Saturday, October 08, 2005

Dr. Patrick Byrne's Message to the Motley Fool Board

Usually Sanity Check is my bully pulpit, from which I pontificate, complain, berate, and mock.

Especially mock. Nothing drives powerful forces up to no good crazier than being mocked. It is almost as though once you have the tens or hundreds of millions of dollars, the next must have is the awe and respect of a breathless public. And when a fun-filled rodent mocks you, or shines a light on your ugly hypocrisy, that apparently doesn't go over very well.

Which is part of the joy in doing it.

This segment of our regular broadcast will be devoted to the enormously erudite and insightful words of a man I have grown to respect, both intellectually, as well as for intestinal fortitude and true moral integrity. As one goes down the road of life it is all to often that our actions seem small and pointless, and our will to excel or attempt the daunting diminishes over time. Dr. Byrne has a way of demanding more out of himself, as well as those fortunate enough to share his company, and by doing so, leads by example. That is rare. Rarer still is a guy who does the right thing, even when he knows doing so will be invite character assassination, will subject him to enormous hardship, and will gain him little or nothing personally from doing it. Dr. Byrne is without question one of the rare ones.

This was posted by Dr. Byrne on the Motley Fool message board today, and represents his capsule summary of the latest rounds of slanderous charges against him, as well as his responses. It should be required reading for anyone that questions his character, his abilities, his commitment, or his honesty.

Without further ado, here is the content of that post:

" Dear Fools (Motley and Otherwise),

Bill has written an excellent piece on the battle we are waging. In that article he quite fairly suggests that something about the news coverage so far seems strangely misguided, but that also, my own over-the-top behavior my be hurting my cause. Again, it is fair to say that, but I would politely respond that my behavior is not so over-the-top is many would pretend, as should be clear when all the truths are known. However, Mr. Mann has given me an idea: I am going to answer some of the flak that gets shot at me by various parties, and then ignore it in the future. I do this both to give the general reader a more detailed look at my arguably over-the-top behavior, and also so that, when folks come back and post and repost the criticisms, perhaps some friendlies can answer for me by copying and pasting from what appears below.

Why do I do this? Because I feel that this is how conversations with SOME (unnamed people) go:

Me: I went out last night to see a movie.

Hostiles: But you were seen at midnight in Howard Johnson's having an ice cream!

Me: That's right, on the way home I stopped at Howard Johnson's to have an ice cream.

Hostiles: But why'd you say you went out to see a movie when you had an ice cream?!? Why didn't you say you had ice cream the first time? And besides, how could you have had an ice cream at the movies? I've been going to movies for 25 years and they don't serve ice cream there. Well, they do in some, but which movie theater were you in having ice cream anyway? I bet it does not serve ice cream and besides, you were wearing a blue shirt, but three years on a conference call you said you prefer red to blue, so were you lying then or now? And what about the ice cream?

In other words, sometimes sincere, sometimes trivial, sometimes self-contradictory stuff which I generally ignore for three reasons:

1) I suspect it is transparent to most adults, and so they don't need me to answer it anyway;

2) When I assume the best and answer it anyway, the person just goes on and on anyway as though I have not answered to drown out my response, or finds something else in my answer to jump on, which leads me to...;

3) I suspect at times that the writer is just trying to waste my time and obfuscate any informative discussion. Thus he does not really believe what he writes anyway, and thus I should not waste time answering points that are not sincerely being asserted. That said, I will, for the record answer all the things that have been bandied about that I can remember at the moment. I will do so clearly, and then I will ignore further discussion on them: again, I ask of readers who follow these matters, when they see the kind of behavior described above, just cut and paste from below and answer for me, to save me answering the same (often trivial or harassing) questions over and over:

A) The SPE for the diamond: we have a great relationship with some folks in the diamond industry who wish to remain in the background. We need their expertise, they need our channel. The SPE gave us a way to compartmentalize our work together and get the economics extremely clean and auditable.

