Thursday, July 31, 2008

Why Jonathan Johnson is the Right Choice for President of Overstock.com

The more that I think about it, I believe that former Vice President of Corporate Affairs and Legal, Jonathan E. Johnson III, is just the right man to take over Patrick Byrne’s role as President of Overstock.com (NASDAQ: OSTK). Patrick Byrne retains the title of Chief Executive Officer.

Role as babysitter for the 40-year-old CEO of a public company

According to Overstock.com’s press release, it was Jonathan Johnson’s early role to provide “adult supervision” as babysitter for his boss Patrick Byrne, the immature, lying, delusional, and paranoid CEO of Overstock.com. Jonathan Johnson joined Overstock.com in 2002 and Patrick Byrne was a tender 40 years old when Johnson began babysitting the CEO of a public company. Jonathan Johnson provided key feedback to Patrick Byrne in shaping Overstock.com’s policy of blaming others for Overstock.com’s management failures through litigation rather than make money through innovation. He is the key legal advisor for Byrne's relentless and despicable smear campaign against critics of the company.

Overstock.com: Litigation rather than make money through innovation

The perennially profitless retailer has bought lawsuits against critics such as independent research firm Gradient Analytics and short seller Copper River Management (formerly Rocker Partners) blaming them for Overstock.com’s continual business foul ups. Overstock.com has never turned an annual profit and has reported an accumulated deficit of $254 million since its inception in 1997. Overstock.com’s only two reported quarterly profits ever (Q4 2002 and Q4 2004) were overstated as a result of an intentional revenue accounting error in violation of GAAP that was uncovered by the Securities and Exchange Commission.

Lies to Wired.com

Despite the SEC’s finding that Overstock.com’s revenue accounting was not reported in compliance with GAAP from inception until Q3 2007, Johnson went on to falsely claim to Wired.com that such revenues were reported in compliance with GAAP. When Overstock.com failed to disclose in its Q1 2008 earnings release that the company compared Q1 2008 GAAP revenues to Q1 2007 non-GAAP revenues and as a result overstated its growth, it was Jonathan Johnson who lied to Wired.com and falsely claimed that Q1 2007’s revenues were reported in compliance with GAAP. See excerpts from Wired.com article below:

"In its earnings release, Overstock.com failed to disclose that it compared first-quarter 2008 revenues reported on a GAAP basis to first-quarter 2007 revenues that were reported on a non-GAAP basis," Antar wrote on his White Collar Fraud blog.

For those who don't speak accountantese, "non-GAAP" basically refers to non-standard accounting practices, and the difference between GAAP and non-GAAP numbers is often substantial.

"Sam is just wrong," says Jonathan Johnson, senior vice president of legal at Overstock. "They're both GAAP numbers . . . I can't read his blog because it's so full of lies."

Note: Bold print and italics added by me.

However, Overstock.com’s Q4 2007 8-K report filed with the Securities and Exchange Commission, clearly contradicted Jonathan E. Johnson’s claim to Wired.com regarding the company’s reported Q1 2008 and Q1 2007 revenues that “They’re both GAAP numbers….”

From the company’s inception through the third quarter of 2007, we have recorded revenue based on product ship date. In the fourth quarter of 2007, in response to an accounting comment from the staff of the SEC, we retrospectively changed our policy to recognize revenue based on estimated product delivery date. We have recorded the cumulative effect of this change in the fourth quarter of 2007.

Note: Bold print and italics added by me.

In a previous blog post, I detailed how Overstock.com misled the SEC about the materiality of its revenue accounting error and as a result, the company wrongfully used a one-time cumulative adjustment to correct previous revenues in Q4 2007 rather than restate such revenues from inception. Therefore, Overstock.com never corrected Q1 2007 reported revenues to conform with GAAP since the company never restated such revenues. As an attorney and new President of Overstock.com, Jonathan Johnson should study Rule 10b-5, which expressly makes it “unlawful for any person….to make any untrue statement of a material fact.”

Stock sales coinciding with lie to Wired.com

After Jonathan Johnson lied to Wired.com, he dumped Overstock.com shares and pocketed almost $1 million in gross proceeds. The day after the Wired.com article was published, Jonathan Johnson pocketed $699,000 from dumping Overstock.com shares and on the next day, Johnson pocketed another $258,000 from dumping even more Overstock.com shares. In addition, Jonathan Johnson has received a raise in salary to $225,000 per year as a result of his promotion to President of Overstock.com.

If you ever wondered why Overstock.com CEO is a habitual liar who blames a Sith Lord and critics for the company’s woes, perhaps you should look no further than his babysitter, Jonathan Johnson. He fits in perfectly with Overstock.com's culture of lies and deceit.

To be continued….

Written by:

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Note: For additional information about Overstock.com, please read Gary Weiss and Tracy Coenen's blogs.

Disclosure: Not long or short Overstock.com

Additional information: Index to all White Collar Fraud blog posts.

Monday, July 28, 2008

What is Mark Mitchell Hiding About Himself, Deep Capture, and Overstock.com?

