Marc Cohodes Buys Stock & Vanishes From Overstock CEO’s Smear Site

Summary

• In recent months, every disparaging reference to former hedge fund manager Marc Cohodes was removed from Deep Capture, a website that viciously smears the financial press and critics of Overstock.com CEO Patrick Byrne.

• Cohodes acquired a position in Overstock shares (NASDAQ: OSTK) beginning in May 2017, and hyped Overstock at a widely publicized Grant’s conference on Oct. 10, saying the stock was going “way the f**k up.” His praise of the company caused the shares to climb as much as 8.7% on the day he spoke at the conference.

• By late October 2017, Cohodes’ name was completely excised from the Deep Capture posts that had falsely claimed he improperly colluded with the press. The names of journalists and other Byrne targets were not removed from those posts. A post referring to him favorably was not touched.

• Coinciding with his vanishing from Deep Capture, Cohodes has lavishly praised Byrne, falsely contended that the smear campaign is a “legacy” issue of no current relevancy, derided Byrne’s victims as “haters,” and said that targets of Byrne’s smears should “let it go” even though Byrne has never retracted his defamatory claims or closed his website.

• Removal of Cohodes’ name from Deep Capture was not disclosed by Cohodes or Byrne, or by the website.

People change their minds about stocks and CEOs all the time. But I am deeply troubled by the way a retired money manager named Marc Cohodes, who once was sued by Overstock.com, has morphed into a shrill advocate of the company. He also has become a tireless shill for its CEO, Patrick Byrne, a con artist who has cooked the books, attacked the press and stalked critics.

His sudden conversion has been written up in Bloomberg and Barron’s, but with all due respect to the fine journalists who wrote those articles, they did not tell the full story.

What these articles did not point out was that Byrne has done Cohodes a really big favor in return for becoming both a shareholder and a lapdog—a favor so significant that I believe that it may be construed as compensation:

In recent months, every disparaging reference to Cohodes has been removed from posts that had previously attacked him on Deep Capture, a fake news site Byrne created in 2007 to harass, stalk and smear critics, short-sellers and the media.

It is true that the Deep Capture site was discredited by the forgery conviction of the one of the founders and longtime operators of the site, Byrne aide Judd Bagley, and by a devastating 2016 libel verdict which excoriated Byrne and found that the truth "was of no consequence” to him and Deep Capture. However, despite this, I have no doubt that removal of his name was worth a great deal to the hypersensitive, egotistical Cohodes.

According to Bloomberg, Cohodes commenced his stock positions in Overstock in May 2017 and added to them after meeting with Byrne a month later. He appeared at a Grant’s conference on Oct. 10, giving an enthusiastic promotion of the stock, which immediately staged a run-up, aided by Cohodes’ intense hype and resulting publicity.

After buying the stock, Cohodes lavished praise on Byrne at the Grant's conference saying "I admire him" and through his Twitter feed, despite his history of atrocious behavior (detailed below).

After taking his Overstock position, Cohodes also engaged in a vigorous behind-the-scenes effort to pressure critics to stop criticizing Byrne on Twitter. He has made phone calls and sent emails and text messages to various parties, myself included, recently telling me to “lay off Byrne.”

I could not do so in good conscience because Byrne has never retracted a single one of his lies. In addition, Byrne has never apologized to me for his vicious attacks against me in retaliation for the accounting shenanigans that I exposed, that he denied, and in which I was vindicated—Overstock was forced to restate its financial reports.

Cohodes has never provided any facts to support his view that Byrne has changed in any way whatsoever—that his character had improved, that he is no longer dishonest, no longer ready to cook the books if it suited his purposes, no longer willing to stalk and smear critics. In fact, by word and deed, Byrne has reiterated that he stands by everything he has said and done.

Nevertheless, Cohodes has been insistent, constantly nagging me directly and through third parties. He even made up out of thin air a personal history between us that never existed, to support his claim that I owed him an obligation to shut up about Byrne. It was strange and creepy, it was childish, and it made no sense.

It is still strange and creepy, but now it is starting to make sense.

How Byrne Expunged Cohodes From Deep Capture

A comparison of Deep Capture posts as they currently appear, vs. recordings of their past appearance on the Wayback Machine, shows how Cohodes was edited out of disparaging posts on the website. Those posts were not removed and were not edited in any other way. The conspiracies and attacks on journalists remain on the site to this day, but with Cohodes no longer mentioned.

For instance, an attack on the integrity of journalist Bethany McLean, “Fortune Magazine Stonewalls Exposure of Bethany McLean Perfidy,” looked like this as recently as Sept. 29, 2017, according to the Wayback Machine (click on image below to enlarge):

As of October, 23, 2017, two weeks after the Grant’s conference, it looked like this according to Google's cache (click on image below to enlarge):

The editing took place sometime between Sept. 29 and Oct. 23. The Grant’s conference, as noted, was on Oct. 10.

Observe that Byrne has changed “Marc Cohodes” to “[redacted].” This implies that his name was removed by some legal or official mechanism, when in fact his name was taken out to make Cohodes happy.

There was just one mention of Cohodes in that post. But there were numerous references to him in another smear job “Bethany McLean: Your Benefit of the Doubt is Hereby Revoked,” which quoted emails that were obtained through pretrial discovery in a lawsuit not involving Overstock. Its purpose was to show a conspiracy between Cohodes and McLean and it attacked the integrity of McLean, Roddy Boyd and Herb Greenberg (all investigative reporters). The three are sneeringly referred to as “journalists,” using scare quotes, and McLean, the principal target of this post, is attacked at length.

The Deep Capture post looked like this as of Sept. 29, 2017, according to the Wayback Machine (click on image below to enlarge):

But by October 22, twelve days after Cohodes did his pump job at Grant’s conference, and coinciding with his pleas to myself and others to shut up about Byrne, every reference to Cohodes was cut out of that post. It now appeared like this, according to Google's cache (click on image below to enlarge):

It was like that throughout the post. Rather than delete it entirely—he was still on board with the underlying conspiracy theory and attacks on journalists—Byrne removed Cohodes’ name from this Judd Bagley post, which turned a routine exchange between reporter and source into the convening of an evil cabal.

Byrne even retained the ridiculous suggestion that “the emails you’ve just read are the real reason Bethany McLean made a sudden departure from the world of business journalism earlier this year.” That’s a reference to her departure from Fortune to work for the prestigious Vanity Fair magazine. That would be considered upward mobility anywhere but in Byrne’s nutty world—and he still feels that way.

That nonsense was retained. McLean’s, Boyd’s and Greenberg’s names were retained. The attack on their integrity remained. Cohodes, however, was gone.

