Previously posted on 7/1/2014 by Patrick Byrne
Learning that a Texas judge recently issued a capias arrest warrant for Rob Brazell (Kondos v Brazell Note Order for Capias) brings back memories of the most extreme sociopath I have ever met. Since 1999 Rob Brazell has stood out in my mind as the most remarkable paragon of dishonesty and two-faced greed it has been my place to witness in any business setting. Fourteen years ago I believed that all business between Rob Brazell and myself was concluded and I hoped never to deal with any issue relating to him again. From time to time over the years I have heard that Brazell was raising money on misleading claims regarding his relationship Overstock.com and myself, and when anyone bothered to ask me, I told the truth. Recently, however, Rob Brazell has had both that capias arrest warrant issued by a Texas judge, and had another fraud action filed against him (rob-brazell-named-in-fraud-lawsuit), yet has become more aggressive in his misleading self-promotion using Overstock’s name. As a result, while I do not generally go out of my way to hurt anyone’s reputation, it has become clear to me that I have a duty to the public to set the record straight, a duty which in my silence so far I have, arguably, neglected. I will here seek to avoid further editorial comment, but simply relate my experiences with Brazell.
In Spring 1999 I received information about a firm that was in the flea-market-products liquidation business. At that time, about 65,000 people in this country made their living selling at flea markets. Brazell had originally formed a company that used a broadcast fax method to alert people in the flea market industry of available lots, and let them order from those lots using the telephone’s push-buttons. Around the time that I first heard of him, Brazell had gotten live a site that allegedly displayed such close-out products for sale on the Internet, but in fact the site was informational only: that is, there was no piping connecting it to products in any warehouses or even basic customer service systems. The site displayed products and let people enter credit cards to be charged, but little of the piping between the two was in place. In addition, the business was, I learned, on its last gasp: it was out of cash and (absent a cash infusion) would be shutting its doors in two weeks.
As primitive, immature, and almost reckless as the system seemed, I recognized the opportunity the internet presented for this business model. At the time, most were analyzing Internet retail in terms of its ability to strip out transportation costs (an ability which was already in question). But liquidation is all about search costs, and the Internet strips out search costs handily. Therefore, liquidation and the Internet seemed made for each other (as eBay was already proving in a B2C model). On that basis, I agreed to meet with them.
My first meeting with Brazell as awkward: Brazell and his lawyer and backers quickly expressed their general discomfort with me (I am not a Utah native, and they all were), and speculated that I was a “vulture capitalist” intent on stealing their business. I assured them that I was not, that I had retired from business, had just accepted a faculty position at Dartmouth, and had no intention of getting involved in the firm. Believing that time was of the essence in getting some momentum and that the buying team Brazell had assembled would give a head start in developing this business model, I made an offer to buy a minority stake in the business for $4 million. The reaction of Brazell and his lawyer to my offer was odd to the point of amateurish: In front of me, they openly discussed it but convinced each other that if they waited another couple of weeks until the business was about to close, they would then have me over a barrel and could demand better terms. Scratching my head, I left, telling them to get in touch if that day came.
The next Thursday they called to inform me they were going bankrupt the next day, Friday, and wanted to negotiate a deal, insisting weirdly that because I only had one day to act before they shut the firm, they expected better terms than I had previously offered. I told them I would inject the same $4 million that I had offered previously, but now I wanted 60% of the business for it. There was a long silence on the speaker phone before I heard Brazell say meekly, “Accepted.” Lawyers set to work handling the money and stock transaction. However, because of the fact that the office was being shut the next day and all employees fired if the cash did not get in the till, it was not possible to perform the customary due diligence first. In addition, other than some credit card processing records that showed de minimus sales (a couple hundred dollars per day) and a checking account with almost nothing in it, I figured (incorrectly), If there are any undisclosed problems, how bad can they be? Our lawyers papered over the transaction the next morning: my one stipulation was that, given that their ownership structure was poorly documented and they apparently were having disputes about that among themselves already, the documents made crystal clear that all such disputes occurred on their side of the 40 yard line.