Mark Mitchell, a washed up former journalist who is now a paid shill for Overstock.com (NASDAQ: OSTK) CEO Patrick Byrne's private vendetta web site called "Deep Capture" is afraid to answer my questions.
For example, Tracy Coenen and I heard that Mark Mitchell was escorted from the building when he left his former employer, Columbia Journalism Review. According to Tracy Coenen’s blog:
This is also a good time to mention that the guy "from the Columbia Journalism Review" is apparently Mark Mitchell, Byrne's paid shill. According to a confidential source, Mitchell was escorted from CJR under mysterious circumstances.
Meanwhile, Patrick Byrne has taken steps to separate his Deep Capture smear web site from Overstock.com while admitting that he founded it. According to the Deep Capture web site:
Deep Capture is not part of Overstock….
However, the Deep Capture web site goes on to direct the reader to click on a link (http://www.overstock.com/?TID=deepcapture) to purchase merchandise at Overstock.com and 5% of the purchase goes to support Deep Capture.

According to Gary Weiss, Patrick Byrne has taken pains to cover up his ownership of Deep Capture. As of April 20, 2008, High Plains Investments LLC, owned by Patrick Byrne and a major shareholder of Overstock.com shares, was listed as the manager of Deep Capture LLC. By June 19, 2008, Judd Bagley, a former spokesperson for Overstock.com, and Evren Karpak, another former Overstock.com employee replaced High Plains Investments LLC as managers of Deep Capture LLC.
Judd Bagley is a nauseating cyber stalker who as an Overstock.com employee, originally set up an anonymous web site called antisocialmedia.net to stalk, intimidate, harass, smear, and blackmail critics of Patrick Byrne. In January 2007, New York Post reporter Roddy Boyd exposed Judd Bagley as the person behind the anonymous antisocialmedia.net web site. Bagley continues to run that web site and further stalk, intimidate, harass, smear, and blackmail critics of Patrick Byrne using anonymous aliases on internet message boards.

Evren Karpak is an internet message board troll hired by Patrick Byrne to work at Overstock.com after stalking, intimidating, harassing, smearing, and blackmailing Byrne's critics, like Bagley. Both Karpak and Bagley recently claim to have left Overstock.com and they are now paid shills for Patrick Byrne at Deep Capture with Mark Mitchell.

Originally, Mark Mitchell, like Judd Bagley, tried to hide his cyber stalking connection with Byrne. Gary Weiss caught Mark Mitchell pretexting (not disclosing his employment by Byrne) and lying about what Weiss said to him.

Mark Mitchell was heavily criticized for naivete and poor performance when he was a CJR editor, and violated journalism ethics by signing a letter from an anti-naked shorting organization while employed by CJR and researching an article on that subject. Mitchell has not denied that he is the "Mark Mitchell" listed as a signatory of that letter.

In a post on the Yahoo message board, I asked Mark Mitchell about him being escorted from the building. He emailed me the following:
From: Mark Mitchell [mailto:mitch0033@gmail.com]
Sent: Friday, July 25, 2008 4:58 PM
To: Sam E. Antar
Subject: Questions
Mr. Antar,
You asked me this question: "Have you ever been forcefully escorted out of any building as a result of your behavior?"
Would you care to explain how you came to ask this very specific question? Do you have information about any instance of my being subjected to force or violence? If so, what is the source of your information?
Mark Mitchell
This is obviously a sore subject for him. I responded:
From: Sam E. Antar
Sent: Friday, July 25, 2008 6:18 PM
To: Mark Mitchell
Subject: RE: Questions
I'm asking the questions, not you.
To Mark Mitchell:
I'm asking the questions, not you.
Do you admit or deny it? Yes or no.
Sam E. Antar
Mark Mitchell's strange response asked me whether I have information about a mugging in which he was supposedly a victim.

Having not received any response from Mark Mitchell specifically denying that he had been escorted out of Columbia Journalism Review's office, I decided to ask him questions about Deep Capture and its relationship to Overstock.com and Patrick Byrne.

For example, Item 404, "Transactions with Related Persons, Promoters and Certain Control Persons" of Securities and Exchange Commission Regulation S-K requires disclosures of certain related party transactions and I was attempting to determine why Overstock.com has not made any disclosures relating to Deep Capture. In addition, I wanted Mark Mitchell's opinion about Judd Bagley's cyber stalking for Patrick Byrne and Overstock.com's continuing violations of SEC Regulation G. See my email below:
From: Sam E. Antar
Sent: Saturday, July 26, 2008 12:54 PM
To: mitch0033@gmail.com
Subject: Additional Questions
To Mark Mitchell:
Please answer each question separately and provide complete and unambiguous details:
  • Who are the current and past owners of DeepCapture?
  • Who are the current and past executives and managers of DeepCapture?
  • Who are the current and past employees of DeepCapture?
  • What is Overstock.com CEO Patrick Byrne's affiliation with DeepCapture?
  • Does your employment for DeepCapture include posting messages on internet web sites such as Yahoo or InvestorVillage?
  • What is DeepCapture's relationship with Overstock.com, High Plains Investments LLC, Haverford-Valley, L.C., and or any entity affiliated with Patrick Byrne?
  • How much compensation is DeepCapture paying you?
  • How is your compensation structured at DeepCapture?
  • Have you ever received direct or indirect compensation from Patrick Byrne, Overstock.com, High Plains Investments LLC, Haverford-Valley, L.C., and or any entity affiliated with Patrick Byrne?
  • Before your employment at DeepCapture did you ever receive any compensation or gifts from Patrick Byrne, Overstock.com, High Plains Investments LLC, Haverford-Valley, L.C., and or any entity affiliated with Patrick Byrne?
  • Who hired you to work at DeepCapture?
  • How often do you communicate with Overstock.com CEO Patrick Byrne?
  • Please name each person who has a current or past role in setting editorial policy for DeepCapture?
  • Who indemnifies you for the content of your stories on DeepCapture?
  • Have you ever discussed the contents of any story published on DeepCapture with Patrick Byrne?
  • Has Overstock.com CEO Patrick Byrne ever instructed you to write any story on DeepCapture?
  • Have you ever posted messages on any internet chat sites, message boards, blogs, or other internet sites using an anonymous alias?
  • If the answer to the above question is yes, please provide details of each and every posted message including the name of the web site?
  • Please provide all aliases that you may have used on the internet?
  • What is your opinion of your colleague Judd Bagley's spying on and stalking of critics?
  • Do you believe that CEOs should obsess about their critics?
  • Do you believe that CEOs should stalk, intimidate, harass, and/or smear their critics either directly or indirectly through proxies such as Judd Bagley?
  • Do you consider yourself to be a proxy for Patrick Byrne's agendas?
  • What is your opinion of Overstock.com's continued violations of Securities and Exchange Commission Regulation G?
  • What is your opinion of Overstock.com's overstatements of EBITDA in violation of Securities and Exchange Commission Regulation G by improperly not reconciling EBITDA to net income and improperly removing stock-based compensation expenses from EBITDA?
Please note that any references to Patrick Byrne above is specifically intended to mean Patrick Byrne (CEO of Overstock.com) and any references to DeepCapture is intended to mean Deep Capture LLC and/or DeepCapture.com.
Regards,
Sam E. Antar
Mark Mitchell has not responded. What is he hiding?

