From Q2 2007 to Q2 2008, the company used improper EBITDA calculations to materially inflate its financial performance in violation of SEC Regulation G. From Q4 2008 to Q3 2009, it violated Generally Accepted Accounting Principles (GAAP) and materially inflated its reported earnings.
In both cases, I provided the company with detailed information about its accounting irregularities, but its management chose to vilify me rather than immediately correct its financial reports. My accounting analysis was proven correct by its later revisions of financial reports. Even after Overstock.com revised its financial reporting, it still continued to smear me in retaliation for exposing accounting irregularities.
Byrne claimed to have a photographic memory
In February 2000, Patrick Byrne claimed that he has a photographic memory. According to Fortune Magazine:
In Q2 2008 (period ended 06/30/08), Overstock.com even reported a positive
$1.117 million EBITDA using its improper calculation instead of a negative
$0.430 million EBITDA had it complied with Regulation G.
False statements and personal attacks by Overstock management
During various conference calls, management made false comments in defense of its EBITDA calculations and attacked me. On July 18, 2008, during the Q2 2008 earnings call
, former CFO David Chidester falsely claimed that the company was justified in adding back stock compensation costs to compute EBITDA. He said “It’s completely the convention in our industry….” On October 24, 2008, during the Q3 2008 earnings call
, Patrick Byrne falsely asserted that “The claim that EBITDA is not compliant with SEC definition, nonsense.” Byrne went on to call me, “Sam Antar the Crook."
Vindication on reporting violations of Regulation G
On November 7, 2008 Overstock.com filed its Q3 2008 10-Q
and disclosed that it discovered errors in its accounting for customer refunds and credits. The company restated financial reports from Q1 2007 to Q2 2008 to correct those errors. It was the second time in two year that Overstock.com had to restate its reports to correct GAAP violations.
In addition the company finally complied with SEC Regulation G and stopped calling its non-GAAP financial measure (operating income plus stock compensation) EBITDA. It warned investors that it was an “adjusted EBITDA” calculation.
Lee Webb from Stockwatch reported
"Antar the Crook" was clearly right and "Wacky Patty" was clearly wrong.
On July 26
and September 12
, 2010, I reported how seven other public companies used improper EBITDA calculations and violated SEC Regulation G. Unlike Overstock.com, those companies corrected their improper EBITDA calculations in their very next financial report and did not attack me for pointing it out.
Overstock.com violated GAAP
On January 30, 2009, Overstock.com reported
a fourth quarter 2008 net profit of $1 million dollars. 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 accounting rules, it would have reported an $800,000 loss instead of a $1 million profit.
During the Q4 2008 earnings call
, the new Overstock.com CFO Steve Chesnut, who recently replaced David Chidester, told investors:
Gross profit dollars were $43.6 million, a 6% decrease. This included a one-time gain of $1.8 million relating to payments from partners who were under-billed earlier in the year.
In February 4, 2009, I detailed
how Overstock.com violated GAAP and materially overstated its earnings in Q4 2008:
That "one-time gain of $1.8 million" referred to above by CFO Steve Chesnut was actually an improper one-time cumulative adjustment of an accounting error.
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."
Under GAAP, we are required to use an accrual basis of accounting. Income is recognized when it is earned and not when it is later billed or when amounts are collected. The “one-time gain of $1.8 million relating to payments from partners who were under-billed earlier in the year” was earned before Q4 2008 and should have been recognized in prior periods. Since the accounting error is material under SAB No. 99, Overstock.com is required to restate prior period financial reports under SFAS No. 154 and cannot use a “one-time gain” to correct its error.
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.
According to SFAS No. 154 paragraph 25:
Any error in the financial statements of a prior period discovered subsequent to their issuance shall be reported as a prior-period adjustment by restating the prior-period financial statements.
Among the criteria that SAB No. 99 uses to define a material accounting error that requires a restatement of prior period financial reports are:
• whether the misstatement masks a change in earnings or other trends
• whether the misstatement hides a failure to meet analysts' consensus expectations for the enterprise
• whether the misstatement changes a loss into income or vice versa
Overstock.com’s accounting error met in all three materiality criteria above and the company should have restated its prior financial reports, rather than use a one-time gain to correct its accounting error in Q4 2008.
I immediately notified the SEC and Overstock.com about its GAAP violations and urged the company to restate its financial reports to correct its illegal accounting practices. However, Overstock.com continued
to violate GAAP and materially overstate its earnings from Q1 to Q3 2009 by improperly reporting recoveries from its underbilled fulfillment partners as income.
Back in October 2008, Overstock.com discovered errors in accounting for customer refunds and credits. The company restated its financial reports from Q1 2007 to Q2 2008 and reduced its retained earnings by 8.2 million to correct those errors due to its overstatement of income during those periods.
