Overstock SVP Johnson: Questioning His Damage Control

As a criminal, I learned the hard way that lies to solve small problems often create even bigger problems. Yesterday, Overstock.com (NASDAQ: OSTK) went on a frantic defensive mode after my Monday blog post detailing how the company illegally manipulated the price of its common shares through a materially and significantly misleading recent earnings release in violation of SEC Rule 10b-5. In the process of attempting to defend Overstock.com's illegal stock market manipulation, Jonathan E. Johnson III (Senior Vice President - Corporate Affairs & Legal) made up new lies and created even more SEC Rule 10b-5 problems for the company. Overstock.com is under investigation by the Securities and Exchange Commission and its CEO Patrick Byrne has admitted to being the target of the SEC probe.

In my previous blog post, one issue of many issues that I detailed was how Overstock.com’s recent Q1 2008 earnings report failed to disclose that the company compared Q1 2008 revenues reported on a GAAP basis to Q1 2007 revenues that were reported on a non-GAAP basis in violation of Statement of Accounting Standards No. 154. However, Jonathan Johnson apparently lied to Betsy Schiffman from Wired.com, by claiming that Overstock.com reported its Q1 2007 revenues in compliance with GAAP (no surprise). According to the Wired.com article:

"In its earnings release, Overstock.com failed to disclose that it compared first-quarter 2008 revenues reported on a GAAP basis to first-quarter 2007 revenues that were reported on a non-GAAP basis," Antar wrote on his White Collar Fraud blog.

For those who don't speak accountantese, "non-GAAP" basically refers to non-standard accounting practices, and the difference between GAAP and non-GAAP numbers is often substantial.

"Sam is just wrong," says Jonathan Johnson, senior vice president of legal at Overstock. "They're both GAAP numbers . . . I can't read his blog because it's so full of lies."

Note: Bold print and italics added by me.

As detailed above, Jonathan E. Johnson claimed that both Q1 2008 and Q1 2007 revenues in Overstock.com’s Q1 2008 earnings release were reported in accordance with GAAP. However, Jonathan E. Johnson was present during the Q4 2007 earnings call when Patrick Byrne made the surprise announcement that Overstock.com’s revenues and other related items were deliberately not reported in compliance with GAAP and the company's revenue recognition disclosures, which is a violation of SEC Staff Accounting Bulletin No. 99. In addition, Overstock.com’s Q4 2007 8-K report filed with the Securities and Exchange Commission, clearly contradicts Jonathan E. Johnson’s claim to Wired.com regarding Q1 2008 and Q1 2007 revenues that “They’re both GAAP numbers….”

From the company’s inception through the third quarter of 2007, we have recorded revenue based on product ship date. In the fourth quarter of 2007, in response to an accounting comment from the staff of the SEC, we retrospectively changed our policy to recognize revenue based on estimated product delivery date. We have recorded the cumulative effect of this change in the fourth quarter of 2007.

Note: Bold print and italics added by me.

Since Overstock.com failed to restate revenues through Q3 2007, how could Q1 2007 revenues be reported in compliance with GAAP when such revenues were compared to Q1 2008 in the company's earnings release? Jonathan E. Johnson’s false statement, above, creates even more legal problems for Overstock.com with the Securities and Exchange Commission. Rule 10b-5 expressly makes it “unlawful for any person….to make any untrue statement of a material fact.”

Question for Jonathan E. Johnson: If you can't read my blog since you falsely claim that it's rife with "lies" - then who exactly at Overstock.com is reading my blog? My log reports 394 visits and counting to my blog from people working for Overstock.com.

Message to Jonanthan E. Johnson from a convicted felon: The cover up is often worse than the crime.

To be continued....

Written by:

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Comments

[legaljunkie:]

Why don't you hit any of the real numbers that came out in the earnings call. The claim that the year over year numbers are calculated on a different set of rules only accounts for 900k in rev or less then 1%. I might believe you on some of your points if your blog were not packed red herrings and irrelevant material.

2008 Apr 23 06:16 PM

[Sanjeev Parsad:]

Sam, this was posted by me on the Fool OSTK Board, and you have yet to answer any of the comments. I'm still waiting for answers from you.

