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'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.

Open Letter to KPMG: The Ties That Bind Overstock.com and Patrick Byrne With Deep Capture LLC

To KPMG:

You must investigate Overstock.com’s (NASDAQ: OSTK) relationship with Deep Capture LLC as part of your continuing audit of the company and take steps to require management to make disclosures under Statement of Financial Accounting Standards No. 57 (SFAS No. 57) governing "Related Party Disclosures."

At the direction of Overstock.com CEO Patrick Byrne, the company has used Deep Capture's resources, such as its web site, as a conduit to intimidate, harass, threaten, smear, and pre-text company critics. For example, Deep Capture Managing Partner Judd Bagley violated Facebook's Statement of Rights and Responsibilities and deceptively posed as "Larry Bergman" in an effort to gather personal information and spy on Overstock.com 's and Patrick Byrne's critics, including me (See Item 3 Safety and Item 4 Registration and Security).

Altogether, Judd Bagley posted on DeepCapture.com the names of 7,483 "Facebook friends" of Patrick Byrne's critics and that list included spouses, minor children, and other people that have nothing to do with Overstock.com, Patrick Byrne, or Byrne's delusional short selling conspiracy theories. Judd Bagley, posing as an imposter, even tried to "Facebook friend" minor children!

Note: For additional details, please read Gary Weiss blog, Felix Salmon's Reuters blog, and Barry Ritholtz's The Big Picture blog.

Overstock.com fails to make material related party disclosures

In a recent "unreviewed" Q3 2009 10-Q report filed with the SEC, Overstock.com claimed the following risk factor:

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.

If the above claimed risk factor is actually for real, Overstock.com has failed to disclose a more likely and significantly more material risk factor: the fact that certain predatory and retaliatory actions taken by Deep Capture managing partner Judd Bagley, such as pre-texting of company critics, at the direction and blessing of Patrick Byrne may lead to "increased regulatory scrutiny" of the company and significant material legal liabilities in the future. To date, Overstock.com has not disclosed to investors its close financial relationship with Deep Capture LLC anywhere in financial reports filed with the Securities and Exchange Commission.

SEC Staff Accounting Bulletin No. 99 (SAB No. 99) "Materiality" notes that:

The Supreme Court has held that a fact is material if there is –

a substantial likelihood that the . . . fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available.

As I will describe below, investors relying on Overstock.com's financial reports are being kept in the dark about the relationship between Overstock.com and Deep Capture LLC and the potential material legal consequences of the company's use of Deep Capture as a platform to attack its critics. Deep Capture LLC is in substance an affiliate of Overstock.com and is in substance controlled by the company, despite certain legal maneuvers made to disguise the true nature of the relationship between the entities. First, let's review certain accounting standards on "related party disclosures."

Related Party Disclosures under Generally Accepted Accounting Principles (GAAP)

Statement of Financial Accounting Standards No. 57 (SFAS No. 57) entitled "Related Party Disclosures" provides some "examples of related party transactions" such as:

transactions between... (d) an enterprise and its principal owners, management, or members of their immediate families; and (e) affiliates.

SFAS No. 57 defines an affiliate as:

A party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an enterprise.

In addition, SFAS No. 57 defines control as:

The possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an enterprise through ownership, by contract, or otherwise.

Furthermore, SFAS No. 57 defines related party transactions to include "services received or furnished" between such related entities. Deep Capture LLC furnishes services to Overstock.com in the form of retaliation against company critics.

How Patrick Byrne tried to conceal his control Deep Capture LLC

On April 17, 2008, investigative journalist, bestselling author, and blogger Gary Weiss reported that Deep Capture LLC is controlled by High Plains Investments LLC which is 100% owned by Patrick Byrne and owned 23.5% of the Overstock.com's common shares (See Proxy Report). See the filing below (Click on image to enlarge):

Later in his blog post, Gary Weiss noted that the Deep Capture website was registered by Patrick Byrne and is "operated over Overstock servers." See below (click on image to enlarge).

On June 19, 2008, Gary Weiss reported that Patrick Byrne took steps to conceal his ownership and control of Deep Capture by substituting High Plains Investments LLC as a principle with two former Overstock.com employees: Judd Bagley and Evren Karpak. See the filing below (Click on image to enlarge):

In addition, Patrick Byrne anonymized Deep Capture's registration. However, Deep Capture's website was still hosted on Overstock.com's servers. See below (click on image to enlarge):

Sometime later, Overstock.com servers stopped hosting the Deep Capture web site.

Financial relationship between Overstock.com, Patrick Byrne, and Deep Capture LLC

Most, if not all, of the funding for Deep Capture LLC comes from Overstock.com which is controlled by Patrick Byrne and directly from Byrne himself. As I described above, two of its managing partners, Judd Bagley and Evren Karpak, are former Overstock.com employees. Patrick Byrne claims to moonlight as a "journalist" for Deep Capture. Mark Mitchell has described Byrne as a "business associate."

Currently, Deep Capture claims that:

The Deep Capture website was created to bypass the “captured” institutions that mediate our nation’s discourse. It was initially funded by Patrick Byrne, CEO of Overstock.com, but it is not part of Overstock. It functions as a separate, limited liability media company, whose co-owners and managers are Judd Bagley, Evren Karpak, and Mark Mitchell.

Overstock.com's heavily promotes DeepCapture.com on its website. Deep Capture receives commissions from customers who purchase merchandise from Overstock.com through referrals from its website to the company. However, such income from Overstock.com is not enough to fund Deep Capture's operations. Apparently, Patrick Byrne funds Deep Capture's operating deficit.

