Overstock's CEO Misled Investors About Earnings

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

(See update below)

I have reported frequently on a range of securities law violations by Overstock.com (NASDAQ: OSTK). The company’s latest earnings report on Aug. 9 raises still new questions, concerning possible insider trading and misleading statements by the company’s CEO, Patrick Byrne.

On Aug. 9, Overstock.com issued its Q2 2010 10-Q (quarter ended June 30) report and surprised investors by reporting a $1.4 million loss, or a loss of $0.06 per share, compared to a small $319k reported profit or earnings per share of $0.01 in the previous year’s comparable quarter, despite higher revenues.

Overstock.com failed to meet consensus analyst expectations for earnings, too. Overstock.com’s reported loss of $0.06 per share was far worse than analyst expectations of a $0.04 per share loss or a 50% higher loss than expected.

A disturbing event preceded this announcement.

On May 20, 2010, Patrick Byrne's 100% controlled High Plains Investments LLC dumped 140,000 company shares and collected over $3 million in proceeds during the last several days, according to SEC filings. That was the first time that Patrick Byrne had ever sold any Overstock.com shares under his control. In my blog, I noted that such a sale was “not a bullish signal to investors.”

Was Byrne aware by May 20 that the company was having a bad quarter, and did he sell having knowledge of that fact? If so, he may be guilty of insider trading, a possible criminal offense. Nine days after Q2 2010 ended, by which time Byrne undoubtedly knew that the quarter had ended with a loss, Investor’s Business Daily reported:

But break-even might be a tough goal for the second quarter. Analysts polled by Thomson Reuters expect the company later this month will report a loss of 4 cents a share, compared with a 2-cent profit a year earlier.

Investor’s Business Daily reporter Doug Tsuruoka asked Patrick Byrne:

You predicted that Overstock would only break even in the second and third quarter, but didn't seem too concerned by that. Why?

Byrne responded:

Given that in 2009 we had close to $40 million of free cash flow (and $8 million net income), I think we should just continue building the intrinsic value of the business right now.

In other words, nine days after Q2 2010 ended, Byrne apparently led investors to believe that Overstock.com was going to break even in that quarter by citing previous year's free cash flow numbers and reported income. However, Byrne did not mention that this year's free cash flow of Overstock.com for the six months ended June 30 2010, was negative $54.8 million, compared to negative $35.8 million in the previous year's comparable period or about $19 million lower.

Overstock.com shares dropped $3.40 to per share to close at $16.78 or a 16.85% decline in market value. In other words, Overstock.com's market capitalization dropped over $50 million as investors reacted to the company's surprise earnings announcement.

Patrick Byrne was luckier. In late May, his 100% controlled High Plains Investments LLC sold 140,000 shares and pocketed about $3.1 million in proceeds at an average selling price of $22.11 per share. That's $5.33 per share higher than Overstock.com's closing price per share.

Nice timing for Byrne! Unfortunately investors don't have his access to the company's books and records on a daily basis.

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 in cold-blood for fun and profit, and 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.
There is a saying, "It takes one to know one." Today, I work very closely with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify and catch white-collar criminals.
I do not seek or want forgiveness for my vicious crimes from my victims. I plan on frying in hell with other white-collar criminals for a very long time.

Recently, I exposed GAAP violations by Overstock.com (NASDAQ: OSTK) which caused the company to restate its financial reports for the third time in three years. The SEC is now investigating Overstock.com and its CEO Patrick Byrne for securities law violations (Details here, here, and here). In addition, the SEC is now investigating possible GAAP violations by Bidz.com (NASDAQ: BIDZ) after I alerted them about the company's inventory accounting practices.

I do not own Overstock.com securities long or short. My investigation of the company is a freebie for securities regulators to get me into heaven, though I doubt I will ever get there.