors?," Part 1, Part 2, and Part 3. I will continue to investigate and detail misleading disclosures by Overstock.com and other questionable activities by Patrick Byrne and others working in concert with him in future blog posts. In future blog posts, I will provide detailed analysis of Copper River's countersuit, too.
Cooper River Partner's charges Patrick Byrne with orchestrating a "desperate and malicious" campaign to silence the company's critics, including Copper River, and inflate the company's stock price:
Overstock and its senior management responded to public criticism with a desperate and malicious campaign to silence the company's critics, including Copper River, and inflate the company's stock price. As set forth in greater detail below, Overstock, Byrne, the company's other officers and directors, and other persons acting in concert with them
a. made false and misleading statements about the company's financial performance and business prospects to distract from legitimate criticism;
b. made false statements about the motives of its critics;
c. falsely accused its critics (and others with no known connection to or interest in Overstock) of conspiring to damage Overstock;
d. attempted to threaten, bully and intimidate critics, including members of the press, with false accusations of wrongdoing and vicious personal slurs; [Emphasis added.]
Very troubling is Patrick Byrne's assault on people who questioned Overstock.com's business model, its accounting policies, its financial disclosures, and its deceptions. According to the countersuit by Copper River, Overstock CEO, Patrick Byrne, orchestrated a "desperate and malicious" campaign to silence the company's critics, including Copper River and Gradient Analytics, to inflate the company's stock price.
As detailed in the countersuit and previous blog posts here, Patrick Byrne and others working in concert with him have attempted to discredit journalists, Wall Street analysts, Gradient Analytics (an independent research firm and co-defendant with Copper River), a 19-year-old teenage blogger, a divorced woman journalist, and other perceived enemies who stood in the way of his business and personal agendas. Patrick Byrne and his collaborators have used intimidation, harassment, threats, blackmail, anti-Semitism, and false accusations to attack the credibility of any person Byrne deems a threat to his agendas.
Patrick Byrne's chief henchman in carrying out his smear campaign is Judd Bagley. Bagley was officially hired by Byrne in August 2006 under the job title Director of Social Media and was recently promoted to Director of Communications and spokesman for the company. About three weeks after being hired, in September 2006, Judd Bagley created an anonymous smear web site, antisocialmedia.net, to stalk, disparage, harass, threaten, intimidate, blackmail, and smear Patrick Byrne's critics. In January 2007, Roddy Boyd of the New York Post exposed the fact that Judd Bagley was administering the web site on behalf of Patrick Byrne. Patrick Byrne has claimed that he is "not behind" antisocialmedia.net, "offers it no support," and that it has "nothing to do with overstock." As late as a week before Roddy Boyd's expose, Byrne denied knowing that Bagley was behind antisocialmedia.net. However, a thorough analysis in my blog post entitled, "The Deceptions of Patrick Byrne (CEO of Overstock.com) and Judd Bagley (Director of Social Media at Overstock.com)," shows Byrne's claims to be implausible.
According to Copper River's countersuit:
Until his identity was revealed by a reporter for the New York Post, Bagley launched his attacks anonymously in an effort to conceal his direct relationship with Overstock. He continues to use multiple pseudonyms to send email and post messages on the internet. Bagley and Overstock have also used electronic spyware embedded in emails and message board posts to spy on and intimidate Overstock's critics. Much of Bagley's efforts on behalf of Overstock were attempts to vilify, harass, and discredit financial reporter and author Gary Weiss, another outspoken critic of Overstock's business and management. [Emphasis added.]
Patrick Byrne has permitted Judd Bagley to post anonymously on internet message boards under multiple pseudonyms to stalk, disparage, harass, threaten, intimidate, blackmail, and smear his critics. The O-Smear blog has detailed how Overstock.com's own internal computers were used to edit the antisocialmedia.net smear web site.