A January 12, 2010 article in the New York Observer quoted Patrick Byrne as saying:

I put in about $500,000, and I think I made one additional smaller infusion.

 
Examples of how Overstock.com and Patrick Byrne use Deep Capture as a platform to attack critics of the company

On October 31, 2009, I sent Patrick Byrne an email and asked to participate in Overstock.com’s Q3 2009 earnings call, so I could ask questions about Overstock.com's violations of GAAP and other SEC disclosure rules. In response, Patrick Byrne responded with an angry anti-Semitic diatribe, called me a “gonif” (Hebrew/Yiddish word for thief), and posted my email on the Deep Capture website, despite previous claims that Deep Capture is unrelated to Overstock.com (See Gary Weiss blog for more details).

On November 18, 2009, I sent Patrick Byrne another email asking to participate in Overstock.com's Q3 2009 conference call where it was going to discuss its filing of an "unreviewed" 10-Q. Again, Byrne posted my email on his Deep Capture site and again referred to me as a "gonif."

On January 13, 2010, investigative journalist Roddy Boyd sent Patrick Byrne an email asking him about Overstock.com's failure to make certain material disclosures about its cash problems and internal control problems. In addition, Boyd asked Byrne about Overstock.com's New York sales tax dodge known as "Operation heist and freeze." See Roddy Boyd's article in The Big Money here).

Byrne responded by posting Boyd's emails on Deep Capture's web site and posted the following tantrum (click on image to enlarge):

If Deep Capture is "not part of Overstock" as it claims:

1. Why did Patrick Byrne post on the Deep Capture web site my emails to him asking to participate in various Overstock.com conference calls and personally attack me with anti-Semitic slurs?

2. Why did Patrick Byrne have to respond to Roddy Boyd's requests for information on Overstock.com's failure to disclose certain material information and a tax dodge scheme by posting his vile rant on Deep Capture?

Certainly, the above issues relate to Overstock.com.

Judd Bagley has refused to answer my emailed questions (cc'd to the SEC) asking him as a "Managing Partner" whether or not and he or others approve Patrick Byrne's blog posts prior to publication on DeepCapture.com. In addition, Judd Bagley has refused to answer questions about whether or not Deep Capture has a "conflict of interest" policy and if he approves of Patrick Byrne calling his critics, who happen to be Jewish like me and Gary Weiss, "gonifs."

Why is Judd Bagley so afraid to answer such questions about Patrick Byrne's activities at Deep Capture?

Apparently, Judd Bagley does not want to answer any questions because it is not in his interests or the interests of his real employers, Overstock.com and Patrick Byrne.

As I will describe below, Deep Capture LLC is a corporate public relations entity doing Overstock.com's bidding by attacking critics of the company.

The Society of Society of American Business Editors calls Deep Capture a "corporate public relations" entity

The Society of Society of American Business Editors and Writers denied Deep Capture membership to its organization because Patrick Byrne's activities as a self-proclaimed "journalist" and "those of DeepCapture seem closer to corporate public relations." See the email below posted by Byrne on Deep Capture's website (Click on image to enlarge):

Conclusion

As I described above, Overstock.com and Deep Capture LLC service each other hand-in-hand. Overstock.com and Patrick Byrne provides just about all of Deep Capture's funding. Steps were taken to conceal the true nature of the relationship between the two entities.
Statement of Auditing Standards No. 45 (SAS No. 45) cautions that:

...the auditor should be aware that the substance of a particular transaction could be significantly different from its form and that financial statements should recognize the substance of particular transactions rather than merely their legal form.

Therefore, KPMG should examine the substance of the relationship between Overstock.com and Deep Capture LLC and not be fooled by the smoke and mirrors used by Patrick Byrne to conceal his control over Deep Capture.

In addition, SFAS No. 57 cautions that:

Transactions between related parties are considered to be related party transactions even though they may not be given accounting recognition. For example, an enterprise may receive services from a related party without charge and not record receipt of the services.

Even if Overstock.com does not directly compensate Deep Capture LLC to carry out its agenda, Deep Capture is providing services in the form of issuer retaliation against critics of the company and those services are considered "transactions between related parties" under accounting rules. Those services are funded by Overstock.com through commissions and by Patrick Byrne, simply by writing out a personal check.

Please note that this open letter has been sent to the Securities and Exchange Commission to assist it in its investigation of Overstock.com.

Respectfully,

Sam E. Antar

Other information:

January 25, 2010: Open Letter to KPMG: A Warning About Overstock.com, Your New Audit Client

Disclosure:

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

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

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

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

Open Letter to the Securities and Exchange Commission (Part 5): Issuer Retaliation Complaint Against Overstock.com

To the Securities and Exchange Commission:

Last week Overstock.com (NASDAQ: OSTK) CEO Patrick M. Byrne ordered his paid internet stalker Judd Bagley to post an enemies list that included the "Facebook friends" of his critics on the DeepCapture.com web site, which has received both direct and indirect funding from the company and Byrne. As I will describe below, Overstock.com uses DeepCapture.com as a vehicle to viciously vilify and intimidate critics of the company and Patrick Byrne.

Recently, the Securities and Exchange Commission started investigating Overstock.com's improper use of "cookie jar" reserves to inflate the company's financial performance starting in Q4 2008 as well as other financial reporting violations, as a result of reporting in this blog. I urge you to also investigate Overstock.com's vicious corporate sponsored retaliation and intimidation campaign against company critics such as myself.

Overstock.com's Board of Directors have breached their fiduciary duty to investors by failing to act on violations of the company's Code of Business Conduct and Ethics by Patrick Byrne and others acting at his direction. Therefore, Patrick Byrne was given an implicit waiver from the company's code of ethics which was not reported as required on form 8-K.

