Can Overstock.com Get the SEC Off Its Back?

Utah Senator Bob Bennett with his favorite constituent

Going Concern today has a post describing the winners and losers in Overstock.com's admission last week that its financial statements going back to 2008 were as phony as a six-dollar bill--thereby vindicating whistleblower and blogger Sam Antar.

Sam and other Overstock critics and media people, including myself, had been viciously attacked by its nutty CEO Patrick Byrne and his toady Judd Bagley--a possible pederast employed by Byrne to stalk wives and kiddies as well as the people actually criticizing the company. And that brings me to the part of GC's post today which I found the most interesting.

Under the category of "jury is out," the respected accounting blog says as follows:

SEC: Everyone know that the Commission doesn’t have the best track record of late. They have managed to be the laughingstock of the entire bureaucracy and despite a lot of huffing and puffing about new divisions and putting together a dream team of enforcement and financial experts, we haven’t seen much for results. Overstock may be a chance to show everyone that they’re done taking shit and that they are going to start smacking companies around.

Indeed, and the question is whether the SEC will let itself be bulldozed, again, by this well-heeled and determined bunch of crooks.

Byrne took the humiliating step of announcing restatement of its financials--and promising to fix its accounting--in the hope of heading off serious penalties from the SEC, which is investigating Overstock's accounting and, ahem, undisclosed "other issues." The company, I'm sure, would love to get the SEC to simply shrug and say "no problem" as it did two years ago, in concluding a probe of the same issues.

I'm sure that Byrne is intensely employing his trust fund (he is the son of billionaire GEICO ex-CEO John J. Byrne) in pursuit of that goal. He and his clan are the largest campaign contributors in Utah, and he has a particularly close relationship with the ultra-right Utah Sen. Robert Bennett. He has a phalanx of lawyers and lobbyists in Washington to do his bidding.

Bennett can't swing quite as much weight as he did when Republicans controlled the administration, but a senator is a senator.

I'm sure that Byrne, Bennett and his Washington suits will claim that it was all unintentional--that he didn't mean to create a cookie jar reserve. It was all an accident! Just the way Bagley is claiming on message boards now that it was all an accident, he didn't mean to stalk wives and kids as part of his work for Byrne. He just accidentally stole someone's photo, accidentally made up a phony identity and accidentally engaged in pretexting on Facebook by mistake. Someone really has to instruct the kiddie stalker that sometimes silence is golden.

Will these excuses work? I imagine they're hoping for either a total exoneration or the kind of easy treatment that was meted out to crooks in the Cox years, such as when Navistar got a wrist slap under similar circumstances--though its auditor Deloitte was targeted as well.

The problem, of course, is that the evidence of intent to commit fraud is overwhelming.

Byrne went on a widely publicized accountant-firing spree when confronted with the need to restate his financials, and then lied publicly about his dealings with his former auditors, Grant Thornton--to the point of being publicly contradicted by GT.

Another problem is that, as Sam has documented over the years on his blog, these were not minor accounting goofs. Overstock committed blatant GAAP and securities law violations, and they were timed in such a way as to boost Overstock share prices. (Such as by, for instance, claiming a fourth quarter 2008 profit that was actually a loss.)

Byrne, his top execs, and members of the Overstock audit committee were made aware of everything they were doing wrong, in real time. Sam's correspondence with Overstock, and the company's retaliation and smear campaign was carefully documented by Sam over the years, and made public on his blog.

For example, here is the first paragraph of Sam's blog on the fourth quarter book-cooking:

Last Friday, Overstock.com (NASDAQ: OSTK) reported a fourth quarter 2008 net profit of $1 million dollars. CEO Patrick Byrne proudly told investors, "After a tough three years, returning to GAAP profitability is a relief." However, Overstock.com's "returning to GAAP profitability" was simply accomplished by the company violating GAAP through its failure to restate prior period financial reports effected by a certain accounting error. Had Overstock.com properly followed acounting rules, it would have reported an $800,000 loss instead of a $1 million profit.

It's hard to find a more simple example of a company seeking to deceive investors in so blatant a manner. Accounting bloggerStacie Kitts observes: "Here is a lesson on making yourself an easy target, lie to the SEC and then file a lawsuit where your internal company documents will expose the lie. DUH"

Overstock's response--the vicious personal attacks on Sam--were proof of intent to commit fraud. As I pointed out in an April 2009 blog post for Portfolio.com, Byrne's minion Bagley (right) engaged in an all-out whispering campaign on his Deep Capture website against Sam, to the point of contacting his estranged wife (who rebuffed him) and attempting to dig up dirt on his divorce.

Bagley is ostensibly focusing on the "crime of naked short selling," but his assault on Sam belies that, proving that his focus is on critics of his boss. Sam has no interest in naked shorting, only in exposing crooks like Byrne.