Another example is a crude 2008 Byrne smear job on journalist Roddy Boyd.

It still retained Cohodes’ name on Oct. 13, 2017, three days after the Grant’s conference, according to the Wayback Machine (click on image below to enlarge):

But sometime between October 13 and October 20, 2017, according to Google's cache, the article was edited to look like this (click on image below to enlarge):

Cohodes’ name was removed from the end of the sentence “Hedge funds can do no wrong, particularly if they belong to a small constellation whose brightest lights are Stevie Cohen, Dan Loeb, David Einhorn, Jim Chanos, and David Rocker.” He was retroactively removed from the conspiracy nine years after Byrne concocted this rubbish.

The same editing job took place in post after post in which Cohodes was negatively mentioned prior to becoming a Byrne fan and shareholder. In every instance he was gone by the latter part of October, after he had acquired shares and had become a Patrick Byrne cheerleader.

The only article I could find in which Cohodes’ name was retained was a 2009 Deep Capture post in which Byrne praised Cohodes while attacking his former partner David Rocker. But if Byrne was taking a shine to Cohodes as far back as 2009, or at least trying to drive a wedge between him and Rocker, why did he wait eight years before cutting his name out of Deep Capture?

What happened to cause this sudden removal of his name—as if we didn’t know?

Cohodes likes to make a big show of giving to journalism nonprofits, and he praises journalists he claims to admire. He sometimes beats his chest and “defends” reporters who have been intimidated by CEOs. But he does so in self-serving fashion on Twitter in conjunction with his attacks on short targets, whose CEOs he scorns even though most are not nearly as bad as Byrne.

He only seems to care about journalists, it seems, if they are not writing negatively about his favorite stock. If they do, they are “haters” and “bleacher bums.”

Ironically, Byrne did much the same thing over the years, praising some journalists while attacking others.

Deep Capture and Byrne’s obsession with critics

Even before Deep Capture was created in 2007, Byrne was obsessed with criticism of the company and, directly and through surrogates, viciously attacked critics and tried to co-opt them. He has never repudiated his tactics and continues to employ them to this day.

In a Fortune article, McLean revealed that Byrne taunted her in misogynistic fashion while she was researching the story, saying in an email “why exactly did you become a reporter? Giving Goldman traders blowjobs didn't work out?"

His vicious personal attacks on McLean continued when he established his Deep Capture fake news website in 2007, and they forced her to stop covering the company, as she recently told Columbia Journalism Review.

Byrne was believed to have advance knowledge of a 2006 SEC subpoena of journalists who wrote negative articles about the company. After an uproar, the subpoenas were later withdrawn.

When Bloomberg columnist Susan Antilla wrote a column on his smear campaign in early 2007, Byrne’s operative Judd Bagley attacked her viciously on a stock message board. Deep Capture was established later that year. Byrne has denied that it is run by Overstock, but he conceded that he is Deep Capture’s publisher and “ultimately controls what is published on the website” in sworn deposition testimony.

I have written frequently about Byrne and Deep Capture, as have many others. One of the most notorious episodes took place in 2009, when Byrne used Judd Bagley to pretext journalists and critics (including me) to gather information about their family members (including minor children) and friends by setting up a phony profile on Facebook under the name Larry Bergman. That got Bagley kicked off Facebook. Barry Ritholtz wrote about it at the time, as did others. Even though it was a public relations disaster that would shame most CEOs, Byrne expressed no regret.

In February 2009, I exposed violations of accounting rules by Overstock.com that allowed it to fabricate a Q4 2008 profit rather than properly report a loss in that quarter and overstate its reported income in later quarters. 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. During that time, Judd Bagley injected himself into my divorce proceedings by contacting my former spouse, who ignored him.

Bagley’s illegal actions were a clear retaliation for my pointing out the company's accounting violations. My work was vindicated when, at my request, the Securities and Exchange Commission investigated Overstock.com and forced it to restate its financial reports to correct its illegal accounting practices.

Again, Byrne has stood by everything I’ve just described.

Cohodes dissembles to protect Patrick Byrne

Cohodes has said that he “bets the jockey, not the horse.” Until recently he viewed Byrne as a crazy fool. During deposition testimony in a lawsuit between Overstock and Goldman Sachs, Cohodes described Byrne as a nut who was not fit to run a public company (click on image below to enlarge).

Cohodes now says he has changed his mind. He has not explained, either publicly or privately, what facts support his view that Byrne is not crazy, never has been crazy, and is and was fit to run a public company. That’s because there aren’t any.

Byrne has not changed one bit. Even his widely debunked naked short selling conspiracy theory has been cited by Byrne in explaining his widely ballyhooed effort to replace Wall Street’s clearing mechanisms with blockchain technology.

Cohodes has claimed on Twitter—without disclosing his Deep Capture vanishing act—that concerns about Byrne’s character and his attacks on the media are all “legacy bullshit” dating back “thirteen years”.

Here is a typical recent Cohodes tweet pumping Overstock, slobbering over Byrne, disparaging his victims as “haters,” and hyping a new Overstock that suddenly materialized after he took a position in the stock.

This kind of cynical behavior is amoral and insulting to Byrne’s numerous targets, including myself, his ex-partner David Rocker, other short-sellers, bloggers, analysts, and journalists like Carol Remond, Joe Nocera, Herb Greenberg, Gary Weiss, Roddy Boyd and Bethany McLean, all of whom are currently under attack on Deep Capture.

By whitewashing the past, dissembling about the present, and mocking Byrne’s victims, Cohodes has misled investors about a risk factor that is unique to Overstock: its CEO, whose behavior has damaged Overstock’s reputation.

Cohodes has every right to have his own opinion about Byrne. But as Daniel Patrick Moynihan once put it, “everyone is entitled to his own opinion, but not his own facts.”

Byrne’s smear site is alive and well. Not a word on Deep Capture—or any of the other venues Byrne and his surrogates have used to spread their lies—has ever been repudiated by Byrne. He has not recently created fresh posts smearing journalists and critics for the simple reason that his tactics work.

There hasn’t been any negative media coverage of Byrne since November 2015, when M.L. Nestel wrote an article on Byrne and chairman Jonathan Johnson for the Daily Beast. As he prepared that article, he sent over to Overstock some questions that Byrne did not like. As a “shot across the bow,” Byrne’s aide Mark Mitchell attacked Nestel on Deep Capture, saying he had gone over to the “dark side.”