Overstock.com enemies list

Judd Bagley violated Facebook's Statement of Rights and Responsibilities and deceptively posed as "Larry Bergman" in an effort to gather personal information and spy on Patrick Byrne's critics, including me (See Item 3 Safety and Item 4 Registration and Security).

Altogether, Judd Bagley posted on DeepCapture.com the names of 7,483 "Facebook friends" of Patrick Byrne's critics and that list included spouses, minor children, and other people that have nothing to do with Overstock.com, Patrick Byrne, or Byrne's delusional short selling conspiracy theories. Judd Bagley, posing as an imposter, even tried to "Facebook friend" minor children!

Note: For additional details, please read Gary Weiss blog, Tracy Coenen's Fraud Files blog, Joe Weisenthal's Business Insider blog, Felix Salmon's Reuters blog, and Barry Ritholtz's The Big Picture blog.

For example, below is an exchange between Bagley and I that was posted in the comments section of Joe Weisenthal's Business Insider blog.

Sam Antar to Judd Bagley:

According to the Deep Capture website, the following is claimed:

"The Deep Capture website was created to bypass the 'captured' institutions that mediate our nation’s discourse. It was initially funded by Patrick Byrne, CEO of Overstock.com, but it is not part of Overstock. It functions as a separate, limited liability media company, whose co-owners and managers are Judd Bagley, Evren Karpak, and Mark Mitchell."

Your website states that Patrick Byrne provided the initial funding for Deep Capture, but it claims that there is no connection between the Overstock.com and Deep Capture. Yet, Patrick Byrne recently made two blogs posts on Deep Capture and published my emails to him asking to participate in Overstock.com’s recent November 3 and 18 conference calls to ask critical questions about financial reporting violations by the company.

What does the subject of my participation in Overstock.com’s November 3 and 18 conference calls to ask questions about the subject of GAAP and SEC disclosure violations by Overstock.com have to do with Deep Capture’s editorial policy?

Is it your contention that money from Patrick Byrne and/or entities controlled by him are not the source of the salary that you and your fellow employees of Deep Capture receive? If not, who is the source of that funding?

After I did not receive a response from Bagley, I posted the following comment:

Patrick Byrne now admits that Judd Bagley used an assumed name aka Larry Bergman on Facebook:

"DeepCapture investigative reporter Judd Bagley used an assumed name to infiltrate their Facebook network...."

What's even more disgusting is the fact that Bagley tried to FB friend my children, too. Bagley succeeded in becoming Facebook friends with other friends of mine that have nothing to do with issues concerning Overstock.com, short selling, hedge funds, etc.

Finally, Judd Bagley responded and showed his callous indifference to adding the names of my children to Overstock.com's enemies list:

Hey Sam, your "kids" are like 30 years old. Time to cut the apron strings, don't you think.

I responded to Judd Bagley:

Judd Bagley:

My children are actually in their 20s. As their father, I unconditionally love them and will protect them from you, Patrick Byrne, and others no matter what their ages are.

In addition, you also posted the names of my minor nieces and nephews on your enemies list. What do my minor nieces and nephews have anything to do with Overstock.com, hedge funds, naked short selling etc?

You attempted to interfere with my matrimonial litigation by threatening me to settle it. You even contacted by ex-spouse. According to her, she rebuffed you.

You used your false Larry Bergman Facebook identity to invade the privacy of other Facebook friends of mine who have nothing to do Overstock.com, hedge funds, naked short selling etc.

So please stop your charade. You are fooling no one, except your cool aid drinkers.

As you know, Overstock.com, Patrick Byrne, and its other officers are under investigation by the Securities and Exchange Commission, as a result of my reporting GAAP and other SEC disclosure violations by the company to the SEC. Overstock.com CEO Patrick Byrne provided the initial funding for Deep Capture LLC and you are a managing partner of that entity.

Your complicity with Patrick Byrne in retaliating against a whistleblower makes you a willing participant in helping Overstock.com defraud investors by trying to intimidate me into silence about the false and misleading financial disclosures by Overstock.com and its management.

Somehow, you don’t seem to care about the legal risk you have brought upon yourself.

In any case, I refuse to back down from exposing GAAP and SEC disclosure violations by Overstock.com and its management team and I will not be intimidated into silence by paid stalkers like you.

Sam E. Antar (convicted felon, former CPA, former Crazy Eddie CFO, and proud member of Patrick Byrne's enemies list)

After broad condemnation by other bloggers, Patrick Byrne trimmed down his enemies list to 1,689 names. However, the name of my oldest son still remains on that list (as of this posting).

Overstock.com's intimate relationship with Deep Capture

Deep Capture claims that:

The Deep Capture website was created to bypass the “captured” institutions that mediate our nation’s discourse. It was initially funded by Patrick Byrne, CEO of Overstock.com, but it is not part of Overstock. It functions as a separate, limited liability media company, whose co-owners and managers are Judd Bagley, Evren Karpak, and Mark Mitchell.

Both Bagley and Karpak are so-called former Overstock.com employees. Mark Mitchell is a washed up former Columbia Journalism Review reporter who left CJR after his lapses of their journalistic ethics.

Overstock.com's web site heavily promotes DeepCapture.com, Patrick Byrne claims to be a "journalist" working for Deep Capture, and Deep Capture receives commissions from customers who purchase merchandise from Overstock.com through referrals from its website to the company.

