Were Groupon’s and Overstock’s Management and Auditors Stupid or Did They Condone Improper Accounting Practices?

Back on August 24, 2011, accounting professors J. Edward Ketz and Anthony H. Catanach Jr., reported in their blog that Groupon (planned ticker symbol: GRPN) violated Generally Accepted Accounting Principles (GAAP) in reporting its revenues and recommended that it restate its financial reports to correct its error. They sent a complaint to the Securities and Exchange Commission Whistleblower Office. Last week, Groupon restated its financial reports to comply with revenue accounting rules as called for by Ketz and Catanach. The company revised its reported 2009 revenues from $30.5 million to $14.5 million and its 2010 revenues from $713.4 million to $312.9 million – no small potatoes!

Why did Groupon’s CFO and its auditors at Ernst and Young (the third largest accounting firm in the world) miss revenue accounting violations? Ketz and Catanach did not have access to company management or its books and records. They found GAAP violations from merely reading financial reports filed with the S.E.C. in anticipation of the company’s initial public offering. They compared the company’s revenue accounting disclosures with applicable accounting rules and found material misstatements in violation of GAAP. Were Groupon’s management and its auditors stupid? Shouldn’t they know revenue accounting rules? In a blog post this evening, noted forensic accountant and author Tracy Coenen suggests that Groupon used higher and improper revenue numbers to mask troubling trends in its business model.

Over the last several years, my blog exposed a pattern of accounting shenanigans which helped Overstock.com (NASDAQ: OSTK) (also known as O.co) materially overstate its reported earnings. From Q2 2007 to Q2 2008, the company used improper EBITDA calculations to materially inflate its financial performance in violation of S.E.C. Regulation G. For example, in Q2 2008 Overstock.com reported a positive $1.117 million EBITDA using its improper calculation instead of a negative $0.430 million EBITDA had it complied with Regulation G. From Q4 2008 to Q3 2009, Overstock.com violated Generally Accepted Accounting Principles (GAAP) and materially inflated its reported earnings. For example, in Q4 2008, Overstock.com improperly reported a $1.014 million net profit instead of a $0.705 million net loss if it has followed GAAP.

In both cases, I provided the company with detailed information about its accounting irregularities, but its CEO Patrick Byrne chose to vilify me and continue violating accounting rules. In both cases, my analysis of Overstock.com's accounting violations was ultimately proven correct by its later revisions of financial reports. The S.E.C. is currently investigating Overstock.com for securities law violations.

Why was I was able to find accounting irregularities at Overstock.com missed by PricewaterhouseCoopers and Grant Thornton (the second and sixth largest accounting firms in the world)?  PricewaterhouseCoopers was Overstock.com's auditors from 1999 to 2008 and Grant Thornton was its auditors from Q1 to Q3 2009. Just like Professors Ketz and Catanach, I found accounting violations by merely reading Overstock.com's financial reports and comparing its financial disclosures to applicable accounting rules. I am not an accounting professor and I lost my CPA license because I am a convicted felon. Is a convicted felon and former CPA smarter than the company and two of the six largest public accounting firms?

Back in my Crazy Eddie days, in many cases I had to deceive my auditors at KPMG (then known as Peat Marwick Main) to manipulate earnings and defraud investors. In October 2000, Joseph T. Wells asked the following question about Crazy Eddie's auditors in the Journal of Accountancy:

Were the auditors stupid? No, just too trusting. After all, no one wants to think the client is a crook. But it happens all too often. That’s why the profession requires auditors to be skeptical.

I personally don’t believe that the managements of both Groupon and Overstock.com tricked their auditors into using improper accounting rules to misstate their respective company's financial performance. Further, I don’t believe that the managements and auditors of Groupon and Overstock.com were so stupid that they did not understand accounting rules. I believe that the managements of both companies simply chose to avoid following applicable accounting rules and their auditors condoned those practices. Seriously, can they be so stupid? If so, their audits are nothing but window dressing.

Public accounting firms are supposed to be gatekeepers and protect the integrity of financial reporting. However, financial reports have apparently become promotional materials to help inflate stock prices, rather than provide investors with a proper picture of a company’s financial performance. In too many cases, public accounting firms have become advocates of management at the expense of investors, creditors, and other users of financial information. Some investors don’t seem to care as long as they can profit from higher stock prices caused by improper accounting practices that are condoned management and so-called independent auditors.

Our government doesn’t seem to care, too. President Barack Obama wants cut red tape and make it easier for small companies to go public without going through a rigorous review process by the Securities and Exchange Commission. Front runner for the Republican Party presidential nomination Mitt Romney wants to repeal corporate governance and accounting reforms under the Sarbanes-Oxley Act altogether. Meanwhile, congressional Republicans have already succeeded in cutting funding for the Securities and Exchange Commission despite increased responsibilities under the Dodd-Frank Act.

Have you ever wondered why committing securities fraud is so easy and is going to get even easier in the future?

Written by:

Sam E. Antar

Recommended reading

TheStreet.com - Bucket List of Apologies -- SEC Edition by Gary Weiss

TheStreet.com - Obama Signals Green Light for Stock Fraud by Gary Weiss

Footnoted.com - The Footnoted Jobs Program... by Michelle Leder

Business Insider - "The Feds Are Drinking The Same Kool-Aid As Crazy Eddie's Former Auditors" by Sam E. Antar

Dag Blog -"Crazy Eddie" Fraudster Sam Antar To Return To Crime - Thanks to Darrell Issa & Anti-Regulation Republicans by William K. Wolfrum

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. In addition, I teach about white-collar crime for 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 have any position in Groupon or Overstock.com securities.

Why the SEC should not be duped by Overstock’s excuses to avoid sanctions

After almost two years of investigation by the Securities and Exchange Commission, Overstock.com (NASDAQ: OSTK), also known as O.co, faces a possible enforcement action and sanctions arising from certain accounting violations reported in this blog. The company cannot deny that it violated various accounting rules. My accounting analysis was proven correct by its later revisions of financial reports. To avoid an enforcement action and possible sanctions, the company has no choice but to attempt to persuade the SEC that it acted in good faith and its misstatements of financial reports were unintentional. That excuse is simply untrue in light of the company’s actions.

Over the last several years, I've reported on a pattern of accounting shenanigans which helped Overstock.com materially overstate its earnings. From Q2 2007 to Q2 2008, the company used improper EBITDA calculations to materially inflate its financial performance in violation of SEC Regulation G. From Q4 2008 to Q3 2009, it violated Generally Accepted Accounting Principles (GAAP) and materially inflated its reported earnings. In both cases, I provided the company with detailed information about its accounting irregularities, but its management chose to vilify me rather than immediately correct its financial reports. Even after Overstock.com revised its financial reporting, it still continued to smear me in retaliation for exposing accounting irregularities.

If the company and its auditors want to claim they acted in good faith, it follows that this convicted felon and former CPA has more knowledge about SEC reporting rules and GAAP than any of them. I guess that I must be an accounting genius. I was able to find accounting irregularities missed by PricewaterhouseCoopers and Grant Thornton (the third and sixth largest accounting firms in the world) who unlike me, had access to the company’s books and records. PricewaterhouseCoopers was Overstock.com's auditors from 1999 to 2008 and Grant Thornton was its auditors from Q1 to Q3 2009.

