Overstock.com's Ethical Dilemma

Using "ethics" in the same sentence as the corporate chamber pot "Overstock.com" is inherently absurd, I know. But one of the pitfalls of post-Enron reforms -- if you're a slippery, blame-shifting, critic-smearing CEO like Overstock's Patrick Byrne -- is that unethical conduct may not just be morally repugnant. It may fall afoul of the securities laws.

Reformed felon and ace fraud-fighter Sam Antar raised that troublesome issue in two insightful blog items over the past few days. They can be found here and here.

The first post points to a line from the Overstock code of ethics (yes, amazingly enough. it has one; you can download a copy here), saying:

"Business records and communications often become public, and we should avoid exaggeration, derogatory remarks, guess work, or inappropriate characterizations of people and companies that can be misunderstood. This applies equally to e-mail, internal memos, and formal reports…. In accordance with these policies, in the event of litigation or governmental investigation please consult with the company’s General Counsel."

Antar, as usual, makes his point in the form of sharp questions -- the same questions that he used to ask Byrne directly on Byrne's favorite message board, until Byrne's minions had him kicked off:

Have your actions been in complete compliance with the above provisions?
Have you avoided exaggeration?
Have you avoided derogatory remarks?
Have you avoided guess work?
Have you avoided inappropriate characterizations of people and companies that can be misunderstood?
When you received your SEC subpoena, did you promptly inform the Company’s General Counsel?
When you received your SEC subpoena, did either you or the company’s general counsel promptly inform Overstock.com’s Audit Committee?

Well, it's pretty obvious to anyone who has followed Byrne's communications with the public (click on the Patrick Byrne tag below) to know that they are a mountain of calumnies, exaggerations, innuendo, evasions and -- as I have personally experienced -- outright fabrications. As forensic accountant Tracy Coenen recently observed: "Why CEO Patrick Byrne never has a straight answer for anything is beyond me. And I’d be curious to know just how many people really believe anything that comes out of his mouth (or in this case his fingers on the keyboard)???"

Only last weekend, "Baghdad Byrne" posted a ludicrous series of nutty, evasive message board posts to slip-slide around his year-late disclosure of an SEC subpoena.


Another example of Byrne in full-dissemble mode was the line of swill that he fed Herb Greenberg in emails last June. Here's Herb's blog item at the time.

As you can see, Herb asked a simple question -- was Overstock in any way associated with the testimony of a witness before the Senate Judiciary Committee? Herb knew perfectly well the answer, which was "yes," as evidenced by the signature on the Microsoft Word document, which indicated that his testimony was drafted on an Overstock.com computer. Byrne's response was almost comical in its evasiveness and dishonesty.

Now, what's wrong with a CEO engaging in "exaggeration, derogatory remarks, guess work, or inappropriate characterizations of people and companies"? The problem is that, unless given a waiver from the code of ethics by the board of directors, the company has a potentially nettlesome securities law issue when the SEC comes calling -- as it has with Overstock and Byrne personally.

Thus we have Sam's follow up questions in the next post, which concern waivers and amendments to a company's code of ethics.

As usual, Sam is hitting the nail on the head, and I hope that his considerable following in the regulatory community is paying attention.

Another useful post from the Overstock beat can be found in the O-Smear blog, which points to the recent disappearance of message board postings by Overstock's resident stalker, its newly appointed director of communications Judd Bagley.

Despite being appointed the company's chief flack, Bagley continues to harass and stalk critics of Byrne and Overstock without disclosing his identity and corporate affiliation with each post. Indeed, as noted by O-Smear, Bagley in one post actually made fun of Regulation FD. In that now-deleted post he admitted to being a Yahoo screen name that has recommended purchase of Overstock shares.

I wonder how the SEC feels about a company official recommending purchase of a stock without identifying that he or she is a company official?

I wonder if the SEC takes the same flip view of FD as Overstock's director of communications? I wonder how SEC enforcement officials feel about a corporate official making fun of FD in a post that, by using a pseudonym, itself thumbs its nose at FD?

O-Smear points out that this very recent Bagley post mysteriously vanished. Note too the updated post referenced at the end, which points to the recent disappearance of other pseudonymous Yahoo posts by Bagley -- all harassing and stalking critics of Overstock -- some several months after they were posted.

Makes you wonder why Yahoo would suddenly take such an action, all of a sudden.

Is Bagley trying to cover his tracks and, if so, why? Yahoo allows users to remove posts by filling out a form. I am told by a person familiar with its procedures that if Yahoo removes a post at a user's request, it usually deletes every post that person has made.

If so that would be futile, as all of his deleted Yahoo posts are available to regulators and have long since been archived by Internet sleuths. So did Yahoo act on its own, and, if so, why? Is this the result of an SEC query?

UPDATE: Note the comment from one reader, who makes some good observations that I think are worth repeating:

In addition to the Reg FD troubles, there is also appears to be Sarbanes-Oxley component to Overstock's failure to enforce these policies.

Individually, one would react to any one of these infractions as a minor matter that does not rise to the level of active regulatory enforcement. However, the volume of infraction, and the manner of execution in this case is quite remarkable, and does rise to actionable violation in my opinion. And if my opinion turns out to be fact, then the SEC’s credibility is on the line if they opt to do nothing.

I would still like to know if the Overstock Sr. Human Resources executive reported these policy violations directly to the Board of Directors, as many - if not most - public company now require in a post-Sarbanes world.

As we all know, the failure of the Board of Directors of Overstock.com, Inc. at Corporate Governance is no less egregious than it’s rogue CEO and his minions.

Also, O-Smear's proprietor points out to me that Bagley's mid-May post under a pseudonym, the one in which he makes fun of Regulation FD, makes a reference to himself as "director of so--" -- that is, his old title of director of social media.

Bagley was actually director of communications at the time, only it was not widely disseminated.

Why the deception? Could it be that Bagley is so accustomed to telling lies that he can't distinguish them from the truth?

© 2007 Gary Weiss. All right reserved.

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