Open Letter to the Securities and Exchange Commission (Part 8): Bring Enforcement Action Against Overstock.com for False and Misleading Disclosures

The SEC must get Patrick Byrne sober

Updated at 9:42 PM Eastern

To Mary Schapiro (Chairperson of the Securities and Exchange Commission):

I respectfully recommend that the Securities and Exchange Commission bring an enforcement action against Overstock.com (NASDAQ: OSTK) for violations of securities laws and retaliation against its critics. Otherwise, the SEC will send a clear message that violations of Generally Accepted Accounting Principles (GAAP), making false and misleading statements to investors, and retaliation against critics who uncover financial reporting irregularities will be tolerated and go unpunished.

On January 29, 2010, Overstock.com disclosed that the company was restating its financial reports for the third time in three years. In Overstock.com's recently filed 2009 10-K report, the company falsely tried to place the entire blame for its recent restatement of financial reports on the following:

We lacked a sufficient number of accounting professionals with the necessary knowledge, experience and training to adequately account for and perform adequate supervisory reviews of significant transactions that resulted in misapplications of GAAP.

Information technology program change and program development controls were inadequately designed to prevent changes in our accounting systems which led to the failure to appropriately capture and accurately process data.

I doubt that Overstock.com, led by CEO Patrick M. Byrne, will ever come clean with investors and admit that they deliberately violated GAAP and other SEC disclosure rules. As I will summarize below, the above disclosure omits material information in violation of Rule 10-5.

In addition, Overstock.com made false disclosures and certain corporate officers made false claims in violation of Rule 10b-5 to support the company's improper accounting for recoveries from underbilled and overpaid fulfillment partners. The company deliberately failed to correct those GAAP violations, after being notified by me.

Instead, CEO Patrick Byrne orchestrated a vicious retaliation campaign against me by smearing me, interfering in my divorce, and pretexting me, my family, and other critics. Overstock.com fired Grant Thornton as its auditors after they recommended that the company restate its financial reports to comply with GAAP, as I recommended.

If anyone at Overstock.com should be held fully responsible for the company's GAAP violations, it is the Audit Committee, CEO Patrick Byrne, and company President Jonathan E. Johnson. They all kept their positions at Overstock.com, while apparently scapegoating former CFO David Chidester and former Treasurer Rich Paongo, both who are no longer employed by the company.

From its inception in 1999 to date, each and every initial financial report for every reporting period has violated GAAP or some other SEC disclosure rule. Overstock.com even increased bonuses in 2009, while KPMG, its auditors, cited the company for material weaknesses in internal controls over financial reporting.

Brief Background

Starting on February 4, 2009, I correctly reported in my blog that Overstock.com violated Generally Accepted Accounting Principles (GAAP) in its accounting for recoveries of amounts due from underbilled fulfillment partners. Overstock.com should have restated its financial reports to reflect income when it was actually earned from those fulfillment partners, less a reasonable estimate for uncollectable amounts (See SFAS No. 154 and SFAS No. 5).

Instead, Overstock.com improperly deferred income that it earned but underbilled its fulfillment partners during prior reporting periods (Q3 2008 and before) by moving such income to future reporting periods (Q4 2008, Q1 2009, Q2 2009, and Q3 2009). In other words, Overstock.com took income that should have been reported in prior reporting periods (Q3 2008 and before) and moved it to future reporting periods (Q4 2008 and later) to materially overstate its financial performance in those later reporting periods. In effect, Overstock.com created an illegal "cookie jar" reserve to inflate its future financial performance.

I correctly reported that Overstock.com ridiculously claimed that the collection of the entire amount of its underbillings (every single penny) “was not assured” and instead falsely claimed that a "gain contingency" existed, rather than make a reasonable estimate of uncollectable amounts as required under SFAS No. 5.

I correctly reported that Overstock.com's improper accounting for recoveries from underbilled fulfillment partners resulted in the company reporting Q4 2008 profit, rather than a properly reported Q4 2008 loss.

Starting in February 2009, I sent emails to Overstock.com that were cc'd to the Securities and Exchange Commission, expressing my concerns about the company's GAAP violations. Instead of listening to me in February 2009, Overstock.com continued to violate GAAP in its Q1, Q2, and Q3 2009 financial reports.

Note: More details in: 08/05/09: Open Letter to the Securities and Exchange Commission: Stop Overstock.com GAAP Violations Now!

In September 2009, the SEC Enforcement Division re-opened its investigation of Overstock.com followed by a parallel probe by the SEC Division of Corporation Finance.

In October 2009, the SEC Division of Corporation Finance discovered that Overstock.com overpaid a fulfillment partner $785,000 during 2008. The company recovered that overpayment in Q1 2009 and improperly reported the overpayment recovery as income in that same quarter, rather than properly restate its 2008 financial reports to correct that error. Overstock.com used the same false "gain contingency" excuse again to justify the company's improper accounting treatment for its recovery of the overpayment.

Overstock.com improperly concealed the recovery of the overpayment by including that amount in recoveries from underbilled fulfillment partners in Q1 2009 instead of separately disclosing the overpayment recovery in its financial reports.

In November 2009, Overstock.com even fired Grant Thornton as its auditors and both Patrick Byrne and Jonathan Johnson publicly vilified them when they recommended that the company restate its financial reports to comply with GAAP, as I recommended in my blog and emails to Overstock.com that were cc'd to the Securities and Exchange Commission.

On January 29, 2010, Overstock.com finally admitted that its accounting for recoveries from underbilled and overpaid fulfillment partners was "inappropriate" and that no gain contingency existed, as I previously reported in my blog.

On March 31, 2010, Overstock.com's 2009 10-K report restated the company's Q4 2008 financial report to show a properly reported net loss rather than an improper net profit, as I correctly said it should in my blog more than a year earlier.

In other words, this convicted felon, who Patrick Byrne has called on many occasions "Sam the crook", was right about Overstock.com's GAAP violations and the company's former auditors PricewaterhouseCoopers, its Audit Committee, and its management team were all wrong.

Overstock.com Corporate Sponsored Campaign to Intimidate Me and Family Members

Soon after I started exposing Overstock.com's recent GAAP violations in my blog, Patrick Byrne responded by escalating his vindictive corporate sponsored retaliation campaign against me, other critics who agreed with my correct analysis, and others he perceived as being part of his deluded conspiracy theory involving the "Sith Lord."

In April 2009, Patrick Byrne sent his paid cyberstalker Judd Bagley to interfere with my divorce proceeding and attempted to blackmail me into settling that case and even tried to contact my ex-spouse in an attempt to intimidate me.

Starting around May or June 2009 Judd Bagley "Facebook friended" me, journalists, bloggers, and other critics on Facebook to collect personal information on them and their family members and violated their terms of service by using a false identity. Bagley even attempted to "Facebook friend" my son and family members of other critics, too.

In December 2009, Judd Bagley posted the names of over 7,000 critics and their "Facebook friends" which included family members under age 18 (including my minor relatives) on Byrne's funded and controlled Deep Capture website as part of his pretexting scheme to harass and intimidate Overstock.com's critics.

Note: More details provided in: How Patrick Byrne Stalked Critics and the Media on Facebook by Gary Weiss

I tried to call into Overstock.com's quarterly conference calls to ask relevant questions about accounting issues, only to be refused access and ridiculed by Byrne on those same calls.

False Statements and Innuendo Made by Certain Corporate Officers to Justify Overstock.com's Improper Accounting

Soon after I correctly indentified certain GAAP violations by Overstock.com, Patrick Byrne and Jonathan Johnson made certain false statements to investors, as described below.

On February 6, 2009, Patrick Byrne responded to my original February 4 blog post identifying the GAAP violations described above on the InvestorVillage message board by claiming that:

Antar's ramblings are gibberish. Show them to any accountant and they will confirm. He has no clue what he is talking about.

A September 25, 2009, Salt Lake Tribune article quoted Patrick Byrne as saying:

"Gary Weiss and Sam Antar are goniffs," Byrne declared, using a yiddish term that he says means "a con man, a hustler and a scoundrel."