Byrne renewed his attacks on the media in an interview with Jesse Ventura on the Kremlin’s RT network on November 3, just three weeks ago. Byrne surrogate Evren Karpak, a Byrne hireling since 2007 and now a Deep Capture “partner,” unleashed a vicious personal attack on investigative journalist Gary Weiss and myself on a stock message board on November 23, just four days ago.

Byrne is also vigorously fighting the libel suit that I mentioned earlier, which resulted in a lengthy judgment so scathing that even the Utah newspapers reported it. The judge dissected in detail Byrne’s deployment of lies to attack his victims. An appellate court hearing is scheduled for January 2018.

Byrne has never withdrawn his vicious lies concerning the plaintiff in that libel suit, Altaf Nazerali, never apologized, never retracted the blog posts that smeared him. Instead he is fighting that suit tooth and nail, even though his case was so thin that he didn’t produce a single witness in his behalf.

Clearly an active corporate attack site, with a staff ready to spring into action at a moment’s notice, a Byrne surrogate smearing a journalist just four days ago, and a team of lawyers fighting a libel suit at a hearing scheduled for January 2018—none of this is either “legacy” nor “bullshit,” and is happening now, not “thirteen years ago.” Opposing such a CEO does not make one a “hater.” The correct word is “rational."

Cohodes likes to brag about how he has “skin in the game” while Byrne’s critics are “in the bleachers” and are “bums.” That of course turns ethical behavior on its head, by saying that only people who have a conflict of interest have a right to speak out about corporations and CEOs. People with no conflict of interest, in Cohodes’ view, occupy “cheap seats.” (That would include, as I noted earlier, all of the journalists Cohodes seeks to cultivate.)

But when it comes to Byrne’s smear campaign, the Overstock CEO saw to it that Cohodes no longer has skin in that game.

Deep Capture has been used for blackmail

The libel suit I referred to above, brought by Canadian businessman Altaf Nazerali, revealed in detail how Byrne and his surrogates systematically published fabrications on his Deep Capture site. It also exposed how Byrne sought to use the site for blackmail.

According to pretrial deposition testimony cited in the court judgment:

After his telephone conversation with the plaintiff, [Byrne surrogate Mark] Mitchell emailed Mr. Byrne “this is going to be fun” and “I am going to talk to him on Friday and see if I can meet him in person”, and also “unless you [Byrne] have objections I am also going to suggest to him (I can do this in a roundabout way) that while I consider the facts to be correct, I am open to changing the story if he can provide other verifiable information that would be valuable”, and “I might even suggest that I will be willing to remove his name from the story altogether if he were to provide me with, say, trading records of global terrorist Yasin al- Qadi”, and lastly “if Nazerali agrees, nothing lost, after he gives me the information I will just put him back in the story. Sleazy, but, well it is what it is”; (Emphasis added)

The libel suit judgment also cites a recorded phone conversation in which Nazerali told Mitchell about errors in the Deep Capture post. After Nazerali enumerated the errors, Mitchell said “the arrangement that I usually have with sources is that if they’re helping with a story, I leave them out.”

In addition to using Deep Capture for blackmail, his surrogate Bagley attempted to blackmail an anonymous blogger who wrote several posts exposing Bagley’s cyber-stalking and smear campaign.

In the email below, Bagley threatened to “dox” the blogger if he did not desist (click on image to enlarge).

This attempt to blackmail the blogger, which received attention at the time in Dealbreaker, did not succeed because the blogger would not be scared off. Bagley made good on his threat two days after his extortion attempt was exposed. The blogger didn’t care. He kept up his good work for months afterwards.

I believe that this is important context in evaluating the removal of Cohodes’ name from Deep Capture. I don’t believe that Cohodes was blackmailed, but the foregoing shows that Byrne will go to any lengths to remove unflattering content from the Internet.

Conclusion

It is possible that Byrne removed Cohodes’ name from Deep Capture out of the goodness of his heart, without even thinking about how Cohodes was showering him with praise, and was driving up the price of a stock in which Byrne is the largest shareholder.

It is possible that Byrne was not aware that Cohodes was now a shareholder, was not aware of the Grant’s conference and Cohodes’ statement that the shares are “going way the fuck up.”

It is possible that Byrne did not know the share price climbed as much as 8.7% the day Cohodes pumped it at Grant’s.

It is possible that Byrne did not read the Bloomberg and Barron’s articles, and thus could not possibly have had any intent to compensate Cohodes for any of the foregoing.

It is possible that Cohodes had no idea his name was being cut out of the Deep Capture articles where he was under attack.

All this is possible, but not very probable.

Everyone who knows Cohodes can attest to his vanity and his sensitivity to criticism. Even his Twitter profile makes that clear, saying that “the best motivator is disrespect,” which suggests that the converse is true, that he craves stroking. Therefore I do not believe that his name was expunged from Deep Capture without Cohodes knowing about it.

If that indeed is his alibi, one has to wonder whether the rest of his due diligence on companies he analyses is equally incomplete and sloppy. I no longer have much respect for Cohodes’ judgment and character, but I find it hard to believe that he is that inept.

Written by,

Sam Antar

Recommended Reading:

Recommended Reading:

5,000 Reasons Why the Overstock.com Saga is Crazier Than Ever, by Gary Weiss Blog, January 30, 2018

Stock Promoter Marc Cohodes Issues a Death Threat, by Sam Antar, YouTube, November 18, 2018

How to NOT Do Investigative Journalism, by Tracy Coenen, The Fraud Files Blog, November 13, 2019

Why Roddy Boyd’s Ethics Failure Matters, Tracy Coenen, The Fraud Files Blog, November 14, 2019

Disclosure:

I am a convicted felon and a former CPA. As the CFO of Crazy Eddie, I helped mastermind one of the largest securities frauds uncovered during the 1980's. Today, I advise law enforcement agencies and professionals about white-collar crime and train them to catch the crooks. I perform forensic accounting services for law firms and other clients.

I have no investment position in Overstock.com shares, long or short.

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

As a criminal myself, in my many years managing the Crazy Eddie fraud, I learned to be careful about employing people with mental problems or substance abuse issues. Byrne himself, of course, was completely unhinged, with his paranoid rants and sometimes anti-Semitic and misogynist comments, making him a laughingstock. In January 2013, Byrne was arrested for having a handgun concealed in his luggage as he tried to board a commercial flight at Salt Lake City airport, and he told police he sleeps with a gun. He hired paid goons like Bagley (currently employed as the Director of Communications at Overstock.com) to stalk his real and imagined adversaries and to write lengthy conspiracy theories on the Internet.

