Monday, February 06, 2012

Francis Chou's Funds Taking a Bath on Common Stock

Various mutual funds managed by Canadian investor Francis Chou have lost about $34.328 million to date on their collective investments in (NASDAQ: OSTK) based on an examination of publicly available documents. Those mutual funds currently own 3,260,738 shares of common stock at a total approximate cost of $56,989,945, an average cost of $17.48 per share. On Monday, shares closed at $6.95 per share placing the total market value of shares held by Chou’s mutual funds at $22,662,129. That's a decline of about 60% from their original cost. (Link to my calculations).

Francis Chou
Back in 2004, Chou said, "If you stick to the principle of value investing, things will work out well for you. If you breach that principle, it will hurt you badly." In the past, has been caught fabricating profits and its CEO Patrick Byrne has attacked me for pointing out those violations of various accounting rules. Byrne has used thugs to pretext other journalists, critics, and their family members (including children). Does "value investing" mean banking on such an unscrupulous CEO?

Over the last several years, this blog has detailed various illegal accounting shenanigans used by to materially overstate its financial performance. From Q2 2007 to Q2 2008, the company used improper EBITDA calculations to materially inflate its pro forma earnings in violation of S.E.C. Regulation G.  For example, in the quarter ended June 30, 2008 reported a positive $1.117 million EBITDA using an improper calculation instead of a negative $0.430 million EBITDA had it complied with Regulation G. From Q4 2008 to Q3 2009, the company violated Generally Accepted Accounting Principles (GAAP) and materially inflated its reported earnings. For example, in the quarter ended December 31, 2008, the company improperly reported a $1.014 million profit by violating GAAP instead of a $0.705 million loss. In both cases I provided the company with detailed information about its accounting irregularities, but its CEO Patrick Byrne chose to vilify me rather than immediately correct its financial reports. My accounting analysis was proven correct by its later revisions of financial reports.

In September 2009, the Securities and Exchange Commission started an investigation of the company after I complained to the regulator. In March 2010, was forced to restate its financial reports to correct various GAAP violations identified in this blog. The S.E.C. investigation of is ongoing.

Patrick Byrne is being sued by District Attorneys from seven California District Attorneys who are alleging consumer fraud. They are seeking at least $15 million of restitution, fines, penalties, and cost reimbursements from the company for allegedly defrauding consumers. The Judge in that case had to compel an uncooperative to turn over information to the California District Attorneys.

In the first nine months of 2011, reported a $16 million loss compared to only a $1.1 million loss during the previous year's nine month period. The company had revealed it was "likely" that it would not comply with certain key terms of  a Master Lease Agreement (sale-leaseback transaction) with U.S. Bank at December 31, 2011 (the end of the fourth quarter), unless "current trends improve substantially." Apparently,'s soon to be reported fourth quarter numbers continued their downward trend. In late December 2011, was unable to restructure its Master Lease Agreement with U.S. Bank. It paid $20.329 million to U.S. Bank which included a $1.428 million prepayment penalty to avoid default and depleted the company of much needed working capital.

On December 9, 2011, filed a shelf registration statement with the Securities and Exchange Commission that would allow it to sell up to $200 million of its debt securities, common stock, warrants and other securities. It appears likely that will need to do some sort of equity related offering in the first quarter of 2012 to stay afloat. Such an offering will likely significantly dilute the value of existing common shares, especially shares held by Chou's funds. (See " continued...." by Davian Letter")

As of September 30, 2011, Chou Associates Management 2,310,209 owned common shares and the Chou America Mutual Fund owned 515,726 shares for a total 2,825,935 shares. Since that date, Chou's mutual funds acquired an additional 434,803 common shares and doled out a total of $3,416,528 or about $7.86 per share. His mutual funds now own 3,260,738 common shares, approximately 14% of the company's total outstanding shares. A current breakdown of how those shares are held among Chou's various funds is unavailable.

Francis Chou's funds started acquiring common shares in 2006 and have lost approximately 60% on their $56.990 million investment to date. At lease one company insider made out like a bandit. 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.  As I detailed above, on Monday, common shares closed at $6.95 per share.

Written by:

Sam E. Antar


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 as an independent whistleblower. I teach white-collar crime classes for various government entities, professional organizations, businesses, and colleges and universities.

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. My past sins are unforgivable.

I do not own any securities long or short and have no position in any of Francis Chou's funds.

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