My Second-to-Last Piece on Overstock.com: “The Best CIO in America”

This is why I stopped shorting stocks. As the saying goes the market ( stock ) can stay irrational longer than you can stay solvent. And I’ve experienced it firsthand on several shorts that defied reason and crushed me. Naturally, after the pounding when you’re to shellshocked to try again, they sink like an anchor. To that end when asked about shorting stocks, W. Buffett replied ” I’ve seen at least 100 stocks that I felt were simply stock promotions. If I had shorted them, I would have lost all my wealth mistiming how high they went or how long they would levitate before disillusionment set in ” I would add that shorting is an incredibly frustrating game. Watching foolishness getting rewarded can get very annoying, thus now I just ignore the craziness. That way I don’t care what happens one way or another. To me, it doesn’t even exist.

Information Week, I should point out, has become a joke in recent years. Lots of glowing profiles of the company or the product of the week, and virtually no critical analysis of anything.

They keep trying to get me to extend my free subscription and I keep ignoring the requests to fill out their annual survey.

-btc

That Schwegman is not qualified for his job is not news. It’s been discussed here often, and I even wrote a piece about him (and how you pick a CIO in general) on my own blog. http://www.belowthecrowd.com/archive/2005/09/on_overstock_an.html

What’s scary to me is that many other members of the management team seem to have similar “qualifications.”

Glad I have no involvement in this one other than as a spectator.

-btc

Jeff: I think I get your point.

How “good” can the CIO be if it takes him and his team of database administrators over a year to deploy an IT system/database upgrade? How stable can the database (Oracle) be if CIO Schwegman is still “making fixes” and patching “bugs”? What does this say about the ability of “the best CIO in America” to botch the implementation of software that is critical to the OSTK’s operations, causing CEO Byrne to both lose face and lose money as well? Only time will tell on this one.

PS – I agree with btc about risk management, except to add that managing risk is equally important on the long side as it is on the short side of investing.

Well, just reviwed Shawn’s bio (see below). Like rest of Sr VP gangs at OSTK, rather young crowd.

Does this guy have the IT/IS insights and knowledges?

For examples:

1. “Previously, Schwegman was director of Books, Music & Videos department and the affiliate marketing program”

Yep not techie that’s FOR SURE! He is MARKETING guy! YIKES. THAT EXPLAINS IT!

2. “Prior to joining Overstock.com in 2000, Schwegman held various sales management and engineering positions at Sycamore Software Development Corp., Fechheimer Brothers Co., KiZAN, and PC Upgrades International Inc.”

He can’t be more than 30 but worked at quite a few places in “SALES MANAGEMENT”! AHA PLOT THICKENS… HE IS SALES AND MARKETING DUDE!

No wonder the IT system is deCRAPitating and more like “bowl of spaghetti”!

PS – Let’s give Shawn some credit for selling out on 9/12 and 5/25 and left with token 988 shares.

DOES SHAWN KNOW SOMETHING WE DON’T like IT SYSTEM IS PHUCKED UP BEYOND REPAIR and hiring consultants?

—

Shawn Schwegman
Senior Vice President, Technology
Shawn Schwegman is the Senior Vice President, Technology for Overstock.com®. He is responsible for IT, development, website design and all Internet, e-mail, affiliate and partner marketing programs.

Previously, Schwegman was director of Books, Music & Videos department and the affiliate marketing program at Overstock.com. He is credited with building both into two of the company’s most successful departments.

Prior to joining Overstock.com in 2000, Schwegman held various sales management and engineering positions at Sycamore Software Development Corp., Fechheimer Brothers Co., KiZAN, and PC Upgrades International Inc.

Jeff,

I need to stop obsessing about OSTK? I have no position short or long. Funny how you have a position and post a blog weekly on OSTK. It is on record. Why deflect the question? Do you have a personal stake in the direction of OSTK?

Come on jeff, for the integrity of fair disclosure and ethics, let us all in on your personal stake in berating OSTK on a continuous basis. The Elgindy transcripts say a lot about the process. LMAO

Overstock’s Three Affidavits
http://www.fool.com/news/commentary/2005/commentary05100508.htm

By Bill Mann (TMF Otter) and John Reeves (TMF Bane)
10/05/2005

The nearly endless fount of mirth surrounding Patrick Byrne’s lawsuit against Gradient Analytics, short-selling hedge fund Rocker Partners, and others is obscuring a case with fairly broad implications for security analysis, First Amendment rights, and the credibility of our public markets. While fanciful visions of Sith Lords and evil shorting hordes make for good copy, this is a lawsuit that is about something more substantive: an accusation that Gradient and Rocker resorted to unfair business practices to knock down Overstock.com’s (Nasdaq: OSTK) share price. Too much coverage has been spent plumbing the entertainment value, and nearly none on the facts of the suit itself.

