Thursday, January 17, 2008

Jason C. Lindsey backdates his resignation: Proof

In two previous blog posts entitled, "Why did Overstock.com President and COO Jason C. Lindsey really resign?' and "Did former Overstock.com President, Chief Operating Officer, and Director Jason C. Lindsey backdate his resignation?" I raised the question about Jason C. Lindsey's possible backdating of his sudden resignation from Overstock.com (NASDAQ: OSTK). According to his resignation letter, Jason C. Lindsey claimed to resign on December 31, 2007. However, according to documents relating to Overstock.com's amended credit agreement with Wells Fargo Bank entered and executed a day later, on January 1, 2008, Jason C. Lindsey was still listed as a person authorized to make advances on behalf of Overstock.com.

Recently, Jason C. Lindsey filed an a sworn declaration in connection with a Special Motion to strike Copper River's countersuit against Overstock.com and certain director defendents. (See my last blog item entitled, "Are certain former Overstock.com directors jumping ship on Patrick Byrne?") According to Jason C. Lindsey's sworn declaration to the court:

I was a member of the Board of Directors of Overstock.com ("Overstock") between October 1999 and between October 2005 and January 2008. I was also Overstock's Chief Financial Officer from 1999 until August 2003 and served as Overstock's President from April 2006 until January 2, 2008.

Note: Bold print and italics added by me.

Therefore, according to Jason C. Lindsey's sworn declaration, he was still a board member until "January 2008" and Overstock.com's President until "January 2, 2008." However, Jason C. Lindsey's sworn declaration contradicts his own resignation letter:

December 31, 2007

Dr. Patrick M. Byrne
Chairman of the Board Overstock.com, Inc.
6350 South 3000 East
Salt Lake City, Utah 84121

Dear Patrick:

As we discussed this afternoon, it has been two years since I came out of retirement to return to Overstock. Much to my satisfaction, Overstock has accomplished a lot during those two years and I am pleased that I was able to participate in the company's turn around. However, as we discussed, we both believe that it is no longer necessary that I be as intimately involved in the day to day operations of the company. I would like to reduce my participation in the company so that I can spend more time with my family and be more involved with some outside business ventures. Thus, effectively immediately, I hereby resign as a director and as the president and chief operating officer of Overstock.com, Inc. As we discussed, I will remain a part-time employee of the company and work on special projects under your direction.

Sincerely,

Jason C. Lindsey

Note: Bold print and italics added by me.

In addition, Overstock.com apparently filed a false 8-K report to the Securities and Exchange Commission, claiming that Jason c. Lindsey resigned on December 31, 2007, since according to Jason C. Lindsey's sworn declation he was a board member until January 2008 and Overstock.com's President until January 2, 2008.

On December 31, 2007, Mr. Jason C. Lindsey resigned, effective immediately, from his positions as President, Chief Operating Officer (principal operating officer) and a member of the Board of Directors of Overstock.com, Inc. (the “Company”). Mr. Lindsey intends to spend more time with his family, but also intends to remain a part-time employee of the Company and to work on special projects as requested from time to time by the Company.

Note: Bold print and italics added by me.

Sounds like fraud to me. I wonder what Wells Fargo Bank and the SEC will think about this latest lie by Overstock.com, too?

Written by:

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

Are certain former Overstock.com directors jumping ship on Patrick Byrne?

A see no evil, hear no evil Board of Directors

Certain current and former Overstock.com (NASDAQ: OSTK) directors have filed a Special Motion to strike Copper River Partners LP (formerly Rocker Partners) countersuit against them as individual defendants. The group includes John J. Byrne (father of Overstock.com CEO Patrick Byrne and a former Director), Allison H. Abraham (current Director), Jason C. Lindsey (recently resigned as President, Chief Operating Officer, and Director), and John A. Fisher (former Director).

It's management's fault, they did it and we had nothing to do with it

Perhaps the most puzzling disclosure is that the Director Defendant's:

...did not, in fact, authorize the August 2005 filing" of Overstock.com's lawsuit against Copper River and Gradient.... It was a management-level decision made at a time when Lindsey was neither an officer nor a director.

Note: Bold print and italics added by me.

Is Overstock.com's Director Defendant's which include Patrick Byrne's father, running for cover and trying to lay the blame on CEO Patrick Byrne? In a previous blog post entitled, "Overstock.com vs. Gradient and Rocker Part 1: Patrick Byrne and his Three Stooges," I analyzed the conflicting, inconsistent, and contradictory allegations of the three former Gradient employees whom Overstock.com is relying on as its main witnesses. Cooper River's countersuit against Overstock.com details false, misleading, and deceptive disclosures by the company and its management dating from before Overstock.com's initial public offering in June 2002 through the current fiscal year. 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.

It's the auditor's fault, even though we are their bosses, we rely on them for "advice and approval"

Another troubling aspect of the Director Defendant's motion is the claim by one current and another former Audit Committee Member of reliance on Overstock.com's auditors which contradicts the company's previous disclosures:

The actions taken by Abraham and Fisher as members of Overstock.com's Audit Committee were based upon the advice and approval of independent auditors from PricewaterhouseCoopers....

