Wednesday, January 30, 2008

No Questions on's Shady Accounting

To no great surprise, ex-felon fraudfighter Sam Antar was shut out of the quarterly conference call for (NASDQ: OSTK), after an exchange of correspondence I noted earlier.

A blog item by New York Times chief financial correspondent Floyd Norris makes clear why that was: Overstock blatantly inflated its EBITDA numbers, which were hyped to the hilt at the smugly self-congratulatory conference call by Overstock CEO Patrick Byrne.

It was a pretty blatant effort to manipulate the numbers. And effective, I might add, as the stock immediately shot up 9%.

Whoever bought those shares got rooked, if they did so on the basis of the EBITDA numbers. Note that the share price went up even though the overall earnings number was beneath analyst expectations.

Byrne said:
For the first time in our history, we were EBITDA positive for two consecutive quarters (Q3 and Q4 2007), generating positive $6.3 million of EBITDA during those six months.
Floyd observed that the Overstock EBITDA number -- earnings before interest, taxes, depreciations and amortization -- added back in the value of stock paid as compensation to employees. Floyd observed that "this is the first time I have noticed a company paying actual stock as compensation and figuring it is not worth considering in EBITDA."

The biggest reason the six-month Overstock EBITDA numbers are positive is all the depreciation expense, which reflects old inverstments the company made before it cut back on investments to conserve cash. But the EBITDA figure would have been $2.9 million lower for the six months if they had counted costs from stock and options as investments.

Why a company should show higher profits (even EBITDA profits) by handing out shares rather than cash to employees is beyond me.

This bombshell explains why Byrne refused to allow Antar on the conference call, except by submitting brief questions in advance. Had he been allowed to participate -- and Sam told me, while the call was underway, that he called in and was not being let through -- he would have asked about the EBITDA bombshell.

Sam had previously written about Overstock's EBITDA issues, including this foul and deceptive practice noted by Floyd. See this post and this one. He was the last person on earth Byrne and his crew would have wanted at the conference call. The "advance questions" ploy was designed to further shield Byrne from the possibility of Sam raising the latest EBITDA sliminess.

It also explains why Byrne dispatched his nauseating paid stalker, the hideous Judd Bagley, on an expedition to smear and discredit Sam.

As can be expected, none of the analysts on the call noticed or, if they noticed, had the guts to ask about it. They're supposed to be following the company. How is it that I noticed the Floyd blog item, which was posted and being sent out by Google while the call was underway, and they didn't?

Even if they didn't pick up the EBITDA stuff themselves, they should have known that Floyd did.

Byrne likes to talk about "lapdogs" in the media -- when reporters point out his chicanery -- but I bet he is happy that the media just rewrote Overstock's "loss narrowing" handout without noting the EBITDA inflation. That is typical of the shoddy journalism that accompanies quarterly earnings reports.

The SEC is investigating, among other things,'s accounting. Gee, I wonder why?

© 2007 Gary Weiss. All rights reserved.

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