Monday, November 16, 2009

Look Out Below! Jumps Off a Cliff

Not to worry, the CEO has plenty of lies if you don't believe his latest ones

People sometimes ask me about my fascination with I've compared it to Marley, very much in jest of course. (Comparing such a nice dog to such awful people!) The serious answer is that this company is about as close to street criminals as you can find in corporate America--openly cooking its books, openly stalking its critics.

Now, very much in the open, the company has jumped off a cliff, proverbially speaking. This afternoon, the company belatedly announced that it fired its auditors on Friday, and today it filed an unaudited un-vouched-for, late Form 10-Q in violation of a host of SEC regulations.

So now Overstock is not current with its filings, which means that its access to the capital markets is essentially crippled. Which means bankruptcy, unless Byrne can figure out some other source of cash (his trust fund?) Profits, except those obtained through numbers-juggling, are not in the cards.

Bad companies are often not current what their filings. What is amazing is that Overstock went ahead and filed its 10-Q without an auditor reviewing it. Even the most sleazebucket penny stock outfits, even Bernie Madoff, manage to get some accountant somewhere to review their filings before sending them in to the SEC. I have never heard of even the most irresponsible company filing an unreviewed financial statement.

To top off all this, Overstock issued a press release by its wacky CEO, Patrick Byrne, replete with an unctuous quote from Nietzsche, that is so totally full of crap that I doubt that even the most brain-dead regulator will fail to take note.

The letter says:
In February 2009, we were notified by a partner that we had overpaid it approximately $700,000, but that the partner wanted to reach a mutual solution to this overpayment and another open issue (the partner has asserted that we might owe it in excess of $400,000 regarding this other issue). At that time, we doubted our ability to recover this overpayment and we could not reasonably estimate what we might recover.
This statement, if true, presupposes that Overstock's management is so completely FUBAR, its accounting controls so screwed up, that it managed to overpay somebody by a sum that is substantial for a company of this size and unprofitability. No company is that inept, not even this one. There are a number of reasons why a company would overpay but... well, let's not get into that right now.

But even if you swallow this obvious hoo-ha, it's plain that Byrne is covering up for the "cookie jar reserve" that has been described in detail in the past by white collar crime expert Sam Antar.

The rest of the letter spins the fact that its auditors at Grant Thornton disagree with the way the above "overpayment" was handled. So it was, naturally, fired. But previous auditors at PriceWaterhouse Coopers, no longer in the company's employ, agree.

So, PWC is coming back on board... right? I'm sure that PWC, or any other reputable accounting firm, would be only too happy to work for such upstanding people.

There will be another conference call, on Wednesday, to give Byrne yet another opportunity to duck questions from Sam Antar, spin and lie.

Here's one question somebody might want to ask: who got fired for the "overpayment"? The answer, I'm sure, is that it's all a personnel matter... or the accountants are good Mormons..... or maybe that it wasn't an accidental, ohmygosh-type overpayment after all but something else....

Oh my, I am so suspicious! Shame on me.

Obviously Byrne is expecting the SEC to get off its duff and, this time, end its ongoing investigation with action. Under "risk factors," the company disclosed as follows:

Public statements we or our chief executive officer, Patrick M. Byrne, have made or may make in the future may antagonize regulatory officials or others.

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.

I can't find a better explanation for Byrne's anti-shorting jihad: to give him a handy excuse if his mismanagement of the company were to ever result in regulatory sanctions.

Again, "mismanagement" is the kindest possible explanation one can find for an "overpayment" of that magnitude. Something tells me that we may wind up in a situation in which a "cookie jar reserve" is the kindest thing you can say about this company's accounting.

Well, as they say, to be continued. . .

UPDATE: Sam Antar has an analysis, calling this a "real dumb move," and Henry Blodget expresses amazement. Blogger Chris Faille compares Overstock to Refco. and William Wolfrum weighs in. So does Floyd Norris, who evidently enjoys Byrne almost as much as I do.

"Dumb" is an understatement. "Suicidal" is more like it. Overstock now can be delisted by Nasdaq, which has a strict auditor requirement, and its stock trading halted by the SEC. Byrne can keep that from happening by finding an accounting firm stupid enough to work for him, but here's something that's guaranteed: since the company is no longer current in its filings, it can't issue stock to raise cash for the next twelve months. That is acknowledged in the 10Q, on page 3:

Filing an amendment to this report, when the independent registered public accountants’ review is complete, would eliminate certain consequences of a deficient filing, but the Company may become ineligible to use Form S-3 to register securities until all required reports under the Securities Exchange Act of 1934 have been timely filed for the 12 months prior to the filing of the registration statement for those securities.
With more money going out than coming in, and no access to borrowing or stock issuing... oh my.

Look out below!

Later, Byrne was quoted in the Salt Lake Tribune as telling the SEC to go to hell, though apparently his medication set in and he withdrew the remark:
"We refuse to knuckle under the SEC's and Grant Thornton's insistence that we abandon generally accepted accounting principles," Byrne said Tuesday, later softening the statement to include only Grant Thornton, saying the Securities and Exchange Commission has a right to look into the company's financials. "Hopefully in the next six weeks, we'll get this cleared up with the SEC."
What's going to happen in the next six week? Does the expect the SEC to revoke the securities laws? This guy is beginning to remind me of Bob Brennan, the head of the First Jersey Securities penny stock house, who took a similarly defiant stance toward the SEC--and wound up in prison.

© 2009 Gary Weiss. All rights reserved.

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