Byrne himself makes no bones about his ownership of Deep Capture. Indeed, note this blog post today. Accounting blogger Stacie Kitts had said Byrne was "a purported owner of a website called Deepcapture.com.” Byrne's response (accompanying a link to an attack on Sam): "there's nothing purported about it."

This is part of a pattern of issuer retaliation going back years. If the SEC wants to make an example of Overstock on that issue, it can pursue a case under Sarbanes-Oxley, which requires companies to disclose waivers to their ethics rules.

Another factor the SEC can't ignore is the pattern of false statements made by Byrne and his minions on this and other issues, but particularly concerning his accounting. Only just the other day, Overstock president Jonathan Johnson gave an absurdly misleading account of the departure of a key financial executive to the Salt Lake Tribune. Byrne also also ignored Regulation Fair Disclosure on numerous occasions, using limited readership message boards to leak out corporate news. But that's like spitting on the sidewalk compared to everything else he's done.

And then, of course, there are the issues--such as the sales tax avoidance scheme and absence of internal controls--highlighted in a recent article in the Big Money. Can Bennett convince the SEC to ignore that?

The SEC can, and should, require that Byrne and the Overstock officials responsible for this mess step down and never become public officers of another company. While so doing, they may want to look at the executive compensation handed out. While the "humble servant" was too rich to draw pay--this was just a hobby for him anyway--other Overstock execs got jaw-dropping compensation packages. The SEC has required corporate execs to cough up their ill-gotten pay under similar circumstances.

Securities lawyer Howard Sirota observes in his blog:

Worse yet, the SEC has subpoenaed the Rocker litigants [the supposed source of the Big Money article] for the documents produced in discovery in Overstock.com’s lawsuit against Rocker et al. No confidentiality order in the prior civil case can immunize these documents from production to the SEC; by definition they were produced in discovery to the adverse party and so are not privileged. This expanded SEC inquiry coincided with Overstock.com’s firing of Grant Thornton in an acrimonious dispute, the engagement of KPMG, and the third restatement in three years as Overstock.com was forced to restate 2008-2009.

The expanded SEC inquiry is highly likely to bear fruit since the very first leaked documents immediately led to the ex-CFO resigning and Overstock.com filing that its prior financials cannot be relied upon. The SEC is highly likely to bring an enforcement proceeding against Overstock.com and certain officers regarding false financial statements and false Sarbanes-Oxley certifications.

In a filing just yesterday, Overstock had the gall to announce huge salary increases and bonus payments for the top officers of the company. Compare with the numbers announced in the 2009 proxy, and you can see that Johnson's base pay went from $250,000 to $350,000, and he got a $225,000 bonus for the terrific job he did helping Byrne run this company into the ground.

CFO Steve Chestnut, who aided Byrne in showing how you can turn dry financial statements into material for standup comics, saw his base pay climb from 200K to $300,000--yup, a 50% salary increase for this dude--plus a 180K bonus. All also got the usual restricted stock grants, including the humble servant.

If that's not a wad of spittle in the face of the SEC, I don't know what is. What it indicates is that if the feds don't take action, a company that openly violates the securities laws--and compensates its execs handsomely for doing so--will get away scot free.

© 2010 Gary Weiss. All rights reserved.

More Fallout From Big Money Article: Overstock.com ex-CFO Quits

More fallout from The Big Money's devastating article on the corporate crime petri dish, Overstock.com: the official in charge of the company's nonexistent internal controls, a disaster area exposed in the article, is out on his rump.

The company issued an 8-K today, at the edge of the time allowed by law, announcing that ex-CFO David Chidester departed the day after the article appeared:

On January 20, 2010 Mr. David K. Chidester left by mutual agreement, effective immediately, from his position as Senior Vice President, Internal Reporting and Information, of Overstock.com, Inc.

In the article, ace financial writer Roddy Boyd pointed out that the company basically didn't have internal controls.

The Big Money has obtained documents showing that in the months after Overstock filed its lawsuit, a series of mishaps surrounding its bungled inventory-management software upgrade pushed it into some dire financial straits. The crux of the problem—which had been building for several months while Byrne railed against short-sellers and sundry business reporters—was that since Overstock’s software system couldn’t track its inventory well, its accounting staff had trouble deciphering how much it owed and whom it had to pay. [Emphasis added]

Note the last sentence. That little detail--not knowing what was going on--didn't prevent Overstock's Creep Executive Officer, Patrick Byrne, from putting his John Hancock alongside Chidester's on Sarbanes-Oxley-required certifications attesting to the soundness of its internal controls. Chidester was CFO during that time.

Overstock restricted itself to that one-line 8-K. No customary press release saying what a terrific, competent guy just vamoosed.

