I will not comment on current or future matters at Overstock.com. However, as Faulkner said, “The past is never dead. It is not even past.” The public has welcomed my explanation of some past Overstock-related events and decisions in such recent posts as “A Message to My Former Colleagues at Overstock”, “The Big O: A Closing Word”, “Come See the Sausage Being Made”, and this Twitter thread about our SiteHelix deal. One of the most significant events in recent years was the abortive GSR deal, and many have asked me to use my newfound freedom to explain what really happened there. I will do so, but NB: I am doing this entirely from memory, without consulting a single email or memo from the past, or any other person’s recollection, or any press release or other source of information. As it is a fairly complicated story, I reserve the right to tighten it up or correct it should the need arise to be more precise. I am just trying to get the basic narrative out to the public.
What really happened with GSR is that Sonny Wu is a monumental four-flusher like none I have ever encountered in life. He has no comprehension of the duties of participants in the US capital market, and in no case should his word ever be taken by anyone again for anything financial. I now picture him as another version of a guy I saw at a Macau blackjack table on December 29, 1983, slowly squeezing his cards apart while squinting and hooting and hollering and making a total ass of himself by slowing down the game because no one ever taught him how a gentleman plays blackjack, all while playing the same $2 hand as the rest of us at the table. For ease of reference, I will refer to this as “Macau big-shotitis”.
In late 2017/early 2018 tZERO began its security token offering. Immediately upon its announcement we had people calling up and demanding $1 million slices, $3 million slices, $5 million slices, and I think a $20 million slice (all per Joe Camerata). If I recall, it added up to about $100 million, all in the first 24 hours of incoming phone calls. Since it was arguably the world’s first true regulatorily-kosher security token offering (we ultimately spent > $10 million with Jones Day to make that so), we knew there might be glitches to work through. However, both as a function of the propensity of some to draw big “soft-circles” that they did not intend to follow through with, and as a function of the half-baked systems of the broker with whom we had partnered to handle the on-ramping (remember, no one had done this before), we found that actually getting such large sums into the tZERO bank account was like milking sludge through a drinking straw.
That said, as the weks and months rolled by, in fits and starts and lumps and squirts, the money did dribble in. $10 million. $20 million… $30 million…. $40 million….. $50 million…..
In the Spring of 2018 I went to Asia due to the clamor for participation there. A round of meetings with the biggest blockchain/crypto groups in Korea, Japan, Honk Kong, Shanghai, and Beijing was organized by the able Beijing-based Greg Van den Bergh (of Bankorus fame). In Asia I found the difference between talk and action proved to be even more frustrating.
For example, in Korea, the law was such that the nominal size of our offering (≈$250-$300 million?) meant that no more than $50 – $60 million of that could be raised within South Korea while staying within their securities regulations. In Seoul I got my normal hotel suite in which to meet. The first three parties who visited my hotel suite demanded to be allowed to take the full $60 million, each. While I was visiting with the second or third of them, there was (no kidding) some kind of scuffle in the hallway: when I opened up the door to see what the heck the scuffle was about there were several waiting investors, fighting to be next, each calling at me things like “20 million!” “$30 million!” . In Tokyo, there was one Asian investor (a fellow who would have brought more than money to the table) who wanted $20 million in tokens if he could have a $30 million investment in the firm’s equity at a ≈$600 million pre-money valuation…. But who later needed to delay on buying any tokens.
Let these stories stand (mutatis mutandis) for dozens of events in Seoul, Tokyo, Hong Kong, Shanghai, and Beijing. Roomfuls of Bitcoin millionaires having meet-ups with me in bars, shouting and haranguing me to let them invest. Again, all we fed all of them into the banking machine managed by Ralph Daiuto (Esq.) and Peter Getz (banker) to manage. By the end of 2-3 weeks in Asia and perhaps 50-100 meetings, we had soft-circles for over $700 million of capital, from Asia alone.
Of that, I believe that approximately $5 million ultimately showed up.