In the years that I’ve written extensively about Overstock.com (NASDAQ: OSTK), I have always been amazed about its bizarre CEO Patrick Byrne and the gang of misfits he has surrounded himself with. By far, the worst was a real loser named Judd Bagley. He dredged up that character from the bowels of the Internet, hiring him as a kind of all-purpose stalker and cybercriminal, harassing and intimidating certain investigative reporters and critics of Overstock.

Over the years, as Byrne lied to investors, used illegal accounting tactics to overstate profits, defrauded consumers, and viciously attacked his critics, he used Bagley as a kind mafia hitman to assassinate the reputations of critics and journalists who questioned in actions, a role that Bagley clearly relished.

Though Byrne managed to charm a tiny number of idiots in the media, mostly members of the Utah press corps, it was plain to me from the start that Bagley clearly had “issues.” His obsessions and the vicious hatred that he exhibited in his online postings, combined with his protestations of purity and phony “piously religious family man” image, raised alarm bells. But only recently have I been able to learn what an absolute horror show, hypocrite and creep this Byrne employee was, and is.

It turns out that Judd Bagley is an admitted criminal and adulterer according to publicly filed court documents I’ve obtained [State of Utah vs. Judson Montgomery Bagley and Plaintiff Husband vs. Judson Montgomery Bagley]. (Note: Bagley, Byrne and Overstock.com are enmeshed in a libel suit brought by one of the targets of his “Deep Capture” website, but I emphasize that I was initially tipped off about Bagley's crime by an Internet sleuth, not the people suing him. During my research, I discovered another court case involving his adulterous affair. I obtained the court documents from both cases on my own.)

Meanwhile, Overstock.com’s former President and current Board Chairman, Jonathan Johnson is planning on running for Governor in Utah, while Judd Bagley remains on the payroll as its chief spokesman to the media and investors.

How Judd Bagley Stalked Critics

A bit of background first.

In 2005, Patrick Byrne made obscene and misogynistic comments to a female reporter suggesting that she gave “blowjobs” to Goldman Sachs traders after she published an article that he disliked. Two years later, investigative journalist Roddy Boyd from the New York Post reported that Patrick Byrne used Judd Bagley to secretly stalk and conduct a smear campaign against critics on the web. Bagley used anonymous aliases on stock chat boards to attack critics of Byrne. He hacked into the accounts of stock chat board posters and implanted spyware in emails to improperly gain personal information on critics. Bagley retaliated by attempting to blackmail the tech savvy blogger who initially exposed his activities. Then in 2009, Patrick Byrne used Judd Bagley to pretext journalists and critics (including me) to gather information about their family members (including minor children) and friends by setting up a phony profile on Facebook under the name Larry Bergman. That resulted in a spate of bad publicity and got Bagley kicked off Facebook.

Patrick Byrne Mugshot

In February 2009, I exposed certain violations of accounting rules by Overstock.com that allowed it to fabricate a Q4 2008 profit rather than properly report a loss in that quarter and overstate its reported income in later quarters. 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. During that time, Judd Bagley injected himself into divorce proceedings by contacting my former spouse who ignored him. Bagley used illegal pretexting tactics to "friend" my children and relatives on Facebook using his phony account. Bagley’s illegal actions was a clear retaliation for my pointing out the company's accounting violations. My work was vindicated when at my request the Securities and Exchange Commission investigated Overstock.com and forced it to restate its financial reports to correct its illegal accounting practices.

Judd Bagley: Admitted Forger, Drug Addict and Adulterer

Judd Bagley should have been thrown in jail a long time ago for violating a host of federal laws. But our captured regulators have generally ignored Overstock’s serial law violations. Eventually, though, the drug-addicted misfit wound up behind bars.

On April 1, 2013, Judd Bagley was charged with eight felony counts of “Obtaining a Prescription Under False Pretenses, a Third Degree Felony, in violation of Utah Code Ann § 58-37-8(3)(a)(ii)….” According to Court Documents, Bagley altered the same prescription nine times by forging the dates and altering the names of substances he was looking to obtain illegally:

B. Kirkham, Lehi Police Department, having probable cause to believe a crime was committed, submitted evidence in support of the filing of this Information: On May 4, August 30, October 29, and December 11, 2012, the defendant presented a script for controlled substances (Lortab and Adderall) at the Macey's Pharmacy in Lehi. The script had originally been written in December, 2010, to be used one time. The defendant had altered the dates and/or the substance in order to receive the substances fraudulently. He did the same thing with the same original script, filling prescriptions for Lortab and Adderall on June 4 and August 30, 2012 and January 2 and January 31, 2013 at the WalMart pharmacy in American Fork. He presented the script again in February, 2013, but the pharmacy refused to fill it. Defendant admitted his conduct when interviewed by police. [Emphasis added.]

According to the arrest record, that lowlife Judd Bagley brought along his minor daughter with him to the WalMart pharmacy where he attempted to obtain medications with the forged prescription (page 13 of 17).

Police "suspect" Judd Bagley brings minor daughter to obtain drugs with forged prescription

On April 4, 2013, Judd Bagley was ordered to report to Utah County Jail for arrest and to have his mugshot and fingerprints taken by the police. On June 4, 2013, Bagley pleaded guilty to three Class A criminal misdemeanors. He was ordered to wear a GPS tracking device in lieu of spending time in jail before his sentencing.

On July 1, 2013, Bagley was sentenced to a one year jail sentence for each criminal misdemeanor, to be served concurrently. He was fined $7,500 ($2,500 for each misdemeanor). The Judge suspended his jail sentence and $6,641 of fines. He was required to complete 120 hours of community service and placed on probation for one year.

While all this was happening, Bagley’s downward spiral continued. He is married and has four young children. Apparently his criminal conduct took a toll on his marriage, because Bagley decided that as long as he was destroying his own family, he might as well destroy an innocent family as well. What follows reminds me a great deal of the serial infidelity of my cousin Eddie Antar, who cheated on his wife and spread misery wherever he went.

On December 13, 2013, Judd Bagley was sued by the husband of a woman he had seduced. It was not the sad excess of a man in midlife crisis, but the vicious act of an out-of-control drug addict, a tawdry affair that smacks of sexual harassment--in addition to exposing Bagley as an absolute hypocrite. The man accused Bagley of intentional infliction of emotional distress, negligent infliction of emotional distress, and alienation of affections. Not mentioned in the suit, obviously, is the toll this open adultery with a married woman wrought on Bagley's long-suffering wife Kristen and their young children.