Many of those persons, who researched, questioned, and exposed Patrick Byrne's despicable, malicious, and vile actions have been the target of his baseless vile hatred and cruel attacks. This blog has detailed how the unprincipled and nauseating Judd Bagley permitted his advisor on capital markets, Edward Manfredonia, to post vicious anti-Semitic comments on antisocialmedia.net. After, Judd Bagley found out that I was investigating Edward Manfredonia's anti-Semitic comments, Bagley threatened my future employment and family using a pseudo-anonymous alias on a Yahoo message board. In a posted message on the Yahoo chat board, under his alias panamapump, Judd Bagley listed my internet visits to antisocialmedia.net and angrily issued the following threat:
On behalf of your family and in the interest of your own employability I ask you never to visit ASM [antisocialmedia.net] again.
Another target of Patrick Byrne's baseless and vile hatred had been investigative journalist, book author, and blogger Gary Weiss. In a blog post entitled, "Open Letter to the Audit Committee of Overstock.com: About how Patrick Byrne's vindictive smear campaign uses threats and anti-Semitism," I detailed how Judd Bagley let a person post physical threats directed against Gary Weiss on the antisocialmedia.net, smear web site. The following threat was posted in September 2006:
"Gary Weiss is PATHETIC…his books suck …he is a weasel. In fact, there are quite a few people out there that are going to make an example out of him. He should be looking over his shoulders more carefully when he wants to engage in disrespectful behavior with people that will hurt him…economically, emotionally, and probably physically. Hey Gary…Louie P and Benny S. say hi…you $cumbag."
Posted 10 Sep 2006 at 8:36 am
That threat was finally deleted from antisocialmedia.net in June 2007, after I notified Overstock.com's Audit Committee. Shortly after that threat was deleted, Judd Bagley permitted his pal Edward Manfredonia to post new vicious anti-Semitic slurs on antisocialmedia.net. Edward Manfredonia's new slurs were deleted after new Overstock.com board member, Joseph J. Tabacco Jr., intervened.
According the Copper River's counter suit, Judd Bagley stalked and tried to intimidate 19 year old teenage blogger, from AOL Money & Finance, Zac Bissonnette. In a blog post entitled, "Judd Bagley, Director of Communications at Overstock.com, stalks a teenage blogger," I detailed Judd Bagley's threats to Zac Bissonnette.
Copper River's countersuit details other irrational, baseless, vile, and malicious attacks on other journalists by Patrick Byrne:
Byrne and Overstock continued their efforts to distract the market from the substantive questions raised by Copper River, Gradient, McLean, and others by bullying and disparaging Overstock's critics with false accusations and personal abuse. In response to McLean's Fortune article, Byrne sent her an email in which he referred to the article as "crap" and closed by asking, "so why exactly did you become a reporter? Giving Goldman traders blow-jobs didn't work out? [Emphasis added.]
Patrick Byrne has falsely and maliciously attacked CNBC contributor, Wall Street Journal and MarketWatch columnist Herb Greenberg. According to Copper River's countersuit:
Byrne accused Greenberg of being a "crooked reporter" paid by hedge funds to write "hatchet jobs" on stocks the hedge funds have sold short -a claim that Greenberg denies and Byrne has never substantiated.
Many other journalists have been subjected to irrational, cruel, and malicious smears by Judd Bagley acting on behalf of Patrick Byrne. According to Copper River's countersuit:
For example, after Bloomberg reporter Susan Antilla wrote an article critical of Overstock in February 2007, Bagley wrote a pseudonymous post to an internet message board challenging Antilla's objectivity by claiming falsely that she was married to a hedge fund manager. Bagley responded to articles critical of Overstock by New York Times columnist Joe Nocera with another pseudonymous post asserting that Nocera was a "hack" who had "sold his soul" and was fabricating his stories. In August 2007, moreover, Bagley sent a threatening email to a 19-year-old student who runs a satirical web site about stocks and who had made a humorous posting about Byrne.
According to Copper River's countersuit Overstock.com has used "anonymous agents" on the internet to harass and intimidate critics:
Overstock has also used anonymous agents to attack, threaten, spy on, and disparage the company's critics on internet message boards and on websites that those agents control.
Apparently, Patrick Byrne rewards his cronies very well for their services. According to Copper River's countersuit:
Further, in some cases, individuals who have most vigorously promoted Overstock's shares and attacked its critics have been rewarded with employment at Overstock.