If the SEC is listening to them, their next step is to let Bernie Madoff write their indictment of me." Byrne was referring to the mastermind, now in prison, of a multibillion-dollar fraud whose case helped show how laissez faire Wall Street regulators had become.

On November 18, 2009, during a conference call with analysts and investors, Patrick Byrne falsely claimed:

In fact, we as I understand it, this doesn't change any positive quarter to a negative quarter or any negative quarter to a positive quarter.

In a November 25, 2009 Salt Lake Tribune article, company President Jonathan Johnson was quoted as saying:

None of these changes that they [Grant Thornton] are talking about, or that people at the SEC are now asking about, make any of our quarters go from negative to positive or from positive to negative.

As it turns out, all of the above explanations claimed by Patrick Byrne and Jonathan Johnson were false, misled investors into believing that Overstock.com properly complied with GAAP, and violated Rule 10b-5. The company actually lost money in Q4 2008 rather than make a profit as previously claimed. Overstock.com deliberately violated GAAP and as evidenced by its ridiculous "gain contingency" claim, its retaliation against me and other critics, and false statements made by Byrne and Johnson to support the company's improper accounting treatment for recoveries from underbilled and overpaid fulfillment partners.

Conclusion

As the criminal CFO of Crazy Eddie, I respected the SEC as an adversary, even as it brought me to my knees. Unfortunately, the public has lost confidence in the SEC because of its failure to listen to Harry Markopolos about Bernie Madoff and David Einhorn about Lehman Brothers and Allied Capital. The SEC has an excellent chance on its second investigation of Overstock.com to regain that lost public confidence by bringing a successful enforcement action against Overstock.com, its Audit Committee, and its management team for securities law violations, including Rule 10b-5.

In addition, you have an excellent opportunity to show that issuer retaliation by public companies against critics will not be tolerated. If you fail to address that issue, you are warned that America will be deprived of future independent whistleblowers like Ralph Nader and books like "Unsafe at Any Speed."

From a former adversary and respectfully,

Sam E. Antar

Update: Associated Press reporter Paul Foy permitted Patrick Byrne to continue lying to investors in an article published today about Overstock.com's GAAP violations, even though I documented Byrne's lies when interviewed by Foy and in our emails. The article states:

Byrne, who owns nearly 30 percent of the company's shares, says Overstock's accounting errors were generally conservative. The latest involved 0.1 percent of revenue and gave the company no advantage, he said.

"No advantage," he says? That is a flat out lie and Foy permitted Byrne to say it unchallenged in the article, even though he had information from Overstock.com's own SEC filings and from me showing that Byrne lied.

Nowhere does the article mention that Overstock.com's GAAP violations enabled the company to improperly report a Q4 2008 net profit, rather than a properly reported net loss. The article fails to mention that Overstock.com restated its Q4 2008 financial report to correct those GAAP violations and changed its previously reported net profit to a properly reported net loss.

Patrick Byrne went on to personally attack me. The AP article quotes Byrne as saying:

Byrne responds that "it's like hearing Bernie Madoff say I'm a bad guy."

No matter what Patrick Byrne calls me whether it is "Sam the crook" or "Bernie Madoff", this convicted felon was right about Overstock.com's GAAP violations and the company, its Audit Committee, its management including Byrne, and its auditors were all dead wrong.

At the very least, Overstock.com should immediately retract Byrne's false remarks so that investors reading the Associated Press article will not be misled about the real scope of the company's accounting errors.

Patrick Byrne will continue lying to investors unless the SEC puts a stop to his shenanigans and holds him accountable for his actions.

For additional information, please read Gary Weiss blog here and Going Concern blog here.

Note to Readers: Please order "Selling America Short: The SEC and Market Contrarians in the Age of Absurdity" by Richard Saurer and especially read Chapter Twelve: The Overstock Flame Wars.

My previous open letters to the SEC (please note that each letter is based on Overstock.com's deliberately vague, incoherent, and inconsistent, and often contradictory disclosures at the time each one was issued):

08/05/09: Open Letter to the Securities and Exchange Commission: Stop Overstock.com GAAP Violations Now!

11/22/09: Open Letter to the Securities and Exchange Commission Part 2: New Information on Overstock.com's GAAP and SEC Disclosure Violations

11/23/09: Open Letter to the Securities and Exchange Commission Part 3: Overstock.com Lied About Grant Thornton and Concealed Error

11/26/09: Open Letter to the Securities and Exchange Commission Part 4: Patrick Byrne Ignores Real Issues As He Vilifies Grant Thornton

12/14/09: Open Letter to the Securities and Exchange Commission Part 5: Issuer Retaliation Complaint Against Overstock.com

01/03/10: Open Letter to the Securities and Exchange Commission Part 6: Conflicting Disclosures by Overstock.com Reveal Improper Audit Opinion Shopping

02/02/10: Open Letter to the Securities and Exchange Commission Part 7: Why Overstock.com and David Chidester Parted Ways

Disclosure

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes, simply because I could.

If it weren't for the 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 own Overstock.com securities short or long. My research on Overstock.com and in particular its lying CEO Patrick Byrne is a freebie for securities regulators and the public in order to help me get into heaven, though I doubt that I will ever get there anyway. I will probably end up joining corporate miscreants such as fifth rate crooks like Patrick Byrne in hell.

In any case, exposing Overstock.com's financial reporting violations is a lot of fun and analyzing the company's financial reporting is a forensic accountant's wet dream.

New False Disclosures about Overstock.com's "Tax Dodge" Found in 10-K

Patrick Byrne has a headache and a hangover

Updated to include new details at 10:40 PM:

Just about every time I examine Overstock.com's (NASDAQ: OSTK) financial reports, I find false, misleading, inconsistent, and contradictory disclosures. In Overstock.com's recent 2009 10-K report, I found yet another false financial disclosure relating to a variable interest entity set up by the company to buy jewelry in 2004, which was later dubbed “Operation Heist and Freeze" by CEO Patrick Byrne.

In January 2010, investigative journalist Roddy Boyd exposed a "tax dodge" scheme by Overstock.com involving that variable interest entity which led to former CFO David Chidester's departure from the company on the following day.

Originally, Overstock.com claimed that in August 2004, the company entered into an agreement to lend a certain sum of money to a variable interest entity. The company improperly omitted that material financial disclosure from its Q3 2004 10-Q and finally disclosed the arrangement in its 2004 10-K report.

However, it now turns out that Overstock.com entered into the agreement to lend a certain sum of money to the variable interest entity in "April 2004" not in "August 2004" as originally reported. Therefore, Overstock.com improperly omitted the material financial disclosure from two quarterly financial reports, not one (Q2 2004 10-Q and Q3 2004 10-Q).

In addition, Overstock.com's 2004 10-K variable interest disclosure was confusing and misled investors about the amount of money the company agreed to lend that entity and actually lent that entity.

I simply compared Overstock.com's variable interest entity disclosure in its recent 2009 10-K report to its disclosure in its 2004 10-K report.

Comparing Overstock.com 2004 and 2009 10-K disclosures

In Overstock.com's 2004 10-K report, the company made the following disclosure about the variable interest entity set up to buy jewelry:

20. VARIABLE INTEREST ENTITY
In August 2004, the Company entered into an agreement which allows the Company to lend up to $10,000 to an entity for the purpose of buying inventory, primarily to supply a new category within our jewelry store which allows customers purchasing diamond rings to select both a specific diamond and ring setting. In November 2004, the Company loaned the entity $8,400. The promissory note bears interest at 3.75% per annum. The Company will also receive fifty percent (50%) of any profits of the entity. Interest shall be due and payable quarterly on the fifteenth day of February, May, August and November, commencing on November 15, 2004 until the due date of November 30, 2006, on which all principal and interest accrued and unpaid thereon, shall be due and payable. The promissory note is collateralized by all of the assets of the entity.

