Overstock.com Reports Even More GAAP Violations

| About: Overstock.com, Inc. (OSTK)

On Monday, Overstock.com (NASDAQ: OSTK) filed a Notification of Late Filing (Form 12b-25) for its 2009 annual 10-K report at around 4:23 PM (Eastern) or about 37 minutes before the drop-dead deadline when the 10-K report was due to be filed.

The Notification of Late Filing identifies new previously undisclosed material violations of Generally Accepted Accounting Principles (GAAP) and other Securities and Exchange Commission disclosure rules. The company needs more time to determine the accounting impact of certain material GAAP violations first acknowledged by the company on January 29 and new GAAP violations reported by the company in its "Notification of Late Filing."

Apparently, KPMG, who was hired as Overstock.com's new auditors after they fired Grant Thornton, has finally learned what I've known for a very long time: The deeper you dig into Overstock.com's financial reporting, the more black holes (GAAP and SEC disclosure violations) you will find.

Newest Found GAAP Violations

As I discussed above, Overstock.com's Notification of Late Filing includes both previously disclosed and newly discovered GAAP violations. Those new GAAP violations were highlighted by me in the text below in bold and italic print:

As announced on January 29, 2010, Overstock.com, Inc. (the “Company”) is restating its previously issued financial statements for the fiscal year ended December 31, 2008 (including the interim periods within that fiscal year), and the quarterly periods ended March 31, 2009, June 30, 2009 and September 30, 2009 to correct errors related to:

Operational errors and the accounting for amounts that the Company pays its drop ship fulfillment partners and an amount due from a vendor that went undiscovered for a period of time. Specifically, these errors related to (1) amounts the Company paid to partners or deducted from partner payments related to return processing services and product costs and (2) amounts the Company paid to a freight vendor based on incorrect invoices from the vendor. Once discovered the Company applied “gain contingency” accounting for the recovery of such amounts, which was an inappropriate accounting treatment.

The accounting for certain of the Company’s share-based compensation plans. Specifically, the Company incorrectly amortized the expense related to restricted stock units based on the actual three year vesting schedule rather than a three year straight line amortization schedule and applied an outdated forfeiture rate in calculating share-base compensation expense under the plans.

Identification of amounts related to customer refunds and credits not properly included in the Company’s monthly reconciliation of customer refunds and credits to third party statements to determine the completeness and accuracy of returns expense.

The accounting for certain external audit fees on a ratable basis, instead of as incurred.

The recognition of co-branded credit card bounty revenue and promotion expense on an immediate recognition basis, instead of over time.

The late recognition of a reduction in the restructuring accrual for a new sublease and the recognition of interest expense related to the accretion of the restructuring accrual.

Other miscellaneous corrections and reclassifications, none of which were material either individually or in the aggregate.

Overstock.com nonchalantly lumped in its latest GAAP violations with other GAAP violations previously disclosed by the company on January 29, rather than separately disclosing them.

Overstock.com CEO Patrick Byrne Goes into Hiding

In the last several days, I sent CEO Patrick Byrne and Audit Committee member Joseph J. Tabacco emails asking them to publicly acknowledge that I was right and the company was wrong about certain GAAP and other SEC disclosure violations in exposed my blog. However, both Byrne and Tabacco refused to respond to my emails. Before I discuss those emails, some background is provided below for clarity:

SEC Regulation G Violations

In various blog posts in 2007 and 2008, I exposed how Overstock.com violated SEC Regulation G by using an improper EBITDA calculation to materially overstate its financial performance from Q2 2007 to Q2 2008. When I confronted management about its EBITDA violations, Patrick Byrne, Jonathan Johnson, and David Chidester lied about the company's compliance with SEC Regulation G during quarterly conference calls and Byrne vilified me for even raising the issue.

In Q3 2008, Overstock.com finally corrected its improper EBITDA calculation by calling it "adjusted EBITDA" when it restated financial reports and amended its filings with the SEC to correct certain GAAP violations involving customer refund and credit errors described below. However, the company improperly failed to disclose in its amended SEC filings that the reason for changing its EBITDA calculation was because of violations of Regulation G (Details here).

Overstock.com's Illegal "Cookie Jar" Reserves

In October 2008, Overstock.com restated its financial reports from Q1 2003 to Q3 2008 to correct certain customer refund and credit errors. In February 2009, I correctly reported in my blog that the October 2008 restatement did not include corrections arising from underbilled offsetting costs and reimbursements that were already earned from its fulfillment partners during those same corresponding periods, less a reasonable estimate of uncollectable amounts. In other words, Overstock.com should have gone back and corrected or restated its financial reports to reflect income already earned from offsetting costs and reimbursements due from its fulfillment partners, less a reasonable estimate for uncollectable amounts (See SFAS No. 154 and SFAS No 5 paragraph 1, 2, 8 and 23).

