Tuesday, February 24, 2009

SEC Investigating Bidz.com after Questions Raised in This Blog about Inventory Disclosures

After the market close yesterday, Bidz.com (NASDAQ: BIDZ) disclosed that the Securities and Exchange Commission started a formal investigation of the company's inventory accounting practices and other matters:

The Company was notified recently by the SEC of a formal investigation relating to certain aspects of its inventory accounting practices, as well as other matters. The Company intends to fully cooperate with the SEC regarding this matter. The Company remains confident its inventory accounting is correct and in full accordance with GAAP.

Apparently, the SEC responded to serious questions, first detailed in this blog, about Bidz.com's inventory disclosures and the company's possible violation of GAAP in accounting for inventories. I had contacted the SEC Los Angeles office.

For example, I examined Bidz.com's fiscal year 2007 10-K inventory disclosures. See below:

Inventories:

Inventories consist mainly of merchandise purchased for resale and are stated at the lower of first-in, first-out cost (FIFO) or market. We record reserves against our inventory equal to the difference between the cost of inventory and the average selling price that is lower than cost of inventory that is held for less than one year. In addition, for the years ended December 31, 2006 and 2007 we recorded reserves for obsolete and slow moving inventory of 100% of the value of inventory held for more than one year. If actual market conditions are less favorable than those projected by us, specific reserves or additional inventory write-downs may be taken.

According to Accounting Research Bulletin (ARB) No. 43, inventory must be valued at the lower of cost or market value. Market means the current replacement cost of inventory. If the current replacement cost of inventory is greater than its net realizable value (estimated selling price less cost of completion and disposal), net realizable value is considered market. If the current replacement cost of inventory is less than its net realizable value minus normal profit margins, than net realizable value minus normal profit margins is considered market. Therefore, the upper limit of market is net realizable value and the lower limit of market is net realizable value minus normal profit margins. Lower of cost or market may be applied to each individual inventory item, the total of each major category of inventory, or the aggregate total of inventory.

Inventory held less than one year

As detailed above, Bidz.com disclosed that "We record reserves against our inventory equal to the difference between the cost of inventory and the average selling price that is lower than cost for inventory that is held for less than one year."

The company's inventory disclosure for inventory held less than one year seems to violate GAAP. Bidz.com cannot use the "difference between the cost of inventory and the average selling price" in valuing its inventory. Average selling price is not net realizable value, since it does not deduct the cost of completion and disposal of inventory. Therefore, in this specific case, inventory may be overstated. Even if Bidz.com were to use net realizable value, the company could only use such a measure if the current replacement cost of inventory is greater than its net realizable value.

Inventory held more than one year

Bidz.com disclosed that "In addition, for the years ended December 31, 2006 and 2007 we recorded reserves for obsolete and slow moving inventory of 100% of the value of inventory held for more than one year." Here too, the company's inventory disclosure seems to violate GAAP. The lowest amount that inventory can be valued at is net realizable value (estimated selling price less cost of completion and disposal) minus normal profit margins.

It seems that Bidz.com's method of valuing inventory over one year old is arbitrarily based on the amount of time that the inventory is held, rather than the application of GAAP. Unless such inventory cannot be sold under any and all circumstances, Bidz.com cannot "record reserves of 100% of the cost of inventory held more than one year." Therefore, in this specific case, inventory may be understated.

In a follow-up posts (here and here), I detailed other Bidz.com questionable inventory disclosures from 2005 to 2008.

Meanwhile, Bidz.com founder and CEO David Zinberg is engaging in a retaliatory smear campaign against me for raising questions about Bidz.com's inventory disclosures. He has falsely claimed that I am short selling Bidz.com. I never owned any Bidz.com securities, long or short, and no one pays me to write about Bidz.com.

Written by:

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

Disclosure:

I have no position in Bidz.com securities long or short.