The Company has a ten year option to purchase ("Purchase Option") 50% of the ownership and voting interest of the entity. The exercise price of the Purchase Option is the sum of (a) one thousand dollars, and (b) $3.0 million, which may be paid, at the Company's election, in cash or by the forgiveness of $3.0 million of the entity's indebtedness to the Company. [Emphasis added.]

In Overstock.com's 2009 10-K report, the company made the following disclosure about the Variable Interest Entity set up to buy jewelry:

26. DECONSOLIDATION OF VARIABLE INTEREST ENTITY
In April 2004, the Company entered into an agreement which allowed the Company to lend up to $10.0 million to an entity for the purpose of buying diamonds and other jewelry, primarily to supply a new category within the jewelry department which allowed customers purchasing diamond rings to select both a specific diamond and ring setting. Under the agreement, the Company was to receive fifty percent (50%) of any profits of the entity. In addition, the Company had a ten year option to purchase ("Purchase Option") 50% of the ownership and voting interest of the entity. The exercise price of the Purchase Option was the sum of (a) one thousand dollars, and (b) $3.0 million, which may have been paid, at the Company's election, in cash or by the forgiveness of $3.0 million of the entity's indebtedness to the Company.

The entity was evaluated in accordance with FASB ASC Topic 810-10-65-2, Consolidation of Variable Interest Entities, and it was determined to be a variable interest entity for which the Company was determined to be the primary beneficiary. As such, the financial statements of the entity were consolidated into the financial statements of the Company. [Emphasis added.]

The 2004 10-K disclosure states that Overstock.com entered into an agreement to lend the variable interest entity “$10,000” and actually loaned that entity “$8,400.”

Even more troubling is that in the very next paragraph of the 2004 10-K report, Overstock.com stops rounding off to the nearest thousand in disclosing the exercise price of the purchase option in the amount of "$3.0 million." That inconsistent rounding in Overstock.com’s financial disclosures originally misled many investors into believing that Overstock.com agreed to lend the variable interest entity “10,000” not “$10.0” million, loaned the entity “$8,400” not “$.8.4 million."

You need to dig deep elsewhere in the 2004 footnotes to find out that Overstock.com dropped three zeros to report how much money the company agreed to lend and actually lent the variable interest entity. In other words, finding the real amount whether its “10,000” or "10.0 million" is a very difficult task for investors.

In its Q3 2005 10-Q report, Overstock.com finally revised its confusing anf misleading variable interest entity disclosure. However, the company still claimed that it entered into an agreement to lend the variable interest entity "$10.0 million" in "August 2004,' not "April 2004" as later reported in its 2009 10-K report. As usual, Overstock.com quietly revised its disclosures without explaining any revisions and corrections.

Roddy Boyd Exposes "Tax Dodge"

In January 2010, The Big Money published an article by investigative reporter Roddy Boyd Overstock.com's efforts to evade paying New York State sales tax in what was known as "Operation Heist and Freeze." Below is an excerpt from that article:

But the truth is much simpler: The deal seems to have been a tax dodge. The joint venture, struck with Moshe Krasnanski and his brother-in-law Mayer Gniwisch—a pair of veteran diamond merchants whom Byrne referred to as “Our Lubbavitcher friends”—had nothing to do with efforts to minimize accounting losses. In an e-mail to the board of directors, Byrne dubbed the process of recruiting the pair, who had set up the profitable online diamond-seller Ice.com, “Operation Heist and Freeze.” According to a memo, Overstock general counsel Jonathan Johnson prepared for the board of directors on July 13, 2005, the company’s VIE was designed to avoid a “nexus in the State of New York for sales tax purposes,” which means that the company would not have to collect, and pay out, sales taxes in the state. The diamond sales effort never really went anywhere for Overstock, and it was closed out during the holidays of 2006 with about $567,000 in accumulated losses, according to an internal balance sheet for the joint venture. [Emphasis added.]

In addition, Roddy Boyd's article detailed how Overstock.com's executives intentionally hid material internal control weaknesses from investors. Overstock.com's subsequent three restatements of financial reports in three years confirmed that the company had material weaknesses in internal controls.

A day after Roddy Boyd's article was published, former CFO David Chidester resigned from the company. It turns out that a few weeks later, former Treasurer Rich Paongo also left Overstock.com, but the company failed to report his departure.

In my last blog post, I detailed how CEO Patrick Byrne and company President Jonathan E. Johnson lied to investors in a failed effort to cover up violations of Generally Accepted Accounting Principles (GAAP) by Overstock.com that were exposed in this blog. Eventually, Overstock.com was forced to restate its financial reports to correct those GAAP violations and the company finally admitted that its accounting was "inappropriate."

Two days ago, Investigative reporter and blogger Gary Weiss uncovered contradictory disclosures in Overstock.com's 2009 10-K report about a criminal investigation of the company's advertising practices in California.

KPMG "expressed an adverse opinion on the effectiveness of the Company's internal control over financial reporting" but still issued a clean audit opinion. Back in my criminal days at Crazy Eddie, Main Hurdman, who later became part of KPMG, noted material weaknesses in our internal controls but still issued a clean audit opinions. Eventually, a massive fraud was uncovered at Crazy Eddie. The dumb-dumbs at KPMG still seem to believe that they can conduct a proper audit in the absence of adequate internal controls. It did not work back in the day and it won't work now.

There are many other black holes in Overstock.com's financial reporting not yet uncovered or ignored by KPMG. Those black holes will be the subject of future blog posts. I am just getting warmed up.

Written by:

Sam E. Antar

Disclosure:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes, simply because I could.

If it weren't for the 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 own Overstock.com securities short or long. My research on Overstock.com and in particular its lying CEO Patrick Byrne is a freebie for securities regulators and the public in order to help me get into heaven, though I doubt that I will ever get there anyway. I will probably end up joining corporate miscreants such as Patrick Byrne in hell.

In any case, exposing corporate crooks is a lot of fun for a forcibly "retired" crook like me. Analyzing Overstock.com's financial reporting is a forensic accountant's wet dream and Patrick Byrne is about to become the SEC's new orgasm.

Another Key Departure at Overstock.com: It Went Unreported, Too

Another key officer, former Treasurer Rich Paongo has quietly left Overstock.com (NASDAQ: OSTK) amid an ongoing Securities and Exchange Commission investigation of financial reporting violations by the company. However, Overstock.com made no disclosure to investors of his February 2010 departure from the company.

This morning, investigative journalist and blogger Gary Weiss received an anonymous comment on an old blog post tipping him off about Paongo's departure:

Anon

Here's a tidbit - you mention Rich Paongo in this article...he "left the company" as well

After Gary Weiss emailed me the comment, I checked Rich Paongo's linked in profile which discloses him leaving Overstock.com in February 2010 after 8 years and 9 months of service. According to SEC Form 8-K instructions:

If the registrant’s principal executive officer, president, principal financial officer, principal accounting officer, principal operating officer, or any person performing similar functions, or any named executive officer, retires, resigns or is terminated from that position, or if a director retires, resigns, is removed, or refuses to stand for re-election (except in circumstances described in paragraph (a) of this Item 5.02), disclose the fact that the event has occurred and the date of the event.

Apparently, it's Overstock.com's position that none of the above applies to Rich Paongo. However, Paongo's departure from Overstock.con can be viewed as a material event requiring disclosure amid an expanding SEC investigation and given Paongo's role at the company. It's certainly something that investors would want to know about.

Paongo's emails back and forth to former CFO David Chidester, who suddenly left the company under a cloud as it turns out at around the same time Paongo left, are under probable scrutiny by the SEC in their investigation of the company.

According to Roddy Boyd's article in The Big Money, Overstock.com failed to disclose certain cash flow problems and material weaknesses in internal controls to investors starting around 2005. Paongo's emails to Chidester were cited by Boyd.

Paongo's linked in profile cites that he was "involved in negotiations for RFP that reduced D&O premiums by 50% but expanded insurance coverage by 40%." Overstock.com will need the expanded D & O liability coverage.

