Thursday, April 01, 2010

The Utah Newspapers Fail -- Again

Overstock.com, best known for its Facebook pretexting campaign against journalists, yesterday restated its financials for 2008 and 2009, turning a much-ballyhooed fourth quarter 2008 profit of $1.014 million into a $705,000 loss--vindicating critics, especially Crazy Eddie mastermind-turned-crime fighter Sam Antar.

At the time the now-retracted "profit" was announced in January 2009, Overstock shares climbed 21% in one day. The company had "beaten analyst expections" of a loss, Reuters reported at the time. I am amazed that Overstock has not been prosecuted criminally for this blatant securities fraud. Yet an ongoing SEC investigation has produced not so much as a slap on the wrist.

Also yesterday, Overstock announced a $7 million profit for 2009 that would have been a loss were it not for paper-shuffling and nonrecurring items. It faces a serious criminal probe of its advertising practices in California, for which it is on the hook for as much as $8.5 million, and its internal controls are a shambles.

All of the above is plainly disclosed in the company's filings with the SEC yesterday. But you wouldn't know about any of this by reading Overstock's hometown newspapers, the Salt Lake Tribune and Deseret News, or by reading an AP puff piece that was subsequently churned out of its Salt Lake City bureau.

Sam today recounts how Overstock.com CEO Patrick Byrne and its president Jonathan Johnson systematically lied about their financials over the past few months--lies they were officially forced to disavow yesterday, as they issued restatements for four financial statements in 2008 and 2009.

Sam describes in detail how Byrne used nonrecurring items to turn his latest loss into a profit -- thereby engineering a 20% rally in the stock yesterday. Thus Overstock shareholders and employees, who are concentrated in Utah, had to read Sam's blog, this one or the Jr. Deputy Accountant to find out what really happened yesterday, thanks to the sheer cowardice of the Utah media.

The Deseret News picked up an AP rewrite of the press release. (The puff piece followed a few days later.) Neither the AP in its two articles nor the Trib article today mention that Overstock's fourth-quarter 2008 "profit," trumpeted by Byrne at the time in a gloating press release-- pumping up the shares by 21%-- was a big phony. It was, as restated yesterday, a loss. The brief Deseret News item doesn't even mention the restatements.

The Trib makes no mention of how it trumped the fourth-quarter 2008 "profit" in this article by the same reporter, which turned out to be a load of hooey.

Instead, the Trib quotes Overstock president Jonathan Johnson uttering this drivel: "When you look at what this restatement is really, it is positive."

Positive? Overstock admitting that its profit was a loss is a "positive"? Indeed, reading the Trib article, you'd think that the restatements were a triumph and not an admission of incompetence at best or, more likely, intentional fraud.

Nor does the Trib or Deseret News point out that California law enforcement authorities want either $8.5 million or $7.5 million from Overstock to settle a criminal investigation of its advertising practices. Both contradictory numbers are used in the 10-K released yesterday. Not only is the contradiction not mentioned in the papers' coverage, but this entire mess is not even mentioned.

Instead we get vague references in the Trib to "questions about its finances," without any mention made of the fact that those questions have been answered. Nor is it mentioned that the company's auditors at KPMG said in the 10-K yesterday that the company's internal controls were FUBAR.

Probably the worst omission in the coverage is this: neither newspapers points out that the $7.7 million profit for 2009 would have been a $6.5 million loss were it not for (as Sam points out):
  • Gain from extinguishment of debt (Consolidated Statement of Cash Flows): $2.8 million
  • Gain from settlements of legal matters (Footnote 16: Commitments and Contingencies): $7.1 million
  • Reduction of sales return allowances $4.3 million (Page F-16)
  • Total: $14.2 million
This is not the first time the Utah media has failed to do its job, or been used by Overstock to mislead its shareholders. Byrne and Johnson were quoted by the Tribune in November 2009 misstating the magnitude of the financial problem that it corrected yesterday. Johnson was quoted as saying as follows:
Johnson said the company believes its 2008 year-end financial statement was accurate and that its accounting firm at that time, PriceWaterhouseCooper, agreed and signed off. . . .

"None of these changes that they [Grant Thornton] are talking about, or that people at the SEC are now asking about, make any of our quarters go from negative to positive or from positive to negative," he said.
Byrne said much the same thing in a conference call with analysts.

There's no mention of any of this in the Trib's article, even though the same reporter wrote both articles. It's almost as if the Trib was covering up for the fact that it was used by Overstock.com to spin the dreadful condition of the company.

Now, we can't expect reporters to be accountants. But we do expect reporters to call accountants when confronted with companies that have a history of making false or misleading statements--particularly to their own newspapers.

The lesson for Utah's newspapers, and other newspapers in similar situations, is Journalism 101: Call an expert. Read the 10-Ks. Sure, you had to go to page F-53 of the 10-K to read about just how significant the 4Q 2008 restatement was -- and how much the company had lied in the past. Given the company's history of lies, evasions and misstatements, what else could they expect? Relying on the press release of a company like Overstock is simply inept.

Years ago you had to pay document retrieval services big bucks to get SEC filings. Now they're on the web, instantaneously. Sure these are big documents. So? If you can't figure them out, there are people who can do so.

The bottom line is that there is no excuse for incompetence nowadays in covering corporate slimeballs like Overstock.com. All it takes is Internet access, a telephone, and something lacking in Salt Lake City's media--a little backbone.

Yes, it's true, the company has a history of smearing the media and whistleblowers like Sam, and there's no doubt at all that Byrne will sic his hired thug, the kiddie stalker and possible pederast Judd Bagley, on any Utah reporter who doesn't toe the company line. Bagley once got in touch with Sam's estranged wife to dig up dirt on him --I mean, the guy will stop at nothing. To quote Barry Rithholtz, he is a "career douchebag." Harassing reporters is his job. He belongs in jail, but meanwhile he's on the loose, and he is doing a great job--just read the Salt Lake City papers today and you can see what I mean.

The journalistic malfeasance in Utah is understandable--but not excusable.

UPDATE: The AP's Paul Foy moved on the wire this atrocious article today, containing the following whopper from Byrne:

Byrne, who owns nearly 30 percent of the company's shares, says Overstock's accounting errors were generally conservative. The latest involved 0.1 percent of revenue and gave the company no advantage, he said.
Seems to me that a profit that really was a loss is an "advantage."

What makes this odd is that Foy knew that Byrne was dissembling. It's in the 10-K that the restatement had changed the fourth quarter 2008 gain to a loss, and Sam tells me he pointed that out to Foy, by phone and in writing.

More on the AP's messed-up reporting can be found in this follow-up.

Also, the Going Concern accounting blog weighs in.

Going Concern also live-blogged the Overstock conference call on Monday. Always a great show.

© 2010 Gary Weiss. All rights reserved.

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