Wednesday, February 11, 2009

Two Universities Say Intrepid Potash President Patrick Avery Didn't Get Degrees Claimed in SEC Filings

Convicted felon turned fraud fighter and personal friend Barry Minkow, co-founder of the Fraud Discovery Institute (FDI) has uncovered yet another corporate executive who did not receive college degrees claimed in SEC filings. This time, a background check by FDI found that Intrepid Potash Inc. (NYSE: IPI) President and Chief Operating Officer Patrick Avery did not earn at least two of three degrees claimed in company disclosures filed with the Securities and Exchange Commission

According to SEC Form S-1 and later amendments, filed in connection with Intrepid Potash's initial public offering, from late 2007 to early 2008, the company disclosed:

Mr. Avery holds a B.A. in Biology and Chemistry from the University of Colorado, an M.S. in Engineering from Loyola, and an M.B.A. from Pepperdine University.

However, Bloomberg contacted the University of Colorado and the registrar's office confirmed Minkow's report that no B.A. degree was awarded to Mr. Avery:

Avery attended the University of Colorado from the fall of 1970 to the spring of 1975 as a full-time student and “no degree was awarded for reasons unknown,” according to a statement faxed to Bloomberg News from the university registrar’s office.

Note: Bold print and italics added by me.

In addition, Loyola Marymount University spokeswoman Christine Nangle told Bloomberg that the university has no record of any M.S. degree awarded to Mr. Avery:

The Intrepid Potash prospectus also said Avery received a master’s degree in engineering from Loyola, without identifying a specific school or its location. Avery studied engineering at Loyola Marymount University in Los Angeles from 1982 to 1985, but the school has no record of awarding him a degree, spokeswoman Christine Nangle said.

Note: Bold print and italics added by me.

At least Avery earned an M.B.A. degree from Pepperdine University. Pepperdine spokesman F. Douglass Gore III confirmed that Avery graduated in 1996. However, according to Bloomberg:

Avery earned the degree through a special program for senior executives, who can get a waiver from a required undergraduate degree, Gore said.

Note: Bold print and italics added by me.

Therefore, Avery did not require an undergraduate degree to earn an M.B.A. from Pepperdine. The company has not yet commented about Minkow's report or the Bloomberg article.

In November 2008, Barry Minkow exposed eight corporate executives lying about their educational backgrounds and a couple of weeks later, he exposed two more. Minkow almost always holds a short position in companies that he investigates and has openly disclosed that he owns put options on Intrepid Potash.

Written by:

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

Disclosure:

I have no position in Intrepid Potash securities. However, Barry Minkow has publicly disclosed a short position in Intrepid Potash and usually shorts companies that he investigates. Please read the Full Disclaimer on FDI for Profit Status.

Over a year ago, I provided funds to Fraud Discovery Institute (FDI) to help pay costs of its investigations, though I had no control over any monies spent. I am not an owner, manager, employee, or consultant of Minkow or FDI and I have not received any compensation from them.

Index to White Collar Fraud Blog Posts

Other Blog and Media Reaction to this Blog

Monday, February 09, 2009

Overstock.com Refuses to Correct GAAP Violations in Latest Financial Report

So far, Overstock.com (NASDAQ: OSTK) has stubbornly refused to correct recent Q4 2008 GAAP violations, exposed last week by this blog that allowed the company to improperly report a $1 million profit, rather than an $800,000 net loss. Instead on last Friday, Overstock.com CEO Patrick Byrne was caught trying to make excuses to readers on a stock bulletin board, using an alias in an unsigned post. After I complained in emails to the company and the Securities and Exchange Commission, Byrne removed his unsigned post and posted the same nonsense with his real name attached to it. I'll have more to say on that, later.

Overstock.com violated accounting rules to report first quarterly profit after 15 consecutive quarterly losses

In my last blog post, I documented how Overstock.com violated Statement of Financial Accounting Standards No. 154 governing accounting errors and improperly reported a $1 million profit in Q4 2008, rather than an $800,000 net loss. During the Q4 2008 earnings call, new CFO Steven Chesnut, told investors:

Gross profit dollars were $43.6 million, a 6% decrease. This included a one-time gain of $1.8 million relating to payments from partners who were under-billed earlier in the year.