Recently, Overstock.com was required to restate its financial reports for the third time in three years, after this blog exposed GAAP and SEC disclosure violation by the company. Rather than restate its financial reports to correct those violations, CEO Patrick Byrne orchestrated a vindictive retaliation campaign against me and other company critics.

In November 2009, Overstock.com fired Grant Thornton as its auditors and Byrne publicly vilified them after they agreed with my recommendation that the company restate its financial reports to correction financial reporting violations. In February 2010, Overstock.com finally announced that it was restated its financial reports to correct certain material financial reporting violations that were exposed out in this blog. On March 16, 2010, Overstock.com delayed filing its 2009 annual 10-K report as new previously undisclosed GAAP violations were revealed by the company.

Written by:

Sam E. Antar

Disclosure:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes, simply because I could.

If it weren't for the 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 own Overstock.com securities short or long. My research on Overstock.com and in particular its lying CEO Patrick Byrne is a freebie for securities regulators and the public in order to help me get into heaven, though I doubt that I will ever get there anyway. I will probably end up joining corporate miscreants such as Patrick Byrne in hell.

In any case, exposing corporate crooks is a lot of fun for a forcibly "retired" crook like me. Analyzing Overstock.com's financial reporting is a forensic accountant's wet dream and Patrick Byrne is about to become the SEC's new orgasm.

My Reporting of a Financial Statement Manipulation Scheme at Overstock.com is Vindicated by Latest Company Announcement

Updated:

This evening Overstock.com (NASDAQ: OSTK) announced that the company is restating all financial reports from 2008 to Q3 2009 as a result of material violations of Generally Accepted Accounting Principles (GAAP) and other SEC disclosure rules. This announcement vindicates my reporting of a financial statement manipulation scheme by Overstock.com and its unprincipled management team, led by CEO Patrick M. Byrne.

How it all started

In October 2008, Overstock.com restated its financial reports from Q1 2003 to Q2 2008 due to customer refund and credit errors. However, the October 2008 restatement did not include corrections arising from underbilled offsetting costs and reimbursements that were already earned from its fulfillment partners during those same corresponding periods, less a reasonable estimate of uncollectable amounts. In other words, Overstock.com should have gone back and corrected or restated its financial reports to reflect income already earned from offsetting costs and reimbursements due from its fulfillment partners, less a reasonable estimate for uncollectable amounts. (See SFAS No. 154 and SFAS No 5 paragraph 1, 2, 8 and 23). It didn’t.

Overstock.com created an illegal "cookie jar" reserve

Instead, Overstock.com improperly deferred income that it earned but underbilled its fulfillment partners during prior reporting periods (Q3 2008 and before) to by moving such income to future reporting periods (Q4 2008, Q1 2009, Q2 2009, and Q3 2009). In other words, Overstock.com took income that should have been reported in prior reporting periods (Q3 2008 and before) and moved it to future reporting periods (Q4 2008 and later) to materially overstate its financial performance in those later reporting periods.

In effect, Overstock.com violated GAAO by creating an illegal cookie jar reserve to materially inflate future earnings or reduce future losses from Q4 2008 to Q3 2009.

False "gain contingency" claim

Overstock.com ridiculously claimed that the collection of the entire amount of its underbillings (every single penny) “was not assured” and instead falsely claimed that a "gain contingency" existed rather than make a reasonable estimate of uncollectable amounts as required under SFAS No. 5. Therefore, Overstock.com improperly recognized income from underbilled fulfillment partners as amounts due to the company were collected on a non-GAAP cash basis, rather when they were earned under accrual accounting or GAAP.

In Overstock.com's 8-K report released this evening, the company finally acknowledged that its gain contingency was phony:

Once discovered, the Company applied “gain contingency” accounting for the recovery of such amounts, which it has now determined was an inappropriate accounting treatment. [Emphasis added.]

Starting in February 2009, I contacted both Overstock.com and the Securities and Exchange Commission and reported to them that the company had set up an illegal "cookie jar" reserve to materially inflate its future financial performance from Q4 2008 to Q3 2009.

Instead of properly restating its financial reports to correct its intentional breach of Generally Accepted Accounting Principles and other SEC disclosure rules, Overstock.com CEO Patrick Byrne responded by orchestrating a massive corporate sponsored retaliation campaign against me and other critics who agreed with my findings.

In addition, Patrick Byrne, company President Jonathan Johnson, former CFO David Chidester, and others blatantly lied to and misled shareholders during various conference calls and vilified me in an attempt to cover up their financial reporting manipulation schemes.

In September 2009, the SEC Enforcement Division and later the Division of Corporation Finance started parallel probes of the company.

Overstock.com improperly concealed an overpayment error to a fulfillment partner

In October 2009, the SEC Division of Corporation Finance discovered that Overstock.com overpaid a fulfillment partner $785,000 during 2008. The company recovered that overpayment in Q1 2009 and improperly reported the overpayment recovery as income in that same quarter, rather than properly restate its 2008 financial reports to correct that error. In addition, Overstock.com improperly concealed the recovery of the overpayment by including that amount in recoveries from underbilled fulfillment partners in Q1 2009 instead of separately disclosing the overpayment recovery in its financial reports.

Grant Thornton claimed that it did not know about the 2008 overpayment and Q1 2009 recovery from the fulfillment partner until October 2009. After learning about the overpayment, Grant Thornton told Overstock.com that it must restate its prior financial reports to correct that error to comply with GAAP.

On November 13, 2009, Overstock.com fired and vilified Grant Thornton, rather than restate its financial reports and later filed an "unreviewed" Q3 2009 10-Q that finally disclosed the overpayment to the fulfillment partner. In this case too, Overstock.com improperly claimed that a "gain contingency" existed as justification for not restating its financial reports to correct the overpayment error. Overstock.com now acknowledges that its accounting treatment for the overpayment recovery from a fulfillment partner was wrong, too.

As a result of its improper accounting for underbilling and overpayment recoveries from fulfillment partners, Overstock.com is:

...expected to shift approximately $1.7 million of income recognized in fiscal year 2009 back to fiscal year 2008.

In addition, the company will be required to restate its 2008 quarterly financial reports. In Q4 2008, Overstock.com reported its first quarterly net profit after 15 consecutive quarterly losses. The company is now expected to report a net loss in Q4 2008.

More improprieties exposed by Roddy Boyd

On January 19, 2010, The Big Money published an article by investigative reporter Roddy Boyd that exposed how Overstock.com purposely withheld information from investors during 2005 and 2006 about its inadequate internal controls and engaged in a New York State sales tax dodge scheme known as "Operation Heist and Freeze." A day later, former CFO and Chief Information Officer David Chidester left the company. The company faces a certain probe by the New York State Commissioner of Taxation and Finance into its sales tax dodge scheme.

Vindication

Today's news is a complete vindication of my analysis of Overstock.com's financial reports and shows that the company willfully engaged in a financial reporting manipulation scheme. The company is restating its financial reports to correct GAAP violations, exactly as I have recommended in this blog. To date, every single initial financial report issued by Overstock.com throughout the company's entire existence has violated GAAP or some other SEC disclosure rule. The company now has the dubious distinction of having to restate its financial reports three times in the last three years to fix GAAP violations.

The Securities and Exchange Commission and the Department of Justice must prosecute these fraudsters

I urge the Securities and Exchange Commission Enforcement Division to bring civil charges against Overstock.com, Patrick Byrne, and other members of the company's management team for securities fraud. In addition, I recommend that the SEC make a criminal referral to the Department of Justice and that Overstock.com's management be prosecuted for their financial frauds on investors and retaliation against their critics.

Patrick Byrne and his cronies should start planning ahead and visit the following web sites:

• Federal Prison Camp Tour

• The Ultimate Guide to Surviving Life Inside Federal Prison

Special thanks to all those people who stood by me, many of whom were illegally pretexted by the creepy "possible pedarast" Judd Bagley at the direction of Patrick Byrne in an effort to bully me and other critics of the company.

I will provide more details about frauds committed by Overstock.com, certain members of its management team, and others colluding with them in my blog, soon.

