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CEO on the hot seat

Unfazed by controversy around Overstock.com, Patrick Byrne swings against Wall Street and the financial press.

A former boxer, Overstock.com CEO Patrick Byrne has picked the ultimate (Wall) street fight.

Byrne sparked enormous controversy last summer by accusing a number of investment bankers, financial journalists and hedge fund managers of collaborating to ruin the reputations of companies in order to profit when the stock price of those companies tumbles. Byrne claims that his online store has been victimized by such a scheme.

In a now infamous summer conference call, he seethed over an alleged conspiracy--going so far as to say that it involved a mastermind he compared to a "Sith Lord," as well as people who had once trafficked in stinger missiles.

Last August, Salt Lake City, Utah-based Overstock filed suit against Rocker Partners, a short-selling hedge fund, and Gradient Analytics, a research firm. Both companies are bearish on Overstock, which is profitless. In the wake of his lawsuit, the U.S. Securities and Exchange Commission has reportedly opened an investigation into the two companies. Critics have accused Byrne of orchestrating the SEC's probe.

"I don't pull any strings over at the SEC," Byrne told CNET News.com. "The SEC didn't need me to develop this case, and my sense is that this has to do with far more than Overstock.com. We're the tip of the iceberg."

I think there is a group of miscreants in the market that have to be flushed out. No financial reporters from the East Coast financial media will report that that's what the fight is about.

But the ranks of Byrne supporters shrank by one last week, when his own father and company chairman, John "Jack" Byrne, publicly came out against his son's campaign to clean up Wall Street practices. The elder Byrne told The Wall Street Journal last week that he considers his son's holy war with the financial community a distraction and that he may resign his chairmanship over it.

"You know, when you're 74, you feel differently every day, based on what you have for breakfast that morning," the younger Byrne said of his father. "I never really expected him to get this fight."

Byrne elaborated on the current controversy in an extended interview last Thursday with CNET News.com.

Q: You seem to relish the role of the outsider or naysayer. What makes you that way?
Byrne: I guess by nature I'm a contrarian. I remember when I was about 11, my parents gave me a blanket with a white sheep on it facing one way and one little black sheep facing the other. I had sort of figured out by that point I was going to see things differently.

How did your fight with Wall Street start?
Byrne: First thing, you cannot believe anything being said about this battle by the financial community, by the East Coast financial press. There has been an urban myth for some years that there's a financial technique that hedge funds can use to make money but in the process destroy smaller-cap companies--small, maybe midcap companies. It's known by many names. I think of it as "failures to deliver"--one flavor of which is naked shorting. But there are other flavors of this problem.

The collective intelligence of the bloggers can actually be pretty good. They started getting in contact with me. When I first heard from them, I thought they were a bunch of wackos. I thought they lined their hats with tinfoil. It was really like that movie "Conspiracy Theory." But the success of any theory is its ability to make accurate predictions. They started making predictions about the things I was going to see.

They were really far out, strange predictions--and they all started coming true. So I started paying them some attention. The big picture is this: What the war is really about is this technique, or this urban myth, that this financial community has a method of profiting virtually risk-free but at the cost of destroying small companies. There is certainly a technique of orchestrating a bear raid on a company to hurt it.

I think there is a group of miscreants in the market that have to be flushed out of the market. No financial reporters from the East Coast financial media will report that that's what the fight is about--that's what the lawsuit is about--other than to just paint it as, "Oh! This is a CEO who is cheesed off because his stock went down, but if he only paid more attention to his company, maybe it wouldn't go down." That's the party line. They're a bunch of party hacks.

Can you tell me who they are? Is this a conspiracy?
Byrne: "Conspiracy" isn't the right word; it's an ideology. Remember I lived in Communist China; I know what it's like to witness party hacks developing a party line. So, yeah, I definitely think that among the reporters, there is a spectrum.

I wouldn't be surprised if there are some--a very small number of (financial) reporters--who actually are on the take. They have displayed such impenetrable stupidity.

I think that there are fine, smart reporters who report the news fairly. They want to get at the truth, and they are people who could work as analysts themselves. The next level down are reporters that maybe get a little lazy: They get very close to some elements in the Wall Street community, they take a lot of tips from them, and maybe they rely a little bit too heavily on the tips.

The next level down includes some reporters who sit and wait for the phone to ring from their buddy at the hedge fund, who takes them out to the mansion in Long Island. And I wouldn't be surprised if there are some--a very small number of reporters--who actually are on the take. They have displayed such impenetrable stupidity. They've actually gone out of their way to let me know that they have an agenda and that they're not going to report fairly. They seem to gloat in the sense of power that they get by letting me know that.