Sam, you're argument is as full of holes as anything I've seen in the past few years. Let's take a look, shall we:

First comment from your blog:

On Friday, April 19, 2008, Overstock.com issued a blatantly false and materially misleading surprise first quarter fiscal year 2008 earnings report hyping the company’s performance that was intentionally timed with the expiration of options to manipulate the market (i.e., as a "short squeeze"). In the hours that followed, Overstock.com’s stock price rose from $14 per share to close at $18.47 or a 32% increase in the price of its common shares.

What does this have to do with anything? As long as there were no insider trades during the blackout period, and they did not fraudently report financials, there is nothing wrong with this. What about when certain journalists or convicted felon message board posters were putting out negative articles during the same period? Your whole argument is based on presumptions that they intentionally chose to create a short squeeze. Where is the actual evidence or fact?

For example, while Overstock.com compared Q1 2008 GAAP reported revenues to Q1 2007 non-GAAP reported revenues, the company did not disclose that Q1 2007 sales volume had declined about 16.2% in comparison with Q1 2006, creating an inordinately low sales volume base for the company's hyped up resumption of “industry level growth” in revenues. Q1 2008 sales volume when compared to Q1 2006 sales volume grew slightly more than 2% on an annualized basis. In addition, Q1 2008 benefited from the early occurrence of Easter holiday sales and an extra shopping day due to the leap year, a benefit not present in the two previous comparable fiscal year quarters.

Name me or provide details on any public corporation where their 10-Q shows only comparisons between current year and two years ago. They all report showing current year, and previous year, and possibly in certain circumstances, also a two years ago comparison. Amazon reported their 10-Q in the same format as Overstock.com. Why aren't you writing an article discussing that?

Please also estimate the total increase in revenues that benefitted 1st Q 2008 due to the early occurence of Easter and the extra day due to the Leap Year. Amazon.com also enjoyed the same benefits, and reported identically, reflecting total increase in revenue and earnings year over year. Please view the press release link below:

www.sec.gov/Archives/e......

So why didn’t the company disclose these factors? One possibility is the desire to cause a short squeeze. Patrick Byrne proudly once proclaimed in a December 2003 interview that, “when opportunities come along where we can knee the shorts in the groin, that's always good for fun and amusement." With Overstock.com’s materially false and misleading Q1 2008 earnings release, issued without a previous announcement, and timed with the expiration of options, the double talking Patrick Byrne appears to have kneed the "shorts in the groin" one more time.

This is all completely presumptive and libelous, not fact-based in the slightest.

As detailed above, Jonathan E. Johnson claimed that both Q1 2008 and Q1 2007 revenues in Overstock.com’s Q1 2008 earnings release were reported in accordance with GAAP. However, Jonathan E. Johnson was present during the Q4 2007 earnings call when Patrick Byrne made the surprise announcement that Overstock.com’s revenues and other related items were deliberately not reported in compliance with GAAP and the company's revenue recognition disclosures, which is a violation of SEC Staff Accounting Bulletin No. 99. In addition, Overstock.com’s Q4 2007 8-K report filed with the Securities and Exchange Commission, clearly contradicts Jonathan E. Johnson’s claim to Wired.com regarding Q1 2008 and Q1 2007 revenues that “They’re both GAAP numbers….”

From the company’s inception through the third quarter of 2007, we have recorded revenue based on product ship date. In the fourth quarter of 2007, in response to an accounting comment from the staff of the SEC, we retrospectively changed our policy to recognize revenue based on estimated product delivery date. We have recorded the cumulative effect of this change in the fourth quarter of 2007.

Note: Bold print and italics added by me.

Since Overstock.com failed to restate revenues through Q3 2007, how could Q1 2007 revenues be reported in compliance with GAAP when such revenues were compared to Q1 2008 in the company's earnings release? Jonathan E. Johnson’s false statement, above, creates even more legal problems for Overstock.com with the Securities and Exchange Commission. Rule 10b-5 expressly makes it “unlawful for any person….to make any untrue statement of a material fact.”

The above statement is from your previous blog, which is the basis for your current wave of assertions and innuendo. In brief, you comment that the revenue Overstock.com reported during 1st Q 2007 was understated, thus making the year over year comparison erroneous.

Truth is any of the big four audit firms will tell you that unless a cumulative charge has a MATERIAL effect on the financial statements, there is no need to restate past quarters. Usually this materiality would be 0.5-1.5% of revenue, equity, etc.