According to the lawsuit, Bagley took advantage of his position as a sponsor at the Karl G. Maeser Preparatory Academy in Lindon, Utah by conducting an extramarital affair with the plaintiff's wife. In the course of ruining this man's marriage, the woman “admitted to having sex” with Judd Bagley “at local hotels, his home in Lehi, and [the woman's] home....” It's not known how the officials of the Karl G. Maeser Preparatory Academy feel about Bagley's predatory activity, but we can only guess.

On January 2, 2014, Bagley initially sought to cover up the affair by denying it in his response to the lawsuit filed in court. Bagley further attempted to cover up the affair by refusing certain discovery requests for documents and information, and denying wrongdoing in his answer.

That turned out to be a lie.

On July 18, 2014, the husband filed an amended complaint and on that same day, faced with a mountain of evidence proving his guilt, Bagley finally admitted to having a “consensual relationship” with the woman starting in “April or May 2012.”

Judd Bagley’s lawyers sought to dismiss the lawsuit by blaming the victim and throwing mud at the man he had victimized. Somehow, to Bagley's addled junkie's logic, there was nothing wrong with Bagley cheating on his wife and engaging in an affair with a parent at the Karl G. Maeser Preparatory Academy because, he claimed, the woman was in a troubled marriage:

This case airs the "dirty laundry" of an unfortunate personal and family matter. But the judicial system is not the proper venue for retribution after spouses have been unfaithful, particularly when Plaintiffs marriage was already troubled.

In other words, the plaintiff and his wife had marital problems, so it was okay for Bagley to waltz in and break up that marriage.

Bagley's lawyer went on to claim that:

Bagley’s participation in a consensual relationship with [the woman], while unwise and regrettable, does not rise to the “outrageous and intolerable” standard required by Utah law for a claim of intentional infliction of emotional distress.

Bagley fought the suit for months with similar rationalizations, evasions and lies. In one written interrogatory, the husband asks Bagley to “identify how many times you have had intimate contact, including but not limited to kissing and sexual intercourse with [his wife]." Bagley responded “Defendant does not know the answer to this question” and refused to provide any responsive information to the question.

Maybe he lost count. I believe that Bagley was probably having multiple affairs at the time that he was cheating on his wife, being an addicted individual with nothing resembling a conscience.

Bagley’s lawyers concluded that:

Bagley does not assert that he behaved admirably in participating in a relationship with [the plaintiff's wife]. However, his actions do not rise to the level of the causes of action alleged in the Complaint, and Plaintiff cannot meet his burden to show each of the requisite elements. Bagley respectfully requests that the Court grant his motion for summary judgment on all causes of actions and dismiss the case.

On September 3, 2014, the lawsuit was dismissed by a mutual agreement between the parties. It is not clear from the court file if Bagley had to pay money to get it withdrawn. Nor can it be quantified how much pain this disgusting junkie inflicted on everybody involved, something that no amount of money can make up for.

I’m no angel myself. I’ve committed crimes and all sorts of sins. But I’ve faced up to them. Bagley has not. A document filed with the court in May 2013 indicates that Bagley has undergone treatment in a Twelve Step program, in the course of shaking off his drug addiction, a very serious misery that I have no doubt whatsoever contributed to his vicious criminal conduct at Overstock, which Byrne exploited for his own ends.

Obviously the treatment didn't take. The Twelve Steps call for a person to have a spiritual reawakening and turn his or her life around. Yet at the time that letter was written and for months afterwards, Bagley was conducting a brazen affair, preying on another man's wife.

Step Eight of the Twelve Steps reads as follows: “Made a list of all persons we had harmed, and became willing to make amends to them all.” Bagley would have a very long list of people to make amends for his years of lies, most of which were much worse than the forgeries he conducted to fuel his addiction. I don’t expect him to even attempt to live up to the Eighth step, because he is an unrepentant criminal as well as a dope addict.

Written by,

Sam Antar

This post was updated to include a mugshot of Judd Bagley in police custody for forgery, police arrest record, and police interrogation video obtained by investigative journalist Gary Weiss under the Utah Freedom of Information Act

Worthy Reading: Closing the File on a Criminal and Junkie Named Judd Bagley by Gary Weiss

Disclosure:

I am a convicted felon and a former CPA. As the CFO of Crazy Eddie, I helped mastermind one of the largest securities frauds uncovered during the 1980's. Today, I advise law enforcement agencies and professionals about white-collar crime and train them to catch the crooks. I perform forensic accounting services for law firms and other clients.

I have no investment position in Overstock.com, long or short.

Overstock.com Facing Dismal Fourth Quarter Numbers?

Yesterday, Overstock.com (NASDAQ:OSTK) disclosed that it was forced to pay off its existing obligations under a Master Lease Agreement with U.S. Bank to avoid an anticipated default under its covenants on December 31, 2011. So far, Overstock.com has lost $16 million in the first nine months of the year compared to only a $1.1 million loss during the previous year's nine month period. The termination of the Master Lease Agreement by Overstock.com to avoid a pending default appears to confirm that it will report dismal fourth quarter 2011 numbers.

According to the 8-K report filed with the Securities and Exchange Commission after the market closed on December 28, 2011:

On December 27, 2011 Overstock.com, Inc. (the “Company”) and U.S. Bancorp Equipment Finance, Inc. — Technology Finance Group (“Lessor”), agreed to terminate a Master Lease Agreement, dated September 17, 2010 (“Master Lease Agreement”) and all related schedules. The Company paid approximately $20.1 million to Lessor in connection with the amendment and agreement to terminate the Master Lease Agreement, including approximately $1.2 million in prepayment premiums. The aggregate amount the Company paid to amend the Master Lease Agreement and terminate the schedules associated with the Master Lease Agreement was less than the amount the Company would have been required to pay over the scheduled life of the Master Lease Agreement and all related schedules. By this transaction, the Master Lease Agreement was first amended to eliminate all financial covenants, effective immediately. Lessor also committed to convey to the Company all of the equipment and other assets covered by the Master Lease Agreement for no additional consideration.

The Company amended the Master Lease Agreement in order to eliminate the total fixed charge coverage ratio covenant under the Master Lease Agreement. As disclosed in the Company’s Form 10-Q for the quarter ended September 30, 2011, based on the Company’s results for the first three quarters of 2011, management considered it likely at that time that the Company would be out of compliance with the Master Lease Agreement’s total fixed charge coverage ratio covenant at December 31, 2011. In order to avoid a covenant violation, the Company amended the Master Lease Agreement to eliminate the financial covenants.

Lessor is an affiliate of U.S. Bank National Association (the “Bank”). The Company has a $20 million cash-secured credit facility with the Bank. The Bank or its affiliates have also provided other commercial services to the Company from time to time. [Emphasis added.]

