Quote Nietzsche on us, will they??? We'll show them who's the Ubermench!
As you'll remember, and we chronicled here, on November 16, Overstock filed with the Securities and Exchange Commission an "unreviewed" Form 10-Q for its results in the quarter that ended September 30. It claimed that it had had to dismiss its auditor, Grant Thornton, because of a sudden change of heart on the part of Grant Thornton as to how a certain matter should be treated.
Specifically, it seems that the key to the dispute was the account of a particular "fulfillment partner." Often, when you order a product through Overstock's website, you are not buying it from Overstock, but from a third party, a business looking to unload its own inventory, and using Overstock as the cyberspace go-between for this purpose. Overstock has said that it accidentally overpaid one of these partners approximately $700,000 in 2008, and the partner informed it of this in February of this year. So ... doesn't that mean that the partner is acknowledging a debt, and that this debt is an asset (an account payable) that should be reflected as such on Overstock's books?
If so, then since the overpayment occurred in 2008, the account payable was an asset as of December 31, 2008. Overstock decided not to treat it as such, but to treat the later payment of $785,000 from that partner (principal and interest?) as part of its acknowledgement of the receipt of one-time non-recurring income of $1.9 million. That involved lumping the $785,000 in with certain other matters we won't trifle with here.
According to paragraph 7 of this press release, which is worth quoting in full because it has now become the crux of the controversy: As our auditors, Grant Thornton reviewed our financial statements in Q1 and Q2 2009 before we filed Form 10-Q's for those quarters. Throughout 2009, our Audit Committee has repeatedly asked Grant Thornton if there was any accounting that it would do differently, and repeatedly received the answer, "No." In fact, as recently as late-October 2009, Grant Thornton confirmed to us that it supported our accounting method for recognizing the $785,000.
Then, somehow, in November Grant Thornton changed its collective mind and decided that the account at issue should have been recorded as an asset in 2008 after all. Grant Thornton then reportedly gave Overstock an ultimatum: restate your 2008 results accordingly or we won't sign off on your third quarter filing. That's why Overstock fired them and, insteads of simply letting the clock continue to run while it searched for a new auditor -- filed the now notorious unreviewed 10Q. Of course, that clock is still running anyway, because they are out of compliance until they come up with an audited one. This filing remains bizaare.
But the new twist to the tale is that on November 20, (Friday, around the time Overstock was revealing that Nasdaq might de-list them), Grant Thornton LLP sent a letter to the Securities and Exchange Commission giving its own account of the story behind Overstock's recent 8K.
The short summary would be: "They are lying about why we left, and we left because they were lying before that." They say that (contrary to paragraph 7 as quoted above) they were not "repeatedly asked" throughout 2009 whether the treatment of this money was proper, and they never signed off on it.
"We disagree with the Company’s statement in paragraph 7 'that upon further consultation and review within the firm, Grant Thornton revised its earlier position' regarding the previously filed 2009 interim financial statements. This statement is not accurate. The Company brought the overpayment to a fulfillment partner to Grant Thornton’s attention in October. After additional discussions with the Company, the predecessor auditor and receipt of additional documentation from the Company we determined that the Company’s position as to the accounting treatment for the overpayment to a fulfillment partner was in error."
Sam Antar makes the case, not for the first time, that what is going on here is the maintenance of a cookie-jar reserve. Antar knows fraud, having committed more than his share of it. On his account, he's now trying to stay out of hell. Theology aside, I think the case he makes is worthy of the the SEC's full attention.
The whole affair continues to have the odor of Refco's hide-the-loan scheme, which unwound four years and one month ago. It looks so far like a low-rent variant of that, but it does not look good.
Wednesday, November 25, 2009
Tuesday, November 24, 2009
What is Ramius Up To?
Ramius Capital is increasing its investment in the technology sector, in particular in the wireless services firm Immersion Corporation (NASDAQ: IMMR), where it now owns 15% of the equity, having been aggressively buying since August.
Between late August and early October, presumably in some part due to this buying, the price of IMMR rose from $3.75 to $5. It peaked there and headed down again, though, and was back down around $3.75 at the start of this month. In the last three weeks, there has been a rebound, so that at the close of business Monday, Nov. 23, the price of the stock was $4.12.
Instead of trying to give meaning to that zig-zag, I'll move on to another example of Remius' tech buying. They've bought the stock of PC motherboard manufacturer Phoenix Technologies Ltd. (NASDAQ: PTEC). Ramius has added 535,535 PTEC shares to its current holdings, for a total of shares outstanding of 13.4%. Ramius offered to buy PTEC in 2007.