Instead, Overstock.com improperly deferred income that it earned but underbilled its fulfillment partners during prior reporting periods (Q3 2008 and before) by moving such income to future reporting periods (Q4 2008, Q1 2009, Q2 2009, and Q3 2009). In other words, Overstock.com took income that should have been reported in prior reporting periods (Q3 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.

In effect, Overstock.com violated GAAP by creating an illegal cookie jar reserve to materially inflate future earnings or reduce future losses from Q4 2008 to Q3 2009.

Overstock.com ridiculously claimed that the collection of the entire amount of its underbillings (every single penny) “was not assured” and instead falsely claimed that a "gain contingency" existed rather than make a reasonable estimate of uncollectable amounts as required under SFAS No. 5. Therefore, Overstock.com improperly recognized income from underbilled fulfillment partners as amounts due to the company were collected on a non-GAAP cash basis, rather when they were earned under accrual accounting or GAAP. (More details can be found in my Open Letter to the Securities and Exchange Commission here).

Starting in February 2009, I notified both Overstock.com and the SEC about the company's illegal "cookie jar" reserve and its phony "gain contingency." Overstock.com CEO Patrick Byrne responded by claiming that:

Antar's ramblings are gibberish. Show them to any accountant and they will confirm. He has no clue what he is talking about.

Instead of properly restating its financial reports to correct its intentional breach of GAAP and other SEC disclosure rules, Overstock.com CEO Patrick Byrne continued to respond by orchestrating a massive corporate sponsored retaliation campaign against me and other critics who agreed with my findings. In addition, Patrick Byrne, company President Jonathan Johnson, former CFO David Chidester, and others blatantly lied to and misled shareholders during various conference calls and vilified me in an attempt to cover up their financial reporting manipulation schemes.

In March 2009, Overstock.com fired PricewaterhouseCoopers as its auditors and hired Grant Thornton to replace them.

In September 2009, the SEC Enforcement Division took a very rare step and re-opened a previously closed probe of financial reporting irregularities at Overstock.com. A few weeks later, the SEC Division of Corporation Finance started a parallel probe of the company's financial reporting irregularities.

In October 2009, the SEC Division of Corporation Finance discovered that Overstock.com 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. Overstock.com improperly concealed the recovery of the overpayment by including that amount in recoveries from underbilled fulfillment partners in Q1 2009 instead of separately disclosing the overpayment recovery in its financial reports.

Grant Thornton claimed that it did not know about the 2008 overpayment and Q1 2009 recovery from the fulfillment partner until October 2009. After learning about the overpayment, Grant Thornton told Overstock.com that it must restate its prior financial reports to correct that error to comply with GAAP.

On November 13, 2009, Overstock.com fired and vilified Grant Thornton, rather than restate its financial reports and later filed an "unreviewed" Q3 2009 10-Q that finally disclosed the overpayment to the fulfillment partner. In this case too, Overstock.com improperly claimed that a "gain contingency" existed as justification for not restating its financial reports to correct the overpayment error.

On December 28, 2009, KPMG replaced Grant Thornton as Overstock.com's auditors.

My Vindication

On January 29, 2010 Overstock.com finally ate crow and admitted that its accounting for recoveries from both underbilled and overpaid fulfillment partners was "inappropriate" and that no gain contingency existed, as I previously reported in my blog. The company reported that its financial reports from Q1 2008 to Q3 2009 "should no longer be relied upon" and that it will restate its financial reports to correct its GAAP violations (More details here.)

Simply said, I was right and Overstock.com was wrong. I was able to identify material GAAP and SEC disclosure violations that Overstock.com's management, its audit committee, and its former auditors at PricewaterhouseCoopers were unable and unwilling to identify and correct. Now KPMG has found even more material GAAP violations as nonchalantly disclosed in its "Notification of Late Filing."

Patrick Byrne in Hiding

I sent CEO Patrick Byrne and audit committee member Joseph J. Tabacco the emails requesting a full apology from the company and the removal of defamatory remarks from Overstock.com's website and its related party Deep Capture LLC website.


I have no doubt that Overstock.com's management and audit committee will continue to violate their fiduciary duties to shareholders while vilifying any critic who uncovers any financial reporting irregularities and other misconduct by the company.

At least KPMG has uncovered previously undisclosed material GAAP and SEC disclosure violations by the company. However, it's only the tip of the iceberg. All I can say for now, is that newly discovered documentation of misconduct and financial reporting irregularities by Overstock.com is in the right hands. At this time, I will provide no closure for Patrick Byrne or KPMG about what I already know and the company has failed to disclose to its auditors and investors. They'll have to keep guessing.

Disclosure: I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes, simply because I could.

If it weren't for the efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.

I do not own Overstock.com securities short or long. My research on Overstock.com and in particular its lying CEO Patrick Byrne is a freebie for securities regulators and the public in order to help me get into heaven, though I doubt that I will ever get there anyway. I will probably end up joining corporate miscreants such as Patrick Byrne in hell.

In any case, exposing corporate crooks is a lot of fun for a forcibly "retired" crook like me.