White collar crime-fighter Sam Antar comments today on Chidester's departure,

In addition to signing false Sarbanes-Oxley certifications, Chidester made false claims to investors about Overstock.com's compliance with SEC Regulation G, governing non-GAAP financial measures, as I will describe in more detail later in this blog post.

The term "mutual agreement" usually means that the company does not want David Chidester around to answer your questions and Chidester does not want to be readily available to respond to your inquires. After all, David Chidester knows where the "black holes" are to be found in Overstock.com's financial reporting irregularities.

It also could mean that Chidester was paid a nice hunk of cash to keep his mouth shut. That won't stymie the SEC investigation into the company's accounting, if it uses its subpoena power
to get Chidester to cough up what it knows.

One thing I wonder is whether the two local Salt Lake City newspapers will continue to ignore all this. Neither paid any attention to the Big Money article. I don't expect much from media outlets within clutching distance of Patrick Byrne, but it will be interesting to see if they continue to keep their readers ignorant of the sewer in their backyard.

UPDATE: Seth Jayson weighs in, with some choice comments on Byrne and his hired goon, the possible pederast and compulsive child-stalker Judd Bagley.

True to form, neither Salt Lake City newspaper picked up on this.

© 2010 Gary Weiss. All rights reserved.

Bernie Madoff's 'Hedge Fund'?

Conspiracy theorist/fantasist Mark Mitchell, Deep Capture blog

If you ever wondered how Mark Mitchell made the transition from editor of CJR's Audit column to former editor of CJR's Audit column, read the latest mass of drivel on the "Deep Capture" website of his employer Patrick Byrne, CEO of Overstock.com.

I'm referring to the fairy tale on Dendreon Corp., which begins by talking about Bernie Madoff's "hedge fund." Only problem is that he didn't run a hedge fund. He ran an "investment advisory business" that had clients from whom he stole.

This is not a semantic difference. Alex Berenson and Diana Henriques explained why in the New York Times, shortly after the scandal broke:

Mr. Madoff was not running an actual hedge fund, but instead managing accounts for investors inside his own securities firm. The difference, though seemingly minor, is crucial. Hedge funds typically hold their portfolios at banks and brokerage firms like JPMorgan Chase and Goldman Sachs. Outside auditors can check with those banks and brokerage firms to make sure the funds exist.

This fundamental boo-boo is then used to tie half the world, and particularly Michael Milken, to long-discredited reports of "naked shorting" of Dendreon shares. Since Dendreon itself has never complained of naked shorting of its stock, this particular conspiracy theory is even goofier baloney than is typical for Mitchell. I mean, if a company sincerely (or insincerely) believed it is being ripped to shreds by "naked shorts," wouldn't it say something about it? The only reference to naked shorting I could find in a Dendreon filing is this prospectus and several similar ones over the years, which talk about possible naked shorting by the underwriter of the issue, and in a benign fashion.

Heck, Dendreon should be chastised for failing to mention such a material fact, wouldn't you say?

I found Mitchell's latest claptrap interesting because, in addition to his Madoff blunder, he wandered back into my old stomping ground, microcap stock fraud, attempting to rewrite history to fit his conspiracy theories. He mainly does that by making up stuff. For example, slain stock promoter Alan Chalem suddenly becomes, without even attempting to prove that assertion, a "naked short seller."

As Byrne himself has pointed out, Deep Capture is a work of public relations in addition to being a work of fiction. For some reason--this man will do anything for publicity, even discrediting himself--Byrne recently quoted an email from the Society of American Business Editors and Writers in which the membership secretary made that point fairly clear:

In SABEW’s view, not all business blogs qualify as news publications just as all writing and editing doesn’t qualify as journalism. From its standpoint your activities and those of DeepCapture seem closer to corporate public relations, and SABEW isn’t open to PR professionals _ or of course to retail business executives.

But that's not free rein for Byrne to spread whatever fictions he finds appealing on the Internet. Public relations has a strict code of ethics. Astroturfing--pretending to be a "news" organization when you are p.r., is against the ethics of the p.r. profession. So is making stuff up.

Mind you, I'm not convinced that such ethical principles are actually enforced or that breaches are punished, but they do exist, at least on paper.

An even bigger problem is that Overstock.com itself has a code of ethics, astonishing as that may seem. As I've pointed out before, such as here, his sponsorship of Deep Capture and frequent use of lies and issuer retaliation against critics is a violation of Sarbanes-Oxley, since Byrne never received a waiver from the Board of Directors to allow him to violate the Overstock ethics code.

The SEC has been taking action against other corporate fraudsters who use naked shorting to excuse their own incompetence or dishonesty, such as CMKM Diamonds and Universal Expresss. It will be interesting to see if the newly reconstituted SEC has the guts to take action against Patrick Byrne and Overstock.com

© 2009 Gary Weiss. All rights reserved.

