overstock

Overstock.com

Overstock.com is an online retailer headquartered in Cottonwood Heights, Utah, near Salt Lake City. Founded in 1997, by Robert Brazell, it pioneered the online sale of surplus merchandise, and now features a combination of surplus, returned, and new items.

Overstock.com was founded in 1997 under the name D2: Discounts Direct, and changed its name to Overstock.com in 1999. The company began selling surplus and returned merchandise on an online E-commerce marketplace, buying the surplus inventory of at least 18 failed dot-com companies at below-wholesale prices. In recent years it has expanded to sell new merchandise.

Overstock went public in May, 2002 at an IPO price of $13. After achieving significant growth and profits in some early quarters, the company's stock traded as high as $77, but following recent losses the company has traded as low as single digits. Its major rivals are thought to be Amazon.com and eBay.

Business model

Part of Overstock.com's merchandise is purchased by or manufactured specifically for Overstock.com. Among their products are handmade goods produced for Overstock by workers in "developing nations. The company also manages the inventory supply for other retailers.

In addition to its direct retail sales, Overstock.com has also offered online auctions on its website since September 24, 2004.

After initially relying solely on word-of-mouth marketing from customers, the company turned to distinctive television advertisements starring German actress Sabine Ehrenfeld. Newer advertisements feature Briana Walker.

Since 1999, when Byrne took control and relaunched the company as Overstock the company has never achieved an annual profit, losing $240 million. Byrne projected in May 2008 that Overstock would be profitable in the fourth quarter of 2008, and would achieve a $10 million profit.

Naked short selling campaign

The company has received attention stemming from CEO Patrick Byrne's battle against alleged naked short selling of his company's shares. Beginning in 2005, Byrne has contended that a number of companies, including Overstock.com, have been the targets of this practice, which involves selling a stock short but without the usual step of initially borrowing or locating the shares. Byrne alleges that the practice circumvents safeguards of conventional shorting, and has been used in large schemes devised to profit from driving down the prices of companies' shares, in many cases leading to these companies' failure. With Overstock, Byrne contends that the company's longstanding appearance on the Regulation SHO Threshold Security list, an SEC-mandated list showing companies with a high number of "fails to deliver," along with high trading volumes that sometimes surpass 100% of the company's stock, establish that it has been targeted by this practice. As of December 26, 2007, there were 4.92 million shares sold short, which is 30.2% of float.

Byrne's campaign has been controversial, including criticism in the financial press that Byrne is seeking to divert attention from Overstock's share price declines and failure to turn a profit. New York Times columnist Joseph Nocera has said in 2006 that, "Except for a few fellow-traveling Web sites, where Mr. Byrne is viewed as a heroic figure, most people who understand the issue or have looked into it think it's pretty bogus." Others have suggested that the problem is real, but that the SEC acts to prevent it and that it does not happen on any scale such as Byrne suggests. SEC Chairman Christopher Cox called abusive naked short selling “a fraud that the commission is bound to prevent and to punish.”

Lawsuits

Overstock filed a lawsuit against the hedge fund Rocker Partners in 2005, for libel, unfair business practices and tortious interference, saying it colluded with a research firm, Gradient Analytics, in short-selling the company while paying Gradient Analytics to publish negative reports about Overstock.com and supplying pre-publication copies to Rocker. Naked short-selling was not alleged in that suit. Rocker Partners, renamed Copper River Management, filed a counterclaim against Overstock in November 2007, alleging overstatement of profits, false projections, and misrepresentations about the company's ventures. Copper River also alleges that Byrne tried to silence critics by suing them.

In February 2007, Overstock.com launched a $3.5 billion lawsuit against Morgan Stanley, Goldman Sachs and other large Wall Street firms, alleging a "massive illegal stock market manipulation scheme" involving naked short selling. Among its allegations, Overstock stated that since at least January 2005, naked short selling has accounted for large portions of Overstock stock, in some cases exceding the 23.4 million total shares outstanding. The lawsuit alleged that this had created "immense downward pressure" on share prices over time. Kerry Fields, associate professor of law and business ethics at the University of Southern California, said, "Byrne may be able to help set new law if he handles this right." Fields said, Byrne's "best approach now is probably to persuade the SEC, which continues to wander around the issue, or the government to serve subpoenas and let them decide whether or not his company was wronged. However, Joseph Nocera criticized the lawsuit, while John Coffee, director of the Center on Corporate Governance at Columbia University Law School, described it as overly ambitious and "extremely unpromising. Two members of the Overstock.com board of directors, John Fisher and Ray Groves, resigned in disagreement over the lawsuit.

SEC involvement

The campaign has involved the Securities and Exchange Commission to varying extents. An SEC investigation of Gradient Analytics was initiated but then dropped in February 2007. An SEC investigation of Overstock.com and Byrne, seeking information as to the company's accounting policies, targets, projections, and estimates relating to its financial performance, continued but was dropped in June 2008.

In July 2007, two American Stock Exchange options market makers were fined and suspended for using Regulation SHO exemptions to "impermissibly engage in naked short selling" in trades involving options and stocks for their own account. Overstock shares were believed to be among the stocks traded. The market makers settled without admitting or denying the allegations. None of the defendants sued by Overstock were named in the decision, but the Dow Jones News Service said that the decision was likely to be used by Byrne in pursuing his case.

Board of Directors

Overstock.com's current Board of Directors includes Dr. Patrick M. Byrne, Allison H. Abraham, Clay Corbus, Joseph J. Tabacco, Jr., and James V. Joyce.

In July 2006, John J. Byrne, the father of Overstock's chief executive, resigned from the board of directors, after a public airing of the elder Byrne's unhappiness with his son's crusade against naked short-selling. In August 2008, Jack Byrne said that after "much initial skepticism" he believed his son was "right all along" about the battle and lawsuits with short-sellers and analysts.

In early 2007, John A. Fisher and Ray Groves resigned from the Overstock board of directors over disagreement with the company's prime broker suit.

On January 2, 2008, Overstock announced that cofounder Jason Lindsey had resigned as President, COO, and as a Director of Overstock effective from December 31, 2007. Byrne said Lindsey had "played a decisive role getting [Overstock] back on track" after "I screwed it up a couple years ago". Overstock stock dropped to a four-year low following the announcement, which an analyst for investment bank Broadpoint Capital described as a "key loss".

References

  1. Clip, MincedMedia. " Overstock.com Rezzes Into Second Life", CNN ireport.com, 2008-05-02. Retrieved on 2008-05-02.

External links

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