The Society of Society of American Business Editors calls Deep Capture a "corporate public relations" entity

The Society of Society of American Business Editors and Writers denied Deep Capture membership to its organization because Patrick Byrne's activities as a self-proclaimed "journalist" and "those of DeepCapture seem closer to corporate public relations." See the email below posted by Byrne on DeepCapture.com (Click on image to enlarge):

Patrick Byrne post my emails asking to participate in various Overstock.com conference calls on DeepCapture.com

On October 31, I sent Patrick Byrne an email and asked to participate in Overstock.com’s Q3 2009 earnings call, so I could ask questions about Overstock.com's violations of GAAP and other SEC disclosure rules. In response, Patrick Byrne responded with an angry anti-Semitic diatribe, called me a “gonif” (Hebrew/Yiddish word for thief), and posted my email on his Deep Capture blog, despite previous claims that Deep Capture is unrelated to Overstock.com (See Gary Weiss blog for more details).

On November 18, I sent Patrick Byrne another email asking to participate in Overstock.com's Q3 2009 conference call where it was going to discuss its filing of an "unreviewed" 10-Q. Again, Byrne posted my email on his Deep Capture blog and again referred to me as a "gonif."

If Deep Capture is "not part of Overstock" as it claims, why did Patrick Byrne post my emails asking to participate in various Overstock.com conference calls and personally attack me with anti-Semitic slurs?

Judd Bagley has refused to answer my emailed questions (cc'd to the SEC) asking him as a "Managing Partner" whether or not and he or others approve Patrick Byrne's blog posts prior to publication on DeepCapture.com. In addition, Judd Bagley has refused to answer questions about whether or not Deep Capture has a "conflict of interest" policy and if he approves of Patrick Byrne calling his critics, who happen to be Jewish like me and Gary Weiss, "gonifs."

Why is Judd Bagley so afraid to answer such questions about Patrick Byrne's activities at Deep Capture? Apparently, Judd Bagley does not want to answer any questions because it is not in his interests or the interests of his real employers, Overstock.com and Patrick Byrne.

Certain other retaliatory actions by Judd Bagley on behalf of Patrick Byrne

In 2007, Judd Bagley colluded with his trusted friend Edward Manfredonia to spread vile anti-Semitic trash talk (download) about Conde Nast contributing editor Gary Weiss and I on his antisocialmedia.net blog. Manfredonia once wrote the International Herald Tribune, “Don’t judge the Nazi’s too harshly.” He has sued Gary Weiss, the Securities and Exchange Commission, and Yahoo claiming among other things delusional criminal conspiracies singling out Jews, in particular. All of those cases were thrown out of court.

Later that year, Patrick Byrne even bribed Utah Attorney General Mark Shurtleff to write a letter (issued as a press release and still posted on Overstock.com’s web site) defaming me by claiming that I made certain agreements that I never made with Shurtleff's office. I went to Utah at my own expense and took no fees to train Shurtleff’s staff on combating white collar crime. However, taped transcripts of phone conversations with Chief Deputy Attorney General Kirk Torgensen and Deputy Attorney General Richard Hamp revealed Byrne’s scheme with Shurtleff to defame and discredit me (Details here).

In April 2009, Judd Bagley threatened me to settle my matrimonial litigation with my ex-spouse and told me to, "settle the suit...give her whatever she wants. Because if it goes to trial, I'll probably attend."

Overstock.com's financial reporting violations

Every initial financial report issued by Overstock.com for every reporting period since the company's inception has violated Generally Accepted Accounting Principles (GAAP) and SEC disclosure rules. The company has restated its financial reports two times in the last three years due to such GAAP and SEC disclosure violations and is now desperately trying to avoid a third restatement of its financial reports.

The SEC started investigating Overstock.com after I alerted them to new GAAP violations by the company. Afterwards, Overstock.com fired Grant Thornton as the company's auditors and publicly vilified them when they recommended another restatement of the company's financial reports, just as I previously called for in my blog. The company filed an "unreviewed" Q3 2009 10-Q and CEO Patrick Byrne and CFO Steve Chesnut did not sign required Sarbanes-Oxley certifications. NASDAQ sent Overstock.com a letter warning the company of a possible de-listing.

A clear case of scienter

Here you have a clear case of scienter for a rule 10b-5 violation based on Overstock.com’s unwillingness to restate its financial reports and instead retaliate against its critics by such as myself.
Conclusion

Your failure to act on blatant issuer retaliation by Overstock.com will encourage even more dishonest companies to retaliate against their critics and result in significant losses to investors.

Respectfully,

Sam E. Antar

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

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

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

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

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

Other documents submitted via email:

Overstock.com's enemies list containing 7,483 names including minor children

Overstock.com's enemies list containing 1,689 names which still includes my oldest son's name.

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

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

Overstock.com CEO Patrick Byrne Is In a Very Sour Pickle

Overstock.com CEO Patrick Byrne is in a pickle or let’s just say that he is in a sour pickle. He has to make key decisions within the next weeks, before issuing his Q3 2009 financial reports, on how to handle certain financial reporting violations uncovered by this blog and now being investigated the Securities and Exchange Commission. As a result of my forensic accounting analysis, the SEC took the highly unusual step of bravely restarting its investigation of Overstock.com’s financial reporting violations, after dropping a previous investigation in June 2008 (details here).

My forensic accounting report to the Securities and Exchange Commission

In my open letter to the SEC, I detailed how Overstock.com failed to comply with Generally Accepted Accounting Principles (GAAP) in correcting its customer refund and credit errors and improperly created a "cookie jar reserve" to materially inflate reported earnings or reduce losses in future reporting periods (details here).

