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FFH holding OSTK files a strange one!


omagh
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No the letter is legit, as they've filed with the SEC.  I believe this is the no-backdown Patrick, thus the non-reviewed filing of the 10-Q.  

 

Most other CEO's would have bowed to Grant Thornton, filed the restatements and then filed another restatement when they finally figured out what was the correct treatment by the SEC.  But in that old Byrne way, Patrick fired Grant Thornton, and took the risk of filing an unreviewed 10-Q until they've figured out what the SEC believes is the correct treatment.  

 

Naturally the shorts, Sam Antar and Gary Weiss are going to have a field day with this.  They'll be furrowing their greasy brows and wagging their weasely tails for weeks!  Cheers!  

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Ironically, I just made a purchase this evening on Overstock...

 

There is a fine line between Chutzpah and Arrogance. IMHO, Patrick can tread closely to the line, but remains on the side of Chutzpah. Some like him and some don't. I like him.

 

For whatever reason, I am not able to confidently value a retail organization, so I have no position, nor am I contemplating a position, in OSTK. But, based on everything I read about the guy, I hope OSTK makes a fortune.

 

-Crip

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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. If it weren't for the efforts of the FBI, SEC, Postal Inspector'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.

 

Golly jee, this makes me wish I had an un-married daughter.

 

On another note, I'm a huge fan of Byrne and have actually made a lot of decisions about others based on their views of him.  I'm not positive I'd want him as a CEO of the only business I owned but I'm certain I'd want him as a friend, partner, honest critic, etc.  He just seems like a great guy and he's gotten less credit than he deserves for highlighting this disgraceful and illegal behavior that has been going on for some time.  All you had to do was to see what these guys resorted to with Mr. Watsa to realize the depths of depraved venality these people were willing to lower themselves.

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It's very bizzarre (and sadly comical) when a company such as Overstock gets criticized for being conservative rather than aggressive with their accounting.  Based on my read of Patrick's letter, the company became aware of a contingent gain in early 2009.  Because the gain was contingent, the company properly waited to recognize it until it was realized.

 

SFAS 5, Accounting for Contingencies, says "contingencies that might result in gains are not reflected in [one's] accounts since to do so might be to recognize revenue prior to its realization."  In other words, don't recognize contingent gains until they are realized (until you've got the money in hand).  This is exactly what Overstock did - they waited until the gain was realized.

 

It's quite possible that we don't have all the facts, but I find it odd that Grant Thornton would object to Overstock's conservative (and GAAP compliant) accounting after the fact.  Normally, audit firms cherish the rare client that isn't continually aggressive in their accounting.

 

I can't recall the specific restatement Overstock had a few years back, but I do recall that it was also a case of Overstock being conservative (rather than aggressive) in their accounting.

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So the SEC pressures Grant Thompson to either change its mind & make the client restate, or drop the client. As both external auditors agree there's actually nothing wrong with the accounting, what we really have is a difference of opinion.

 

Why does the SEC want the more aggressive accounting?

(1) Did somebody at the SEC take a bribe, in the hope that Patrick would kick up enough dust that nobody would actually question why the SEC wants the more aggressive accounting. (2) Or does the SEC actually need to discourage this conservative approach, because other significant registrants i]need the more aggressive approach ?

 

The SEC forced the funny-money MTM's that produced much of the US banking sectors Q3 unrealized gains, & CIT has just failed. Why do we get the feeling that perhaps CIT owed some significant registrants, & they cant collect unless they can use the aggressive accounting .... so for the 'good' of the system, make it happen?

 

SD

 

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...so, now the NASDAQ files notice that OSTK is delinquent in their filing...and notably, their CEO certification under SarbOx.  Johnston seems to have taken over the file from O'Byrne and is now handling the press releases with a plan to put the company back on track with proper financials.  The board meetings must be fascinating these days...

http://investors.overstock.com/phoenix.zhtml?c=131091&p=RssLanding&cat=news&id=1357961

 

-O

 

http://investors.overstock.com/phoenix.zhtml?c=131091&p=RssLanding&cat=news&id=1356035

 

This letter to shareholders furrows the brow...I don't doubt the veracity of the letter, but Patrick O'Byrne strikes me as a no-backdown, no-compromise negotiator.

 

-O

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i am surprised people on this site are so devoted to byrne.  his own father quit his board. 

 

who knows what the truth is but time will tell and i think the facts indicate that it is more likely than not that ostk has committed accounting fraud.  this is not short seller manipulation, this is accounting manipulation.

 

http://www.sec.gov/Archives/edgar/data/1130713/000110465909066580/a09-34089_2ex16d1.htm

 

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i am surprised people on this site are so devoted to byrne.  his own father quit his board.

