After that first episode with BusinessWeek’s Tim Mullaney in February, 2004, I did not hear from him for nearly a year. In January, 2005 Tim contacted us again. As I recall, he had nothing precise with which to attack me, but again flailed away with a set of “When did you stop beating your wife?” questions, delivered in a tone and manner whose message seemed calculated to convey that he already had a hatchet job written, and that by calling me he was simply checking off a box.

You ask, dear reader, “Why should I take Byrne’s word on that?” Fortunately you don’t have to, because in January, 2006 Tim came back for a third try, but made the mistake of committing it all to email.

First, he called Scott (our PR Director at the time, a kind and, as I wrote earlier, mellow Californian) asking (once again) precisely the same questions that some other reporters (about whom you will read later) had called that same day to ask. Given that there was no news and we were in a quiet period before announcing earnings in a few weeks, Scott made the reasonable inference that someone was feeding the questions to these reporters. He suggested to Tim he consider that possiblity: as is Scott’s style, he did so gently and politely. The following exchange ensued:

—–Original Message—–
From: Scott XXXXX
Sent: Thursday, January 05, 2006 1:40 PM
To: Mullaney, Tim
Subject: RE: quick check on something

Tim, the person who fed you this false information also called some other reporters (the usual ones). Thought you’d want to know.

Mullaney, Tim
Sent: Thursday, January 05, 2006 12:23 PM
To: Scott XXXX
Subject: RE: quick check on something

I wasn;t fed info, just asked a question. I didn’t know the answer so I checked. I’ll call you after a meeting, but you’re going to have to accept that I know a little accounting and am more than experienced enough to know what is happening here.

Tim Mullaney

—–Original Message—–
From: Scott XXXXX
Sent: Thursday, January 05, 2006 3:07 PM
To: Mullaney, Tim
RE: quick check on something

Ok. I was simply letting you know that a group of reporters from different outlets all contacted me at the exact same time about this particular matter. Two reporters confirmed that someone called them — and others in their organizations — spreading this rumor. (Interestingly, a couple said they just happened to look at our IR site.) I do appreciate that you checked with us.

I’m not an accountant — what do you mean by you are more than experienced enough to know what is happening here?

From: Mullaney, Tim
Sent:Thursday, January 05, 2006 1:10 PM
To: Scott
Subject: RE: quick check on something

I’ve been through companies battling with shorts before. I know how the media gets played. I know more than amply how to get beyond he-said, she-said. You may or may not know this, but I keep a Web stock model portfolio for BW that beats the IIX pretty consistently, and I also happen to be an attorney (so if, for example, we get into debating the rules around naked shorting, it’s not going to be Pat-says-this, David-says-this; it’s gonna be citations and cases, because I can read them myself and understand what they mean). If your numbers hold together and the model works and the management team is sound, you have nothing to worry about from me, so let’s put aside the “who told you that” aspect and just deal with questions. If someone feeds me bullshit, I am going to figure it out before publication. I have those tools.

Tim Mullaney

The following Tuesday, Tim Mullaney, Esq. used his tools to send questions for my reply.

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From: Mullaney, Tim
Sent: Tuesday, January 10, 2006 6:55 PM
To: Scott XXXX
Subject: Some questions to get started

Hi Scott:

As we discussed, here are some questions for Patrick and others at Overstock. This is most of my line of questioning, but not necessarily all the questions that may arise…

OK, here goes…

First topic: What went wrong in 2005?

1. Let’s walk through each of the four quarters. In the first quarter, there was a miss attributed in part to errors in buying offline media. What happened? Who made the buy? Which purchases didn’t deliver? How do you measure that: i.e. how do you know which buys to blame? What corrective actions did you take.

