Skip to main content

Open Letter to the Securities and Exchange Commission: Stop GAAP Violations Now!

To Mary Schapiro (Chairperson of the Securities and Exchange Commission):

The Securities and Exchange Commission must take immediate action to require (NASDAQ: OSTK) to properly restate all financial reports affected by its accounting errors and stop the company from issuing any more financial reports that violate Generally Accepted Accounting Principles (GAAP). Enough is enough.

In February 2009, I notified both the SEC and about how the company violated GAAP by improperly deferring the recognition of an accounting error to create a cookie jar reserve to inflate future profits. However, nothing was done to stop this illegal practice and's latest Q2 2009 press release and 10-Q report filed with the SEC violated GAAP, too.

In this blog post, I will provide the SEC with a bullet proof case to take enforcement action against


On October 24, 2008, disclosed that it discovered customer refund and credit errors and restated all prior affected financial reports from 2003 to Q2 2008 to correct such errors. Those customer refund and credit errors resulted in an additional $8.2 million of accumulated losses in prior reporting periods.

The customer refund and credit errors also caused to underbill its fulfillment partners for offsetting costs and reimbursements. While restated prior financial reports to correct its customer refund and credit errors, it failed to make such corrections resulting from underbilling its fulfillment partners as required by GAAP (See SFAS No. 154).

In addition, failed to make a reasonable estimate of uncollectable underbilled amounts due from its fulfillment partners as required by GAAP (See: SFAS No. 5 paragraph 1, 2, 8, 22, and 23). Instead, the company improperly recognized income from such underbillings as they were recovered on a non-GAAP cash basis in future accounting periods (Q4 2008, Q1, 2009, and Q2 2009).

In effect, overstated accumulated losses of $8.2 million in prior periods from its customer refund and credit errors by failing to accrue offsetting costs and reimbursements due from its fulfillment partners, less estimated uncollectable amounts. It turns out that over $3 million of underbilled amounts to fulfillment partners was actually recovered within several months. Those amounts were improperly recognized as income in future reporting periods after the error was discovered (Q4 2008, Q1 2009, and Q2 2009). In other words, improperly created a cookie jar reserve to inflate financial results in future reporting periods. See the chart below:

In $000s

Q4 2008

Q1 2009

Q2 2009

Total Trailing Nine Months

Net income or loss (as reported)





Improper deferral of accounting error from underbilling fulfillment partners in prior reporting periods or before Q3 2008 (estimated for Q1 2009 based on Byrne's earnings call comments)





Q4 2008 overbilling by a freight carrier improperly recognized as income in Q1 2009 (estimated amount based on Byrne's earnings call remarks)





Total accounting errors





Net income or loss (under GAAP)





Notes to chart:

In Q1 2009, disclosed yet another accounting error because a freight carrier overbilled the company "several hundred thousand dollars" in Q4 2008," according to remarks made by CEO Patrick M. Byrne during the Q1 2009 earnings call. For purposes of my analysis, I'll assume that the amount overbilled by the freight carrier is $500,000. That overbilling error from the freight carrier partially offset’s improper recognition of income from its underbilling error to its fulfillment partners in Q4 2009.

If would have properly followed GAAP in Q4 2008, the company (1) would have reported a net loss instead of a net profit, (2) would have reported sixteen consecutive losses instead of 15 consecutive losses, and (3) it would have failed to meet mean analysts’ consensus expectation for earnings per share (anyone of three materiality yardsticks under SEC Staff Accounting Bulletin No. 99 that would have triggered a restatement of prior year’s effected financial reports).

Why’s deferral of income from its underbilling errors to fulfillment partners is dead wrong under GAAP and SEC rules

Under Statement of Financial Accounting Standards No. 154, is required to restate each affected prior period financial report to reflect when the underbilled cost reimbursements and fees due from fulfillment partners were actually earned by the company (accrual basis or GAAP).

Statement of Financial Accounting Standards No.5 requires to offset such accrued income in each restated financial period with a reasonable estimate of uncollectable underbilled amounts.