A few weeks thereafter (in early June, 1999) I went to see Brazell to look at the business in which I had now acquired majority stake. Brazell sat me down and in a roundabout fashion explained that they had a small “logistics” problem. My interest perked up: I always enjoyed logistics. Brazell continued, For some time they had been taking orders for products they did not actually have. The plan had been to wait until they had, say, orders for six units of some model of Seiko watch, then call Seiko and try to buy those watches, receive them in their office, then remail them to the six customers. However, Brazell continued, they had been taking the cash that they had been getting by charging customer credit cards, then using it to pay operating expenses, so they were in a little bind, and he wanted my advice. Still not quite grasping what he was explaining to me, I asked, “How much would it cost to buy all the inventory you have already charged people for?” He told me, “$300,000.” I told him I was shocked at the size of the number and his description of it as a “logistics” problem, when in fact, it sounded criminal to me: He was charging people’s credit cards without having the goods to sell. He replied, “We researched that. It turns out you can charge the credit card if you have a ‘reasonable belief’ you are going to be able to acquire the goods. And the lawyers say that we can say we have ‘reasonable belief’ if….” He proceeded with some Philadelphia lawyer argument that showed he had anticipated exactly how he would defend himself if he ended up in court. I cut him off and said, “So how quickly can you buy those and get them out to people?” Brazell replied, “We could do that in a week or so. But I have a better idea. I have scouted out a space on the west side of town. We could move there, change our name, and…” Brazell continued explaining as I, puzzled, lost the thread, trying to understand how any of such maneuvers would solve the fact that there were customers expecting $300,000 of products that they did not have. It took me quite a bit longer than it should have to grasp, Oh, Brazell is suggesting that we just disappear under a new name and address and keep the $300,000. He’s a swindler. As soon as I understood where he was going I cut him off and told him, “Of course we are going to buy the $300,000 of products and send them out. And don’t ever suggest something like that to me again.”
On the same day, while going through their meager financial statements (really no more than a few simple Excel spreadsheets), I realized that they did not make any sense whatsoever. They did not tie to each other. I asked their CFO (allegedly a CPA) some basic questions and discovered, for example, that he did not know thee difference between gross margin and net margin, or what costs went into gross margin, etc. I told him I wanted to check on his CPA credentials, at which point he got up and walked out of the room, picked up his hat, and left the company. I confronted Rob about it, and discovered that not only he could he not tell me his gross margin, he could not define it, either. And his ideas for developing the company all amounted to PR stunts of one form or another, but had nothing to do with building value of any kind. I hired and inserted Jason Lindsey (CPA) as CFO to make sure no further untoward activities occurred.
At this point I belatedly conducted due diligence on Rob Brazell and discovered quite a colorful past. At one company he had run he had gotten short on cash and solved the problem by going into his credit card receipts and randomly picking hundreds of people to whom he could charge $100 each, in order to get tens of thousands of dollars to keep his firm afloat. He had also conserved cash by stopping payments on the health insurance for his employees and their families, without telling them: They learned when someone took their kid to the hospital. He had had a run-in with the Utah Attorney General over getting people to cough up hundreds of dollars to learn about various get-rich-quick schemes that never panned out, and had to sign a Consent Decree with the Utah Attorney General in order to stay out of jail. And he had worked at a company that was in the flea market supply business, but he used his position as Sales Manager to steal all that firm’s customers by diverting them to the new business he started on the side (causing the collapse of the business for which he had been working). In Salt Lake City, which the Wall Street Journal regularly names as the Fraud Capital of America, Brazell was known as a remarkable scoundrel. Being from New Hampshire, I had known none of this.
As these facts came in over the course of the summer, my dreams of slipping off into a quiet academic life began to recede. At the end of the summer semester I left that teaching position at Dartmouth, went to Utah, and starting digging in. As they say in The Godfather, “The fish stinks from the head down”: When a fellow like Brazell is running a firm, many employees are sure to be crooks themselves. In dealing with them, it became clear to Jason and me that the firm was going to need an enormous bloodletting. I did not know who was good, but it was easy to see who some of the bad actors were who had to be removed. So in September, 1999, I began cutting the shady people, starting with Brazell himself: Brazell was gone on some extended vacation, but when he returned I had him meet me in my motel room across the street, and fired him. Over the next month or two, I cut twelve out of eighteen people.
There started to be signs of a board fight, but Brazell had run everything in such a slipshod way that none of the paperwork and documentation existed by which anything could be worked out in a businesslike manner. I hired a much more serious law firm than the one which the firm had previously used, and instructed them to create whatever set of documents needed Brazell’s signature to make everything airtight. “But how do we get Brazell to sign them?” we wondered. Our lawyers contacted his lawyers, who refused on his behalf. That put Brazell in the position of having leverage over the firm simply by gumming up the board work that had to be completed to get the business ship-shape and properly organized.