Note: Bold print and italics added by me.

However, disclosures in Overstock.com's "Report of the Audit Committee," included in the company's previous proxy statement, contradict claims made by Abraham and Fisher in the Director Defendant's motion:

The Audit Committee serves a board-level oversight role, in which it provides advice, counsel and direction to management and the auditors on the basis of the information it receives, discussions with management and the auditors and the experience of the Audit Committee's members in business, financial and accounting matters.

Note: Bold print and italics added by me.

How can Allison H. Abraham and John A. Fisher claim that their actions "were based on the advice and approval of independent auditors" when as Audit Committee members they served a "board-level oversight role, in which it provides advice, counsel and direction to management and the auditors...."?

Apparently Abraham and Fisher are concerned about various misleading statements made during various earnings conference calls by Jason C. Lindsey (who recently resigned as President, Chief Operating Officer, and Director) about Overstock.com's reported inventory reserves as they down play his comments. For example, they claim that:

Lindsey's comment in 2006 that reserves were adequate is entirely benign and was based upon a determination made in consultation with the PricewaterhouseCoopers auditors.

Note: Bold print and italics added by me.

Whether or not Overstock.com's auditors were consulted does not alleviate its management of any responsibility for the integrity of the company's financial reporting. According to Overstock.com's "Report of the Audit Committee in its last proxy statement:

Management is responsible for the preparation, presentation and integrity of the Company's financial statements, accounting and financial reporting principles, and internal controls and procedures designed to ensure compliance with accounting standards, applicable laws and regulations.

Note: Bold print and italics added by me.

Remember, as detailed above, that Overstock.com's Audit Committee, "provides advice, counsel and direction to management and the auditors..." Therefore, false and misleading financial reporting is clearly the Audit Committee's responsibility, too. According to Overstock.com's Audit Committee Charter:

...the purpose of the Audit Committee is to provide general oversight of the Company's financial reporting, internal control and audit functions.

Note: Bold print and italics added by me.

We have to wonder, who are these monkey's trying to fool?

Let's examine certain disclosures by Overstock.com and its management regarding inventories and inventory reserves in fiscal year 2006

During Overstock.com's first quarter 2007 earnings conference call, Patrick Byrne revealed a previously undisclosed plan for earnings management dating back to the first quarter of fiscal year 2006:

We had our game plan. Really, we had our game plan as of Q1 last year [2006] of what was going to have to happen.

We knew things were going to get really ugly and the company was going to have take medicine but that we could come out of it a far better company, and that medicine was going to be in the form of some expenses, it was going to be in the form of dumping a bunch of inventory as we figured out really how to take our inventory management to the next level -- all kinds of things. We knew it was going to get ugly. Maybe not as ugly as it got but we thought we would come out in the first quarter smelling like a rose operationally and this is exactly what we -- what I at least thought was going to happen in the first quarter.

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

However, Overstock.com did not make a timely disclosure that "things were going to get really ugly." According to Overstock.com's news release for the first quarter of fiscal year 2006, the company reported gross margins of 14.0% compared to 14.9% in 2005. With an undisclosed disaster looming, during the first quarter fiscal year 2006 earnings conference call, Patrick Byrne played down concerns about Overstock.com's inventory problems:

...we've come out of it now, but we did mark things down in order to flush things through. So that hurt our margins a bit.

Note: Bold and italics added by me.

According to Overstock.com's 10-Q filed about two weeks later, the company reported that inventory reserves had dropped to $3.3 million at the end of the first quarter of fiscal year 2006 from $5.241 million at the end of the previous quarter. In addition, inventory reserves as a percentage of gross inventory had dropped to 3.90% of gross inventory from 5.32% of gross inventory at the end of the previous quarter. In other words, the relative level inventory reserves reportedly dropped about 26.7%.

After reporting its second quarter fiscal year 2006 results, it was quite clear that Overstock.com did not "come out of it" and had not alleviated its inventory problems. According to Overstock.com's news release for the second quarter of fiscal year 2006, the reported gross margins of 14.4% compared to 15.1% in 2005. However, during the second quarter earnings conference call, Jason C. Lindsey reassured investors:

So far, it has sold okay. We are getting rid of it and it does not look like we have - obviously, we are more than adequately reserved, I think, for all of it, but just as far as having sold the last of it, so that there is no more drag on margins, we definitely want to have that happen by the end of the year.

Note: Bold and italics added by me.

Jason C. Lindsey had claimed that "So far it has sold okay. We are getting rid of it...." However, as detailed above, Patrick Byrne had previously claimed after the first quarter that, "...we've come out of it now, but we did mark things down in order to flush things through."