To be continued....

Written by:

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Update (New Email from Mark Mitchell):
From: Mark Mitchell [mailto:mitch0033@gmail.com]
Sent: Monday, July 28, 2008 11:40 PM
To: Sam E. Antar
Subject: request correction
Dear Sam,
Your blog is false. You know very well that I was not "escorted" from the Columbia Journalism Review.
Please post a correction.
Thank you,
Mark Mitchell
My public response:
To Mark Mitchell:
I was simply reporting what I heard, unlike you who reports what he has not heard. I see no reason to change the specific item you are referring to.
Respectfully,
Sam E. Antar (White Collar Fraud Blog Reporter)
Note: Read Gary Weiss's latest blog post on Mark Mitchell.

Disclosure: Not long or short Overstock.com

Additional Information: For additional up to date coverage of Overstock.com, please read Tracy Coenen.

Thursday, July 24, 2008

Are Overstock.com's Stock Buybacks "Destroying Shareholder Value"?

In Berkshire Hathaway's (NYSE: BRKA) 1999 annual report, Warren Buffett once said:
Now, repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason: to pump or support the stock price... We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated."  (Emphasis added.)
So, I ask the question, "Why does a perennial money loser like Overstock.com (NASDAQ: OSTK) buyback its shares?" After a careful analysis provided below, I believe that Overstock.com's "unstated" reason for its share repurchases, like many other companies, is "to pump or support the stock price."

Patrick Byrne's father, former Ovestock.com Director John "Jack" Byrne who resigned and bailed out in 2006 over disputes with his son, is a former business associate and close friend of legendary investor Warren Buffett. Patrick Byrne himself once worked as CEO of Fechheimer Brothers, Inc., a Berkshire Hathaway company. So, why does Overstock.com CEO Patrick Byrne thumb his nose at the very wise advice of Warren Buffett?

Before we begin, let's review certain comments made by Andrew Watts from Oaktree Capital LLC during Overstock.com’s Q2 2008 earnings call:
….I am one of those guys who I think equity repurchases to a large degree are one of those emperor with no clothes kind of situations where a lot of companies have purchased huge amounts of stock at a huge premium to book value, which I see as really destroying shareholder value, except for the guys who happen to sell at that particular point.... I have just seen too many companies that have kind of swallowed the – drink the (inaudible) on the equity buyback and as a result really trash their balance sheets by purchasing stock at just ridiculous premiums to book and the mathematics to me are pretty simple.  (Emphasis added.)
In other words, Andrew Watts believes that companies who pay "a huge premium to book value" to repurchase their common shares are “really destroying shareholder value.” However, Overstock.com has not historically practiced what Andrew Watts espoused in his comments above. Rather, the company has historically wasted shareholder capital as it gobbled up millions of shares by paying "a huge premium to book value" or rather "ridiculous premiums to book" and depleting working capital while reporting over $250 million in accumulated deficits to date.

Most recently, during Q1 2008, Overstock.com repurchased 1.1098 million common shares at an average price of $10.81 per share and paid a total of $12 million. In Q4 2007, the previous quarter before Overstock.com’s stock repurchases, the company’s book value was about $1.13 per common share. Therefore, Overstock.com paid "a huge premium to book value" of about ten times book value to repurchase its common stock.

During fiscal year 2005, Overstock.com repurchased 665,000 common shares at an average price of $36.24 per share and paid a total of $24.1 million. During that same fiscal year, Overstock.com acquired an additional 1 million common shares at an average price of $41.10 per share and paid a total of $41.1 million as a result of structured stock repurchase transactions. In Q4 2004, the quarter before Overstock.com’s stock repurchases, the company’s book value was about $8.77 per common share. Therefore, during 2005, Overstock.com paid "a huge premium to book value" of over four times book value to repurchase its common stock.

The "mathematics to me are pretty simple" too

Since 2005, Overstock.com repurchased approximately 2.765 million common shares at an average price of $27.92 per common share and totaling about $77.2 million of shareholder’s capital. As of yesterday, Overstock.com’s shares closed at $17.45 per share. Therefore, the average price per share of each common share repurchased by Overstock.com declined $10.47 per share for a total loss of about $28 million on those shares.

