Sam Antar at White Collar Fraud Blog has posted the second part of his analysis of Overstock.com’s second quarter numbers, and it ain’t pretty! Looks like Byrne and company are doing even more fancy math! Yoo-hoo… SEC… are you listening?

Sam says this about [tag]financial crimes[/tag]:

[tag]White collar crime[/tag] is a [tag]crime[/tag] of persuasion. Often, the white collar criminal uses “the language of business” to persuade investors to buy their company’s stock at an inflated values. At college, we had many debates about the essence of accounting. Is accounting an art or a science? For the white collar criminal, there is no debate: accounting is a work of art to be crafted.

Alas, Patrick Byrne, CEO of Overstock.com and the target of a federal investigation, practices this art frequently. Since Overstock is such a poorly-run company with little hope of ever turning a profit, Byrne’s mission is to accentuate the positive (even going so far as making up pretend accounting measures to make the company look good) and deflect attention away from the negative.

Are you planning on asking hard questions about the numbers at Overstock? Are you interested in challenging the accuracy of the numbers? Would you suggest that someone at Overstock is committing fraud? Get ready to be sued as part of a vast conspiracy of naked short sellers, or at the very least, be prepared to be stalked and threatened by Judd Bagley, Overstock’s Director of Communications.

Yet Sam still bravely raises questions about Overstock’s numbers:

…I will detail the possible manipulation of earnings by Overstock.com using a technique, known as “managing earnings,” that involves manipulating inventory reserves. I will detail how statements by Overstock.com about inventory and reserves are inconsistent and contradictory and as a result point to the possible manipulation of earnings.

In an April 2007 conference call, Patrick Byrne said that Overstock had a “game plan” in the first quarter of 2006 regarding inventory. He said they they knew in that first quarter of 2006 that “things were going to get really ugly and the company was going to have to take medicine” related to inventory on-hand.

Yet in early 2006, investors were not told about this inventory problem. Instead, Patrick Byrne made the rounds and hyped the 2006 projections. Despite his statements that the company would hit the billion dollar mark in sales and have an EBITDA profitable year, Overstock.com didn’t come close.

The company stayed afloat with cash from $50 million in equity offerings in 2006.

Equity offerings? Oh boy. That couldn’t be the reason why Byrne had to keep his mouth shut about the inventory problems he knew about in the first quarter, could it?

Sam does a great job of detailing Overstock’s cash flow crisis and inventory figures, making a compelling case that Overstock may have been “managing earnings” by manipulating inventory and reserve numbers.

It becomes interesting because the company’s inventory reserves went up dramatically as a percentage of gross inventory as of 12/31/06. The company said it dumped its worst inventory in the fourth quarter, yet the reserve went up significantly. As Sam put it so eloquently:

If the crappiest inventory was not around at the end of the fourth quarter, we would have to ask, why did Overstock.com book huge inventory reserves after claiming to have dumped their crappiest inventory?

Was Overstock.com possibly overstating inventory reserves at the end of the fourth quarter after understating such reserves at the end of the third quarter? Could it be that Overstock.com took advantage of an already catastrophic quarter to book added inventory reserves? By booking excess inventory reserves in the fourth quarter, it could increase future gross margins.

During the fourth quarter conference call, Jason C. Lindsey had claimed that Overstock.com had gotten “rid of all the slow-moving inventory” and “sold it” during the fourth quarter. If so, why were inventory reserves at all time highs?

Since there was an equity offering on December 15, 2006, that could be the motivation behind a possible understatement of reserves in the third quarter. Higher reserves booked in a quarter mean lower earnings for that quarter, and that doesn’t help when a company is trying to raise money.

More on the Overstock saga from Gary Weiss.

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