What about Herb Greenberg?
Byrne: Well, Herb Greenberg (of Dow Jones' MarketWatch) would certainly be at the lower end of that spectrum. You know, I'm not saying he is on the take, but I think he is nothing more than a lapdog for certain powerful hedge funds.

(The San Francisco office of the SEC issued subpoenas to Greenberg and another financial journalist that required them to turn over phone and e-mail communications with sources. In an interview last week with The San Francisco Chronicle, Greenberg, who has been critical of Overstock in his columns, said: "The subpoenas were not about an investigation of me. They were about an investigation of Gradient Analytics." )

There are some people who have accused you of just blowing smoke to cover a profitless company, and there are others who say you've gone crazy. Has this hurt your business?
Byrne: Well, I could say just as easily that these guys are blaming Overstock for now being the target of federal subpoenas and investigations. But the truth is, you can see I was speaking about this when our company was blowing through its numbers and blowing everyone's expectations as well. This has nothing to do with Overstock; that's just a party line.

The SEC issued subpoenas, including one to Greenberg. Is this SEC investigation a result of your accusations?
Byrne: I'm glad you asked me that. When we filed our suit, we heard from several federal and state authorities and law enforcement agencies. We had developed an awful lot of good data, including e-mail, computer files, witnesses, affidavits...much more than what we've made public.

Being good, concerned, law-abiding citizens, we of course provided this to all these law enforcement agencies. I would say the reaction of different agencies has been different. Until yesterday, I had never acknowledged that I even met with the SEC. But yes, the SEC was one of those agencies. What became clear in our communication and meeting was that the agency was far down this path before we got here. I can't ask them questions, but it became very clear to me that they had to develop an extensive understanding on their own, and I just took the opportunity to fill in a few tiny squares for them.

It's kind of funny. The role is reversed. These guys have turned into a bunch of conspiracy nuts. They're saying these SEC investigations and subpoenas were orchestrated by somebody else and that they're innocent and how awful this is. Well, that's exactly what most companies say when they come under a bear raid. They say, "Hey, we've got some short seller who has dug up phony evidence, pasted it together, and they've tried to get some investigations launched."

I saw a clip where Herb Greenberg used the word "conspiracy" six times in 7 seconds. So, the irony of this situation is not lost. I'm anything but the guy behind the SEC investigation. I don't pull any strings at the SEC. The SEC didn't need me to develop this case, and my sense is that this has to do with far more than Overstock.com. We're the tip of the iceberg.

Overstock doesn't have any profits. Isn't that a legitimate reason for someone to short the stock?
Byrne: Shorting is great. Shorting is absolutely legal.

You've shorted, right?
Byrne: I've shorted a couple of times. Shorting is perfectly legitimate and fine, but this isn't about shorting. This is about naked shorting. The intellectual bankruptcy of The Wall Street Journal and similar organs is to try to pretend that this is a fight about shorting. This is not a fight about shorting, as I will repeat for the nth time. The naked-shorting fight is a fight about failures to deliver. It's not the same as shorting.

(Editor's note: Click the following links for discussions of shorting and naked shorting.)

Your father said on Friday that he may quit as Overstock's chairman. Is there a family feud over this issue?
Byrne: No, there's no feud whatsoever. We remain quite close. You know, when you're 74, you feel differently every day, based on what you have for breakfast that morning. But no, we're quite close, and you know, he's 74 or 75, and he wants to step down. He's going to step down, and I've wanted him to be chairman. I had him as chairman for the first three years of the company. A year ago, I asked him to come back. He just came back six months ago. It took me nine months to get him to be chairman again, and now he is making noise about maybe stepping down.

It sounds like he disagrees with you on this fight. Is that true?
Byrne: I think he thinks just what he said, that this has been too much of a distraction for me.

Does that hurt? It's your father. Why would he go public with his feelings?
Byrne: It didn't even really occur to me that it should hurt. I never really expected him to get this fight. He is my best friend. We've had our rough patches, but he is my best friend. We're wired a bit differently. He brought me up teaching me about how bad Wall Street is, how Wall Street is so evil.

Amazon, at our stage, was losing $1.2 million a year in operations. It made up a phony accounting standard--pro forma. And when it reached pro forma breakeven, Wall Street set off fireworks.

I remember he used to come in, discouraged after spending time on Wall Street about the caliber of men that he found. There were some exceptions, but in general, I remember how discouraged he would become (in my teenage years), as he really got to know how Wall Street operated. I think he thinks it's too big a dragon to slay.

