Overstock.com executives subject to clawback provision in Sarbanes-Oxley?

This past week, our good friends at Overstock.com (NASDAQ:OSTK) – – CEO Patrick Byrne, President Johnathan Johnson, and SVP of Finance David Chidester – – made an announcement about how they have screwed up the company’s financial statements again.

Overstock has a colorful history of issuing incorrect financial statements, with the following discoveries of their errors (and maybe irregularities):

  • October 2008 restatement due to improper implementation of accounting system – Result: $10 million more in losses – Restating 2003 through 2007 financials
  • January 2008 recorded cumulative effect as of December 2007 due to improper recording of revenue – Result: $8.7 million reduction in revenue – No restatement, but all financials since the start of the company would have been impacted
  • February 2006 restatement due to failure to properly record freight costs – Result: $3.5 million in gains – Restating 2002 through 2005

Consider the years 2003, 2004 and 2005: They will have been restated twice with an additional problem that the company chose not to do a restatement for. That means the financial statements for each of those years has been issued three times and could have a fourth set issued if Overstock.com hadn’t elect to not do that restatement.

Why would any user of the company’s financial statements have any reason to believe any of the numbers Overstock now releases?

And the restatements raise an interesting issue… Section 304 of the Sarbanes-Oxley act of 2002 has a clawback provision which reads:

Sec. 304. Forfeiture of Certain Bonuses and Profits

(a) Additional Compensation Prior to Noncompliance With Commission Financial Reporting Requirements. If an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall reimburse the issuer for —

(1) any bonus or other incentive-based or equity-based compensation received by that person from the issuer during the 12-month period following the first public issuance or filing with the Commission (whichever first occurs) of the financial document embodying such financial reporting requirement; and

(2) any profits realized from the sale of securities of the issuer during that 12-month period.

(b) Commission Exemption Authority. The Commission may exempt any person from the application of subsection (a), as it deems necessary and appropriate.

It would be left to the SEC to determine if there was material non-compliance and misconduct. Of course, the Overstock.com supporters would say there is neither, but I’m not so sure it’s as black and white as that.

The SEC hasn’t used the clawback provision much. A December 2007 settlement with a UnitedHealth was reportedly the first time the SEC had entered into a settlement with an individual relating to the clawback provision.

If the provision has been used once in a five-year-period, that doesn’t give me much confidence that the SEC is goign to aggressively pursue such an issue, but I raise the issue because it is, indeed, an issue. Over the last year, the following executives had have stock sales totaling:

David Chidester – $77,324
Johnathan Johnson – $957,962

Lucky for Johnson, he doesn’t seem to fall under this rule, but Chidester does. I don’t know to what level the actions of executives have to rise before the SEC gets serious about them, although I do know that the SEC is seriously understaffed and unmotivated. They can’t possibly investigate all the legitimate allegations against companies, even if they wanted to.

The bottom line regardless of enforcement actions? Overstock.com’s financial statements have never complied with GAAP. Fair warning for anyone stupid enough to invest in this company.

2 thoughts on “Overstock.com executives subject to clawback provision in Sarbanes-Oxley?”

  1. I never read Sarb-Ox that closely… certainly never noticed Section 304.

    That would be too funny if Chidester got jammed with this clawback provision, even if it was only for five figures.

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