Skip to main content

How Violated S.E.C Rules on Timely Disclosures and Delayed Reporting a Default on Bank Loan

Last Friday after the stock market closed, (NASDAQ: OSTK) filed an 8-K report and disclosed that it defaulted on its loan covenants with U.S. Bank. The loan default resulted from's failure to file timely reports with the Securities and Exchange Commission. The bank granted the company a waiver of default. However, a close examination of the company’s various S.E.C. filings reveals that committed another securities law violation. The company improperly delayed the disclosure of the loan default to investors for several more weeks until it could resolve the default issue with the bank. Even in the face of an ongoing S.E.C. investigation into previous financial shenanigans, continues to flout securities law right under the nose of regulators.

Since public companies have up to four business days to file an 8-K report, they often choose to disclose negative news on a Friday, after the stock market closes and especially before a three-day holiday weekend, in hopes that most investors won't notice it. could have filed its 8-K report as early as Thursday February 16 or on Tuesday or Wednesday of the following week. Clearly, the company was hoping to bury news of its loan default and securities law violations.


On March 21, 2011, filed a proxy statement and its shareholders were asked to vote at the annual meeting on how frequently the company should seek an “advisory vote” on the compensation of its executive officers. Shareholders were given a choice on whether the advisory vote should be held every year, two years, or three years. However, the vote was “not binding.” The Board of Directors could ultimately decide, " hold an advisory vote on executive compensation more or less frequently, as applicable, than the option approved by our stockholders." After the Board finally reaches its decision, the company is required to file an amended 8-K report within four business days.

At the annual meeting on May 4, 2011, shareholders approved an “advisory vote” every three years. The next day, it filed an 8-K report which disclosed the amount of votes in favor of the nonbinding proposal. Apparently, the management of could not add or subtract. On May 24, 2011, the company filed an amended 8-K report to fix the amount of votes casted, though it did not change the outcome of the vote.

Misleading 8-K report filed with the Securities and Exchange Commission

On Friday, January 6, 2012, filed another amended 8-K report and disclosed that its Board made a final decision about the frequency of advisory votes on its executive’s compensation:

Consistent with the stockholders’ advisory vote on this matter, Overstock intends to hold future stockholder advisory votes on executive compensation once every three years until the next required vote on the frequency of stockholder votes on executive compensation.

It turns out that the amended 8-K report filed on January 6, 2012 was filed late. It should have been filed on September 30, 2011. By failing to file that amended 8-K report on time, defaulted on its loan agreement with U.S. Bank. The company misled investors by failing to disclose that the amended 8-K report should have been filed earlier. In addition, the company improperly omitted information about the loan default which resulted from its failure to file a timely report with the S.E.C. Instead, continued to deceive investors by delaying disclosure of its loan default until February 17, 2012, a day after it resolved its default issues with U.S. Bank.

On Friday, February 17, 2012, finally disclosed that it failed to file a timely 8-K report with the S.E.C. and informed investors that it defaulted on its loan with U.S. Bank. The lender granted the company a waiver of default:

….the Amendment grants a waiver of any default under the Financing Agreement resulting from the Company’s filing on January 6, 2012 of an amendment to its Form 8-K originally filed on May 5, 2011 to report that the Company would follow its own recommendation, as approved by the Company’s stockholders in an advisory vote on May 4, 2011, regarding the timing of future advisory votes of the Company’s stockholders regarding the Company’s executive compensation. The waiver is effective as of or immediately prior to the due date of the amendment to the Form 8-K. [Emphasis added.]

According to the amended loan document:

Pursuant to Section 12.1(d) of the Financing Agreement, an Event of Default shall occur if, among other things, Borrower fails to timely file with the Securities and Exchange Commission periodic and current reports that are in material compliance with the requirements of the Exchange Act. Borrower has informed Bank that Borrower failed to timely file a required amendment to Borrower’s Form 8-K regarding Borrower’s annual meeting of stockholders held on May 4, 2011 (such failure being referred to herein as the “Existing Default”). Borrower has requested that Bank waive the Existing Default, and subject to the full satisfaction of the conditions precedent set forth in Section 4.1 below, Bank hereby so waives the Existing Default, effective as of September 30, 2011. Except as expressly provided in the foregoing provisions of this Article II and as expressly provided in Article III below, all provisions of the Financing Agreement remain in full force and effect and the foregoing waiver will not apply to any other or subsequent failure to comply with the Section identified above or any other provision of the Financing Agreement. [Emphasis added.]