It's Official: Patrick Byrne Admits Owning Smear Sites

Overstock's wack-a-doo CEO, Patrick Byrne, can always be counted on to insert his Florsheims in his mouth when given the opportunity. It happened again yesterday, when Byrne threw away all the carefully crafted corporate shells, repudiated earlier lies and admitted that he owned two astroturf websites created to attack critics, antisocialmedia.net and Deep Capture.

As previously, Byrne made these damaging admissions in an off-the-cuff posting on a stock message board, responding to my post on Friday describing how he had spat in the eye of Sarbanes-Oxley by violating the Overstock code of ethics for the umpteenth time.

Byrne helpfully corrected one error in my post--the email I described went to millions, not thousands of Overstock customers--and then proceeded to respond to other points in the article.

He denied being a conspiracy theorist, even though he pushes conspiracy theories.

He denied violating the code of ethics which was, I presume, a joke. He claimed that the prohibition on derogatory business communications, including emails (such as the one that was the subject of my article) relates only to "communicating inside our corporation," and that the same statements made publicly are just jim-dandy. The code of ethics, of course, makes no such distinction.

Byrne's next comment is a doozy. I'll quote from Byrne and a response subsequently posted in response, from one of the few non-Byrne aficionados using that board:

Byrne: "running his company into the ground"? A mischaracterization. The last quarter I checked was profitable, and we seem to be holding some pretty good cash flows for the last couple years, while much of the rest of retaildom is melting down. Things could be better, of course, but we're still chugging along better than most.

Reply: So, running your company into the ground is a "mischaracterization"? How so? I don't want to mischaracterize anything, so let's reiterate those working capital levels: end of 2004 - $ 267,640; 2005 - $79,561; 2006 - $59,475; 2007 - $62,621; 2008 - $39,679. (It's getting a little thin, isn't it? "Holding some pretty good cash flows for the last couple years" seems an odd characterization of those numbers, but I express no definite opinion.) Then there are those stockholder equity numbers: 2004 - $169,504; 2005 - $89,148; 2006 - $56,367; 2007 - $18,212; 2008 - ($2,985). All in thousands, of course, and ending with those embarrassing parentheses. It appears that Overstock has disposed of about $172.5 million in capital just in the last few years. I certainly hope that doesn't mischaracterize anything, since there's not much opinion involved in stating those numbers.

But the pièce de résistance was this slip of the tongue:

"...gleeful hopping on the get-Cramer bandwagon". A lie. Gary knows I have been at loggerheads with Cramer for years, was banned from CNBC over it. The video Jon Sewart used to destroy Cramer has been on antisocialmedia.net for a couple years, and DeepCapture.com for a year. Also, a year ago I published this lengthy critique of Jim Cramer's career ("Jim Cramer is a Complicated Man"). So by describing me now as "hopping on the get-Cramer bandwagon" Gary is lying through his teeth. [emphasis added]

Actually he disappeared from the CNBC screens in March 2006, after holding up a sign (right) promoting "thesanitycheck.com," a now-forgotten nutcase conspiracy site run by a former used medical equipment salesman named Phil Saunders.

But I stand corrected on the statement that he was "hopping on the get-Cramer bandwagon." Not true, he had done so years before via the websites he runs through proxies. How silly of me.

I can understand how Byrne might "forget" being persona no grata at CNBC after the oafish "sign" episode, but surely he had to remember his many tall tales he and his henchman Judd Bagley have told claiming that Byrne has no relationship with those websites. Byrne made that claim insistently concerning antisocialmedia, as analyzed by Sam Antar in this blog post. (For example, on Jan. 31, 2007, Byrne wrote: “Overstock and I have precisely 0 to do with AntiSocialMedia.”) And just a week ago, Bagley, "managing director" of Deep Capture, claimed that he didn't work for Byrne.

The lies, and the Florsheim-in-mouth episode, is old news from Byrne. But I'm a bit curious why Byrne bothered to go to the trouble of dredging up excuses for his flouting of Sarbanes-Oxley. Could he be concerned that the new regime at the SEC may not be as tolerant as it was under the do-nothing Christopher Cox?

© 2009 Gary Weiss. All rights reserved.

Patrick Byrne Spits in the Eye of Sarbanes Oxley--Again

Overstock.com's ethically challenged CEO Patrick Byrne, in what may be the most dramatic example of a sepia-toned cookware calling a similarly colored kettle black, has a new "come and get me" challenge to the SEC.

According to a blog post today, he's used an Overstock.com marketing email to millions of customers to call CNBC's Jim Cramer a "criminal."

Byrne, whose primary claim to fame is running his company into the ground and spouting conspiracy theories, is probably the last person on earth who should be calling any nonconvicted person a criminal. But his gleeful hopping on the get-Cramer bandwagon has the added quality of being a blatant violation of Sarbanes-Oxley.

