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Open Letter to the Securities and Exchange Commission (Part 7): Why and David Chidester Parted Ways


To the Securities and Exchange Commission:

I believe that it is no coincidence that David Chidester left (NASDAQ: OSTK) while KPMG continues to audit its financial reports amid your ongoing investigation of the company and a day after Roddy Boyd's damaging article was published in The Big Money. Recently, both CEO Patrick M. Byrne and former CFO David K. Chidester refused to comment to the Salt Lake Tribune and company President Jonathan E. Johnson gave evasive and misleading answers to them about Chidester's departure from the company.

As an eleven year veteran of the company, David Chidester knows where the "dead bodies" are to be found in's continuous failure to issue financial reports in compliance with Generally Accepted Accounting Principles (GAAP) and other SEC disclosure rules. claims that David Chidester and the company parted ways by "mutual agreement." I believe that their so-called "mutual agreement" is based on Patrick Byrne not wanting David Chidester to stay around and David Chidester not wanting to be around to answer questions as KPMG continues its audit of the company's financial reports.

Instead, is using an "ignorance is bliss" approach to dealing with KPMG, its new auditors. Current CFO Steve Chesnut, who joined the in January 2009, was not around when most of the financial reporting improprieties under investigation were committed by management. Simply said, Chesnut was not around when the "bodies were buried" and would not know where to find all of them. He is not even a CPA.

Salt Lake Tribune article by Paul Beebe

According to an article published yesterday in the Salt Lake Tribune:

Why did a top executive of suddenly leave the Internet retailer after 11 years?

David Chidester resigned Jan. 20 amid an ongoing investigation of Overstock by the Securities and Exchange Commission and one day after an unflattering article about CEO Patrick Byrne appeared in The Big Money, a business Web site by the editors of Slate.

In a document filed with the SEC five days later, Overstock said only that "Chidester left by mutual agreement, effective immediately, from his position as senior vice president of internal reporting and information."

On Monday, Jonathan Johnson, president of Salt Lake City-based Overstock, added this about the departure of Chidester, the company's chief information officer and former chief financial officer:

"David had been with us over 10 years. It felt like for both David and the company it was time to move to something new.

"I don't know who said what first, but it was clearly a mutual agreement. We've grown a lot in 10 years. We are a big organization and thought it was time for both parties to move on."

Efforts to reach Chidester for comment were unsuccessful, and Byrne was unavailable.

Later, the article goes on to say that:

Johnson called allegations that Chidester was forced out because of the article "conjecture" that is "just wrong."

Patrick Byrne was uncharacteristically "unavailable" to comment to the Salt Lake Tribune on Chidester's departure from the company. In the past, the local Salt Lake Tribune has conveniently chosen to largely ignore Patrick Byrne past transgressions against investors and has given him a friendly platform to spread malicious smears against his critics. A certain source told me that the Salt Lake Tribune had been working on that article for several days and another source told me that Byrne was deliberately dodging the Tribune (information to be sent privately). See Gary Weiss's blog post, here.

Also troubling is Johnson's evasive comment to the Salt Lake Tribune that "I don't know who said what first....." As the President of, Johnson certainly must know all the details of what transpired between the company and Chidester.

Apparently, Johnson wants to deceive investors into believing that David Chidester's sudden resignation was just a mere coincidence and is unrelated to the ongoing SEC investigation and damaging article by Boyd. However, the timeline provided below shows that Chidester's departure was not a mere coincidence but instead resulted from damning evidence of wrongdoing uncovered by Roddy Boyd.

Chidester's tenure of CFO

During Chidester's tenure as CFO, every single initial financial report for every reporting period issued by from the company's inception to date has violated Generally Accepted Accounting Principles GAAP and other SEC disclosure rules.

In February 2006, restated financial reports from Q1 2002 to Q3 2005 to correct inventory accounting errors.

In February 2008, the SEC Division of Corporation Finance discovered that's revenue accounting from the company's inception to Q3 2007 violated GAAP.

In addition, from Q2 2007 to Q2 2008 violated SEC Regulation G by using an improper EBITDA calculation to materially inflate its financial performance. After I wrote a series of blog posts detailing how management lied about the company's compliance with SEC Regulation G, finally corrected its improper EBITDA calculation (Details here).

In October 2008, restated its financial reports from Q1 2003 to Q3 2008 due to customer refund and credit errors. It was the second time in two years that had to restate its financial reports due to accounting errors.

In January 2009 David Chidester was replaced by Steve Chesnut as CFO and was moved to the position of Senior Vice President Internal Reporting and Information. In addition, Grant Thornton replaced PricewaterhouseCoopers as's auditors. still kept David Chidester around

After two restatements of financial reports in two years and a history of issuing financial reports that turned out to violate GAAP and SEC rules, still kept David Chidester on the payroll in the key position of Senior Vice President Internal Reporting and Information with no reduction in salary (See Proxy Report page 17).

