Saturday, November 23, 2013

Did Tesla violate S.E.C. rules by failing to disclose the retirement of George Blankenship?

Last Thursday, Silicon Beat reported that George Blankenship retired from his position as Vice President, Worldwide Retail at Tesla Motors (NASDAQ: TSLA). According to Blankenship's LinkedIn profile, he had already left the company in October 2013. Tesla's most recent proxy report listed Blankenship as a "named executive officer." The retirement, appointment, resignation, or termination of a registrant’s "named executive officer" is required to be disclosed within four business days of such a departure on Form 8-K. Therefore, it appears that the company should have disclosed his retirement no later than November 6, 2013. So far, Tesla has made no such disclosure.

On November 21, 2013, Silicon Beat reported that:

Blankenship is still listed as Vice President, Sales & Ownership Experience on Tesla’s website. But his LinkedIn profile now says he is “Director of Smiles for the Blankenship Family” and he apparently left Tesla a few weeks ago.

Shortly after Silicon Beat's exclusive report, Blankenship's name was finally removed from Tesla's list of officers on its website.

George Blankenship's LinkedIn profile says he was employed at Tesla until October 2013 and was "done at Tesla" in November 2013. See below (click on image to enlarge):


When Tesla finally gets around to filing an 8-K report, will it claim that Blankenship did not retire in October 2013 as he reported in his Linkedin profile? That seems to be the only way Tesla can claim that it did not violate S.E.C. disclosure rules governing the departure of a named executive officer.

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. I do not want or seek forgiveness for my vicious crimes from my victims. My past sins are unforgivable.

There is a saying, "It takes one to know one." I've provided professional work for the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify fraud and catch white-collar criminals. Often, I refer cases to them as an independent whistleblower. In addition, I teach white-collar crime classes for various government entities, professional organizations, businesses, and colleges and universities. Recently, I've helped the AICPA Fraud Task Force develop better methods for detecting fraud.

I do not own any Tesla securities long or short.

Monday, October 28, 2013

Is Overstock.com Trying to Cook The Books, Again?

I hoped that Overstock.com (NASDAQ: OSTK) had finally learned the error of its ways. Now it seems that the company has again resorted to accounting shenanigans to inflate its reported income.

Background

From Q2 2007 to Q2 2008, Overstock.com used an improper EBITDA calculation to materially overstate its pro-forma income in violation of Securities and Exchange Commission Regulation G. From Q4 2008 to Q3 2009, the company violated Generally Accepted Accounting Principles (GAAP) and materially overstated its reported earnings. I endured malicious personal attacks, cyber-stalking, pretexting, and threats to my personal safety from Overstock.com’s gun-toting CEO Patrick Byrne and his paid thugs in retaliation for exposing its illegal accounting practices. In each case, I complained to the Securities and Exchange Commission. Eventually Overstock.com was forced to stop using those illegal accounting practices. It seems that Overstock.com is up to its old tricks again.

Executive summary

In the three month period (third quarter) ended September 30, 2013, Overstock.com claimed that its pretax income was $3.624 million compared to $2.824 million in the same quarter of 2012, an $800,000 increase over the previous year. However, the validity of the increase in pretax income is questionable.

In 2013, Overstock.com quietly changed the useful life of certain fixed assets. The company did not inform investors in its 2013 financial reports that the useful life of its computer software and computer hardware costs was higher in 2013 than it was in 2012, leaving the impression that their useful lives were the same in both years. It simply changed the useful life numbers without providing an explanation. Since it was able to spread depreciation and amortization expenses over a longer period of time, it was able to report a lower depreciation and amortization expense in each quarter and inflate its reported profits.

Furthermore, there is a $700,000 numerical discrepancy in the amount reported for capitalized internal use-software and website development costs in the third quarter. There is another $400,000 numerical discrepancy in the amount reported for amortization expense associated with internal use-software and website development in the third quarter.

Moreover, in the third quarter of 2013, Overstock.com reduced its accrual for loss contingencies by $300,000 from the previous quarter despite a growing number of serious lawsuits against the company. If the company reversed its previous estimate of loss contingencies, it added $300,000 to its third quarter pretax income.

At the very least it appears that a substantial part of the $800,000 increase in pretax income would have disappeared if Overstock.com had not changed the useful life of certain fixed assets. It's possible that Overstock.com could have reported a decline in pretax income. The third quarter numbers don't add up. The numbers cannot be trusted. These accounting irregularities could be a red flag for a material weakness in internal controls over financial reporting.

Depreciation and amortization accounting

Fixed assets are required to be depreciated or amortized over their “estimated” useful lives. For example, a company purchases computer software for $10,000. It amortizes computer software over its 2 year useful life. Initially, the computer software is reported on the balance sheet as fixed asset. No expense is initially recognized on the income statement. Over the next two years, the company recognizes $5,000 per year of amortization expense in its income statement ($10,000 cost divided by 2 year useful life).

If a company lengthens the useful life of a fixed asset, it spreads out depreciation and amortization expense over a longer period of time. Therefore, it can report higher profits by recognizing a lower depreciation and amortization expense in each period. For example, if a company changes its policy to amortize computer software over 4 years instead of 2 years, it can reduce its amortization expense from $5,000 per year to $2,500 per year ($10,000 cost divided by 4 year useful life). Therefore, the company can increase its profits by $2,500 per year in the first 2 years it owns the software by extending the useful life from 2 years to 4 years.

As the amount of fixed assets increase on the balance sheet, the amount reported for depreciation and amortization expense should grow too. However, after analyzing Overstock.com's numbers, I discovered that its fixed assets increased year-over-year, while its depreciation and amortization expense decreased year-over-year. The numbers grew in opposite directions. That occurs when a company is either reporting an erroneous amount of depreciation and amortization expense or when it lengthens the useful life of its fixed assets.

Overstock.com buries changes in the useful life of fixed assets

To find out how Overstock.com changed the useful life of its fixed assets, you have to compare different S.E.C. flings over two years because the company did not fess up and tell investors about the change. Buried under 72 pages of disclosures and another 9 page of footnotes in Overstock.com's 2012 10-K report, we finally learn that the useful life of computer software was 2 to 3 years and the useful life of computer hardware was 3 years in 2012. See below (highlights added):

Overstock.com 2012 10-K report

However, Overstock.com's 10-Q reports issued for each quarter of 2013 show a different useful life for computer software and computer hardware than was reported in 2012. Buried on page 9 of the first two quarter 10-Q reports and page 10 of the third quarter 10-Q report, Overstock.com revealed that the useful life of computer software was 2 to 4 years. However, the useful life of computer software was 2 to 3 years in 2012. In those same 2013 10-Q reports, the useful life of computer hardware was 3 to 4 years. However, the useful life of computer equipment was only 3 years in 2012. (Source: Q1 10-Q, Q2 10-Q, and Q3 10-Q reports)

In each of those 2013 10-Q reports, Overstock.com disclosed:

Fixed assets

Fixed assets, which include assets such as technology infrastructure, internal-use software, website development, furniture and fixtures and leasehold improvements, are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related assets or the term of the related capital lease, whichever is shorter, as follows:


Note: Yellow highlights were added for emphasis

Overstock.com's fixed asset disclosure leaves the impression that the useful life of its computer software and computer hardware was the same in both 2013 and 2012. The company did not inform investors that the useful life of computer software and computer hardware was higher in 2013 than it was in 2012. It simply changed the numbers without explanation. It did not provide a year-to-year comparison of the useful life of its fixed assets in its 2013 financial reports.

