Patrick Byrne Admits Ownership of Deep Capture

Not exactly a well-kept secret, yet Byrne still lied about it

Two posts on the corporate crime petri dish Overstock.com in one day! My goodness.

Overstock's loony CEO, Patrick Byrne, has been curled up under his desk since his company announced that its financial statements dating back to 2008 have been phony. But before the cone of silence descended, Byrne made a startling admission: he conceded that he owns the Deep Capture smear site. It just came to my attention, and nobody has picked up on it.

In a post on Stacie Kitts' excellent accounting blog on Jan. 18, Stacie had said in passing,

Now, if I am getting this right, Patrick Byrne is the CEO of Overstock.com and a purported owner of a website called Deepcapture.com.

Byrne materialized the following day with a comment:

Thanks for the story and the link. There are, however, some minor suggestions I’d make. You say:

“and a purported owner of a website called Deepcapture.com.”
Actually, for much of its existence we just put a big bubble on the upper right hand corner of the home page explaining that I am indeed the funder of DeepCapture.com; later, we added a whole page about it and who we are. So there is nothing “purported” about it. [Emphasis added]

Now, Byrne's ownership of Deep Capture was not exactly a well-kept secret. It used to be that users of that website could click on a link taking them to Overstock, and 5% of purchases would go to the site (see illustration at top of item).

But this is the first time he's fessed up and admitted owning the site, which is dedicated to personal attacks on the "criminal" journalists, bloggers and ordinary citizens who have dared to criticize Byrne: myself, Sam Antar, Roddy Boyd, Joe Nocera, Betany McLean, Susan Antilla, Herb Greenberg, and a host of others. Some of the targets are message board users, people you've never heard of, who hate crooks.

It's not clear why Byrne decided to let the cat out of the bag. Perhaps the subject came up in the SEC probe. Perhaps he's off his meds. Perhaps he's on his meds. Who the hell knows? All I know is that Byrne and his minions have lied about this in the past, and that if Stacie hadn't mentioned it in her blog today I might have missed it entirely.

Byrne had previously gone to great lengths to conceal his ownership of Deep Capture, initially listing a Byrne-controlled entity as owner in Utah corporate records, and then erecting a separate corporate shell. Ditto the bottom-feeding creep who runs the site, Judd Bagley. The latter denied that he worked for Byrne in a webcast last week. Byrne had admitted to the extent of his funding in a New York Observer article last month, but never came clean about actually owning it.

In a comment to an article in The Industry Standard in 2008, Byrne explictly denied that he owned Deep Capture.

The author of the article asked:

A few questions for you regarding your statement that Deep Capture is a work of "investigative journalism": Are the writers paid by you? Are they paid, full-time employees, or freelancers? Who pays their salaries? You describe yourself as a reporter, but are you also an editor? Do you assign and vet their work? Would you ever kill something that they wrote?

Byrne responded:

PS In direct answer to your questions: the employees of DeepCapture are paid by DeepCapture, LLC. I founded DeepCapture and gave it its initial capitalization, but then withdreww as a member of the LLC, and am not an employee. Yes, I am a reporter for DeepCapture, but I do not get paid. I am neither an editor nor do I "assign" stories. Occasionally I see stories before they go live and give my comments (which they are free to accept or ignore as they wish), but more often, I do not see the stories before they go live. And you did not ask, but I'll tell you anyway: yes, I enjoy being a reporter. [emphasis added]

I guess he forgot he said that. What's the old saying, something about "a liar requires a good memory"? Note that he wasn't even asked if he owned Deep Capture. He volunteered that information, while ignoring most of the questions.

The problem with lies like this is that they violate the securities laws (Rule 10b-5, to be exact) by deceiving shareholders about a material aspect of the company. The SEC can't regulate the morality of corporate officers, but fraud definitely falls within its purview.

In its filings, Overstock has never admitted that it has a link to Deep Capture, and a Deep Capture web page to which Byrne links in his recent blog comment does not disclose that he owns the website. Instead, it makes the misleading statement that "it is not part of Overstock" and refers to the three creeps who churn out attacks as "co-owners."

No, not directly. But under accounting rules--admittedly not one of Byrne's strong points--he is required to disclose his ownership of Deep Capture. As blogger Sam Antar pointed out in a blog post last month, the Overstock-Deep Capture relationship is covered by Statement of Financial Accounting Standards No. 57 (SFAS No. 57) governing "Related Party Disclosures":

Statement of Financial Accounting Standards No. 57 (SFAS No. 57) entitled "Related Party Disclosures" provides some "examples of related party transactions" such as:

transactions between... (d) an enterprise and its principal owners, management, or members of their immediate families; and (e) affiliates.

SFAS No. 57 defines an affiliate as:

A party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an enterprise.

In addition, SFAS No. 57 defines control as:

The possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an enterprise through ownership, by contract, or otherwise.

Furthermore, SFAS No. 57 defines related party transactions to include "services received or furnished" between such related entities. Deep Capture LLC furnishes services to Overstock.com in the form of retaliation against company critics.

I'm still uncertain that the SEC actually will take action against Overstock, but Byrne's admission on this point--especially considering that he's lied about this in the past--makes that possibility somewhat more likely.