In Overstock.com's press release from January 30, 2008, they state (bold faced is my emphasis):

We performed a detailed analysis of the impact of this change through the fourth quarter of 2007, and we have preliminarily determined that the impact of this change is immaterial to prior periods. As a result, for the full year 2007, we have recorded revenue of $768.8 million, which comprises of $777.5 million of revenue under the revised revenue recognition policy, less $8.7 million, the cumulative effect of revenue that would have been deferred as of the end of 2006. Our consolidated balance sheet at December 31, 2007 reflects $5.0 million of deferred revenue related to shipments in transit as of that date; we also reduced gross profit and net income in Q4 related to the revenue deferral by approximately $800K. Going forward, each quarter, we will make a similar deferral based on estimated product delivery date.

The SEC did not ask them for a restatement. Only that they treat revenue based on product delivery date rather than ship date. They took the charge in the 4th Q, which virtually any accounting firm will tell you was adequate response to the request.

At the same time, it should be noted that just as revenues were not recognized in 1st Q 2007, the equivalent amount of revenues, if not greater, were pushed out of 1st Q 2008 and into 2nd Q 2008. In essence, the impact to 1st Q 2008 revenues is IMMATERIAL, as it would have amounted to less than $2M or less than 1% of 1st Q 2008 revenues!

On April 23 and 24, 2008, in the two days following the latest lies by Overstock.com’s management team, Jonathan Johnson unloaded 55,922 Overstock.com common shares and pocketed gross proceeds totaling about $957,000 (Source: SEC Form 4 – here and here). In the months prior to Jonathan Johnson’s stock sales, Overstock.com repurchased 1.1 million shares at an average price of $10.90. Afterwards, Jonathan Johnson sold his shares at an average price of $17.13 per share or $6.23 higher than Overstock.com’s cost of buying back shares. The company still intends to spend another $8 million to buyback shares. Therefore, you have a lethal combination of false and misleading disclosures combined with the company simultaneously buying back shares to boost the market price of its common stock, while a key insider is selling.

Let me ask you something Sam. Why did Jonathan Johnson sell his shares on April 23rd and 24th? If you go back and look at his SEC filings, he actually exercised three lots of options back on September 28, 2007:

www.sec.gov/Archives/e......

The price of Overstock that day was $28.80? This is an insider of the company, so if he wanted to really make a buck, and he's as corrupt as you slanderously portray him, then why didn't he sell that day and clean up?

In fact, why didn't he sell all the way until October 29th, 2007, when the stock peaked at $38? More than double what he got on the 23rd and 24th of April, 2008! Really, he could have sold at a much higher profit right into early December 2007. Surely, an insider would have had some idea of what Q4 2007 was going to look like!

The truth is, he retained his shares all the way as the price approached a 52-week low, and the short interest peaked at 4.8M shares or almost 30% of the float. There was no way this man was going to make anything remotely close to what he would have earned, if he just sold the shares when he originally exercised the options. The transactions on the 24th were due to options that had to be exercised by the 29th of April...again, clearly stated and obvious in the last filing and past filings.

So, you think Jonathan, along with the entire executive board of Overstock.com colluded to create a short squeeze, so that Jonathan could make a profit on 14,590 shares that he had to exercise by the 29th of April? That Patrick, who has how many millions of shares, decided to risk it all so that a subordinate could make a few thousand dollars?!

I'll bet you that Jonathan sells another 14,078 shares before July 28, 2008, if the price is above $13.09. And he'll sell another 5000 shares before January 22, 2009 if the price is above $18.58. And I'll really go out on a limb here. I bet if Jonathan is still working at Overstock.com in 2017, that he'll sell another 40,000 shares before February 6th of that year, if the price is above $17.08! How do I know? Because it's in the friggin' filings you imp!

www.sec.gov/Archives/e......

What the truth really is here, is that you are fraudently writing continually slanderous and libelous blog posts, which have little basis or fact. Exactly what motivation you have, or the devious nature behind your modus operandi is what truly needs to be investigated. How a slithery wreck of a human being is allowed to perpetrate such malicious innuendo without any due recourse by financial regulators is beyond me. If you have any real answers for the questions above, please feel free to post here!

2008 Apr 28 12:18 PM

[Sanjeev Parsad:]

Sam,

I've tried to contact you numerous times to answer a simple question, and I haven't received any response whatsoever:

Do you believe that Patrick Byrne, or any executive at Overstock.com, has manipulated the company's financial statements? Yes or no?

Gary Weiss responded...he asked me "Do you like mango chutney?" Why the deceptiveness and deflection? Why not just go on the record?

2008 Apr 28 11:45 PM