Lost amid the sturm und drang of Overstock.com's (OSTK) recent travails - the libel suit against CEO Patrick Byrne, its greater-than-expected third-quarter loss, its flirtation with insolvency, the shutdown of three business units - comes new and bad news from California, where nine county prosecutors are suing the company for fraudulent pricing practices.
According to publicly available court records, the prosecutors are insisting upon detailed information on Overstock's method of determining its "list" and "comparable" advertised prices on its product web pages. The DAs say those numbers were fraudulently inflated to overstate the "bargain" consumers thought they were getting.
Overstock is fighting hard against release of this information, claiming this routine discovery request is "burdensome."
Here is a letter in the court file from the DAs to Overstock, which outlines in some detail the information that the prosecutors are seeking. Other court documents indicate that the prosecutors are seeking to obtain facts behind a BusinessWeek article from 2004 which found that a hundred Overstock "bargains" really weren't, because the comparable and "list" prices were overstated.
Additionally, the California DAs are probing statements made at the time of the filing of the suit by Byrne and general counsel Mark Griffin, in which they told the media that their pricing practices were hunky-dory and in line with industry practices.
My interpretation of this legal maneuvering is that the DAs are pushing for the maximum possible settlement from the company. But the company's financial position is so precarious, given its recent disclosure that it is close to default, that it just can't afford to settle. This is a high-risk gambit for Overstock. If it goes to trial, and the California prosecutors win, Overstock might be hit with a judgment that will bleed it white.
The DAs are seeking $15 million in damages, and any settlement or judgment close to that could put a severe dent in the company's cash position and move it closer to bankruptcy. Prior to filing of the suit last year, Overstock had rejected an effort by the DAs to settle the charges for $7.5 million.
Aside from the grave financial implications for Overstock, there is an irony here. In his various legal battles over the years, including his much-ballyhooed lawsuit against Wall Street firms pushing his naked shorting conspiracy theories, Byrne has repeatedly claimed that the "truth" will show the horrid things being done to his company. He and his supporters have drooled over discovery that they have said would show dramatic horribleness by the other side. Yet here we have Overstock accused of not a conspiracy theory but a well-substantiated charge of outright consumer fraud, and the company is resisting efforts to get at the truth.
This latest tempest will be heard by a California Superior Court judge on Nov. 18. The case is being tried in Oakland, where Overstock - what a coinkydink! - just squandered some of its scarce cash to buy naming rights for the local stadium.
This isn't the first time Overstock has tried to obstruct discovery efforts by the California prosecutors. Overstock previously tried to force the prosecutors to contact former employees through Overstock. This was spun as an effort to protect the privacy of former employees, when of course the opposite was the clear intent. Overstock wanted to know which of its former employees were being contacted by prosecutors to chat about the company's cheesy pricing practices. The court rejected that effort to stymie this civil fraud prosecution, and it will be interesting to see if this latest legal gambit works.
One thing is for sure: Overstock is expending some big bucks in legal fees to keep the California courts from getting at the truth of the company's pricing practices. This leads one to wonder: what have they got to hide?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