Now, according to Overstock.com's second quarter fiscal year 2006 10-Q, the company reported that total inventory reserves had slightly increased to $3.4 million at the end of the second quarter of fiscal year 2006 from $3.3 million at the end of the previous quarter. In addition, inventory reserves as a percentage of gross inventory had increased to 4.35% of gross inventory from 3.90% of gross inventory during the previous quarter. In other words, the relative level inventory reserves reportedly increased about 10% and Jason C. Lindsey had now claimed that "we are more than adequately reserved...so there is no more dragon margins."

Obviously, Overstock.com was not "more than adequately reserved...so that there is no more drag on margins." According to Overstock.com's news release for the third quarter of fiscal year 2006, reported gross margins continued to decline, in contrast to Lindsey's previous claim that the company "was more than adequately reserved," so there would be "no more drag on margins". The company reported gross margins of 14.5% compared to 15.7% in 2005.

During Overstock.com's third quarter earnings conference call, Patrick Byrne finally sang a different tune about gross margins and gave a slight hint of the fourth quarter disaster that lay ahead:

I am going to put some meat on that, because we think that we can dramatically reduce inventory from here. But to move that amount of inventory, core inventory, we are giving great deals, better than -- well, we are giving great deals and clearing a whole bunch of stuff out, so we will end with extremely fresh inventory and a much smaller amount than you have ever seen us run with as a fraction of sales....

But to do that, to clean out every nook and cranny in the warehouse, is going to require clearance prices on it, so that is why the margins are going to hurt.

Note: Bold and italics added by me.

Jason C. Lindsey chimed in claiming:

There is $10 million to $20 million worth of stuff in our warehouse now that we do not ever want to have in our warehouse again. We are clearing it out nicely.

Note: Bold print and italics added by me.

According to Overstock.com's third quarter fiscal year 2006 10-Q, the company reported that total inventory reserves had increased to $4.5 million at the end of the second quarter of fiscal year 2006 from $3.4 million at the end of the previous quarter. In addition, inventory reserves as a percentage of gross inventory had increased to 6.14% of gross inventory from 4.35% of gross inventory during the previous quarter. In other words, the relative level inventory reserves reportedly increased about 41.1%.

Was Overstock.com "more than adequately reserved" this time around? After carefully examining Overstock.com's fourth quarter results, it is clear that the company still failed to maintain adequate inventory reserves at the end of the third quarter.

According to Overstock.com's news release for the fourth quarter of fiscal year 2006, overall gross margins dropped to 12.8% compared to 15.0% in 2005. However, gross margins for Overstock.com's direct sales had dropped to an astounding negative 3.1% and most of the company's inventory on hand is to support its direct sales. The company had lost an estimated $7 million to $11 million (my calculations) from dumping slow moving inventory and it was apparently under-reserved at the end of its third quarter. Note: Overstock.com only handles sales return inventories for its fulfillment sales.

During the fourth quarter fiscal year 2006 earnings conference call, but before Overstock.com had released its 10-K report that included inventory reserve disclosures, Jason C. Lindsey explained Overstock.com’s negative gross margins and lower inventory levels as follows:

We took all that to heart in the fourth quarter and although the fourth quarter results are very bad, and I admit they are very bad, they were bad on purpose. In other words, we used the fourth quarter to get rid of all the slow-moving inventory. I am quite pleased with the inventory balances we have now....I am pleased that the fourth quarter is now over. We have sold it. Our inventory turns are much higher. Our margins are much higher and it really does feel like we have made a lot of progress there.

Note: Bold print and italics added by me.

The key words are “I admit they are very bad, they were bad on purpose… we used the fourth quarter to get rid of all the slow moving inventory.”

But, the bad inventory wasn’t gone. This is clear because inventory reserves rose from about $4.5 million at the end of the third quarter to about $6.6 million at the end of the fouth quarter. On a relative basis, inventory reserves went up a staggering 299% from about 6.14% of gross inventory at the end of the third quarter to about 24.52% of inventory at the end of the fourth quarter. How could Overstock.com have “sold it” and gotten “rid of all the slow moving inventory” if the company actually estimated that it had more slow moving inventory in both absolute dollars and relative amounts?

Perhaps Overstock.com was burying its inventory mistakes as it carried out Patrick Byrne's yet undisclosed "game plan." During the second quarter fiscal year 2007, earnings conference call Jason C. Lindsey revealed:

To support this level of sales and have $17 million of inventory when at the same time a year ago [2006] I think we had close to $80 million, the amount of mistakes that can be buried in that are much smaller.

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

Examine the chart below in light of Jason C. Lindsey's statement that "the amount of mistakes that can be buried" are much smaller as inventory levels decline:

Selected Inventory Information from Overstock.com's SEC filings

Quarter Ended 12/31/05

Quarter Ended 03/31/06

Quarter Ended 06/30/06

Quarter Ended 09/30/06

Quarter Ended 12/31/06

Gross Inventory (in millions of dollars)

98,510

84,651

78,222

73,282

26,859

Reserve for Obsolete and Damaged Inventory (in millions of dollars)

5,241

3,300

3,400

4,500

6,585

Net Inventory (in millions of dollars)

93,269

81,351

74,822

68,782

20,274

Percentage of Reserve for Obsolete and Damaged Inventory to Gross Inventory

5.32%

3.90%

4.35%

6.14%

24.52%

On December 15, 2006 Overstock.com had received a long awaited equity infusion of about $40 million after the company had cancelled a previously planned equity offering after the Securities and Exchange Commission launched a formal order of investigation on May 9, 2006. Was Overstock.com burying its inventory “mistakes” until after its equity infusion of about $40 million on December 15, 2006?