It is our hope that the following information, culled from three documents acquired by The Motley Fool, will provide readers with a clear view of what is being alleged.

In an affidavit recently acquired by The Motley Fool, Demetrios Anifantis, who identifies himself as a former employee of the research firm Gradient Analytics, alleges that the company conspired with David Rocker of the hedge fund Rocker Partners to publish damaging information “for the purpose of negatively influencing the price of Overstock shares so that Rocker could profit from its existing or intended short positions in Overstock shares.”

Two additional sworn statements in our possession, ostensibly by former Gradient employees Robert Ballash and Daryl Smith, also allege that Gradient provided biased research on behalf of its clients. Both Anifantis and Ballash additionally accuse Gradient of running a hedge fund advisory called Pinnacle Investment Advisors, contrary to the company’s public statements at that time. The three affidavits we reviewed were forwarded to us by Patrick Byrne, Overstock’s CEO and president. The documents set out some of the rationale for Overstock’s complaint filed back in August against Rocker Partners and Gradient.

The complaint, which was filed in California state court in Marin County, accuses Rocker Partners and Gradient of violating the unfair competition and deceptive business practices provisions of the Business and Professions Code of California. The relevant statutes are quite broad and may well apply to an alleged campaign to present misleading information in order to drive a stock down.

Note that the above paragraph actually outlines a simple law case. There is no mention of naked shorting, a giant conspiracy involving half of Lower Manhattan, strip clubs, or anything of the sort. We make no judgments on the merits of the case, nor are we, by providing this information, placing any imprimatur on it. In short: What you are reading below is what Overstock’s case is about. Nothing more.

The complaint
Despite the high drama surrounding the case, Overstock’s complaint is very straightforward. It alleges that Gradient issued approximately 58 earnings quality analytics (EQAs) and various other reports on Overstock, which were almost always negative. In addition, Overstock charges that Rocker collaborated in producing the reports with Gradient’s co-founder Donn Vickrey and that Rocker was able to request that Gradient withhold publication of these negative reports until he was able to establish short positions in the stock.

Are these charges true? That’s for a court of competent jurisdiction to decide. But is it “crazy” to think that a research firm would offer biased information to move a stock for the benefit of a client? No, we don’t think so. We do believe, however, that Byrne’s over-the-top presentations and continued public pronouncements on the issue have made it easier for some observers to dismiss his charges out of hand. It may be wise, however, for investors to take a closer look at this complaint. Let’s now turn to some of the evidence. Do the affidavits support Byrne’s case?

The evidence
The most detailed and apparently most damaging affidavit, if it is true, was delivered by Anifantis. He worked as a customer service representative for Gradient from November 2003 until November 2004. The New York Post reported that he was fired from the research firm for forwarding his employer’s client list to his personal email.

According to his statement, Anifantis recalled being on phone discussions during which “David Rocker, Marc Cohodes, or other representatives of a hedge fund called Rocker Partners, LP, requested that the special report contain more negative information, or that the report emphasize a specific negative fact and that the report downplay any positive facts.”

Anifantis also states that customers like Rocker would ask that Gradient not disseminate a negative report “to the public for a specific period of time, so the customer could ‘get their own’ position in the stock before the public got the information.” This conspiracy went beyond just Vickrey and Rocker, according to Anifantis, who also says that it “appeared” to him that Herb Greenberg, who then wrote for TheStreet.com, joined in coordinating the attacks on Overstock.

The statements by Ballash and Smith are far less detailed. Ballash, who worked at Gradient for more than two and a half years, was also fired in November 2004, according to the New York Post. He states that the research at Gradient was biased and that it published several negative reports on Overstock that had been developed with Rocker via telephone. Smith, who worked for Gradient from October 2002 until October 2003, also describes Gradient as biased in its research and notes that customers had considerable input on reports. He does not mention Overstock specifically, however.

