Tuesday, May 29, 2007

The Private Dick That Patrick Byrne 'Forgot'

Patrick Byrne's worst enemy -- Patrick Byrne -- strikes again

One of the fascinating things about following Overstock.com, as it self-destructs, is the suspense: What embarrassing gaffe will it make next? What cyberstalking atrocity will be committed by its nauseating resident stalker and official spokesman, Director of Communications Judd Bagley? What SEC rule will it ignore or violate? What lie will emerge from the ever-flapping mouth of Overstock.com CEO Patrick Byrne?

Byrne was jawing away on the Investor Villlage message board --his fifty-second post this year -- over the Memorial Day Weekend, and proved once again that he is the gift that keeps on giving. He is truly the fraud investigator's best friend, and his own worst enemy.

In an post from his pseudonym "Hannibal" on the limited circulation message board ("Screw you, Regulation FD!") we were treated to a double header --triple header, if you count the Reg. FD defiance:

1. Byrne told a whopper of a lie, and

2. He made it perfectly plain that Overstock.com had concealed significant facts in its 8-K disclosing the resignation of director Ray Groves.

Let's deal with these one at a time.

In response to a question asking "how much is paid to private dicks" in relation to his naked-shorting jihad, Byrne responded:

Unusually for Byrne, this answer is clear, unambiguous, and unhedged. Forensic accountant Tracy Coenen's observation that "Byrne never has a straight answer for anything" certainly did not apply in this instance. Note that the answer is unequivocal. It doesn't apply just to the "naked shorting jihad" but all situations. "I DON'T USE PRIVATE EYES." Just security firms for "physical security."

Only problem is that it is a flat-out lie. In fact, it is such a blatant, easily verifiable lie that I really am beginning to wonder whether Byrne can distinguish between fact and fancy. Or maybe he expects that the wage slaves at the SEC, which is investigating and has subpoenaed Byrne and Overstock, are going to ignore his lies because of all the money he gives to the Republican Party.

Byrne forgot that Overstock.com had been dragged into a mess involving an unscrupulous private detective named Michal Lair, who was sentenced to 27 months in prison for ripping off a bunch of high-profile clients--among them, Overstock.com. Here's a Wall Street Journal law blog item laying out what happened.

According to the notice of Judgment in Lair's criminal case, Overstock.com -- not some outside lawyer, but the company itself -- paid Lair $50,000 in April of 2006.

Overstock appeared in the list of idiot "victims" who were ripped off by a grand total of $307,103.50. Lair is required to pay back every penny of that sum.

Although the indictment refers to "an attorney for an internet services company involved in a high-profile litigation with hedge funds," that "attorney" was not an outside law firm, but Overstock's in-house lawyer, Jonathan Johnson.

So Byrne cannot claim that an "outside firm" hired this loathsome gumshoe and he is shocked, shocked! to learn that it happened. Particularly since Overstock's involvement with this private detective was widely reported at the time.

What makes Overstock stand out in the papers is that not only was this chronic money-loser one of the few non-law firms to be ripped off by this rogue private eye, but Overstock was also his biggest customer.

It's not clear precisely what dirt Lair promised to dig up for Overstock, but a fellow client was the drug company Biovail, indicating that Overstock's junk lawsuit against Gradient Analytics was the subject of the private detective's attention. Biovail, a fellow SEC-investigatee, and Overstock filed similar blame-shifting lawsuits against Gradient and others, claiming that nefarious market forces and not their own ineptitude were to blame for the companies' woes.

Evidently Overstock must have appealed to him as far dumber than Biovail's law firm, which just paid $4,030. Another reputed victim of rapacious short-selling, Net2Phone, paid $10,000.

The Journal blog reported at the time:

Prosecutors alleged that Lair approached lawyers claiming to have incriminating information that could help their clients’ cases. He would demand payments upfront and then failed to produce the information, prosecutors said.

“He flimflammed some pretty sophisticated outfits,” Judge Keenan said.

With one exception, apparently.

Moving on to No. 2:

Last week, Overstock reported the resignation of a member of its Audit Committee, Ray Groves. As I observed last week, Groves resigned in a brief letter saying, "My resignation relates to the Company’s prime broker suit" -- something not disclosed in Overstock's press release announcing the resignation.

As I pointed out last week, it seemed odd that Groves is resigning now over a junk lawsuit (separate from the Gradient lawsuit I mentioned earlier) that was filed in early February. Another director quit on that same issue in February.