Further, the Sarbanes-Oxley Act of 2002 eliminates the excuse that a company relied on the erroneous advice of its auditors. It clearly places the primary responsibility for poor internal controls and improper financial reporting on management.

Overstock.com has so far restated its financial reports three times due to GAAP violations. Every single financial report from 1999 to Q3 2009 had to be revised from one to three times due to GAAP violations. Every single internal control certification signed by the CEO and CFO of the company during that period turned out to be false. Every single audit by PricewaterhouseCoopers from 1999 to 2008 and review by Grant Thornton in 2009 turned out to be flawed.

The Sarbanes-Oxley Act is a law to be enforced. Companies and their auditors who violate that Act must be held accountable by the SEC. Compliance is not a performance goal where violations are shrugged off by the SEC and where companies and their auditors who violate that Act are asked to do better next time. It's the law! The integrity of financial information is the main pillar underlying our capitalist economic system. It is not supposed to be the cat and mouse game that seems to be going on today between the SEC on one side and public companies and their auditors the other side.

Early lies about profitability

Patrick Byrne

On December 11, 2001, Patrick Byrne appeared on Fox News claimed, “We're profitable.” On March 5, 2002, Overstock.com filed an S-1 report in connection with its planned initial public offering. It contradicted Byrne’s claim that his company was anywhere near “profitable.” In future years, Byrne’s deceptive behavior continued as Overstock.com resorted to violating accounting rules to materially overstate its financial performance and even report profits when it was actually losing money.

Overstock.com violated SEC Regulation G governing non-GAAP pro forma numbers

In April 2004, Patrick Byrne appeared on the CNBC and said “I don’t believe in EBITDA. If somebody talks EBITDA, put your hand on your wallet; they’re a crook.” In 2007, Overstock.com changed its tune and starting using EBITDA in its financial reports. In February 2008, the company even said, “A multiple of EBITDA is currently the most standard measure of valuation in the industry.” With that admitted knowledge, the company used an improper EBITDA calculation to materially overstate its financial performance from Q2 2007 to Q2 2008.

On December 3, 2007, I detailed how Overstock.com improperly started its EBITDA calculation with operating income or loss (rather than net income or loss) and improperly added back stock-compensation costs. Under Regulation G, EBITDA can only be computed by starting from net income or net loss and adding back net interest (interest expense minus interest income), taxes, depreciation, and amortization. On May 28, 2008, I detailed how the SEC Division of Corporation Finance reviewed similar improper EBITDA calculations by two other public companies and made them comply with Regulation G. During this period, I sent multiple emails with links to my blog posts alerting the SEC and Overstock.com about the improper EBITDA calculations. However, the company defiantly continued to use an improper EBITDA calculation and materially overstated its financial performance. (See the chart below. Click on image to enlarge.)

In Q2 2008 (period ended 06/30/08), Overstock.com reported a positive $1.117 million EBITDA using its improper calculation instead of a negative $0.430 million EBITDA had it complied with Regulation G.

During various conference calls, management made false comments in defense of its accounting policies and attacked me. On July 18, 2008, during the Q2 2008 earnings call, former CFO David Chidester falsely claimed that the company was justified in adding back stock compensation costs to compute EBITDA. He said “It’s completely the convention in our industry….” On October 24, 2008, during the Q3 2008 earnings call, Patrick Byrne falsely asserted that “The claim that EBITDA is not compliant with SEC definition, nonsense.” Byrne went on to call me, “Sam Antar the Crook.

Vindication

On November 7, 2008 Overstock.com filed its Q3 2008 10-Q and disclosed that it discovered errors in its accounting for customer refunds and credits. The company restated financial reports from Q1 2007 to Q2 2008 to correct those errors. In addition, it finally complied with SEC Regulation G and stopped calling its non-GAAP financial measure (operating income plus stock compensation) EBITDA. It warned investors that it was an “adjusted EBITDA” calculation.

On July 26 and September 12, 2010, I reported how seven other public companies used improper EBITDA calculations and violated SEC Regulation G. Unlike Overstock.com, those companies corrected their improper EBITDA calculations in their very next financial report and did not attack me for pointing it out.

Overstock.com violated GAAP


In February 4, 2009, I detailed how Overstock.com violated GAAP and materially overstated its earnings in Q4 2008. In that quarter, Overstock.com improperly reported a net profit instead of a net loss due to its GAAP violation. It was the company’s first reported net profit after 15 consecutive quarterly losses. I immediately notified the SEC and Overstock.com about its GAAP violations and urged the company to restate its financial reports to correct its illegal accounting practices. However, Overstock.com continued to violate GAAP and materially overstate its earnings from Q1 to Q3 2009.

Back in October 2008, Overstock.com discovered errors in accounting for customer refunds and credits. The company restated its financial reports from Q1 2007 to Q2 3008 and reduced its retained earnings by 8.2 million to correct those errors due to its overstatement of income during those periods. It also underbilled its fulfillment partners certain offsetting fees and reimbursements due the company arising from those errors. However, Overstock.com’s restatement of financial reports did not properly reflect adjustments for income that it already earned from those offsetting costs and reimbursements during those periods.

Public companies are required to use accrual basis accounting. Income is recognized in the period it is earned and not when it is later billed or when amounts are subsequently collected. Instead, the company recorded income as payments were received from its fulfillment partners on a non-GAAP cash basis in future accounting periods (Q4 2008 to Q3 2009). In other words, Overstock.com took income that should have been reported in prior reporting periods (Q2 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. The company effectively created a "cookie jar" reserve to inflate future earnings.

On February 6, 2009, Patrick Byrne responded to my initial accounting analysis with his usual vindictive attack on the InvestorVillage message board. He claimed that “Antar's ramblings are gibberish. Show them to any accountant and they will confirm. He has no clue what he is talking about.”

On February 23, 2009, Overstock.com filed its 2008 10-K report and claimed that a "gain contingency" existed to justify its accounting practices. It said that, “When the underbilling was originally discovered, we determined that the recovery of such amounts was not assured, and that consequently the potential recoveries constituted a gain contingency.”

Judd Bagley

In April 2009, Patrick Byrne sent his paid hack Judd Bagley to spread false information my divorce, attempted to blackmail me into settling that case, and even tried to contact my ex-spouse in an attempt to intimidate me. At about the same time, Judd Bagley created a Facebook profile under the name of Larry Bergman and proceeded to con people into friending him. The company’s pretexting operation targeted me, journalists, bloggers, our families, and even minor children, too. Eventually, Facebook booted Bagley for violating its rules.

On July 22, 2009, during the Q2 2009 earnings call, Patrick Byrne called me “Sam Antar the Crook” because I dared to question his company’s claim that a "gain contingency" existed.

On August 5, 2009, I published a letter to the SEC that cited various accounting rules and pointed out that “No gain contingency existed.” Overstock.com had made the ridiculous assumption that all potential recoveries of underbilled fees and reimbursements owed to it from fulfillment partners (every single penny) were “not assured”. In addition, I noted that the company did not mention the existence of a “gain contingency” when it originally disclosed the underbilling error in its Q3 2008 10-Q report filed in November 2008. It waited until it filed its annual 2008 10-K report in February 2009 to claim that a gain contingency existed.