B) Press release: We release news when we have it. We had a 5 week hiatus in uploading products, but as we got that part of the system nearly working it occurred to us to do a marketing blitz about it. We send emails Monday, Wednesday, and Friday, and so decided to devote one of them to pound a "largest inventory upload in our history!" theme, along with a bunch of messaging on our home page, along with some messages to our affiliate marketing partners (who focus a lot on new inventory), along with a press release that we hoped would get picked up in a few newspapers and drive some consumers to the site.

I reviewed the marketing email theme and the home page messaging, and wrote the bones of a press release over the weekend. But the inventory upload was not working by Sunday (though we hoped it might be), so scratched it for the Monday email. IT kept working away on the program and we hoped we could upload Tuesday, but the program kept clogging, so we scratched Wednesday. Thursday it began working in fits and starts, but did not get out of test mode until around 11 PM Thursday night. They began uploading products through the night, saying it would take until sometime Friday for all to be complete (I believe there were tens of thousands of products). Someone in marketing made the (correct) decision to release the Friday marketing email to about 6 million people, but set it to go later in the morning than our normal email, I believe, to give time for more products to be populating the site. The product loader continued running at full blast until noon on Friday. We knew we had uploaded somewhere between $16 million and $40 million of inventory, depending on what one counted and how one counted it, and asked for IT to run a query to get an answer. They came back at 1:40 PM with the number (I think it was $30 million). We are in Utah: 1:40 PM is 3:40 PM in New York. Our guys put out a press release twenty minutes later.

Somewhere late in that process it occurred to us to add to the end of the press release a section for the benefit of shareholders, filling them in on internal events, as is my habit with quarterly earnings letters. Also, somewhere late in that process when it became clear when we would be hitting the "Go" button it occurred to some among us: "Wait! If you release news on a Friday afternoon people say you are trying to bury it." I gave that objection somewhere less than 10 seconds of consideration before deciding to ignore it for the following reasons:

i) It is a dumb convention:_____a) It dates from the days of print journalism;_____b) The rest of the world works on Friday afternoon until 5: so can Wall Street.

i) I don't care about Wall Street conventions anyway (anyone notice how we went public, or our earnings letters, or our earnings calls, etc.?)

iii) It seems right to release news when we have it, and to ignore all such considerations anyway (with the exception of not releasing news on weekends, and the possible exception of placing important news at the beginning or end of a trading day);

iv) If we did not release it Friday we had to wait until Monday, but the whole point was to get it to coincide as closely as possible with the 6 million recipient marketing blast and the home page announcement.Now among my colleagues there may have been some whose reaction was, "Perception is reality." The mere fact that some will perceive it as objectionable means that it IS objectionable!” To which my internal response was, “Above nearly any expression I can think of, I detest 'Perception is reality' above all. Reality is reality, perception is perception: get that neo-Kantian drivel out of here (Immanuel Kant is the enemy of the human race, but that is for another day). I deal in reality, not perception. Etc.” Well, my response was not so philosophical, but that is about what I was thinking. (If you had a choice between doing A and B, and you knew A was the right thing to do and B the wrong, but you knew that the arrangement of facts was such that the world was going to see A as being wrong and B right, which would you do? You do the right thing and take your lumps.)

Of course, the usual suspects showed up on blogs and message boards within a few days: "Can you believe that they ignored a convention of Wall Street and put out news on a Friday afternoon?!?!?!? Oh my God!!!!!!!!!! Don't they know that there is a convention of Wall Street that says you don't do that?!?!?! And they ignored it?!?!?! Oh my God!!!!!!!!!! How could anyone ignore a convention of Wall Street?!?!?!”

C) Moles and disinformation: this is one of those things that I explained on the Miscreants' Ball conference call, knowing full well that the bad guys would twist it all around and make hoo-hah about it. But consider: in Bill Mann's excellent piece on our three affidavits one of his most telling points is something he puts quite subtly. "Unlike a lot of the silliness in the media relating to Overstock, this complaint is not frivolous on its face, and although Overstock will need to prove its allegations, the case must be taken seriously. The question to us is why the atmosphere around this lawsuit has, from the beginning, been comical."

I told this story with care on my Miscreants' Ball call, and will tell it again with greater care here. I ask the reader to consider it against how it was treated by a few members of the "press". Compare this story to what they wrote, for it perhaps gives a road map to who the bent journalists are.