If you agree with Andrew Watts's comments, Overstock.com is "destroying shareholder value" by paying ever larger "ridiculous premiums to book" value. In 2005, Overstock.com paid a "huge" premium in excess of four times book value to repurchase its common shares and in 2008 the company paid an even more "ridiculous" premium of about ten times book value to repurchase its common shares.

In addition, Overstock.com suffered a significant drop in book value per common share from $8.77 per share in 2004 to just $0.54 per share at the end of Q1 2008 when it stopped repurchasing common shares. A major reason for the massive drop in Overstock.com's book value per common share stems from the fact that Overstock.com is a perennial money loser that has never had a profitable year and has reported about $254 million in accumulated deficits to date (Q2 2008). In fact, Overstock.com has reported only two profitable quarters since its inception in 1997 (Q4 2002 and Q4 2004). Those two quarter's reported earnings it turns out were overstated as a result of Overstock.com's intentional revenue accounting errors uncovered by the Securities and Exchange Commission in 2008.

Why did Overstock.com pay "a huge premium to book value" to repurchase it common shares?

Based on Overstock.com's historic pattern of false and misleading disclosures, violations of GAAP accounting, and lies by its management team led by CEO Patrick Byrne, as detailed in this blog, I believe that the company's common stock repurchases are part of its management's plan to hype up its stock price at almost any cost and by just about any means. A high stock price helps Overstock.com to capitalize its perennial money losing operations.

According to Overstock.com's fiscal year 2007 10-K report:
Prior to the second quarter of 2002, we financed our activities primarily through a series of private sales of equity securities, warrants to purchase our common stock and promissory notes. During the second quarter of 2002, we completed our initial public offering pursuant to which we received approximately $26.1 million in cash, net of underwriting discounts, commissions, and other related expenses. Additionally, we completed follow-on offerings in February 2003, May 2004 and November 2004, pursuant to which we received approximately $24.0 million, $37.9 million and $75.2 million, respectively, in cash, net of underwriting discounts, commissions, and other related expenses. In November 2004, we also received $116.2 million in proceeds from the issuance of our convertible senior notes in a transaction event exempt from registration under the Securities Act. During 2006, we received $64.4 million from two stock offerings in May and December. At December 31, 2007, our cash and cash equivalents balance was $101.4 million and we had $46.0 million in marketable securities, for a total of $147.4 million of cash, cash equivalents and marketable securities.  (Emphasis added.)
Therefore, Overstock.com has received total cash infusions of about $344 million as a public company and it has yet to show any annual profits. Besides having accumulated deficits to date of about $254 million, Overstock.com has wasted another $77.2 million of capital by buying back its common shares at huge premiums to book value.

Starting from its inititial public offering in 2002, $228 million of Overstock.com's cash infusions came from selling about 10.5 million common shares to investors at an average price of $22.67 per share (based on gross proceeds of approximately $237 million). As I detailed above, since 2005, Overstock.com paid about $77.2 million to repurchase approximately 2.765 million common shares at an average price of $27.92 per common share. Therefore, Overstock.com paid about $5.25 per common share to buyback stock in excess of the average price it sold common shares to investors. Since Overstock.com's common shares closed at $17.45 per share yesterday, the current share price is $10.47 lower than the average price that it paid to repurchased shares from investors and $5.25 lower than the average price that it sold shares to investors. Where is the supposed shareholder value being created?

2004 - 2006: Sell high, buy lower, and then raise more capital at even lower prices per share as losses grow (its insaaaaane!)

Just take a look at Overstock.com's stock sales to investors, later repurchases of its common shares, and then having to go back to investors to sell even more shares as the company's losses mounted from 2004 to 2006.

In 2004, Overstock.com sold 2.68 million common shares to investors at an average price of about $43.90 per share and the company reported a net loss of $4.728 million. In 2005, Overstock.com repurchased 1.665 million common shares at an average price of $39.16 per share or $4.74 less per share compared to shares sold to investors in 2004. In 2005, the company's net loss widened to $25.1 million. In 2006, Overstock.com sold 3.776 million more common shares to investors at an average price of just $17.21 per share or a whopping $21.95 less per share compared to shares repurchased in 2005. In 2006, the company's reported a record net loss of $101.9 million.

Therefore, in 2005, Overstock.com repurchased 1.665 million common shares at a total cost of $65.2 million or $39.16 per share only to go back into the capital markets in the next year (2006) to raise about the same $65 million by selling 3.776 million common shares at an average price of $17.21 per share. The end result is a dilution of about 2.1 million extra common shares.

Could another answer be that Overstock.com wanted to stabilize its stock price after announcing that the SEC uncovered intentional revenue accounting errors dating back to at least fiscal year 2000?

In a previous blog post, I detailed how Overstock.com misled the SEC Division of Corporation Finance about the materiality of its intentional revenue accounting errors dating back to at least fiscal year 2000 in an attempt to justify a one-time cumulative adjustment to correct its revenue accounting errors rather than restate all prior year’s financial reports. In that blog post, I detailed how Overstock.com, in a February 26, 2008 letter to the SEC, failed to make a “full analysis of all relevant considerations” including both "quantitative and qualitative factors" to assess the materiality of its revenue accounting errors as required by SEC Staff Accounting Bulletin No. 99.
For example, in my blog post, one of the many factors that I detailed to determine materiality is whether or not the revenue accounting error resulted in a “significant positive or negative market reaction.” Overstock.com’s response to the SEC on that same question was “no.” The company went on to claim that:
The stock price has not moved significantly since the earnings release date [January 30, 2008]. Therefore, we believe that recording the cumulative adjustment in Q4 2007 would not affect a reasonable investor making an investment decision.  (Emphasis added.)
However, Overstock.com failed to disclose to the SEC that during the month of February 2008 the company had repurchased a significant amount of common stock that very likely prevented its shares from declining in reaction to its revenue accounting errors. During the entire month of February 2008, Overstock.com repurchased 845,378 common shares at an average price of $11.11 per share or a premium of $0.23 per share or 2.1% over the average selling price during the February 1 to February 28 period. Such share repurchases by Overstock.com during the February period represented 14% of all shares traded or close to 10% of its float as defined by the company in its response to the SEC.