Just take a look at the huge increase in the relative amount of reported inventory reserves at the end of the fourth quarter, after Overstock's equity infusion on December 15, 2007 from 6.14% of gross inventory at the end of the third quarter to 24.52% of gross inventory at the end of the fourth quarter or about a 299% relative increase in inventory reserves.

Finally, consider Jason C. Lindsey's claim at the end of the fourth quarter of fiscal year 2006 that, “I admit they are very bad, they were bad on purpose…. We used the fourth quarter to get rid of all the slow moving inventory.” It is clear, as later disclosed in its 10-K, that Overstock.com did not get rid of "all" of its "slow moving inventory" as Jason C. Lindsey had claimed. It still had such inventories and it had it in record numbers.

Apparently, Overstock.com's fourth quarter fiscal year 2006 results were "....were very bad, they were very bad on purpose.....," as Jason C. Lindsey has claimed. As detailed above, Patrick Byrne had an undisclosed "game plan" that "things were going to get really ugly and the company was going to have take medicine." Overstock.com took its "medicine" in the fourth quarter of fiscal year 2006 as inventory reserves rose to record levels, even though Jason C. Lindsey had disclosed that "We used the fourth quarter to get rid of all the slow moving inventory." If they sold it, why did they still have it in record numbers as indicated by the significant increase in inventory reserves?

Are certain defendant directors now worried about possible earnings management by Overstock.com?

Do Overstock.com's Defendent Directors really believe that the Court or a future jury will buy their claim that "Lindsey's comment in 2006 that reserves were adequate is entirely benign," in light of Overstock.com's reported declines in gross margins and massive increases in inventory reserves, that followed? Are they playing the "being stupid is not a crime" game?

The SEC does not seem to be buying it as its investigation of Overstock.com continues and Patrick Byrne is the admitted target of their probe. In light of Jason C. Lindsey joining the Defendent Director's special motion, it is now apparent that Jason C. Lindsey had other reasons for his sudden resignation than what he previously disclosed.

Written by:

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

Monday, January 07, 2008

Did former Overstock.com President, Chief Operating Officer, and Director Jason C. Lindsey backdate his resignation?

There is a saying, "When the core of an organization is rotten, everything else that flows from it is rotten, too." You need to look no further than the tone set at the top of Overstock.com (NASDAQ: OSTK) provided by Patrick Byrne, the company's delusional, paranoid, and lying CEO for a clue as to the deceitful behavior and general incompetence of certain members of its management team. All too often, disclosures by Overstock.com and statements by its management team are inconsistent with each other and in many cases contradict other facts on hand.

One of the questions I raised in my previous blog item entitled, "Why did Overstock.com President and COO Jason C. Lindsey really resign?," was if Jason C. Lindsey's resignation letter was backdated. A careful examination of certain Overstock.com disclosures and documents raises serious questions about the actual timing and circumstances surrounding the surprise resignation of Jason C. Lindsey. Former Overstock.com co-founder, President, and Chief Operating Officer, Jason C. Lindsey obviously surprised co-founder and long time friend CEO Patrick Byrne when he made a quick run to the exit doors and purportedly resigned from Overstock.com on December 31, 2007. Later disclosures by Overstock.com about its recently amended credit agreement raise serious questions as the timing and accuracy of certain disclosures by the company.

Let's examine the time sequence very carefully

According to Jason C. Lindsey's resignation letter purportedly signed on December 31, 2007 and later disclosed in a Securities and Exchange Commission 8-K filing on January 2, 2008, he discussed his resignation with Patrick Byrne on the afternoon of December 31:

December 31, 2007

Dr. Patrick M. Byrne
Chairman of the Board Overstock.com, Inc.
6350 South 3000 East
Salt Lake City, Utah 84121

Dear Patrick:

As we discussed this afternoon, it has been two years since I came out of retirement to return to Overstock. Much to my satisfaction, Overstock has accomplished a lot during those two years and I am pleased that I was able to participate in the company's turn around. However, as we discussed, we both believe that it is no longer necessary that I be as intimately involved in the day to day operations of the company. I would like to reduce my participation in the company so that I can spend more time with my family and be more involved with some outside business ventures. Thus, effectively immediately, I hereby resign as a director and as the president and chief operating officer of Overstock.com, Inc. As we discussed, I will remain a part-time employee of the company and work on special projects under your direction.

Sincerely,

Jason C. Lindsey

Note: Bold print and italics added by me.