As I detailed above,'s amended 8-K report filed on January 6, 2012 should have been filed on September 30, 2011. Therefore, U.S. Bank waived the “Existing Default” stemming from the company’s failure to file a timely amended 8-K report, “effective as of September 30, 2011.” The company misled investors by failing to disclose that the amended 8-K report was filed late. Furthermore, the amended 8-K report improperly omitted information that defaulted on its loan because it failed to file a timely report with the S.E.C. Under S.E.C. rules, an “event of default” is required to be disclosed within four business days (8-K General Instructions and Item 2.04). Therefore, the company improperly delayed disclosure of the loan default for several more weeks. On February 16, 2012, the company obtained a waiver from the bank. A day later it finally disclosed the loan default.

Weak financial position

Patrick Byrne, CEO
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 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. owes U.S. Bank $17 million under its current loan agreement and that amount is due on December 31, 2012. Therefore, the amount due U.S. Bank will be classified as a current liability on’s first quarter 2012 balance sheet and reduce its net working capital by another $17 million. The company had only $18.4 million in working capital as of September 30, 2011. It could report negative working capital on March 31, 2012 if current trends continue.

In 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 raise capital in the first quarter of 2012 to stay afloat. Such an offering will likely significantly dilute the value of existing common shares. (See " continued...." by the Davian Letter").

On December 14, 2011, the unloaded millions of dollars of excess inventory in a public auction and generated a mere $150,000 in cash, just pennies on the dollar. On January 30, 2012, held another public auction of excess merchandise, but the company did not disclose how much merchandise was sold.

Francis Chou takes a bath after CEO Patrick Byrne dumps shares

Francis Chou, F
Mutual funds managed by Canada-based investment manager Francis Chou have taken a bath on their investment in common shares. Chou’s funds have invested approximately $57 million in the company’s common stock and own approximately 14% of all its outstanding common shares. That investment is losing $34.9 million (down 61%) based on Friday’s closing stock price of $6.77 per share. CEO Patrick Byrne is not as unfortunate as Francis Chou. Back on May 20 to May 24, 2010, 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.

Ongoing S.E.C. investigation into fabricated earnings

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 alerted the company by providing detailed information about its accounting irregularities. However, its CEO Patrick Byrne chose to vilify me rather than immediately correct its financial reports.

My accounting analysis was proven correct by's 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 initially identified in this blog. The S.E.C. investigation of is ongoing.

California District Attorneys allege consumer fraud 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.

Written by:

Sam E. Antar


Overstock - Another Default? by The Davian Letter

Recommended Reading Facebook's Biggest Surprise -- No Funny Numbers by Gary Weiss

JOSB and the conflicting inventory accounting disclosures by The Davian Letter


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.


Popular Posts

Did a Clever SEC Bait Goldman Sachs into Compounding Its Legal Problems With the "Kiss of Death" Message?

Updated: At 3:48 AM ET 04/20/2010 on bottom

The Kiss of Death

In filing its lawsuit against Goldman Sachs (NYSE: GS) on a Friday, the Securities and Exchange Commission sent what I call the "kiss of death" message to the embattled company. In other words, the SEC wanted to stick it to Goldman Sachs and Fabrice Tourre, the Executive Director of Goldman Sachs International, who is also a defendant in the complaint. While the SEC as a practice does inform target companies and individuals of an impending enforcement action, it does not always tell them exactly when such an action will be filed.