As I detailed in my previous blog post, Overstock.com did not repurchase any shares on January 30 and 31. On February 27 and 28, Overstock.com’s common shares closed at $10.61 and $10.79 per share respectively. Since Overstock.com paid an average of $11.11 per share from February 1 to February 28, it is very safe to assume that a significant majority of its share repurchases occurred during February 1 to February 26, prior to the company's response to the SEC.
Why didn’t Overstock.com tell the SEC about its stock repurchases? If Overstock.com had disclosed to the SEC its significant share repurchases during February 2008, the SEC may have objected to the company’s claim that its reported revenue accounting error resulted in "no" significant positive or negative market reaction.

To be continued....

Written by,

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Note: For additional up to date coverage of Overstock.com, please read Tracy Coenen and Gary Weiss's blogs.

Disclosure: Not long or short Overstock.com

Additional Note: I deleted my earlier blog post due an error in the Seeking Alpha earnings call transcript that erroneously attributed certain comments to Overstock.com CFO David Chidester. I apologize for the error.

Saturday, July 19, 2008

The SEC stands by while Overstock.com continues to violate Regulation G and overstates EBITDA in latest report

Before we begin let's review some of Overstock.com's history of false and misleading disclosures

Overstock.com (NASDAQ: OSTK) CEO Patrick Byrne likes to call himself a “humble servant” to his company's shareholders and a “market reform advocate” to the investing public, while he and his company have a documented long history of false and misleading disclosures and utterly despicable behavior such as stalking and smearing critics with its in-house black ops team. As previously detailed in this blog, from December 2000 to March 2002, Patrick Byrne had lied about Overstock.com being profitable when the company was never profitable at that time. Overstock.com’s unprincipled management team intentionally violated GAAP in reporting revenues from at least fiscal year 2000 until the SEC Division of Corporation Finance recently forced the company to report revenues in compliance with GAAP. To make matters worse, the company misled the SEC Division of Corporation Finance about the materiality of its revenue accounting errors and therefore violated Statement of Accounting Standards No. 154 by not restating prior period financial statements to correct its revenue accounting errors. In fact, Overstock.com has had only two profitable quarters (Q4 2002 and Q4 2004) in its entire history. At least one of those quarters earnings were materially overstated as a result of Overstock.com's intentional revenue accounting errors that were uncovered by the SEC. To make matters even far worse, as detailed many times in this blog dating back to November 2007, when it comes to non-GAAP disclosures, Overstock.com has continually violated SEC Regulation G and overstated EBITDA in its financial reports filed with the SEC from Q2 2007 forward.

Apparently, Patrick Byrne and his management team feel that they can make their own accounting and SEC disclosure rules on the fly - GAAP and SEC disclosure requirements be damned. In the mean time, the SEC sits by idly while Overstock.com distorts its financial performance to investors.

Overstock.com’s continued material violations of SEC Regulation G governing non-GAAP disclosures such as EBITDA causes it to turn a negative EBITDA to a positive EBITDA

It is incomprehensible that the SEC has so far failed to take any action against Overstock.com for violations of Regulation G, despite being continually informed by this blogger, its recently terminated investigation of the company, and also taking actions against other similarly non-compliant companies to force them to correct such violations.

In Overstock.com’s latest Q2 2008 earnings report, the company improperly reported EBITDA of $1.117 million in violation of SEC Regulation G. Overstock.com’s reported non-compliant EBITDA was overstated by $1.545 million as a result of the company improperly removing from its EBITDA calculations the effects of certain stock-based compensation expenses and improperly reconciling EBITDA to operating loss rather than net loss, in violation of SEC Regulation G. Therefore, had Overstock.com properly reported EBITDA in compliance with SEC Regulation G, the company would have reported a negative EBITDA of $428,000 instead of its non-compliant positive EBITDA of $1.117 million.

The sheer size of Overstock.com’s overstatement of EBITDA is clearly a material accounting error as defined by SEC Staff Accounting Bulletin No. 99. Overstock.com’s overstatement of EBITDA in violation of SEC Regulation G flips a properly calculated negative EBITDA of $428,000 into an improperly reported positive EBITDA of $1.117 million. According the SAB No. 99, one of the main considerations in determining if an accounting error is material is, “whether the misstatement changes a loss into income or vice versa.” Here with Overstock.com, we have a clearly material violation of SEC Regulation G in the company's Form 8-K filed with the Securities and Exchange Commission. See the charts below:

EBITDA incorrectly reported by Overstock.com in violation of SEC Regulation G

Items (in thousands of $)

Three Months Ended 06/30/07

Three Months Ended 06/30/08

Operating income or (loss)