No doubt this was to some degree our fault. It was the world’s first securities token offering managed with an eye towards being 100% compliant with all regulators in all jurisdictions. There were delays caused by the complexities of laws in places like Seoul, Tokyo, and Hong Kong, and trying to apply their local securities laws to this new invention of a “security token”. Generally, this meant there were regulators to be met with, coddled, stroked, educated, and schmoozed. There were local opinions to be written (I will take this opportunity to mention that the firm’s then-GC, Ralph Daiuto, handled that side of things manfully and competently). There was the complexity of dealing in these jurisdictions with people and firms who were sometimes no more than a guy with a wallet who had made $25 million by getting into Bitcoin or Ether in the early days and who wanted to invest $1 million with us, and performing KYC/AML and “accredited investor” tests on him or his “firm” that met US standards was challenging, to say the least. And, of course, there was the on-going real-time development of the systems that would support these efforts, when again (as it was the world’s first kosher security token) the legal niceties of everything were getting worked out as we went. A handful of us were inventing a new universe and trying to shoehorn it into the regulatory system as it existed among South Korea, Japan, Hong Kong, PRC, and the USA (when on numerous occasions I have said things like, “We are plowing an icebreaker through an arctic ice field, breaking 3-meter-thick ice one meter at a time, but the next guys after us are going to be able to kayak in our wake,” this is the kind of thing to which I was referring). So no doubt some of the problem related to our need to make this the world’s first regulatory-kosher security token offering, and that is easier to say than do.
But I think much of the problem was Macau Big-shotitis across Asia.
Sometime in the Spring of 2018, Sonny Wu of GSR showed up at tZERO and began talking big. Sonny is indeed an impressive figure: a PhD from MIT, he returned to China in the 1990’s and became “the father of the Chinese semi-conductor industry,” which is no small feat. He built a multi-billion entity called “GSR” (which, he let us know, had splintered several years previously into three groups, only one of which was now controlled by him). Sonny’s GSR came hand-in-hand with a highly respectable Singapore-based fund called “Makara Capital” managed by Ali Ijaz Ahmad (which itself comes hand-in-hand with Singapore Sovereign Wealth money), and the two of them were working on two deals totaling over $2 billion involving cobalt mines in South America.
I must also stress that Sonny Wu is enormously bright, and his understanding of the potential significance of this innovation called “securities tokens” exceeded anyone I had met in the higher levels of business circles in the USA. He was not only an early and enthusiastic convert, he was an ardent champion of securities tokens while bulge bracket bankers I was meeting in NYC were still responding to mention of securities tokens with chesnuts like, “But isn’t Bitcoin just used for ecstasy dealing on Silk Road?” Sonny was also tied in (as best as we could tell) with some of the most significant players in the Chinese power structure, who (he said) were adamant that he land China a role in this deal with us. In my own conversations with high-level players in Chinese financial circles, these claims of Sonny Wu were confirmed.
Saum Noursalehi (by then, CEO of tZERO) and Seth Moore (an SVP-at-large within Overstock who was managing strategic conversations for us) met numerous times with Sonny in Manhattan and developed this information. I was asked to fly to NYC to meet Sonny, which I did, and we spent time together over a couple of days, and again, as disappointed as I am in Sonny now, I must acknowledge I was impressed with his mind. He needed no convincing from me: when it came to securities tokens he was already there, and in fact, wanted to meet me only to see if we shared the same vision of the titanic potential of securities tokens, and to calibrate on global strategy. His main concern was that we were not committed enough and would not move fast enough nor go global quickly enough as much as GSR and Makara desired.
Before long Sonny was telling us he was ready to invest a couple hundred million dollars in tZERO equity at a $2 billion valuation while buying out our token offering with another ≈$100 million and simultaneously investing $100 million in OSTK to share in the upside that his tZERO equity and token investments would create for OSTK shareholders. In fact, the bulk of the negotiations concerned how much we would allow him to put in at each of those three levels. This question had some Hart-Scott-Rodino and CFIUS implications that we did have to research.
