Wednesday, April 25, 2007

Is's Quarterly Delusion 'Materially Misleading'?

Another Overstock conference call grapples with reality

The quarterly conference calls of the red ink machine always have a surreal quality to them, even when Patrick Byrne isn't ranting about the Sith Lord or the Israeli Mafia. But today's Byrne gab-fest -- which coated the company's latest atrocious financials with a coast of shellac -- was even weirder than most.

Byrne had the gall to issue a press release saying "Our business is dramatically improving," and to make similar comments during the call. "Bold words from a man who runs an online retailer that burned $58 million in cash on rev enues of $158 million," observed the Motley Fool.

This latest performance makes me wonder whether Byrne is pushing against the dividing line between spin and what the feds might call being "materially misleading."

I don't know. Maybe it is perfectly OK for CEOs to duck between the raindrops and unload a crock on the public every quarter. If it is legal, it shouldn't be. Remember that what Byrne says is actually believed by some people, amazing at that may seem.

It didn't help that the analysts asking questions were timid even by sell-side analyst standards. When Byrne let slip that he was calling in from Washington, DC, no one had the brains (or guts) to ask, "You sell toasters out of Salt Lake City. What are you doing in Washington?"

Byrne's spin was so grotesquely off the mark that he caught the attention of one of the nation's leading forensic accountants, Tracy Coenen. "It seems that the executives of online retailer of may want invest in a good dictionary," she observed.

Tracy went on to say:
Their definition of “improving” certainly must be a lot different from mine. Why? The company is doing horribly:
  • Revenue for the quarter was down 11%
  • Operating losses for the quarter were $17.7 million
  • Operating losses were $3.5 million more than last year
  • Net losses for the quarter were $21.4 million
  • Net losses were $5.5 million more than last year

Who in their right mind believes that such numbers represent an improvement in the business???

Tracy is widely respected by regulators. Hopefully her words will be taken to heart by the SEC, which is conducting an investigation "on", according to Overstock's SEC filings. (The rest of the word would call that an investigation of, but remember what Tracy said about the "dictionary.")

Another Overstock-watcher with a large federal following, reformed felon Sam Antar, has raised some sharp questions about Overstock's recent filings. I have no doubt his views are, as usual, being studied carefully by the SEC.

When the SEC reads Tracy's and Sam's comments, they should keep this question in mind: When does spin stop being spin, and start becoming "materially misleading"?

© 2007 Gary Weiss. All rights reserved.


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