PTEC's stock price took a tumble in mid-October when it announced said its fourth-quarter results. The net loss widened to $5.02 million from $4.57 million in the prior year period. Thomson Reuters had polled three analysts and on average they expected the company to report a loss of $0.06 per share for the quarter. They actual loss per share was $0.15.
Just some wonkish facts for the day. Look for significance elsewhere.
Between late August and early October, presumably in some part due to this buying, the price of IMMR rose from $3.75 to $5. It peaked there and headed down again, though, and was back down around $3.75 at the start of this month. In the last three weeks, there has been a rebound, so that at the close of business Monday, Nov. 23, the price of the stock was $4.12.
Instead of trying to give meaning to that zig-zag, I'll move on to another example of Remius' tech buying. They've bought the stock of PC motherboard manufacturer Phoenix Technologies Ltd. (NASDAQ: PTEC). Ramius has added 535,535 PTEC shares to its current holdings, for a total of shares outstanding of 13.4%. Ramius offered to buy PTEC in 2007.
PTEC's stock price took a tumble in mid-October when it announced said its fourth-quarter results. The net loss widened to $5.02 million from $4.57 million in the prior year period. Thomson Reuters had polled three analysts and on average they expected the company to report a loss of $0.06 per share for the quarter. They actual loss per share was $0.15.
Just some wonkish facts for the day. Look for significance elsewhere.
Monday, November 23, 2009
What's a Proven Reserve?
The accountants for oil companies report their employers' "proven reserves" of crude oil. Not a difficult concept to grasp, right? A "reserve" is like a company's inventory -- except that insofar as it is "reserve" it hasn't been recovered yet -- it is still in the ground. But we known where it is, because that is implied in the adjective "proven," right?
Well ... maybe not. Alan von Altendorf suggests that there is some controversy about these simple-seeming terms.
Altendorf begins with the fact that the SEC has two new regulations coming into effect on January 1, 2010, that bear on this matter: S-K and S-X.
I'll skip down to page 7 of the PDF for you: "The new SEC rules are a joke and
professional explorationists know it. Very few will speak out about it, because there was a wave of computer automation and black box software to cover up and gloss over the shortage of experienced oil & gas geoscientists."
Who is Altendorf? The principal of CWSF, an independent oil consultancy out of Houston. I know nothing first-hand about him, but normally reliable folk think he's a bright guy who knows the field. It which case, the new rules may just be a cover for fraud and very bad news.
Well ... maybe not. Alan von Altendorf suggests that there is some controversy about these simple-seeming terms.
Altendorf begins with the fact that the SEC has two new regulations coming into effect on January 1, 2010, that bear on this matter: S-K and S-X.
I'll skip down to page 7 of the PDF for you: "The new SEC rules are a joke and
professional explorationists know it. Very few will speak out about it, because there was a wave of computer automation and black box software to cover up and gloss over the shortage of experienced oil & gas geoscientists."
Who is Altendorf? The principal of CWSF, an independent oil consultancy out of Houston. I know nothing first-hand about him, but normally reliable folk think he's a bright guy who knows the field. It which case, the new rules may just be a cover for fraud and very bad news.
Sunday, November 22, 2009
Cadbury and Shareholder Democracy
The argument in favor of shareholder democracy (and the argument in favor of making the expression of this democracy ever more direct) has long been that the owners of equity are the residual risk-holders of the company, and that as such they ought to be making the decisions on which those risks turn.
Why is it so much easier, so much more common, to be nervous as a passenger on an airplane than to be nervous driving one's own car? The latter is more dangerous, but while driving the car you feel that you are in control of your fate, whereas while a passenger on a plane (or a bus for that matter) a perfect stranger has control of your fate. Owners of equity naturally want to drive the car.
One of the counter-arguments to shareholder democracy, or any very direct expression thereof, is that many of the shareholders have a very short-term perspective. They don't intend to maintain the car properly, so to speak, because they plan to sell their interest in it after one quick trip. Managers and directors with a more long-term perspective are to be trusted. As are the institutional investors typically in for the long haul, like pension fund managers.
These theories and arguments collide directly in the emerging bidding war for Cadbury. Look for example, at a story Andrew Ross Sorkin of The New York Times recently published, "Do Stockholders Really Know What's Best?".
The money quote from Sorkin, "Indeed, one parlor game in London has been to guess how much of Cadbury’s long-term shareholder base has already sold out to arbitrageurs, whose goal is to see the company sold as quickly as possible and then move on to another deal .... People involved in the deal estimate that about a third of the shares have already changed hands, moving from long-term shareholders to hedge funds. Those funds, said Joseph Grundfest, a professor at Stanford Law School, 'have a long-term time horizon of about 12 minutes.'"