Recently, Overstock.com hired Evren Karpak, a message board troll, who together with Judd Bagley attempted to blackmail the O-Smear blogger, known as Scipio Africanus (pen name). The O-Smear blog has provided detailed information about Patrick Byrne's smear campaign and Judd Bagley's use of spyware to collect information on Byrne's critics on the internet.
In my blog post entitled," InvestorVillage is the place for Overstock.com CEO Patrick Byrne, his henchman Judd Bagley, and their cronies," I detailed how both Judd Bagley and Evren Karpak, now officially employed by Overstock.com, used the InvestorVillage message boards, the antisocialmedia.net smear web site, and the Yahoo message boards in an attempt to intimidate and blackmail O-Smear blogger, Scipio Africanus into silence.
On May 13, 2007, in a post (message number 7306) on InvestorVillage, under his alias De Daumier-Smith, Judd Bagley threatened Scipio Africanus:
This is going to get very interesting, very quickly, folks. To quote Patrick, I'm going to do Scipio "slow."
On June 14, 2007, Judd Bagley sent Scipio Africanus an email threatening blackmail. He wrote:
I'm also very much aware of the impact this could have on your reputation, especially where you live, and I feel obligated to offer you a way out. So, if you're ready to set things right, I'll keep your name to myself and figure we'll both be karmically better off for it.
Copper River's countersuit alleges:
Although this conduct by Overstock, Byrne, and Bagley is unlawful and violates Overstock's own code of ethics, the Director Defendants have never taken any action to prevent it.
Other than maybe the newest board member, Joseph J. Tabacco, Jr. in certain limited situations, I would have to say that I agree with Copper River that Overstock.com's board of directors has its head in the sand.
Other individuals have been rewarded for helping further Patrick Byrne's vile agendas. According to Copper River's countersuit:
At the same time, in or around November 2004, Overstock and Byrne obtained help in their scheme to inflate Overstock's share price and silence its critics from an internet stock tout who operates under the pseudonym Bob O'Brien. "O'Brien" later continued these efforts through his organization, the so-called National Coalition Against Naked Short Selling ("NCANS"). Plaintiff Mary Helburn is the Executive Director of NCANS and Byrne has admitted providing substantial amounts of money to NCANS.
"O'Brien" began touting Overstock on investor message boards without disclosing his true identity or his relationship to Overstock and Byrne. In fact, at all times relevant to this Cross-Complaint, "O'Brien" was acting as Overstock's agent.... [Emphasis added.]
A co-plaintiff of Overstock.com in its litigation against Copper River and Gradient is Mary Helburn, the Executive Director of the National Coalition Against Naked Short Selling ("NCANS"). Prior to Overstock.com and co-plaintiff Mary Helburn filing their lawsuit against Copper River and Gradient, Patrick Byrne, in different stories, claims that he contributed from $20,000 to $75,000 to NCANS to place an advertisement in the Washington Post about naked short selling.
We need to ask, did Patrick Byrne buy a co-plaintiff and an ally in his litigation and smear campaign against Copper River and Gradient?
In February 2005, Patrick Byrne had originally claimed that he donated only $20,000 to NCANS for the Washington Post ad:
We came out swinging last week with a full page ad in The Washington Post, explaining this issue. It cost $100,000: I donated about $20k of that, and spent a lot of time working with O'Brien through email (as I have never met him yet), getting the ad just right. Meanwhile, he opened his ncans.net site, which explains all of this thoroughly.
In the last few days, The Empire Has Begun To Strike Back. [Emphasis added.]
Patrick Byrne had claimed that he told Dow Jones Newswire journalist Carol A. Remond:
Carol was adamant that you [Phil Saunders aka Bob O'Brien] and I have been cooking up this plan for months. I confirmed for her that I have cooperated in the writing of the Washington Post ad and contributed money to run it. I told her, however, that lots of the money for the ad came in the form of $200 checks from grandmothers (who really have no business doing this), and that in fact, at least $40,000 (O'brien - probably more than $50K) had come in from such folks. She asked if it was safe to infer that you and I had contributed the rest, and I said it was: still, she seemed not to believe that any money had come in from anyone but me and you. (O'Brien - she has received dozens of emails from people who contributed, so it is difficult to be charitable at this point as to why she is ignoring those actual testimonials). [Emphasis added.]
