Market Overview

The Naked Truth - Patrick Byrne: CEO of OverStock.com Part 1

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Today our guest is Patrick Byrne, CEO of Overstock.com. How are you doing today, Patrick?

I'm great Alex. Thanks for having me on.

Good. Glad to hear it. Could you start off by telling us how you got your start in the business world?

Well, my early life alternated between business and academia. But even as a teenager I was doing small scale things like Christmas tree lots and the hay business sort of small scale businesses along the way. When I was 13 years old this funny guy showed up and started staying at our house and visiting us from time to time, some guy named Buffett from Omaha, and this was before any one had heard [of him]. He wasn't this big, famous guy. But he was just this fellow in the 1970s who used to stay with us and I took a liking to him. So, he gave me some great advice early in my life that saved me years, if not decades, figuring it out for myself, if I ever would have figured it out.

Could you tell us what some of that advice was?

Sure! I remember when I was 13, him sitting me down and saying “I'm going to give you a piece of advice that people either get in five minutes or they never get in all their lives,” and the advice is you buy a share of stock if and only if you would buy it even if the market were shutting down for 10 years tomorrow. So you don't think of yourself buying a little piece of paper on an uptick, you understand that you are buying a piece of that company and do you want to own a piece of that company for the next 10 years.

Overstock.com's eleventh anniversary has recently passed. How has the company grown and changed since it began?

Well, we've grown from $2 million to where we will do over a billion this year. We were nice and profitable last year we made $8 million gap and $39 million in free cash flow. I'm hoping for even better numbers this year and we will know over the next few weeks. It's evolved and our supply chains have gotten much more sophisticated. But it really comes down to the same basic point: where can we cut cost out of the normal retail system and then pass on savings to consumers. It's really just a huge exercise in trying to find inefficiencies and getting more and more efficient.

What should Overstock.com users and investors look for in the future? Any new plans or anything we should be watching for?

Well, I try to stay away from investors. I'm not interested in talking about my stock or any projections. I think we are really making some moves in terms as to what we are going to be able to offer people. We have built a really wonderful platform and not only is our value the best, but our customer service [has always been] number-one or number-two as the best customer service in retail online or off. The industry has named us number-one several times, and the consumer polls put us at number-two only behind L.L. Bean.

We are now expanding; we re-launched the Club O rewards program this year, and I think this is a very big deal. This is a points program, and unlike the points programs where you get 200,000 points and you earn a cupcake or something, our points are dollars. You can join Club O for $20 and for that you get year-round free shipping and 5% cash back in your account. And that's real cash. You can spend it on our site, or you can actually get gift cards. If you get a hundred dollars, you can turn it into a gasoline card and things like that. So it's real money. And if you get our credit card, you get 8% cash back on all your purchases with us. I hear more and more people talk about how user-friendly and clean our site is.

The e-commerce industry as a whole seems destined for growth. What are your thoughts on that?

Yeah I think it's going to grow about 10% above the rate in which the economy grows because it's just a better business model and a better customer experience than normal shopping. For example if the US grows zero and retail grows zero, then you can expect to see online growth at about 10. It has better values, quicker, more convenient. So if the US grows 4% you can expect to see online at about 14 or more.

You mention the US, but what about abroad? Do you think e-commerce will still be taking off in emerging markets as well?

Yeah, I think so. I think that there are emerging markets that are much more wired than one would have expected, like Brazil. The last I heard, South Korea was the most wired nation and maybe Norway is second. We are not really at the forefront of any of that. The biggest constraint in online shopping in the developing world, is the delivery systems rather than the access to computers. There are not well developed Fed Ex routes in Tanzania I think it's more a logistics issue, which will probably be solved in the near future, but the emerging markets more than likely will not go through the same stages as the developed world.

Let's switch gears for a moment. Since 2005 you have led a very public and passionate campaign against Naked Short Selling, and where you have claimed that other companies are targeting Overstock.com by using the practice in order to make the stock prices plummet. Can you tell our listeners what your thoughts are on Naked Short Selling?

Actually, it's a much a broader set of claims that I have been making. Since late 2004 or 2005 I have been making three claims:

(1) Wall Street, meaning the hedge funds and the prime brokers, a network had evolved within that community that was crookeder than a street walker's stumble.

(2) The SEC and the New York-based financial press were asleep at the switch.

(3) This was all going to end in a deep, systemic crisis.

Now, the things we were talking about – why it had gotten so crooked – included stock manipulation. Various forms of stock manipulation, one is called naked short selling. Another was insider trading and manufacturing – basically manipulating and the use of phony expert companies that really amount to nothing but a way [for] people to poke inside your company and get information. We were highlighting a lot of sleazy practices on Wall Street that we thought had to be cleaned up.

