Overstock.com CEO Patrick Dumped Stock Ahead of Bad Earnings Report and Misled Investors About Earnings

Updated on Tuesday, August 10 at bottom of post

I have reported frequently on a range of securities law violations by Overstock.com (NASDAQ: OSTK). The company’s latest earnings report yesterday raises still new questions, concerning possible insider trading and misleading statements by the company’s CEO, Patrick Byrne.

Yesterday, Overstock.com issued its Q2 2010 10-Q (quarter ended June 30) report and surprised investors by reporting a $1.4 million loss or a loss of $0.06 per share compared to a small $319k reported profit or earnings per share of $0.01 in the previous year’s comparable quarter, despite higher revenues.

Overstock.com failed to meet consensus analyst expectations for earnings, too. Overstock.com’s reported loss of $0.06 per share was far worse than analyst expectations of a $0.04 per share loss or a 50% higher loss than expected.

A disturbing event preceded this announcement.

On May 20, 2010, Patrick Byrne's 100% controlled High Plains Investments LLC dumped 140,000 company shares and collected over $3 million in proceeds, according to SEC filings. That was the first time that Patrick Byrne had ever sold any Overstock.com shares under his control. In my blog, I noted that such a sale was “not a bullish signal to investors.”

Was Byrne aware by May 20 that the company was having a bad quarter, and did he sell having knowledge of that fact? If so, he may be guilty of insider trading, a possible criminal offense.

Nine days after Q2 2010 ended, by which time Byrne undoubtedly knew that the quarter had ended with a loss, Investor’s Business Daily reported:
But break-even might be a tough goal for the second quarter. Analysts polled by Thomson Reuters expect the company later this month will report a loss of 4 cents a share, compared with a 2-cent profit a year earlier.
Investor’s Business Daily reporter Doug Tsuruoka asked Patrick Byrne:
You predicted that Overstock would only break even in the second and third quarter, but didn't seem too concerned by that. Why?
Byrne responded:
Given that in 2009 we had close to $40 million of free cash flow (and $8 million net income), I think we should just continue building the intrinsic value of the business right now.
In other words, nine days after Q2 2010 ended, Byrne apparently led investors to believe that Overstock.com was going to break even in that quarter by citing previous year's free cash flow numbers and reported income. However, Byrne did not mention that Overstock.com's this year's free cash flow for the six months ended June 30, 2010 was negative $54.8 million compared to negative $35.8 million in the previous year's comparable period or about $19 million lower.

Written by:

Sam E. Antar

Update: Friday afternoon stock market close

Overstock.com shares dropped $3.40 to per share to close at $16.78 or a 16.85% decline in market value. In other words, Overstock.com's market capitalization dropped over $50 million as investors reacted to the company's surprise earnings announcement.

Patrick Byrne was luckier. In late May, his 100% controlled High Plains Investments LLC sold 140,000 shares and pocketed about $3.1 million in proceeds at an average selling price of $22.11 per share. That's $5.33 per share higher than Overstock.com's closing price per share.

Nice timing for Byrne! Unfortunately investors don't have his access to the company's books and records and on a daily basis.

Update: Overstock.com's earnings conference call

On Monday, August 9, 2010, Overstock.com was scheduled to a hold conference call at 3 PM ET to discuss its Q2 2010 financial reports with investors. Going Concern blogger Caleb Newquist reported that I sent CEO Patrick Byrne, company President Jonathan Johnson, Public Relations Director Kevin Moon, and audit committee member Joseph J. Tabacco the following email:
Dear Patrick Byrne and other persons from Overstock.com:

Overstock.com’s Q2 2010 conference call is scheduled for today at 3 PM ET. I will be calling in. I expect to be permitted to participate in said call and ask relevant questions about Overstock.com. As I recall, in 2005 you allowed a lay person named Phil Saunders AKA Easter Bunny to participate in the call.

Sam E. Antar
Portfolio.com and Street.com columnist Gary Weiss predicted:
I think that we can expect no impolite questions from the quaking analysts in attendance, and no questions permitted from Sam Antar
During the conference call, Jonathan Johnson asked for questions and the operator instructed all participants to dial *1 to ask questions. I dialed *1 as instructed, but the company ignored my request to ask questions and falsely claimed that there were no other questions.

Other blogs

Going Concern: Remember the $3 Million in Overstock Shares Patrick Byrne Sold? Sam Antar Does by Caleb Newquist

Disclosure:

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 in cold-blood for fun and profit, and 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.

There is a saying, "It takes one to know one." Today, I work very closely with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify and catch white-collar criminals.

I do not seek or want forgiveness for my vicious crimes from my victims. I plan on frying in hell with other white-collar criminals for a very long time.

Recently, I exposed GAAP violations by Overstock.com (NASDAQ: OSTK) which caused the company to restate its financial reports for the third time in three years. The SEC is now investigating Overstock.com and its CEO Patrick Byrne for securities law violations (Details here, here, and here).

