For the second time in the last two years, Overstock.com has “refused” to turn over crucial information about potential witnesses to the prosecutors, according to recent court filings. Judge Wynne Carvill had to issue a court order compelling Overstock.com to turn over such information, as Judge Robert B. Freeman had done in a previous court ruling.
The District Attorneys are seeking at least $15 million of restitution, fines, penalties, and cost reimbursements from Overstock.com. Evidently Overstock feels that the information it has withheld, which it must now disclose, will help the DAs in achieving that goal.
Judge compels Overstock.com to produce documents
In the lawsuit, filed in November 2010, the California DAs alleged that “Overstock routinely and systematically made untrue and misleading comparative advertising claims about the prices of its products.” On April 1, 2011, the District Attorney of Alameda County filed a motion to compel Overstock.com to turn over contact information for certain former employees with knowledge of alleged fraudulent pricing practices because the company “refused” to turn over such information. On May 17, 2011, Judge Robert B. Freeman issued a court order to compel Overstock.com to turn over the information to the district attorneys.
More recently, on October 19, 2012, the District Attorneys again had to go to court to deal with Overstock's stubborn refusal to share potentially damaging information with the prosecutors. They complained that:
The issue now facing the court is virtually identical to the one it was forced to decide last year. The consumers who complained to Overstock - like Overstock's former employees - are potential witnesses to the deceptiveness of its comparison pricing practices. These individuals likely have first-hand knowledge of specific instances when Overstock's comparison prices were misleading or simply incorrect, as well as the methods used by Overstock to redress these: errors. This information is relevant and material to prove disputed facts of consequence to the determination of this action and, at the very least, is calculated to lead to other admissible evidence. This Court should (again) compel Overstock to supply the requested information.
Defendant shall produce the personal identifying information of those of its customers who complained to Defendant or questioned Defendant or made a statement to Defendant about any of the comparison prices for any of Defendant's products during the applicable time period.
Overstock.com had no issue violating the privacy of whistleblowers, journalists, and critics
In February 2009, I identified certain violations of Generally Accepted Accounting Principles (GAAP) by Overstock.com that allowed it to fabricate a Q4 2008 profit rather than properly report a loss in that quarter. I urged the company to restate its financial reports to correct its improper accounting practices. CEO Patrick Byrne retaliated by personally attacking me on a stock market chat board, during various earnings calls, and in the press in an effort to discredit me. Instead of properly complying with GAAP, Overstock.com continued to overstate income in Q1, Q2, and Q3 2009.
Byrne's hired thug Bagley even injected himself into my divorce proceedings, contacting my former spouse, as well as using illegal pretexting tactics to "friend" my children and relatives on Facebook using a phony account. This was clear retaliation for my pointing out the company's accounting violations.
According to journalist and author Gary Weiss who uncovered the pretexting:
Bagley created "Larry Bergman" and an unknown number of phony Facebook accounts to con people into "friending" him. That way he could circumvent Facebook security, violating their rules and, well, Lord knows how many laws he broke in this pretexting scheme.
Attorney and Big Picture blogger (over 1.5 million monthly readers) Barry Rithholtz called Judd Bagley a "possible pedarast" after learning that he and his family members were pretexted. Eventually, Facebook (NASDAQ: FB) booted Bagley for violating its rules. It deleted both his false "Larry Bergman" profile and his personal profile.
Judd Bagley claimed that Overstock's internet pretexting scheme was designed to unveil connections between hedge funds and the journalists who write about them. However, Bagley targeted only journalists and bloggers (and their friends and family members thereof) who had written about Overstock. Altogether he compiled a database containing personal information on over 7,400 people.
In September 2009, the Securities and Exchange Commission started an investigation of Overstock.com’s accounting practices. In March 2010, Overstock.com finally admitted that it violated GAAP and restated its financial reports to correct its accounting violations, as I had recommended over a year earlier.
No consequences for retaliation and Judd Bagley is still in business
To add insult to injury, Overstock.com and Bagley have developed a new social media app for Facebook and Twitter called “myCurrent Desktop” which will collect personal information on its users. The app's terms of service explicitly states that there is "...no guarantee of confidentiality or privacy...." I have no doubt that some of that personal information could someday be used by Byrne and Bagley to stalk potential critics in the future.
Major Overstock.com shareholder starts dumping stock
S.E.C. filings reveal that right after the California District Attorneys complained about Overstock.com's refusal to turn over crucial information about customer complaints on October 19, 2012, money manager Francis Chou slowly started unloading his huge position in Overstock.com shares. Various funds managed by Chou had accumulated 3,260,738 shares of Overstock.com, about 13.9% of its outstanding shares. Since that date, Chou has sold 74,598 shares of Overstock.com. See the chart below:
In addition, Francis Chou has sold a number of call options. The purchaser(s) of those call options paid Chou a premium (fee) in return for the right to acquire a specified amount of Overstock.com shares at a certain price per share (strike price) on or before the expiration date. Chou makes a profit on those call option contracts if the value of Overstock.com’s shares do not rise above a certain price level (strike price plus premium) by the expiration date. In other words, if Overstock.com's stock price does not rise above the strike price and premium per share paid to Chou, they are worthless to the purchaser of the call options, and Chou makes a tidy profit. See the chart below:
In S.E.C. filings, Francis Chou claimed that he was selling Overstock.com shares for “diversification purposes” while at the same time he also claimed that such shares were “undervalued and represents an attractive investment opportunity.” However, he started selling his shares only after the District Attorneys complained to the Court that Overstock.com was refusing to turn over evidence about customer complaints. Furthermore, if Chou thinks Overstock.com shares are undervalued, why did he sell those call options?
Sam E. Antar
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. More recently, I've helped the AICPA Fraud Task Force develop better methods for detecting fraud. I do not want or seek forgiveness for my vicious crimes from my victims. My past sins are unforgivable.
I do not own any Overstock.com securities long or short.