The Securities and Exchange Commission’s interpretation of accounting rules is that “GAAP do not allow for the deferral of accounting adjustments arising from a change in estimate or the correction of error.” (Source: Cease and Desist order issued “In the matter of Carl M. Apel”).

In an earlier blog post, I criticized’s improper deferral of income from its underbillings to fulfillment partners for offsetting cost and reimbursements. Patrick Byrne responded on the stock market chat board and claimed that "conservatism" permitted his company to recognize recoveries from underbilled fulfillment partners as they were collected on a non-GAAP cash basis. See below:

Antar's ramblings are gibberish. Show them to any accountant and they will confirm. He has no clue what he is talking about.

For example: when one discovers that one underpaid some suppliers $1 million and overpaid others $1 million. For those whom one underpaid, one immediately recognizes a $1 million liability, and cleans it up by paying. For those one overpaid, one does not immediately book an asset of a $1 million receivable: instead, one books that as the monies flow in. Simple conservatism demands this (If we went to book the asset the moment we found it, how much should we book? The whole $1 million? An estimate of the portion of it we think we'll be able to collect?) The result is asymmetric treatment. Yet Antar is screaming his head off about this, while never once addressing this simple principle. Of course, if we had booked the found asset the moment we found it, he would have screamed his head off about that. Behind everything this guy writes, there is a gross obfuscation like this. His purpose is just to get as much noise out there as he can.

Note: Bold print and italics added by me.

Patrick Byrne’s remarks that “one books that as the monies flow in. Simple conservatism demands this….” runs counter to the SEC Chief Accountant's interpretation of GAAP in a letter to the American Institute of Certified Public Accountants:

Conservatism in financial reporting should no longer connote deliberate, consistent understatement of net assets and profits...The Board emphasizes that any attempt to understate results consistently is likely to raise questions about the reliability and integrity of the information about those results and will probably be self-defeating in the long run.”

Accordingly, the consistent understating of results (i.e., conservatism) or overly optimistic estimates of realization (i.e., lack of conservatism or aggressiveness) are inconsistent with the characteristics of quality financial reporting needed for transparent reporting in today’s markets.

In other words, conservatism cannot be used to understate profits or overstate losses. restated prior financial reports to correct its customer refund and credit error, but failed include in its restatement offsetting costs and reimbursements earned from its fulfillment partners. Therefore, violated GAAP by overstating losses from its accounting error.

Those underbilling errors were improperly recognized as income as amounts were recovered in future reporting periods. As I detailed above, cannot defer recognition of any accounting error (See SFAS No. 154 and cease and desist order issued “In the Matter of Apel”).

In later SEC filings, apparently played a game of catch up by making up yet another false excuse in an effort to rebut criticism in my blog of Byrne’s internet chat board remarks. The company falsely claimed that future recoveries of amounts underbilled to fulfillment partners was a “gain contingency” because the recovery of such underbilled amounts "was not assured" (Source: 2008 10-K, Q1 2009 10-Q, and Q2 2009 10-Q). See below:

When the underbilling was originally discovered, we determined that the recovery of such amounts was not assured, and that consequently the potential recoveries constituted a gain contingency. Accordingly, we determined that the appropriate accounting treatment for the potential recoveries was to record their benefit only when such amounts became realizable (i.e., an agreement had been reached with the partner and the partner had the wherewithal to pay).

Note: Bold print and italics added by me.

However, improperly failed to disclose any potential “gain contingency” in its prior Q3 2008 10-Q report, when it disclosed that it underbilled its fulfillment partners for offsetting costs and reimbursements (See: SFAS No. 5 Paragraph 17b). had already earned those "fees and charges" in prior periods from fulfillment partners. It simply underbilled them. Those fulfillment partners were already "contractually obligated to pay" such underbilled amounts. In addition, there was no question that was owed money from its fulfillment partners and that the recovery of substantial amounts was assured. Therefore, no gain contingency existed under accounting rules.

If there was any question as to the recovery of any amounts owed the company, management is required to make a reasonable estimate of uncollectable amounts (loss contingency) and book an appropriate reserve against amounts due from fulfillment partners. By immediately considering underbilled amounts due from fulfillment partners as a gain contingency, the company failed to make a reasonable estimate of such uncollectable amounts and violated accounting rules or GAAP (See; SFAS No. 5 paragraph 1, 2, 8, 22, and 23).