Sonny asked us to delay the closing of our offering from late June 2018 to early August, 2018 so he could make the necessary arrangements for the three tiers of his investments, and the numbers could be finalized, which themselves could not happen until the HSR analysis was complete, and so on and so forth. It did not seem like an overly large concession to make, given what he was bringing. Law firms were engaged, online document rooms were set-up, their lawyers were going through them… Meanwhile, at some point that summer Sonny had Seth and Saum fly to Spain to meet him and Ali Ijaz Ahmad (Makara Fund) to continue the negotiation, finalize the numbers at the three different levels, and most of all, plan global expansion strategy. Again, the imperative from Beijing was (Sonny insisted) for him to finalize the deal with us and get China in on tZERO, so they could ride along as we built a global network of security token exchanges that could capitalize the trillions needed for their Belt-and-Road infrastructure projects.
It was partly in anticipation of this that I took the gamble of holding in the afterburner on Overstock’s one attempt to act like a normal Internet company. We smashed the accelerator on advertising to offset a strange and unprecedented collapse of our Google traffic, as we were in talks with players interested in buying our Retail business and the main concern they voiced was, “OK, we see that you are just about the only guys online who make money, but we brick-and-mortars already know how to make money. We want to know if we bought your Retail business, would you be able to deliver growth?” We kept the afterburner firing with an eye to losing lots of money just like a normal Internet company (as I fully explained to Wall Street that they should expect), delivering on the growth, and having the Retail business sold by the end of 2018.
August 2018 arrived, however, and Sonny’s money did not show up.
We closed the tZERO security token offering with whatever we had in the bank at that point (>$100 million?), and began to grow concerned about GSR’s Sonny Wu. However, GSR had performed what we estimated to be > $1 million of legal work related to due diligence. There was also some slip-up related to his $2 billion investment in cobalt mines in South America that drew some bad ink and was drawing his focus. There were in fact some outstanding HSR issues remaining to be confirmed, and these gated the ability to decide what percent he could buy at each level of the investment he made in our three layers (tZERO tokens, tZERO equity, and OSTK stock). But quite important in our decision to grant an extension was my judgement that clearly a guy with his background and who ran in his circles would not be wasting our time. I thought. (And again, I visited China for other reasons, and had confirmed to me by leading Beijing-based financial players of Sonny Wu’s connections and their desire that we consummate a deal together.)
As I recall, in August Sonny asked for three months to manage through his cobalt mine issues, finish due diligence, finalize an HSR opinion, and let that guide the final negotiations of the deal with us. Most problematic was his insistence that the $2 billion number had been a post-money valuation, and only an approximation, and that is as was starting to slip to $1.8 billion post-money, which meant ≈ $1.5 billion pre-money… etc. Anyone who has ever negotiated with Chinese knows the game. Still, Sonny Wu was adamant that he would have $300 – $400 million in our bank come November.
As we approached the November Overstock earnings call, though he still had a couple of weeks to deliver on his postponed investment, Sonny Wu and his CFO, David Lim, got on the phone with Saum, Seth and me and told us that he had moved $120 million around and that it was in a bank account, ready to wire us. He was adamant that it was done, final, the money pulled together in the proper account, the capital controls this, the sun rising in the West that, and at the end of next week we would have $120 million. That being just a couple of days after the scheduled earnings call, Seth and I were actually concerned about a possible lawsuit for not disclosing in the conference call that we expected the funds a couple of days after the call. That is, all we were going to be able to say in the conference call was that the money was not yet in but we still anticipated it coming. But if it came in a day or two later, might we have short sellers filing suit saying that we had been too opaque in the conference call? That literally was our legal concern during that November conference call, so adamant and convincing was Sonny Wu.