Frankly, such an appeal leaves me cold. After all, every completed transaction has two parties. These short-termers have bought up a lot of stock from the institutions with longer-term horizons that used to hold it, you say? Why have those institutions sold it? Because, in whatever temporal horizon interests them, some other investment looked better, right? They sold to get the cash to put that cash somewhere else.
When and why did Cadbury cease to be an attractive place to have their assets for those long-termers? We can hardly blame that on the short termers who (this is inherent in this diagramming of the situation) hadn't bought yet.
I don't know what Cadbury's fate is going to be. But it seems to me that arguing that it ought to remain an independent company forever because that is the long-term best thing to do, because only short-termers buy stock is just ... well, silly. People who 'reason' that way should put the chocolate down and try some brain food.
Why is it so much easier, so much more common, to be nervous as a passenger on an airplane than to be nervous driving one's own car? The latter is more dangerous, but while driving the car you feel that you are in control of your fate, whereas while a passenger on a plane (or a bus for that matter) a perfect stranger has control of your fate. Owners of equity naturally want to drive the car.
One of the counter-arguments to shareholder democracy, or any very direct expression thereof, is that many of the shareholders have a very short-term perspective. They don't intend to maintain the car properly, so to speak, because they plan to sell their interest in it after one quick trip. Managers and directors with a more long-term perspective are to be trusted. As are the institutional investors typically in for the long haul, like pension fund managers.
These theories and arguments collide directly in the emerging bidding war for Cadbury. Look for example, at a story Andrew Ross Sorkin of The New York Times recently published, "Do Stockholders Really Know What's Best?".
The money quote from Sorkin, "Indeed, one parlor game in London has been to guess how much of Cadbury’s long-term shareholder base has already sold out to arbitrageurs, whose goal is to see the company sold as quickly as possible and then move on to another deal .... People involved in the deal estimate that about a third of the shares have already changed hands, moving from long-term shareholders to hedge funds. Those funds, said Joseph Grundfest, a professor at Stanford Law School, 'have a long-term time horizon of about 12 minutes.'"
Frankly, such an appeal leaves me cold. After all, every completed transaction has two parties. These short-termers have bought up a lot of stock from the institutions with longer-term horizons that used to hold it, you say? Why have those institutions sold it? Because, in whatever temporal horizon interests them, some other investment looked better, right? They sold to get the cash to put that cash somewhere else.
When and why did Cadbury cease to be an attractive place to have their assets for those long-termers? We can hardly blame that on the short termers who (this is inherent in this diagramming of the situation) hadn't bought yet.
I don't know what Cadbury's fate is going to be. But it seems to me that arguing that it ought to remain an independent company forever because that is the long-term best thing to do, because only short-termers buy stock is just ... well, silly. People who 'reason' that way should put the chocolate down and try some brain food.
Wednesday, November 18, 2009
Going Private
Perhaps we should spend more time in this blog on "going private" transactions. I think this is the first time I've ever even mentioned such deals here.
Yet it will only be a mention: a sort of IOU. I write-and-run. Landry's stock rose dramatically after Pershing Square announced its opposition to the CEO's efforts to take the restaurant company.
The chairman of Landry's Tilman Fertitta, proposes to take the company private in a $14.74 per share buyout. This means in essence that Fertitta wants to work for himself and a group of friendly known investors, not for the every-shifting multitudes of public shareholders who are always buying and selling stock. And not, presumably, for Bill Ackman.
Pershing Square says in a filing last week that it has economic exposure to more than 3.8 million of Landry's outstanding shares, or 23.7%.
"The reporting persons do not intend to support the transaction," it also says. Fertitta had been attempting to take Landry's private for nearly two years, going back to a January 2008 offer of $23.50 a share.
The $14.75 deal values Landry's at $238 million.
Yet it will only be a mention: a sort of IOU. I write-and-run. Landry's stock rose dramatically after Pershing Square announced its opposition to the CEO's efforts to take the restaurant company.
The chairman of Landry's Tilman Fertitta, proposes to take the company private in a $14.74 per share buyout. This means in essence that Fertitta wants to work for himself and a group of friendly known investors, not for the every-shifting multitudes of public shareholders who are always buying and selling stock. And not, presumably, for Bill Ackman.
Pershing Square says in a filing last week that it has economic exposure to more than 3.8 million of Landry's outstanding shares, or 23.7%.
"The reporting persons do not intend to support the transaction," it also says. Fertitta had been attempting to take Landry's private for nearly two years, going back to a January 2008 offer of $23.50 a share.