The only way that could recognize income from underbilling its fulfillment partners in future accounting periods is if there was a “significant uncertainty as to collection” of all underbilled amounts (See SFAS No. 5 paragraph 23). As it turns out, a large portion of the underbilled amounts to fulfillment partners was easily recoverable within a very brief period of time: Q4 2008 $1.8 million, Q1 2009 $1.4 million, and Q2 2009 $78k. There was no “significant uncertainty as to collection” of all amounts underbilled fulfullment partners.

Why had to know that the recovery of significant underbilled amounts was assured's management had to know that the collection of significant amounts due from underbilling of its fulfillment partners was assured, contrary to its disclosure that "the recovery of such amounts was not assured, and that consequently the potential recoveries constituted a gain contingency."

All you need to do is to follow the cash trail. When sells fulfillment partner inventory, customers promptly remit cash to the company. Afterwards, remits the portion cash proceeds due to its fulfillment partners for the inventory it sold to its customers.

According to’s “Supplier Agreement” with fulfillment vendors, the company (Source: correspondence to SEC Division of Corporation Finance):

Remit(s) semi-monthly payments within 2 business days of the 1st and 16th of each month for Product sold, subject to offsets. Payments shall be made net 30.

Note: Bold print and italics added by me.

Initially gets to float cash that it receives from customers and is later required to pay fulfillment partners in up to 30 days. In addition, retains the right to offset various errors against future remittances to its fulfillment partners. Therefore, if the fulfillment partners are still doing business with, all that the company has to do is to withhold a larger portion of the monthly remittances from such fulfillment partners (up to a few months, if necessary) to recover underbilling errors.

The greatest amount of the underbillings would certainly be attributable to its higher volume fulfillment partners who sold the most merchandise. Those high volume fulfillment partners are likely to be long time and current company suppliers of merchandise.

Therefore, the ability to recoup a substantial share of previous underbillings to fulfillment partners can be reasonably estimated, as required by Statement of Financial Accounting Principles No. 5. In many ways,'s recovery of underbilled amounts due fulfillment partners is far more certain than recouping money in credit card disputes from its average customers. violated GAAP by immediately claiming that a "gain contingency" existed and not considering material subsequent events

The claim by the company that it immediately determined that a “gain contingency” existed improperly did not take into account subsequent material events as required by GAAP. is required to consider material events affecting the measurement or realization of assets in a financial report up to the date that either the final 10-Q report or 10-K report is filed with the commission (See: SAS No. 1 Paragraph 1, 2, 3, and 7 and Letter from SEC Chief Accountant entitled "Audit Risk"). In other words, if new information is received after the cut-off date that affects either assets or income in a financial report, a company must adjust its financial report to reflect that new information.

In any case, even if we take at its word that it determined that a “gain contingency” existed when the “underbilling was originally discovered” that date of discovery had to be sometime after August 4, 2008, the filing date of Q2 2008 10-Q, and before October 20, 2008, the date that approved restatement of financial reports due to customer refund and credit errors (Source: 8-K report page 5).

During Q4 2008, easily collected a total of “$1.8 million relating to payments from partners who were underbilled earlier in the year.” filed its Q3 2008 10-Q report 38 days into that quarter and clearly should have known by that time that significant amounts owed by fulfillment partners from underbilling them in the past was actually collectable and that no gain contingency existed as to such amounts. In addition, collected about $1.4 million in underbilled amounts during Q1 2009 and $87k in underbilled amounts during Q2 2009.

If's explanation of a gain contingency is to be believed, the company improperly determined that a gain contingency existed when it first discovered underbilling its fulfillment partners, instead of spending any time trying to determine the recoverability of such underbilled amounts as required by GAAP. should have waited at least until November 7, 2008 (or 38 days into the fourth quarter) when it filed its Q3 2008 10-Q report before making a final determination as to the collectability of underbilled amounts due from fulfillment partners as of the end of Q3 2008.