I asked, "Are there other disagreements that have not been disclosed?"

The same question was asked of Byrne on IV. The exchange went like this:

Other than the prime broker stuff, was Ray upset about anything related to Overstock or you? Why did he quit now? What happened since February to make him quit?

Again, Byrne makes perfectly plain that this director was indeed upset about Overstock and Byrne -- contradicting a previous answer that there were no material disagreements with him.

Moreover, as Sam Antar points out, SEC rules require that companies disclose all "such issues" and not keep them in some boardroom Cone of Silence. The relevant passage is item 5.02:

(a)(1) If a director has resigned or refuses to stand for re-election to the board of directors since the date of the last annual meeting of shareholders because of a disagreement with the registrant, known to an executive officer of the registrant, as defined in 17 CFR 240.3b-7, on any matter relating to the registrant’s operations, policies or practices, or if a director has been removed for cause from the board of directors, disclose the following information;

(iii) a brief description of the circumstances representing the disagreement that the registrant believes caused, in whole or in part, the director’s resignation, refusal to stand for re-election or removal. [emphasis added]
In other words, Overstock can't just cherry-pick the reasons that are least embarrassing and leave the rest, the ones that make the CEO look like a jerk, concealed from shareholders and left in the "privacy of the boardroom."

I think Tracy Coenen put it best in her latest post on Overstock.com : "Is the house of cards finally falling down?"

There's a lot more to be said about Byrne's latest jaw-flapping -- such as his denying he knows the identity of Phil Saunders a/k/a "Bob O'Brien," despite having brought Saunders to a meeting with the media in 2005 -- but that should do for now. I'll update this item as developments warrant, so watch this space.

UPDATES: John Carney of Dealbreaker sums up the mess:

Against all odds, the story of Overstock continues to get worse. The company has been a laughing stock to almost anyone who can be bothered to think about it anymore. It’s the focus of an SEC investigation. I is run by a chief executive whose name—Patrick Byrne—long ago became synonymous with wacky conspiracy theories. It regularly deploys nasty tactics to defame reporters who dare mention its deterioration. [And] it’s bleeding directors. . .

[Groves] was, in the eyes of some observers, the last and best hope the company had to maintaining a sense of credibility. His departure comes as only the latest of a series of resignations by board members. The past year has seen also seen departures by directors John Fisher and John Byrne, the CEO’s father. When your father bails on your company, you know you are in trouble. Or rather, you would know. Patrick Byrne seems to think it’s a sign of his companies strength. Or something. We’ve long ago given up trying to figure out anything about what goes on inside of Byrne-the-younger’s brain.
John concludes: "The sailors are scurrying for the life-rafts even as a wet-kneed Captain Byrne continues to shout orders to man the guns against the naked short sellers that no-one but him can see."

Sam Antar's blog has thought-provoking open letter to the surviving members of the Overstock.com audit committee. This was evidently emailed to them, so they cannot claim not having received it. And if I were them, I would pay careful attention to what it says.

Here's a paragraph that they should read very carefully:

It is possible that actions by certain employees of Overstock.com violate the company's Code of Business Conduct and Ethics. It appears that such possible violations of Overstock.com’s Code of Business Conduct and Ethics may have been executed with the approval and/or endorsement of one or more of the company's Senior Financial Officers (as defined by its Code) and may be construed by the Securities and Exchange Commission as an ethics violation by such officers. If it is determined that you failed to act on possible material ethics violations by Senior Financial Officers of the company, there may be disclosure issues with the Securities and Exchange Commission.

... which brings to mind another issue that I have seen raised. Does Overstock.com maintain sufficient D&O (directors and officers) insurance for its board members? In the past, directors have had to pay significant out-of-pocket sums when presiding over corporate train wrecks--$25 million in the case of Worldcom.

You really have to wonder who is in his or her right mind would serve as a director of this corporate chamber pot, even if getting ironclad guarantees that there is sufficient insurance to guard against the inevitable day of reckoning.

That raises yet another question: What insurer would be nutty enough to write D&O insurance for Overstock.com?

O-Smear, meanwhile, hits the nail on the head in a post calling Byrne the Paris Hilton of Corporate America. "That's what you get when you add unlimited funds to a "rules and regulations are for the little people" attitude." It's a must-read analysis of Byrne's doubletalk and amoral conduct.

© 2007 Gary Weiss. All rights reserved.


Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site, gary-weiss.com.

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