Later on the evening of December 31, 2007 at 8:41 PM local time, Patrick Byrne, using his Hannibal alias, posted a message on InvestorVillage claiming that his "calender (sic) is clearing up a bit." Despite the co-founder, President, and Chief Operating Officer of Overstock.com resigning and despite the fact that according to Overstock.com's disclosure in its 8-K report to the SEC that, "Mr. Lindsey's principal duties will revert to the Company's Chief Executive Officer, Patrick M. Byrne," Patrick Byrne had claimed that his "calender (sic) is clearing up a bit."

Since Jason C. Lindsey claimed in his resignation letter to have discussed his resignation with Patrick Byrne earlier in the day ("this afternoon"), Byrne's comment on the InvestorVillage message board makes no logical sense. It appears that Patrick Byrne either was unaware of Jason C. Lindsey's resignation or was lying when he claimed that his calendar "is clearing up a bit."

A careful examination of two credit agreement documents below, released by Overstock.com after Jason C. Lindsey resigned, raises serious questions about the actual timing of Lindsey's resignation. As a minimum, these documents clearly show that Jason C. Lindsey's resignation surprised Patrick Byrne as he resigned in a hurry. There are new questions as to the accuracy of Overstock.com's recent 8-K disclosure about its amended credit agreement as detailed below, too.

Other documents released by Overstock.com raise questions if Jason C. Lindsey's resignation backdated

On January 3, 2008, a day after Overstock.com disclosed in an 8-K report Jason C. Lindsey's resignation which purportedly occurred on Monday, December 31, 2007, the company filed another 8-K report disclosing an amended credit agreement with Wells Fargo Bank:

On December 31, 2007 Overstock.com, Inc. (the "Company") entered into an Amendment (the "Amendment") to the Credit Agreement dated February 13, 2004 (the "Credit Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"). The Amendment extended the expiration date of the Credit Agreement from December 31, 2007 to January 1, 2010, and decreased the interest rate on fixed rate advances under the credit facility from 1.35% above LIBOR to 1.0% above LIBOR in effect on the first day of each fixed rate term under the credit facility. In connection with the Amendment, the Company also executed a revised Revolving Line of Credit Note note dated January 1, 2008. The Amendment is filed as Exhibit 10.1 hereto and the Revolving Line of Credit note is filed as Exhibit 10.2 hereto, and reference is hereby made to the text of such documents. Certain of our officers and directors have banking relationships with Wells Fargo Bank.

Note: Bold print, italics, and underlines added by me.

However, contrary to Overstock.com's disclosure above, which claimed that the Amendment to the Credit Agreement was "entered into" on "December 31, 2007," an examination of that agreement clearly indicates that it was entered into and executed by David K. Chidester, Senior Vice President - Finance, a day later on January 1, 2008 or a day after Jason C. Lindsey's purported resignation on December 31, 2007.

The other credit agreement document, the Revolving Line of Credit Agreement Note, indicates that it was entered into and executed on January 1, 2008 as disclosed above by Overstock.com. However, the Credit Agreement Note included Jason C. Lindsey as a person authorized to make advance requests on behalf of Overstock.com despite Lindsey's claim that he resigned as President and Chief Operating Officer a day earlier. Since Jason C. Lindsey was no longer an officer of Overstock.com, how could he still be authorized to make advance requests, if he had already resigned? Note that there was no title under Jason C. Lindsey's name in his resignation letter. He did not use an Overstock.com letterhead, too.

Examine the two loan documents

The Ninth Amendment to Credit Agreement clearly indicates that the Amendment to the Credit Agreement was entered into and executed on January 1, 2008 and not on December 31, 2007 as disclosed by Overstock.com in its 8-K report. Did Overstock.com attempt to backdate the date of the credit agreement to match the date that Jason C. Lindsey claims he resigned? Otherwise why did Overstock.com claim that the Ninth Amendment to Credit Agreement document was entered into by the company on December 31, 2007 when the document clearly shows that it was entered into by David K. Chidester a day later? Read excerpts from the document below:

THIS AMENDMENT TO CREDIT AGREEMENT (this “Amendment”) is entered into as of January 1, 2008, by and between OVERSTOCK.COM, INC., a Delaware corporation (“Borrower”), and WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”)....

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above.

OVERSTOCK.COM

By: /s/ David K. Chidester

Title: Vice President, Finance

The Revolving Line of Credit Note which indicates that it was entered into and executed on January 1, 2008 explicitly lists Jason C. Lindsey as a person authorized by Overstock.com to make requests for advances, despite his claim that he purportedly resigned a day earlier as the President and Chief Operating Officer of the company and therefore, was no longer a corporate officer of the company. Read excerpts from that document below:

REVOLVING LINE OF CREDIT NOTE

$30,000,000.00

Salt Lake City, Utah

January 1, 2008

FOR VALUE RECEIVED, the undersigned OVERSTOCK.COM, INC. ("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at 299 South Main, 9th Floor, Salt Lake City, Utah, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Thirty Million Dollars ($30,000,000.00), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein....