In fact, the company could have waited an additional seven days to determine the collectability of underbilled amounts due from fulfillment partners and still filed its 10-Q report on time. If management truly wanted to make a reasonable estimate as to the collectability of underbilled amounts due from fulfillment partners, could have properly filed a late 10-Q report by explaining the circumstances. It didn't. Apparently, management deliberately tried to avoid restating its financial reports for a third time in three years.

Substantial amounts of underbilled amounts to fulfillment partners were recovered

In the three quarters after’s underbillings to fulfillment partners was discovered, the company was able to recover approximately $3.3 million. sought to only recover such underbillings from the year prior to discovering that accounting error.

Originally,’s customer refund and credit errors added $8.2 million to accumulated losses reporting periods prior to Q3 2008. Of that $8.2 million dollar amount, $1.7 million of customer refund and credit errors occurred in Q1 and Q2 2008 (six months prior to discovery of the underbilling error).

Those customer refund and credit errors, along with certain other revenue accounting errors added $3.0 million in losses to fiscal year 2007 (7 to 18 months prior to discovery of the error). Therefore, the gross potential amount of customer refund and credit errors occurring in the eighteen months prior to its discovery is about $4.7 million (Source: 8-K report dated October 24, 2008). collected about $3.3 million in offsetting costs and reimbursements from fulfillment partners who were underbilled because of those customer refund and credit errors. conservatively collected over 70% of underbilled amounts due from its fulfillment partners arising in the eighteen months prior to announcing its accounting error. The company only sought to collect such underbilled amounts for a period of only twelve months prior to the discovery of billing errors. Therefore, the percentage of recoveries was probably even much higher.

Those calculations aside, the recovery of over $3 million of underbilled amounts to fulfillment partners within a relatively short period of time shows that substantial amounts were easily recoverable and could have been estimated. The only question was how long it would take for to recover such underbilled amounts.

Request for prompt SEC action

For the reasons detailed above, the Securities and Exchange Commission has a duty to require to restate all financial reports to properly reflect when income was actually earned from offsetting costs and reimbursements underbilled to its fulfillment partners. Otherwise, investors will continue to rely on financial reports issued by that violate GAAP.

Written by:

Sam E. Antar


I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's.

I do not own securities short or long. My research on and in particular its lying CEO Patrick Byrne is a freebie for securities regulators and the public in order to help me get into heaven, though I doubt that I will ever get there anyway. I will probably end up joining corporate miscreants such as Patrick Byrne in hell.

Personal note to the Securities and Exchange Commission:

The Securities and Exchange Commission is cautioned not to take my freebies for granted any more, unless they want another Bernie Madoff embarrassment on their hands. All frauds ultimately implode and so will implode under the weight of its continued violations of GAAP and its management's lies to investors.

Special note to journalists:

Don't let the nutcase lying CEO of Patrick Byrne hide behind a wall of false integrity as a stock market reformer and let him draw attention away from his lies to investors and his company's financial reporting irregularities. Consider it a badge of honor if he smears you like he has done with other great journalists such as Bethany McLean, Joe Nocera, Gary Weiss, Roddy Boyd, and Herb Greenberg.


Hopefully the SEC won't let this one slip through the cracks.

Popular Posts

Did a Clever SEC Bait Goldman Sachs into Compounding Its Legal Problems With the "Kiss of Death" Message?

Updated: At 3:48 AM ET 04/20/2010 on bottom

The Kiss of Death

In filing its lawsuit against Goldman Sachs (NYSE: GS) on a Friday, the Securities and Exchange Commission sent what I call the "kiss of death" message to the embattled company. In other words, the SEC wanted to stick it to Goldman Sachs and Fabrice Tourre, the Executive Director of Goldman Sachs International, who is also a defendant in the complaint. While the SEC as a practice does inform target companies and individuals of an impending enforcement action, it does not always tell them exactly when such an action will be filed.