Further, I pointed out how Overstock.com used that same phony gain contingency rationale to further inflate its reported earnings in Q1 and Q2 2009. During 2009, the company found overbillings from vendors that occurred in 2008. When it corrected the 2008 overbillings from vendors in 2009, it inflated its reported income. It should have adjusted its 2008 financial reports to correct those errors.

SEC investigates

On September 17, 2009, the SEC Enforcement Division started investigating Overstock.com. On September 23, 2009, a Salt Lake Tribune article reported Patrick Byrne’s angry reaction with anti-Semitic overtones:

"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. 

Best-selling author and investigative reporter Gary Weiss had exposed Patrick Byrne’s dirty trick tactics against critics. Both Gary Weiss and I are Jewish.

In October 2009, Aaron Edelstein from Crain’s New York Business asked Patrick Byrne about my reporting of accounting irregularities. Byrne responded saying “He’s a criminal who works for short-sellers. He throws mud day after day. No matter what he says, he finds some spurious thing to jump up and down about.”

On October 1, 2009, the SEC Division of Corporation Finance started reviewing Overstock.com’s financial reports. It discovered that the company 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.  Grant Thornton, who replaced PricewaterhouseCoopers as Overstock.com’s auditors in 2009, claimed that it did not know about the 2008 overpayment and the Q1 2009 recovery from the fulfillment partner until October 2009. The SEC wanted Overstock.com to restate its financial reports to correct that error and other GAAP violations previously identified in my blog. Grant Thornton agreed.

The SEC reviewers also wanted to know why Overstock.com failed to report the existence of a gain contingency when it originally disclosed the underbilling error in its Q3 2008 10-Q report filed on November 7, 2008. The company waited until it filed its 2008 10-K report on February 23, 2009 to claim that a gain contingency existed. Overstock.com told them that as of November 2008 "...it would have been inappropriate to disclose a gain contingency." However, the 10-K report claimed that it determined that a gain contingency existed "When the underbilling was originally discovered...." back on October 24, 2008. If Overstock.com's 10-K disclosure was true, the company's explanation to the SEC could not be true. Likewise, if Overstock.com's explanation to the SEC was true, the company's 2008 10-K disclosure can't be true. Nevertheless, the SEC determined that no gain contingency existed, as I did my August letter.

On November 13, 2009, Overstock.com fired Grant Thornton rather than restate its financial reports. Three days later, Overstock.com defiantly issued an “unreviewed” Q3 2008 10-Q report without correcting its GAAP violations.

Jonathan Johnson

On November 18, 2009, Patrick Byrne falsely claimed that even if the company restated its financial reports, no previously reported profit would turn into a loss. Byrne said, “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.

On November 24, 2009, the Salt Lake Tribune reported that Company President Jonathan Johnson said, “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.”

Vindication

On December 29, 2009, Overstock.com hired KPMG to replace Grant Thornton. On January 29, 2010, Overstock.com warned investors that its financial reports “…. should no longer be relied upon.” On March 31, 2010, Overstock.com filed its 2009 10-K report and finally restated its financial reports to correct GAAP violations, as I recommended back in February 2009. The company also admitted that the "gain contingency…was an inappropriate accounting treatment.” (See the chart below detailing restatements. Click on image to enlarge.)

As it turns out, every comment made by Patrick Byrne and Jonathan Johnson were false. The company actually lost money in Q4 2008 rather than make a profit as previously claimed.

Back in February 2009, Byrne said “Antar's ramblings are gibberish. Show them to any accountant and they will confirm. He has no clue what he is talking about.” The "gibberish" was Overstock.com's illegal accounting practices and Byrne's ramblings in defense of his company's accounting shenanigans. I knew exactly what I was talking about.

Continued retaliation

In November 2010, District Attorneys from seven California counties filed a lawsuit alleging consumer fraud by Overstock.com. On April 12, 2011, I reported how the DAs complained to the court that Overstock.com was withholding personal contact information of former employees with possible knowledge of wrongdoing. That day, a Bloomberg reporter asked Patrick Byrne about the issue and he went on a disgusting rampage in his Deep Capture website:

The sounds of squealing could be heard over the low hum of the air recirculation machinery in the drab, windowless federal interview room.  “Please!” Sam Antar wimpered. “Let me write one more smear. Let me feel like I’m a player, one last time!”

The federal agent spoke sharply: “Silence!”  She turned to look at her colleagues with bemusement.  “Jesus, what is it with these finance gerbils? I haven’t seen someone break this pitifully since that bookkeeper in Reno. ” She set aside her Nutcracker Flail, took a long pull on her Gaulioses, and said, “OK, let’s give Sam the night off. We’ll get him cleaned up for the judge in the morning.”

With that, Sam Antar, still restrained in straightjacket, was hauled back to the Shower Room, where he spent the night toe-writing in excrement on the linoleum.

Which would be altogether unremarkable, were it not for the fact that within hours, a Bloomberg reporter named Clyde Eltzrothis called, asking me to comment on it.

Patrick Byrne went on to accuse the California District Attorneys of not acting in good faith:

It is not our job to host DA’s on a no-limits fishing trip, especially when they have not acted in good faith in the past.

On May 18, 2011, Judge Robert B. Freeman granted the California District Attorney’s motion to compel Overstock.com to turn over the contact information of certain former employees. He rejected Byrne's argument.

Good faith?

Responsible companies that act in "good faith" fix their accounting errors and move on. They don't retaliate against whistleblowers who point out misstatements in financial reports. Patrick Byrne doesn't seem to be upset that Overstock.com violated accounting rules and had to restate its financial reports. Apparently, he's upset because his company's accounting irregularities were exposed. Byrne's disgusting prison fantasy involving me demonstrates his obsession to get back at me for pointing out his company's shenanigans. Byrne and his crew will make up anything and resort to any smear tactic in their attempts to punish me for uncovering their wrongdoing. But the fact remains that I uncovered violations of accounting rules which helped Overstock.com overstate its financial performance and the company made revisions in its financial reporting to correct those violations.

Final comments

Last year, the Dodd-Frank Act was signed into law and the SEC issued final regulations about whistleblower protections. On May 25, 2011, SEC Chairman Mary Schapiro said in a speech that, “… the final rules make clear that the statute’s whistleblower protections apply to anyone who provides us information, even if that information relates to a possible securities law violation, and regardless of whether it leads to a successful enforcement action.”

Here, the SEC has a whistleblower that correctly identified accounting violations which caused a public company to restate its financial reports. The SEC has clear evidence of blatant retaliation by the issuer against that whistleblower. The freedom to criticize accounting practices without fear of reprisal from public companies is essential to our democracy and the integrity of our capital markets. It’s time for the SEC to put its money where its mouth is. The ball is in their court!

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. In addition, I teach about white-collar crime for 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.

Does Overstock.com CEO Patrick Byrne Know When to Shut Up, Especially While the SEC Investigates his Company?

During an ongoing SEC investigation into financial reporting violations by a public company, competent lawyers will advise management that the wisest course of action is to simply shut up. Not so, with Overstock.com (NASDAQ: OSTK) CEO Patrick Byrne. He does not know when to stop blabbing away, misleading investors, and lying to the media – even during an ongoing SEC investigation of his antics.