-13,519

-6.317

Depreciation and amortization

7,974

5,887

Stock-based compensation

1,137

1,068

Stock-based compensation to consultants for services

135

329

Stock-based compensation relating to performance share plan

0

150

Issuance of common stock from treasury for 401 (K) matching contribution

113

0

EBITDA, as reported by Overstock.com in violation of SEC Regulation G

-4,160

1,117

EBITDA, as should have been correctly reported by Overstock.com in compliance with SEC Regulation G

Items (in thousands of $)

Three Months Ended 06/30/07

Three Months Ended 06/30/08

Net income or (loss)

-13,768

-6.463

Depreciation and amortization

7,974

5,887

Interest expense

1,027

888

Interest income

-1,078

-740

EBITDA, as should have been correctly reported by Overstock.com in compliance with SEC Regulation G

-5,845

-428

Overstock.com's material overstatement of EBITDA in violation of SEC Regulation G

Items (in thousands of $)

Three Months Ended 06/30/07

Three Months Ended 06/30/08

EBITDA, as reported by Overstock.com in violation of SEC Regulation G

-4,160

1,117

EBITDA, as should have been correctly reported by Overstock.com in compliance with SEC Regulation G

-5,845

-428

Amount of EBITDA overstatement by Overstock.com

1,685

1,545

Percentage of EBITDA overstatement by Overstock.com

40.50%

138.32%

SEC Regulation G defines EBITDA specifically as "earnings before interest, taxes, depreciation, and amortization" but Overstock.com makes up its own EBITDA and violates SEC rules

During the Q2 2008 earnings call, the following exchange took place between CEO Patrick Byrne and CFO David K. Chidester:

Patrick Byrne

Great. Slide number 10. EBITDA and this excludes stock based compensation. Do you want to mention that Dave? Do you want to – ?

David Chidester

Just – there is different ways people calculate EBITDA I think. We just want to make sure it’s clear that our calculation of EBITDA does [ph] include stock based compensation.

Patrick Byrne

Is that the convention?

David Chidester

(inaudible) It’s completely the convention in our industry and I think because it’s a new – it only came about a couple of years ago, everybody pretty much excludes it when they talk about EBITDA and talk about cash earnings.

What David Chidester said is that he thinks Overstock.com can compute EBITDA by eliminating stock-based compensation expenses from its computation and as a result of such a false claim by him, the company reported a materially overstated EBITDA in violation of SEC Regulation G. He further claims that removing stock-based compensation from EBITDA is "completely the convention in our industry." David Chidester's claims about Overstock.com's EBITDA disclosures are flat out false and as the CFO of a public company, he cannot claim ignorance to SEC Regulation G. That "everyone else is doing it" excuse was previously used by both David Chidester and Patrick Byrne as justification for the company's intentional revenue accounting errors uncovered by the SEC. However, SEC Staff Accounting Bulletin No. 99 specifically states that "Authoritative literature takes precedence over industry practice...."

In this case, Overstock.com improperly removed stock-based compensation expenses to flip a properly calculated negative EBITDA in compliance with Regulation G into an improperly reported positive EBITDA. In fact, for public companies the SEC provides specific rules for calculating EBITDA under SEC Regulation G. Overstock.com clearly cannot exclude stock-based compensation expenses from EBITDA.

According to the SEC Division of Corporation Finance Regulation G guidance provided by their "Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures" EBITDA refers specifically to “earning before interest, taxes, depreciation and amortization." See below:

Question 14: Section I of the adopting release describes EBIT as "earnings before interest and taxes" and EBITDA as "earnings before interest, taxes, depreciation and amortization." What GAAP measure is intended by the term "earnings"? May measures other than those intended by the description in the release be characterized as "EBIT" or "EBITDA"? Does the exception for EBIT and EBITDA from the prohibition in Item 10(e) (1) (ii) (A) of Regulation S-K apply to these other measures?

Answer 14: "Earnings" is intended to mean net income as presented in the statement of operations under GAAP. Measures that are calculated differently than those described as EBIT and EBITDA in the adopting release should not be characterized as "EBIT" or "EBIDTA." Instead, the titles of these measures should clearly identify the earnings measure being used and all adjustments. These measures are not exempt from the prohibition in Item 10(e) (1) (ii) (A) of Regulation S-K.

Note: Bold print and italics added by me.

Therefore, the intended meaning of “earnings” for EBITDA under Regulation G is “net income as presented in the statement of operations under GAAP.” EBITDA can only be computed as earnings (meaning net income or loss) before interest, taxes, depreciation, and amortization and the SEC requires that “measures that are calculated differently than those described as…EBITDA in the adopting release [Regulation G] should not be characterized as EBITDA.” Net income, not operating income as used by Overstock.com, is the starting point towards computing EBITDA and stock-based compensation expenses cannot be excluded from EBITDA according to SEC Regulation G.

David Chidester’s above comments about Overstock.com's EBITDA disclosures are flat out false! On May 13, David K. Chidester, Senior Vice President – Finance sold 2,766 shares at an average price of about $27.83 per share of and pocketed gross proceeds totaling about $77,000. After Overstock.com’s Q1 2008 earnings call, the company’s stock price plunged 41.12% or $11.31 to close at just $16.31 per share. As David Chidester cashes out, Overstock.com shareholders are bearing the losses.

The SEC has taken action against other non-compliant companies violating Regulation G but has utterly failed to take action against Overstock.com for similar violations

In a previous blog post, I detailed how CGG Veritas, like Overstock.com, improperly removed stock-based compensation expense from its reported EBITDA in violation of SEC Regulation G. The SEC Division of Corporation Finance informed CGG Veritas that:

The acronym EBITDA refers specifically to earning before interest, tax, depreciation and amortization. However, your measure also adjusts earnings for stock option expense. We will not object to your using such a measure as a liquidity measure but request that you rename it to avoid investor confusion.