Advances. Advances hereunder, to the total amount of the principal sum stated above, may be made by the holder at the oral or written request of (i) David Chidester or Lisiate (Rich) Paongo or Jason Lindsey, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with respect to advances deposited to the credit of any deposit account of any Borrower, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of each Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by any Borrower….

IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above.

OVERSTOCK.COM, INC.

By: /s/ David K. Chidester

Title: Senior Vice President, Finance

Note: Bold print and italics added by me.

When did Jason C. Lindsey really resign?

Why would Jason C. Lindsey's name be listed as a person authorized to make advances under the Revolving Line of Credit Note, entered into and executed on January 1, 2008, if he had already resigned on the previous day? As detailed above, an examination of the other loan document, the Ninth Amendment to Credit Agreement indicates that it was entered into and executed January 1, 2008 and not on December 31, 2007 as reported by Overstock.com. Did Overstock.com try to backdate its Ninth Amendment to Credit Agreement document to the same day that Jason C. Lindsey purportedly resigned to provide corroboration that Lindsey resigned on that date or was the Ninth Amendment to Credit Agreement document wrongfully post dated? If as Jason C. Lindsey claims that he actually resigned on December 31, 2007, did Patrick Byrne lie when he claimed on the InvestorVillage message board that, his "calender (sic) is clearing up a bit."? In any case, why do Overstock.com's credit agreement disclosures inaccurately reflect the timing of the Ninth Amendment to Credit Agreement document and why does the Revolving Line of Credit Note document fail to reflect the resignation of Jason C. Lindsey?

The key question is who lied: Jason C. Lindsey, Patrick Byrne, David K. Chidester, Overstock.com's disclosures, or the company's documents? For at least one of those persons, disclosures, or documents to be truthful, the others need to be lies.

The more likely scenario is that Jason C. Lindsey backdated his resignation to the afternoon of December 31, 2007. Apparently, Patrick Byrne did not know at 8:41 PM local time that day that either Jason C. Lindsey intended to resign or in fact had resigned since he claimed in his posted message on InvestorVillage that his "calender (sic) is clearing up a bit" unless he lied. As detailed above, in his resignation letter, Jason C. Lindsey claims that he discussed his resignation with Patrick Byrne, earlier in the afternoon of December 31, 2007. If Patrick Byrne was assuming Jason C. Lindsey's "principal duties" as disclosed by the company, how could he have more time? According to Overstock.com's press release that announced Jason C. Lindsey's resignation, Patrick Byrne is quoted as saying:

Jason co-founded the company and helped build it before retiring the first time. When I screwed it up a couple years ago he came out of retirement and has played a decisive role getting it back on track,....He’s done a superb job.

Note: Bold print and italics added by me.

By Patrick Byrne's own admission, Jason C. Lindsey played a "decisive role" in getting the company "back on track" when Byrne says that he "screwed it up." In the 24/7 Wall Street blog, Jon C. Ogg noted how Lisa Rapuano, portfolio manager and founder of Lane Five Capital Management, in effect called Jason C. Lindsey a babysitter for Patrick Byrne:

...she noted how controversial CEO Patrick Byrne was now being kept at bay by the fairly new President & COO Jason Lindsey being thought of as "adult supervision."

Note: Bold print and italics added by me.

Therefore, Jason C. Lindsey was in effect Patrick Byrne's right hand man and was deemed crucial to Overstock.com. So how could Patrick Byrne's calendar be "clearing up a bit" if Jason C. Lindsey had purportedly resigned earlier in the day?

The Revolving Line of Credit Note document indicates that it was entered into and executed a day after Jason C. Lindsey's resignation. Yet the document still lists Lindsey as a person authorized to make advances on behalf of Overstock.com, despite his claim that he resigned and was no longer an officer of the company. Apparently, David K. Chidester did not amend the Revolving Line of Credit Note to revoke Jason C. Lindsey's authority to make advances for Overstock.com.

Wouldn't David K. Chidester have known that his boss, Jason C. Lindsey had resigned? Wouldn't Jonathan E. Johnson III, Overstock.com's Senior Vice President - Corporate Affairs and Legal, have reviewed the loan documents, too? Wouldn't both David K. Chidester and Jonathan E. Johnson III want Overstock.com's credit agreement disclosures to accurately reflect the timing of such agreements and its loan documents to reflect the resignation of Jason C. Lindsey? By the time Overstock.com got around to its 8-K disclosure about the credit agreements on January 3, 2008, why wasn't the Revolving Line of Credit Note amended to exclude Jason C. Lindsey as a person authorized to make advances on behalf of the company, since Lindsey had purportedly resigned as a corporate officer?

Why did Jason C. Lindsey abruptly resign?

Since the Revolving Line of Credit Note was not amended by David K. Chidester to exclude Jason C. Lindsey as having authority to make advances on behalf of Overstock.com, it is apparent that Lindsey's resignation at the every least came as a surprise to Patrick Byrne.