However, on May 28, 2007, in a post (message number 7655) on InvestorVillage.com, Patrick Byrne now admitted to donating $75,000 of the $100,000 cost for the NCANS Washington Post ad. Responding to a question asked by another message board participant, Patrick Byrne using his alias Hannibal wrote:
How much was paid to the National Assn. Against Naked Shortselling?:
A COUPLE YEARS AGO I DONATED AROUND $75K TO NCANS (I ASSUME THAT IS WHAT YOU MEAN?) BUT BOBO [Phil Saunders aka Bob O'Brien] USED THAT TO BUY AN AD IN THE WASHINGTON POST SO I DO NOT THINK OF THAT AS A "PAYMENT" TO BOBO. [Emphasis added.]
Tracy Coenen, a noted forensic accounting expert and author took issue with Patrick Byrne's new story and asked Patrick Byrne for a response. Byrne posted a response in her blog:
Patrick Byrne on June 26th, 2007 8:55 pm Hi Tracy,
“So, Patrick…. how much was really given to NCANS for this Washington Post ad? And why does the amount change in your posts on message boards?”
Because I sent NCANS $22k, then about $25k a few weeks later, and then some time later, I think, another wire of around the same amount. I’m not sure if I did send a third. So in May when asked I rounded up and responded “75k”.
Any more X-File type mysteries you need help solving?
Patrick [Emphasis added.]
We need to ask, was Patrick Byrne backdating his contributions to NCANS for its Washington Post ad?
Originally, Patrick Byrne had claimed that "at least $40,000 (O'brien - probably more than $50K)" came from "grandmothers...and such folks" and the balance of the $100,000 cost was donated by him and O'Brien. In February 2005, Byrne claimed that he specifically donated $20,000 towards the cost of the Washington Post ad. In May 2007, Patrick Byrne changed his story and claimed that he donated $75,000 of the $100,000 cost. If "grandmothers...and such folks" donated "at least $40,000" or probably "more than $50K" about $60,000 to $50,000 or less of Byrne's $75,000 contribution can be applied to the cost of the Washington Post ad. Where did the other $15,000 to $25,000 or more from Byrne's donation go? There are similarities here to the government's allegations against the Milberg Weiss law firm which is accused of buying plaintiffs for lawsuits.
After the Washington Post ad was published, Phil Saunders aka Bob O'Brien, who helped start NCANS, threatened Copper River's Marc Cohodes. According to Copper River's countersuit:
Overstock's agent O'Brien also made personal threats against the family of defendant Cohodes in response to Copper River's short trading activity. In February 2005, O'Brien was aggressively promoting a sub-prime mortgage lender called Novastar Financial. Copper River was a critic of Novastar, based on its belief that Novastar's business model amounted to a sophisticated Ponzi scheme. On an internet message board concerning Novastar, "O'Brien" posted threatening messages with a picture of Cohodes's disabled son, information about Cohodes's family, and the Cohodes family's home address. After posting that personal information, "O'Brien" included the threat that "[t]his is coming on game over time."
Copper River's assessment of Novastar proved to be true; its stock price later collapsed, causing losses of hundreds of millions of dollars to small investors. [Emphasis added.]
Allegations of stock market manipulation through a short squeeze and orchestrating a Securities and Exchange Commission investigation based false allegations by Overstock.com, Patrick Byrne, and three former Gradient employees
Cooper River's countersuit alleges that Byrne and his cohorts engaged in stock market manipulation and attempted to have the SEC investigate both Copper River and Gradient on false charges. According to Copper River's countersuit:
Overstock, Byrne, the company's other officers and directors, and other persons acting in concert with them....
e. orchestrated illegal "short squeezes" in order to inflate the price of its stock and injure investors with short positions in the stock;'
f. brought this lawsuit premised on assertions of fact that Overstock, Byrne, and the Director Defendants knew to be false and supported those false allegations with a perjured affidavit of a former Gradient employee elicited by Overstock, Byrne, and the Director Defendants;
g. made false allegations of fact and provided false and misleading documents to the Securities and Exchange Commission to convince the SEC to open an unwarranted investigation of the independent stock research firm Gradient Analytics, Inc. ("Gradient") and to subpoena Copper River and Overstock's critics in the financial press (which investigation was closed with no enforcement action, no findings of wrongdoing, and the issuance of a "no action" letter by the SEC);
h. publicly misrepresented the investigation of Gradient, as well as the SEC's continuing investigation of Overstock itself, as an indication of wrongdoing by Copper River and its principals. [Emphasis added.]