Third quarter 2013: Higher level of fixed assets but lower depreciation and amortization expense

In the three month period (third quarter) ended September 30, 2013, Overstock.com claimed that its pretax income was $3.624 million compared to $2.824 million in the same quarter of 2012. Pretax income increased by $800,000 over the previous year. However, the validity of the increase in pretax income is questionable.

In the three month period ended September 30, 2013 (third quarter) depreciation and amortization expense was $3.307 million compared to $3.839 million in the same three month period of the previous year. Depreciation and amortization expense decreased by $532,000 year-over-year.

At the end of the third quarter of 2013, Overstock.com reported fixed assets of $26.892 million on its balance sheet compared to $23.034 million at the end of the same quarter of the previous year. The amount of fixed assets on its balance sheet was $3.858 million higher in 2013 than it was in 2012. Depreciation and amortization expense was $532,000 lower despite a $3.858 million higher amount of fixed assets.

Third quarter 2013: Numbers don't add up

The amount of internal-use software and website development costs that the company claimed it capitalized for the entire nine month period (first three quarters) ended September 30, 2013 is $700,000 lower than the totals it claimed that it capitalized in each of the three quarters of the year. In the previous quarter ended June 30, 2013, the six month total equaled the total reported for the first and second quarters. Therefore, the $700,000 discrepancy appears to impact its third quarter 2013 numbers.

Moreover, amortization expense for internal-use software and website development costs that the company claimed it reported for the entire nine month period (first three quarters) ended September 30, 2013 is $400,000 higher than the totals it claimed it amortized in each of the three quarters of the year. In the previous quarter ended June 30, 2013, the six month total equaled the total reported for the first and second quarters. Therefore, the $400,000 discrepancy appears to impact its third quarter 2013 numbers.

According to the third quarter ended September 30, 2013 10-Q report:

During the three months ended September 30, 2013 and 2012, we capitalized $3.3 million and $3.0 million, respectively, of costs associated with internal-use software and website development, both developed internally and acquired externally. Amortization of costs associated with internal-use software and website development was $1.8 million and $2.0 million for those respective periods. During the nine months ended September 30, 2013 and 2012, we capitalized $8.1 million and $6.8 million, respectively, of such costs and had amortization of $5.9 million and $6.3 million for those respective periods. [Emphasis added.]

In three month period ended September 30, 2013, Overstock.com claimed that it capitalized $3.3 million of costs associated with internal-use software and website development. In the nine month period ended September 30, 2013, the company claimed that it capitalized $8.1 million of such costs.

In the three month period ended September 30, 2013, Overstock.com claimed that its amortized $1.8 million of internal-use software and website development costs. In the nine month period ended September 30, 2013, the company claimed that it amortized $5.9 million of such costs.

In the second quarter ended June 30, 2013 10-Q report, Overstock.com claimed that:

During the six months ended June 30, 2013 and 2012, we capitalized $5.5 million and $3.9 million, respectively, of such costs and had amortization of $3.7 million and $4.3 million for those respective periods. [Emphasis added.]

Let's do some basic math.

During the six month period ended June 30, 2013, Overstock.com capitalized $5.5 million of costs associated with internal-use software and website development. In the three month period ended September 30, 2013 it claimed that it capitalized an additional $3.3 million of such software costs. Therefore, Overstock.com should have reported a nine month total of $8.8 million. However, it reported a nine month total of $8.1 million, leaving a $700,000 discrepancy in its third quarter numbers.

During the six month period ended June 30, 2013, Overstock.com amortized $3.7 million of costs associated with internal-use software and website development. In the three month period ended September 30, 2013 it claimed that it amortized an additional $1.8 million of such software costs. Therefore, Overstock.com should have reported a nine month total of $5.5 million. However, it reported a nine month total of $5.9 million, leaving a $400,000 discrepancy in its third quarter numbers.

Third quarter 2013: Reduction in amounts accrued for loss contingencies

In the three month period (third quarter) ended September 30, 2013, Overstock.com reduced its accrual for loss contingencies by $300,000 from the previous quarter despite a growing number of serious lawsuits against the company. If the company reversed its previous estimate of loss contingencies, it added $300,000 to its third quarter pretax income.

In the third quarter ended September 30, 2013 10-Q report, Overstock.com disclosed:

We establish liabilities when a particular contingency is probable and estimable. At September 30, 2013, we have accrued $2.6 million in light of these probable and estimable liabilities. It is reasonably possible that the actual 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. [Emphasis added.]

In the second quarter ended June 30, 2013 10-Q report, Overtock.com reported:

We establish liabilities when a particular contingency is probable and estimable. As of June 30, 2013, we have accrued $2.9 million in light of these probable and estimable liabilities. It is reasonably possible that the actual 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. [Emphasis added.]

A loss contingency reserve can be reduced two ways. Either the company paid out money it previously accrued (no effect on income) or it changed its estimate of contingent liabilities (reversed prior accruals of loss contingency expense). Such a change in estimate would increase its pretax income. Was Overstock.com trying to further tweak its third quarter numbers?

Conclusion

Given Overstock.com's prior history of accounting violations and its past malicious retaliatory actions against journalists, independent whistleblowers like me, and other critics, investors should be skeptical of its accounting and financial disclosures.

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. I do not want or seek forgiveness for my vicious crimes from my victims. My past sins are unforgivable.

There is a saying, "It takes one to know one." I've provided professional work for the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify fraud and catch white-collar criminals. Often, I refer cases to them as an independent whistleblower. In addition, I teach white-collar crime classes for various government entities, professional organizations, businesses, and colleges and universities. Recently, I've helped the AICPA Fraud Task Force develop better methods for detecting fraud.

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

Thursday, October 03, 2013

Is Medifast a Cry Baby or a Corporate Bully?

This is the way corporate bullying works. Last Monday, September 30, 2013, I reported that Medifast (NYSE: MED), its former CFO, and the engagement partner who supervised its audits for its former accounting firm agreed to the entry of separate Cease-and-Desist Orders by the Securities and Exchange Commission for various violations of securities laws. On Wednesday, October 2, 2013, I received a letter from its lawyers with the following barely veiled threat, “…The Company, is not adverse to taking decisive action to redress false accusations against its business.”

