Wednesday, February 22, 2012

Overstock.com Was Ineligible to File a Registration Statement Last December

Yesterday, I described how Overstock.com (NASDAQ: OSTK) defaulted on its loan covenants with U.S. Bank because of its failure to a file timely report with the Securities and Exchange Commission. In addition, I detailed how the company improperly delayed disclosure of the loan default until it could obtain a waiver from the bank. Now it appears that Overstock.com’s failure to file a timely report with the S.E.C. made it ineligible to file its Form S-3 registration statement on December 9, 2011 where it is seeking to raise additional funds to keep the company afloat. In addition, Overstock.com's continuing failure to comply with S,E.C. rules could indicate that is has a material weakness in internal controls. The company seems to be incapable of complying with S.E.C. rules even as it faces a continuing investigation by the regulator into previous financial shenanigans.

Background

On March 21, 2011, Overstock.com filed a proxy statement and asked its shareholders 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, three years, or to abstain from voting. The vote was “not binding.” The Board of Directors could ultimately decide, "...to 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. At the annual meeting on May 4, 2011, shareholders approved an “advisory vote” every three years.

On Friday, January 6, 2012, Overstock.com filed an amended 8-K report and disclosed that its Board reached 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 turned out that the amended 8-K report filed on January 6, 2012 was filed late. It should have been filed on September 30, 2011. Since the company failed to file timely reports with the S.E.C., it defaulted on its loan covenants with U.S. Bank. The company failed to disclose that its amended 8-K report was filed late and it failed to notify investors about the loan default. 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). Instead, Overstock.com improperly delayed disclosure of its failure to file timely reports with the S.E.C. and its loan default until February 17, 2012, a day after it resolved its default issues with U.S. Bank. The bank granted the company a waiver of default “effective as of September 30, 2011”, the same day that the amended 8-K report was supposed to be filed.

Ineligible to file a Form S-3 Registration Statement

Overstock.com’s late filing of the amended 8-K report made it ineligible to file its Form S-3 Registration Statement on December 9, 2011. Overstock.com held its annual meeting on May 4, 2011. Overstock.com filed its amended 8-K report on January 6, 2012. Under Item 5.07 (d) of S.E.C. rules for filing an 8-K report, a company’s decision on the frequency of its advisory vote involving executive compensation must be disclosed:

(d) No later than one hundred fifty calendar days after the end of the annual or other meeting of shareholders at which shareholders voted on the frequency of shareholder votes on the compensation of executives....

Since the S.E.C rules cite “calendar days” rather than business days, it was required to file an amended 8-K report by Friday, September 30, 2011, 149 "calendar days" after the annual meeting of shareholders. U.S. Bank waived the default stemming from the late filing “effective as of September 30, 2011.” Therefore, the company did not comply with S.E.C. rules under Item 5.07 due to its late filing of the amended 8-K report.

On December 9, 2011, Overstock.com filed a Form S-3 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. On December 20, 2011, the S.E.C. gave Overstock.com a "Notice of Effectiveness" on its Form S-3 registration statement. On December 22, 2011, Overstock.com filed its prospectus with the S.E.C. When Overstock.com made those filings pursuant to its Form S-3 Registration Statement it was not current on all its filings as required by S.E.C. rules. Its amended 8-K report filed on January 6, 2012, should have been filed on September 30, 2011 to comply with S.E.C. rules under Item 5.07.

Under S.E.C. rules, a company that does not comply with Item 5.07 on an 8-K report loses its eligibility to file a Form S-3 registration statement. According to an article written in the New York Law Journal written by Guy P. Lander:

Companies must disclose their decisions as to how often they will hold say-on-pay votes going forward either in the Form 8-K disclosing their annual meeting voting results or in an amendment to that Form 8-K. If companies choose the amendment to the Form 8-K, it must be filed led no later than 150 calendar days following their annual meetings and at least 60 calendar days before their deadlines for submission of shareholder proposals. Missing the filing deadline for this Item 5.07 of Form 8-K will cause issuers to lose their eligibility to file Form S-3 registration statements (absent a subsequent waiver from the SEC Staff). [Emphasis added.]

Overstock.com was not eligible to file its Form 3 Registration Statement because there is no safe harbor resulting from a failure to comply with Item 5.07 on Form 8-K. According to S.E.C. rules:

Item 5.07 is not among the list of items subject to the safe harbor from liability in Rules 13a-11 [17 CFR 240.13a-11] and 15d-11[17 CFR 240.15d-11] under the Exchange Act. In addition, companies that fail to file a timely report required by Item 5.07 will lose their eligibility to file Form S-3 registration statements. [Page 49, Footnote 168].