In October 2008, Overstock.com disclosed new customer credit and refund accounting errors and restated all financial reports from Q1 2003 to Q2 2008 to reflect an additional $8.2 million of claimed accumulated losses in prior reporting periods. It was the second time in two years that Overstock.com restated its financial reports due a violation of GAAP.

Those customer refund and credit errors also caused Overstock.com to underbill earned income due from its fulfillment partners for offsetting costs and reimbursements. Overstock.com restated its prior financial reports to correct its customer refund and credit errors. However, the company failed to make offsetting corrections and accrue underbilled income earned from its fulfillment partners in those same affected prior reporting periods, as required by GAAP. Instead, Overstock.com improperly recognized income from its underbilled fulfillment partners using a non-GAAP cash basis as amounts were collected future accounting periods (Q4 2008 $1.8 million, Q1 2009 estimated at $1.4 million, and Q2 2009 $87k).

In effect, Overstock.com improperly created a "cookie jar reserve" to inflate earnings in future reporting periods. For example, the company should have reported a Q4 2008 loss, but instead reported a profit for that quarter by violating GAAP. That improperly reported net profit enabled Overstock.com to report its first quarterly profit after a string of 15 consecutive quarterly losses and beat mean analysts’ consensus expectations for earnings per share.

Patrick Byrne’s choices

When Overstock.com issues its next financial report (due in a few weeks), the company can either restate its affected prior financial reports to properly reflect income from underbilling its fulfillment partners as it was earned in those periods or the company can tough it out and wait for the SEC or Grant Thornton (new auditors) to force a restatement of its financial reports.

If Patrick Byrne chooses to restate financial reports

If Overstock.com restates its financial reports it will be the third time in three years that the company had to correct financial reports due to violations of GAAP: (1) inventory accounting error - Q1 2002 to Q3 2005, (2) customer refund and credit error – Q1 2003 to Q2 2008, and (3) underbilled income from fulfillment partners – Q1 2003 to Q2 2009. Patrick Byrne will have the unique distinction being the CEO of a company that restated financial reports from overlapping prior accounting periods three times: Q1 2003 to Q3 2005.

I have no doubt that Patrick Byrne will continue to falsely claim it’s all an honest mistake (See Gary Weiss Blog, here). However, Overstock.com was notified by me of its GAAP violations starting in January 2009 and the company deliberately failed to act on it. Instead, I was viciously smeared by Patrick Byrne during earnings calls (Q4 2008, Q1 2009, and Q2 2009).

Patrick Byrne sent his paid internet stalker Judd Bagley to threaten me into settling my divorce case with my ex-spouse and smear me on the internet as retaliation for my exposure of Overstock.com's GAAP violations.

Another paid henchman used by Patrick Byrne to smear his critics is Mark Mitchell, a former Columbia Journalism Review (CJR) reporter who left his job under a cloud, when serious questions were raised about his journalistic integrity and ethics. In Byrne's Deep Capture blog, Mitchell claimed:

Antar writes with almost daily regularity that Deep Capture reporter Patrick Byrne is running a fraudulent company (Overstock.com), though he has produced nothing to support his claims, and every reputable person who has examined his arguments has concluded that they are absurd.

Yes, I do believe that Patrick Byrne has committed securities fraud. However, contrary to Mitchell's claim that I have "produced nothing" to support my claims, my blog has thoroughly documented false and misleading financial reporting by Overstock.com and lies to investors by Patrick Byrne dating back some ten years (some details, here).

In fact, every single financial report issued by Overstock.com, since its inception, has initially violated GAAP or other SEC disclosure rules. Only certain disreputable members of the management team running Overstock.com have disputed my findings. The SEC apparently agrees with me and not Byrne or Mitchell and it has restarted its investigation of Overstock.com.

If the SEC did not re-start its investigation of Overstock.com, I doubt that the company on its own would ever restate its improper financial reports to properly comply with GAAP as I have called for in my blog. For example, it took me a year of blogging and letter writing to Overstock.com and the SEC to push the company into properly complying with SEC Regulation G governing non-GAAP financial measures such as "Earnings before interest, taxes, depreciation, and amortization" or EBITDA (details here and here). During that time, Patrick Byrne, current company President Jonathan E. Johnson, and former CFO (now demoted) David Chidester falsely claimed that Overstock.com's improper EBITDA measure complied with Regulation G. However, Overstock.com finally changed its improper disclosures to comply with Regulation G and I was proven right.

If Patrick Byrne chooses to tough it out

If Overstock.com is willing to take the risk of an SEC enforcement action to compel the company to correct its financial reports, the company will face almost certain sanctions from the SEC for delaying its restatements. According to a paper issued by major securities law firm Paul Weiss:

Waiting for the SEC to force disclosure of accounting irregularities and making misleading statements to the press during an investigation in respect to the underlying focus of the investigation...all have the potential to result, and have in fact resulted, in significant penalties.

Paul Weiss specifically cited the SEC investigation of Dynegy (See page 3 and 4).

Patrick Byrne’s denials of wrongdoing and at the same time vilifying me in various earnings calls (Q4 2008, Q1 2009, and Q2 2009) and false and misleading statements to the press such as to Crain’s New York Business (subscription required), Deseret News, and the Salt Lake Tribune make him subject to stiff SEC sanctions. For example, Patrick Byrne told the Deseret News:

Byrne doesn't think Antar should get his hopes up as the restatements involve a trio of bookkeeping mistakes that when added and subtracted together decrease the company's bottom line by a mere $2 million against a total of $5 billion that was originally reported.

As Gary Weiss reported in his blog:

Byrne is obscuring the issue. All accounting errors cancel out over time (any forensic accountant can tell you about the double down effect-–you have to commit twice the fraud to maintain the fraud). It’s the timing of the accounting errors and their impact of quarterly results that counts – the "cookie jar reserve" that Sam has described in his blog. That's what has impacted the bottom line in several quarters.