Background

On September 19, 2013, Medifast (NYSE: MED) disclosed that on the previous day it consented to an entry of a Cease-and Desist Order and agreed to pay a $200,000 civil money penalty in connection with an "investigation" by the Securities and Exchange Commission into its improper financial reporting from 2006 to 2009. I reported that Medifast's press release and 8-K report made no mention that Brendan N. Connors, its former CFO and Marc G. Nochimson, the engagement partner who had supervised Medifast's audits for its former accounting firm, consented to the entry of separate Cease-and-Desist Orders which alleged improper conduct. Furthermore, I wrote that "I did not find any specific disclosure of the above referenced investigation in any of Medifast's previous filings with the S.E.C. I asked the company for an explanation via email, but it did not respond my request."

Therefore, I asked a reasonable question: "Was Medifast transparent with investors about an S.E.C. investigation?" based on underlying facts that were referenced in the S.E.C.’s three Cease-and-Desist Orders, Medifast’s S.E.C. filings and a certain press release). Medifast responded by having their lawyer Robert A. Giacovas send me a threatening legal letter. The letter cannot cite a single false or erroneous fact that it claims I published. Instead, it resorts to veiled threats, personal attacks, and innuendo in an attempt to distort the meaning of what I wrote and to bully me. [Read a copy of the letter from Robert A. Giacovas, Esq. here.]

Medifast's letter and my response

If I may be so bold as to summarize their lawyer’s letter, they are complaining that I “did not find any specific disclosure of the [SEC] investigation in any or Medifast’s previous filings with the S.E.C.” They claim “the Company cannot locate any email” from me asking them for an explanation. They requested that I forward them "the email that was supposedly sent to the Company and went unanswered." [Emphasis added.]

On September 20, 2013 at approximately 3:00 AM, I filled out an online inquiry for Medifast's Investor Relations Department:

Did Medifast make any PRIOR disclosure referenced in the 8-K report filed on 9/13/2013?
Here is the link:
http://www.sec.gov/Archives/edgar/data/910329/000114420413051618/v355486_8k.htm
I cannot find any disclosure by the company of the referenced SEC investigation PRIOR to the filing of the 8-K.
Please respond via email.

See the screen shot below (Click on image to enlarge it):




At about 3:01 AM ET, I received the following confirmation that my inquiry was received. See the screen shot below (Click on image to enlarge it):



In addition, on September 20, 2013 at 4:41 AM ET, I sent an email to Medifast’s Investor Relations Department which made the same request: [Read the full email here.].

Question: Did Medifast make any disclosure of the above referenced investigation into Medifast's financial reporting in its previous filings with the S.E.C.? I cannot find any reference to the above referenced investigation in any of Medifast’s filings with the S.E.C. prior to the filing of the 8-K report referenced above.

I’d appreciate a prompt answer to this question via email.

However, Medifast did not respond to me as of the time I published my blog 10 days later on September 30, 2013. If Medifast cannot find my online inquiry and email detailed above, I respectfully suggest that apparently either someone at the company is not being truthful to them or it has a problem with its information technology infrastructure.

Medifast's letter does not deny that it failed to report the existence of an S.E.C. investigation prior to the issuance of a Cease-and-Desist Order, press release, and 8-K filing. Instead, it explains that Medifast had no specific legal obligation to disclose such an investigation:

However, there is no statute, regulation, or rule that explicitly imposes an affirmative duty upon a public company to disclose the existence of an SEC investigation.

The letter says:

First, you state that you "did not find any specific disclosure of the [SEC] investigation in any of Medifast's previous filings with the SEC." The statement and your emphasis on the word "any" is clearly meant to convey that the Company has somehow not made proper disclosures to investors."

Apparently, the letter claims that I inferred that Medifast had broken the law by not reporting the existence of an ongoing investigation prior it consenting to the entry of a Cease-and-Desist Order. I made no such claim or inference. I asked a reasonable question: “Was Medifast transparent with investors about an S.E.C. investigation?” For example, many public companies report the existence of confidential S.E.C. investigations. Whether or not public companies should disclose the existence of ongoing S.E.C. investigations has been a matter of endless public debate. Therefore, even if we accept Medifast’s contention that by the letter of the law it was not required to report the existence of the S.E.C. investigation, it is still reasonable to ask a question about whether it was transparent with investors in communicating with them.

In addition, I reported that Medifast did not disclose in its press release and 8-K filing that its former CFO and the former engagement partner who supervised its audits also consented to the entry of separate Cease-and-Desist Orders. Their letter claims that I inferred that Medifast “purposely omitted mention of these other settlements." [Emphasis added]. As I detailed above, Medifast claimed that it had no specific legal obligation to report the S.E.C. investigation prior to it accepting the entry of a Cease-and Desist Order against it. Is Medifast now claiming it would have reported the other two Cease-and-Desist orders if they had known about them prior to its press release and filing of an 8-K report? If that is so, Medifast could have issued another press release and filed an amended 8-K report with the S.E.C. if it had chosen to do so. It did not.

The letter goes on to say that:

For your information, as a matter of policy, the SEC does not disclose the status of any investigations and settlement discussions with other potential parties (and it did not in this case).

The letter claims that:

The Company learned about details of those settlements at the same time as everyone else – when they were released by the S.E.C.

Those statements raise another reasonable question. Their letter is silent on whether Medifast knew that its former CFO and the engagement partner who supervised its audits were being simultaneously investigated by the S.E.C. Is Medifast inferring that it did not know that the S.E.C. was investigating its former CFO and the engagement partner who handled its audits until after it learned that they consented to the entry of Cease-and-Desist Orders? If Medifast did know that its former CFO and the engagement partner were being investigated by the S.E.C., wouldn't its lawyers be in contact with their lawyers to monitor the ongoing investigation? Again, these are reasonable questions based on the information presented.

Furthermore, Medifast, its former CFO, and the engagement partner who supervised its audits for its former accounting firm all consented to Cease-and-Desist Orders on the same day: September 18, 2013. The respective Cease-and Desist Orders entered against all three parties contain sequential Securities Exchange Act of 1934 file numbers, sequential Accounting and Auditing Enforcement Release numbers, sequential Administrative Proceeding file numbers, and sequential URLs to access them on the internet. A day later, on September 19 at around 9:19 AM Medifast issued a press release which reported its Cease-and-Desist Order, but omitted reference to the other two orders. Its 8-K filing with the S.E.C., which also omitted reference to the other two Cease-and-Desist Orders, was accepted by the S.E.C. later that same day at 4:59 PM. Based on that sequence of events, it’s a reasonable question to ask why Medifast did not disclose the two Cease-and-Desist Orders in its initial press release and 8-K report. In any case, as I suggested above, Medifast could have issued a new press release or filed an amended 8-K report disclosing the other two Cease-and-Desist orders if it chose to do so. It did not. There still remains a reasonable question to ask about whether Medifast was transparent in communicating with investors even if Medifast complied with S.E.C. reporting requirements on this issue. [Cease-and-Desist against Medifast, Cease-and-Desist against Brendan Connors, and Cease-and-Desist against Marc Nochimson]

What further amuses me about Medifast's bullying is their lawyer's apparent blundering. For example, the letter states:

Your post, which begins with the question – “Was Medifast transparent with investors about an S.E.C. investigation?” – then contains a number of statements that answers the question in the affirmative, thereby raising specter of some improper conduct by Medifast surrounding the entry of a cease and desist order with the Securities and Exchange Commission (“SEC’). [Emphasis added.]

