Wednesday, January 13, 2010

Patrick Byrne Admits Funding Dirty Tricks Operation


Throws down the gauntlet to the SEC

(See Update: Overstock cleaned up after Byrne's latest mess by issuing an 8-K)

A chilling story is out today in the New York Observer on Overstock.com's dirty tricks operation. Apart from the usual "oh my goodness" stuff, what's most interesting from a securities fraud perspective is further evidence of how Overstock.com CEO Patrick Byrne is flouting SEC disclosure rules.

First, Byrne has failed to disclose in any Overstock filing his ownership and ongoing financing of the "Deep Capture" astroturf website. The article made clear that it's his website, bought and paid for with a cool half million bucks, making rather pointless his efforts in the past to erect corporate shells to disguise his role.

The second and more clear cut violation of the securities laws is his flippant, almost giddy disregard of Regulation FD:

. . . Overstock does not enjoy getting into why it’s never recorded an annual profit in its history. (Mr. Byrne, though, said at deadline that the company is about to report its first annual profit. “I’m probably going to get a lot of shit for having said this,” he offered.)
That's entirely possible, but it depends on how serious the SEC is about enforcing Regulation FD, as in "fair disclosure." That's designed to ensure investors get material information uniformly, and not through the online editions of newspapers not ordinarily read by investors in Utah stock frauds, and teasers planted on bulletin boards ("PS: Patrick gives some interesting "guidance" in the piece. You OSTK investors will probably appreciate it.")

I'll be interested to see if Overstock wipes up after this latest mess by issuing an 8-K before the start of trading today. Whether it does or not, Byrne has just thrown down the gauntlet to the SEC, and it's up to them to accept the challenge or, as usual when crooked execs throw down gauntlets, do nothing.

"Profit" of course is an elastic term as Overstock, which is why the SEC is investigating its accounting.

You can't write about Byrne or his nauseating lackey Judd Bagley without being grossed out, so we have this creepy bit of stalking:
. . . Afterward, he was looking on a map to get his bearings. “And I saw this little cul-de-sac. I thought, ‘I know I’ve heard of that before.’ And I remembered, ‘That’s right! Gary Weiss lives there. So I just kind of walked down it.”
Bagley was off target. We haven't many young kids for him to stalk where I live, but there's a public school just around the corner.
“Posting the name of my 16-year-old son, what did that prove?” said the Barron’s editor Eric Savitz.
Well, I guess it proves that Bagley is a special kind of douchebag, as this article makes abundantly clear. But you have to admit that he's a well-financed douchebag.

The article was written by Max Abelson, who shares a surname (I don't know if he's related) with Alan Abelson of Barron's. Alan Abelson years ago was subjected to constant legal harassment by bagholders of companies he wrote about, who blamed him for the decline of stocks in which they invested. The only thing that's changed is that the harassers are getting scummier, and that they're going after families.

The parting shot from Barry Ritholtz is probably the best description of naked shorting that I've ever seen:
“It’s like a guy leaping off the Empire State Building, and he hits the pavement, and it turns out he also has high cholesterol,” Mr. Ritholtz said. “When they do the autopsy, I don’t think they’ll give a fuck about the high cholesterol. Naked shorting is the high cholesterol.”
UPDATE: BusinessInsider reminds me that Byrne, reconfiguring his nutty "Sith Lord" rant from 2005 is now saying there is not one but two "Sith Lords": Michael Milken and Steven Cohen of SAC Capital. Sort of the Sith Lord Twins. I'm surprised he didn't throw in Bernie Madoff and Al Capone, to make it a quartet.

A sarcastic message board post sums up Byrne's latest self-created problem: "An annual profit! Wow! OK, I am changing my sentiment to STRONG BUY, because of this information. . . . Now that I have changed my sentiments based on this statement by Mr. Byrne, I am going to start searching for the Reg FD filing."

Late in the day, Overstock's legal beagles shot over to the SEC a clean-up-the-latest-Byrne-mess filing, with the Observer article attached, but they were tardy. The filing came after the market closed, after an illegal runup of the stock, which ended up nearly a percentage point.

Ahem. I call that closing the barn door after the cow, or in this case the Reg. FD violation, had gone.

The filing says basically nothing: "The Company has not yet completed its financial statements for the year ended December 31, 2009. The Company intends to issue a press release containing financial results for the year ended December 31, 2009 when they are available." So what is that supposed to mean? That just makes the whole thing murkier. This is one of the weirdest 8-Ks I've ever seen, even from these buffoons.

This has happened before. Let's face facts: Patrick Byrne does not like abiding by the securities laws. I mean, they're not included in the envelope with the check that comes every month from the trust fund, so why should he obey them?

By the way, when Byrne said “I’m probably going to get a lot of shit for having said this,” the term of art for that is scienter.

© 2010 Gary Weiss. All rights reserved.

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