The Big O: A Closing Word

Previously posted on 9/25/2019 by Patrick Byrne

Nothing is more tacky than an ex-CEO hanging around his former firm and kibitzing what they are doing. On the other hand, given that I was CEO for part of Q3 and there are many people asking fair questions of me, I think I should answer them. I also am comfortable talking about aspects of the past, especially where they have greater significance for the subject of Deep Capture. But I am now 100% disassociated from Overstock, and people should stop asking me to comment on current management’s activities or decisions, or to connect someone here to some person there to handle some token sale or product placement. You need to contact them yourselves.

   1.  Due to a controversy which began bubbling into the public’s awareness on July 26, Overstock’s then-CFO reported on Saturday, August 17, in writing to the board that it was “impossible” to get D&O insurance with me at the firm. While some aspects of his report were a tad ambiguous, when one gets into the business of parsing with the CFO and Chair what “impossible” to get insurance means, it is time to leave.

      ·  On that day, I wrote the board and told them that this fact was decisive, and that I would eject from the firm. Precisely one director contacted me to say he supported my decision to come forward to America about what I had been involved in, and that I should stay. But in conversation with the Chair it was made clear to me that “the Board” wanted me dissociated from the firm.

         ·  I immediately instructed my personal (not corporate) colleagues to work with Jones Trading to prepare to sell all my stock.

         ·  I learned that it would all take a couple of weeks working with Jones Trading: moving around shares from bank boxes in Switzerland and two accounts in the USA, getting opinions, removing legends, all that legal stuff. I am sure there are > 100 emails and such between Jones Trading and my personal legal team documenting that lots of hands got busy and many people spent sleepless nights to get those 5 million shares ready for sale.

        ·  I would be filing a Form 4 reporting my sales. To avoid letting it affect/mess up the upcoming dividend, I asked them to make the sale as late as possible while still being able to announce it all at least one day before the September 19 “no-div date” on the dividend, so all information would be completely known in the market when the market found its market clearing price for our stock (that way, no one could claim later that they had not made the decision they would have otherwise made if they had known of my departure). Thus, by September 18. But normally the last date in the quarter in which I could sell would be the blackout date of September 15: since that fell on a Sunday, it would make September 13 the last date I could sell, but it was unclear if that blackout rule applied to me after leaving the firm in the quarter.

        ·  So in sum: by August 18 my decision and instructions were that all shares were to be sold and reported by September 13 or September 18 (depending upon how that last legal issue was resolved). Again, I am sure that countless emails document all the good work done between Jones Trading and my personal office. Also, I can name seven people at the firm whom I informed of this plan: that I would completely sell all shares during the week before the no-div date, so they should not to be shocked when they saw it.

        ·  A legal opinion was delivered that the September 13 date was not binding after I left the firm, and it could be September 18. Thus, my final instructions were that all shares would be sold September 16-17-18, and the announcement made at the end of trading September 18. Thus, all information would be in the marketplace for the final day of trading before the dividend. That way, no report of my sales too far ahead of the no-div date would mess up the dividend, yet no one could say I was trying to ride a squeeze (if it happened) to the end, either.

   2.  On Tuesday, August 20, we celebrated our 20th anniversary. On Thursday August 22 I said my goodbyes and left. In the announcement of my departure, I included an updated letter presenting my state of knowledge at that moment. The letter was thoroughly reviewed by all appropriate parties within the firm, and represented my precise state of knowledge on every front. Again, I wanted no one to have anything to gripe about later.

   3.  I emailed the execs and said I wanted to be sure no one sent me any information after that moment. I also told them that I was leaving for Asia, would on a boat sailing around an obscure part of Indonesia, and would be out of communication. I did all that so that no question of Material Non-Public Information could possibly be raised. Why? Because I have learned that in moments such as that, when so many dots are being created, then no matter what happens subsequently, someone will be able to find dots that they can connect this way or that so they can argue that mischief was afoot. I wanted to eliminate all possibility of tears later.

   4.  That was that. I left it to my private office to execute this decision, I got on a plane, I left the USA, and I went 100% dark on communications to anyone at OSTK. This was easy, because I was floating around among islands generally without Internet or cell coverage, with no satellite up-link. Deliberately. That is to say, I went to the proverbial “end of the earth” to create a situation so that I would have no information past mid-August, the stock sales were on autopilot, and I was to be as divorced from it all as one can possibly be divorced. So no matter what happened, no tears from anyone. If the stock spiked to $100, if it cratered to $5, if if if…. None of it mattered. The autopilot was on. There could not possibly be tears from anyone.

   5.  Over the weekend before the sale, we sailed within range of a cell phone tower, and I received a text (as I recently discussed on “Liquid Lunch”) that the boys from the prime brokers were in Bobby Vans (a Wall Street watering hole) on Thursday and Friday, September 12 and 13, saying that the SEC had leaked to the prime brokers that they (the SEC) were going to put the kibosh on the dividend, and that they, the prime brokers, we leaking it to their clients. Really. I have the text from midnight Saturday, September 14, from when the boat came within range of a cell antenna. We talked: the report was the boys in Bobby Vans were specifically saying that their firms were getting this from the SEC.

   6.  Now I was in a quandary. My decision was made and instructions given three weeks earlier. But now I had also heard a rumor that the SEC was leaking something. What were my duties to the marketplace? Legally, I had none, I think, but it seemed ethically problematic. Do I have inside information if I hear the SEC is leaking something? Or does the fact that the SEC is leaking it make it not inside information? It seemed perhaps worthy of lengthy Talmudic debate, but one thing I knew: it did not seem fair that the primes were given preferential leaks by the SEC, so I leaked the SEC leak to the marketplace in a blog I drafted and posted in between SCUBA dives.

