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It seems that Overstock.com (NASDAQ:OSTK) is about to take a hefty hit against earnings - $1.944 million, to be exact - thanks to the looniness and litigiousness of Overstock CEO Patrick Byrne.

This will come as no surprise to anyone who's closely read the company's disclosures. In other words, pretty much nobody who has been bidding up the stock lately.

When a California court tossed out Overstock's much-ballyhooed "naked shorting" lawsuit against Goldman Sachs (NYSE:GS) and Merrill Lynch (NYSE:BAC), there was as an aspect of the rout that didn't get much attention. The court ruled that "Defendant's [sic] shall recover cost of suit as provided in Section 1032 of the Code of Civil Procedure."

In major suits, costs can amount to serious money, and they do in this case--so large that Overstock may have to take a major hit against its earnings. According to a calendar entry in the California court website, Merrill is claiming $1.93 million in court costs and Goldman $513,000, a total of exactly $2,441,402.74. See the image below.

(click to enlarge)

This was not unanticipated by Overstock--but not adequately anticipated.

Sam Antar, who has written for years about Overstock's book-cooking efforts (a good digest is here), tells me that in its Form 10-K for 2011, Overstock points out that "The defendants have the right to apply to the court (but have not yet done so) to seek reimbursement from us of their allowable court costs." It made the same disclosure in its first-quarter 10-Q.

The problem, he says, is that Overstock is not adequately reserved for this loss. And it isn't exactly flush with cash. For a company with negative $9 million in working capital (as of March 31), a $2.44 million expense is a big problem.

Overstock had $2.4 million in loss contingencies as of Dec. 31. Sam points out that at that time,

Patrick Byrne was claiming that Overstock.com would win its cases against the prime brokers. If we take Byrne at his word, I doubt that Overstock.com's loss contingencies covered an unfavorable outcome to the prime broker case.

After the dismissal was announced in January, Overstock increased its loss contingency by $500,000, to $2.9 million, in the first quarter report.

The $2.44 million in costs claimed by the two prime brokers will deplete Overstock's loss contingencies to $544,000. That's plainly not enough - not for a company that is involved in a lengthy series of lawsuits, from patent infringement to a consumer fraud suit by a consortium of California district attorneys.

To make up the shortfall, Overstock will have to add to its litigation contingency the sum of $2.44 million (the amount claimed in costs) minus the half million already reserved. That's means that exactly $1.944 million will have to be charged against its earnings or, more likely, its loss, in the next quarter.

Unless, of course, Overstock can figure out some way to juggle the books, or delay the day of doom. I doubt it, but you never know with these guys.

That would be one hell of a hit against earnings for a company operating quite so close to the bone as Overstock. Sure, the company is appealing, but what of it? It still has to adequately reserve against this loss, which is very unlikely to be tossed out by the court.

In a sense, Overstock was lucky. Sam notes that "If the prime broker's filing for cost reimbursements had come before the quarter ended March 31, 2012, it could have wiped out most of Overstock.com's meager $2.7 million profit reported in that quarter."

As usual, Overstock shareholders are suffering because of Byrne's conspiracy theories - which, in this case, has proven only that the prime brokers seem to be screwing their short-seller clients, and not engaging in a stock-targeting conspiracy.

Proving that has turned into a money-losing fiasco for Overstock shareholders. Yet Byrne is pouring yet more money down the drain in attorneys fees by appealing the California ruling and threatening to sue again in New Jersey.

I wish him well in his litigation. This is the best theater you can find outside Broadway. It's a great show, especially when other people -- the ones dumb enough to buy this stock -- are footing the bill.

Source: Overstock.com Faces $2.4 Million In Court Costs From Failed Suit