Now to me, it was really the spin that the other guys came up with – oh, this guy's mad at Overstock, he's just mad his stock went down. My fight was never about Overstock as I've said a thousand times. Forget Overstock, this isn't about me. That's the thumbnail sketch on the fight.

And I imagine that you have some interesting thoughts on the scandals that were just uncovered this week.

Halleluiah! My thoughts on that are Halleluiah! It's about freaking time! All props to the Department of Justice and the FBI. And there is no love lost between me and the Feds, I really don't like the Feds, I mean I've been under federal investigation for the past six years. When they finish one investigation they start another. It just goes on and on.

But that's because I ticked off some really powerful people on Wall Street and I was told that this would happen – that I would be retaliated against and I'd be subject to endless investigations until I shut up.

All that said, I know that the hedge fund community and the Wall Street Banks basically form an oligopoly. They are so powerful, they have news papers and specific journalists on their side. They have senators and regulators on their side, so to get the FBI and the Department of Justice to go after these people has really taken some spines, which the SEC showed long ago they lacked. I have to give the FBI and the Department of Justice mad props because they must have sifted through a lot of political pressure to prevent them from what they're doing now.

Do you think this is in response to the public up swell against what has been going on?

I think they're doing this because these people are criminals and this should have been done five years ago. I think they are doing this for all the right reasons. If anything, I'm just mad they're not doing this just to cater to public opinion – I think they're doing it ‘cause they should have done it five years ago.

I see Wall Street in spin mode this morning. CNBC, who I think are nothing but shields for basically the same hedge funds that are getting rounded up now, doing everything they can to downplay and spin and get in front of the story. But I think it may even be something beyond even CNBC's ability to spin.

Now, why do you think it has taken them so long to uncover all of this?

It's hard to build a criminal case, I'm sure, and it's so overwhelming. And what this really means is that the rot goes so deep into…it's like a ship whose timbers are all wormy. It may look just fine from the outside, but the truth is that the wood, if you inspect it, is all wormy.

I think that is a fair description of this community. And I have no insight into this other than reading the paper, but it must have taken them a long time to understand this and all its complexity.

Some critics have said that naked short selling is just another way to blame falling stock prices. What are your thoughts on that?

I think that's all the spin. It's silly. I've been talking about this when my stock price went up, when it went down, when it went back up. If that's true, if I was wrong ‘cause our stock price went down, then when our stock price went up does that make me right? It's a complete non sequitur.

It's not about me and it's not about Overstock. It's not about blaming short sellers. That's all the spin that they put on it to keep anyone from thinking about this. What we're saying is that there's a huge amount of illegal, inappropriate activity on Wall Street through a network of hedge funds and the prime brokers who serve them, primarily centered on Steven Cohen, SAC Capital and Goldman Sachs, but this whole network that's tied into them all, and they are engaged in all kinds of inappropriate things.

It seems to me that some hack journalists on Wall Street who more or less work for these guys tried to prevent anyone from listening to me by saying, “Oh, this guy's just mad at short sellers.” I say, forget me. Look at the data that says this stuff has been going on. I don't think that it's even a serious argument that they make.

Or, if it is, then it means that when we make money…if they were willing to say, “Byrne is losing money, so he must be wrong about his claims about Wall Street,” I get to say that, “Now that I'm making lots of money…does that make me right about Wall Street?”

The truth is, no, it doesn't make me right about Wall Street. But when we were losing money in our startup phase it didn't make me wrong either. But that was a mental leap that the Jim Cramer crowd could bring themselves to cross. I think that's because the Jim Cramer crowd was in on it, as Cramer more or less admitted on that famous video he made on Jon Stewart.

Why do you think these financial media heads have taken this perspective on Overstock and your comments?

There is no question that there's an unholy intersection between the New York financial community and the New York financial media. That intersection, mostly, the place you might start looking at it is Jim Cramer. Jim Cramer admitted all of this on the video. Did you see Jon Stewart on the comedy show take Jim Cramer apart a year ago?

I did.

We supplied him that video. Jim Cramer used lawyers to get it taken down everywhere else on the Internet. That wasn't gonna happen with us. He's just a bully. Bullies are all like that. If you stand up in their grill, they put their tail between their legs. He did not get it off our site, and Comedy Central used it to great effect, I thought.

Anyway, in that video, Jim Cramer, what was so funny is that, everyone who said I was nuts, if you watch the video, I was just saying what Jim Cramer said. I was just saying it in 2005. What Jim Cramer in the video explained was how, as a hedge fund, he used the financial press to manipulate stocks and trade in front of him and do all this stuff. That is all I was saying. He makes clear that he used certain financial reporters that he used as lapdogs. A number of e-mails have become available, through various court cases, e-mails between hedge funds and reporters that are wildly inappropriate. And it's all up there on Deep Capture. It's crystal clear that an inappropriate relationship has developed within the New York financial community and the media that report on them.