2. In the second quarter, what was the problem? What did you do about it? Did it work?

3. For the third quarter, IT was the problem. How long did that fester before it was recognized? Why did it take so long to be recognized, and then to be disclosed? (Orbitz.com, by contrast, reported a big problem with its Oracle databases in I believe 2003 within a day or two of the snafu). Why did it take so long to correct? Where was Shawn Schwegman during this period? During the extended leave Patrick has described on The Motley Fool, who was standing in for the CIO? With regard to the account of Shawn having sold stock to buy a home immediately upon his return, some questions. A. Who was the woman? B. Did they get married? C. Are they still together? D. Can we review the timing of exactly when he sold the shares, and from where he contacted his broker? E. What background in running large technology systems did Shawn have before joining Overstock? Before becoming CIO? When exactly did he go on leave, does he remain on leave, and who is fulfilling the CIO function? (I see you have an SVP for technology, but that is not quite the same title and the date of his assuming that role is not given in his bio).

4. In the fourth quarter, what was the source of the disappointing sales growth PMB mentioned on Bloomberg? How bad was it? Is the Street on target in putting full-year sales for 05 around $840M and a 15 cents per share loss? What will be the operating cash flow for the fourth quarter and cash position (exclusive of short-term securities) at 12.31?

5. Everyone knows online retailers are strongly cash-flow positive in 4Q, and then pay bills in January. This is not exclusive at all to OSTK. What will be the cash position at 3/31/06, when the short-term exaggeration of cash flow has been flushed out?

6. How is your liquidity? Can you describe the Asian-currency instrument that is tying up the $70 million-plus, or direct me to the correct pages in your SEC filings that describe this instrument and when it matures? Preferably, do both. There have also been some fluctuations in the interest rate and terms of your Wells Fargo facility. Please explain, and do they indicate, taken together, that Overstock has become a stronger or a weaker credit?

7. Seems as if marketing issues were a pretty consistent 2005 problem. Why? Some on the short side contend that the issue can be traced to having an underqualified executive running offline marketing. Without any reference to this person’s non-existent illicit past, why is someone whom Howard Lemcke describes as a former office manager for a small local business running such a critical function for a public company closing in on $1 billion in sales?

8. Why did gross margins stall? Why did you take marketing spend to 10% or more of revenues? Was this planned, or a function of revenue shortfalls relative to internal budgets?

9. Why did operating expense spike so? Technology spending? Several analysts told me they did not know tech spending was going to rise so sharply in 05, though none accuses you of lying about it. Did you change your mind? When? When was 2005’s tech spend approved, and why didn’t sell-side analysts, several of whom work for firms that had banked for Overstock, know about it? And was it a tactical mistake, or anything worse, not to communicate that change in strategy or tactics once you decided on it?

10. The cash consumption of the business multiplied during the first nine months of 2005, even relative to the size of the business. Why? Was that planned?

11. everal analysts blame 2005 on management’s inability to properly vet and manage up to a dozen or more major projects. Jewelry, travel, auctions, Club O, the software upgrade – it’s a longish list. How fair is this critique? Why did you take on so much? Did any of it succeed? An industry source says that tracking the serial numbers of diamonds convinces him that you are selling as few as 2 to 4 diamond rings a month, with at least $7 million in inventory on your balance sheet, representing approximately 2,700 to 2,800 stones. True?

12. Walk me through the metrics for emerging markets: How much travel are you selling (use GTS please; I am recognized as an online travel expert and have spoken at several PhoCusWright and Travelcom conferences)? Revenue from auctions? How many diamonds? And whither Club O and b2b? How much of your inventory bloat do the diamonds represent? Are you going to have to write them down? When?

13. Also, who runs each of these efforts? What domain expertise did they have, if any? Was a jewelry expert running jewelry? Did Ms. MacDonald Korth have any material background in online auctions? Who ran travel? And so on. Do they add up to a pattern, as sell side analysts contend, of having weak executives running key growth initiatives. What does that say about the executives who appointed them if this is, in fact, a consistent pattern? How exactly did Ms. Simon and Ms. MacDonald Korth get hired? Why was MacDonald Korth retained after a brush with the law reported in the Salt Lake City papers in 2002? (I am confirming the disposition of this case with the SLCPD, but I understand it was dismissed).