Sometime last autumn I came to suspect I was being bugged because in a phone call to my girlfriend (Gina, the woman in New York who runs a restaurant whom I have mentioned in a conference call or two) a figure of speech I used showed up on the message boards in a posting from a basher. I do not remember the expression, but I recall it was neither a common one nor a really arcane one. I think it was something along the lines of, "Such-and-such an idea of mine really sh-t the bed." A few days later, an attacker on Yahoo (the message board was not so clogged then that I could spend 20 minutes once or twice a week and catch up on it) then wrote something like, "Byrne's idea on such-and-such really sh-ts the bed." I don't recall the idea or if this was the precise expression, so I am just trying to give a feel for it: the expression was just odd enough and the Yahoo post just dead on enough that it piqued my suspicion.

About this same time, as you will understand when the whole story gets told someday (I hope Brad Pitt plays me in the movie!), I began to get a lot clearer picture of the players involved in the Miscreant's Ball, including certain professionals who have a reputation for being as crooked as the day is long and who are quite capable of bugging phones and apartments (and whose modus operandi includes placing moles).

In any case, when next I saw Gina, we agreed that we would test this occasionally and try to confirm or falsify it. I considered using financial information, but decided against it for two reasons. First, it gets stale within months, and if I lied one time ("Gina, we are having a terrible Christmas!") and then later came out with a good one, the miscreants would know I was on to them. Secondly, if I did it and people (even miscreants and blackguards) started trading on it in the marketplace, then it would be like poisoning a town well supply to get at a few hooligans. So if I could not use financial information, I had to use personal information: thus, we agreed on "cocaine" for the cell phone and "gay" for the landline, that periodically we would put that information down those channels and see if it bubbled up anywhere. Again I apologize to anyone offended by appearing to equate the two: I just needed two things that, if they appeared, I would have no question about where they came from nor would I care if they appeared. (Incidentally, it was in that context that I mentioned on the Miscreants Ball conference call that with the exception of one evening I have never even seen coke in my life, so if the rumor appeared I would have no doubt where it came from: in the hands of the miscreants that turns into "Why is Byrne denying he is a cokehead? He must be a cokehead!").

Within a few weeks I did start noticing occasional message board posts along the lines of, "Byrne is such a f-g." But nothing decisive, and for all I know it was some 15 year old. Then I got a call from my old dissertation advisor from Stanford, who now lives in England. He told me that a woman had called him claiming to be an investor doing due diligence, and wanted to ask about me. She had asked him a lot of personal questions about me, including was I into drugs, especially cocaine. Again, nothing conclusive (although such due diligence is common with privately held companies, and not the kind of thing that mutual funds or legitimate investors do when considering buying stock in a public company, in my experience).

Then in this July's conference call I described how tightly held OSTK is by myself and my parents, my brothers and cousins ("folks I had taken a bath with" when I was a toddler), a few friends, and 10 institutions. Almost immediately a reporter named Carol Remond, whom is widely thought to be in league with the same hedge funds I am battling (look for companies that David Rocker is short that Carol has written stories on), starting calling people to tell them that the phrase "folks I had taken a bath with" was a reference to (I kid thee not) a gay bathhouse cabal which I run. Again, I kid thee not.

Now is any of that decisive? No. As I say in my conference calls, "You now know everything I do." Well, not actually, but you know a lot.

I also began hunting for a mole within the company. There are various ways to do this that I cannot go into (except to say that we considered using financial misinformation within the company and then tracking where it leaked, but discarded it for the same reason mentioned above). Also, I do not want to identify the individuals at this time so I must be circumspect in how I tell this story. In any case, the hunt was on and went nowhere for some time. Then a funny thing happened: after a lot of negatives, suddenly one indicator went strongly, strongly positive for a couple people. These alarms concerned apparent regular contact with certain elements in New York, along with unusual and ultimately inexplicable financial matters. Fill in the blanks yourself (but please know that "elements in New York" refers to people other than David Rocker).