Apparently, the letter erroneously claims that I answered my own question “in the affirmative” which means that I implied that Medifast engaged in proper conduct while it goes on to erroneously claim that I answered the question in the negative, meaning that Medifast engaged in improper conduct. I'm confused by their language. A company can follow the letter of the law and still not be transparent as I understand the term to mean. In any case, I did not say that Medifast was transparent or that it was not transparent. I simply asked a reasonable question about whether Medifast was transparent with investors and published the underlying facts accurately to help readers reach their own conclusion.

The letter references a certain defamation lawsuit Medifast brought against "...your friend and twice convicted felon Barry Minkow and (others)." I thought Minkow was a friend, but he is no longer a friend anymore and he has not been a friend for years. In any case, Medifast's defamation lawsuit against Barry Minkow was dismissed, although it is appealing the ruling. (See 10-Q report - Contingencies on page 14.)

Finally, Medifast requested that “And if you are truly interested in full transparency, you should publish this letter for your readers.” Well, I am interested in transparency. I made an upload of their letter available in the first paragraph of this blog, provided links to it several times above, and it can be uploaded here, too. In the spirit of the First Amendment to the Constitution of the United States, I welcome the debate. Back in 2012, I defended a government employee's right to free speech after he was fired for saying personal insults about me:

When Antar was asked about the critique of his talk and Mr. Kaplan’s firing his reaction was, “He has every right to voice his opinion of me. It was wrong for the City of Philadelphia to fire him for what he said about me."

In my humble opinion, Medifast appears to be thin-skinned. They are acting like crybabies. However, Medifast, like me has a constitutional right to the freedom of speech. Their opinions like mine here have a right to be heard. However, I will not allow them to bully me.

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. I do not want or seek forgiveness for my vicious crimes from my victims. My past sins are unforgivable.

There is a saying, "It takes one to know one." I've done professional work for the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify fraud 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. Recently, I've helped the AICPA Fraud Task Force develop better methods for detecting fraud.

I do not own any Medifast securities long or short.

Monday, September 30, 2013

Was Medifast transparent with investors about an S.E.C. investigation?

About two weeks ago, Medifast (NYSE: MED) disclosed that it consented to an entry of a Cease-and Desist Order and agreed to pay a $200,000 civil money penalty in connection with an "investigation" by the Securities and Exchange Commission into its financial reporting from 2006 to 2009. However, Medifast's press release and 8-K report made no mention that Brendan N. Connors, its former CFO and Marc G. Nochimson, the engagement partner who had supervised Medifast's audits, consented to the entry of separate Cease-and-Desist Orders which alleged improper conduct. Furthermore, I did not find any specific disclosure of the above referenced investigation in any of Medifast's previous filings with the S.E.C. I asked the company for an explanation via email, but it did not respond my request.

Medifast pays a $200,000 civil penalty

Both Medifast's press release and identical 8-K report did not mention that its former CFO and the engagement partner who supervised its audits had consented to the entry of separate Cease-and-Desist Orders. They only stated that:

On September 18, 2013, Medifast, Inc. (the “Company”) reached a settlement with the Securities and Exchange Commission (the “SEC”) in connection with an SEC investigation of certain items in the Company’s financial statements for the years 2006 through 2009 that led to the Company’s restatement of such financial statements in 2010 and 2011. Under the settlement, the Company, without admitting or denying the SEC’s findings, consented to the entry of a cease-and-desist order prohibiting the Company from committing or causing any violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, as amended, and Rules 12b-20 and 13a-1 thereunder and agreed to pay a civil penalty of $200,000. As noted in the order instituting the proceeding, the SEC considered the remedial acts undertaken by the Company, including its enhancement of internal controls and retention of additional accounting personnel. [Emphasis added.]

According to the Cease-and-Desist Order entered against Medifast, it understated income tax expense from 2006 to 2008 and it overstated revenue and understated certain other expenses from 2008 to 2009. It said:

Medifast’s improper accounting practices and internal controls deficiencies resulted in Medifast filing periodic reports with the Commission for the years 2006 through 2009 which materially overstated its income and understated its expenses. [Emphasis added.]

For example, Medifast "did not comply with FAS 109" governing the proper accrual of income tax expense and deferred tax liabilities. From 2006 to 2008, Medifast understated income tax expense and "materially" overstated net income "by an average of 12.4% over the three affected years." The order revealed that Medifast's internal income tax calculations did not match up to the numbers it reported:

9. Moreover, Medifast’s reported income tax provision in its Form 10-Ks for the years 2007 and 2008 were not supported by Medifast’s internal income tax provision worksheets for those years. These worksheets were used to calculate the Company’s current and deferred taxes at year-end for financial statement and GAAP purposes. [Emphasis added.]

According to a separate Cease-and-Desist Order entered against former CFO Brendan N. Connors, his income tax calculations did not match the numbers Medifast reported in its financial reports:

9. In addition, Connors’ tax calculations as entered on the Tax Spreadsheets differed materially from the current and deferred income tax provisions that were reported in Medifast’s Form 10-K filings. On the Tax Spreadsheet for 2007, for example, Connors calculated the Company’s current tax provision as $1,805,708 and a total deferred tax asset of $1,079,321. In contrast to those numbers, however, Medifast’s Form 10-K for 2007 reported the current income tax provision as $1,233,000 and a deferred tax expense of $473,000. On Medifast’s Tax Spreadsheet for 2008, Connors calculated a current income tax provision of $2,578,107 and a total deferred tax asset of $1,321,072, but Medifast’s Form 10-K for 2008 reported the current income tax provision as $1,711,000 and a deferred tax expense of $704,000.

10. In fact, both the reported figures for Medifast’s income tax provision in its 2007 and 2008 Forms 10-K and the tax provision calculations prepared by Connors on the Company’s Tax Spreadsheets for those years were wrong, and Medifast’s income tax expense increased significantly... [Emphasis added.]

In other words, the S.E.C. said that Medifast reported a lower income tax provision than was calculated by Connors is 2007 and 2008. Both the reported numbers and calculations ended up to be wrong, but in the end Medifast still understated its income tax expense and materially overstated net income.

Former Medifast CFO Brendan Connors to pay a $40,000 civil penalty to settle Cease-and-Desist Order

Back on November 12, 2012, Medifast disclosed that Brendan N. Connors resigned as its CFO "to pursue other interests." No mention was made of any S.E.C. investigation or possible improper conduct in its press release. Chairman and Chief Executive Officer, Michael C. MacDonald gave him a nice sendoff stating:

“On behalf of our employees and the Board we would like to thank Brendan for his contributions to the growth of Medifast over the last seven years,” commented Mr. MacDonald. [Emphasis added.]