For example, in 2009, I correctly reported in my blog that Overstock.com violated Generally Accepted Accounting Principles (GAAP) in accounting for its recoveries of certain offsetting costs and reimbursements amounts due to the company from its fulfillment partners (suppliers) who were under-billed in previous reporting periods, from Q1 2007 to Q 2 2008. Overstock.com should have restated its financial reports to recognize income when those offsetting costs and reimbursements were actually earned by the company in those previous reporting periods.

Instead, the company improperly recognized income as those amounts were collected in future accounting periods (Q4 2008 to Q3 2009) on a non-GAAP cash basis. In one instance, Overstock.com improperly reported Q4 2008 profits, even though the company should have reported a loss under accounting rules.

Despite many emails from me, Patrick Byrne stubbornly refused to correct his company's GAAP violations and even fired Grant Thornton as its auditor for agreeing with my recommendations. Instead, Byrne opened up his big mouth and attacked me on a stock market chat board and during various earnings calls in an effort to discredit me. Byrne even hired internet stalker Judd Bagley to interfere with my divorce and pretext my children and relatives on Facebook after I pointed out the company's accounting violations.

Patrick Byrne while intoxicated

The company's pretexting operation also targeted dozens of other journalists, bloggers, critics, and their minor children, too. Big Picture (over 140,000 subscribers) blogger Barry Rithholtz called Judd Bagley a "possible pedarast." His family was spied on, too. Eventually, Facebook booted Bagley.

Eventually, the SEC started investigating Overstock.com and the company was forced to restate its financial reports. Patrick Byrne will have a difficult time explaining to SEC investigators why they should not find that Overstock.com’s GAAP violations were a deliberate scheme to manipulate earnings. At the very least, it seems that the company was reckless in continuing to issue reports that violated accounting rules after being notified by me numerous times in emails which were also cc'd to the SEC.

Patrick Byrne’s more recent antics

More recently, Patrick Byrne gave a series of interviews which raise serious questions of possible illegal insider trading and misleading hype about the company’s financial performance to investors. In trying to explain his actions, Byrne raised more questions than answers about troubling issues concerning his recent sale of stock in late May 2010.

On May 6, 2010, the Salt Lake Tribune interviewed Byrne for an article headlined “Salt Lake City-based Overstock expects to break even in the next two quarters” and reported:

… Byrne anticipates the online discount retailer will just break even during the next two quarters -- and he isn't too concerned.

"If we can break even through September then we can then go on to make tens of millions of dollars during the fourth quarter," Byrne said, pointing to Overstock.com's busiest time of the year.

From May 20 to May 24, 2010, Patrick Byrne's 100% controlled High Plains Investments LLC dumped 140,000 company shares and collected over $3 million in proceeds, according to SEC filings. That was the first time that Patrick Byrne had ever sold any Overstock.com shares under his control.

On July 9, 2010, nine days after Q2 2010 ended, but before Overstock.com reported earnings, Byrne continued to hype Overstock.com’s prospects despite concerns expressed by Investor’s Business Daily that the company would not meet analysts’ forecasts:

But break-even might be a tough goal for the second quarter. Analysts polled by Thomson Reuters expect the company later this month will report a loss of 4 cents a share, compared with a 2-cent profit a year earlier.

Investor’s Business Daily reporter Doug Tsuruoka asked Patrick Byrne:

You predicted that Overstock would only break even in the second and third quarter, but didn't seem too concerned by that. Why?

Byrne responded:

Given that in 2009 we had close to $40 million of free cash flow (and $8 million net income), I think we should just continue building the intrinsic value of the business right now.

Apparently, Byrne still led investors to believe that Overstock.com was going to report break even earnings and beat analysts’ estimates, by citing the previous year’s free cash flow numbers and reported income.

Judd Bagley pretexted minor children

However, Patrick Byrne did not tell Investor’s Daily that Overstock.com's free cash flow for the most recent six months ended June 30, 2010 was negative $54.8 million compared to negative $35.8 million in the previous year's comparable period or about $19 million lower. He made no effort to explain that Overstock.com was going to report a Q2 2010 loss, instead of break-even earnings.

Later, I will detail how Information Week interviewed Byrne and reported that Overstock.com's management "can roll up its profit-and-loss position in two hours, giving executives accurate, up-to-date insight for fast decision-making."

Overstock.com reports a dismal Q2 2010 loss and fails to meet Wall Street analysts' expectations

On August 5, 2010, Overstock.com issued its Q2 2010 10-Q (quarter ended June 30) report and surprised investors by reporting a $1.4 million loss or a loss of $0.06 per share compared to a small $319,000 reported profit or earnings per share of $0.01 in the previous year’s comparable quarter, despite higher revenues.  Overstock.com failed to meet consensus analyst expectations for earnings, too. Overstock.com’s reported loss of $0.06 per share was far worse than analyst expectations of a $0.04 per share loss or a 50% higher loss than expected.

Overstock.com shares dropped $3.40 to per share to close at $16.78 or a 16.85% decline in market value. In other words, Overstock.com's market capitalization dropped over $50 million as investors reacted to the company's surprise earnings announcement.

Patrick Byrne was luckier. But recall, Patrick Byrne's 100% controlled High Plains Investments LLC sold 140,000 shares and pocketed about $3.1 million in proceeds in May, at an average selling price of $22.11 per share. That was $5.33 per share higher than Overstock.com's closing price per share.

Concerns of possible insider trading and misleading statements

On August 6, 2010, I reported that:

The company’s latest earnings report yesterday raises still new questions, concerning possible insider trading and misleading statements by the company’s CEO, Patrick Byrne.

In his respective interviews with the Salt Lake Tribune before he dumped his stock and Investor's Daily after he dumped his stock, Patrick Byrne led investors to believe that Overstock.com would beat analysts' consensus estimates of a $.04 per share loss and report breakeven earnings.


Patrick Byrne attempts to refute possible insider trading claims in Forbes interview

On August 19, 2010, Forbes published a blog headlined “Overstock.com’s CEO Refutes Insider Trading Claims” and reported that:

He said during today’s interview, “I said we’d break even in the first 9 months and would come out ahead full-year. I don’t worry about each quarter and worry about what Wall Street’s estimates are. I believe we’re right on track.” [Emphasis added.]

That claim contradicts what the Salt Lake Tribune reported in May, as I detailed above:

… Byrne anticipates the online discount retailer will just break even during the next two quarters -- and he isn't too concerned. [Emphasis added.]

This time, Byrne tried deceive Forbes by claiming that Overstock.com was going to breakeven in the first three quarters of 2010 as a whole, rather than the second and third quarters separately.

In addition, Investor’s Daily had expressed reservations about Overstock.com beating analysts’ estimates, but Byrne continued to lead them to believe that the company would breakeven and beat analysts’ estimates by not reporting losses.

In a follow up video interview with Forbes, Patrick Byrne went on claim that:

I don’t, we don’t pay any attention to the stock price. I have no idea what Wall Street’s earnings consensus are, anything like that. We pay zero attention.