For example, Copper River's countersuit states:
When asked about the December 2003 short squeeze, Byrne replied, "when opportunities come along where we can knee the shorts in the groin, that's always good for fun and amusement."
In my previous blog item entitled, "Overstock.com vs. Gradient and Rocker Part 1: Patrick Byrne and his Three Stooges," I examined credibility issues arising from conflicting, inconsistent, and contradictory allegations of the three former Gradient employees against Gradient and Copper River (formerly Rocker Partners). In another blog item entitled, "Did Patrick Byrne, CEO of Overstock.com, Deliver a Trojan Horse to the Securities and Exchange Commission?," I raised the question as to whether Patrick Byrne used his company's lawsuit against Gradient Analytics and Rocker Partners as a "Trojan Horse" diversion tactic to the Securities and Exchange Commission in an effort to thwart their inquiries and later investigation of Overstock.com and him.
Gradient Analytics independent research reports apparently ticked off Patrick Byrne. According to Copper River's countersuit:
In response to a Gradient report questioning the independence and competence of Overstock director Gordon Macklin, who had served as a director of WorldCom during the period it perpetrated the largest financial fraud in U.S. history, Byrne sent an ernail to Donn Vickrey of Gradient. That email stated, "You deserve to be whipped, fucked, and driven from the land." [Emphasis added.]
Cooper River's countersuit provides additional information that further discredits the allegations of the three former Gradient employees and provides additional details on how Patrick Byrne used them to orchestrate the SEC investigation of Cooper River and Gradient.
On August 11, 2005, Overstock.com and co-plaintiff Mary Helburn sued Gradient Analytics, an independent research firm, and Rocker Partners (now Copper River Partners), a short seller. Overstock.com alleged that Gradient's research reports were purposely biased to benefit its customers and that it withheld publication of such reports to allow their clients to accumulate short positions prior to their issuance. Three former Gradient employees (Demetrios Anifantis, Robert Ballash, and Darryl Smith) had signed sworn declarations aka affidavits alleging wrongdoing by their employer.
A day after Overstock.com's lawsuit was filed against Gradient and Rocker Partners, Patrick Byrne revealed that the SEC started an informal inquiry of Overstock.com in February 2005 and that its inquiry "went nowhere." Around October 2005, based on the allegations of Overstock.com, Patrick Byrne, and the three former Gradient employees, the Securities and Exchange Commission started investigating Gradient Analytics. However, on May 9, 2006, the Securities and Exchange Commission started a formal investigation of Overstock.com, in contrast to Byrne's earlier claim that the SEC informal inquiry "went nowhere."
On May 17, 2006, Patrick Byrne received a personal subpoena from the Securities and Exchange Commission. However, Overstock.com waited almost an entire year, until May 9, 2007, to disclose Patrick Byrne's personal subpoena. In February 2007, the SEC dropped its investigation of Gradient, issued them a "no action" letter, and continued its formal probe of Overstock.com. On May 10, 2007, a day after Overstock.com disclosed Patrick Byrne's personal SEC subpoena, about a year late, Patrick Byrne had claimed that the SEC investigation was "not Overstock-centric" and that he was not the focus of their investigation despite the formal SEC probe and having received a personal subpoena from them. However, on August 10, 2007, Patrick Byrne finally admitted to being the "target" of a Securities and Exchange Commission investigation, in contrast to his previous denials.
There are many more details of alleged wrongdoing by Overtock.com, Patrick Byrne, and other persons working in concert with him in Copper River's countersuit. I will provide a thorough analysis of Cooper River's countersuit in future blog posts. In the mean time, Overstock.com's Board of Directors may want to read my blog post about a recent opinion by the Tenth Circuit on whether misrepresentations in financial statements incorporated by reference in a D & O policy application could serve as a basis for policy rescission under Utah law.
To be continued.....
Sam E. Antar (former Crazy Eddie CFO & convicted felon)