Note: Bold print and italics added by me.

That "one-time gain of $1.8 million" referred to above by CFO Steve Chesnut was actually an improper one-time cumulative adjustment of an accounting error. Overstock.com "under-billed" partners earlier in the year and that is simply an accounting error covered by SFAS No. 154.

To compound the problem, Overstock.com recognized the "one-time of $1.8 million" using cash-basis accounting when it "received payments from partners who were under-billed earlier in the year" instead of accrual basis accounting, which requires income to be recognized when earned. A public company is not permitted to correct any accounting error using cash-basis accounting.

If an accounting error is material, like in the case of Overstock.com detailed here, a company must restate all effected prior period financial reports, rather than use a one-time cumulative adjustment to correct such an error.

Overstock.com’s accounting error met at least three materiality criteria under SEC Staff Accounting Bulletin No. 99, governing the materiality of accounting errors. The accounting error only had to meet one materiality criteria to require a restatement of all effected prior period financial reports. See below:

(1) Whether the misstatement masks a change in earnings or other trends

(2) Whether the misstatement hides a failure to meet analysts' consensus expectations for the enterprise

(3) Whether the misstatement changes a loss into income or vice versa

Prior to Q4 2008, Overstock.com reported 15 consecutive quarterly losses and the mean analysts’ consensus expectations for Overstock.com’s Q4 2008 financial results were negative $.03 earnings per share. If Overstock.com had properly restated its prior period financial reports, rather than improperly report a one-time gain of $1.8 million from correcting its accounting error due to under-billing fulfillment partners in prior periods, the company would have reported an $800,000 loss in Q4 2008, instead of a $1 million profit.

By improperly using a "one-time gain" to correct its accounting error, Overstock.com's:

(1) Misstatement changed its trend of 15 consecutive quarterly losses to improperly report a Q4 2008 net profit $1 million, instead of properly reporting an $800,000 net loss;

(2) Misstatement hid a failure to meet analysts' consensus expectations of negative $.03 earnings per share by improperly reporting positive $.04 earnings per share, instead of properly reporting negative $.04 per share;

(3) Misstatement allowed the company to improperly report a $1 million profit, rather than a properly reported $800,000 net loss.

Patrick Byrne double-talks investors on an internet chat board

In trying to double-talk his way out of Overstock.com's latest financial reporting fiasco, Patrick Byrne started out with his usual personal attack on me, violated the company's Code of Business Conduct and Ethics, and possibly Regulation FD, as he tried to con readers of a stock bulletin board into believing that the company did not violate accounting rules:

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.

Nowhere in Patrick Byrne's comment above does he mention the issue of the proper treatment of accounting errors under GAAP and SEC rules, as I have documented in my blog. Byrne can't address it. No matter what boloney Byrne said above, Overstock.com simply had a material accounting error that required the restatement of effected prior period financial reports.

Instead, Patrick Byrne, like a white collar criminal caught in the act of violating GAAP in SEC reports, tried to make excuses for Overstock.com's decision to correct its accounting errors by claiming that "conservatism demands" waiting until "monies flow in" from under-billed fulfillment partners, after such an error is discovered by the company. That is improper cash-basis accounting for a public company and does not address the restatement issue. In any case, Overstock.com is required to restate all prior period financial reports affected by its accounting error.

Patrick Byrne went on to make up new lies in an effort to discredit my exposure of Overstock.com's GAAP and SEC reporting violations:

In the last quarter he ignores a $4 million write-down. He says that we dispensed with a $3 million bonus for executives when it was really just $1 million. Etc. etc. It's just a guy on a street corner, spouting gibberish, hoping someone will toss him a quarter.

I did not write about Overstock.com's "$4 million write-down" relating to a note receivable because it is irrelevant to the company's violation of GAAP concerning accounting errors. In addition, I never wrote about any bonuses for Overstock.com executives, anywhere, despite Byrne's claim that I wrote about it. Patrick Byrne is simply making it up.