However, the Cease-and-Desist Order entered against Connors said that:

Connors’ improper conduct resulted in Medifast filing periodic reports with the Commission for the years 2006 through 2008 that materially understated its tax expense and overstated its net income after tax. [Emphasis added.]

Furthermore, the Cease-and-Desist order said that:

...the Commission finds that Connors violated Rule 13b2-1 of the Exchange Act and willfully aided and abetted and was a cause of Medifast’s violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-thereunder. [Emphasis added.]

Connors consented to the entry of a Cease-and Desist Order "without admitting or denying the findings...." The S.E.C. usually settles such actions without an admission or denial. As part of the settlement, he agreed to pay a $40,000 "civil money penalty" and was "...denied the privilege of appearing or practicing before the Commission." He can request a reinstatement after one year. Connors is a Certified Public Accountant.

Cease-and-Desist Order entered against audit engagement partner Marc G. Nochimson

The Cease-and-Desist order entered against audit engagement partner Marc G. Nochimson, said he:

...engaged in improper professional conduct pursuant to Rule 102(e)(1) by failing, in several instances, to comply with the PCAOB Standards in conducting Medifast’s 2006, 2007 and 2008 financial statement audits.... [Emphasis added.]

Nochimson consented to the entry of a Cease-and Desist Order "without admitting or denying the findings...." The S.E.C. usually settles such actions without an admission or denial. As part of the settlement, Nochimson was "denied the privilege of appearing or practicing before the Commission as an accountant." He can request a reinstatement after one year.

Marc G. Nochimson was a partner at Bagell, Josephs, Levine & Company LLC, Medifast's former auditors. In January 2010, Bagell, Josephs, Levine combined with Friedman LLP which took over as Medifast's auditors. Nochimson joined Friedman LLP when the firms combined. On April 16, 2010, Medifast dismissed Friedman LLP and hired McGladrey & Pullen, LLP/RSM McGladrey of Baltimore MD to perform audit and tax services.

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. I do not want or seek forgiveness for my vicious crimes from my victims. My past sins are unforgivable.

There is a saying, "It takes one to know one." I've done professional work with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify fraud 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. Recently, I've helped the AICPA Fraud Task Force develop better methods for detecting fraud.

I do not own any Medifast securities long or short.

Tuesday, August 27, 2013

Simple Questions for Donald J. Trump

Dear Donald Trump:

Last Saturday, New York Attorney General Eric Schneiderman filed a lawsuit against you, Trump Entrepreneur Initiative LLC formerly known as Trump University LLC, and others alleging that the defendants, "...operated an unlicensed, illegal educational institution" and engaged in other fraudulent practices.

On twitter, you claimed that:

Lightweight NYS Attorney General Eric Schneiderman is trying to extort me with a civil law suit.

According to the lawsuit:

Until May 2010, respondents operated their program illegally as "Trump University," because they were not chartered as a university as required by New York law and were even notified by the New York State Education Department ("NYSED") as early as 2005 that their use of the word "university" violated New York law.

On Good Day NY, Schneiderman said:

He hasn't explained why he operated this thing as a university when it was against law; why they never got their teachers certified. These people weren't experts.

On May 20, 2010 Trump University finally changed its name to Trump Entrepreneur Initiative LLC, five years after the New York State Education Department complained that it was an illegal university.

Three Questions

Question 1: Do you claim that you and your associates did proper due diligence to make sure Trump University was in compliance with New York law?

About five months later, on October 12, 2010, you contributed $12,500.00 to "Schneiderman for Attorney General Inc." As I detailed above, you claimed that Attorney General Eric Schneiderman was trying to "extort" you with a civil suit.

Question 2: Are you also claiming that you paid protection money to Attorney General Eric Schneiderman. If so, would that be an illegal act too?

More recently, on December 3, 2012, Ivanka Trump contributed $500.00 to "Schneiderman 2014." Fox News reported that:

The legal team also says that the attorney general has from the outset of his case “told many, including Ivanka Trump and [the] organization, that his case is weak, that it was going nowhere, but that he has to go through the process to appease people under him.

Question 3: Was Ivanka Trump trading money for inside information on the investigation?

Please note that I am not implying that you or anyone did anything wrong nor am I making any allegations about you or anyone else. I am just asking simple questions based on what you said, what has been reported in the media, and information provided by the New York State Board of Elections.

Very truly yours,

Sam E. Antar

PS: Please give your attorney George Ross my warmest regards.

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. More recently, I've helped the AICPA Fraud Task Force develop better methods for detecting fraud. I do not want or seek forgiveness for my vicious crimes from my victims. My past sins are unforgivable.

Tuesday, January 29, 2013

Overstock.com 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 Overstock.com 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
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 whipped, f--cked and driven from the land.” He almost had a fistfight with a lobbyist after Utah legislators repealed his pet bill.

But the severity of Patrick Byrne's issues has only just become evident. He appears to have crossed the red line that separates paranoia from being a figure of speech to a description of actual mental illness.

According to a stunning revelation, buried in a police report that was filed in conjunction with Byrne's recent arrest for trying to carry a concealed weapon on an airplane, Byrne sleeps every night with a semiautomatic Glock 23 .40-caliber pistol by the side of his bed, loaded and ready to kill with lethal hollow-point bullets. [Read copy of police report.]

I am not making this up. Below are the details, which are a matter of public record:

Byrne provides conflicting details to police

Last week, this blog reported that Overstock.com CEO Patrick Byrne was arrested after Transportation Security Administration (TSA) officers found a loaded semi-automatic pistol concealed in his carry-on bag at an airport security checkpoint. The gun was loaded with twelve rounds of ammo. Byrne was handcuffed, according to the newly released police report, and spent several hours in Salt Lake County jail before being released on bail. The incident was so serious that the FBI was notified, though it declined to take action, according to the police report.

At first, the police said that that Byrne told them “he did not know of a gun in his luggage and had no idea where it would be.” The Salt Lake Police Department report provided details of Byrne’s arrest:

DETAILS:
I responded to Terminal Two screening, lane two on a report of a firearm located in a passengers carry on luggage. TSA officer, Randy Glenn, discovered what appeared to be a firearm in carry on luggage in the lane two baggage x-ray machine. I went over and viewed the X-Ray screen and could make out the clear shape of a firearm with bullets in the magazine. I obtained the bag from the baggage belt and took it over to the passenger, BYRNE, Patrick, and asked him if he knew of a firearm he would be carrying. He stated he did not know of a gun in his luggage and had no idea where it would be. I opened the outer pocket on the luggage and noticed the firearm sitting on top of an Apple Ipad inside. I retrieved the weapon from the bag and cleared it of any possible rounds in the chamber. The chamber was empty and the magazine contained twelve rounds of .40 caliber hollow point bullets. Mr. BYRNE was arrested and transported to the station for further investigation. [Emphasis added.]

Afterwards, when interviewed on tape by police, Byrne admitted to packing his own bag, but said that he “may have slipped” the gun into a carry-on bag that was not used for over a year. Byrne's explanation left open the excuse that someone might have planted the gun in a bag he had not used for over a year:

"Yes, I packed my own bag."
When asked if he put the gun in his bag, "I may have slipped it in there."
"I keep the gun next to my bed every night"
"I haven't used that bag in over a year."
[Emphasis added.]