Forbes asked:

Knowing what you know now, would you have done it differently, would you have waited?

Patrick Byrne responded:

We don’t pay too much attention to the stock market, what people say, what people say on Wall Street. My sale had nothing to do with what I was thinking five weeks into the quarter. It’s all nonsense.

Oh really? Over the years, Overstock.com has authorized numerous stock repurchase programs buying back over $80 million in stock. In addition, the company has an ongoing repurchase program to buy back its convertible debt. Overstock.com’s recent 2009 10-K report contradicts Byrne’s claim that “I don’t, we don’t pay any attention to the stock price” by disclosing that:

We made the repurchases because we believed that the stock was trading at attractively low prices, that we had sufficient cash on hand for all reasonably possible contingencies, and that the use of the cash to repurchase shares was in the best interest of the Company and the stockholders. [Emphasis added.]

In addition, the issue is what Byrne knew or should have known 7 1/2 weeks into the quarter when he sold his stock and not what he "was thinking five weeks into the quarter."

What did Patrick Byrne know when he dumped his stock?

On October 13, 2010, Information Week published another interview with Patrick Byrne and reported:

Online discount retailer Overstock.com is recognized as a world-class technology organization. Using advanced information management technology, for instance, it can roll up its profit-and-loss position in two hours, giving executives accurate, up-to-date insight for fast decision-making. [Emphasis added.]

A world-class technology organization? So far, from 1999 to Q3 2009, every single financial report issued by Overstock.com had to be restated at least once, sometimes twice or even three times to correct material accounting errors. The company claimed that its last two restatements were caused by technology problems.

In its 2009 10-K report, Overstock.com claimed:

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.

In its latest Q2 2010 10-Q report, Overstock.com still claimed material weaknesses in internal controls because it still had not finished "implementing improvements to our information system."

If it is true that Overstock.com “can roll up its profit-and-loss position in two hours” why did Byrne lead the Salt Lake Tribune and Investors Daily into believing that Overstock.com would breakeven and beat forecasts, when it was already losing money during Q2 2010? What did Patrick Byrne really know about Overstock.com's numbers when he dumped his stock last May?

In any case, Patrick Byrne's inconsistent and contradictory claims will give the SEC plenty more issues to investigate. For them, I am sure that Patrick Byrne is a gift that keeps on giving.

Written by:

Sam E. Antar

Blog note:

New contributor Eva Ogonowska will soon be blogging here about other white-collar crime topics not previously covered in this blog. She has a graduate degree in Criminal Justice from John Jay College of Criminal Justice.

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.

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.

I do not own any Overstock.com securities long or short. My investigation of that company is a freebie for securities regulators to get me into heaven, though I doubt I will ever get there. My past sins are unforgivable.

Patrick Byrne Pockets $3.1 Million from Dumping Overstock.com Shares While Trying to Stave Off Possible SEC Enforcement Action

Patrick Byrne intoxicated after drinking too much alcohol

Amidst an ongoing Securities and Exchange Commission investigation into financial reporting violations by Overstock.com (NASDAQ: OSTK), CEO Patrick Byrne's 100% controlled High Plains Investments LLC dumped 140,000 company shares and collected over $3 million in proceeds during the last several days, according to SEC filings. This marks the first time that Patrick Byrne has ever sold any Overstock.com shares under his control, not a bullish signal to investors.

Meanwhile, the company is desperately trying to stave off an enforcement action by the SEC. Before I discuss that issue, let's review some recent history.

Why the SEC is Investigating Overstock.com

So far, each and every initial financial report for every reporting period issued by Overstock.com from the company's inception in 1999 to Q3 2009 violated GAAP or some other SEC disclosure rules. Likewise, every single audit report issued by PricewaterhouseCoopers, Overstock.com's former auditors, from 1999 to 2008 was wrong turned out to be false, too. In addition, information uncovered by investigative journalist Roddy Boyd shows that managment deliberately concealed material weaknesses in internal controls over financial reporting as far back as 2005.

More recently, during 2009, I detailed how Overstock.com deliberately violated Generally Accepted Accounting Principles (GAAP) in recognizing income for recoveries from underbilled and overpaid fulfillment partners by improperly claiming that a “gain contingency” existed when it did not actually exist under accounting rules.

Under GAAP, Overstock.com is required to recognize income from underbilling and overpaying its fulfillment partners when such income was actually earned (before Q3 2008). By improperly claiming that a “gain contingency” existed, Overstock.com improperly recognized income as monies were recovered from the underbilled and overpaid fulfillment partners in future reporting periods on a non-GAAP cash basis. Therefore, Overstock.com improperly shifted income earned before Q3 2008 to future accounting periods (Q4 2008 to Q3 2009). In Q4 2008, Overstock.com improperly reported a $1.014 profit, instead of a $750k because of GAAP violations.

Creepy Judd Bagley

I notified both the company and the SEC of Overstock.com's improper accounting for recoveries from underbilled fulfillment partners and later on, for overpaid fulfillment partners. Instead of properly complying with GAAP, Overstock.com CEO Patrick Byrne defamed me in various quarterly conference calls with analysts and investors, sent his paid internet stalker Judd Bagley to interfere in my divorce proceedings, and even had Bagley and spy on my family and other company critics (including our minor family members) using a fake Facebook name.

In September 2009, the SEC re-opened a previously closed investigation of Overstock.com after I notified them of violations of Generally Accepted Accounting Principles (GAAP) in the company's reporting of recoveries from previously underbilled fulfillment partners.

In November 2009, Overstock.com fired Grant Thornton as its auditors after they recommended that the company restate its financial reports to correct GAAP violations, as I previously called for in my blog. In December 2009, KPMG replaced Grant Thornton as Overstock.com's auditors.

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. However, a few days later, Patrick Byrne falsely claimed to AP reporter Paul Foy that "Overstock's accounting errors were generally conservative...and gave the company no advantage."

In its Q1 2010 10-Q report, Overstock.com reported continuing material weaknesses in internal controls.

Overstock.com's Current Discussions with SEC

According to certain sources, Overstock.com is currently trying to stave off an enforcement action from the Securities and Exchange Commission by claiming that management had no "intent" to violate GAAP and other SEC disclosure rules and that its history of financial reporting problems was a result of incompetent staffing. I find it hard to believe that any rational person the SEC could be so stupid as to believe such nonsense from company paid lawyers.

How can Overstock.com claim a "lack of intent" when its management defiantly failed to promptly correct GAAP violations when notified by me and later fired Grant Thornton as its auditors, rather than correct those GAAP violations? Worse yet, the company engaged in a vicious campaign to stalk, harass, and intimidate me and other media critics. The company even spied on me, other critics, and our families.

If the SEC fails to take action against Overstock.com, it will send a clear message that whistleblowers who correctly point out securities law violations are still not welcome despite the regulator's widely publicized bungled investigation of Bernie Madoff, after they ignored whistleblower Harry Markopolos.

As I said in my last open letter to Chairperson Mary Schapiro, "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."