Byrne violated Overstock's code of ethics by that email (see "derogatory remarks" under Section 8). Since a search of recent 8-Ks shows the Overstock board did not pass a resolution waiving the code--the SarbOx requirement--that puts Byrne in violation of what is probably the nation's most violated securities law. I sometimes think that Byrne thinks that Section 8 of his code of ethics actions mandates derogatory comments, rather than prohibiting them.

An SEC rule promulgated under Section 406 of Sarb-Ox says:

Companies must comply with the code of ethics disclosure requirements promulgated under Section 406 of the Sarbanes-Oxley Act in their annual reports for fiscal years ending on or after July 15, 2003. They also must comply with the requirements regarding disclosure of amendments to, and waivers from, their ethics codes on or after the date on which they file their first annual report in which the code of ethics disclosure is required.

Clever, isn't it? The SEC basically made violating one's code of ethics a disclosure violation, unless one's board waives the code and discloses it. Byrne, as it its wont, does neither when he craps over his corporate code of ethics. He's chairman of the board, his father having quit in disgust a while back, and the other board members spend their days, like good sheep, grazing on a verdant hill north of Salt Lake City.

More on the subject can be found in this Sam Antar blog post (about an instance when the board actually did waive the code of ethics for Byrne),

President Obama's bad choice for SEC chairman, Mary Schapiro, might want to take time out from giving speeches in Congress and look into this. That would be a pleasant and, I daresay, unexpected surprise.

© 2009 Gary Weiss. All rights reserved.

Overstock.com Covers Up Demise of 'Omuse'

Don't expect this list of blank Omuse pages to last much longer

More fun and games at my favorite corporate crime poster child, Overstock.com.

In previous blog items I've described how Overstock CEO Patrick Byrne set up Omuse, a kind of Wikipedia wanna-be, to provide corporate cover for his employment of an ex-Jeb Bush dirty trickster, a nauseating creep named Judd Bagley.

Omuse was a waste of shareholder resources from the start, and Byrne has made it progressively harder to see just how big a flop Omuse truly is. In February 2007 he made it impossible to see all "recent changes" in Omuse--which had indicated that few people were editing the site. Though that was gone, you could still see the number of new pages, and when they were created. In this July 2008 post I described how how Omuse was dying, based on the almost total absence of new pages.

Here is a display of the number of new pages as of July 2008:



But today, if you go to the site and click on the display of new pages, you see this:



Poof! History has been erased, Stalin-style. The "new pages" function has been disabled, to make it difficult (but not impossible, as we will see) to see just how badly Omuse is doing.

However, another page that Byrne neglected to delete, "Newest Guides," tells the story.

If you look at the history of the newest guides, you can see that a grand total of three guides, all of them blank starter pages, have been created since the beginning of 2009. The three most recent guides, all empty, were created on Feb. 4 and Feb. 6.

There were no Omuse pages in January 2009, one created on Dec. 25, and other pages created on Dec. 3, Nov. 24, Sept. 15, Aug. 25, and two on Aug. 13. All except the last two, a polemic on "poverty and hunger" and something on "MLA Format Works," were blank.

Don't expect the "newest guides" page to last much longer.

The only guides with any detail aren't "guides" at all, but a polemic on naked shorting written by Byrne and conspiracy theorist Phil Saunders, and a lengthy attack on me by Byrne. The latter is a blatant violation of Sarbanes-Oxley, which is designed to prevent CEOs from engaging in misconduct. Unless, that is, Byrne received an explicit waiver from the corporate code of ethics from his board of directors for that little act of issuer retaliation.

The Overstock board is as dumb as it is lacking in guts and integrity, but not so dumb as to move from a "see no evil" stance to active complicity.

Chris Cox's SEC has ignored Byrne's accounting tricks and Sarbox violations. It will be interesting to see if the new administration takes a dimmer view of corporate wrongdoing.

© 2009 Gary Weiss. All rights reserved.

The Little Profit That Wasn't There

With great fanfare, my favorite corporate fraud poster child, Overstock.com, reported the first quarterly earnings in a dog's age. Whoopee! The "earnings" were tiny, but the shares shot up -- only to fall again, when two analysts downgraded the stock, pointing out that the company had achieved the "profit" by one time events and that revenues were way down.

Now it seems that it had no profit at all. Fraud-fighter Sam Antar points out in his blog today that Overstock only was able to report "earnings" by violating accounting rules. Its "profit" (quote, unquote) should have actually been a loss of $800,000.

Sam reported:

According to Statement of Financial Accounting Standards No. 154 and SEC Staff Accounting Bulletin No. 99, Overstock.com should have restated all prior accounting periods, rather than use a "one-time gain" to correct its accounting errors "relating to payments from partners who were under-billed earlier in the year."

As a result of violating SFAS No. 154 and SAB No. 99, Overstock.com improperly reported a Q4 2008 net profit of $1 million, instead of an $800,000 net loss.

