Skip to main content's New Disclosures Today Show Company Financial Reports Were a "Joke"’s (NASDAQ: OSTK) new amended financial reports filed today, vindicates findings, first exposed in this blog, that the company violated Securities and Exchange Commission Regulation G governing non-GAAP disclosures, such as EBITDA and materially overstated its non-compliant EBITDA in financial reports dating back to Q2 2007. Even worse, disclosed in its 10-Q for Q3 2008, released today, that its restatement of financial reports dating back to 2003, due to accounting errors relating to revenues, customer refunds, and customer credits, may subject the company to future regulatory action from the Securities and Exchange Commission and litigation from shareholders seeking damages:

On October 24, 2008, we disclosed certain accounting errors and announced our intent to restate certain of our financial statements and other information to correct these errors (see Note 3 to the consolidated financial statements contained in Part I, Item 1 “Financial Statements (Unaudited) (Restated)”). As a result of these errors, we may become subject to litigation and regulatory action. Although we would vigorously defend against any such actions, there can be no assurance that we would prevail. An award of damages in such suit or a regulatory penalty imposed as a result of regulatory action could be substantial and harm our business. The financial costs and the dedication of the time of management to defend such actions could also harm us financially and disrupt our business.

Note: Bold print and italics added by me.

As I detailed in a previous blog post, on October 24, 2008, surprised investors and reported that it was restating all financial reports dating back to 2003, due to a newly disclosed accounting error relating to customer refunds and credits. The company disclosed that all previous financial reports issued from 2003 to Q2 2008 “should no longer be relied upon.”

In's latest 10-Q report released today, the company revealed:

...the CEO (principal executive officer) and Senior Vice President, Finance (principal financial officer) each concluded that the control deficiency previously described constituted a material weakness in the Company’s system of internal control over financial reporting as of September 30, 2008., including our CEO (principal executive officer) and Senior Vice President, Finance (principal financial officer), has revised its earlier assessment and has now concluded that our disclosure controls and procedures were not effective as of December 31, 2007 or during the interim periods ending September 30, 2008 in reaching a reasonable level of assurance that information required to be in our reports filed or submitted under the Exchange Act was properly recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms.

Note: Bold print and italics added by me.

Therefore, disclosed that it did not maintain a straight set of books due to a "material weakness" in internal controls.

The latest customer refund and credit accounting errors follow a string of material accounting errors that have plagued throughout its history. Earlier this year, the Securities and Exchange Commission discovered that intentionally did not report revenues in compliance with GAAP, since its inception. In February 2006, the company disclosed inventory accounting errors for fiscal years 2002 to 2005.

According to a Fortune magazine article way back in February 2000: came to Byrne's attention last spring when its founder approached High Plains for capital. "The financials were a joke," says High Plains CFO John Pettway.

Note: Bold print and italics added by me.

However,'s financial reports remained a "joke," as evidenced by its string of material accounting errors and willful non-compliance with SEC Regulation G in reporting a non-compliant EBITDA.

Starting in November 2007, this blog was the first to expose’s willful violations of SEC Regulation G governing non-GAAP disclosures, such as EBITDA. As a result of's violations of Regulation G, the company materially overstated its non-compliant EBITDA in financial reports from Q2 2007 to Q2 2008, including comparable non-compliant EBITDA numbers for each period. reconciled its non-compliant EBITDA to operating loss, rather than net loss (the most directly comparable GAAP measure required under SEC Regulation G), and improperly removed stock-based compensation costs from its non-compliant reported EBITDA.

Beginning in November 2007 to just last week, I informed Audit Committee member Joseph J. Tabacco Jr, via several emails, Cc'd to the SEC, about the company's non-compliant EBITDA disclosures, but management led by CEO Patrick Byrne, stubbornly refused to change its non-compliant EBITDA disclosures, until today. When originally disclosed that it was restating its financial reports dating back to 2003 in its October 24 press release and subsequent Q3 2008 earnings call, my blog noted that the company continued to report a non-compliant EBITDA in its Q3 2008 earnings report. During the Q3 2008 earnings call, both CEO Patrick Byrne and company President Jonathan Johnson, responding to questions posted in my blog a day earlier, flat out denied that violated Regulation G. Patrick Byrne told investors:

The claim that EBITDA is not compliant with SEC definition is nonsense.

Note: Bold print and italics added by me.

In my next blog post, I detailed how's recently announced accounting errors for customers refunds and credits caused further material overstatements of the company's non-compliant EBITDA disclosures.

Shortly afterwards, I emailed's Board of Directors, CEO Patrick Byrne, and Audit Committee member Joseph J. Tabacco Jr. to alert them about the company's continuing non-compliance with Regulation G in reporting EBITDA. CEO Patrick Byrne responded with callous indifference, writing me:

I usually have my secretary handle these kinds of letters. Would you like her email?

Yours ever,


However, cooler heads at the company, likely led by Audit Committee member Joseph J. Tabacco Jr., prevailed over Patrick Byrne and Jonathan Johnson. Now, in's latest 10-Q for Q3 2008 released today, the company renamed its non-compliant EBITDA disclosure to “Adjusted EBITDA” and it reconciles "Adjusted EBITDA" to net loss, rather than operating loss, the most directly comparable GAAP measure required under Regulation G. By renaming its non-compliant EBITDA disclosure as “Adjusted EBITDA,” the company can now properly eliminate stock-based compensation costs and losses from discontinued operations from “Adjusted EBITDA.”

Journalists, bloggers, and others who dared to expose misdeeds by's unprincipled management team have faced a vicious retaliatory smear campaign orchestrated by CEO Patrick Byrne with the collusion of his paid shills: cyberstalker Judd Bagley, Mark Mitchell (former Columbia Journalism Review reporter who left CJR under mysterious circumstances), and message board trolls Dave Patch and Evren Karpak.

Journalists Gary Weiss, Herb Greenberg, Joe Nocera, Floyd Norris, Roddy Boyd, Carol Remond, Bethany McLean, Seth Jayson, bloggers Jeff Matthews, Zac Bissonnette and Tracy Coenen, and others have faced reprisals in the form of despicable smears and outright lies spewed by Byrne and his paid cronies.

In addition, independent research firm Gradient Analytics and short seller Copper River Management were subjected to meritless litigation from, on top of the smear campaign orchestrated by CEO Patrick Byrne. Gradient, whose early work first exposed deceptive financial reporting of revenues by, recently settled with the company, while the litigation against Copper River continues on.'s latest disclosures about accounting errors and restatements of financial reports, puts its litigation prospects with Copper River in severe jeopardy.

Patrick Byrne even recruited the current Attorney General of the state of Utah Mark Shurtleff, with a $5,000 payment, to discredit me in an effort to get me to back off from covering in my blog. Byrne's collusion with Shurtleff was exposed in tape recorded conversations by me with members of Shurtleff's office.

I call on the Securities and Exchange Commission to start an enforcement action and the Justice Department to conduct a criminal investigation into the vicious retaliatory smear campaign orchestrated by CEO Patrick Byrne in an effort to prevent critics from exposing the false and misleading reports and disclosures by and its unprincipled management team.

To be continued....

Written by,

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

Disclosure: Not short or long


Anonymous said…
Yo Eddie!

Can you add some numbers to this post to better illustrate the materiality of the changes?

In the 10/24 press release Crazy Patty compared the changes to revenue to make them look tiny though comparing them to EBITDA was a lot more relevant.

As a side note, Greenberg and Bethany were heroes with OSTK but I fail to see what the others contributed to the cause. Matthews just pointed out the obvious, Patrick is nuts, and milked that for publicity but did no original work that I am aware of.

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