 

From what I understand from various people I've spoken to, Byrne and his father are pretty much the same, and both are extremely pig-headed.  I believe Byrne senior stepped down simply because his relationship with his son was worth more than any directorship at Overstock.com.

 

who knows what the truth is but time will tell and i think the facts indicate that it is more likely than not that ostk has committed accounting fraud.  this is not short seller manipulation, this is accounting manipulation.

 

They were saying the same thing about Prem a few years ago.  Suddenly all those that were accusing him, participating against him and manipulating the stock are in trouble themselves, or being investigated for related matters to other cases...Chanos, SAC, Exis, Morgan Keegan, Gwynn, etc. 

 

Byrne can be accused of a lot of things...ALOT!  But unethical behavior is not one of them.  Cheers! 

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What worries me more in that story is the implied weakness in Overstock's processes and internal controls: why did they have to wait for their business partner to notify them that they had overpaid by $700k? Isn't that something they should have found out themselves in the first place, before paying? Or even shortly after the payment>

 

$700k is quite material for a business like OSTK... In the long term, I'd worry more about weak processes and controls than that fight with the SEC and Grant Thornton.

 

I'm not sure either it's a good allocation of the CEO time. I've owned and made money with Overstock in the past primarily because I like Patrick Byrne's personality - he is an incredible fighter. But I'm not sure I understand what he picked that one. Would Buffett do the same thing?

 

thanks

Eric

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i am surprised people on this site are so devoted to byrne.  his own father quit his board. 

 

who knows what the truth is but time will tell and i think the facts indicate that it is more likely than not that ostk has committed accounting fraud.  this is not short seller manipulation, this is accounting manipulation.

 

http://www.sec.gov/Archives/edgar/data/1130713/000110465909066580/a09-34089_2ex16d1.htm

 

[/quote

 

It's a strange type of fraud where you OVERPAY

your supplier right at the end of the year.  However,

the facts as publicly stated would be consistent

with paying a supplier up front who said he had

found a great deal, but then the deal fell through.

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Too bad its posted by Henry Blodget .....

 

Grant is pressing because they've lost credibility in their clients eyes, & those clients are now threatening to walk elsewhere for their external reviews & audits. Grant isn't KPMG, PWC, E&Y, etc; all of these firms do not have the credibility problem that Grant does, & they could all do the same reviews without any issue.

 

Yes - you can mislead a board, & make the case that you weren't legally liable (it was a 'misunderstanding'); but none of those folks are ever going to trust you again, & their bad 'word of mouth' is going to poison the well at your potential clients. 

 

Kind of like a reporter failing to mention prior prosecutions ?

 

SD

 

 

 

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Blodget says: "Well, that's a load of bunk, Grant Thornton says, in an even more extraordinary SEC filing."

 

The fact that Grant Thornton filed a letter to respond to Overstock's disclosure of the change in accountants is not extraordinary.  In fact, audit firms are required to respond to companies' disclosures regarding the reasons for changes in certifying accountants to indicate whether or not they agree with the disclosed reasons. 

 

Blodget says: "Now, aside from the fact that this disagreement will turn the SEC heat on Overstock up several notches, there's a very important detail in the letter above, which we've highlighted in red.  It concerns Overstock's filings for THIS YEAR.  And it suggests Overstock may have overstated its performance in the first quarter."

 

This is written as if to indicate that the Grant Thornton response letter has some new revelation about 2009's reported results.  In fact, nothing could be further from the truth.  It was clear from Overstock's initial disclosure of the matter that (1) they didn't recognize amounts in 2008 that they discovered in 2009 (but before issuance of the 2008 financial statements) because there was uncertainty as to realization and (2) the amounts were instead recognized "this year" because "this year" (2009) was when they were realized.

 

It appears Blodget is finally grasping the notion that if the amounts should have been recognized in 2008 (as Grant Thornton now contends) that they wouldn't be recognized in 2009, which would have the effect of reducing earnings in the current period.  Well duh!!  They can only be recognized in one period or the other.  If the amounts are moved to 2008 and increase 2008's reported results, then 2009's reported results would have to decrease by a corresponding amount.

 

Blodget says: "Overstock's CEO Patrick Byrne described this disagreement in his letter explaining the Grant Thornton firing last week, but he did not say clearly that Overstock's accounting treatment had boosted the company's bottom line.  Instead, he just vaguely discussed "recognizing" the payment."