This is the first outright Overstock fraud to take place on the watch of the new chairman, Mary Schapiro. The ball is now in her court.

Every time Antar has reported on Overstock's chicanery -- which he has done numerous times in the past -- he has been a target of a slimy smear campaign by Overstock CEO Patrick Byrne, and his vicious attack dog Judd Bagley. Byrne already engaged in a kind of preemptive strike, childishly attacking Antar during the conference call.

It's the kind of issuer retaliation and blatant Sarbanes-Oxley violations (failure to get a waiver from the corporate code of ethics) in which Byrne has engaged freely, without any interference from Chris Cox's SEC. It will be interesting to see what these two creeps will unleash on this guy, and it will be even more intereting to see if Mary Schapiro's SEC will let them get away with it -- and with Overstock's continued flouting of accounting rules.

UPDATE: Predictably, Byrne sicced a wacked-out former journalist named Mark Mitchell to attack Antar on the Deep Capture site. It is a comical rant that reads as if Mitchell was sucking an LSD cube while his sweaty hands flew over the keyboard, with cameos by Mike Milken and Bernie Madoff (a naked shorter, wouldn't you know). Screwy as it is, it's still issuer retaliation, no matter how many corporate shells Byrne may erect.

© 2009 Gary Weiss. All rights reserved.

Overstock.com Under Criminal Investigation on Ads

The fascinating corporate basket case Overstock.com, and its dipsy doodle CEO Patrick Byrne, have engaged in a flurry of activity in recent days. Byrne has been doing stuff that didn't seem quite rational -- like moving the antisocialmedia.net corporate smear site to the Overstock website.

Now we know why: Overstock is the target of yet another investigation, this one a grave criminal probe by not one but five counties in northern California. That's on top of the active probe of its accounting that has been slowly chugging away by the SEC for the past two years.

This calamitous news is buried in the Overstock first quarter earnings loss press release. It is buried so far down you'd that Byrne could have used camouflage netting if he could:

On April 15, 2008, we received a letter from the Office of the District Attorney of Marin County, California, stating that the District Attorneys of Marin and four other counties in California have begun an investigation into the way we advertise products for sale, together with an administrative subpoena seeking related information and documents. We follow industry advertising practices and we intend to respond fully to the subpoena and cooperate with the investigation.

That's a material event, to say the least. Funny that Overstock didn't disclose it at the time, even while it was churning out a press release putting a spin on a libel suit filed recently against the company. How come that is a "material event" and not an investigation by five counties in California? Under Sarbanes Oxley, material events must be disclosed within 48 hours, and something this grave, I would think, would have to be disclosed even sooner. Nasdaq also mandates swift disclosure of piddling stuff like criminal investigations.

As for the numbers in the press release.... stay tuned. The numbers were so hyped by Byrne in the earnings release that the stock took an enormous pop -- 35% at last look -- even though the company is still losing money at such a rate that it will be out of business before long. In the past, particularly when it comes to non-GAAP accounting measures, Overstock's numbers have proven dubious, to say the least.

UPDATE: Tracy Coenen weighs in on AOL Bloggingstocks.



© 2008 Gary Weiss. All rights reserved.

Overstock.com's Ethical Dilemma

Using "ethics" in the same sentence as the corporate chamber pot "Overstock.com" is inherently absurd, I know. But one of the pitfalls of post-Enron reforms -- if you're a slippery, blame-shifting, critic-smearing CEO like Overstock's Patrick Byrne -- is that unethical conduct may not just be morally repugnant. It may fall afoul of the securities laws.

Reformed felon and ace fraud-fighter Sam Antar raised that troublesome issue in two insightful blog items over the past few days. They can be found here and here.

The first post points to a line from the Overstock code of ethics (yes, amazingly enough. it has one; you can download a copy here), saying:

"Business records and communications often become public, and we should avoid exaggeration, derogatory remarks, guess work, or inappropriate characterizations of people and companies that can be misunderstood. This applies equally to e-mail, internal memos, and formal reports…. In accordance with these policies, in the event of litigation or governmental investigation please consult with the company’s General Counsel."

Antar, as usual, makes his point in the form of sharp questions -- the same questions that he used to ask Byrne directly on Byrne's favorite message board, until Byrne's minions had him kicked off:

Have your actions been in complete compliance with the above provisions?
Have you avoided exaggeration?
Have you avoided derogatory remarks?
Have you avoided guess work?
Have you avoided inappropriate characterizations of people and companies that can be misunderstood?
When you received your SEC subpoena, did you promptly inform the Company’s General Counsel?
When you received your SEC subpoena, did either you or the company’s general counsel promptly inform Overstock.com’s Audit Committee?