It also underbilled its fulfillment partners certain offsetting fees and reimbursements due the company arising from those errors. However, Overstock.com’s restatement of financial reports did not properly reflect adjustments for income that it already earned from those offsetting costs and reimbursements during those periods.
Public companies are required to use accrual basis accounting. Income is recognized in the period it is earned and not when it is later billed or when amounts are subsequently collected. Instead, the company recorded income as payments were received from its fulfillment partners on a non-GAAP cash basis in future accounting periods (Q4 2008 to Q3 2009).
In other words, Overstock.com took income that should have been reported in prior reporting periods (Q2 2008 and before) and moved it to future reporting periods (Q4 2008 and later) to materially overstate its financial performance in those later reporting periods. The company effectively created a "cookie jar" reserve to inflate future earnings.
Patrick Byrne responds
On February 6, 2009, Patrick Byrne responded
to my initial accounting analysis with his usual vindictive attack on the InvestorVillage message board. He claimed that “Antar's ramblings are gibberish. Show them to any accountant and they will confirm. He has no clue what he is talking about.”
Further, Byrne tried to justify Overstock.com's accounting for recoveries of underbillings to its fulfillment partners:
For example: when one discovers that one underpaid some suppliers $1 million and overpaid others $1 million. For those whom one underpaid, one immediately recognizes a $1 million liability, and cleans it up by paying. For those one overpaid, one does not immediately book an asset of a $1 million receivable: instead, one books that as the monies flow in. Simple conservatism demands this (If we went to book the asset the moment we found it, how much should we book? The whole $1 million? An estimate of the portion of it we think we’ll be able to collect?) The result is asymmetric treatment. Yet Antar is screaming his head off about this, while never once addressing this simple principle. Of course, if we had booked the found asset the moment we found it, he would have screamed his head off about that. Behind everything this guy writes, there is a gross obfuscation like this. His purpose is just to get as much noise out there as he can.
On February 9, 2009, I responded
to Byrne's remarks:
No matter what boloney Byrne said above, Overstock.com simply had a material accounting error that required the restatement of effected prior period financial reports.
...Patrick Byrne... tried to make excuses for Overstock.com's decision to correct its accounting errors by claiming that "conservatism demands" waiting until "monies flow in" from under-billed fulfillment partners, after such an error is discovered by the company. That is improper cash-basis accounting for a public company and does not address the restatement issue. In any case, Overstock.com is required to restate all prior period financial reports affected by its accounting error.
That same day, forensic accountant and accounting book author Tracy Coenen took issue with Byrne's remarks in her blog
In Overstock’s case, the items at issue were earned and realizable in prior quarters, not in the 4th quarter. The fact that the company is clueless and underbilled partners changes neither of those.
If you find items in months, quarters, or years after they should have been booked, the only proper way to record them under accrual basis accounting rules would be to go back and restate the prior period financial statement.
Retaliation by Byrne
In April 2009, Patrick Byrne sent his hired thug Judd Bagley to inject himself into my divorce
proceedings and contact my former spouse. Bagley used an anonymous alias on a Yahoo stock chat board, which he later acknowledged was his, to threaten
me saying, “Here's some advice: settle the suit... give her whatever she wants. Because if it goes to trial, I'll probably attend." He used illegal pretexting tactics to "friend" my children and relatives on Facebook using a phony account. This was clear retaliation for my pointing out the company's accounting violations.
operation also targeted
journalists, bloggers, their families, and even minor children, too. Altogether, Patrick Byrne compiled a database
of information on over 7,400 people. Judd Bagley claimed that Overstock's internet pretexting scheme was designed to unveil connections between hedge funds and the journalists who write about them. However, Bagley targeted only journalists and bloggers (and their friends and family members thereof) who had written about Overstock.
According to journalist and author Gary Weiss who uncovered the pretexting
Bagley created "Larry Bergman" and an unknown number of phony Facebook accounts to con people into "friending" him. That way he could circumvent Facebook security, violating their rules and, well, Lord knows how many laws he broke in this pretexting scheme.
Attorney and Big Picture blogger (over 1.5 million monthly readers) Barry Rithholtz called
Judd Bagley a "possible pedarast" after learning that he and his family members were pretexted. Eventually, Facebook (NASDAQ: FB) booted Bagley for violating its rules. It deleted both his false "Larry Bergman" profile and his personal profile.
New excuse: A "gain contingency" existed
On February 23, 2009, Overstock.com filed its 2008 10-K
report and for the first time claimed that a "gain contingency" existed to justify its accounting practices. It said that, “When the underbilling was originally discovered, we determined that the recovery of such amounts was not assured, and that consequently the potential recoveries constituted a gain contingency.