At roughly the same time, one of those people requested a very odd transfer within the company. I do not want to identify this person, so all I will say is that the request was as strange as if someone working in the inbound trucking department suddenly wanted to work in the department that creates art for the home page. Except that the arena this person wanted to work in was one that would provide detailed information on all the workings in the company. Behind the scenes I made arrangements for the request to be approved. The person assumed the new position and began acting in ways that mystified and alarmed colleagues. Within Overstock, only two people besides myself knew of my suspicions, yet the four people close to this person began sounding the alarm that some extremely odd behavior was occurring.

I repeat, this is a person who had access to our daily financial information, as well as a weekly packet that covers everything going on within the company. Who was having, I believe, regular contact with a certain hedge fund and related party in New York, through a channel they had disguised only with some effort. And who had some quite strange personal financial dealings. In a perfect world or in different settings we could have played various games for a long time to sting the miscreants. However, I could not use financial information (for the reasons given above), and was cognizant of the responsibility to put an end to a leak that I believe probably existed since January (that is, I suspect a hedge fund has been receiving all our financial and operational details since January, on a weekly basis). Also, I was tired of dancing with these folks. So I confronted the person. Again, I do not wish to disclose identifying details, so I will recount the conversation in the framework of Charlie Brown.

"Charlie, do you know Linus, Snoopy, or Lucy?"
"No, I never met Linus, Snoopy, or Lucy."
"OK, here is a photo of you with Linus."
"Oh that's right, I do know Linus, but I don't know Snoopy or Lucy."
"OK, here is information that you and Snoopy own this bank account together."
"Oh that's right, I do have a bank account with Snoopy. But I don't know Lucy."
"OK, here is where you and Lucy have a dummy corporation together."
"Ah, yes we do. I forgot."
"OK, what does the company do?"
"I don't really know."

Seriously, it was that bizarre a conversation. With three witnesses. Obviously, the person is no longer employed here.

Incidentally, we alerted authorities, who have tried to question this person: the person has refused to be questioned and instructed the authorities to contact a certain lawyer (the call from the law seems to have been expected). Even that is relatively strange and sophisticated behavior in such circumstances for a person who had been working in the job equivalent of inbound trucking.

D) IT? Stuff happens. Shawn is awesome, and got us through a massive re-architecture over the last two years. First, he got us through a period when our then current systems were redlining so badly we were in danger of imploding. Second, he got us onto a set of systems that scale horizontally and vertically for the foreseeable future (see my Q2 conference call for greater detail). Third, we had reached the point where our code writing was log-jammed: it was taking longer and longer to add new features besides so much of the code was just hard-wired patches. This is not completely fixed yet, incidentally: still, large elements of our code base have gotten transformed, made modular, upgraded, or been replaced by professional third party packages. Not bad for two years' work. And not bad for a tiny fraction of the cost of our competitors.

That said, Shawn has been begging to step down for a year, either to go back into business development or take a leave of absence. I described in my Q2 call that there was one more large package to be delivered, probably in August: he delivered it and left for a vacation that might have stretched out to a couple of months. At that time I appointed Sam Peterson Acting CIO, thinking we would sort it all out when Shawn returned. In fact, however, the last package did not really spin up as well as we had hoped, and after a few weeks Shawn canceled his leave to come back and help. He has been here a few weeks, things are much better (albeit not completely resolved), and so he has taken a leave of absence. Sam is CIO (although, since we eschew "C" titles here, officially it is "SVP Technology").

I do have a non-IT mission for Shawn that will keep until he returns, if he decides to return: he has put in 5 hard years working for Overstock and is due a rest. Since our executives rarely if ever sell stock, and since I keep buying it, the miscreants claim that there is some kind of "blood oath" among us not to sell stock. Shawn in fact has only bought stock, except for the time he exercises options to buy a car, and the time he exercised some to get $50k to fund a small restaurant in his hometown.

Yet Shawn met a girl in Europe and wanted her to come back with him to the USA when he was done his vacation. He needed money to move out of the Marriott Residence Inn (where has lived for 5 years) to buy a home and her a car. So he sold 2,700 shares, some or all of which were shares that he had personally bought in the open market at $11 a couple years ago. This leaves him with about 60,000 options (if memory serves), at least half of which have vested and which he could have cashed in for half a million to a million, but which he choose not to do. He got off the plane and placed an order to sell some shares because our blackout period was about to go into effect (September 15), so he could have the funds to move out of the Marriott and find a home when his gal showed up. He placed the order before even being back in the office, and before he was aware of any inventory uploads or marketing blitz the following Friday.