Obviously Byrne did not think the Salt Lake police would buy that story. Finally, Byrne claimed in a signed voluntary Miranda Statement claiming only that:

It was an accident. It did not know it was in the outer pocket of my bag.

This time, he omitted reference to a bag which he previously claimed was not used in over a year.

Byrne’s slippery behavior in police custody is less troubling than his admission, freely given to the police, that he sleeps with a loaded gun by his side.

Byrne’s previous indications of paranoia

In the past, it had been commonplace to refer to Patrick Byrne as being “paranoid,” in the colloquial sense of being unduly suspicious. But a person who keeps a loaded Glock by the side of his bed at night is either: (A) In real danger, or (B) Paranoid in the clinical sense. Byrne obviously meets the second criteria.

For example, on August 11, 2005, Patrick Byrne went into a long rambling rant about a vast criminal conspiracy involving an unidentified mastermind named as the “Sith Lord” who was out to destroy his company. It was widely mocked as a paranoid fantasy. [See transcript.]

Joe Nocera reported in the New York Times that:

...it was an hourlong monologue during which Mr. Byrne laid out a vast, overarching conspiracy, made up of dozens of Wall Street players -- including the New York attorney general, Eliot Spitzer! -- all under the thumb of a mysterious puppet master, whom Mr. Byrne labeled the Sith Lord. He titled the conspiracy ''The Miscreants' Ball,'' an obvious reference to Michael Milken's old Predators' Ball.

Furthermore, Nocera reported that:

In addition to his conspiracy-mongering, Mr. Byrne talked about Stinger missiles, Wayne and Garth, a mysterious Spanish phone message, stuttering and cocaine. (''I'm not a coke head,'' he said, unprompted.) [Emphasis added.]

Bethany McLean reported in Fortune Magazine that:

Byrne's behavior has been so over the top that it would be tempting to dismiss it as a paranoid fantasy. Can you imagine the CEO of another company making a conference call like Byrne's without being sent packing by his directors? [Emphasis added.]

In December 2005, Byrne had told Bloomberg that “You'll probably read a headline that I was stopped with drugs or a dead body.”

In April 2008, Patrick Byrne appeared on Fox Business Channel and accused CNBC of taking orders from hedge funds through via a secret fax machine:

I think that there’s been an unhealthy collusion developed between certain short sellers and certain journalists. They center around your competitor, CNBC. I happen to know for a fact that there’s a fax machine in the CNBC offices where every morning hedge machines, I mean hedge funds send instructions and journalists sit around and take instructions. [Emphasis added.]

Fox Business Channel reporter Liz Claman responded:

Well I worked in CNBC and I never saw that fax machine. [Emphasis added.]

In his Market Watch column, Herb Greenberg wondered whether:

...it’s time to start feeling sorry for Patrick Byrne, the Overstock CEO whose comments at times, such as today, appear to be detached from any sense of reality. [Emphasis added.]

Minyanville reporter Justin Rohrlich suggested that Byrne had "gone wild" and lost his mind.

“Accident” excuse doesn’t add up

In addition to the questions that Byrne’s conduct raises concerning his mental state, the statement that he gave to Salt Lake Airport policy simply does not make sense. It’s difficult to believe that Patrick Byrne didn’t know there was a loaded gun in his carry-on bag, for the following reasons:

1. The gun is very special to Byrne. Until it was confiscated by airport police, he slept with it every night.

2. The photograph released by the airport police, which has not been previously published, shows that the gun was in the front pocket of his carry-on bag, on top of his iPad. (See below):

Patrick Byrne's carry-on bag

3. According to the Glock website, the gun is 7.28 inches in length, 4.99 inches in height, and 1.18 inches in width. It weighs 31.06 ounces (almost 2 pounds) fully loaded.

4. Byrne has claimed in the past that he has a photographic memory.

According to Fortune Magazine:

He has a nearly photographic memory, which he is fond of demonstrating with what he calls his memory trick: If he studies a deck of cards for a couple of minutes, he can recite them back, one by one, in either direction. He can even recite the same list again six months later. [Emphasis added.]

Patrick Byrne had appeared on Utah Now and showed off his photographic memory. He asked interviewer Doug Fabrizio, "What is your birthday?" Fabrizio replied, "July 18." Within seconds, Byrne correctly told Fabrizio the exact day of the week he was born on: Saturday. Byrne further bragged, "When I was seven, I could memorize cards." [See transcript.]

Overstock is late to disclose this serious incident involving its CEO

Initially, Overstock.com was hoping no one would find out about Byrne’s arrest on January 16. News of Byrne's arrest was only disclosed on Friday in a TSA announcement a day later. When interviewed by the Salt Lake Tribune, Overstock.com President Jonathan Johnson claimed that it was all a mistake because Patrick Byrne took the wrong bag to the airport:

"He has told me he regrets and apologizes for the incident," Johnson said. Byrne is a longtime concealed carry permit holder and is very careful and skilled with guns, but he was in a rush to get to the airport Wednesday night and mistakenly believed the weapon was safely in his home, not in a bag he hadn’t used in a while, Johnson said. [Emphasis added.]

However, Johnson’s story falls apart when reading the arrest report. Byrne, who claims to have a photographic memory, packed a gun that he slept with the night before in the front pocket of his carry-on bag on top of his iPad. How could he forget where his gun was?

Patrick Byrne was carrying $3,178 in cash

According to the police report, Patrick Byrne was carrying $3,178 in cash. What was he planning to do with all that cash? Maybe self-medicate?

Should Patrick Byrne be carrying a gun?

Given Byrne’s past bizarre behavior and paranoid fantasies, why is Patrick Byrne permitted to carry a gun? Byrne’s temper tantrums and paranoia has been well documented in the press. His paranoia is no longer a figure of speech. He is literally sick. People sleep with guns by the side of their bed when they have genuine fears of someone coming to kill them.

There are two possibilities: Either Byrne’s life is in danger or he is mentally ill. I’m putting my money on No. 2.

Written by,

Sam E. Antar

Suggested Reading: Overstock.com Hatchet Man Judd Bagley's Downward Spiral: Junkie, Confessed Criminal, Admitted Adulterer by Sam Antar (here), and Closing the File on a Criminal and Junkie Named Judd Bagley by Gary Weiss (here)

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. More recently, I've helped the AICPA Fraud Task Force develop better methods for detecting fraud. I do not want or seek 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, January 22, 2013

Patrick Byrne: Armed, Dangerous, and Delusional

Update article: Overstock.com Hatchet Man Judd Bagley's Downward Spiral: Junkie, Confessed Criminal, Admitted Adulterer

Last Wednesday, Overstock.com (NASDAQ: OSTK) CEO Patrick Byrne was arrested after Transportation Security Administration (TSA) officers found a loaded pistol concealed in his carry-on bag at an airport security checkpoint. He spent several hours in Salt Lake County jail before being released on bail. The company made no disclosure to investors, and news of Byrne's arrest was only disclosed on Friday in a TSA announcement.

