Monday, November 01, 2010

More Trouble for and Patrick Byrne after Dismal Third Quarter Report

Updated on 11/03/2010 at bottom of post

Two consecutive failures to meet Wall Street analysts’ consensus expectations

Last Friday morning, (NASDAQ: OSTK) stunned investors and reported a Q3 2010 $3.381 million loss or a loss of $0.15 per share compared to a Q3 2009 reported loss of $1.379 million or a loss of $0.06 per share. The company failed to meet Wall Street consensus analysts' expectations for earnings, too.’s reported loss of $0.15 per share was five times greater than analysts' expectations of a $0.03 per share loss. That same day, shares of tumbled $2.46 per share or 15.5% lower to close at $13.41 per share. The company’s market capitalization (shares outstanding multiplied by the market price per share) dropped over $55 million in a single day.

It was the second consecutive quarter that failed to meet Wall Street analysts’ consensus expectations for earnings.

Previously, reported a Q2 2010 loss of $1.4 million or a loss of $0.06 per share compared to a Q2 2009 reported profit of $319,000 or $0.01 per share.’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.

Afterwards, shares dropped $3.40 to per share to close at $16.78 or a 16.85% decline in market value. On that day,'s market capitalization dropped over $75 million as investors reacted to the company's surprise Q2 2010 earnings numbers.

Patrick Byrne dumped stock ahead of two consecutive poor financial reports

Patrick Byrne intoxicated after drinking liberally
Back on May 20 to May 24, 2010, Patrick Byrne's 100% controlled High Plains Investments LLC dumped 140,000 company shares at an average price of $22.11 per share and collected over $3 million in proceeds, according to SEC filings. It was the first time that Patrick Byrne had ever sold any shares under his control.

After Byrne sold his stock,’s shares have dropped about 39% in market value from his average selling price of $22.11 per share to $13.41 last Friday. The company’s market capitalization has dropped approximately $200 million since Byrne sold his shares.

Questions of possible illegal insider trading

I’ve written two blog posts (here and here) questioning the timing of Patrick Byrne’s May 2010 sale of stock and raising the possibility of illegal insider trading considering’s dismal financial results in the relatively short period of time after he sold his stock.

As I will detail below, both before and after Patrick Byrne sold his stock, he led investors to believe that that would break even in its second and third quarters and beat Wall Street analysts' consensus expectations for Q2 and Q3 2010.

Hyping's anticipated financial results

On May 6, 2010, the Salt Lake Tribune interviewed Patrick Byrne and reported that:

… Byrne anticipates the online discount retailer will just break even during the next two quarters -- and he isn't too concerned.

"If we can break even through September then we can then go on to make tens of millions of dollars during the fourth quarter," Byrne said, pointing to's busiest time of the year. [Emphasis added.]

About two weeks later, from May 20 to May 24, Patrick Byrne sold 140,000 shares at an average price of $22.11 per share and pocketed about $3.1 million in proceeds.’s second quarter ended on June 30. By July 9, the company had not yet reported its financial results. On that day, Investor’s Business Daily published an article expressing concerns that:

…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 tried to allay Tsuruoka's concerns by responding:

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 both interviews above, before and after Patrick Byrne sold his stock, he apparently led investors to believe that would break even in its second and third quarters and in turn beat Wall Street analysts’ consensus expectations for Q2 and Q3 2010.

On August 5, 2010, reported a Q2 2010 loss of $1.4 million loss or a loss of $0.06 per share which 50% worse than analyst expectations of a $0.04 per share loss.

On August 19, 2010, Forbes interviewed Patrick Byrne and he tried to defend himself against my allegations that he was hyping expectations of’s Q2 and Q3 profitability and the possibility of illegal insider trading by him:

I said we’d break even in the first 9 months and would come out ahead full-year. I don’t worry about each quarter and worry about what Wall Street’s estimates are. I believe we’re right on track.

In other words, Patrick Byrne changed his story and now claimed he said that would “break even in the first 9 months” or Q1, Q2, and Q3 2010 taken together, instead of just Q2 and Q3 as reported by the Salt Lake Tribune and Investor's Daily. However, that claim to Forbes lands Byrne into deeper trouble as I will describe below.

New trouble for Patrick Byrne

Seven weeks into Q3 2010, Byrne told Forbes that “we’d break even in the first 9 months” and “I believe we’re right on track.” Right track to breaking even in the first nine months, he said?

Last Friday, reported a Q3 2010 loss of $3.381 million and the company now has reported losses during the first nine months of 2010 totaling $1.069 million.

So, what did Patrick Byrne know?

You have to wonder what Byrne knew about’s financial performance when he was interviewed by the Salt Lake Tribune, Investor’s Daily, and Forbes. For example, Information Week recently interviewed Byrne and reported that:

Online discount retailer is recognized as a world-class technology organization. Using advanced information management technology, for instance, it can roll up its profit-and-loss position in two hours, giving executives accurate, up-to-date insight for fast decision-making. [Emphasis added.]