Opportunity presented itself a few days later, when Brazell demanded to meet Jason and me off-site to air his feelings of having been cheated out of his firm. As I was to learn was his custom in business meetings, he brought his wife, a highly attractive female triathlete, a real head-turner, who opened up the meeting telling me, “Look me in the eye. I like a man to look me in the eye when he’s fucking me.” Startled, I proceeded with the business matters at hand, explaining gently that the business Brazell had known was gone, that it was now under the control of a new investing group, and he had no position in the new firm other than as a minority shareholder. Brazell responded with a 30 minute lecture that, as was his wont, constantly misused legal and business terms, as though all he knew he had acquired from watching TV shows. Somewhere in his rant, when he got good and wound up, some perverse instinct made me say, “By the way, as long as you are here, would you mind signing some paperwork?” I put in front of him the stack the lawyers had prepared. With his typical grandiosity he flourished a pen and began signing his way through the stack of paperwork as he continued his rant at me. Again his wife interrupted to say, “Look me in the eye. I like a man to look me in the eye while he’s fucking me.” For my part, I was trying to keep a straight face as I watched Brazell sign away the only leverage he had left on the firm. When he finished his signing and his ranting, I asked for the stack of documents, made a copy of it all, and handed it to Rob with the suggestion he show them to his lawyer. Brazell, satisfied that he had properly stood up for himself, stood to leave, giving his wife one more chance to turn and say to me, “Look me in the eye. I like a man to look me in the eye as he is fucking me.” I looked her in the eye. About thirty minutes later Brazell called me from the office of his lawyer, who was explaining to Rob that he had just signed away all the leverage he had over us (that being, that the corporate records were so sloppy as to be virtually nonexistent). Brazell told me, “I am going to drive back to your office, and on the advice of counsel, I demand that you give me every signature page I signed.” I told him I would not do that. Brazell replied, “Then on the advice of counsel I rescind my signature.” I hung up.
In October, 1999 we launched Overstock.com. Brazell was not an employee when we launched, had no position in the company, and had no legal relationship other than a small minority shareholder, and was unwelcome on the premises. But I could do nothing to keep him from showing up at the shareholder meetings. In those early days we were having shareholder meetings about once per month. I had inherited a group of minority investors who ranged from sophisticated investors to farmers from northern Utah who had put their savings into the firm that Brazell had run into the ground. The investors ranged from sharpies to innocents who had been lured into investing over a backyard barbecue. I sought to treat them all fairly and graciously, though some fraction of them were half-buying Brazell’s line that I was a vulture capitalist who had swooped in and stolen their firm from them, and if only I had not done this against Brazell’s wishes they would all be rich (however, I believe that by two or three meetings all or essentially all of the shareholders had come to see things a bit more clearly). The capital structure was a mess (most of those investors had no business whatsoever investing with a guy like Brazell), but I played that hand as fairly as I could, passing the hat for further capital raises at prices that did not wipe everyone else out (like most majority owners would have done). I was facing a moral dilemma: I did not think some of those people should have been investing in a risky start-up, but they were already shareholders and so it was not fair to water them down without letting them invest, either. Therefore, these capital raises were accomplished by giving then-current shareholders pari passu investment rights, but admonishing them that it was highly risky and they should probably not be taking part. Of course, for some of them such warnings only seemed to make them salivate over the opportunity to invest more, whereas others appeared to heed my warning.
One incident in this regard stands out, though it represents many. There was a woman with a clerical job in the company. She was attractive, 50-ish, and had followed Brazell from firm to firm for several years. She was a widow, and I thought she was a fine lady, but I understood her loyalties were to Brazell. One day Brazell slipped into the office unannounced (he had been forbidden from coming inside, but that day he did anyway): he and this woman quickly slipped into a meeting room while Jason and I stood down the hall, discussing whether we should actually physically remove him. When he saw me walking down the hall towards the meeting room, Rob quickly stood up and departed. But an hour later this fine woman asked to see Jason and me. It appeared to be registering on her for the first time that this man she idolized, Brazell, might not be looking out for her best interests. Haltingly, her story came out: A year or two earlier Brazell had come to her and asked her to buy stock in the company: She had $180,000 in savings, and Brazell had convinced her to give it to him, in return for which he gave her some stock. Now, a year later, with Brazell gone and the company in new hands, she owned about 5% of the company. However, at the prices at which we were then raising money for the firm, her position was worth about $1 million. The reason Brazell had shown up in the office, she explained, was that he was now telling her that the $180,000 she had given him had been only a loan, not a purchase of equity, and that the stock she had been given was just collateral for that loan she made. He had shown up with a check for $180,000 and paperwork documenting that she was having her loan paid back, and was now retrieving the stock for his own possession. It was the strangest, most slap-dash view of financing I had ever heard, given by a widowed clerical worker who clearly had no idea what she was talking about or doing, and who should never, ever have been invited by Brazell to invest in the first place. Not only had he done that, now that her investment was worth $1 million, he had gone to her to swindle her out of it with a bunch of equity/loan double-talk. It was a remarkable performance, even for Brazell.