Patrick Byrne retaliates by employing paid shill Mark Mitchell to smear me

In another effort to discredit me, Patrick Byrne and his paid shill, washed up former Columbia Journalism Review (CJR) reporter Mark R. Mitchell, falsely claim that I am connected to the Genovese crime family and:

Now he is paid by short sellers with ties to David Rocker and associates of Michael Milken. The assignment to which he devotes the majority of his time is to use the Internet to harass and smear the reputations of Deep Capture founder Patrick Byrne and his colleagues.

That is untrue. I do not receive consideration of any kind, directly or indirectly, for examining Overstock's financial reporting, and publicly offering my observations regarding this firm. No one has ever paid me or promised to pay me any compensation in return for writing about Overstock.com, Patrick Byrne, and his colleagues. I am simply exposing Patrick Byrne's frauds on investors and his vicious retaliation against critics through paid shills like Mark Mitchell, Judd Bagley, and others who are enabling and abetting Byrne's frauds and abuses.

About two years ago, Mark Mitchell left CJR under a cloud after information surfaced that he violated its journalistic standards. Sources claim that Mitchell was escorted out of the building. I once asked Mark Mitchell about that alleged episode and he responded on the Yahoo Overstock.com message board saying, “I'm [meaning Mark Mitchell] a drug fiend and a psychopath and I've been escorted out of lots of places (pretty much everywhere I go, actually)." After realizing his folly, Mitchell deleted his Yahoo post and tried to deny being escorted out of the building. Like Byrne, Mitchell seems to be missing a few marbles, to say the least.

Overstock.com's Q4 2008 financial report is not reliable due GAAP violations

Overstock.com's Q4 2008 financial report cannot be relied on as a result of the company's failure to comply with SFAS No. 154 and SAB No. 99 governing accounting errors.

Last Wednesday, I emailed Joseph J. Tabacco Jr. and the Securities and Exchange Commission Utah Office to alert them of Overstock.com's latest violation of GAAP and SEC rules. According to SEC rules (See Items B-1 and 4.02), Overstock.com has until today to come clean and disclose that its Q4 2008 financial reports are not reliable. Don't count on it, unless the SEC takes action.

It took Overstock.com about a year to correct its violations of SEC Regulation G, after this blog exposed how the company used a non-compliant EBITDA measure to materially overstate its financial performance.

Until Overstock.com finally revised its EBITDA measure, CEO Patrick Byrne, company President Jonathan E. Johnson, and former CFO David Chidester all lied to investors claiming that Overstock.com was in compliance with SEC Regulation G, when it wasn't.

At that time, Byrne claimed that I was writing gibberish, too. He was proven wrong, when Overstock.com ate crow and finally revised its non-compliant EBITDA measure in its Q3 2008 10-Q report.

To be continued....

Written by,

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

Disclosure:

I have am not long or short Overstock.com securities.

Wednesday, February 04, 2009

Overstock.com and CEO Patrick Byrne Violate Accounting Rules in Q4 2008 Financial Report

Latest GAAP Violations by Overstock.com in Q4 2008 Financial Report Improperly Turn a Loss into a Profit

Last Friday, Overstock.com (NASDAQ: OSTK) reported a fourth quarter 2008 net profit of $1 million dollars. CEO Patrick Byrne proudly told investors, "After a tough three years, returning to GAAP profitability is a relief." However, Overstock.com's "returning to GAAP profitability" was simply accomplished by the company violating GAAP through its failure to restate prior period financial reports effected by a certain accounting error. Had Overstock.com properly followed acounting rules, it would have reported an $800,000 loss instead of a $1 million profit.

During the Q4 2008 earnings call, the new Overstock.com CFO Steve Chesnut, who recently replaced David Chidester, told investors:
Gross profit dollars were $43.6 million, a 6% decrease. This included a one-time gain of $1.8 million relating to payments from partners who were under-billed earlier in the year.
Note: Bold print and italics added by me.
That "one-time gain of $1.8 million" referred to above by CFO Steve Chesnut was actually an improper one-time cumulative adjustment of an accounting error.