For example, Overstock used smoke and mirrors to turn a fourth quarter 2008 loss into its "first quarterly profit in sixteen quarters." Didn't happen. Byrne's trying to portray this deliberate chicanery as "carelessness." Except that it was totally deliberate. Byrne has been on notice about these GAAP violations all along.

If anything, Patrick Byrne's actions reflect his deliberate intent to avoid following GAAP and SEC disclosure rules.

Issues with new auditors

Overstock.com’s new auditors, Grant Thornton, faces a thorny issue, too. The former auditors, PricewaterhouseCoopers signed off on Overstock.com’s 2008 financial reports, but failed to require Overstock.com to restate prior financial reports to properly reflect when underbilled income was actually earned from its fulfillment partners. Overstock.com’s GAAP violations in 2008 caused material errors in 2009 financial reports that Grant Thornton must audit. I doubt that Grant Thornton will go out on a limb and risk issuing a clean audit opinion without Overstock.com restating financial reports to correct its GAAP violations.

A CEO and company that apparently is unwilling to abide by the rules

Patrick Byrne once said:

Well, first of all, I’m all about GAAP. I have been so critical of the companies that do–I don’t believe in one-time charges; I don’t believe in EBITDA. If somebody talks EBITDA, put your hand on your wallet; they’re a crook.

To this day, Overstock.com and its CEO Patrick Byrne were never about GAAP or following SEC disclosure rules such as Regulation G governing non-GAAP accounting measures such as EBITDA. So far, the company has restated its financial reports two times due to GAAP violations and an SEC Division of Corporation Finance review found that all financial reports from the company's inception to Q2 2008 failed to follow GAAP in reporting revenues. Financial reports from Q1 2003 to Q2 2009 must be restated to properly reflect when income was earned from underbilled fulfillment partners.

From Q2 2007 to Q2 2008, Overstock.com materially overstated its financial performance by using a non-compliant EBITDA in violation of SEC Regulation G. Patrick Byrne had said above that, "I don't believe in EBITDA. If somebody talks EBITDA, put your hand in your wallet: they're a crook." Overstock.com not only used EBITDA in its financial reports, it also misused EBITDA by excluding certain items from the calculation in violation of SEC Regulation G. Therefore, Patrick Byrne is a self-defined "crook" and a violator of securities disclosure rules.

In every single period of its existence, Overstock.com has issued financial reports that at least initially violated GAAP and other SEC disclosure rules. Meanwhile, Overstock.com has lost money in every single year of its existence while taking advantage of gullible investors by raising capital and issuing phony financial reports. In recent quarters, Overstock.com made $5.7 by buying back debt at a discount (less than face value) from unfortunate investors who relied on financial reports that failed to follow GAAP and SEC disclosure rules. Just about the only thing that Patrick Byrne is "about" is issuing phony financial reports, while taking money from his investors to finance a company that has never made money in any year.

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. The Paul, Weiss law firm was Crazy Eddie's outside corporate counsel. I scammed them, too.

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.

Today's Overstock.com Q1 2009 Earnings Conference Call: Questions Submitted to Patrick Byrne

Updated

Overstock.com's (NASDAQ: OSTK) earnings conference call is scheduled to start on Wednesday, April 22, 2009 at 3:00 PM Eastern. Therefore, I have submitted the questions below for CEO Patrick Byrne to answer. Before asking each question, I provide the context of my questions. Let's see if the masquerading stock market reformer Patrick Byrne has the guts to provide a detailed truthful response to each and every question.

To Patrick M. Byrne:

Senior Note Repurchases

As of December 31, 2008, Overstock.com reported that $67.5 million of Senior Notes were outstanding. Those notes were issued in November 2004. Since that time Overstock.com has disclosed that there were material weaknesses in internal controls and that its revenue accounting did not conform to GAAP and SEC disclosure rules from the company’s inception (day one).

In addition, financial reports from Q1 2003 to Q3 2004 (periods before the Senior Notes were offered) have been restated twice. Recently, Overstock.com has been buying back such notes at a discount or profit by paying investors less than the face amount of such notes.

Questions:

Do you believe that investors would have purchased such Senior Notes under those same terms and conditions in November 2004, in light of Overstock.com’s subsequent disclosures about material weaknesses in internal controls, departures from GAAP and violations of SEC disclosure rules, as recently disclosed by the company?

Is it fair to say that you are taking advantage of investors in Senior Notes by buying the debt at a discount to face value?

James V. Joyce Resignation and Contract Termination Fee paid to Icent LLC (run by Mr. Joyce)

On April 1, 2009, James V. Joyce resigned from Overstock.com’s board of directors. In an 8-K report filed with the Securities and Exchange Commission, Overstock.com disclosed that Icent LLC (a company run by Mr. Joyce) received $1.2 million to terminate its contract with Overstock.com.

According to the proxy statement, Overstock.com "...paid Icent LLC $360,000 annually, and paid approximately $75,187 of reimbursable expenses to Icent in 2008."

Questions:

Please describe in detail the services rendered by Icent LLC to Overstock.com. What factors justified the huge $1.2 million contract termination fee which is approximately 3.5 times annual fees paid to Icent LLC?

Is it Overstock.com’s view that its agreement with Icent LLC and any amendments thereof are considered a “material definitive agreement” under SEC rules?

Please explain in detail Overstock.com’s position of that point.

Does Overstock.com intend to disclose as an exhibit in a future filing to the SEC copies of any agreements made with Icent LLC?

