Overstock.com's 'Stock Manipulation Friday'

Byrne's Friday gambit caused his shares to jump

The fascinating corporate train wreck Overstock.com has added a new term to the financial lexicon: "Stock Manipulation Friday."

A devastating item this morning in reformed felon Sam Antar's blog describes how Overstock combined a misleading press release and an options expiration to create a short squeeze that sent the shares climbing by nearly one-third on Friday.

The gambit on Friday was a blatant attempt to artificially inflate the company's share price and to conceal bad news.

This is, as Sam points out, easily the most significant of the many accounting and disclosure irregularities that Overstock has committed over the past two years. Sam's past posts on Overstock can be found here. Sam was the mastermind of the Crazy Eddie stock swindle, and he has since become an unpaid consultant for law enforcement agencies around the country and the SEC, which is investigating Overstock. This is a guy who knows fraud from the inside, and he has honed in on Overstock, fascinated with its systematic effort to conceal is poor finances.

As in all serious frauds, what happened was so simple that a first year high school student can figure it out. Overstock.com reported that revenues in the first quarter were $200.7 million, vs. $157.9 million a year earlier, a 27% increase. However, Sam notes, "in its earnings release, Overstock.com failed to disclose that it compared Q1 2008 revenues reported on a GAAP basis to Q1 2007 revenues that were reported on a non-GAAP basis."

Comparing non-comparable numbers is a big, fat no-no. It's like saying "this day is 27% warmer than last year," when your thermometer was broken a year ago. Fraud expert Tracy Coenen points out that

. . . accounting rules are pretty simple in this regard: If you’re going to compare numbers, you have to make them COMPARABLE. You just can’t take numbers that were calculated with different methodology and pretend they mean the same thing. Unless you’re Patrick Byrne, I suppose.

In engineering this clumsy scheme, Overstock.com's dipsy doodle CEO, Patrick Byrne, was obviously trying to overshadow the criminal investigation of its advertising by five California counties. Byrne improperly delayed for three days release of news on this probe, by the Marin County District Attorney and other prosecutors, in the hope that he would overshadow it with this latest gambit. Instead of issuing a separate 8-K disclosing the investigation, he buried in in the bottom of the earnings release.

I'd say he did a fine job of overshadowing his latest legal troubles, but not quite in the way he anticipated.

Tracy observes in her blog today:

Wow…. this is some pretty damaging stuff, and Sam makes a very strong case. I wonder how surprised Patrick Byrne is that Sam unraveled all of this?

That's a good question. My theory is that Byrne is so wrapped up in his delusions that he he has pretty much lost hold of reality. Remember the "Sith Lord"? It is anybody's guess whether he really believed that fantasy or was just flat-out lying in his famous 2005 conference call. I have long leaned toward the latter, but I am not so sure anymore.

Overstock's analyst conference call is tomorrow. Since Byrne has a habit of hounding, attacking and suing analysts who question his sleazy accounting, you can count on a calm and pleasant session.

© 2008 Gary Weiss. All rights reserved.