Regards,

Sam E. Antar

For more details, please read:

Gary Weiss: Overstock.com Admits its Financial Statements Were Phony

William K. Wolfrum: Overstock.com and Patrick Byrne Help Define Cookie Jar Reserve

Barry Ritholtz: Overstock.com to Restate Earnings

Howard Sirota: Overstock.com Litigation Update 2010

Christopher Faille: An Overstocked Cookie Jar

Recommend Reading:

10/04/09: Crazy Like a Fox by Aaron Elstein in Crain's New York Business (Download) about my battle with Patrick Byrne to force Overstock.com to comply with GAAP and SEC disclosure rules.

My previous open letters to the SEC (please note that each letter is based on Overstock.com's deliberately vague, incoherent, and inconsistent, and often contradictory disclosures at the time each one was issued):

08/05/09: Open Letter to the Securities and Exchange Commission: Stop Overstock.com GAAP Violations Now!

11/22/09: Open Letter to the Securities and Exchange Commission Part 2: New Information on Overstock.com's GAAP and SEC Disclosure Violations

11/23/09: Open Letter to the Securities and Exchange Commission Part 3: Overstock.com Lied About Grant Thornton and Concealed Error

11/26/09: Open Letter to the Securities and Exchange Commission Part 4: Patrick Byrne Ignores Real Issues As He Vilifies Grant Thornton

12/14/09: Open Letter to the Securities and Exchange Commission Part 5: Issuer Retaliation Complaint Against Overstock.com

01/03/10: Open Letter to the Securities and Exchange Commission Part 6: Conflicting Disclosures by Overstock.com Reveal Improper Audit Opinion Shopping

02/02/10: Open Letter to the Securities and Exchange Commission Part 7: Why Overstock.com and David Chidester Parted Ways

Open Letters to Overstock.com's Auditors:

03/30/09: To Grant Thornton, New Auditors for Overstock.com

01/25/10: Open Letter to KPMG: A Warning About Overstock.com, Your New Audit Client

01/27/10: Open Letter to KPMG: The Ties That Bind Overstock.com, Patrick Byrne, and Deep Capture LLC

Disclosure:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes, simply because I could.

If it weren't for the 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 own Overstock.com securities short or long. My research on Overstock.com and in particular its lying CEO Patrick Byrne is a freebie for securities regulators and the public in order to help me get into heaven, though I doubt that I will ever get there anyway. I will probably end up joining corporate miscreants such as Patrick Byrne in hell.

In any case, exposing corporate crooks is a lot of fun for a forcibly "retired" crook like me.

Analyzing Overstock.com's financial reporting is a forensic accountant's wet dream and Patrick Byrne is about to become the SEC's new orgasm.

Open Letter to the Securities and Exchange Commission (Part 7): Why Overstock.com and David Chidester Parted Ways

Updated

To the Securities and Exchange Commission:

I believe that it is no coincidence that David Chidester left Overstock.com (NASDAQ: OSTK) while KPMG continues to audit its financial reports amid your ongoing investigation of the company and a day after Roddy Boyd's damaging article was published in The Big Money. Recently, both CEO Patrick M. Byrne and former CFO David K. Chidester refused to comment to the Salt Lake Tribune and company President Jonathan E. Johnson gave evasive and misleading answers to them about Chidester's departure from the company.

As an eleven year veteran of the company, David Chidester knows where the "dead bodies" are to be found in Overstock.com's continuous failure to issue financial reports in compliance with Generally Accepted Accounting Principles (GAAP) and other SEC disclosure rules. Overstock.com claims that David Chidester and the company parted ways by "mutual agreement." I believe that their so-called "mutual agreement" is based on Patrick Byrne not wanting David Chidester to stay around and David Chidester not wanting to be around to answer questions as KPMG continues its audit of the company's financial reports.

Instead, Overstock.com is using an "ignorance is bliss" approach to dealing with KPMG, its new auditors. Current CFO Steve Chesnut, who joined the Overstock.com in January 2009, was not around when most of the financial reporting improprieties under investigation were committed by management. Simply said, Chesnut was not around when the "bodies were buried" and would not know where to find all of them. He is not even a CPA.

Salt Lake Tribune article by Paul Beebe

According to an article published yesterday in the Salt Lake Tribune:

Why did a top executive of Overstock.com suddenly leave the Internet retailer after 11 years?

David Chidester resigned Jan. 20 amid an ongoing investigation of Overstock by the Securities and Exchange Commission and one day after an unflattering article about CEO Patrick Byrne appeared in The Big Money, a business Web site by the editors of Slate.

In a document filed with the SEC five days later, Overstock said only that "Chidester left by mutual agreement, effective immediately, from his position as senior vice president of internal reporting and information."

On Monday, Jonathan Johnson, president of Salt Lake City-based Overstock, added this about the departure of Chidester, the company's chief information officer and former chief financial officer:

"David had been with us over 10 years. It felt like for both David and the company it was time to move to something new.

"I don't know who said what first, but it was clearly a mutual agreement. We've grown a lot in 10 years. We are a big organization and thought it was time for both parties to move on."

Efforts to reach Chidester for comment were unsuccessful, and Byrne was unavailable.

Later, the article goes on to say that:

Johnson called allegations that Chidester was forced out because of the article "conjecture" that is "just wrong."

Patrick Byrne was uncharacteristically "unavailable" to comment to the Salt Lake Tribune on Chidester's departure from the company. In the past, the local Salt Lake Tribune has conveniently chosen to largely ignore Patrick Byrne past transgressions against investors and has given him a friendly platform to spread malicious smears against his critics. A certain source told me that the Salt Lake Tribune had been working on that article for several days and another source told me that Byrne was deliberately dodging the Tribune (information to be sent privately). See Gary Weiss's blog post, here.

Also troubling is Johnson's evasive comment to the Salt Lake Tribune that "I don't know who said what first....." As the President of Overstock.com, Johnson certainly must know all the details of what transpired between the company and Chidester.

Apparently, Johnson wants to deceive investors into believing that David Chidester's sudden resignation was just a mere coincidence and is unrelated to the ongoing SEC investigation and damaging article by Boyd. However, the timeline provided below shows that Chidester's departure was not a mere coincidence but instead resulted from damning evidence of wrongdoing uncovered by Roddy Boyd.

Chidester's tenure of Overstock.com CFO

During Chidester's tenure as CFO, every single initial financial report for every reporting period issued by Overstock.com from the company's inception to date has violated Generally Accepted Accounting Principles GAAP and other SEC disclosure rules.

In February 2006, Overstock.com restated financial reports from Q1 2002 to Q3 2005 to correct inventory accounting errors.

In February 2008, the SEC Division of Corporation Finance discovered that Overstock.com's revenue accounting from the company's inception to Q3 2007 violated GAAP.

In addition, from Q2 2007 to Q2 2008 Overstock.com violated SEC Regulation G by using an improper EBITDA calculation to materially inflate its financial performance. After I wrote a series of blog posts detailing how management lied about the company's compliance with SEC Regulation G, Overstock.com finally corrected its improper EBITDA calculation (Details here).

In October 2008, Overstock.com restated its financial reports from Q1 2003 to Q3 2008 due to customer refund and credit errors. It was the second time in two years that Overstock.com had to restate its financial reports due to accounting errors.

In January 2009 David Chidester was replaced by Steve Chesnut as CFO and was moved to the position of Senior Vice President Internal Reporting and Information. In addition, Grant Thornton replaced PricewaterhouseCoopers as Overstock.com's auditors.

Overstock.com still kept David Chidester around

After two restatements of financial reports in two years and a history of issuing financial reports that turned out to violate GAAP and SEC rules, Overstock.com still kept David Chidester on the payroll in the key position of Senior Vice President Internal Reporting and Information with no reduction in salary (See Proxy Report page 17).

At that point, Overstock.com had no problem keeping David Chidester around since the SEC was not investigating the company and Boyd had not yet published his article providing new details of wrongdoing at Overstock.com. Chidester stayed employed by Overstock.com until January 20, 2010 and left the company "effective immediately," a day after Boyd's devastating article.