Does Overstock.com have a material weakness in internal controls?

Overstock.com's failure to file a timely amended 8-K report could be indicative of a material weakness in internal controls. For example, the S.E.C. Division of Corporation Finance asked China Lithium Technologies (CLTT:OTC BB) to explain why certain problems, including a "Failure to file timely a current report on Form 8-K pursuant to Item 5.07...", was not indicative of a weakness in disclosure controls and procedures. The company responded by saying, "...our amended 2010 Form 10-K will include an acknowledgement of the material weaknesses in our disclosure controls and procedures." (See pages 8 and 9.).

Overstock.com should file an amended 10-Q report for the quarter ended September 30, 2011. On the very first page of the 10-Q report the company inaccurately asserted that it filed all required reports.

Ongoing S.E.C. investigation into fabricated earnings

Patrick Byrne
Over the last several years, this blog has detailed various illegal accounting shenanigans used by Overstock.com 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 Overstock.com 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 Overstock.com'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, Overstock.com was forced to restate its financial reports to correct various GAAP violations initially identified in this blog. The S.E.C. investigation of Overstock.com is ongoing.

California District Attorneys allege consumer fraud

Overstock.com 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 Overstock.com to turn over information to the California District Attorneys.

Written by:

Sam E. Antar

Disclosure

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. My past sins are unforgivable.

I do not own any Overstock.com securities long or short.

Tuesday, February 21, 2012

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

Last Friday after the stock market closed, Overstock.com (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 Overstock.com'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 Overstock.com 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, Overstock.com 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. Overstock.com 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.

Background

On March 21, 2011, Overstock.com 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, "...to 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 Overstock.com 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, Overstock.com 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, Overstock.com 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, Overstock.com 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, Overstock.com 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, Overstock.com'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 Overstock.com 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, Overstock.com 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, Overstock.com's soon to be reported fourth quarter numbers continued their downward trend. In late December 2011, Overstock.com 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.

Overstock.com 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 Overstock.com’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, Overstock.com 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 Overstock.com 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 "Overstock.com continued...." by the Davian Letter").

On December 14, 2011, the Overstock.com 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 Overstock.com 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.

Overstock.com 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 Overstock.com 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 Overstock.com 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 Overstock.com'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, Overstock.com was forced to restate its financial reports to correct various GAAP violations initially identified in this blog. The S.E.C. investigation of Overstock.com is ongoing.

California District Attorneys allege consumer fraud

Overstock.com 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 Overstock.com to turn over information to the California District Attorneys.

Written by:

Sam E. Antar

Update


Overstock - Another Default? by The Davian Letter


Recommended Reading

TheStreet.com: Facebook's Biggest Surprise -- No Funny Numbers by Gary Weiss

JOSB and the conflicting inventory accounting disclosures by The Davian Letter

Disclosure

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 Overstock.com securities long or short and have no position in any of Francis Chou's funds.

Monday, February 06, 2012

Francis Chou's Funds Taking a Bath on Overstock.com Common Stock

Various mutual funds managed by Canadian investor Francis Chou have lost about $34.328 million to date on their collective investments in Overstock.com (NASDAQ: OSTK) based on an examination of publicly available documents. Those mutual funds currently own 3,260,738 shares of Overstock.com common stock at a total approximate cost of $56,989,945, an average cost of $17.48 per share. On Monday, Overstock.com 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, Overstock.com 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 Overstock.com 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 Overstock.com 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, Overstock.com was forced to restate its financial reports to correct various GAAP violations identified in this blog. The S.E.C. investigation of Overstock.com is ongoing.

Patrick Byrne
Overstock.com 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 Overstock.com to turn over information to the California District Attorneys.

In the first nine months of 2011, Overstock.com 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, Overstock.com's soon to be reported fourth quarter numbers continued their downward trend. In late December 2011, Overstock.com 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, Overstock.com 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 Overstock.com 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 "Overstock.com continued...." by Davian Letter")

As of September 30, 2011, Chou Associates Management 2,310,209 owned Overstock.com 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 Overstock.com 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 Overstock.com 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 Overstock.com 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, Overstock.com common shares closed at $6.95 per share.

Written by:

Sam E. Antar

Disclosure

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 Overstock.com securities long or short and have no position in any of Francis Chou's funds.