Jason C. Lindsey could have made his resignation effective at some future date to give Patrick Byrne enough time to find a successor but instead chose to immediately resign as President, Chief Operating Officer, and a Board member. Investigative journalist and author Gary Weiss noted:

The first is that it is obviously an abrupt decision that took Byrne by surprise, because no successor was in the wings. It's always better to say "so-and-so appointed as president, succeeding Jason Lindsey," rather than detonating a humiliating stink bomb like this after the market close.

Note: Bold print and italics added by me.

As detailed above, Jason C. Lindsey claimed in his resignation letter that, "it is no longer necessary that I be as intimately involved in the day to day operations of the company." In addition, Lindsey not only resigned as President and Chief Operating Officer of Overstock.com, but also resigned from the Board of Directors. Lindsey's resignation letter claims that he "...will remain a part-time employee of the company and work on special projects....."

Why would Jason C. Lindsey resign as a Director of Overstock.com, too? According to Overstock.com's previous Notice of Annual Meeting of Shareholders for 2007, the Board of Directors held only six meetings during fiscal year 2006. It is doubtful that the Board held significantly more meetings during 2007. Jason C. Lindsey was not serving on either Overstock.com's Audit Committee or Compensation Committee. Obviously, being a member of the Board of Directors of Overstock.com was not a drain of Lindsey's time. Forensic accountant and author Tracy Coenen noted:

Sell, and sell fast. We’ve been telling you all along that this is a sinking ship. The departure of Jason Lindsey, co-founder, president, COO, and member of the board of directors is a bad sign. They say he’s sticking around part-time, but that doesn’t hold water in light of his resignation from the board. How much more “part-time” can you be than to be on the board?

Note: Bold print and italics added by me.

Overstock.com is the subject of a continuing investigation by the SEC, particularly into its accounting and disclosures. The other Overstock.com co-founder, CEO Patrick Byrne, a long time friend of Jason C. Lindsey, has admitted to being a target of the SEC probe. As discussed in my previous blog item, certain apparently false and misleading comments about Overstock.com's gross margins and inventories by Jason C. Lindsey during earnings conference calls are being carefully investigated by the SEC. Overstock.com has additional disclosure issues arising from its misuse of SEC Regulation G governing certain non-GAAP financial measures to hype its financial performance in its second and third quarter fiscal year 2007 10-Q, too. In addition, on November 9, 2007, Copper River Partners filed a countersuit (download here) against Overstock.com, naming Jason C. Lindsey, Patrick Byrne, and other present and former Overstock.com Directors as separate defendants alleging securities fraud. That's good enough reason for Jason C. Lindsey to start distancing himself as soon as possible from the "big fish," in the SEC investigation, Patrick Byrne. If Jason C. Lindsey had backdated his resignation, the reason as to why he did it begins with his association to the deceptions of his boss, Patrick Byrne.

Written by:

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

Wednesday, January 02, 2008

Why did Overstock.com President and COO Jason C. Lindsey really resign?

According to a Securities and Exchange Commission 8-K filing by Overstock.com (NASDAQ: OSTK) late yesterday afternoon on January 2, 2008:

On December 31, 2007, Mr. Jason C. Lindsey resigned, effective immediately, from his positions as President, Chief Operating Officer (principal operating officer) and a member of the Board of Directors of Overstock.com, Inc. (the "Company"). Mr. Lindsey intends to spend more time with his family, but also intends to remain a part-time employee of the Company and to work on special projects as requested from time to time by the Company. Copies of a press release issued by the Company regarding Mr. Lindsey's resignation and of Mr. Lindsey's letter of resignation are furnished herewith. Mr. Lindsey's principal duties will revert to the Company's Chief Executive Officer, Patrick M. Byrne.

However, at 8:41 PM (local Utah time) on New Years Eve of the same day that Jason C. Lindsey resigned, but before news of his resignation was released, Patrick Byrne posting under his alias Hannibal on the InvestorVillage message board, claimed that his "calender (sic) is clearing up a bit." Did Patrick Byrne know about Jason C. Lindsey's resignation at the time of his message board posting? Why would Byrne have more spare time if he knew that that Jason C. Lindsey was resigning? Perhaps it was as big a surprise to Byrne as it was to the rest of the market?

According to Jason C. Lindsey's resignation letter, he claimed that he discussed his resignation with Patrick Byrne during the afternoon of December 31, 2007, before Byrne's InvestorVillage message board post above. Was the letter backdated or how could the delusional Byrne have more spare time after losing his President and COO?

The question is, why is Lindsey resigning now?

Was the SEC investigation of Overstock.com an undisclosed factor in Jason C. Lindsey's resignation?

Overstock.com is the subject of a continuing investigation by the SEC, particularly into its accounting and disclosures. Patrick Byrne has admitted to being the target of the SEC probe, in contrast to his previous denials. Overstock.com had waited until almost an entire year to disclose Patrick Byrne's receipt of a personal subpoena from the SEC.