In September 2009, the SEC Enforcement Division started investigating Overstock.com I reported to you how the company used an improper "cookie jar" reserve to material inflate its financial performance from Q4 2008 to Q3 2009.

In November 2009, Overstock.com fired Grant Thornton after new material accounting errors and omitted disclosures were uncovered during a separate probe by the SEC Division of Corporation Finance. Grant Thornton wanted Overstock.com to restate its financial reports, like I had called for in my blog. Instead, Overstock.com fired and publicly vilified Grant Thornton and filed an unreviewed Q3 2009 10-Q report.

On December 23, 2009, Overstock.com hired KPMG to replace Grant Thornton.

As I will describe below, it was the fallout from new damaging information revealed in Roddy Boyd's article that caused Overstock.com to mutually agree to part ways.

Fallout from Roddy Boyd article

On January 19, 2010, The Big Money published an article by investigative reporter Roddy Boyd that exposed how Overstock.com purposely withheld information from investors during 2005 and 2006 about its inadequate internal controls and engaged in a New York State sales tax dodge scheme known as "Operation Heist and Freeze."

The next day, Overstock.com and David Chidester parted ways and the company issued a tersely worded statement saying that:

On January 20, 2010 Mr. David K. Chidester left by mutual agreement, effective immediately, from his position as Senior Vice President, Internal Reporting and Information, of Overstock.com, Inc. (the “Company”).

Unlike other departures of key insiders, there were no "farewell" tributes or words of praise for Chidester from Byrne or the company. Chidester left the company "effective immediately." There was no transition period. He simply left the building in a hurry and ran like hell. The company faces a probable probe from the New York State Department of Taxation and Finance and new evidence of wrongdoing by its management for the SEC to investigate.

A separate examination of Overstock.com's SEC filings by me found that both CEO Patrick Byrne and David Chidester deliberately signed false Sarbanes-Oxley certifications for financial reports claiming that the company had effective internal controls over financial reporting. Internal company documents obtained by The Big Money contradict their signed certifications to investors.

So far, those same financial reports that were certified by Byrne and Chidester were later restated two times: in February 2006 due to inventory accounting errors and in October 2008 due to customer refund and credit errors. Overstock.com faces a third restatement of those same financial reports as a result of its use of improper "cookie jar" reserves under investigation by the SEC.

In September 2009, the SEC also subpoenaed Overstock.com for documents related to those two prior restatements in 2006 and 2008 before Roddy Boyd broke his damning article. In June 2008, the SEC concluded an earlier investigation of Overstock.com and took no enforcement action against the company. In that earlier investigation, the SEC subpoenaed documents relating to Overstock.com's 2006 restatement of financial reports. In other words, you are re-examining certain issues from your first investigation: the 2006 restatement of financial reports by Overstock.com.

Based on the fact that both Byrne and Chidester knowingly signed false Sarbanes-Oxley certifications, it's reasonable to assume that you are looking into how they obstructed your earlier investigation of the company. In addition, they probably lied to and misled PricewaterhouseCoopers, Overstock.com's former auditors. However, I have other information suggesting that PricewaterhouseCoopers may have been complicit in helping Overstock.com hide certain material accounting errors. That will be the subject of another blog post.

Written by:

Sam E. Antar

My previous open letters to the SEC (please note that each letter is based on Overstock.com's deliberately vague, incoherent, and inconsistent, and often contradictory disclosures at the time each one was issued):

08/05/09: Open Letter to the Securities and Exchange Commission: Stop Overstock.com GAAP Violations Now!

11/22/09: Open Letter to the Securities and Exchange Commission Part 2: New Information on Overstock.com's GAAP and SEC Disclosure Violations

11/23/09: Open Letter to the Securities and Exchange Commission Part 3: Overstock.com Lied About Grant Thornton and Concealed Error

11/26/09: Open Letter to the Securities and Exchange Commission Part 4: Patrick Byrne Ignores Real Issues As He Vilifies Grant Thornton

12/14/09: Open Letter to the Securities and Exchange Commission Part 5: Issuer Retaliation Complaint Against Overstock.com

01/03/10: Open Letter to the Securities and Exchange Commission Part 6: Conflicting Disclosures by Overstock.com Reveal Improper Audit Opinion Shopping

Disclosure:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes, simply because I could.

If it weren't for the 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 own Overstock.com securities short or long. My research on Overstock.com and in particular its lying CEO Patrick Byrne is a freebie for securities regulators and the public in order to help me get into heaven, though I doubt that I will ever get there anyway. I will probably end up joining corporate miscreants such as Patrick Byrne in hell. In any case, exposing corporate crooks is a lot of fun for a forcibly "retired" crook like me and analyzing Overstock.com's financial reporting is a forensic accountant's wet dream.

KPMG has sponsored at least two of my free speaking engagements to universities and colleges.

Former Overstock.com Insider David Chidester in the Hot Seat

Hopefully, David Chidester will not allow himself to be made into the fall guy by Overstock.com (NASDAQ: OSTK) and its CEO Patrick Byrne and as the Securities and Exchange Commission continues its investigation of the company. David Chidester is certainly now in the "hot seat." As I will detail below, David Chidester was a ten year veteran insider at Overstock.com. Chidester certainly knows where the black holes are to be found in Overstock.com's financial reporting. He is sure to face tough questioning by the SEC as its investigation expands.

David Chidester's tenure of Overstock.com CFO

During Chidester's tenure as CFO, every single initial financial report for every reporting period issued by Overstock.com from the company's inception to date has violated Generally Accepted Accounting Principles (GAAP) and other SEC disclosure rules. Overstock.com restated its financial reports two times due to accounting errors.

In February 2006, Overstock.com restated its financial reports from Q1 2002 to Q3 2005 due to inventory accounting errors.

In February 2006, the SEC Division of Corporation Finance discovered that Overstock.com's revenue accounting violated Generally Accepted Accounting Principles (GAAP) since the company's inception.

In October 2008, Overstock.com restated its financial reports from Q1 2003 to Q3 2008 due to customer refund and credit errors. It was the second time in two years that Overstock.com had to restate its financial reports due to accounting errors.

From Q2 2007 to Q2 2008 Overstock.com violated SEC Regulation G by using an improper EBITDA calculation that materially overstated it financial performance. When I confronted management about its improper EBITDA calculations, Patrick Byrne, Jonathan Johnson, and David Chidester lied about the company's compliance with SEC Regulation G during quarterly conference calls. In Q3 2008, Overstock.com finally corrected its improper EBITDA calculation by calling it "adjusted EBITDA" when it restated financial reports and amended its filings with the SEC to correct certain GAAP violations involving customer refund and credit errors described above (Details here).

In January 2009 David Chidester was replaced by Steve Chesnut as CFO and was moved to the postion of Senior Vice President Internal Reporting and Information. In addition, Grant Thornton replaced PricewaterhouseCoopers as Overstock.com's auditors.

In September 2009, the SEC Enforcement Division started investigating Overstock.com after reports in this blog detailed how the company used an improper "cookie jar" reserve to material inflate its financial performance from Q4 2008 to Q3 2009.

In November 2009, Overstock.com fired Grant Thornton after new accounting errors were uncovered during a separate probe by the SEC Division of Corporation Finance. Grant Thornton wanted Overstock.com to restate its financial reports, like I have called for in my blog. Instead, Overstock.com fired Grant Thornton and filed an unreviewed Q3 2009 10-Q report.

On December 23, 2009, Overstock.com hired KPMG to replace Grant Thornton.

Roddy Boyd article

On January 19, 2010, The Big Money published an article by investigative reporter Roddy Boyd that exposed how Overstock.com purposely withheld information from investors during 2005 and 2006 about its inadequate internal controls and engaged in a New York State sales tax dodge scheme known as "Operation Heist and Freeze."

My separate examination of Overstock.com's SEC filings found that CEO Patrick Byrne and CFO David Chidester both signed Sarbanes-Oxley certifications for financial reports claiming that the company had effective internal controls over financial reporting, while internal company documents obtained by The Big Money contradict their representations to investors.