According to Statement of Financial Accounting Standards No. 154 and SEC Staff Accounting Bulletin No. 99, Overstock.com should have restated all prior accounting periods, rather than use a "one-time gain" to correct its accounting errors "relating to payments from partners who were under-billed earlier in the year."

Under GAAP, we are required to use an accrual basis of accounting. Income is recognized when it is earned and not when it is later billed or when amounts are collected. The “one-time gain of $1.8 million relating to payments from partners who were under-billed earlier in the year” was earned before Q4 2008 and should have been recognized in prior periods. Since the accounting error is material under SAB No. 99, Overstock.com is required to restate prior period financial reports under SFAS No. 154 and cannot use a “one-time gain” to correct its error.

As a result of violating SFAS No. 154 and SAB No. 99, Overstock.com improperly reported a Q4 2008 net profit of $1 million, instead of an $800,000 net loss.

According to SFAS No. 154 paragraph 25:
Any error in the financial statements of a prior period discovered subsequent to their issuance shall be reported as a prior-period adjustment by restating the prior-period financial statements.
Note: Bold print and italics added by me.
Among the criteria that SAB No. 99 uses to define a material accounting error that requires a restatement of prior period financial reports are:
• whether the misstatement masks a change in earnings or other trends
• whether the misstatement hides a failure to meet analysts' consensus expectations for the enterprise
• whether the misstatement changes a loss into income or vice versa
Overstock.com’s accounting error met in all three materiality criteria above and the company should have restated its prior financial reports, rather than use a one-time gain to correct its accounting error in Q4 2008. See below.


Whether the material misstatement masks a change in earnings and other trends

Overstock.com has never reported a profitable year and has reported only three profitable quarters (Q4 2002, Q4 2004, and Q4 2008), since its inception. Prior to Q4 2008, Overstock.com’s last reported profitable quarter was four years earlier, in Q4 2004. If Overstock.com had properly restated its prior financial reports, rather than improperly report a one-time gain of $1.8 million from correcting its under-billing of fulfillment partners in prior periods, the company would have reported an $800,000 loss in Q4 2008, instead of a $1 million profit.

Therefore, Overstock.com clearly changed its trend of 15 consecutive reported quarterly losses by improperly using a one-time gain of $1.8 million to correct its accounting error in Q4 2008. The company’s treatment of its accounting error as a one-time gain “masks a change in earnings and other trends” and is considered a material accounting error under SAB No. 99. Therefore, Overstock.com should have restated its financial reports as required under SFAS No. 154.

Whether the misstatement hides a failure to meet analysts’ consensus expectations for the enterprise

The mean analysts’ consensus expectations for Overstock.com’s Q4 2008 financial results were negative $.03 earnings per share. Overstock.com reported $.04 positive earnings per share because of the $1.8 million one-time gain it improperly reported from correcting its under-billing of fulfillment partners in prior periods.

Without that $1.8 million one-time gain, Overstock.com’s earnings per share would have been reported at negative $.04 earnings per share, compared to analysts’ consensus expectations of negative $.03 earnings per share.

Therefore, Overstock.com’s accounting error was material under SAB No. 99, since it “hides a failure to meet analysts’ consensus expectations” and we have another reason why Overstock.com should have restated its financial reports as required under SFAS No. 154.


Whether a misstatement changes a loss into income or vice versa

As I detailed above, Overstock.com reported a Q4 2008 profit of $1 million instead of a loss of $800,000 because the company improperly used a one-time gain of $1.8 million to correct its under-billing of fulfillment partners in prior periods. Clearly, Overstock.com’s accounting error is material, since it changes a properly reported net loss into an improperly reported net profit.

Overstock.com’s more recent violations of Generally Accepted Accounting Principles (GAAP) and SEC rules should come as no surprise readers of my blog. What should be surprising is the SEC’s failure to take enforcement action against the company and its management.

Written by,

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


Disclosure:

I am not long or short Overstock.com securities.