Since Information Week reports that can "roll up its profit-and-loss position in two hours" I continue to ask the following question:

What did Patrick Byrne really know about's financial condition when he dumped his stock last May and he when hyped expectations of Q2 and Q3’s financial performance before and after he sold his stock?

Maybe, Patrick Byrne can provide a clear and rational answer to that question during this coming Wednesday's scheduled conference call with investors, though I doubt it. In any case, the SEC which is investigating the company for certain GAAP violations uncovered in this blog will certainly question Byrne about his sale of stock and comments about's financial performance.

New troubling risk disclosures

In its latest Q3 2010 10-Q report, disclosed a new troubling lawsuit brought against the company:

On September 29, 2010, a trustee in bankruptcy filed against us an adversary proceeding in the matter of In re: Petters Company, Inc., a case filed in United States Bankruptcy Court, in the District of Minnesota. The complaint alleges principal causes of action against us under various Bankruptcy Code sections and the Minnesota Fraudulent Transfer Act, to recover damages for alleged transfers of property from the Petters Company occurring prior to the filing of the case initially as a civil receivership in October 2008. The trustee’s complaint alleges such transfers occurred in at least one note transaction whereby we transferred at least $2,300,000 and received in return transfers totaling at least $2,547,406. The trustee does not specify a date for the transactions; however we believe that any alleged transaction with the Petters Company would have taken place in excess of seven years from the date of the filing of the adversary proceeding. We have not answered the complaint. The case is in its early stages. The nature of the loss contingencies relating to claims that have been asserted against us are described above. However no estimate of the loss or range of loss can be made. We intend to defend vigorously this action.

In December 2009, Thomas Joseph Petters was convicted by a Federal jury of orchestrating a $3.65 billion dollar Ponzi scheme. The bankruptcy trustee wants to fork over $2,547,406 that the company received from Petters in 2001. The trustee alleges that

...knew or should have known that it was benefiting from fraudulent activity, or at a minimum, failed to exercise reasonable due diligence with respect to Petters and PCI in connection with the Ponzi scheme.

A copy of the lawsuit can be downloaded here.

In previous filings with the SEC, disclosed that the "District Attorneys of Marin and four other counties in Northern California" are investigating the company's advertising practices. They are seeking $8.5 million in penalties and reimbursements to resolve their claims. Accrording to's latest Q3 2010 10-Q report, in October 2010 the Alameda County District Attorney "joined” the ongoing investigation of alleged fraudulent advertising practices. faces potential claims of $612,784 in taxes, interest, and penalties from the State of Ohio for commercial activity taxes.

In just the three cases cited above, has total potential future losses exceeding $11.5 million, not including possible liabilities from other government investigations and litigations listed in its Q3 2010 10-Q report. However, has establised reserves to cover only $1.2 million in potential claims against the company. disclosed that:

It is reasonably possible that the potential losses may exceed our accrued liabilities.
We have other contingencies which are reasonably possible; however, the reasonably possible exposure to losses cannot currently be estimated.

In other words, it is "reasonably possible" that's future losses will exceed the $1.2 million it set aside to pay such future claims.

Continued reported weakness in internal controls

In its Q3 2010 10-Q report, reported that "material weaknesses in our internal control over financial reporting continue to exist at September 30, 2010." Therefore, the company still does not have an adequate system in place to insure accurate financial reporting. From's inception in 1999 to at least Q3 2009, every single initial financial report for each reporting period issued by the company had to be revised and restated to correct accounting errors. In fact, has restated its financial reports three times since 2006.

Written by:

Sam E. Antar


On Wednesday, November 3, 2010, finally held its scheduled conference call with analysts to discuss the company's dismal earnings report. However, Patrick Byrne was absent. According to company President Jonathan Johnson:

Patrick Byrne is not with us today. He came in this morning and took ill and is unable to to be on the call.

The onset of such sudden illnesses is common among the targets of an SEC investigation, like Patrick Byrne. Back in the Crazy Eddie days, it was known as "SEC induced sudden illness syndrome" or by the short acronym SIS. Common symptoms include panic attacks, headaches, nausea, cold sweats, trembling, stomach pains, vomiting, and worst of all, diarrhea.

Patrick Byrne could have avoided all of this. Instead of publicly attacking me, Byrne should have listened to me about the GAAP and other SEC disclosure violations identified in my blog and promptly taken steps to correct them. His vanity got in the way.


I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped my cousin 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 heroic 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. Often, I refer cases to them

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

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.

I do not own any securities long or short. My investigation of that company is a freebie for securities regulators to get me into heaven, though I doubt I will ever get there. My past sins are unforgivable.

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