The $14.75 deal values Landry's at $238 million.
Tuesday, November 17, 2009
Overstock Files Unreviewed 10Q
This is amazing.
A tip of the hat to Overstock-news-junkie Gary Weiss here. As Weiss points out, even Bernie Madoff had "some accountant somewhere" who would review his filings. But Overstock files this quarter without an auditor review. And it opens up its press release on the subject by quoting Nietzsche: "All things are subject to interpretation; whichever interpretation prevails at a given time is a function of power and not truth."
I'm getting a Refco-in-October-2005 kind of vibe about Overstock right now.
You may remember that the first time the naive portion of the world learned that there was anything wrong at Refco it was Monday, October 10, 2005, when Refco announced that through an internal review over the weekend it had discovered a receivable owed to the company in the amount of approximately US$430 million.
That struck many people as a rather strange thing to suddenly 'discover' and the stock price started tanking.
Over the course of that week, further revelations came out. I won't go into them now because I have no reason to believe they are useful to the analogy. But the gist of it is, the initial market sell-off was more than justified by the underlying facts. Only one week later, Refco filed for chapter 11 protection.
I'm not saying that the same will happen here. I have no idea. And Overstock's argument with its (former) auditor, Grant Thornton, seems to have involved a matter quantitatively much smaller than the sum involved in the news that broke on October 10, 2005. But this has that feel -- a bit of accounting-matter weirdness that is sufficiently unusual that one suspects there is more to it. Overstock made this announcement after the markets had closed (check the PR Newswire announcement to which I linked you above -- it gives the time of release as 5:35 EST Monday.)
The market will make a judgment soon enough.
A tip of the hat to Overstock-news-junkie Gary Weiss here. As Weiss points out, even Bernie Madoff had "some accountant somewhere" who would review his filings. But Overstock files this quarter without an auditor review. And it opens up its press release on the subject by quoting Nietzsche: "All things are subject to interpretation; whichever interpretation prevails at a given time is a function of power and not truth."
I'm getting a Refco-in-October-2005 kind of vibe about Overstock right now.
You may remember that the first time the naive portion of the world learned that there was anything wrong at Refco it was Monday, October 10, 2005, when Refco announced that through an internal review over the weekend it had discovered a receivable owed to the company in the amount of approximately US$430 million.
That struck many people as a rather strange thing to suddenly 'discover' and the stock price started tanking.
Over the course of that week, further revelations came out. I won't go into them now because I have no reason to believe they are useful to the analogy. But the gist of it is, the initial market sell-off was more than justified by the underlying facts. Only one week later, Refco filed for chapter 11 protection.
I'm not saying that the same will happen here. I have no idea. And Overstock's argument with its (former) auditor, Grant Thornton, seems to have involved a matter quantitatively much smaller than the sum involved in the news that broke on October 10, 2005. But this has that feel -- a bit of accounting-matter weirdness that is sufficiently unusual that one suspects there is more to it. Overstock made this announcement after the markets had closed (check the PR Newswire announcement to which I linked you above -- it gives the time of release as 5:35 EST Monday.)
The market will make a judgment soon enough.
Monday, November 16, 2009
Bingham McCutcheon
On October 28th I reported here that dissident shareholders led by Shamrock had won a showdown with the incumbent board of Texas Industries (TXI) the supplier of cement and other building materials (not to be confused with Texas Instruments).
I've just discovered a press release in which the prominent law firm Bingham McCutcheon crows about these results. It tells us that its partners, David Robbins and John Filippone, assisted by associate James Parker, represented Shamrock Activist Value Fund, L.P. in this matter.
Personally, I'm not at all clear about what those three gentlemen did. Did they give advice? Was there ancillary litigation in which they made themselves useful?
There are lots of documents to be drafted in the course of a proxy fight. And of course there are complicated documents that govern the relations among the Shamrock entities and between them and their underlying investors. So there is plenty these gentlemen might have done. I just wish the release they put out had been a little bit more explicit.
I've just discovered a press release in which the prominent law firm Bingham McCutcheon crows about these results. It tells us that its partners, David Robbins and John Filippone, assisted by associate James Parker, represented Shamrock Activist Value Fund, L.P. in this matter.
Personally, I'm not at all clear about what those three gentlemen did. Did they give advice? Was there ancillary litigation in which they made themselves useful?
There are lots of documents to be drafted in the course of a proxy fight. And of course there are complicated documents that govern the relations among the Shamrock entities and between them and their underlying investors. So there is plenty these gentlemen might have done. I just wish the release they put out had been a little bit more explicit.
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