What are Overstock's problems right now, and when will the company be profitable?
Byrne: I don't know. We have a plan this year that we should cross the billion-dollar mark. Put it this way: Amazon, at our stage, was losing $1.2 million a year in operations. It made up a phony accounting standard--pro forma. And when it reached pro forma breakeven, Wall Street set off fireworks.

When it reached EBITDA (earnings before interest, tax, depreciation and amortization) breakeven, Wall Street wanted to declare it a national holiday. I've never used pro forma in my life. We've had some GAAP (generally accepted accounting principles) profitable quarters, plenty of operating profit and EBITDA profitable quarters. This year, with a little luck, we should be an EBITDA-profitable year, so I'm kind of comfortable with that.

Is that why Wall Street doesn't like you?
Byrne: I was told that I would be a pariah forever on Wall Street, just for having gone with the Dutch auction. We're now exposing a really seamy underside of Wall Street. I'm not ever going to get any support on Wall Street, but that's OK. This is going to be so much bigger--what is being exposed is so much bigger even than what's being talked about in the public now that I'm sure Wall Street will--well, they won't be erecting any statues of me there.

The basic problem: Wall Street has a system for being parasitic on Main Street, and it's illegal and it's hidden, and there are some people who figured it out, and it's no longer a bunch of pajama heathens; it's economists, serious economists. You know, one was the undersecretary of commerce under Clinton, one was an economist of the Depository Trust & Clearing Corporation (DTCC). There are people who get in touch with me and say, "What you're saying is absolutely right."

There's an entire industry devoted to taking short positions on companies and trying to get reporters to bash them.

I've become sort of the central point for people who believe that America is being handicapped by this system of miscreants. Once you understand it, it's like that movie "The Matrix." Once you've seen it, you start seeing the entire world this way. It becomes so clear what's happening, and then I just can't turn my back on it. The board of directors is welcome to remove me at any time, but until they do, this is just not about Overstock, this is about Main Street America and entrepreneurship, and somebody has to stand up to these people.

Do you think this fight has distracted you?
Byrne: It has been a distraction. They have many ways of going after small companies, and especially if anybody fights back, they have ways of making it difficult to fight back. One is, they just say, "(This person) is a lunatic. Anyone who believes in this stuff is a lunatic." It becomes such an enormous distraction that most companies can't put up with it, but fortunately, this is no longer my distraction.

This is moving into the realm of Washington, D.C. I'm not talking about the SEC; I'm talking about how a lot of other people in D.C. are getting their minds around this. And I think that there is, as of today, actually, a great big, U.S. government-grade, hot fudge high colonic getting whipped up for some fellows on Wall Street.

Why haven't you gotten more support? There must be other people who see this problem with Wall Street.
Byrne: Well, there are. Some of the things I say--everybody in Wall Street knows they're true. For example, the way an IPO really functions. Anybody who has worked on Wall Street a few years can tell you that that's how it works. Not a single one has ever said I was wrong about how an IPO works. They just don't like me explaining it to the world.

The Internet has let people combine at a grassroots level to gain an understanding of somebody's systems. In general, the mass media leaves financial matters to the Wall Street press, and it's not a conspiracy. It's more like the days of the Washington press corps, pre-Watergate. There was all kind of stuff going on in D.C.--with Johnson and Kennedy and Nixon--that basically everybody in the know knew about. And yet they were all poker-playing buddies, and it just didn't get written until two 20-year-old reporters, who weren't part of the system, got it and started writing about it. That's very much like the way the Wall Street press is with Wall Street.

I used to consider myself a Republican, but all these guys are not just pro-business, they're just pro-Wall Street. It doesn't matter what the issue is. They are just blindly and mechanically pro-Wall Street. So why don't more people know about it? Journalists sit there, waiting for years for the big break, for some huge scandal and so forth, and there is (a scandal) sitting there, and I'm just amazed more journalists don't pick up on it. I think the problem is, if they're nonfinancial journalists in general, they don't understand it.

Has this Wall Street fight slowed your pace?
Byrne: I developed a bit of a heart issue that has slowed me down. Really, for the last year-and a half, this fight has sucked up all my spare time. I spent 10 to 12 hours a day at Overstock, and I spent sometime each evening working on the "jihad"--that's what I call it.

I've been to Afghanistan and Iran and Saudi Arabia, and I also started Worldstock, and that's taken me around quite a few places. But I haven't traveled as much as I used to. I'm slowing down. This fight has been really all-consuming, though I really do think we have reached the breakthrough point. I think we have reached it quite recently, not just with the SEC subpoenas. When (the issues) erupt for all the world to see, I'll say this fight is in better hands than mine.  

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