Questioning Overstock.com's "gain contingency" claim
On May 4, 2009, I cited
various accounting rules and pointed out that “No gain contingency existed.” Overstock.com had made the ridiculous assumption that all potential recoveries of underbilled fees and reimbursements owed to it from fulfillment partners (every single penny) were not assured.
I noted that the company did not
mention the existence of a “gain contingency” when it originally disclosed the underbilling error in its Q3 2008 10-Q report filed in November 2008. It waited a full three months when it filed its annual 2008 10-K report in February 2009, to claim that a gain contingency existed.
On July 22, 2009, during the Q2 2009 earnings call
, Patrick Byrne called me “Sam Antar the Crook” because I dared to question
his company’s claim that a "gain contingency" existed.
On August 5, 2009, I published
an open letter to the Securities and Exchange Commission urging the regulator to take action to stop continuing GAAP violations and material overstatements of earnings by Overstock.com. The company continued to violate GAAP and materially overstate its earnings in Q1 and Q2 2009 by improperly reporting recoveries from its underbilled fulfillment partners as income.
I pointed out how Overstock.com used its phony gain contingency rationale to further inflate its reported earnings in Q1 and Q2 2009. During 2009, the company discovered overbillings from vendors
that occurred in 2008. When it corrected the 2008 overbillings from vendors in 2009, it further inflated its reported income. It should have adjusted its 2008 financial reports to correct those errors.
On September 17, 2009, the SEC Enforcement Division started investigating
Overstock.com. On September 23, 2009, a Salt Lake Tribune article
reported Patrick Byrne’s angry reaction with anti-Semitic overtones:
"Gary Weiss and Sam Antar are goniffs," Byrne declared, using a yiddish term that he says means "a con man, a hustler and a scoundrel." If the SEC is listening to them, their next step is to let Bernie Madoff write their indictment of me.
and investigative reporter Gary Weiss had exposed Patrick Byrne’s past dirty trick
tactics against critics. Both Gary Weiss and I are Jewish.
In October 2009, Aaron Edelstein from Crain’s New York Business asked
Patrick Byrne about my reporting of accounting irregularities. Byrne responded saying “He’s a criminal who works for short-sellers. He throws mud day after day. No matter what he says, he finds some spurious thing to jump up and down about.”
On October 1, 2009, the SEC Division of Corporation Finance started reviewing
Overstock.com’s financial reports. It discovered
that the company overpaid a fulfillment partner $785,000 during 2008. The company recovered that overpayment in Q1 2009 and improperly reported the overpayment recovery as income in that same quarter, rather than properly restate its 2008 financial reports to correct that error.
Grant Thornton, who replaced PricewaterhouseCoopers as Overstock.com’s auditors in 2009, claimed
that it did not know about the 2008 overpayment and the Q1 2009 recovery from the fulfillment partner until October 2009. The SEC wanted Overstock.com to restate its financial reports to correct that error and other GAAP violations previously identified in my blog. Grant Thornton agreed.
The SEC reviewers also wanted to know why
Overstock.com failed to report the existence of a gain contingency when it originally disclosed the underbilling error in its Q3 2008 10-Q report filed on November 7, 2008. The company waited until it filed its 2008 10-K report on February 23, 2009 to claim that a gain contingency existed.
the SEC that as of November 2008 "...it would have been inappropriate to disclose a gain contingency." However, in the 10-K report, Overstock.com claimed that it determined that a gain contingency existed "When the underbilling was originally discovered...." back on October 24, 2008.
If Overstock.com's 10-K disclosure was true, the company's explanation to the SEC could not be true. Likewise, if Overstock.com's explanation to the SEC was true, the company's 2008 10-K disclosure can't be true. Nevertheless, the SEC determined that no gain contingency existed, as I did my August letter
On November 13, 2009, Overstock.com fired
Grant Thornton rather than restate its financial reports. Three days later, Overstock.com defiantly
issued an “unreviewed” Q3 2008 10-Q
report without correcting its GAAP violations.
On November 18, 2009, Patrick Byrne falsely claimed
that even if the company had restated its financial reports, no previously reported profit would turn into a loss. Byrne said, “In fact, we as I understand it, this doesn't change any positive quarter to a negative quarter or any negative quarter to a positive quarter.
On November 24, 2009, the Salt Lake Tribune reported
that Company President Jonathan Johnson said, “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.”
Vindication on reporting GAAP violations
On December 29, 2009, Overstock.com hired
KPMG to replace Grant Thornton. On January 29, 2010, Overstock.com warned
investors that its financial reports “…. should no longer be relied upon.” On March 31, 2010, Overstock.com filed its 2009 10-K
report and finally restated its financial reports to correct GAAP violations, as I recommended back in February 2009. The company also admitted that the "gain contingency…was an inappropriate accounting treatment.”
See the chart below detailing restatements. Click on image to enlarge.