Overstock.com tried to spin its termination of the Master Lease Agreement as positive news by claiming that the amount paid to US Bank was “was less than the amount the Company would have been required to pay over the scheduled life of the Master Lease Agreement and all related schedules." However, the company apparently agreed to pay the full obligation of $18.9 million that was due under the Master Lease Agreement as of December 31, 2011 plus applicable taxes and a stiff $1.2 million prepayment penalty. It was unable to restructure its Master Lease Agreement and obtain less stringent terms from U.S Bank.

As of September 30, 2011, OSTK owed US Bank $20.329 million under the Master Lease Agreement. $1.428 million of that amount was payable during the quarter ending December 31, 2011. (See Quarter Ended September 30, 2011 10-Q report page 17). Therefore, Overstock.com would have owed US Bank $18.901 million as of December 31, 2011 ($20.329 million less $1.428 million). The prepayment penalty amounts to approximately 6% of Overstock.com's obligation to U.S. Bank under the Master Lease Agreement as of December 31, 2011. That prepayment penalty will be reflected as charge to its otherwise expected dismal fourth quarter financial results. Furthermore, the company will have to take additional depreciation charges in future periods since it will take title to the equipment and other assets covered under the Master Lease Agreement.

Liquidity problems

As of September 30, 2011, Overstock.com reported that it had only $18.4 million in working capital. However, the company would have reported a mere $1.4 million of net working capital (current assets minus current liabilities) had it not played a shell game and window dressed its balance sheet during the third quarter.

On September 21, 2011, Overstock.com borrowed $17 million under a separate Financing Agreement (line of credit) with U.S. Bank and used $7.5 million of internal cash to redeem $24.5 million of convertible debt before its December 1, 2011 due date (10-Q report page 16 and 33). The convertible debt was classified on the company's balance sheet as a current liability. The $17 million that it borrowed under its Financing Agreement (line of credit) is a long term debt (noncurrent liability) because payment is due on December 31, 2012 (10-Q report page 42). Had Overstock.com not borrowed that $17 million from U.S. Bank to redeem its convertible debentures before the end of the third quarter (September 30, 2011), it would have ended the quarter with a mere $1.4 million in working capital (current assets less current liabilities). In any case, its balance sheet window dressing is temporary, since the $17 million it borrowed will become a current liability by the end of the first quarter of 2012 (March 31, 2012) which is traditionally a weak quarter for the company.

As of December 31, 2011, $12.959 million of Overstock.com's $18.901 million obligation under the Master Lease Agreement would have been classified as a long term liability. Since the company paid $20.1 million, including a $1.2 million prepayment penalty to terminate the Agreement, its working capital was apparently depleted by another $7.1 million ($20.1 million less $12.959 million).

In December 9, 2011, Overstock.com filed a shelf registration statement with the Securities and Exchange Commission that would allow it to sell up to $200 million of its debt securities, common stock, warrants and other securities. It appears likely that Overstock.com will need to do some sort of equity related offering in the first quarter of 2012 to stay afloat and avoid further liquidity problems. Such an offering will likely significantly dilute the value of existing common shares. (See Davian Letter "Overstock.com is Overstocked.")

On December 14, 2011, the company unloaded millions of dollars of excess inventory in a public auction and generated a mere $150,000 in cash, just pennies on the dollar.

Other issues

Patrick Byrne

Overstock.com also has to contend with an ongoing investigation by the Securities and Exchange Commission into securities law violations after this blog exposed it fabricating its earnings numbers. So far, every single financial report issued from its inception in 1999 to the third quarter of 2009 had to be restated up to three times due to violations of Generally Accepted Accounting Principles.

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

Earlier in the year, Google penalized Overstock.com because it improperly gamed its search algorithm to boost its search rankings.

In October 2011, Overstock.com CEO Patrick Byrne, his hedge fund High Plains Investments LLC, Deep Capture LLC, and Mark Mitchell, a writer for Deep Capture, were sued in a Canadian court for defamation. Deep Capture LLC is an affiliate of Overstock.com and its website was used to promote Byrne's delusional conspiracy theories and libel company critics.

Latest deceptions

Back in January 2011, Overstock.com changed its name to O.co and directed its customers to use the O.co domain. As late as September 30, 2011, Patrick Byrne claimed in a press release that, "Our customers associate 'O' with Overstock.com, which made the transition to O.co seamless."

However, in the third quarter ended September 30, 2011, Overstock.com reported a $7.8 million loss compared to a $3.4 million loss in the previous year's quarter. Revenues during that quarter had declined by 2% to $239.7 million from $245.4 million dollars in the previous year. The company revealed that, "We also believe that our current efforts to rebrand ourselves from Overstock.com to O.co may have contributed to the decline in revenue." (See 10-Q page 33). Apparently, Overstock.com's transition to O.co was not as "seamless" as previously claimed by Byrne at the end of that same quarter. During a conference call with analysts, Patrick Byrne now admitted that customers found the transition was "confusing."

Jonathan Johnson

On November 14, 2011, Ad Age reported that the company's president, Jonathan Johnson also backpedaled on remarks made by Byrne at the end of its third quarter:

The online retailer's president, Jonathan Johnson, said it is stepping back from the O.co name "for now," though not abandoning it outright...."

Confused? So were customers. Mr. Johnson said customers responded well to the O.co advertising, but after watching the spots, "a good portion" of those who sought out the website went to O.com, instead of O.co. (O.com is one of the off-the-market single letter domain names still held by ICANN.)

"We were going too fast and people were confused, which told us we didn't do a good job," Mr. Johnson said.

Marketing Magazine put Overstock.com's rebranding efforts at the top of its list of 2011 marketing blunders.

Worst customer service in 2011

Just yesterday, the Huffington Post reported that, “The site with the dubious honor of proffering the worst customer service in 2011 was Overstock.com, those ubiquitous merchants of discounted furniture, clothes and home furnishing.”

Byrne sold shares before decline

Yesterday, Overstock.com common stock closed at $7.77 per share. Back on May 20 to May 24, 2010, Patrick Byrne's 100% controlled High Plains Investments LLC dumped 140,000 company shares at an average price of $22.11 per share and collected over $3 million in proceeds. Despite Byrne's optimistic forecasts, the company surprised investors and failed to meet analysts' consensus earnings expectations in the quarter ended June 30, 2010. Since the time Byrne has sold his stock, Overstock.com’s shares have dropped about 65% in market value and its market capitalization has dropped approximately $330 million.

Written by,

Sam E. Antar

Recommended Reading

Seeking Alpha: Green Mountain Coffee Roasters Surpasses Overstock.com As Worst Stock of 2011, By Gary Weiss

Disclosure

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

If it weren't for the heroic efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.