 

I think it was clear to everyone but Blodget.  The term "recognize" is a standard accounting term that means to record.  Overstock's filing says, "Thus, we recognized $785,000 in our 2009 Q1 Form 10-Q financials..."  If that isn't clear enough that the amount was included in the results for Q1 2009, then I don't know what would be.

 

I do agree that these problems appear to indicate a problem with internal controls.  However, I do think some context is needed with respect to the main issue of these vendor over and under payments.  The issue is really one of timing of recognition (recording) not one of whether the amounts should or should not have been recognized.  And the timing issue appears to span the length of about one quarter. 

 

And most importantly, the criticizism of Overstock for this issue is very ironic considering that they are essentially being criticized for being too conservative in their accounting (i.e., waiting until amounts are sure to be received before putting them in income).  How often do you see companies being conservative in keeping their books? 

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Blodget is disgusting he is Eddy Haskel's twin brother.He has not changed his spots one bit as an analyst he time after time issued research reports based on either their headline appeal or alternatively he would write what he was told whether he believed it to be true or not. I am convinced that Henry and others have found alternative revenue streams other than advertising to suppliment the revenues for their new media ventures.

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twacowfca,

cookie jar reserving is accounting fraud.  if your goal is to show ever increasing progress then in an abnormally good quarter you skim off some of the gains and save them for the future when you need them to sustain the momentum.  the reason you do this is to keep the hype and the story going in the event a secondary offering is needed so execs can sump their shares on the public or to add some cash to the balance sheet buying more time for the business to prove itself.

 

people on this board are ignoring obvious warning signs.  ostk is at a minimum a sketchy company that is a highly speculative investmetn that doesnt provide a margin of safety.  it is a short seller's target because the business model is bad (generates no income, cash or book value growth) and the management team is nutty.  don't compare ostk to ffh just because they were both targeted by shorts at one point.  ffh is a real business that makes money and grows book value.  ostk has never turned a profit and instead has a growing accumulated deficit of $268mm. 

 

and i don't buy the argument that when the time is right they will make money.  good companies are profitable or cash flowing even as they are in their early growth stages (e.g. google).

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twacowfca,

cookie jar reserving is accounting fraud.  if your goal is to show ever increasing progress then in an abnormally good quarter you skim off some of the gains and save them for the future when you need them to sustain the momentum.  the reason you do this is to keep the hype and the story going in the event a secondary offering is needed so execs can sump their shares on the public or to add some cash to the balance sheet buying more time for the business to prove itself.

 

people on this board are ignoring obvious warning signs.  ostk is at a minimum a sketchy company that is a highly speculative investmetn that doesnt provide a margin of safety.  it is a short seller's target because the business model is bad (generates no income, cash or book value growth) and the management team is nutty.  don't compare ostk to ffh just because they were both targeted by shorts at one point.  ffh is a real business that makes money and grows book value.  ostk has never turned a profit and instead has a growing accumulated deficit of $268mm. 

 

and i don't buy the argument that when the time is right they will make money.  good companies are profitable or cash flowing even as they are in their early growth stages (e.g. google).

[/quote

 

 

I agree that Overstock's business is not the type that

should have a durable competitive advantage.  I wonder

why Prem bought it?

 

My point was that the type of business they are in is

based on finding good deals for their customers.  In this type

of business suppliers are continually offering great deals,

especially at the end of the year to goose THEIR numbers.

The jury is still out on what really happened, and I don't

know what the verdict will be.  My point is that , based on

what we know, this could very well be a situation where

a supplier overpromised on an end of the year deal and

then failed to deliver.

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C,

 

OSTK is FCF-positive on an annualized basis and the value of that cash stream will grow going forward.  It has also been built with less invested capital than AMZN.  You'll also note that they don't capitalize many of their costs for amortization over several years, so they're running things such as e-platform development costs through the income statement in a single year, but the value of the e-platform persists.  It's worth much more than its book value.

 

O'Byrne with a more sensible personality would be a good partner.  If his father was running the show, I would invest.

 

-O

 

 

people on this board are ignoring obvious warning signs.  ostk is at a minimum a sketchy company that is a highly speculative investmetn that doesnt provide a margin of safety.  it is a short seller's target because the business model is bad (generates no income, cash or book value growth)

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  • 4 months later...

OSTK is now back in the good graces of the NASDAQ...

http://investors.overstock.com/phoenix.zhtml?c=131091&p=RssLanding&cat=news&id=1409639

 

http://investors.overstock.com/phoenix.zhtml?c=131091&p=RssLanding&cat=news&id=1356035

 

This letter to shareholders furrows the brow...I don't doubt the veracity of the letter, but Patrick O'Byrne strikes me as a no-backdown, no-compromise negotiator.

 

-O

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