UPDATE: It's not related to this, but Henry Blodget describes a problem he just experienced: the nauseating Judd Bagley appearing, unwanted, in his email box, which apparently is as pleasant as finding a dead mouse on the kitchen floor. "How do we get rid of him?" he asks. "You open up YOUR Buzz and see Judd Bagley tweeting at YOU and see how you feel about it."

Indeed. The only answer that comes to mind is the simplest: incarceration.

© 2010 Gary Weiss. All rights reserved.

Restatements Highlight Overstock.com's Lies to Salt Lake Tribune

Overstock.com's stunning admission yesterday that its recent financial statements were phony --vindicating years of hammering by whistleblower Sam Antar-- highlights an issue that I think could loom large in the SEC's probe of this creepy little company.

It all has to do with a fish story that Overstock.com president Jonathan Johnson gave to the Salt Lake Tribune, which appeared in the paper on Tuesday. Of all the lies that have spewed forth from this corporate crime petri dish over the years, these were among the most blatant and, I think, could be damaging to him personally, and to the company.

Johnson told the Trib that David Chidester, the senior vice president for internal controls, had not departed from the company because of any material issue. Johnson piled on the hooey, saying that Chidester had left because... well, because. No particular reason. He had been there for ten years, and it was time to move on.

Yet at the same time that Johnson was giving that rubbish to the Trib--the article appeared online the evening of Monday, Feb. 1--Johnson already knew that a decision had been made to restate all the recent financials, and that the Overstock board's Audit Committee had specifically determined, three days earlier, on Jan. 29, that its financial controls had been deficient for an extended period of tiem.

In the Form 8-K filed with the SEC yesterday, Overstock disclosed that the Audit Committee said the following on Jan. 29:

The Audit Committee has instructed management to prepare a comprehensive review and analysis of the causes of the errors identified above. The Audit Committee has further instructed management to submit to the Audit Committee a comprehensive detailed plan for the remediation of the underlying cause of the errors and for the implementation of stricter policies to avoid errors or deficiencies in accounting procedures and application going forward.

. . . In connection with the restatement of the Company’s fiscal 2008 consolidated financial statements, management has reassessed the Company’s controls and procedures including internal control over financial reporting as of December 31, 2008. Management has concluded that there was a deficiency in the operating effectiveness of the Company’s controls in place related to accounting for billings to drop ship fulfillment partners which constituted a material weakness. Accordingly, management’s report on internal control over financial reporting for fiscal 2008 can no longer be relied upon. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

Johnson surely knew all of this--it had happened on Friday, Jan. 29--at the time that he fed the following ca-ca to the Trib three days later concerning the exit of the exec who was CFO through the end of 2008, and afterwards head of internal financial controls:

"David had been with us over 10 years. It felt like for both David and the company it was time to move to something new.

"I don't know who said what first, but it was clearly a mutual agreement. We've grown a lot in 10 years. We are a big organization and thought it was time for both parties to move on."

Johnson was right in one sense. No, Chidester hadn't left because of a recent Big Money article describing a sales tax avoidance scheme and FUBAR internal controls. He left because of something considerably more important. But Johnson--who, remember, wasn't obliged to say a thing to the Trib--decided to mislead and lie by withholding a material fact, which was that Chidester was in hot water with the board of directors. He wasn't walking away from a 300K job because he felt like going out into the job market in a recession.

Johnson's motivation in not lying would not be something as old-fashioned as "telling the truth," but a more primal urge called "self preservation." Rule 10b-5 of the securities laws forbids corporate officers not just from lying, but make it verboten "to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading."

Johnson once famously said about Sam Antar that he "can’t read his blog because it’s so full of lies." He clearly meant to say "full of truth."

I'll be interested to see if the Trib ever gets around to reporting Overstock's disclosures yesterday. And if it does, will it describe its own role in Overstock's scheme to mislead the media, the public, and its shareholders.

Most newspapers would be upset about being lied to this way, let alone to be used by a company to commit securities fraud. But remember that this is Utah, and evidently the rules of journalism don't apply there. Remember that there is another statewide paper, the Deseret News, and it hasn't breathed a word about any of the travails of this open sore in its neighborhood.

Another thing I'll be interested to see is if either Salt Lake City newspaper adjusts its heretofore uncritical view of Overstock and its wacky CEO, Patrick Byrne, in light of recent events. Byrne has so far been out of pocket, but I'm sure he'll deploy his possible-pederast fetchit boy, Judd Bagley, on a diversion mission fairly soon. Plenty of kids out there for these two douchebags to stalk.

UPDATE: The Going Concern accounting blog has this to say about the SEC finally taking action against these bums:

So while this appears to wrap up the SEC’s Division of Corporation Finance investigation, one little problem that still remains is that the SEC’s Enforcement Division has not wrapped up its probe of the company. Yeah; so there’s that. Considering the the track record of the SEC, we’d typically give a company a 50/50 shot of coming out of a probe by the Enforcement Division unscathed but in the case of Overstock, we’ll be going with Schape’s {SEC chairperson Mary Schapiro's] crew.

© 2010 Gary Weiss. All rights reserved.