There is a saying, "It takes one to know one." Today, I work very closely with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify and catch white-collar criminals. Often, I refer cases to them as an independent whistleblower. I teach white-collar crime classes for various government entities, professional organizations, businesses, and colleges and universities.

I do not seek or want forgiveness for my vicious crimes from my victims. I plan on frying in hell with other white-collar criminals for a very long time. My past sins are unforgivable.

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

Overstock.com (O.co): Insolvency Looming?

Updated at bottom of blog post to include analyst downgrade

Overstock.com (NASDAQ:OSTK), also known as O.co, faces possible insolvency if current earnings trends continue and it cannot restructure two loans with U.S. Bank, its biggest creditor by March 31, 2012 at the latest. In an apparent effort to mask its weakening net working capital position, it played a shell game to window dress its balance sheet at the end of the third quarter (September 30, 2011). Overstock.com owed U.S. Bank $20.329 million under the “Master Lease Agreement” (sale-leaseback) and another $17 million under a “Financing Agreement” (line of credit). Therefore, the company owes U.S. Bank $37.329 million under two loan agreements.

Last week Overstock.com surprised investors by reporting a third quarter $7.8 million net loss (diluted earnings per share of negative $0.33) compared to a net loss of $3.4 million (diluted earnings per share of negative $0.15) in the previous year’s third quarter. Its net loss was $0.10 per share higher than was projected by Wall Street analysts. So far, Overstock.com has lost $16 million in the first nine months of the year compared to only a $1.1 million dollar loss during the previous year's nine month period.

"Likely" breach of debt covenant buried in footnotes

As I described in my last blog post, the company buried news of an impending default in its Master Lease Agreement (sale leaseback) with U.S. Bank on page 43 of its footnotes in its third quarter 10-Q report. The Master Lease Agreement with U.S. Bank requires Overstock.com "…to maintain a minimum Total Fixed Charge Coverage annualized ratio of at least 1.20:1.00, based on operating results, measured at the end of each fiscal quarter." The company revealed that, "… based on the results for the first three quarters of 2011, it is likely that we will be out of compliance with the Total Fixed Charge Coverage ratio at December 31, 2011 unless current trends improve substantially. We have held initial and collegial discussions with U.S. Bank regarding this potential non-compliance."

The 10-Q report gives a peek into Overstock.com’s "current trends" and since it was filed 27 days into the 92 day fourth quarter. According to the company’s own analysis, the projected fourth quarter numbers don’t look good “unless current trends improve substantially” in the next few weeks.

Window dressing its balance sheet

At the end of its third quarter, the Overstock.com had $18.4 million of net working capital (current assets minus current liabilities). However, the company would have reported a mere $1.4 million of net working capital had it not played a shell game and window dressed its balance sheet during the third quarter. Apparently, the company wanted to avoid reporting dangerously low net working capital going into the fourth quarter, while at the same time it is trying to renegotiate terms of its Master Lease Agreement (sale leaseback) with U.S. Bank.

On September 21, 2011, Overstock.com borrowed $17 million under its Financing Agreement (line of credit) with U.S. Bank and used $7.5 million of internal cash to redeem $24.5 million of convertible debt before its December 1, 2011 due date (10-Q report page 16 and 33). It could have waited until the fourth quarter to redeem its convertible debt when it was due. Further, the convertible debt was unsecured debt, while the amount it borrowed from U.S. Bank is secured debt.

The convertible debt was classified on the company's balance sheet as a current liability at the end of its second quarter. The $17 million that it borrowed under its Financing Agreement (line of credit) is a long term debt (noncurrent liability) because payment is due on December 31, 2012 (10-Q report page 42). The company used secured long term debt (noncurrent liability) to replace an unsecured current liability in the quarter before its payment was due.

Had Overstock.com not borrowed that $17 million from U.S. Bank to redeem its convertible debentures before the end of the third quarter (September 30, 2011), it would have ended the quarter with a mere $1.4 million in working capital (current assets less current liabilities). In any case, its balance sheet window dressing is temporary, since the $17 million it borrowed will become a current liability by the end of the first quarter of 2012 (March 31, 2012) which is traditionally a weak quarter for the company.

Liquidity issues

CEO Patrick Byrne

At the end of the third quarter (September 30, 2011), Overstock.com owed U.S. Bank $20.329 million under its Master Lease Agreement (sale leaseback). As I detailed above, the company revealed that if current trends don’t "substantially improve" it "likely" won't be in compliance with certain minimum financial benchmarks required under the agreement. According to the Master Lease Agreement, an "Event of Default" includes the "...failure of Lessee to perform any term, covenant or condition of the Lease...." In such a case, if the company cannot restructure its Master Lease Agreement with U.S. Bank, the lender can require the company to immediately pay "…the entire amount of rent and other sums…."

$14.485 million of the $20.329 million Overstock.com owed U.S. Bank under its Master Lease Agreement (sale leaseback) was classified as long term debt (noncurrent liability) as of the end of the third quarter (September 30, 2011). As I detailed above, Overstock.com had only $18.4 million of net working capital at the end of the third quarter. By window dressing its balance sheet, the company made it appear that it had adequate net working capital to pay all amounts due under that agreement in the event of a potential default. Even if we set aside the window dressing issue, the company barely had enough net working capital to pay all amounts due under the Master Lease Agreement in the event of a potential default.

The company is required to have $30 million in compensating balances deposited at U.S. Bank against its Master Lease Agreement (sale leaseback) and Financing Agreement (line of credit). Excluding those $30 million compensating cash balances, the company had only $95.8 million of current assets available to cover $101.6 million of current liabilities as of the end of its third quarter. (Note: The $101.6 million current liabilities amount excludes $5.8 million of current liabilities under the Master Lease Agreement).

In other words, Overstock.com could have a difficult time paying debts as they come due if continues to maintain $30 million in compensating cash balances at U.S. Bank. Further, the $17 million it borrowed under the Financing Agreement becomes classified at a current liability in the first quarter of 2012 which will reduce net working capital by the same amount.

Overstock.com may have to reduce its $30 million of compensating balances on deposit with U.S. Bank. However, if the company does not maintain its compensating balances with U.S. Bank it would default on both loan agreements totaling $37.3 million. Therefore, Overstock.com also may have to renegotiate its Financing Agreement (line of credit) with U.S. Bank.

Other issues

Overstock.com also has to contend with an ongoing investigation by the Securities and Exchange Commission into securities law violations after this blog exposed it fabricating its earnings. So far, every single financial report issued from its inception to Q3 2009 had to be restated up to three times due to violations of Generally Accepted Accounting Principles.