Again something happened having to do with cobalt this, Makara that, capital controls in China the other thing, the sun rising in the West… Sonny Wu needed until the middle of December to deliver funds, but we could expect it to be
the full $300 ≈$180 million by then. I told Sonny that we were growing exceedingly concerned, and told him that the US capital markets are not the palace to go around making commitments and welshing on them. He swore he would not fail, it was all being finalized, the money was assembling, he had to make a trip to Chile to keep his $2 billion cobalt deals with Makara on track, but that there would be no problem delivering several hundred million dollars in mid-December.
On the appropriate date in December, 2018 we stood by for the phone call. All the terms were final. There was supposed to be a signed document coming through the fax machine, a binding document with performance guarantees and funds expected to flow a few weeks thereafter. 24 hours beforehand Sonny Wu confirmed it would be there, and wanted to schedule a phone call to celebrate its arrival. That evening (a Friday evening, I believe) myself and others eagerly waited on a conference call, with someone standing by the fax machine….. And Sonny Wu showed up on the call asking for an extension until February.
I lost my shit. I told him that how Chinese behave in China does not fly in the United States. One does not play these games in the US capital market, that he was going to get us all arrested. Inwardly, I was sick to my stomach, because I knew what I would be doing that weekend: figuring out how to strip $40 million out of Overstock’s expense structure (which essentially meant 400 out of 1,300 jobs, which we had bulked up in anticipation of finally having the kind of capital that other Internet players do to do everything first class). I told him we could not extend again and we were going to announce a busted deal.
Sonny Wu lost his shit back at me. I am Sonny Wu! My word is good! I promise you, I promise you, I promise you, I give you my word that you will have that money in February. Makara this, Singapore Sovereign Wealth money that, I am Sonny Wu, ask anyone in China, my word is good, and I promise you that in February this deal will be consummated. I explained to him that if at any point he believed it was more likely than not that he would not perform, he had to tell me this, and we had to announce a busted deal. Sonny swore up down and sideways that he understood this point. I told him that under no circumstances would we consider extending again, but disheartened, I yielded, and hung up, already thinking about how I was going to trim 400 jobs that weekend.
Come February, 2019 I was asked to fly to Singapore to meet with Ali Ijaz Ahmed myself. Sonny Wu and his large investors would meet us there. I was told that the finalized deal documents would be signed, and we would be expecting money flowing weeks after that. I flew to Singapore, and presented to Makara. Singapore sovereign money was in attendance. Sonny Wu and team show up later that night …. And without even being able to look me in the eye, Sonny began to ask for an extension. I cut him off and let him know I was announcing a busted deal.
Makara’s Ali Ahmed assured me that this was not necessary, for Makara was now in the deal, all would be conducted according to Hoyle, and things would finally get professionalized, finalized, and we would be off to the races. Letting them know that only because Makara was now involved would we consider taking another step with them, we agreed to give Makara time to do some due diligence and lead the deal. I believe it was at this juncture that we demanded and extracted a concession from Sunny of a hard-and-fast $5 million payment in return for letting the one aspect of our previous deal that was binding (a purchase of $30 million of security tokens) be delayed again. I think we also extracted something else: if we went to file the arbitration claim we kept the $5 million and he pre-conceded the remaining $25 million (but the precise terms are something I do not recollect. (NB I believe GSR was given an extension until …. June?).
Over the following
next couple of months Makara did conduct due diligence. They were professional and thorough, like a real fund is. There were again online document rooms and models created and interminable transoceanic meetings…. And eventually they let us know that this is that and that is the other thing and the sun is rising in the West and they would not complete. ( NB While they were still involved through the summer, I now recall that their final determination came the day I left Overstock: I believe I heard it essentially as I was going out the door).
In June or July(?) we
We went to collect our $5 million from Sonny, and he said he would pay us in the form of $X million in cash and $Y million in stock in a Hong Kong account (where X+Y = $5 million). That turned into $1 million in cash, and some stock, that turned out not be deliverable because of capital controls, or HK regulations, or or or…. Last I heard, Overstock/tZERO may have collected about $2 million cash, and was working up to file an arbitration claim that was pre-forfeited for the rest of the $30 million, which might arrive in Utah someday, or might only make a nice frame-able piece of paper, as Sonny just circles the drain in Hong Kong. I have no knowledge what happened after I left on August 22.
