Yesterday, I described how Overstock.com (NASDAQ: OSTK) defaulted on its loan covenants with U.S. Bank because of its failure to a file timely report with the Securities and Exchange Commission. In addition, I detailed how the company improperly delayed disclosure of the loan default until it could obtain a waiver from the bank. Now it appears that Overstock.com’s failure to file a timely report with the S.E.C. made it ineligible to file its Form S-3 registration statement on December 9, 2011 where it is seeking to raise additional funds to keep the company afloat. In addition, Overstock.com's continuing failure to comply with S,E.C. rules could indicate that is has a material weakness in internal controls. The company seems to be incapable of complying with S.E.C. rules even as it faces a continuing investigation by the regulator into previous financial shenanigans.
On March 21, 2011, Overstock.com filed a proxy statement and asked its shareholders to vote at the annual meeting on how frequently the company should seek an “advisory vote” on the compensation of its executive officers. Shareholders were given a choice on whether the advisory vote should be held every year, two years, three years, or to abstain from voting. The vote was “not binding.” The Board of Directors could ultimately decide, "...to hold an advisory vote on executive compensation more or less frequently, as applicable, than the option approved by our stockholders." After the Board finally reaches its decision, the company is required to file an amended 8-K report. At the annual meeting on May 4, 2011, shareholders approved an “advisory vote” every three years.
On Friday, January 6, 2012, Overstock.com filed an amended 8-K report and disclosed that its Board reached a final decision about the frequency of advisory votes on its executive’s compensation:
Consistent with the stockholders’ advisory vote on this matter, Overstock intends to hold future stockholder advisory votes on executive compensation once every three years until the next required vote on the frequency of stockholder votes on executive compensation.
It turned out that the amended 8-K report filed on January 6, 2012 was filed late. It should have been filed on September 30, 2011. Since the company failed to file timely reports with the S.E.C., it defaulted on its loan covenants with U.S. Bank. The company failed to disclose that its amended 8-K report was filed late and it failed to notify investors about the loan default. Under S.E.C. rules, an “event of default” is required to be disclosed within four business days (8-K General Instructions and Item 2.04). Instead, Overstock.com improperly delayed disclosure of its failure to file timely reports with the S.E.C. and its loan default until February 17, 2012, a day after it resolved its default issues with U.S. Bank. The bank granted the company a waiver of default “effective as of September 30, 2011”, the same day that the amended 8-K report was supposed to be filed.
Ineligible to file a Form S-3 Registration Statement
Overstock.com’s late filing of the amended 8-K report made it ineligible to file its Form S-3 Registration Statement on December 9, 2011. Overstock.com held its annual meeting on May 4, 2011. Overstock.com filed its amended 8-K report on January 6, 2012. Under Item 5.07 (d) of S.E.C. rules for filing an 8-K report, a company’s decision on the frequency of its advisory vote involving executive compensation must be disclosed:
(d) No later than one hundred fifty calendar days after the end of the annual or other meeting of shareholders at which shareholders voted on the frequency of shareholder votes on the compensation of executives....
Since the S.E.C rules cite “calendar days” rather than business days, it was required to file an amended 8-K report by Friday, September 30, 2011, 149 "calendar days" after the annual meeting of shareholders. U.S. Bank waived the default stemming from the late filing “effective as of September 30, 2011.” Therefore, the company did not comply with S.E.C. rules under Item 5.07 due to its late filing of the amended 8-K report.
On December 9, 2011, Overstock.com filed a Form S-3 shelf registration statement with the Securities and Exchange Commission that would allow it to sell up to $200 million of its debt securities, common stock, warrants and other securities. On December 20, 2011, the S.E.C. gave Overstock.com a "Notice of Effectiveness" on its Form S-3 registration statement. On December 22, 2011, Overstock.com filed its prospectus with the S.E.C. When Overstock.com made those filings pursuant to its Form S-3 Registration Statement it was not current on all its filings as required by S.E.C. rules. Its amended 8-K report filed on January 6, 2012, should have been filed on September 30, 2011 to comply with S.E.C. rules under Item 5.07.