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

Earlier in the year, Google penalized Overstock.com for improperly gaming its search algorithm to boost its search rankings.

Two weeks ago, Overstock.com CEO Patrick Byrne, Deep Capture LLC, and Mark Mitchell, a writer for Deep Capture, were sued in a Canadian court for defamation. Deep Capture LLC is an affiliate of Overstock.com and its website was used to promote Byrne's delusional conspiracy theories and libel company critics. The judge ordered the Deep Capture website shut down.

Written by,

Sam E. Antar

Update

Two days after the above post post was published, TheStreet Wire "downgraded" Overstock.com "from hold to sell" based on the following issues:

The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Internet & Catalog Retail industry. The net income has significantly decreased by 131.9% when compared to the same quarter one year ago, falling from -$3.36 million to -$7.79 million.

The debt-to-equity ratio is very high at 2.34 and currently higher than the industry average, implying that there is very poor management of debt levels within the company. Along with the unfavorable debt-to-equity ratio, OSTK maintains a poor quick ratio of 0.84, which illustrates the inability to avoid short-term cash problems.

Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Internet & Catalog Retail industry and the overall market, OVERSTOCK.COM INC's return on equity significantly trails that of both the industry average and the S&P 500.

The gross profit margin for OVERSTOCK.COM INC is rather low; currently it is at 16.10%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of -3.20% trails that of the industry average.

Net operating cash flow has decreased to $7.24 million or 11.92% when compared to the same quarter last year. Despite a decrease in cash flow of 11.92%, OVERSTOCK.COM INC is in line with the industry average cash flow growth rate of -15.64%.

Recommended Reading

Overstock.com Nears Default While Utah Media Sleeps, by Gary Weiss

Green Mountain Coffee: Accounting Irregularities and Other Concerns, by Tracy Coenen

How to Commit Short Sale Fraud ...And Get Away With It, by Monique Byrher

Advance Praise for Ayn Rand Nation, by Gary Weiss

Disclosure

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

If it weren't for the heroic efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.

There is a saying, "It takes one to know one." Today, I work very closely with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify and catch white-collar criminals. Often, I refer cases to them as an independent whistleblower. I teach white-collar crime classes for various government entities, professional organizations, businesses, and colleges and universities.

I do not seek or want forgiveness for my vicious crimes from my victims. I plan on frying in hell with other white-collar criminals for a very long time. My past sins are unforgivable.

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

Overstock's "Likely" Breach of Debt Covenants

Yesterday, Overstock.com (NASDAQ: OSTK), also known as O.co, issued a press release and surprised investors by reporting a third quarter $7.8 million net loss (diluted earnings per share of negative $0.33) compared to a net loss of $3.4 million (diluted earnings per share of negative $0.15) in the previous year’s third quarter. Its net loss was $0.10 per share higher than was projected by Wall Street analysts. Third quarter revenues declined 2% to $239.7 million, compared to $245.4 million in the previous year's third quarter.

Overstock also filed a separate 10-Q report with the Securities and Exchange Commission and buried even worse news deep inside the footnotes on page 43. The company revealed "it is likely" that it won't comply with certain key terms of  its Master Lease Agreement (sale-leaseback transaction) with U.S. Bank at December 31, 2011 (the end of its fourth quarter), unless "current trends improve substantially." The 10-Q report was filed 27 days into its 92 day fourth quarter. The company owes U.S. Bank $20.329 million under the Master Lease Agreement.

Overstock.com has two loan agreements with U.S. Bank, a Financing Agreement (line of credit) and a Master Lease agreement (sale-leaseback transaction). The Master Lease Agreement requires the company to maintain certain minimum financial benchmarks. See below:

The Master Lease Agreement requires us to maintain a minimum Total Fixed Charge Coverage annualized ratio of at least 1.20:1.00, based on operating results, measured at the end of each fiscal quarter. “Total Fixed Charge Coverage” is defined as our EBITDAR (which is defined to mean earnings before interest expense, tax expense or benefit, depreciation expense, amortization expense and rent (defined as payments for real property leases and other operating leases)) less the aggregate amount of federal, state, local and/or foreign income taxes accrued less declared dividends less 50% of depreciation expense divided by our (rental expense plus interest expense plus required principal payments including capitalized leases, excluding principal payments made for retirements of Senior Notes, on a trailing twelve-month basis). The “annualized ratio” shall be based on a four-quarter, rolling average of the current fiscal quarter and the immediately preceeding three fiscal quarters. [Emphasis added].

The company disclosed that "it is likely" that it won't be able to maintain the minimum financial benchmarks required under the Master Lease Agreement. See below:

U.S. Bank has the contractual right to demand payment of all amounts outstanding under the Financing Agreement and Master Lease Agreement if we fail to comply with certain loan covenants. At September 30, 2011 our Total Fixed Charge Coverage annualized ratio was in excess of the required 1.20:1.00. However, based on the results for the first three quarters of 2011, it is likely that we will be out of compliance with the Total Fixed Charge Coverage ratio at December 31, 2011 unless current trends improve substantially. We have held initial and collegial discussions with U.S. Bank regarding this potential non-compliance. [Emphasis added].

Whether or not Overstock.com will be able to modify the terms of its Master Lease Agreement, it is clearly worried about the current trend of its fourth quarter numbers, even though that quarter is supposed to be its best quarter.

Overstock.com also has to contend with an ongoing investigation by the Securities and Exchange Commission into securities law violations after this blog exposed it fabricating its earnings.

The company is being sued by District Attorneys from seven California District Attorneys who are alleging consumer fraud. The Judge in that case had to compel an uncooperative Overstock.com to turn over information to the California District Attorneys.

Last week, Overstock.com CEO Patrick Byrne, Deep Capture LLC, and Mark Mitchell, a writer for Deep Capture, were sued in a Canadian court for defamation. Deep Capture LLC is an affiliate of Overstock.com and its website was used to promote Byrne's delusional conspiracy theories and libel company critics. The judge ordered the Deep Capture website shut down.

Written by,

Sam E. Antar

Disclosure

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

If it weren't for the heroic efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.

There is a saying, "It takes one to know one." Today, I work very closely with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify and catch white-collar criminals. Often, I refer cases to them as an independent whistleblower. I teach white-collar crime classes for various government entities, professional organizations, businesses, and colleges and universities.

I do not seek or want forgiveness for my vicious crimes from my victims. I plan on frying in hell with other white-collar criminals for a very long time. My past sins are unforgivable.

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