During fiscal year 2006, Overstock.com lost over $100 million and had negative gross margins on its direct sales in the last quarter as its total revenues declined. One issue that the SEC is considering in its investigation is if Overstock.com had taken artificially low inventory reserves in the previous quarters of fiscal year 2006 to decrease reported losses, waiting until after an infusion of about $40 million in new equity on December 15, 2006, before taking appropriate inventory write downs.

The timing of the write-down looks all the more unusual considering comments made by management at the time. During the fourth quarter fiscal year 2006 earnings conference call, but before Overstock.com had released its 10-K report that included inventory reserve disclosures, Jason C. Lindsey explained Overstock.com’s negative gross margins and lower inventory levels as follows:

We took all that to heart in the fourth quarter and although the fourth quarter results are very bad, and I admit they are very bad, they were bad on purpose. In other words, we used the fourth quarter to get rid of all the slow-moving inventory. I am quite pleased with the inventory balances we have now....I am pleased that the fourth quarter is now over. We have sold it. Our inventory turns are much higher. Our margins are much higher and it really does feel like we have made a lot of progress there.

Note: Bold print and italics added by me.

The key words are “I admit they are very bad, they were bad on purpose… we used the fourth quarter to get rid of all the slow moving inventory.”

Just a few short weeks later, the company would release its 10-K for the year. In that filing, the company reported its highest ever level of inventory reserves, making it quite clear that the slow moving inventory had not been moved (contrary to Lindsey’s earlier assertion).

It gets worse from here. Soon it would be revealed that Byrne and Lindsey had a plan for earnings management at the end of 2006. During the earnings conference call for the next quarter (first quarter fiscal year 2007) Patrick Byrne made the following startling admission of Overstock.com’s previously undisclosed “game plan” for the previous fiscal year 2006, that reinforced Jason C. Lindsey’s comment that the fourth quarter of fiscal year 2006 was “very bad…bad on purpose.”

We had our game plan. Really, we had our game plan as of Q1 last year [2006] of what was going to have to happen.

We knew things were going to get really ugly and the company was going to have take medicine but that we could come out of it a far better company, and that medicine was going to be in the form of some expenses, it was going to be in the form of dumping a bunch of inventory as we figured out really how to take our inventory management to the next level -- all kinds of things. We knew it was going to get ugly. Maybe not as ugly as it got but we thought we would come out in the first quarter smelling like a rose operationally and this is exactly what we -- what I at least thought was going to happen in the first quarter.

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

The key words here are, “….we used the fourth quarter to get rid of all the slow-moving inventory. I am quite pleased with the inventory balances we have now....I am pleased that the fourth quarter is now over. We have sold it.”

Well, one part of the duo’s statements is true. Things got very ugly. During fiscal year 2006, Overstock.com had huge losses (over $100 million) and in fact Overstock dumped a bunch of inventory. Gross inventory levels (before reserves) started the year at about $98.5 million and dropped to about $26.9 million by the end of the year, about a $71.6 million drop in inventory.

But, the bad inventory wasn’t gone. This is clear because inventory reserves rose from about $5.2 million at the beginning of the year to about $6.6 million at the end of the year. On a relative basis, inventory reserves went up a staggering 361% from about 5.3% of gross inventory at the beginning of the year to 24.5% of inventory at the end of the year.

See chart below:

Selected Inventory Information from Overstock.com's SEC filings

Quarter Ended 12/31/05

Quarter Ended 03/31/06

Quarter Ended 06/30/06

Quarter Ended 09/30/06

Quarter Ended 12/31/06

Gross Inventory (in millions of dollars)

98,510

84,651

78,222

73,282

26,859

Reserve for Obsolete and Damaged Inventory (in millions of dollars)

5,241

3,300

3,400

4,500

6,585

Net Inventory (in millions of dollars)

93,269

81,351

74,822

68,782

20,274

Percentage of Reserve for Obsolete and Damaged Inventory to Gross Inventory

5.32%

3.90%

4.35%

6.14%

24.52%

The key question

How could Overstock.com have “sold it” and gotten “rid of all the slow moving inventory” if the company actually estimated that it had more slow moving inventory in both absolute dollars and relative amounts?

A revealing comment by Jason C. Lindsey

During the second quarter fiscal year 2007, earnings conference call Jason C. Lindsey revealed:

To support this level of sales and have $17 million of inventory when at the same time a year ago I think we had close to $80 million, the amount of mistakes that can be buried in that are much smaller.

Note: Bold print and italics added by me.

Was Overstock.com burying its “mistakes” until after its equity infusion of about $40 million on December 15, 2006?

While Jason C. Lindsey may have resigned to spend more time with “family” and “outside ventures” he will need to allot a considerable amount of time during 2008 to explain this series of deceptive comments (and a whole host of other deceptive comments) to the SEC, lawyers for Copper River and Gradient, and perhaps other regulatory authorities.

Written by:

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