In any case, by now you get the idea with Sonny Wu. He is a guy who in the end could not write a check for $5 million. He could not write a check for $2 million. He could barely write a check for $1 million. But he runs around the world with his pretty 24 year old translator signing binding $30 million deals on this and $120 million Letters of Intent on that, $300 million in this other deal, $2 billion in cobalt mines in South America, and as far as I can tell none of it ever closes. He is that Macau Big-shotitis blackjack player, running around in global financial circles giving his word and screaming “I am Sonny Wu! The word of Sonny Wu is gold! I promise you, I promise you, you will have your money in six weeks!”
Of course I feel stupid to have been jerked us around like this. I would never have let it happen for any normal investor. The cognitive dissonance I still have about it is that Sonny is, indeed, recognized as the father of the Chinese semi-conductor industry. He is, in short, the Andy Grove of China. And he does ride cheek-to-jowl with Ali Izad Ahmed, the founder of Makara, who in fact is aligned with Singapore sovereign wealth money, about the most respected sovereign wealth fund in the world. One would not expect to see Andy Grove behave like this, and give his word and ink deals and scream that “You have my word! You have the word of Andy Grove! You will have your money. My word is good!” Yet just not perform. It just is not something one normally sees in the West at the level of people with Sonny Wu’s background and connections and who operate in deals measured in hundreds of millions and even billions of dollar.
What about Overstock? We did in fact have an ATM in place, and knowing the risks one way or the other, we had legal advisors at every point, the legal advisors were completely clued in to the process, and we communicated precisely what we were advised the correct way to describe our state of knowledge was at each juncture. Given this fact, which is true, the market had exactly the same knowledge about the future as we did. The market priced its estimation of the probabilities into OSTK. We then leaked that ATM out in different times into the market, seeking to balance risk aversion (i.e., we wanted some capital) versus dilution (given that we had fear of selling too much OSTK than having Sonny perform and feeling like we had already taken too much dilution too cheaply).
It is not like we did nothing with the capital: we built tZERO, which stole a night’s march on the rest of the world when it comes to the trillion dollar opportunity of security tokens (though the SEC may be trying to bazoomba that, I fear). Medici has significant investments in a number of the most exciting blockchain investments in existence. And the Retail business did use the capital both to “play Wayfair” temporarily and get traffic back growing 20% (at which the market yawned), but simultaneously to scale up its technology side, build out a bunch of great technology, then attrit about half of the non-technologists from the building, thus transforming the Retail side of the firm from a Retail business with some good technology, to a technology business that does Retail.
And Sonny Wu? Nice guy. Charming, brilliant, and as complete and thorough a four-flusher as I have ever encountered. He gave his word over and over on commitments upon which, in the end, he had troubling performing at the level of 1/100th of his commitment. He is that Macau Big-shotitis gambler I spotted years ago, squinting at his cards and hollering and drawing all the attention to himself that he can…. as he pats his pockets for $2 to lay on the table.
Again, please note that this entire story was written from memory, in one sitting, while deliberately not consulting an email, a document, a press release, or any other participant’s memory. It was written merely to give a public (that has asked a quite reasonable question) the backstory on a significant series of events over the last couple of years in the firm I recently left. Given that, it is absolutely as true a description of that that series of events as I can muster. I withhold the right, when I am sitting across from the SEC someday, to revisit any of the dates, sums, or other details included herein, having had opportunity to refresh my memory on any of it. But I think I got most if not all the facts of it right, and I know I got the gestalt of it right.
Postscript: I woke up today, reviewed this, and edited a few details. Generally when I post blogs I find myself tweaking grammar and spelling for 12-24 hours, but do not generally make substantive corrections and do not feel it necessary to note them. In this case, however, given that I have tweaked a few details of the story after a good sleep, I have used
strikeouts and bolds to mark my changes.