Apparently, the SEC filed its lawsuit without giving Goldman Sachs the heads up that it was planning to file it that day. Business Insider observed that Goldman Sachs was clearly unprepared to respond to the complaint as news of the lawsuit dominated the headlines all day. Goldman issued a short denial around noon and issued an extensive denial late in the afternoon, after most people had … CEO Patrick Byrne Sleeps With a Gun

In numerous blog posts in the past, and in widespread media coverage, evidence has accumulated for years that CEO (NASDAQ: OSTK) Patrick Byrne has shown signs of being mentally unbalanced and paranoid.

Byrne has blamed his company's financial woes on an unnamed "Sith Lord." He hired paid goons to stalk his real and imagined adversaries and to write lengthy conspiracy theories on the Internet. Byrne has close ties with Bo Gritz. The Anti-Defamation League lists Bo Gritz as a far-right extremist with “extensive connections to both white supremacists and anti-government groups and leaders.”

Patrick Byrne's infamous temper tantrums when he doesn’t get want he wants are well documented too. He made obscene and misogynistic comments to a female reporter. He suggested that she gave “blowjobs” to Goldman Sachs traders. He suggested that a male reporter “Sucks It Likes He’s Paying the Rent.” An independent research analyst was told that “You deserve to be whippe…

Nature's Sunshine Products, Willbros Group, Cal Dive International, and BSQUARE Violate S.E.C. Rules on Calculating EBITDA

Nature’s Sunshine Products (NASDAQ: NATR), Willbros Group (NYSE: WG), Cal Dive International (NYSE: DVR), and BSQUARE (NASDAQ: BSQR) have recently issued earnings reports which include a calculation of EBITDA (earnings before interest, taxes, depreciation, and amortization) that apparently does not comply with Securities and Exchange Commission interpretations for Regulation G governing such non-GAAP financial measures. In each case, their erroneous EBITDA calculations have enabled them to significantly distort their financial performance by erroneously reporting a positive EBITDA, when they should have reported a negative EBITDA in the latest quarter.

How EBITDA is supposed to be calculated under Regulation G

According to the S.E.C. Compliance & Disclosure Interpretations, EBITDA is defined under Regulation G as net income (not operating income) before net interest, taxes, depreciation, and amortization. See below:

Question 103.01Question: Exchange Act Release No. 47226 describes E…

InterOil, John Thomas Financial, and Clarion Finanz: Anatomy of a Stock Market Manipulation Scheme

In this blog post, I will provide evidence of what I believe is a stock market manipulation scheme involving InterOil (NYSE: IOC), John Thomas Financial, and Clarion Finanz AG. I believe that InterOil with the assistance of Clarion Finanz concealed John Thomas Financial’s involvement in helping it raise $95 million through a private placement of convertible debt securities.

Clarion Finanz acted as a buffer between InterOil and John Thomas Financial to help InterOil hide John Thomas Financial's role in raising funds. Afterwards, InterOil filed false and misleading reports with the Securities and Exchange Commission in an effort to conceal John Thomas Financial’s role in helping the company raise $95 million in convertible debt.

Carl Caserta, who in 1991 was barred by the Securities and Exchange Commission from “association with any broker, dealer, or investment advisor” played a role in helping InterOil use John Thomas Financial to obtain funds from investors. InterOil, John Thoma…

Class Action Complaint against Amedisys uses Sarbanes-Oxley Act Corporate Governance Provisions to Battle Alleged Corporate Malfeasance

Updated at bottom of article

Last week, Pomerantz Haudek Grossman & Gross LLP filed a class action lawsuit against Amedisys (NASDAQ: AMED) charging the company, its CEO William F. Borne and its CFO Dale E. Redman with securities fraud.  In the next few days, Bernstein Liebhard LLP and Finkelstein Thompson LLP filed similar class action lawsuits against the company. The lawsuits allege that Amedisys abused Medicare's reimbursement system for at-home therapy care based on a compelling analysis of company revenues in an April 27 Wall Street Journal article.

In addition, the lawsuits innovatively utilize a provision under Section 406 of the Sarbanes-Oxley Act 2002 which provides a back-door way for investors to force ethical corporate governance and sue public companies for malfeasance. That provision requires Senior Financial Officers, such as the CEO and CFO of public companies, to abide by a strict code of ethics which broadly defines corporate malfeasance and effectively makes…