Under S.E.C. rules, a company that does not comply with Item 5.07 on an 8-K report loses its eligibility to file a Form S-3 registration statement. According to an article written in the New York Law Journal written by Guy P. Lander:
Companies must disclose their decisions as to how often they will hold say-on-pay votes going forward either in the Form 8-K disclosing their annual meeting voting results or in an amendment to that Form 8-K. If companies choose the amendment to the Form 8-K, it must be ﬁled led no later than 150 calendar days following their annual meetings and at least 60 calendar days before their deadlines for submission of shareholder proposals. Missing the ﬁling deadline for this Item 5.07 of Form 8-K will cause issuers to lose their eligibility to ﬁle Form S-3 registration statements (absent a subsequent waiver from the SEC Staff). [Emphasis added.]
Overstock.com was not eligible to file its Form 3 Registration Statement because there is no safe harbor resulting from a failure to comply with Item 5.07 on Form 8-K. According to S.E.C. rules:
Item 5.07 is not among the list of items subject to the safe harbor from liability in Rules 13a-11 [17 CFR 240.13a-11] and 15d-11[17 CFR 240.15d-11] under the Exchange Act. In addition, companies that fail to file a timely report required by Item 5.07 will lose their eligibility to file Form S-3 registration statements. [Page 49, Footnote 168].
Does Overstock.com have a material weakness in internal controls?
Overstock.com's failure to file a timely amended 8-K report could be indicative of a material weakness in internal controls. For example, the S.E.C. Division of Corporation Finance asked China Lithium Technologies to explain why certain problems, including a "Failure to file timely a current report on Form 8-K pursuant to Item 5.07...", was not indicative of a weakness in disclosure controls and procedures. The company responded by saying, "...our amended 2010 Form 10-K will include an acknowledgement of the material weaknesses in our disclosure controls and procedures." (See pages 8 and 9.).
Overstock.com should file an amended 10-Q report for the quarter ended September 30, 2011. On the very first page of the 10-Q report the company inaccurately asserted that it filed all required reports.
Ongoing S.E.C. investigation into fabricated earnings
Over the last several years, this blog has detailed various illegal accounting shenanigans used by Overstock.com to materially overstate its financial performance. From Q2 2007 to Q2 2008, the company used improper EBITDA calculations to materially inflate its pro forma earnings in violation of S.E.C. Regulation G. For example, in the quarter ended June 30, 2008 Overstock.com reported a positive $1.117 million EBITDA using an improper calculation instead of a negative $0.430 million EBITDA had it complied with Regulation G. From Q4 2008 to Q3 2009, the company violated Generally Accepted Accounting Principles (GAAP) and materially inflated its reported earnings. For example, in the quarter ended December 31, 2008, the company improperly reported a $1.014 million profit by violating GAAP instead of a $0.705 million loss. In both cases I alerted the company by providing detailed information about its accounting irregularities. However, its CEO Patrick Byrne chose to vilify me rather than immediately correct its financial reports.
My accounting analysis was proven correct by Overstock.com's later revisions of financial reports. In September 2009, the Securities and Exchange Commission started an investigation of the company after I complained to the regulator. In March 2010, Overstock.com was forced to restate its financial reports to correct various GAAP violations initially identified in this blog. The S.E.C. investigation of Overstock.com is ongoing.
California District Attorneys allege consumer fraud
Overstock.com is being sued by District Attorneys from seven California District Attorneys who are alleging consumer fraud. They are seeking at least $15 million of restitution, fines, penalties, and cost reimbursements from the company for allegedly defrauding consumers. The Judge in that case had to compel an uncooperative Overstock.com to turn over information to the California District Attorneys.
Disclosure: I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped my cousin 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 heroic 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. Often, I refer cases to them as an independent whistleblower. I teach white-collar crime classes for various government entities, professional organizations, businesses, and colleges and universities. I do not seek or want forgiveness for my vicious crimes from my victims. My past sins are unforgivable.
I do not own any Overstock.com securities long or short.