The reason Shawn sold when he did, then, was that we have about the most restrictive blackout period in corporate America, and if he did not do it then he would not have been able to sell a share until late October or early November; he had a gal moving over from England, and did not want to start off with her in the same Marriott room he has been living for five years; and he was not aware of quite what was going on in the office.

That said, Shawn has now split again, and does not expect to come back. When Shawn left he reminded me of what Jason said when he left. Jason Lindsey, you may remember, was my partner in getting Overstock off the ground: he started as CFO but became President to my CEO, but resigned almost immediately, giving the miscreants opportunity to rail about that, of course. What actually happened was that (as Jason has given me permission to disclose) his wife turned out to have a hole in her heart and he needed to take care of her and his family, and when he came and asked for a few weeks off I suggested he feel free to leave and attend to her full-time. Before he left he said, "Dude, I feel like there is some wild bull that no one else has ever ridden. All these fancy cowboys show up with million-dollar diamond studded saddles and get thrown in seconds. There is some fat slob in the corner who has wasted billions and the crowd fawns over him saying, 'Look at gracefully he sailed into the pile of manure! Look at how quickly he good he looks as the clowns carry him out of the arena.' But here we are, we show up like Mike Tyson wearing a pair of black shorts and some sneakers, and we ride this bull like no one ever rode it. We go like a few years ago no one thought it could be ridden. But all the knuckleheads in the stands say, 'Oh but you said you were going to smile over your right shoulder when you rounded and you smiled over your left, you were supposed to hold that wave a little longer than you did.' Why do you want to work for these jerks another day?" That pretty much sums up Shawn's attitude as well.

The quarter we are in (q4 2005), I expect to reach an interesting mark: we should be somewhere between 1/4 and 1/3 the size of Amazon in North America (in about half their lifespan). We have been growing since we went public at a rate of near 100%: hypothetically, if we continue at 75% we catch Amazon North America in size in about two more years (q4 2007). Our gross margin is quite close to theirs, and has even passed it in at least one recent quarter (put their fulfillment back into COGS to get an apples-to-apples comparison with ours). We have done this on about 1/15th of their corporate G&A, 1/25th of their technology spending, and 1/30th their losses. And we have done it while being true the whole way to the principles of fairness to the common investor: from the way we went public through a Hambrecht Dutch auction (though we were warned that we would be a Wall Street pariah for doing so), to the degree with which we treat shareholders like true owners (though every securities lawyer we knew warned of the high exposure in doing so), to my decision to risk fortune and reputation to start a barroom brawl against a group of folks who for years have used Wall Street machinations to suck the blood of small companies, though most think suicidal of me to do so (wait until you read the affidavits before you make up your mind on that one).

So a bunch of quisling bloggers, lapdog journalists, and hedge fund shills vilify me, lie about what I say, smear my colleagues as strippers and what-not, and try to spew as much mirth, mockery, venom and distortion as they can to prevent any discussion of the claims, which as Bill Mann says, are really quite straightforward. Well, boo-freaking-hoo. Go figure. Never saw that one coming.

Anyway, I hope that this gives folks who want to understand what is going here the psychic inoculation they will need for what the future holds. And I am not saying that everyone who criticizes me on these boards is a shill, but the way: some may be quite sincere. It is hard for me to tell at this point. But if anyone wants to use any of this material to answer either the the Yahoo jackanapes on my behalf, or the putatively sincere ones, I'd be much obliged.

Respectfully,

Patrick

3 Comments:

Blogger canceled111111 said...

This comment has been removed by a blog administrator.

3:38 PM  
Blogger bob obrien said...

I will be posting his more important posts here from time to time. I suspect that he has his hands full operating a successful online retailer going into the Xmas season, and thus would not be able to devote appropriate time to his own blog.

I hear that retail does well around Xmas time.

10:35 AM  
Blogger canceled111111 said...

This comment has been removed by a blog administrator.

2:07 PM  

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