Written by:

Sam E. Antar

Recommended Reading (Especially for the SEC Commissioners, Lawyers, and Investigators)

Gary Weiss - Patrick Byrne Dumps His Overstocked Overstock Shares by Gary Weiss

The Big Picture - Long OSTK, Short Byrne by Barry Ritholtz
May 26, 2010: Going Concern - Why Did Patrick Byrne Sell $3 million in Overstock.com Shares? by Caleb Newquist

May 26, 2010: Jr Deputy Accountant - It's Not at All Suspicious That Patrick Byrne Just Unloaded a Bunch of Overstock Shares by Adrienne Gonzalez

Selling America Short: The SEC and Market Contrarians in the Age of Absurdity by Richard Sauer (Wiley 2010) - Chapter 12: The Overstock Flame Wars

Stockwatch - Overstock.com faces another shoddy accounting challenge by Lee M. Webb

Crain's New York Business - Crazy Like a Fox by Aaron Elstein (Download)

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. However, I doubt that I will ever get into heaven anyway, because my sins are unforgivable. 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.

Are InterOil's Auditors Capable of Finding Fraud in Plain Sight?

Fraud Discovery Institute (co-founded by convicted felon turned fraud buster Barry Minkow) is putting PricewaterhouseCoopers (PwC), InterOil's (NYSE: IOC) auditors, on notice that they must look out for possible fraud by the company as required by Statement of Auditing Standards No. 99. Fraud Discovery released a video to provide a road map to PwC "in an attempt to give investors clearer picture of the inside workings of the controversial company." Minkow believes that InterOil is "a financial crime in progress." In addition, former LA Times investigative reporter William Lobdell, who now writes for Fraud Discovery's iBusiness Reporting blog, issued a report detailing a "troubling pattern of behavior" by InterOil since its founding in 1997.




However, I am skeptical about PwC's capability to find any fraud at InterOil based on my prior experience with them as the auditors of Overstock.com (NASDAQ: OSTK) another scam company investigated in this blog. I correctly identified certain GAAP and SEC disclosure violations by Overstock.com and PwC still certified the company's financial reports as being in compliance with GAAP and SEC rules. A year later, Overstock.com admitted to those same GAAP and SEC disclosure violations exposed in my blog and restated its financial reports to correct its violations.

Both Barry Minkow and William Lobdell have publicly disclosed holding short positions in InterOil securities. I do research for Fraud Discovery on InterOil and I do not own any securities in InterOil, long or short. More disclosure at the bottom of this blog post.

Statement of Auditing Standards: Consideration of Fraud in a Financial Audit

According to SAS No. 99, "The cornerstone of an effective antifraud environment is a culture with a strong value system founded on integrity." Unethical behavior by company management is considered a red flag for possible fraud and auditors are required to increase the scope of their audits to detect potential fraud to insure that financial reports are free from material errors. Fraud Discovery Institute's InterNoOil.com website and its iBusiness Reporting blog have published many reports detailing a troubling pattern questionable behavior by InterOil management.

Forensic accountants look for a "pattern of inconsistent and conflicting disclosures" in investigating fraud at public companies, like InterOil. Likewise, PricewaterhouseCoopers is required by SAS No. 99 to look at "inconsistent and conflicting disclosures" to determine if InterOil is committing fraud, such as those described below.

Previous examples of a "pattern of inconsistent and conflicting disclosures" by InterOil

In my June 2009 blog post entitled, "InterOil, John Thomas Financial, and Clarion Finanz: Anatomy of a Stock Market Manipulation Scheme," I detailed how InterOil filed a false report with the Securities and Exchange Commission claiming that the company paid no fees for a private placement $95 million convertible debt offering. However, documents submitted in another court case reveal that Clarion Finanz (a major shareholder of InterOil) had in fact received $5.7 million in fees, contrary to InterOil's SEC filings.

In March 2010, William Lobdell went to a Texas courthouse to examine documents filed in a litigation by the original investors of InterOil against CEO Phil Mulacek alleging fraud by him dating as far back as 1997 (Details here, here, and here).

In another blog post, entitled, "Did InterOil Commit Securities Fraud?" I detailed how CEO Phil Mulacek made sworn statements in that court case which conflicted with InterOil's financial disclosures to investors. In his sworn court testimony, Mulacek claimed that a $50 million judgment against InterOil would bankrupt the company, while InterOil's financial disclosures to investors claimed that a judgment in excess of $125 million would have a material adverse impact on the company.

Under SAS No. 99, "Misrepresentation in or intentional omission from the financial statements of events, transactions, or other significant information" is considered "relevant to the auditor's consideration of fraud." In both of the situations cited above, InterOil told one story to investors in its SEC filings and financial reports and its management told a conflicting story to the courts in sworn statements. If one story is true, the other story simply cannot be true. In each of the cases cited above, InterOil misrepresented or omitted material information in its financial reports to investors, as evidenced by its management's conflicting disclosures to the courts.

Based on InterOil's conflicting disclosures, PwC is required to investigate such irregularities under SAS No. 99, as part of its audit of the company. However, I am skeptical of PwC's auditing abilities and it's capability to uncover any fraud committed by clients such as InterOil. So far, they seem to have ignored significant management integrity issues at InterOil, like the two issues detailed above.

Why I am skeptical about PwC's capability to find fraud at InterOil

PwC was Overstock.com's auditors from 1999 to 2008. During that period, every initial financial report for every reporting period issued by Overstock.com and reviewed or audited by PwC violated Generally Accepted Accounting Principles (GAAP) or some other SEC disclosure rules. Overstock.com CEO Patrick Byrne blatantly lied to investors over a ten year period about the company's financial performance, internal controls, and compliance with GAAP and other SEC disclosure rules.

Starting in February 2009, I wrote a series of blog posts correctly identifying certain GAAP violations by Overstock.com in 2008 and prior years. Both Overstock.com and PwC ignored my requests for them to correct those GAAP violations and restate the company's financial reports. Patrick Byrne responded by orchestrating a smear campaign to discredit me and other critics who agreed with my findings, while PwC improperly certified the company's financial reports as being in compliance with GAAP.

In March 2009, Overstock.com hired Grant Thornton to replace PwC as its auditors. In September 2009, the SEC started investigating Overstock.com's accounting irregularities that were pointed out in my blog. In November 2009, Overstock.com fired Grant Thornton after they agreed that I correctly identified certain GAAP violations and wanted the company to restate its financial reports. PwC still stuck to its guns and claimed that Overstock.com did not violate GAAP.

In December 2009, Overstock.com hired KPMG to replace Grant Thornton. In February 2010, Overstock.com finally admitted that the company violated GAAP and restated its financial reports to correct GAAP violations, previously identified by me. I was right and Overstock.com and PwC was wrong.

Overstock.com's financial reports that were audited by PwC were restated three times in ten years and every single audit report issued by PwC was wrong. PwC ignored serious management integrity issues at Overstock.com and I have no reason to believe that they will address any management integrity issues at InterOil.

A "troubling pattern of behavior" by InterOil

William Lobdell's latest report details even more questionable behavior by InterOil's management team. Lobdell cites "InterOil’s 12 years of hyping gas and oil fields in Papua New Guinea" and points out that InterOil still has no proven commercially exploitable reserves to date. Lobdell lists ten wells that InterOil hyped to investors, only to abandon them later on.