At that point, had no problem keeping David Chidester around since the SEC was not investigating the company and Boyd had not yet published his article providing new details of wrongdoing at Chidester stayed employed by until January 20, 2010 and left the company "effective immediately," a day after Boyd's devastating article.

In September 2009, the SEC Enforcement Division started investigating I reported to you how the company used an improper "cookie jar" reserve to material inflate its financial performance from Q4 2008 to Q3 2009.

In November 2009, fired Grant Thornton after new material accounting errors and omitted disclosures were uncovered during a separate probe by the SEC Division of Corporation Finance. Grant Thornton wanted to restate its financial reports, like I had called for in my blog. Instead, fired and publicly vilified Grant Thornton and filed an unreviewed Q3 2009 10-Q report.

On December 23, 2009, hired KPMG to replace Grant Thornton.

As I will describe below, it was the fallout from new damaging information revealed in Roddy Boyd's article that caused to mutually agree to part ways.

Fallout from Roddy Boyd article

On January 19, 2010, The Big Money published an article by investigative reporter Roddy Boyd that exposed how purposely withheld information from investors during 2005 and 2006 about its inadequate internal controls and engaged in a New York State sales tax dodge scheme known as "Operation Heist and Freeze."

The next day, and David Chidester parted ways and the company issued a tersely worded statement saying that:

On January 20, 2010 Mr. David K. Chidester left by mutual agreement, effective immediately, from his position as Senior Vice President, Internal Reporting and Information, of, Inc. (the “Company”).

Unlike other departures of key insiders, there were no "farewell" tributes or words of praise for Chidester from Byrne or the company. Chidester left the company "effective immediately." There was no transition period. He simply left the building in a hurry and ran like hell. The company faces a probable probe from the New York State Department of Taxation and Finance and new evidence of wrongdoing by its management for the SEC to investigate.

A separate examination of's SEC filings by me found that both CEO Patrick Byrne and David Chidester deliberately signed false Sarbanes-Oxley certifications for financial reports claiming that the company had effective internal controls over financial reporting. Internal company documents obtained by The Big Money contradict their signed certifications to investors.

So far, those same financial reports that were certified by Byrne and Chidester were later restated two times: in February 2006 due to inventory accounting errors and in October 2008 due to customer refund and credit errors. faces a third restatement of those same financial reports as a result of its use of improper "cookie jar" reserves under investigation by the SEC.

In September 2009, the SEC also subpoenaed for documents related to those two prior restatements in 2006 and 2008 before Roddy Boyd broke his damning article. In June 2008, the SEC concluded an earlier investigation of and took no enforcement action against the company. In that earlier investigation, the SEC subpoenaed documents relating to's 2006 restatement of financial reports. In other words, you are re-examining certain issues from your first investigation: the 2006 restatement of financial reports by

Based on the fact that both Byrne and Chidester knowingly signed false Sarbanes-Oxley certifications, it's reasonable to assume that you are looking into how they obstructed your earlier investigation of the company. In addition, they probably lied to and misled PricewaterhouseCoopers,'s former auditors. However, I have other information suggesting that PricewaterhouseCoopers may have been complicit in helping hide certain material accounting errors. That will be the subject of another blog post.

Written by:

Sam E. Antar

My previous open letters to the SEC (please note that each letter is based on's deliberately vague, incoherent, and inconsistent, and often contradictory disclosures at the time each one was issued):

08/05/09: Open Letter to the Securities and Exchange Commission: Stop GAAP Violations Now!

11/22/09: Open Letter to the Securities and Exchange Commission Part 2: New Information on's GAAP and SEC Disclosure Violations

11/23/09: Open Letter to the Securities and Exchange Commission Part 3: Lied About Grant Thornton and Concealed Error

11/26/09: Open Letter to the Securities and Exchange Commission Part 4: Patrick Byrne Ignores Real Issues As He Vilifies Grant Thornton

12/14/09: Open Letter to the Securities and Exchange Commission Part 5: Issuer Retaliation Complaint Against

01/03/10: Open Letter to the Securities and Exchange Commission Part 6: Conflicting Disclosures by Reveal Improper Audit Opinion Shopping


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 committed my crimes, simply because I could.

If it weren't for the efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.

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. In any case, exposing corporate crooks is a lot of fun for a forcibly "retired" crook like me and analyzing's financial reporting is a forensic accountant's wet dream.

KPMG has sponsored at least two of my free speaking engagements to universities and colleges.


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