Note: Bold print and italics added by me.

As a result of the SEC’s review, CGG Veritas changed its non-compliant EBITDA measure to EBITDAS or earnings before interest, taxes, depreciation, amortization, and stock-based compensation. CGG Veritas responded to the SEC that, "we will in future filings refer to the non-GAAP measure in question as 'EBITDAS' which we will define as 'earnings before interest, tax, depreciation, amortization and share-based compensation cost' ….”

As detailed above, Overstock.com, just like CGG Veritas, improperly removed the effects of stock-based compensation expenses from its non-compliant EBITDA disclosures in violation of Regulation G. Yet the SEC has continued to fail to take action against Overstock.com to correct such non-compliant EBITDA disclosures despite being directly informed by this blogger.

In that same blog post, I detailed how CKX Inc, like Overstock.com, improperly reconciled its non-compliant EBITDA to operating income or loss rather than net income. The SEC notified CKX Inc.:

Reference is made to your presentation of the non-GAAP financial measure, EBITDA, in the table of your historical and pro forma financial information for the year ended December 31, 2004. We note that you define EBITDA as income or loss from continuing operations before interest expense, income tax expense (benefit), depreciation and amortization, and consider it to be an important supplemental measure of your operating performance which is used by management to evaluate the performance of the Company. However, it appears your definition of EBITDA does not comply with the guidance set forth in Question 14 of the “Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures.” Question 14 states that the term “earnings” is intended to mean net income as presented in the statement of operations under GAAP and further, measures that are calculated differently than those described as EBIT or EBITDA should not be characterized as “EBIT” or “EBITDA.” In this regard, please revise your calculation of EBITDA such that it is computed as net income (loss) (rather than income or loss from continuing operations) before interest expense, income tax expense (benefit), depreciation and amortization. Alternatively, if you believe your current presentation of your non-GAAP measure is appropriate, but has been characterized inappropriately as EBITDA, revise your presentation and supplementally tell us in detail how it complies with FR-65.

Note: Bold print and italics added by me.

The SEC told CKX Inc. that its non-compliant EBITDA must be computed by revising their "calculation of EBITDA such that it is computed as net income (loss) (rather than income or loss from continuing operations) before interest expense, income tax expense (benefit), depreciation and amortization." Any other calculation cannot be called EBITDA. However, Overstock.com, just like CKX Inc., improperly reconciled its non-compliant EBITDA to operating income or loss rather than net income or loss and the SEC has utterly failed to take action against Overstock.com to correct its non-compliant EBITDA disclosures despite being notified by this blogger.

CKX responded to the SEC:

The Registrant has revised its presentation in the Summary Historical and Pro Forma Financial Data to include operating income before depreciation and amortization ("OIBDA"). All references to EBITDA have been removed. The Registrant has revised its disclosures to reconcile OIBDA to operating income which is the most directly comparable financial measure calculated and presented in accordance with GAAP.

Note: Bold print and italics added by me.

Therefore, CKX renamed its non-compliant EBITDA disclosure as OIBDA or operating income or loss before depreciation and amortization and the company was able to remove losses from discontinued operations from its non-GAAP financial measure.

What is the appropriate term for Overstock.com’s non-compliant EBITDA financial measure?

Overstock.com, like CKX, improperly used operating income or loss as the starting point to compute its non-compliant EBITDA calculation. In addition, Overstock.com, like CGG Veritas, improperly removed stock-based compensation expenses from its non-compliant EBITDA calculation. Perhaps Overstock.com's non-compliant EBITDA should be renamed OIBDAS or operating income or loss before depreciation, amortization, and stock-based compensation expense. Note: Overstock.com does not have income tax expenses due to its losses. However, this blogger has directly notified Overstock.com Audit Committee member Joseph J. Tabacco Jr. of the company's non-compliant EBITDA disclosures and the company has failed, just like the SEC, to address its EBITDA reporting errors.

What’s going on at the SEC?

I am beginning to believe that our present SEC is not of the same caliber that I feared as the criminal CFO of Crazy Eddie in the 1980s. They are overwhelmed and under-resourced. Instead, they using their highly taxed resources to chase delusional conspiracy theories such as those blaming short sellers on problems related to the subprime crises effecting Fannie Mae and Freddie Mac. I suggest that you read Joe Nocera's blog post entitled, "First, Let's Kill All Short-Sellers." Perhaps that explains why companies like Overstock.com can thumb their noses at SEC rules while the SEC drops investigations of such companies.

As detailed above, Overstock.com's stock price on Friday 41.12% or $11.31 to close at just $16.31 per share after the company's misleading earnings release. Eric Savitz, in the Barron's Tech Trader Daily blog noted:

Stifel Nicolaus analyst Scott Devitt this morning cut his rating on Overstock.com (OSTK) to Sell from Hold. He notes that the company, which reported Q2 financial results this morning, trades for 21×2009 EBITA, “the highest multiple in the sector.”

Devitt says the company has had two consecutive quarters of mid-20% growth, but that it has had “fairly easy comps,” and that growth could drop into the low-to-mid teens by 2009.

Note: Bold print and italics added by me.

However, Gary Weiss noted in his blog that:

Sam [Antar] has specifically warned that Overstock was distorting the "growth" numbers reported to the public. He set forth his case in exhaustive detail. But analysts and the clowns at the SEC -- who just gave Overstock's accounting a clean bill of health -- paid no attention.