Many short sellers, including Minkow and Lobdell, are skeptical of InterOil's claimed estimates of contingent resources (not proven reserves). Lobdell examined the track record of GLJ Engineering, a firm hired by InterOil in 2009 to estimate its oil and gas resources. He found three major blunders by GLJ in the past and questioned the reliability of their reports on InterOil.

Then, Lobdell details how InterOil was apparently shopping for a favorable engineering report on its reserves before the company hired GLJ:

InterOil’s Netherland Sewell report is MIA.

GLJ's past mistakes might not be that much of an issue if it weren't for the "Case of the Missing Netherland Sewell Report."

In March 2007, InterOil CEO Phil Mulacek told attendees at a Raymond James conference in Orlando, Florida that three "world-class" firms were in the process of performing reserve analysis on InterOil gas fields. Mulacek named one firm, the iconic Netherland Sewell, stating that InterOil had hired the company, according to a reliable source.

This news of an imminent evaluation from Netherland Sewell was frequently mentioned in fawning investor reports by Raymond James and on blogs and message boards promoting InterOil.

But the report never came.

About 17 months later, Mulacek indicated in a conference call to investors that an international firm hired by InterOil would finish its reserve analysis report by the end of October 2008.

Again, the report never came.

So what happened to the Netherland Sewell report? Netherland Sewell nor InterOil will comment. And since InterOil is never shy about releasing good news, this should be worrisome to investors.

In the balance of his report, William Lobdell takes issue with InterOil's hype on the company's long term viability. He analyzes how InterOil is running out of cash and questions and other roadblocks facing the company in the future.

Closing comments

I cannot understand how auditing firms like PwC with their access to a company's books and records can miss red flags and financial reporting violations correctly pointed out by outsiders such as short sellers like Barry Minkow and William Lobdell and independent whistleblowers like me. Unlike us, PwC seems to be incapable of finding fraud, even fraud in plain sight .It seems that the reliability of PwC's audit reports is nothing more than pot luck in most cases.

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 do research on InterOil for Fraud Discovery Institute. However, I do not own any InterOil securities, short or long.

I plan on meeting corporate miscreants, such as fifth rate crooks like Patrick Byrne, in hell. In addition, it is likely that InterOil CEO Phil Mulacek may join Patrick Byrne and me in hell, too. We will all fry together.

Overstock.com's New 10-K Report Reveals Management Deceptions, Major Internal Control Problems, and Zero Quality Earnings

Patrick Byrne is suffering a hangover

Yesterday's release of Overstock.com's two week overdue 2009 10-K report and Q4 2009 financial report provide further vindication of this blog's identification of the company's violations of Generally Accepted Accounting Principles (GAAP) that improperly turned its Q4 2008 loss into a reported profit. In that quarter, Overstock.com improperly reported its first quarterly profit after fifteen consecutive quarterly losses, improperly exceeded analysts' consensus expectations for earnings, and improperly turned a loss into a profit.

If Overstock.com would have properly followed GAAP in Q4 2008, the company (1) would have reported a net loss instead of a net profit, (2) would have reported sixteen consecutive losses instead of 15 consecutive losses, and (3) it would have failed to meet mean analysts’ consensus expectation for earnings per share (anyone of three materiality yardsticks under SEC Staff Accounting Bulletin No. 99 that would have triggered a restatement of prior year’s effected financial reports).

As I will describe below, both Overstock.com CEO Patrick M. Byrne and company President Jonathan E. Johnson made false statements about the possible impact of certain questionable accounting practices on the company's previously issued financial reports in a deliberate effort to avoid restating the company's financial reports to comply with GAAP.

Afterwards, I will detail a disturbing stupid financial reporting error and provide a brief analysis of the smoke and mirrors that helped Overstock.com report its first annual profit.

Brief Background - Overstock.com's Illegal "Cookie Jar" Reserves

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

In February 2009, I correctly reported in my blog that 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.

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).

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 GAAP by creating an illegal cookie jar reserve to materially inflate future earnings or reduce future losses from Q4 2008 to Q3 2009.

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. (More details can be found in my Open Letter to the Securities and Exchange Commission here).

Overstock.com's Stubborn Refusal to Comply with GAAP

Starting in February 2009, I notified both Overstock.com and the SEC about the company's illegal "cookie jar" reserve and its phony "gain contingency." Based on information available at the time, I initially calculated that Overstock.com improperly reported a Q4 2008 net profit of $1.014 million, instead of a properly reported net loss of $800k. As a result of violating GAAP, Patrick Byrne was able to boast that the company reported its first quarterly profit after fifteen consecutive quarterly losses.

Patrick Byrne responded to my blog 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.

Instead of properly restating its financial reports to correct its intentional breach of GAAP and other SEC disclosure rules, Overstock.com continued to issue phony financial reports in Q1, Q2, and Q3 2009 while publicly vilifying me.

In September 17, 2009, the SEC Enforcement Division took a very rare step and re-opened a previously closed probe of financial reporting irregularities at Overstock.com. A few weeks later, the SEC Division of Corporation Finance started a parallel probe of the company's financial reporting irregularities.

A September 25, 2009, Salt Lake Tribune article quoted Patrick Byrne's reaction to the SEC investigation instigated by my blog reports detailing GAAP and SEC disclosure violations:

"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.

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 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 details about the overpayment, Grant Thornton told Overstock.com that it must restate its prior financial reports to correct that error and other underbilling errors previously indentified in this blog to comply with GAAP.

On November 13, 2009, Overstock.com fired and publicly vilified Grant Thornton, rather than restate its financial reports as its auditors and this blog had recommended.

On November 16, 2009 filed an "unreviewed" Q3 2009 10-Q that finally disclosed the overpayment to the fulfillment partner. However, Overstock.com still improperly claimed that a "gain contingency" existed as justification for not restating its financial reports to correct its previously reported underbilling errors and newly disclosed overpayment errors.

On November 18, 2009, during a conference call Patrick Byrne tried to justify Overstock.com's improper accounting of recoveries from underbilled fulfillment partners, overpaid fulfillment partners, and other overpaid vendors that were reported as income on a non-GAAP cash basis. He falsely claimed that even if Overstock.com changed its accounting for underbilling and overpayment recoveries, it would not change any previously reported profit into a loss or any previously reported loss into a profit:

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, 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.

A day later, I posted in my blog new calculations of the impact of Overstock.com's GAAP violations on Q4 2008 to counter both Byrne's and Johnson's false statements to the Salt Lake Tribune, based on revised disclosures in the company's Q3 2009 "unreviewed" 10-Q report. This time I reported that Overstock.com improperly reported net profit of $1.014 million should have been properly reported as a $485k net loss.

On December 28, 2009, KPMG replaced Grant Thornton as Overstock.com's auditors.

Vindication I

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

The company reported that its financial reports from Q1 2008 to Q3 2009 "should no longer be relied upon" and that it will restate its financial reports to correct its GAAP violations. In addition, Overstock.com disclosed another GAAP violation due to its improper amortization of expenses for share-based compensation plans.

Simply said, I was right and Overstock.com was wrong. I was able to identify material GAAP and SEC disclosure violations that Overstock.com's management, its audit committee, and its former auditors at PricewaterhouseCoopers were unable and unwilling to identify and correct.