Patrick Byrne Mug Shot
This was only the most recent of a series of bizarre incidents involving Patrick Byrne dating back to 2004, when Byrne blamed an unnamed "Sith Lord" for his company's problems, and when he made obscene and misogynistic comments to a female reporter. Rather than dismissing this as just another instance of Byrne behaving irresponsibly, the press, securities analysts, investors and other interested observers of the company should focus on the implications of this incident.

Did Overstock President Jonathan Johnson tell the truth in press statements issued shortly after the incident, and in light of Byrne's present and past behavior, is it appropriate for him to be allowed to carry a concealed firearm under Utah law? In the wake of the Newtown school massacre last month, more attention has focused on access to guns by mentally unbalanced people.

Excuses don’t add up

According to the Salt Lake Tribune, Overstock.com President Jonathan Johnson claimed that it was all a mistake:

"He has told me he regrets and apologizes for the incident," Johnson said. Byrne is a longtime concealed carry permit holder and is very careful and skilled with guns, but he was in a rush to get to the airport Wednesday night and mistakenly believed the weapon was safely in his home, not in a bag he hadn’t used in a while, Johnson said. [Emphasis added.]

Johnson’s excuse does not seem to add up. Back in February 2000, Byrne, who has a Ph. D. from Stanford University, had boasted to Fortune Magazine that he has a photographic memory:

He has a nearly photographic memory, which he is fond of demonstrating with what he calls his memory trick: If he studies a deck of cards for a couple of minutes, he can recite them back, one by one, in either direction. He can even recite the same list again six months later. [Emphasis added.]

On December 12, 2007, Patrick Byrne appeared on Utah Now and showed off his photographic memory. He asked interviewer Doug Fabrizio, "What is your birthday?" Fabrizio replied, "July 18." Within seconds, Byrne correctly told Fabrizio the exact day of the week he was born on: Saturday. Byrne further bragged, "When I was seven, I could memorize cards." [See transcript.]


The gun, a Glock 23 .40-caliber pistol, was loaded with a dozen .40-caliber rounds in the magazine. It was found in the “front pocket” of his carry-on bag. The gun is 7.28 inches in length, 4.99 inches in height, and 1.18 inches in width. It weighs 31.06 ounces (almost 2 pounds) fully loaded. It’s difficult to believe that Patrick Byrne didn’t know there was a loaded gun in the front pocket of his carry-on bag.

TSA Photo: Patrick Byrne's Gun and Ammmo seized at airport
Patrick Byrne’s ties with the right-wing extremists

Patrick Byrne is a decade's long friend of 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.” In 1988, former Ku Klux Klansman David Duke was the presidential candidate for the Populist Party. Bo Gritz agreed to join the ticket as the Populist Party’s vice presidential candidate, but later dropped out to run for congress.

In April 2012, Patrick Byrne appeared as a guest of Earnest Hancock’s on his Freedom’s Phoenix radio show. Three years earlier, in August 2009, TPM reported that:

Ernest Hancock, the online radio host who staged an interview with an assault rifle-wielding associate at the Obama event in Arizona yesterday — and was himself armed with a 9 millimeter pistol — was a vocal supporter and friend of right-wing anti-government militia members who were convicted of conspiracy and weapons charges in the 90s. [Emphasis added.]

Patrick Byrne's violent tantrums

Before joining Overstock.com, Patrick Byrne's well connected father helped him get as job as the CEO of Fechheimer Brothers. Fortune Magazine reported that "He once challenged union leaders to a fistfight to resolve a labor dispute." The Union of Needletrades, Industrial and Textile Employees (UNITE) sought to organize workers at a San Antonio plant. According to UNITE, "Until they began to organize, the company often did not provide toilet paper to its mostly Latina workers."

Patrick Byrne claims “photographic memory”

As I detailed above, in February 2000, Patrick Byrne bragged to Fortune Magazine that he has a “photographic memory.” In December 2007, he showed off his memory skills on Utah Now. On December 11, 2001, Overstock.com CEO Patrick Byrne appeared on Fox News claimed, “We're profitable.” On March 1, 2002, Business 2.0 Magazine reporter Owen Thomas asked, "Are you profitable? Patrick Byrne responded, "Yes, that's real GAAP profit, not Amazon-bullshit-accounting profit." On March 5, 2002, Overstock.com filed an S-1 report with the Securities and Exchange Commission in connection with its planned initial public offering. It contradicted Byrne’s claim that his company was anywhere near “profitable.” The company lost money in each and every quarter since its inception.

Did Patrick Byrne lie to Fortune Magazine when he claimed to have a photographic memory? Did Patrick Byrne and his interviewer Doug Fabrizio stage a fake a demonstration of Byrne's memory skills on Utah Now? Or did Patrick Byrne lie to Fox News or Business 2.0 when he claimed that Overstock.com was profitable when it was actually losing money? Maybe Byrne is delusional?

Byrne’s bizarre behavior escalates

Over the next several years, Overstock.com continued to lose money. Patrick Byrne's behavior grew more erratic as he lashed out at critics with vicious verbal assaults and in one case made obscene and misogynistic comments to a female reporter.

In 2004, independent research firm Camelback Research (now known as Gradient Analytics) gave Overstock.com an earnings quality grade of "F" and mentioned that a member of its board of directors served on WorldCom's board while it was embroiled in an accounting scandal. Byrne wrote an analyst from Camelback:

...you make a living toadying to bully hedge funds. In this role, you insulted Mr. Macklin, a friend, a lifelong mentor and a decent and wonderful man. You deserve to be whipped, f--cked and driven from the land. Little punctilious submissive rejoinders such as your letter cannot change this or recalibrate our relationship on other terms. You drew first blood: own it. [Emphasis added.]

In Fortune Magazine, Bethany McLean reported that:

In the fall of 2004, I wrote a FORTUNE story titled "Is Overstock the Next Amazon?" After the piece came out, Byrne sent me an e-mail saying "Fair. And balanced." Two days later he wrote another e-mail: "I actually thought it was crap.... So, why exactly did you become a reporter? Giving Goldman traders blowjobs didn't work out?" [Emphasis added.]

Byrne’s paranoid fantasies

On August 11, 2005, Patrick Byrne went into a long rambling rant about a vast criminal conspiracy involving a mastermind who he identified as the “Sith Lord” who was out to destroy his company. It was widely mocked as a paranoid fantasy. [See Transcript.]