Please describe any contract termination provision in any agreement with Icent LLC.

Assuming that the original contract with Icent LLC had a contract termination provision, was it ever amended?

Did the original contract with Icent LLC call for a contract termination payment of $1.2 million? If not, was it agreed to at a later time?

Did James V. Joyce or Icent LLC render any services that relate to Deep Capture LLC or antisocialmedia.net?

Smear Campaign

You have viciously retaliated against me and other brave journalists and bloggers with innuendo, smears, and lies for having the courage to expose your misdeeds. Recently, your paid internet stalker Judd Bagley posted smears, innuendo, and lies about my ongoing matrimonial action in an attempt to discredit me. He even threatened me to "settle the case." (Details here)

Questions:

Do you deny orchestrating a retaliatory smear campaign against your critics through your funding and admitted control of Deep Capture LLC, compensating individuals such as Judd Bagley and Mark Mitchell to post smears, innuendos, and lies about your critics on Deep Capture's web site and internet public chat boards?

Do you deny ever violating Overstock.com’s Code of Business Conduct and Ethics?

Please explain your answer in detail.

Do you deny ever lying or misleading investors or the public about Overstock.com’s financial performance?

Please disclose the exact nature of the relationship between Overstock.com and Deep Capture, including but not limited to any Overstock.com resources used by Deep Capture, whether past or present.

Recently, Judd Bagley who claims to be compensated by Deep Capture LLC, a company that you funded, posted innuendo, lies, and smears about my divorce on the Yahoo message boards.

Do you approve of Bagley’s behavior towards me and other critics?

Recent Amendments to Financial Reports

Overstock.com recently filed amendments to prior financial reports filed with the Securities and Exchange Commission. Each of those amendments contains an “Explanatory Note” detailing the changes in certain disclosures and the reasons for such changes.

From Q2 2007 to Q2 2008, Overstock.com violated SEC Regulation G by using a non-compliant EBITDA and the company materially overstated its financial performance. In Q3 2008, Overstock.com revised its non-compliant EBITDA disclosure and called it “adjusted EBITDA” to try to conform to SEC Regulation G. Overstock.com also revised its previously reported (Q2 2007 to Q2 2008) non-compliant EBITDA disclosures in those amended reports. However, there is no explanation why such non-GAAP disclosures were changed.

Question: Please explain why Overstock.com made no reference to using a non-compliant EBITDA in its “Explanatory Note” to amended financial reports and provided no reason for changing such non-GAAP disclosures.

Update:

Lee Webb from Stockwatch analyzes Overstock.com's responses and lack of responses to my questions (detailed here).

Written by:

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Disclosure:

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

Overstock.com Refuses to Correct GAAP Violations in Latest Financial Report

So far, Overstock.com (NASDAQ: OSTK) has stubbornly refused to correct recent Q4 2008 GAAP violations, exposed last week by this blog that allowed the company to improperly report a $1 million profit, rather than an $800,000 net loss. Instead on last Friday, Overstock.com CEO Patrick Byrne was caught trying to make excuses to readers on a stock bulletin board, using an alias in an unsigned post. After I complained in emails to the company and the Securities and Exchange Commission, Byrne removed his unsigned post and posted the same nonsense with his real name attached to it. I'll have more to say on that, later.

Overstock.com violated accounting rules to report first quarterly profit after 15 consecutive quarterly losses

In my last blog post, I documented how Overstock.com violated Statement of Financial Accounting Standards No. 154 governing accounting errors and improperly reported a $1 million profit in Q4 2008, rather than an $800,000 net loss. During the Q4 2008 earnings call, new CFO Steven Chesnut, told investors:

Gross profit dollars were $43.6 million, a 6% decrease. This included a one-time gain of $1.8 million relating to payments from partners who were under-billed earlier in the year. [Emphasis added.]

That "one-time gain of $1.8 million" referred to above by CFO Steve Chesnut was actually an improper one-time cumulative adjustment of an accounting error. Overstock.com "under-billed" partners earlier in the year and that is simply an accounting error covered by SFAS No. 154.

To compound the problem, Overstock.com recognized the "one-time of $1.8 million" using cash-basis accounting when it "received payments from partners who were under-billed earlier in the year" instead of accrual basis accounting, which requires income to be recognized when earned. A public company is not permitted to correct any accounting error using cash-basis accounting.

If an accounting error is material, like in the case of Overstock.com detailed here, a company must restate all effected prior period financial reports, rather than use a one-time cumulative adjustment to correct such an error.

Overstock.com’s accounting error met at least three materiality criteria under SEC Staff Accounting Bulletin No. 99, governing the materiality of accounting errors. The accounting error only had to meet one materiality criteria to require a restatement of all effected prior period financial reports. See below:

(1) Whether the misstatement masks a change in earnings or other trends
(2) Whether the misstatement hides a failure to meet analysts' consensus expectations for the enterprise
(3) Whether the misstatement changes a loss into income or vice versa

Prior to Q4 2008, Overstock.com reported 15 consecutive quarterly losses and the mean analysts’ consensus expectations for Overstock.com’s Q4 2008 financial results were negative $.03 earnings per share. If Overstock.com had properly restated its prior period financial reports, rather than improperly report a one-time gain of $1.8 million from correcting its accounting error due to under-billing fulfillment partners in prior periods, the company would have reported an $800,000 loss in Q4 2008, instead of a $1 million profit.