Late Filing of 2009 10-K Report

On March 16, 2010, Overstock.com announced that it could not file its 2009 10-K report by that day's deadline. The company required a two week extension to complete its financial reports.

However, Overstock.com nonchalantly disclosed even more GAAP violations "in its notification of late filing" that were previously undisclosed by the company. Overstock.com falsely claimed that those errors were previously disclosed by the company on January 29, when the company announced that it was restating its financial reports to comply with GAAP as described above.

Vindication II

On March 31, 2010 Overstock.com filed its 2009 10-K report and Q4 2009 financial report. Overstock.com's financial disclosures revealed that company improperly reported a Q4 2008 net profit of $1.014 million instead of a properly reported Q4 2008 net loss of $705k (See page F-53).

Excluding relatively minor adjustments relating to new GAAP violations reported by Overstock.com, I was right again and Patrick Byrne and Jonathan Johnson were entirely wrong again. I calculated that Overstock.com would report a loss in Q4 2008 if the company properly followed GAAP. In contrast, both Byrne and Johnson falsely stated that none of those questionable accounting practices turned a loss into a reported profit.

Byrne and Johnson, as the principal officers of Overstock.com had the means to make the same calculations I did. They both knew that any accounting error that turns a properly reported loss into an improperly reported profit is grounds for an automatic restatement of financial reports to correct such errors. Instead, they lied to investors in a deliberate attempt to hide the material financial impact of the company's GAAP violations to avoid restating the company's financial reports to correct those violations.

As I have said many times before, each and every initial financial report for every reporting period issued by Overstock.com from its inception in 1999 to Q3 2009 turned out to violate GAAP or some other SEC disclosure rules. Likewise, every single audit report from 1999 to 2008 was wrong and every single Sarbanes-Oxley internal control certification signed by management turned out to be false. The company's audit committee is as useless as Crazy Eddie's audit committee was, back in the day. So far, Overstock.com has restated its financial reports three times to correct GAAP violations.

Screwed up Internal Controls Cost Millions

KPMG issued "an adverse opinion "on the effectiveness of the Company's internal control over financial reporting."

Even though Overstock.com seems to have corrected certain GAAP violations, the company revealed that during 2009 it continued to underbill its fulfillment partners approximately $1.2 million but will "to not seek recovery of these amounts from our fulfillment partners."

Previously, Overstock.com disclosed that it underbilled its fulfillment partners $2.8 million in 2007 and $2.7 million in 2008. The company claims that it recovered none of the underbilling originating in 2007 and $2.3 million of the underbilling originating in 2008.

Therefore, from 2007 to 2009 literally $4.4 million of earned income walked out the door - 2007: $2.8 million, 2008: $400k, and 2009: $1.2 million.

New Financial Disclosure Errors Uncovered by Gary Weiss

Investors still cannot be comfortable with the credibility of Overstock.com's financial reporting.

For example, investigative reporter, bestselling author, and blogger Gary Weiss just browsed through Overstock.com's 2009 10-K report and uncovered yet another unsettling financial reporting error by Overstock.com. See below:

...the Marin County District Attorney and four other DAs in northern California want the company to fork over $8.5 million to settle consumer ripoffs by Overstock. The company disagrees and is fighting it, so .... No, wait a moment, make that read "$7.5 million." It uses the smaller number on page F-37 and the bigger number on page 33.

Really. Here it is. Page 33:

In January 2010 attorneys for the Company received correspondence from the Office of the District Attorney of County of Santa Clara in which the respective offices of the various district attorneys have made a collective proposal to resolve the dispute by the Company's payment of $8,500,000 in penalties and reimbursement.

Page F-37:

The Company received correspondence from the Office of the District Attorney of the County of Monterey in which the respective offices of the various district attorneys have made a collective proposal to resolve the dispute by the Company's payment of $7,500,000 in penalties and reimbursement.

Hey what's a million here or there when your numbers are already fabricated, right? Anyway, I'm sure glad they asked for that delay to get their numbers straight.

By the way, California made this demand back in January. Isn't it charming how Overstock didn't bother filing an 8-K saying that people who can put you in jail want $8.5 million/$7.5 million? As I've said before, Overstock's not big on niceties of the securities laws, particularly the ones concerning "fraud," "ethics" and "disclosure."

Apparently, Overstock.com's management, its audit committee, and its auditors are simply incapable of simply proof reading its financial reports.

Here's another unsettling misleading disclosure error under the caption "Risk Factors: and I am not joking:

Public statements we or our chief executive officer, Patrick M. Byrne, have made or may make in the future may antagonize regulatory officials or others.

We and our chief executive officer, Patrick M. Byrne, have from time to time made public statements regarding our or his beliefs about matters of public interest, including statements regarding naked short selling. Some of those public statements have been critical of the Securities and Exchange Commission and other regulatory agencies. These public statements may have consequences for us, whether as a result of increased regulatory scrutiny or otherwise.

Overstock.com should revise that disclosure to state that it's the lies told to investors by Patrick Byrne and his deliberate unwillingness to comply with GAAP and other SEC disclosure rules which are the company's biggest risk factors.

Smoke and Mirrors behind Overstock.com Reported 2009 Net Profit

Overstock.com reported a 2009 first time annual profit of $7.7 million. However, a careful study of the company's financial disclosures reveals that its profit is derived from one-time nonrecurring items or other non-operating items. See below:

• Gain from extinguishment of debt (Consolidated Statement of Cash Flows): $2.8 million
• Gain from settlements of legal matters (Footnote 16: Commitments and Contingencies): $7.1 million
• Reduction of sales return allowances $4.3 million (Page F-16) which added $900k to profits
• Total: $10.8 million

Without the above items, Overstock.com's 2009 reported $7.7 million net profit disappears into a $3.1 million loss.

Overstock.com's debt was issued in 2004 under false pretenses. Financial reports issued by Overstock.com prior to the issuance of such debt were restated twice by the company due to material GAAP violations. In other words, Overstock.com repurchased debt at a profit that was originally issued to investors on the basis of financial reports that violated GAAP.

The gains in settlements of legal matters merely reflect to a large extent Overstock.com's recoupment of costs previously incurred in litigation.

The significant reduction of sales return allowances is a change in estimate. In others words, previously reported sales return allowances by the company may have been overstated. A downward revision of such an estimate creates a temporary book profit.

New Loss Contingencies

In its 2009 10-K report, Overstock.com disclosed new loss contingencies that could put a big hole in its corporate pockets (Footnote 16: Commitments and Contingencies):

• District Attorneys of Marin and four other counties in Northern California to settle investigation into advertising practices: $8.5 million.
• Ohio taxes: $613k
• Total potential future losses: $9.13 million

Conclusion

With the SEC investigation of Overstock.com continuing, KPMG took a huge risk in certifying the company's 2009 financial reports. Apparently, KPMG needs a refresher course on Statement of Auditing Standards No. 99 that deals with management teams that lack integrity like the executives running Overstock.com. There are many black holes in Overstock.com's financial reporting that KPMG may not be aware of. Those black holes will be the subject of future blog posts.

Note:

On 10/26/10, I updated certain amounts relating to sales return allowances based on new clarified disclosures by Overstock.com resulting from an SEC Division of Corporation Finance inquiry.

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.