You would never find in – DC, for example – you would never find reporters having the same relationships with the people, the politicians, and the regulators and the people they report on as you find in New York among these two communities.

In the past you have said that there was a ‘Sith Lord' orchestrating all of this. Can you shed any light on this subject for our listeners?

I think this all leads to Michael Milken. What I actually said was, someday – you know, I put that out as a throwaway line at the end of an hour speech. And everybody was all, “Oh, Sith Lord, what could he have meant by that?” What I mean by that is, behind this whole network… This network originated somewhere. I don't think it was purely… I don't think it evolved like bacteria in a Petri dish. I think there was some organizing. I'll put it this way: if you dig into them, and if you go onto Deep Capture, you'll see dozens and dozens of pieces and analyses that trace these links, they all trace back to Steven Cohen of SAC Capital. And then, if you go back 10 or 15 years earlier to Michael Milken, and all [of his] cronies.

When I actually made the Sith Lord comment, what I said was, someday I may SAC up and tell the world who the mastermind was. And that was a way of getting across to the two of them who I was talking about. And since then, by the way, every day there's been people from SAC Capital reading Deep Capture, and also from Milken's office. We analyze the IPs and [they've] kept a very close eye on everything we've been digging up since then.

So, I don't have any recordings of Michael Milken specifically talking to any of these people. But if you trace back, all kinds of shenanigans [are] going on, right even to people being pursued this week. It all traces back to a cluster of people who evolved around Michael Milken in the 1980s. Next to them, I tell you – it's either them, or you also get a lot of people with organized crime connections. Again, all of which is thoroughly documented on Deep Capture.

And, you know, this all sounds a little bit lunatic until you look into some of the FBI cases. [Google the term] ‘Operation Uptick.' Operation Uptick was a case 10 years ago when the FBI swooped in. It was the biggest mob bust in US history, when they swooped in one day and arrested 120 people all over Wall Street and accused them of being tied into the Genovese family. So it isn't just us saying that organized crime has infiltrated [Wall Street].

I think that there's a very blurry line between organized crime and the hedge fund community.

How did recent events shape your views of the SEC and Wall Street?

I was sort of raised to have a not too positive opinion of Wall Street. I grew up in financial circles and I grew up hearing that it was dirty. It was nothing like this 20 years ago. And I was [taught] to revere the SEC – you know, regulating a capital market is a sacred mission. Both of them, the stocks of both of them has fallen in my eyes. Wall Street is or became much dirtier than it was 20 years ago when I worked there.

I think the behavior that is run-of-the-mill now would have stood out like a sore thumb a generation ago. The standards have fallen so far.

And then the SEC – I hate insulting government/public servants, people giving their lives to serve their country. But I think the SEC was asleep at the switch for the last decade. I think that primarily comes from the brass. My sense, my understanding, is that people in the middle-tiers of the SEC and on the frontlines actually supported us in many cases. But the brass, especially the brass in the last decade, got terribly co-opted. And by the brass I mean the top 200 or 300 people in Washington, DC [who were looking for their] million-dollar jobs and exits from the SEC. They really stopped doing their job.

There's a new woman in charge of the SEC, Mary Schapiro, and I think she's got some guts. I think she's provided some leadership and that she's changing the mentality of that brass, and a lot of the members of it as well.

My opinion of them is open to improvement. My improvement to Wall Street was so… I think an answer to your question, what I really learned, was I'm reminded of a story of Bertrand Russell, who was once debating with a Hindu cosmology professor. And the professor was saying, “Well, the universe rides on the back of a turtle.” And Russell said, “Well, what's the turtle ride on?”

And the professor said, “Well, in our cosmology he rides on the back of another turtle.” And Russell said, “Well, what's that turtle ride on?”

And the Hindu said, “Well, sorry, it's turtles all the way down.”

Well, we took our suspicions about what was going on to the establishment, to the bankers' compliance officers and tried to show them data to show their banks were letting stuff go on that shouldn't go on. And we got laughed out of court. We went to NASDAQ and we got laughed out of court.

We went to the SEC, and as predicted, they responded by opening up investigations on me. Then we went to the Senate Banking Committee. Then we finally went to the New York financial press and became the target of a tremendous smear campaign. So I gradually learned that our east-coast financial establishment is just turtles all the way down. It's corrupt all the way to the toes.

To see Part 2, click here

Posted-In: Benzinga Podcast patrick byrne SAC Stevie CohenMovers & Shakers General

 

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