14. Scott Devitt, perhaps the most sympathetic buy-side analyst extant, says you missed all four quarters of 2005 relative to his forecasts (Yahoo Finance says you met the second quarter; Devitt says that was due to a non-recurring item). What does that say about management and control? Are you aware of any public company that has done that in recent years without management getting fired? Why shouldn’t you be fired, other than your ownership position in OSTK? Why has the board not insisted on better performance?

15. What was the purpose or meaning of the board changes? How much time is Jack Byrne spending at OSTK? Who reports to him? What are his functions as non-executive chairman of the board? Competitors suggest Jack is running the company’s day to day operations in tandem with Jason Lindsey. Please sort out who is doing what, and how much time Patrick is devoting to the Rocker litigation, the NCANS and related matters. Was Patrick, in essence, relieved of his CEO duties as some believe?

Section II. What is the strategy going forward?
1. What is the prospect for getting gross margins higher, especially in the part of the business where you take inventory risk? What do you say to sell-side critiques – and please note that this is a sell-side critique – that the prominent role of shopping bots in consumer electronics will constrict your ability to rebuild margins? Given the very tight competition in consumer electronics, how much margin wiggle room do you have in this sector? What percentage of your sales come from consumer electronics, which tend to be among your most expensive SKUs?

2. Explain the strategy for maintaining or expanding gross margins in the consignment part of the business. We may want to have me discuss this business offline with a more junior executive to prepare me for speaking with PMB, so I understand it better. To what extent does your fulfillment business compete directly with Amazon, and to what degree are you working distinct markets ( i.e. are yours closeouts and theirs not?). What is the difference between your margins and share in this business and theirs? How do you answer a critique that Amazon will be able to keep you from raising margins by setting the pricing standards for this market?

3. Aaron Kessler and Derek Brown – and to a degree Scott Devitt – all say you have to slow the rate of growth, cut marketing spending to 8% or 9% of sales, and try to achieve profits beginning in 2006. How, in fact, could you do that? To get opex under control, for example, will you have to lay off employees who fall under SG&A? How many? How, especially, do you do that when the consensus is that online advertising rates are rising strongly? What are your options, and your plans?

4. What margins can you achieve if you successfully do these things? What about in 07?

5. Posters to various blogs, including one claiming to be an insider, have raised the notion that management and Jack Byrne would like to take Overstock private, tune out the public market noise, and get the company fine-tuned in a more manageable atmosphere. Is management considering this? Has the board discussed it, in even a preliminary fashion? If you are not interested in such an option, why not?

6. Several people have expressed skepticism that such a buyout would be credit-worthy. Have you had any discussions with lenders? On the other hand, given the large management stake and close association with Scion and Fairholme, how much stock would you need to buy to buy the company, assuming investors recruited by management and the board participated?

7. Related question: Who runs Odyssey America Reinsurance, which bought 475,000 shares in the third quarter? Do its officers, directors or portfolio managers/analysts have any past or present ties to Messr. Byrnes, Macklin, Fisher or Lindsey? Can you describe any meeting with management Odyssey had before buying the position, or any outreach that Overstock, its directors, its bankers or other representatives conducted with Odyssey before or during Odyssey’s efforts to amass its position?

8. Describe your strategy for rebuilding trust and confidence among sell-side analysts.

9. As an out-year scenario, one can envision OSTK as a 1.5 billion to $2 billion company with perhaps 4% EBITDA margins. How do you get there? Can you get margins beyond that on 15% Gross margins? How? (Even assuming you can hit those revenue figures, which seems likely). Can you grow that much while trimming marketing? How long would it likely take?

Section III. The Disputes…
1. Let’s review numbers. Overstock has 19 million shares outstanding. The float appears to be 10 million shares. According to Nasdaq, the short position is 7.1 million shares. Why does Overstock believe that it is necessary to violate securities laws to short the shares. Why is a short seller who says “19 million shares, 10 million float, 7 million short, what’s the problem?” incorrect? Are these numbers incorrect? I believe I recall reading an assertion by PMB, though offhand I do not recall where, that the company knew in detail who owned its shares, who was allowing their shares to be borrowed and who was not, and that the then-existing position was impossible. Please review what you know and whether I correctly remember this statement, and what basis you might have for making such an assertion.