Those same financial reports that were certified by Byrne and Chidester were later restated two times: in February 2006 due to inventory accounting errors and in October 2008 due to customer refund and credit errors. Apparently, both Byrne and Chidester signed Sarbanes-Oxley certifications that were knowingly false.

The SEC is certainly going to expand its investigation to include false filings to investors by Byrne and Chidester. In addition, Overstock.com faces an investigation by the New York State Department of Corporation Finance for its sales tax dodge scheme reported by Boyd and known inside the company as "Operation Heist and Freeze."

Why Overstock.com and David Chidester parted ways

A day after Roddy Boyd's article was published, Overstock.com and David Chidester parted ways by "mutual agreement." In a tersely worded statement, the company disclosed:

On January 20, 2010 Mr. David K. Chidester left by mutual agreement, effective immediately, from his position as Senior Vice President, Internal Reporting and Information, of Overstock.com, Inc. (the “Company”).

Unlike other departures of key insiders, there were no words of praise for Chidester from Byrne or the company.

Apparently, the term "mutual agreement" means that Overstock.com does not want David Chidester to be readily available to KPMG during the year-end audit and Chidester does not want to be readily available to respond to KMPG's inquiries while an SEC investigation of Overstock.com is going on.

Perhaps Overstock.com is taking the "ignorance is bliss" approach to dealing with KPMG, its new auditors. Current CFO Steve Chesnut, who joined the company in January 2009, was not around during most of the improprieties being investigated by the SEC. While Patrick Byrne does not want Chidester, who knows where the bodies are buried, to stay around.

Other issues SEC is probably considering

In September 2009, the SEC also subpoenaed Overstock.com for documents related to those two prior restatements in 2006 and 2008 before Roddy Boyd broke his damning article. In June 2008, the SEC concluded an earlier investigation of Overstock.com and took no enforcement action against the company. In that earlier investigation, the SEC subpoenaed documents relating to Overstock.com's 2006 restatement of financial reports. Therefore, the SEC is taking a second look at Overstock.com's 2006 restatement of its financial reports.

Was the SEC tipped off by an insider with personal knowledge of black holes in Overstock.com's financial reporting? In any case, it's reasonable to assume that the SEC believes that Overstock.com's management "pulled the wool over their eyes" in its earlier investigation of the company.

On the hot seat

While David Chidester certainly has personal knowledge of improprieties at Overstock.com, I view him as a weak minded follower and not a leader type. According my sources, Chidester is "yes man" who eagerly catered to the whims of his ego centric boss Patrick Byrne. Therefore, investigators will probably put Chidester under tough scrutiny and enormous pressure in order to get him to cooperate and provide testimony implicating Byrne and others. I personally think it's just a matter of time before Chidester cuts a deal. How long is anyone's guess.

Written by,

Sam E. Antar

Disclosure:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes, simply because I could.

If it weren't for the 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 own Overstock.com securities short or long. My research on Overstock.com and in particular its lying CEO Patrick Byrne is a freebie for securities regulators and the public in order to help me get into heaven, though I doubt that I will ever get there anyway. I will probably end up joining corporate miscreants such as Patrick Byrne in hell. In any case, exposing corporate crooks is a lot of fun for a forcibly "retired" crook like me and analyzing Overstock.com's financial reporting is a forensic accountant's wet dream.
KPMG has sponsored at least two of my free speaking engagements to universities and colleges.

Open Letter to KPMG: A Warning About Overstock.com, Your New Audit Client

Updated to include today's announcement of David Chidester leaving the company

To KPMG:

Recently, your firm was naive enough to become Overstock.com’s (NASDAQ: OSTK) new auditors, after the company fired and publicly vilified Grant Thornton rather than properly follow Generally Accepted Accounting Principles (GAAP) as recommended by them. Prior to firing Grant Thornton, the Securities and Exchange Commission started investigating your new audit client as a result of reports in this blog detailing how the company improperly setup “cookie jar” reserves to materially inflate its financial performance in future accounting periods (Q4 2008 and thereafter).

Roddy Boyd's exposed new troubling issues in the Big Money

Overstock.com faces a probable investigation by the New York State Department of Taxation and Finance for its sales tax dodge scheme known as “Operation Heist and Freeze” that was exposed by investigative journalist Roddy Boyd in The Big Money.

In addition, the SEC will widen its investigation of Overstock.com based on internal company documents obtained by the Big Money that show that CEO Patrick Byrne and former CFO David Chidester knowing signed false Sarbanes-Oxley certifications. The Big Money obtained internal Overstock.com documents that revealed that the company's "software system couldn’t track its inventory well, its accounting staff had trouble deciphering how much it owed and whom it had to pay." Those documents contradict Sarbanes-Oxley certifications signed by CEO Patrick Byrne and former CFO David Chidester claiming that Overstock.com had effective internal controls over financial reporting.

Overstock.com and David Chidester part ways

A day after Boyd's article was published, Overstock.com and David Chidester parted ways by "mutual agreement." Just this morning, Overstock.com announced that:

On January 20, 2010 Mr. David K. Chidester left by mutual agreement, effective immediately, from his position as Senior Vice President, Internal Reporting and Information, of Overstock.com, Inc. (the “Company”).

In addition to signing false Sarbanes-Oxley certifications, Chidester made false claims to investors about Overstock.com's compliance with SEC Regulation G, governing non-GAAP financial measures, as I will describe in more detail later in this blog post.

The term "mutual agreement" usually means that the company does not want David Chidester around to answer your questions and Chidester does not want to be readily available to respond to your inquires. After all, David Chidester knows where the "black holes" are to be found in Overstock.com's financial reporting irregularities.

Fate seems to bring us together again

It seems like fate that our paths must cross again. Many years ago, KPMG was Crazy Eddie’s auditors.* While, I scammed you, your audit team was grossly negligent. Your eagerness to please us as an audit client made committing fraud quite easy at Crazy Eddie.

Unlike you, Grant Thornton was not eager to please Overstock.com by going along with its financial reporting charades. Grant Thornton was fired and vilified by the Overstock.com, for telling the company to restate its financial reports and comply with GAAP.

Note: KPMG's predecessor firms Main Hurdman and Peat Marwick Main were Crazy Eddie's auditors. They are the "M" and the "P" in KPMG.

Personal advice

Personally, I believe that you should cut your potential exposure and resign. Some clients are simply not worth the risk. Since I don't believe that you will resign, I feel that I owe you some advice just for old time’s sake to avoid another audit meltdown similar to what happened at Crazy Eddie. However, I have my doubts that any firm can properly audit Overstock.com given its apparent lack of effective internal controls, its management integrity issues, and its continued willingness to violate GAAP and SEC disclosure rules.

Statement of Auditing Standards No. 99 - Consideration of Fraud in a Financial Statement Audit

In particular, you must consider Statement of Auditing Standards No. 99 entitled, “Consideration of Fraud in a Financial Statement Audit” in both the planning and execution of your Overstock.com audit engagement. KPMG was hired by the company only eight days before its fiscal year ended. It is quite easy for Overstock.com's dishonest management team to lie to you, to mislead you, and conceal transactions from you as its auditors because you arrived late on the scene. Hopefully, you paid careful attention to the requirements of SAS No. 99, in particular the following guidance provided below:

Creating a Culture of Honesty and High Ethics

It is the organization's responsibility to create a culture of honesty and high ethics and to clearly communicate acceptable behavior and expectations of each employee. Such a culture is rooted in a strong set of core values (or value system) that provides the foundation for employees as to how the organization conducts its business. It also allows an entity to develop an ethical framework that covers (1) fraudulent financial reporting, (2) misappropriation of assets, and (3) corruption as well as other issues.

Setting the Tone at the Top

Directors and officers of corporations set the "tone at the top" for ethical behavior within any organization. Research in moral development strongly suggests that honesty can best be reinforced when a proper example is set—sometimes referred to as the tone at the top. The management of an entity cannot act one way and expect others in the entity to behave differently.