Well, it's pretty obvious to anyone who has followed Byrne's communications with the public (click on the Patrick Byrne tag below) to know that they are a mountain of calumnies, exaggerations, innuendo, evasions and -- as I have personally experienced -- outright fabrications. As forensic accountant Tracy Coenen recently observed: "Why CEO Patrick Byrne never has a straight answer for anything is beyond me. And I’d be curious to know just how many people really believe anything that comes out of his mouth (or in this case his fingers on the keyboard)???"

Only last weekend, "Baghdad Byrne" posted a ludicrous series of nutty, evasive message board posts to slip-slide around his year-late disclosure of an SEC subpoena.


Another example of Byrne in full-dissemble mode was the line of swill that he fed Herb Greenberg in emails last June. Here's Herb's blog item at the time.

As you can see, Herb asked a simple question -- was Overstock in any way associated with the testimony of a witness before the Senate Judiciary Committee? Herb knew perfectly well the answer, which was "yes," as evidenced by the signature on the Microsoft Word document, which indicated that his testimony was drafted on an Overstock.com computer. Byrne's response was almost comical in its evasiveness and dishonesty.

Now, what's wrong with a CEO engaging in "exaggeration, derogatory remarks, guess work, or inappropriate characterizations of people and companies"? The problem is that, unless given a waiver from the code of ethics by the board of directors, the company has a potentially nettlesome securities law issue when the SEC comes calling -- as it has with Overstock and Byrne personally.

Thus we have Sam's follow up questions in the next post, which concern waivers and amendments to a company's code of ethics.

As usual, Sam is hitting the nail on the head, and I hope that his considerable following in the regulatory community is paying attention.

Another useful post from the Overstock beat can be found in the O-Smear blog, which points to the recent disappearance of message board postings by Overstock's resident stalker, its newly appointed director of communications Judd Bagley.

Despite being appointed the company's chief flack, Bagley continues to harass and stalk critics of Byrne and Overstock without disclosing his identity and corporate affiliation with each post. Indeed, as noted by O-Smear, Bagley in one post actually made fun of Regulation FD. In that now-deleted post he admitted to being a Yahoo screen name that has recommended purchase of Overstock shares.

I wonder how the SEC feels about a company official recommending purchase of a stock without identifying that he or she is a company official?

I wonder if the SEC takes the same flip view of FD as Overstock's director of communications? I wonder how SEC enforcement officials feel about a corporate official making fun of FD in a post that, by using a pseudonym, itself thumbs its nose at FD?

O-Smear points out that this very recent Bagley post mysteriously vanished. Note too the updated post referenced at the end, which points to the recent disappearance of other pseudonymous Yahoo posts by Bagley -- all harassing and stalking critics of Overstock -- some several months after they were posted.

Makes you wonder why Yahoo would suddenly take such an action, all of a sudden.

Is Bagley trying to cover his tracks and, if so, why? Yahoo allows users to remove posts by filling out a form. I am told by a person familiar with its procedures that if Yahoo removes a post at a user's request, it usually deletes every post that person has made.

If so that would be futile, as all of his deleted Yahoo posts are available to regulators and have long since been archived by Internet sleuths. So did Yahoo act on its own, and, if so, why? Is this the result of an SEC query?

UPDATE: Note the comment from one reader, who makes some good observations that I think are worth repeating:

In addition to the Reg FD troubles, there is also appears to be Sarbanes-Oxley component to Overstock's failure to enforce these policies.

Individually, one would react to any one of these infractions as a minor matter that does not rise to the level of active regulatory enforcement. However, the volume of infraction, and the manner of execution in this case is quite remarkable, and does rise to actionable violation in my opinion. And if my opinion turns out to be fact, then the SEC’s credibility is on the line if they opt to do nothing.

I would still like to know if the Overstock Sr. Human Resources executive reported these policy violations directly to the Board of Directors, as many - if not most - public company now require in a post-Sarbanes world.

As we all know, the failure of the Board of Directors of Overstock.com, Inc. at Corporate Governance is no less egregious than it’s rogue CEO and his minions.

Also, O-Smear's proprietor points out to me that Bagley's mid-May post under a pseudonym, the one in which he makes fun of Regulation FD, makes a reference to himself as "director of so--" -- that is, his old title of director of social media.

Bagley was actually director of communications at the time, only it was not widely disseminated.

Why the deception? Could it be that Bagley is so accustomed to telling lies that he can't distinguish them from the truth?

© 2007 Gary Weiss. All right reserved.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site, gary-weiss.com.

Did Overstock.com CEO Patrick Byrne Lie to the SEC?

This is fast becoming one of Overstock.com CEO Patrick Byrne's worst days in quite a few red-ink-smeared months. Pardon me if I am not shedding tears.