Overstock’s day in court
At first glance, the affidavits raise troubling questions about the nature of “independent research.” If the three former employees of Gradient are telling the truth, the alleged conspiracy between the research firm and Rocker Partners would represent an egregious example of market manipulation, which most likely would have seriously harmed individual investors, as well as Overstock itself.

But the veracity of these individuals has not been established, and Rocker Partners and Gradient vigorously deny the charges. As the New York Post has reported, at least two of the affiants may have credibility issues or reasons to hold grudges against Gradient. If this case makes it to trial, Anifantis, Ballash, and Smith will have to testify in court and withstand cross-examination by top defense attorneys. It will be interesting to see whether their charges are supported by documentary evidence — emails, revised reports, notes of phone calls, and the like. Within the affidavits are charges that would prove quite persuasive if supported with concrete documents. For example, in support of the charge that Rocker had considerable input on the creation of reports, Anifantis’s affidavit refers to an “exhibit 5” (which we did not receive) allegedly containing revised reports on Overstock with Rocker’s revisions in brackets.

There is quite a lot of speculation throughout all three of the documents, particularly the statement of Anifantis. It is not clear how much of his affidavit is based upon events that he actually witnessed and how much is based upon his opinions, conjecture, or even fantasies. His testimony is peppered with phrases such as “it was common knowledge” and “there was no doubt.” Some of the allegations might be far too subjective to hold up in court. For example, when describing the alleged conspiracy among Rocker, Greenberg, and Vickrey, Anifantis states that “it appeared to me that Rocker, Vickrey, and Greenberg were coordinating their attacks on Overstock and Vickrey and Greenberg were coordinating the content and timing of their various reports on Overstock to please Rocker.” Does Anifantis have hard evidence for this view, or did he just “feel” that it was true? Furthermore, it would not necessarily be wrong for clients and journalists to influence analyst reports. Although analysts must take responsibility for their own work, how sensible would it be for them to ignore the informed opinions of experienced investors and journalists? The California court may have to answer when the legitimate exchange of information ends and sinister conspiracy begins.

Foolish Take
Ultimately, we believe that these affidavits raise important questions for investors about the integrity of our financial system. 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. If the behavior set forth in these allegations is true, then the implications of the ease at which the financial professionals can manipulate the public markets are stark.

Again, we make no judgments as to the veracity of the affidavits — we have no grounds upon which to do so. But we do wish that it were more apparent from coverage to date that the case itself is quite serious, with implications that go far beyond Overstock.com. We will continue to follow this case quite closely.

Neither of the authors has a position in Overstock.com. Overstock is a recommendation of the Motley Fool’sRule Breakers newsletter. Bill Mann co-authors theMotley Fool Hidden Gems newsletter.

——————————————————————————–
Legal Information. ©1995-2005 The Motley Fool. All rights reserved.

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Jeff,

I guess you start with – How do you know the affadavits are nonsense? Were you in those calls and meetings? Do you personally know how Gradient and Rocker Operated? I suppose the allegations of Greenberg and Harris are likewise “made up” even though there is a papertrail left behind.

RE: The media obtaining those affadavits, they were mentioned in the conference call, portions were read on CNBC – I believe you were there then – and now they have been provided to the media. I believe they have also been provided to the proper authorities.

We already know Elgindy put out a horde of negative publicity to foster his personal wealth. We know that Analysts got zapped by Spitzer for putting out false reports for profits, and we know Wall Street Institutions got crushed over the late trading privaledges that were provided to preferential Hedge Funds. With what we know, what these affadavits contest seem quite possible.

Jeff,

I guess you have a little problem with the law. There is nothing illegal about the affadavits being delivered to the press.

Funny you apparently have no problem with Gradient speaking to Roddy Boyd at the NY Post about the affadavits and the individuals however.

Your bias is never more clear.

Do you have any problem with a fund controlling analyst reports – in general? Did you personally get preferential treatment in late trading funds as part of teh wall Street Mutual Fund Scandal? Are all teh recent claims of fraud aginst Hedge Funds just a conspiracy against such stellar people?

Settlements,

Give it up. This guy automatically states that the any evidence from the plaintiffs is “nonsense” and “trash” in obvious prejudice. You are not going to get an honest discourse with this evader here.

Hey Jeff, can your connections that email you with tips let us know who the Mole Man is? Check this out from Byrne’s MF post on the Mole:

—

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.