Note: Bold print and italics added by me. Bracketed information added by me for clarity.

Acclaimed forensic accountant, author, and blogger Tracy Coenen asked:

I keep wondering why Pricewaterhouse Coopers doesn’t catch this material error in calculating a figure that is heavily touted in reports to investors. Rumor has it that they review the quarterly reports, but this makes me wonder.

Note: Bold print and italics added by me.

The tragedy of American capitalism is that most investors rely on incompetent or at the very least lazy and spineless Wall Street analysts for research and inadequately trained but similarly spineless auditors to make sure financial reports are free of material errors. This tragedy is further compounded by an overwhelmed and under-resourced SEC chasing delusional conspiracy theories touted by company managements who are unwilling to take responsibility for their misdeeds.

To be continued….

Written by:

Sam E. Antar (former Crazy Eddie and a convicted felon)

Disclosure: Not long or short Overstock.com, CGG Veritas, and CKX. Inc.

Tuesday, July 15, 2008

Limiting Auditor Liability is Plain Dumb

Audit firms put too many relatively inexperienced staffers on audits to do much of the leg work. Most auditors never take a single semester in-depth college level course devoted exclusively to combating fraud or understanding weaknesses in internal controls before graduating college. Worst yet, too many topics covered on the CPA exam have to be learned in a cram CPA review course, only after potential CPA candidates’ graduate college.

Now some clowns at certain audit firms want to limit their liability for failed audits? As a former CPA and the criminal CFO of Crazy Eddie, I advise public accounting firms to increase the professional competence of your staffs and improve your audit procedures if you truly want to reduce your liability exposure for your screw ups.

In the AAO Blog, Jack Ciesielski writes:

The funny thing is - the audit is under the control of the auditor. They could "audit better," if they chose to do so. And they could walk away from audits that they cannot audit better. Better that they have limits to their legal responsibility? Hmm... seems like they'd have even less incentive to do an audit better. I smell a moral hazard in the offing.

However, limiting auditor liability is not just a “moral hazard.” Limiting auditor liability is ultimately a danger to the integrity of financial information that is relied upon by investors. The integrity of financial information is the main pillar of our great capitalist economic system.

Written by:

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Shop To Earn Tries to Bully Bloggers with Litigation

Shop To Earn (website: ShopToEarn.net), a multi-level marketing company, apparently does not like anyone questioning their business practices. Recently, two bloggers have received letters from a Shop To Earn attorney threatening legal action against them as a result of their critical examination of the company's business practices. According to a blog post at Everyday Finance:

Unfortunately, my original post from several weeks ago, which had a balanced, yet critical review of the business process, had to be taken down due to the threatening emails sent to me by the legal counsel of Shop To Earn. Until I investigate my rights/risks further, I have removed parts of the post as of July 14, 2008 to comply with the uncompromising, bullying (in my opinion) behavior of this company. Readers had benefited from the important information displayed, but I really don't have the time or energy for a prolonged legal battle to defend my free speech. Fortunately, I have an LLC firewall between this attorney and my personal assets, but I really don't want to spend the time, nor would I like to lose the blog, over this issue unless I have further assurances from my legal inputs, so for now, here's the abridged version that, for any reasonable individual, has nothing that could invite legal action for OPINIONS....

Note: Bold print and italics added by me.

A few days ago, a Shop To Earn attorney apparently attempted to bully acclaimed forensic accountant, author, and blogger Tracy Coenen into removing her blog posts examining the company's business practices by threatening her with litigation, too.

According to a post on her blog, Tracy Coenen received the following letter from Shop To Earn attorney Gerald Nehra:

I represent ShopToEarn and advise them on direct selling legal matters.

You are on notice to CEASE & DESIST your disparaging and potential libelous references to ShopToEarn and the unapproved use of the ShopToEarn logo on your website.

The ShopToEarn program is legally and economically sound, and the company will take all steps necessary to protect its’ rights.

Gerald Nehra

Attroney (sic) for ShopToEarn

Tracy Coenen’s response:

Gerry – Thanks for your note. As free speech is protected under the Constitution of the United States, I will continue to analyze and critique Shop To Earn. I’m sure you’re aware that the law clearly allows me to voice my opinion about the program, even if that opinion differs from yours or is negative about the company. If I’ve cited any incorrect facts about the program and company, I’d be happy to issue a correction if you can point out those errors and provide documentation of the correct facts. I will not amend my opinions about the program, as I still believe the program should be avoided by consumers.

I understand this is not the first time you’ve tried to intimidate a blogger who had a negative opinion about the Stop To Earn program. Your reaction to these negative critiques suggests the company may have something to hide, and I won’t hesitate to have Fraud Discovery Institute start an investigation into the company to confirm what I’ve found about the program.

Besides learning how to spell the word "attorney" correctly (not spelled "attroney" as in his letter to Tracy Coenen quoted above), I think Shop To Earn attorney Gerald Nehra needs a refresher course on Constitutional law as it relates to free speech. He can read the United States Constitution here.

It is unfortunate that too many companies like Shop To Earn are bullying critics with litigation. Critical analysis of companies is an important part of our vibrant capitalist economy and such free speech is protected by our Constitution. If corporate bullying is allowed to continue, our nation risks a downward spiral into crony capitalism.

This blog will be watching Shop To Earn's actions very carefully, too. I agree with Tracy Coenen that Fraud Discovery Institute run by convicted felon turned crime fighter Barry Minkow should take a look at this company.

Written by:

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)