Joe Nocera reported in the New York Times that:

...it was an hourlong monologue during which Mr. Byrne laid out a vast, overarching conspiracy, made up of dozens of Wall Street players -- including the New York attorney general, Eliot Spitzer! -- all under the thumb of a mysterious puppet master, whom Mr. Byrne labeled the Sith Lord. He titled the conspiracy ''The Miscreants' Ball,'' an obvious reference to Michael Milken's old Predators' Ball.
Although Mr. Byrne told me that his Sith Lord speech ranked among ''the 10 proudest moments of my life,'' most people, including me, thought it was loony beyond belief. Roddy Boyd of The New York Post recalled hearing about it from someone on Wall Street. ''When he described it, I thought he was embellishing,'' Mr. Boyd said. But when he listened to the replay, ''my jaw dropped -- you cannot make up what occurred on that phone call.''
In addition to his conspiracy-mongering, Mr. Byrne talked about Stinger missiles, Wayne and Garth, a mysterious Spanish phone message, stuttering and cocaine. (''I'm not a coke head,'' he said, unprompted.) [Emphasis added.]

NY Post Photo Mocking Byrne
Billionaire Mark Cuban said that "Patrick Byrne has emerged as the star of his own X-Files like drama" and added:

Never before in the history of Wall Street has a single conference call mentioned the following topics:
Miscreants, an unnamed Sith Lord he hopes the feds will bury under a prison, gay bath houses, whether he is gay, does cocaine, both or neither, and an obligatory, not that there is anything wrong with that, phone taps, phone lines misdirected to Mexico, arrested reporters, payoffs, conspiracies, crooks, egomaniacs, fools, paranoia, which newspapers are shills and for who, payoffs, money laundering, his Irish temper, false identities, threats, intimidation, and private investigators. All in 61 minutes.

Hedge fund manager Jeff Matthews told The Register that:

It was the most bizarre hour and change I have ever witnessed on the Street. [Emphasis added.]

In Fortune Magazine, Bethany McLean wrote:

Byrne's behavior has been so over the top that it would be tempting to dismiss it as a paranoid fantasy. Can you imagine the CEO of another company making a conference call like Byrne's without being sent packing by his directors? [Emphasis added.]

On August 29, 2005, Patrick Byrne, himself, did not dismiss concerns raised about his "whacko" behavior on Motley Fool:

I can COMPLETELY understand why some would look at my behavior and think it whacko: it is not as though the possibility never occurs to me before I do something weird.

Patrick Byrne's violent tantrum at the Utah State Legislature


In May 2007, Patrick Byrne went into a raging fit as the Utah legislature sought to repeal a certain law that was passed only a year earlier. Senator Bramble, the original sponsor of the legislation, now supported its repeal. New York Times columnist, Joe Nocera described Byrne's tirade:

Then, he became increasingly agitated, accusing Senator Bramble of betraying him. As his tone became more belligerent, and he began cursing, most of the others in the room, their jaws agape, simply listened to him rant. Several of them later told me they had never heard anything like it.
After the meeting, a confrontation broke out between Mr. Byrne and a securities industry lobbyist.

Chief Deputy Utah Attorney General Kirk Torgensen told me that "I saw him almost get into a fistfight... at the legislature." Byrne was seen cursing and screaming at legislators and lobbyists.

NAACP demands an apology from Byrne

In October 2007, Utah legislature was debating a referendum to provide vouchers for families sending kids to private schools. Apparently, Patrick Byrne believed that minority children who did not graduate from high school should be burned. During a debate, Patrick Byrne said:

Right now 40% of Utah minorities are not graduating high school. You may as well burn those kids. That's the end of their life in any signif... that's the end of their ability to achieve in this society. If they do not get a high school education, you just might as just throw the kids away. [Emphasis added.]

The NAACP demanded an apology, but Byrne refused.

When the state-wide voucher referendum was defeated, the Salt Lake Tribune reported that:

Voucher supporter Overstock.com chief executive Patrick Byrne - who bankrolled the voucher effort - called the referendum a "statewide IQ test" that Utahns failed. [Emphasis added.]

Many people in Utah were offended by Byrne's remarks. Chief Deputy Utah Attorney General Kirk Torgensen said:

He called us all a bunch of morons that didn’t care about kids….

Critics and their family members are stalked and threatened by Byrne’s operatives

Judd Bagley
In August 2006, Patrick Byrne hired Judd Bagley to run an anonymous blog called antisocialmedia.net. It was used a platform to smear critics of Overstock.com. In January 2007, New York Post reporter Roddy Boyd exposed Byrne and Bagley is being behind the anonymous website.

In April 2007, I was doing research on Bagley’s activities and visited his blog multiple times over a couple of days. Bagley used an anonymous alias "panamapump" to post a message on a Yahoo stock chat board detailing every time I visited the blog. He threatened me saying, “On behalf of your family and in the interest of your own employability I ask you to please never visit ASM again. I'll email you new articles when they come out.” Later, as I uncovered accounting irregularities at Overstock.com, Bagley made good on his threat.

In February 2009, I identified certain violations of Generally Accepted Accounting Principles (GAAP) by Overstock.com that allowed it to fabricate a Q4 2008 profit rather than properly report a loss in that quarter. I urged the company to restate its financial reports to correct its improper accounting practices. CEO Patrick Byrne retaliated by personally attacking me on a stock market chat board, during various earnings calls, and in the press in an effort to discredit me. Instead of properly complying with GAAP, Overstock.com continued to overstate income in Q1, Q2, and Q3 2009.

Byrne's hired thug Bagley even injected himself into my divorce proceedings, contacting my former spouse, as well as using illegal pretexting tactics to "friend" my children and relatives on Facebook using a phony account. This was clear retaliation for my pointing out the company's accounting violations.

According to journalist and author Gary Weiss who uncovered the pretexting:

Bagley created "Larry Bergman" and an unknown number of phony Facebook accounts to con people into "friending" him. That way he could circumvent Facebook security, violating their rules and, well, Lord knows how many laws he broke in this pretexting scheme.

Attorney and Big Picture blogger (over 1.5 million monthly readers) Barry Rithholtz called Judd Bagley a "possible pedarast" after learning that he and his family members were pretexted. Eventually, Facebook (NASDAQ: FB) booted Bagley for violating its rules. It deleted both his false "Larry Bergman" profile and his personal profile.

Judd Bagley claimed that Overstock's internet pretexting scheme was designed to unveil connections between hedge funds and the journalists who write about them. However, Bagley targeted only journalists and bloggers (and their friends and family members thereof) who had written about Overstock. Altogether he compiled a database containing personal information on over 7,400 people.

In September 2009, the Securities and Exchange Commission started an investigation of Overstock.com’s accounting practices. In March 2010, Overstock.com finally admitted that it violated GAAP and restated its financial reports to correct its accounting violations, as I had recommended over a year earlier.

It was the third time since 2006 that Overstock.com had to restate its financial reports to correct violations of accounting rules. Every single financial report issued by Overstock.com from 1998 to 2009 was initially wrong and had to be corrected up to three times.

It will be interesting to see whether Patrick Byrne receives equal justice in the Utah courts, or is let off in deference to his wealth and heavy campaign contributions to the Utah Republican Party.

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. More recently, I've helped the AICPA Fraud Task Force develop better methods for detecting fraud. I do not want or seek forgiveness for my vicious crimes from my victims. My past sins are unforgivable.

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