In many cases, particularly in larger organizations, it is necessary for management to both behave ethically and openly communicate its expectations for ethical behavior because most employees are not in a position to observe management's actions. Management must show employees through its words and actions that dishonest or unethical behavior will not be tolerated, even if the result of the action benefits the entity. Moreover, it should be evident that all employees will be treated equally, regardless of their position.

For example, statements by management regarding the absolute need to meet operating and financial targets can create undue pressures that may lead employees to commit fraud to achieve them. Setting unachievable goals for employees can give them two unattractive choices: fail or cheat. In contrast, a statement from management that says, "We are aggressive in pursuing our targets, while requiring truthful financial reporting at all times," clearly indicates to employees that integrity is a requirement. This message also conveys that the entity has "zero tolerance" for unethical behavior, including fraudulent financial reporting.

The cornerstone of an effective antifraud environment is a culture with a strong value system founded on integrity. This value system often is reflected in a code of conduct. The code of conduct should reflect the core values of the entity and guide employees in making appropriate decisions during their workday.

The “tone at the top” at Overstock.com is set by its CEO and major shareholder Patrick M. Byrne, who has lied to investors about the company’s financial performance dating as far back as the year 2000 and continues his unabated lies to them today.

Every single initial financial report for every reporting period issued by Overstock.com from the company's inception to date has violated GAAP and other SEC disclosure rules. So called "clean" audit opinions issued by PricewaterhouseCoopers (predecessor auditor to Grant Thornton) turned out to be wrong as the company has already restated its financial reports two times in the last three years. Overstock.com now faces a third restatement of such reports as a result of its improper use of "cookie jar" reserves under investigation by the SEC.

Rather than comply with GAAP and SEC disclosure rules, the company stubbornly continued to violate such rules and engaged in a campaign of harassment, intimidation, smears, threats, and pretexting directed at me and other critics (Details from my blog here and here and from investigative journalist and blogger Gary Weiss here). Overstock.com's independent audit committee has failed to enforce the company's Code of Business Conduct and Ethics and rein in management's improper and illegal behavior.

Therefore, I believe that it is nearly impossible for you to adequately increase the scope of your field work to conduct a proper audit of Overstock.com, as required by SAS No. 99. There are simply too many management integrity issues. The company's management has continuously lied to investors and has shown a willingness to issue financial reports that violate GAAP and SEC disclosure rules. On top of that, you cannot make up for the fact that you arrived on the scene only eight days before the fiscal year ended.

Below is a summary of management's continuous pattern of lying to investors and willful failure to follow GAAP and SEC disclosure rules.

Lies by Patrick Byrne prior to Overstock.com's initial public offering in 2002

From December 2000 to March 2002, Patrick Byrne lied about Overstock.com’s financial performance in a series of interviews on national television and in various publications prior to the company’s initial public offering in March 2002. Patrick Byrne deceptively used pro forma non-GAAP “gross value merchandise value sales” (instead of the lower GAAP commission revenue) to hype the company’s top-line performance in order to falsely claim that Overstock.com was profitable, when it never was profitable (Details here).

Overstock.com violated SEC Regulation G governing non-GAAP financial measures

From Q2 2007 to Q2 2008 Overstock.com improperly computed EBITDA by starting its calculation with operating income and adding back interest, taxes, depreciation, amortization, and stock based compensation. In other words, Overstock.com improperly defined EBITDA as operating income before interest, taxes, depreciation, amortization, and stock based compensation.

However, SEC Regulation G requires EBITDA to be computed as net income (not operating income) before interest, taxes, depreciation, and amortization (and not stock-based compensation). Therefore, Overstock.com was not permitted by Regulation G to use operating income as the starting point to compute EBITDA and the company was not allowed to eliminate stock-based compensation from its EBITDA calculation.

Since Overstock.com had reported losses from discontinued operations in various reporting periods, by improperly using operating income as the starting point to calculate EBITDA, it was materially overstating EBITDA by the amount of loss from discontinued operations. Likewise, by Overstock.com improperly eliminating stock-based compensation from its EBITDA calculation, the company was materially overstating its reported EBITDA by such amount in each reporting period.

When I confronted management about its EBITDA violations, Patrick Byrne, Jonathan Johnson, and David Chidester lied about the company's compliance with SEC Regulation G during quarterly conference calls and Byrne vilified me for raising the issue. In Q3 2008, Overstock.com finally corrected its improper EBITDA calculation by calling it "adjusted EBITDA" when it restated financial reports and amended its filings with the SEC to correct certain GAAP violations involving customer refund and credit errors described below. However, the company improperly failed to disclose in amended SEC filings that the reason for changing its EBITDA calculation was because of violations of Regulation G (Details here).

Overstock.com's history of GAAP violations

In February 2006, Overstock.com restated financial reports dating from Q1 2002 to Q3 2005 to correct its improper inventory accounting.

In February 2008, the SEC Division of Corporation Finance discovered that Overstock.com's revenue accounting violated GAAP from the company's inception to Q3 2007 (Details here).

In October 2008, Overstock.com restated its financial reports from Q1 2003 to Q2 2008 due to customer refund and credit errors. However, the October 2008 restatement did not include corrections arising from underbilled offsetting costs and reimbursements that were already earned from its fulfillment partners during those same corresponding periods, less a reasonable estimate of uncollectable amounts.

In other words, Overstock.com should have gone back and corrected or restated its financial reports to properly reflect income it already earned from offsetting costs and reimbursements due from its fulfillment partners, less a reasonable estimate for uncollectable amounts. Instead Overstock.com violated GAAP by improperly moving income that the company already earned in Q2 2008 and prior reporting periods to Q4 2008 and future reporting periods. In effect, Overstock.com improperly created a "cookie jar reserve" to materially inflate future earnings or reduce future losses (Details here).

In February 2009, I alerted both the Securities and Exchange Commission and Overstock.com's audit committee and management about the company’s improper use of a "cookie jar" reserve to inflate its financial performance in future reporting periods. Overstock.com continued to stubbornly refuse to restate its financial reports to comply with GAAP.

In September 2009, the SEC Enforcement Division and later the Division of Corporation Finance started parallel probes of the company.

In October 2009, the SEC Division of Corporation Finance discovered that Overstock.com overpaid a fulfillment partner $785,000 during 2008. The company recovered that overpayment in Q1 2009 and improperly reported the overpayment recovery as income in that same quarter, rather than properly restate its 2008 financial reports to correct that error. In addition, Overstock.com improperly concealed the recovery of the overpayment by including that amount in recoveries from underbilled fulfillment partners in Q1 2009 instead of separately disclosing the overpayment recovery in its financial reports (Details here).

Grant Thornton claimed that it did not know about the 2008 overpayment and Q1 2009 recovery from the fulfillment partner until October 2009. After learning about the overpayment, Grant Thornton told Overstock.com that it must restate its prior financial reports to correct that error and comply with GAAP. On November 13, 2009, Overstock.com fired Grant Thornton, rather than restate its financial reports and later filed an "unreviewed" Q3 2009 10-Q that finally disclosed the overpayment to the fulfillment partner. (See details here).

SAS No. 99 clearly states:

The cornerstone of an effective antifraud environment is a culture with a strong value system founded on integrity.

If company management can lie to investors, what makes you think that they won't lie to you in their efforts to violate GAAP and SEC disclosure rules? Therefore, if you decide to maintain Overstock.com as your client, proceed at your own risk.

Warmest regards,

Sam E. Antar

Disclosure:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes, simply because I could.

If it weren't for the 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 own Overstock.com securities short or long. My research on Overstock.com and in particular its lying CEO Patrick Byrne is a freebie for securities regulators and the public in order to help me get into heaven, though I doubt that I will ever get there anyway. I will probably end up joining corporate miscreants such as Patrick Byrne in hell. In any case, exposing corporate crooks is a lot of fun for a forcibly "retired" crook like me and analyzing Overstock.com's financial reporting is a forensic accountant's wet dream.

KPMG has sponsored at least two of my free speaking engagements to universities and colleges.