2. I’ll ask an open-ended question more generally…Why do you think shorts—and which ones – have violated Regulation SHO? Take all the time you need with this one; I want to understand your basis for this in detail, whether I end up devoting much space to it or just a little.

3. When during the Bloomberg interview were you cut off? I have a transcript that does not note any interruption (am checking with Bloomberg). Why do you believe this occurred?

4. I note with interest Bob O’Brien’s post about members of the Byrne family being unable to buy shares. Can you explain, and can you put me in touch with brokers and other third parties who can confirm this?

5. Who is Bob O’Brien? Is he really a penny-stock artist affiliated with Richard Mellon Scaife? Are you at all concerned that this association hurts Overstock’s reputation or credibility? Can you supply his contact information?

6. What is your basis for:
a. Asserting on Bloomberg that “some of these officials are mobsters”? Please explain also the remark about a body being found on you.
b. Asserting that 10 to 15 million shares of Overstock have been counterfeited? By whom? How do you know? Have you seen any forged certificates?
c. Asserting that journalists accept assignments from short sellers?
d. Asserting that Jim Cramer is an undisclosed investor in Rocker Partners?
e. Asserting that “a master criminal from the 1980s” is coordinating an attack on Overstock? Is this Michael Milken? Why does Bob O’Brien appear to think so, judging from his postings?f. Saying that you are afraid of the Israeli mafia? Have you received any threats? If so, describe. (Note: I have seen an excerpt of PMB’s remarks, but have not yet listened to the CFR webcast.) Or is this a more general observation that society should fear crime? If so, how is it even remotely related to securities violations surrounding OSTK shares? Do you have any expectation thatg. Asserting that Overstock would dominate the mid-priced diamond market?
7. Please explain the Bethany McLean e-mail. I’ve read Bethany’s story; I want to hear it straight from PMB.
8. How much time does PMB devote to NCANS, the litigation and related matters, including media appearances. He has acknowledged financially supporting NCANS; how much has he spent? Is it a distraction from work?
9. May I have a phone number or e-mail address for Mr. O’Brien and for Mary, whose last name escapes me, from NCANS.
10. There are not more questions about Gradient in part because I’ve read the filings posted on your site and understand your basis for those specific allegations.11. It appears from Bloomberg’s summaries of SEC filings that the top 35 holders own 99%+ of OSTK shares. If Bob O’Brien and NCANS believe so strongly that you have been wronged by the short side, have they bought any?

Section IV. Just for the Record…
1. How is PMB’s health? In comparing old pictures of PMB to more recent ones, a senior BW editor – i.e. not me - noted what appeared to be a significant weight gain that occurred within the last two years. Is this correct? If so, is it a function of stress? 

2. Is PMB manic depressive? Has he ever sought care or diagnosis for any mental incapacity? Is he on any psychoactive medications of any kind? (I mean no offense, and this is no more intrusive than Pat’s own public discussion of whether he uses illegal drugs).

3. Why is Jim Cramer referring e-mails from NCANS supporters to his lawyers? Has any counsel for Cramer contacted OSTK or PMB about pending or threatened defamation claims? E-mail trails I have read include Cramer asserting he may have a claim against OSTK or OSTK defenders at NCANS. Are these e-mails genuine? (I’m calling JJC as well).

4. Mark Cuban, asked in jest if he would trade PMB for Ron Artest, even up, responded in part: “No. Ron Artest knows what his issues are and takes medication.” Please comment. We know about Mr. Cuban’s short position in OSTK, which he puts at 20,000 shares.

Scott, let’s get it started. I don’t have enough space, most likely, for all this material. But I have to understand it deeply to write the strongest possible 1200-1500 words I can.

Best

t

Tim Mullaney
E-Business Editor, BusinessWeek
212-XXX-XXXX

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And here I’ll leave you with a cliffhanger. By what fiendishly clever method did I parry the tool that is Tim Mullaney’s knifelike journalism? Check back soon….