In addition, the SEC is now investigating possible GAAP violations by Bidz.com (NASDAQ: BIDZ) after I alerted them about the company's inventory accounting practices.

I do not own Overstock.com securities long or short. My investigation of the company is a freebie for securities regulators to get me into heavean, though I doubt I will ever get there.

Another Question about Timing of NBTY Insider Stock Purchases Prior to Announcement of Carlyle Acquisition

In my last blog post about NBTY (NYSE: NTY), I examined the timing of purchases of company stock by directors Michael L. Ashner and Peter J. White just two months before the July 15 announcement that Carlyle Group was acquiring NBTY at about $55 per share in cash. CNBC’s David Faber reported that, “Carlyle approached NBTY with an offer in early May, according to people familiar with the deal.” Both Ashner and White purchased their shares in mid-May at about $34 per share and $35 per share respectively. I wanted to know if “early May” meant “before or after” Michael Ashner and Peter White purchased their NBTY shares.

Now, we have an answer and one more question.

NBTY Preliminary Proxy Statement

Yesterday, NBTY filed a Preliminary Proxy Statement which provided certain details of the events leading up to the announced acquisition of the company by Carlyle:
The board of directors and senior management in the ordinary course of business continually review and assess strategic alternatives available to us to enhance stockholder value. As part of this ongoing process, the board of directors has also periodically considered potential business combination transactions. BofA Merrill Lynch has from time to time, as requested by the Company, assisted the board of directors and senior management in this strategic review process.

From time to time over the last few years, a number of parties, including Carlyle, have approached Scott Rudolph, Chairman and Chief Executive of the Company, Harvey Kamil, President and Chief Financial Officer of the Company, and representatives from BofA Merrill Lynch regarding possible transactions involving the Company. Until the discussions described below, those approaches did not proceed past preliminary conversations and exchanges of limited confidential information.

On or about April 23, 2010, a representative from Carlyle contacted Mr. Kamil and expressed Carlyle’s interest in exploring a potential business combination transaction with the Company. Mr. Kamil subsequently informed Mr. Scott Rudolph of this expression of interest.

Mr. Kamil then had a preliminary discussion with representatives from Carlyle to further clarify and understand Carlyle’s interest. On April 29, 2010, the Company and an affiliate of Carlyle entered into a confidentiality agreement, dated as of April 27, 2010, which was subsequently amended on June 1, 2010. Carlyle was then provided with limited confidential information about the Company.

On May 11, 2010, Mr. Scott Rudolph and Mr. Kamil met with representatives from Carlyle to discuss the Company and gather additional information about Carlyle’s interest.
According to SEC filings, on May 13, 2010, Michael Ashner purchased 5,000 NBTY common shares at a total cost of $171,295 or an average price per share of $34.26. Five days later on May 18, 2010, Peter White purchased 4,000 NBTY common shares at a total cost of $140,398 or an average price per share of $35.10.

The Preliminary Proxy Statement goes on to provide additional details:
On May 21, 2010, the board of directors held a regularly scheduled meeting. Members of senior management and representatives from BofA Merrill Lynch and Sullivan & Cromwell LLP, the Company’s outside legal counsel, which we refer to as Sullivan & Cromwell, participated in this meeting. Mr. Scott Rudolph reviewed with the board of directors the approach by Carlyle to the Company, the execution of a confidentiality agreement with an affiliate of Carlyle and the discussions with and information provided to Carlyle at that time.
As I detailed above, on July 15, 2010, NBTY announced that it was being acquired by the Carlyle Group for $55 per share.

Based on the above timeline, Michael Ashner and Peter White purchased their NBTY stock after the “Company and an affiliate of Carlyle entered into a confidentiality agreement” and “Mr. Scott Rudolph and Mr. Kamil met with representatives from Carlyle to discuss the Company and gather additional information about Carlyle’s interest.” So I have one additional question.

Question

At what point in time did Ashner and White know anything about the discussions with Carlyle and when did they find out about the confidentiality agreement?

Often, such agreements are executed after the board has been notified. In this case, the confidentiality agreement was signed before Ashner and White purchased their NBTY shares.

Written by:

Sam E. Antar

Disclosure:

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 in cold-blood for fun and profit, and 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.

There is a saying, "It takes one to know one." Today, I work very closely with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify and catch white-collar criminals.

I do not seek or want forgiveness for my vicious crimes from my victims. I plan on frying in hell with other white-collar criminals for a very long time.

Recently, I exposed GAAP violations by Overstock.com (NASDAQ: OSTK) which caused the company to restate its financial reports for the third time in three years. The SEC is now investigating Overstock.com and its CEO Patrick Byrne for securities law violations (Details here, here, and here).

In addition, the SEC is now investigating possible GAAP violations by Bidz.com (NASDAQ: BIDZ) after I alerted them about the company's inventory accounting practices.

I do not own NBTY securities long or short.