By improperly using a "one-time gain" to correct its accounting error, Overstock.com's:

(1) Misstatement changed its trend of 15 consecutive quarterly losses to improperly report a Q4 2008 net profit $1 million, instead of properly reporting an $800,000 net loss;

(2) Misstatement hid a failure to meet analysts' consensus expectations of negative $.03 earnings per share by improperly reporting positive $.04 earnings per share, instead of properly reporting negative $.04 per share;

(3) Misstatement allowed the company to improperly report a $1 million profit, rather than a properly reported $800,000 net loss.

Patrick Byrne double-talks investors on an internet chat board

In trying to double-talk his way out of Overstock.com's latest financial reporting fiasco, Patrick Byrne started out with his usual personal attack on me, violated the company's Code of Business Conduct and Ethics, and possibly Regulation FD, as he tried to con readers of a stock bulletin board into believing that the company did not violate accounting rules:

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

For example: when one discovers that one underpaid some suppliers $1 million and overpaid others $1 million. For those whom one underpaid, one immediately recognizes a $1 million liability, and cleans it up by paying. For those one overpaid, one does not immediately book an asset of a $1 million receivable: instead, one books that as the monies flow in. Simple conservatism demands this (If we went to book the asset the moment we found it, how much should we book? The whole $1 million? An estimate of the portion of it we think we'll be able to collect?) The result is asymmetric treatment. Yet Antar is screaming his head off about this, while never once addressing this simple principle. Of course, if we had booked the found asset the moment we found it, he would have screamed his head off about that. Behind everything this guy writes, there is a gross obfuscation like this. His purpose is just to get as much noise out there as he can. [Emphasis added.]

Nowhere in Patrick Byrne's comment above does he mention the issue of the proper treatment of accounting errors under GAAP and SEC rules, as I have documented in my blog. Byrne can't address it. No matter what boloney Byrne said above, Overstock.com simply had a material accounting error that required the restatement of effected prior period financial reports.

Instead, Patrick Byrne, like a white collar criminal caught in the act of violating GAAP in SEC reports, tried to make excuses for Overstock.com's decision to correct its accounting errors by claiming that "conservatism demands" waiting until "monies flow in" from under-billed fulfillment partners, after such an error is discovered by the company. That is improper cash-basis accounting for a public company and does not address the restatement issue. In any case, Overstock.com is required to restate all prior period financial reports affected by its accounting error.

Patrick Byrne went on to make up new lies in an effort to discredit my exposure of Overstock.com's GAAP and SEC reporting violations:

In the last quarter he ignores a $4 million write-down. He says that we dispensed with a $3 million bonus for executives when it was really just $1 million. Etc. etc. It's just a guy on a street corner, spouting gibberish, hoping someone will toss him a quarter.

I did not write about Overstock.com's "$4 million write-down" relating to a note receivable because it is irrelevant to the company's violation of GAAP concerning accounting errors. In addition, I never wrote about any bonuses for Overstock.com executives, anywhere, despite Byrne's claim that I wrote about it. Patrick Byrne is simply making it up.

Patrick Byrne retaliates by employing paid shill Mark Mitchell to smear me

In another effort to discredit me, Patrick Byrne and his paid shill, washed up former Columbia Journalism Review (CJR) reporter Mark R. Mitchell, falsely claim that I am connected to the Genovese crime family and:

Now he is paid by short sellers with ties to David Rocker and associates of Michael Milken. The assignment to which he devotes the majority of his time is to use the Internet to harass and smear the reputations of Deep Capture founder Patrick Byrne and his colleagues.

That is untrue. I do not receive consideration of any kind, directly or indirectly, for examining Overstock's financial reporting, and publicly offering my observations regarding this firm. No one has ever paid me or promised to pay me any compensation in return for writing about Overstock.com, Patrick Byrne, and his colleagues. I am simply exposing Patrick Byrne's frauds on investors and his vicious retaliation against critics through paid shills like Mark Mitchell, Judd Bagley, and others who are enabling and abetting Byrne's frauds and abuses.

About two years ago, Mark Mitchell left CJR under a cloud after information surfaced that he violated its journalistic standards. Sources claim that Mitchell was escorted out of the building. I once asked Mark Mitchell about that alleged episode and he responded on the Yahoo Overstock.com message board saying, “I'm [meaning Mark Mitchell] a drug fiend and a psychopath and I've been escorted out of lots of places (pretty much everywhere I go, actually)." After realizing his folly, Mitchell deleted his Yahoo post and tried to deny being escorted out of the building. Like Byrne, Mitchell seems to be missing a few marbles, to say the least.

Overstock.com's Q4 2008 financial report is not reliable due GAAP violations

Overstock.com's Q4 2008 financial report cannot be relied on as a result of the company's failure to comply with SFAS No. 154 and SAB No. 99 governing accounting errors.

Last Wednesday, I emailed Joseph J. Tabacco Jr. and the Securities and Exchange Commission Utah Office to alert them of Overstock.com's latest violation of GAAP and SEC rules. According to SEC rules (See Items B-1 and 4.02), Overstock.com has until today to come clean and disclose that its Q4 2008 financial reports are not reliable. Don't count on it, unless the SEC takes action.

It took Overstock.com about a year to correct its violations of SEC Regulation G, after this blog exposed how the company used a non-compliant EBITDA measure to materially overstate its financial performance.

Until Overstock.com finally revised its EBITDA measure, CEO Patrick Byrne, company President Jonathan E. Johnson, and former CFO David Chidester all lied to investors claiming that Overstock.com was in compliance with SEC Regulation G, when it wasn't.

At that time, Byrne claimed that I was writing gibberish, too. He was proven wrong, when Overstock.com ate crow and finally revised its non-compliant EBITDA measure in its Q3 2008 10-Q report.

To be continued....

Written by,

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Disclosure:

I have am not long or short Overstock.com securities.