The fiasco du jour has been Byrne's failure to disclose for one year his subpoena by the SEC, and subsequent meltdown and spin campaign. His loyal subordinate, stalker-in-residence Judd Bagley, has served his boss by smearing Jim Cramer and spying on users of the Investor Village message board. (Hey, he's not called "Sleazey McSleaze" for nothing. Personally I think "the nauseating spectacle of Judd Bagley" has more of a ring to it.)

Now, on top of that, some have questioned whether the real issue du jour is not delay or concealment, but rather that Byrne has been flat-out lying.

It's not surprising that Byrne would lie, for the simple reason that he is a liar. I can say that with some confidence because just about every word out of his mouth about me has been a lie. But lying to the SEC is not a wise move. Under the right circumstances it can be a criminal offense.

A sharp-eyed reader posted the following as a comment and I think it is worth repeating here:

Did [Byrne] not only fail to disclose but also make false disclosures? See the deal docs for OSTKs 12/06 [secondary offering]:

Except as disclosed in the Prospectus, there are no legal, governmental or regulatory actions, suits or proceedings pending, nor, to the Company’s knowledge, any legal, governmental or regulatory investigations, to which the Company or any Subsidiary is a party or to which any property of the Company or any Subsidiary is the subject that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect or materially and adversely affect the ability of the Company to perform its obligations under the Agreement; to the Company’s knowledge, no such actions, suits or proceedings are threatened or contemplated by any governmental or regulatory authority or threatened by others; and there are no current or pending legal, governmental or regulatory investigations, actions, suits or proceedings that are required under the Act to be described in the Prospectus that are not so described.

The key words here are "except as disclosed in this Prospectus." Ain't no disclosure of a subpoena of Byrne, boys and girls. Seems to me that Byrne is saying, "I'm not subpoenaed." But he was.

Gee, is that bad? Is it bad when a CEO misleads people who buy stock issued by his company?

Next comes reformed felon Sam Antar, who has pointed out on message boards that Byrne certified to the accuracy and completeness of the 10-K for 2006, as required by Sarbanes-Oxley.

Here's the relevant wording:

I, Patrick M. Byrne, certify that:

1. I have reviewed this Annual Report on Form 10K of Overstock.com, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;….

Oh my goodness. I think an SEC subpoena of the CEO of a company, in connection with an investigation of the CEO and his company, is a "material fact." He omitted that.

Gosh. Is that bad? Is it bad when a CEO omits a material fact from a 10-K and then certifies that he hasn't omitted any material facts from the 10-k?

And if it is bad, what is the SEC going to do about it?

The SEC may have bigger fish to fry in its investigation of Byrne and Overstock.com, but if you ask me this one stinks to high heaven.

UPDATE: Byrne's continued message board rants continued over the weekend.

© 2007 Gary Weiss. All rights reserved.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site, gary-weiss.com.

More NovaStar Fallout

This post by Peter Cohan in bloggingstocks.com gives several reasons why NovaStar Financial may wind up as a penny stock. Pay particular attention to this one:

• Weak disclosure. While I am not an expert on mortgage accounting or disclosure requirements, one analyst who is said that NFI's financial disclosure was the "most difficult . . . that we have examined." For example, its 10K reveals that the value of NFI's mortgage loan portfolio is based on management's assumptions about current economic conditions, the makeup of the portfolio based on credit grade, loan-to-value, delinquency status, historical credit losses, whether NFI purchased mortgage insurance, etc. -- which are not made explicit to investors. Thus there is no way of knowing whether management used assumptions that artificially inflate its financial condition. One thing's for sure -- while NFI's top line -- interest income -- rose 54% to $495 million, its cash balance fell 43% in 2006. This is the sort of red flag that attracted James Chanos to Enron, who made a fortune shorting its stock.

NFI's weak disclosure leaves important questions unanswered. . .

... which he goes on to list. But to me, what he is describing is an excellent example why Sarbanes-Oxley is not the panacea for accounting mischief as it was billed in 2002. It did nothing to address the central problem, which is the tendency of some corporate managers to obfuscate, conceal and lie.

Another issue raised in Cohan's piece is the value of short-sellers to counteract management overenthusiasm.

NovaStar was the "beneficiary" (quote unquote) of a campaign by the anti-naked-shorting crowd, which set up an "independent" stock-pump website, created by naked-shorting fruitcake Phil Saunders, that vilified critics of this company.

The endless pumping on the site and in message boards turned NovaStar into a "cult stock" that sucked in untold numbers of small investors. Some were persuaded to put a substantial portion of their retirement savings in NovaStar, such as this investor cited by Cohan.

Every year sees new and better ways of ripping off investors, and the newest are what we saw at NovaStar -- pumper websites ostensibly unaffiliated with the stock issuer. NovaStar demonstrated that these can be just as damaging as traditional boiler-room pumping. Time for regulators to hone in on this problem and punish the people responsible.

© 2007 Gary Weiss. All rights reserved.
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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.