Overwhelmed with my now-full understanding of Rob Brazell, and aware that this widow, formerly his acolyte, had lost her trust in Brazell (and perhaps slowly gained some in us), I asked my father for his advice. On that advice, I went out and hired her a lawyer at the company expense. The lawyer was a real piece of work: the kind of junkyard dog attorney who advertises on the back of the Yellow Pages. I met him and said that even though the firm was paying, I wanted him to defend the widow’s and only the widow’s interest, to get involved, and do whatever he thought right, even if that meant suing the firm. After a day of talking with his client, he came back and explained to me that he dealt with guys like Brazell all the time, that there was a culture in Utah arising from the uranium boom days where people talk neighbors and acquaintances into investing in flim-flam penny stocks, often conducted at a backyard barbecue or over a neighbor’s fence. He had spoken to the widow and had her roughly convinced that we (myself and the company) were the good guys, and that Brazell had cheated her. She would not sue if she could have her stock back and keep the $180,000. The lawyer told me, “I deal with these sociopaths all the time. He’ll probably cry. But he’ll sign.” I had the pleasure of calling Brazell, bringing him into my office, telling him the widow’s demands, and sliding the requisite paperwork in front of him. The lawyer had been right: Brazell broke into a flop-cry like I have never witnessed. His tears literally flew across the table on me. Never saw anything like it. As he signed away the $1 million of stock out of which he had just cheated her, and the $180,000, he cried, “What I need is an adviser! I need someone who can show me the ins-and-outs of these things!” I told him, “Rob, you don’t need an adviser to tell you not to rip off a widow.” He signed the paperwork and delivered the funds that day.
For some reason I still cannot comprehend, I actually tried to save Brazell face after that. We let him attend some board meetings as an observer only (with no actual board membership). I did not speak ill of him. There had been one significant investor who had been Brazell’s friend who had sided with Brazell during these skirmishes. That fellow invested $10 million in a new Internet business Brazell started. We worried that Brazell was coming to our board meetings as an observer just to pick up our secrets (there were at the time enormous arbitrages available in Internet marketing, and while observing our board meetings he was taking detailed notes on them). However, we should have realized we had nothing to fear: Brazell went out and did precisely the opposite of what we were doing, and was bankrupt in a few months. When I ran into that large investor socially a few years later, he apologized to me for having sided against me and not having realized that Brazell was a “crook” (his word).
There is one more classic Brazell story to share. I had made president of our firm Karla Bourland (a highly-regarded factory-physics Tuck Business School professor who had assumed the role of a personal tutor for me years earlier). I was CEO, but Karla was president in those early days (1999-2001). Karla thought it was odd, given my history with Rob, that I still tried to treat him with dignity, and made face-saving measures on his behalf. However, given that I had made that decision, she supported it fully, treated Brazell with dignity, and supported the little face-saving measures I took on his behalf publicly and with the company. Brazell always expressed great appreciation to us both for this.
While president of Overstock, Karla was invited to join the Young Presidents’ Organization, a prestigious business society. Karla was thrilled at the professional recognition, and did everything possible to prepare for joining. She made the rounds, met other members, did the screenings, etc. When the time came for the local chapter to vote on her admittance, however, someone used his or her blackball privileges to veto her membership (every member of a YPO chapter has the right to blackball the admittance of a new member). I knew Karla could rub people the wrong way, and wondered which of the town burghers she had offended. I called Brazell (probably the first and only time I initiated a contact with him), who had been a member of YPO for years and still maintained good relations there, to see if he could figure out who it was that had blackballed Karla, that she might be given a second vote. Brazell was on good terms with Karla at the time and, grateful that she had accommodated some face-saving measures for him, readily agreed to look into it. A few weeks went by with no word from him other than that he was nosing around trying to find out. Finally, a senior member of the local YPO sought me out to tell me the truth: Karla had been blackballed by Brazell himself.