Apparently, the SEC filed its lawsuit without giving Goldman Sachs the heads up that it was planning to file it that day. Business Insider observed that Goldman Sachs was clearly unprepared to respond to the complaint as news of the lawsuit dominated the headlines all day. Goldman issued a short denial around noon and issued an extensive denial late in the afternoon, after most people had … CEO Patrick Byrne Sleeps With a Gun

In numerous blog posts in the past, and in widespread media coverage, evidence has accumulated for years that CEO (NASDAQ: OSTK) Patrick Byrne has shown signs of being mentally unbalanced and paranoid.

Byrne has blamed his company's financial woes on an unnamed "Sith Lord." He hired paid goons to stalk his real and imagined adversaries and to write lengthy conspiracy theories on the Internet. Byrne has close ties with Bo Gritz. The Anti-Defamation League lists Bo Gritz as a far-right extremist with “extensive connections to both white supremacists and anti-government groups and leaders.”

Patrick Byrne's infamous temper tantrums when he doesn’t get want he wants are well documented too. He made obscene and misogynistic comments to a female reporter. He suggested that she gave “blowjobs” to Goldman Sachs traders. He suggested that a male reporter “Sucks It Likes He’s Paying the Rent.” An independent research analyst was told that “You deserve to be whippe…

Nature's Sunshine Products, Willbros Group, Cal Dive International, and BSQUARE Violate S.E.C. Rules on Calculating EBITDA

Nature’s Sunshine Products (NASDAQ: NATR), Willbros Group (NYSE: WG), Cal Dive International (NYSE: DVR), and BSQUARE (NASDAQ: BSQR) have recently issued earnings reports which include a calculation of EBITDA (earnings before interest, taxes, depreciation, and amortization) that apparently does not comply with Securities and Exchange Commission interpretations for Regulation G governing such non-GAAP financial measures. In each case, their erroneous EBITDA calculations have enabled them to significantly distort their financial performance by erroneously reporting a positive EBITDA, when they should have reported a negative EBITDA in the latest quarter.

How EBITDA is supposed to be calculated under Regulation G

According to the S.E.C. Compliance & Disclosure Interpretations, EBITDA is defined under Regulation G as net income (not operating income) before net interest, taxes, depreciation, and amortization. See below:

Question 103.01Question: Exchange Act Release No. 47226 describes E…

InterOil, John Thomas Financial, and Clarion Finanz: Anatomy of a Stock Market Manipulation Scheme

In this blog post, I will provide evidence of what I believe is a stock market manipulation scheme involving InterOil (NYSE: IOC), John Thomas Financial, and Clarion Finanz AG. I believe that InterOil with the assistance of Clarion Finanz concealed John Thomas Financial’s involvement in helping it raise $95 million through a private placement of convertible debt securities.

Clarion Finanz acted as a buffer between InterOil and John Thomas Financial to help InterOil hide John Thomas Financial's role in raising funds. Afterwards, InterOil filed false and misleading reports with the Securities and Exchange Commission in an effort to conceal John Thomas Financial’s role in helping the company raise $95 million in convertible debt.

Carl Caserta, who in 1991 was barred by the Securities and Exchange Commission from “association with any broker, dealer, or investment advisor” played a role in helping InterOil use John Thomas Financial to obtain funds from investors. InterOil, John Thoma…

Class Action Complaint against Amedisys uses Sarbanes-Oxley Act Corporate Governance Provisions to Battle Alleged Corporate Malfeasance

Updated at bottom of article

Last week, Pomerantz Haudek Grossman & Gross LLP filed a class action lawsuit against Amedisys (NASDAQ: AMED) charging the company, its CEO William F. Borne and its CFO Dale E. Redman with securities fraud.  In the next few days, Bernstein Liebhard LLP and Finkelstein Thompson LLP filed similar class action lawsuits against the company. The lawsuits allege that Amedisys abused Medicare's reimbursement system for at-home therapy care based on a compelling analysis of company revenues in an April 27 Wall Street Journal article.

In addition, the lawsuits innovatively utilize a provision under Section 406 of the Sarbanes-Oxley Act 2002 which provides a back-door way for investors to force ethical corporate governance and sue public companies for malfeasance. That provision requires Senior Financial Officers, such as the CEO and CFO of public companies, to abide by a strict code of ethics which broadly defines corporate malfeasance and effectively makes…