   7.  I would think that from all these steps, I am about as pure as the driven snow on the fact that I sold all my stock. Could anyone have bent over backwards farther than I did to both accommodate the wishes of the shareholders (expressed through their representatives, the board), eject so quickly (3 days) from the firm and board, finalize the divorce by setting up a hands-off process so it would all be carried out without me, then go 10,000 miles away and start spending my days under 100 feet of water in the most remote part of Indonesia? Is there any step I might have taken to be more pure on that?

   8. Subsequent days saw some surprises for me:

        ·  OSTK announced that they delayed the dividend but would be working to get the dividend registered so it could trade freely.

           ·  I would not have backed down to the SEC, because I am spoiling for another fight with them (as the discerning reader may note). Everything was announced in late July, Mr. Shorty was sleepy and stepped on his weenie, and if the SEC objected after the fact, I would love to have met the SEC in court and put them on trial. Current management has a different style, as is their prerogative.

            ·  I am pleased and impressed to see that OSTK has already filed to register that dividend: if granted (and how odd it would be if the SEC turned that down, given that such shares have already been live and trading on tZERO all summer), it should obviate the concern about a squeeze.

        ·  September 24’s announcements regarding:

        ·  The CFO’s departure – Not a surprise he is gone, but the speed of it surprised me. I have not read it (I have read little press since I left: I got 20 words into a Lauren-from-Forbes piece, and knew what Party Line instructions had been issued), but I have been told that he slagged me to the WSJ on his way out. That says all that needs to be said.

        ·  JJ as CEO and Rob Hughes as CFO: great news both. Shareholders will note one difference immediately: when I gave estimates to the public on any subject, I always gave my best guess estimate: that is, I choose estimates that I believed we had a 50% chance of meeting or exceeding, a 50% chance of missing (this gave my detractors numerous opportunities to call strikes, about half the time I made an estimate, but I bet if all off my predictions over the years were tallied one would find about as many base hits as strikeouts). Jonathan and Rob have a different mentality: they will make predictions that the company has at least a 90% chance of hitting (if anything, I would fear their natural conservatism will reinforce each other’s, leading to too much conservatism in their predictions). They will want to bat .900, whereas .500 was my goal.

        ·  The change in forecast:

            ·  Tariffs – They were hardly a secret. I’m not even sure what state they were in with President Trump when I left.

           ·   D&O – I am surprised this is still a problem, as both the CFO and Marsh (our insurance broker) wrote emails alleging that my presence was what made getting insurance difficult (or even “impossible”). I thought the problem would solve itself with me gone.

          ·  Waning consumer confidence – Again, not a secret. In the month since I left, it has become increasingly clear to me that the economy is fraying. German manufacturing has hit the skids (having an Italian central banker for Europe is going to work out for them just as well as it does for Italy). Housing is a good surrogate for furniture sales: watch that.

          ·  Freight:

               ·  The Watkins-Schneider bankruptcy happened in early August. I do not recall it coming up at the executive level beyond (perhaps) a mention that the logistics team was rolling some business around among OSTK’s dozens of freight carriers. But I am not even sure about that.

                · I understand that when they closed the August books in September they found that the carriers to whom they had moved had been more expensive than Watkins-Schneider, partially on account of the suddenness of the rolling over of business beyond the capacity for which those freight firms had planned. That starch in pricing may work itself out with time and planning.

               ·  Watkins-Schneider might account for (as I recall/estimate) ≈ $10 million/year of freight spend. So if one assumes the alternatives are 10%-20% more expensive…. You do the arithmetic.

        ·  Increased search traffic – When I left five weeks ago, search traffic (a good measure of both Google ranking and brand familiarity) was increasing nicely: there was some evidence that patriotic Americans in support of my coming forward about things were giving us a new look.

        ·  It is also quite normal with search traffic that when something happens to make it increase, it goes up for 4-8 weeks before it starts converting. That is how it worked every times in the past, anyway: people start arriving through Google again and again, get familiar with the site, and in a month or two start buying.

          ·  However, that has to be offset against the economic worries that seem to be shading the world as well.

          ·  Pebbles on each side of a scale.

You now know everything I know, everything I knew, and when I knew what I know and what I know about when I knew it.

As I said at the outset of this essay, it is tacky for an ex-CEO to linger around a firm after departure. I am gone as gone gets. I am no longer going to discuss anything about what is going on within Overstock. Given that I was CEO for the first half of Q3, it seemed barely appropriate that people have been asking me questions about Q3, either regarding my actions or the firm’s actions. However, from this point forward, any questions about what is currently happening or will happen at Overstock will be met with a one word answer: “Inappropriate”.

You may hear me clear up mysteries about what happened in the past, however. Not because I have any interest in reliving any of it (I have moved on to new worlds). But because sometimes it may fit into other narratives that need to be shared and dynamics that need to be exposed.I am, after all, at liberty. And as the old joke goes, “What’s Irish Alzheimer’s? That’s when you forget everything but your grudges.” If you thought 2005-2008 was a wild ride, hold onto your hat.

Free at last, free at last, thank God almighty I’m free at last.

Your humble servant,

Patrick M. Byrne

Founder & CEO (ret.)

Overstock.com