For perhaps the 10th time I met Brazell offsite, this time with Karla in tow, and told him what a skunk he was, given that Karla was at the time working 100 hour/weeks for a firm in which he had a financial interest, and that she had joined me in going out of our way not to discredit Brazell in the business community (though we had both been afforded chances aplenty). Brazell once again burst into tears, said his shrink told him he had some complex or another that made him do these things, blah blah blah, and left. A month or so later Brazell called me to get together. We did, and he told me that his therapist had told him that the only way to fix things was to make amends, atone for himself, and that Brazell had decided to do that by nominating Karla to YPO himself. I thought that was an unusually classy move of Brazell, and thanked him. He nominated Karla, who was again rejected, this time on the grounds that she had passed the age-limit for new YPO members the previous week.
Again, weeks later someone in YPO who know Brazell reached out to me to tell me the truth (about which Brazell was already bragging to those he thought were his friends, most of whom had been burned so many times by Brazell they would readily dish up things like this): Rob had asked for the YPO bylaws to study, and when he did, he discovered an age limit, and that Karla was a month away from crossing it. So Brazell held back two months, and then came to us with his whole “atonement” story of wanting to nominate Karla, knowing that she would again be rejected because of the age limit. The tearful “atonement” stuff was just more sociopathology. The only thing I can say to the credit of Brazell is that, when I confronted him about this behavior, he again collapsed emotionally, acknowledged it was true, said he did not know what made him do the things he did, etc.
Thankfully, that was the last business dealing I ever had with Rob Brazell. I did see him once more, a few years later, while I was sitting in a diner into which Brazell happened to walk. He came over, I stood, we shook hands, and he politely asked if he could call me for lunch some day. I told him, “I’d rather you not.” Then, a few years later, Brazell rode on a plane next to someone who is close to me, who later reported that Brazell was raving about a new business he had started that was like “free money”: It was a brokerage or some similar entity that gave promiscuous locates to short-sellers and collected fees for doing so (if this does not make sense, search around on DeepCapture for an explanation). According to my friend, Brazell was giggling about his new business because it was so simple: All one had to do was tell short-sellers some words they needed to hear, and the checks just rolled in. It was not clear to my friend if Brazell understood that such a business model was illegal, abetted the criminal behavior of stock-manipulators, and put him square in the center of the pernicious Wall Street activities that I was then seeking to bring to the attention of the public. I told my friend that it would not matter to Rob Brazell if he understood all of that, or not.
That was the last time I heard any specifics of Rob Brazell’s activities, though occasionally through the years I have heard word of him running around raising money for some scheme or another saying he started Overstock.com. In sum, however, the truth is that Brazell started a company that had no sustainable business model, employed a bunch of crooks, collapsed, and which I led a group of investors to acquire, recapitalize, and re-start. Brazell never worked one day at any company called “Overstock.com.” He started a predecessor company that failed (in part, because Brazell literally does not know how to read a balance sheet or an income statement, and uses terms like “gross margin” without having the faintest idea what they actually mean). The day his company failed, I stepped in and bought control of it, shortly thereafter fired him and most of his shady colleagues, and restarted it all over again, and relaunched it as Overstock.com. Brazell has fleeced those close to him (from widows family members to fellow members of the LDS Church) of millions upon millions. He took ideas that were well-known by the early 1980’s (that we were moving from a manufacturing economy to one where intellectual capital was more important), regurgitated them fifteen years later in a puerile text called The Idea Economy which he self-published, then ran around acting like he was a Nobel prize winner. I do not know of anyone who ever invested with Brazell who did anything but lose all his money, sometimes to Brazell himself. I cannot recall a single conversation with Rob Brazell where he did not propose something unseemly, unethical, or illegal, sometimes with no apparent awareness that it was so, but more often, with obvious indifference to such concerns. He is a sociopath, the kind who plays games like the YPO story illustrated above, and can with all comfort sit and look across the table from someone and lie through his teeth, but be back the next day scraping and apologizing, while actually just trying to figure out his next trick. That a warrant has been issued in Texas for the arrest of Rob Brazell is something worth celebrating.