Patrick M. Byrne

Patrick M. Byrne (born 1962, Fort Wayne, Indiana,) is an American entrepreneur, e-commerce pioneer, CEO and chairman of Overstock.com. In 1999, Byrne took control of the company, then called D2: Discounts Direct, and changed its name to Overstock. He had previously served shorter terms leading two smaller companies, including one owned by Warren Buffett's Berkshire Hathaway.^[1]

In 2002, Byrne took Overstock.com public. Since the initial public offering, the company has since increased its revenue to over $1 billion a year, and achieved full profitability in 2009.^[2]

Beginning in 2005, Byrne become known for his campaign against the practice of naked short selling. Byrne says it has been used in violation of securities law to hurt the price of his and other companies' stock.^[3] Under his direction, Overstock.com has filed two lawsuits alleging improper acts by Wall Street firms, a hedge fund, and an independent research firm.^[4]

Background

Patrick Byrne is the son of John J. Byrne, former chairman of Berkshire Hathaway's GEICO insurance subsidiary and White Mountains Insurance Group.^[5] He holds a certificate from Beijing Normal University, has a Bachelor of Arts degree in Chinese studies from Dartmouth College, a Master's degree from Cambridge University as a Marshall Scholar, and a Ph.D. in philosophy from Stanford University.^[6]

Byrne was a teaching fellow at Stanford University from 1989 to 1991 and was manager of Blackhawk Investment Co. and Elissar, Inc. He served as chairman, president and CEO of Centricut, LLC, a manufacturer of industrial torches, then held the same three positions at Fechheimer Brothers, Inc., a Berkshire Hathaway company manufacturing police, firefighter, and military uniforms.^[5][7]

Byrne has a black belt in tae kwon do, and once pursued a career in professional boxing. He is a cancer survivor, and has ridden a bicycle across the country to raise awareness and money for cancer research at the Dana Farber Cancer Institute. Byrne has also supported implementing school vouchers and other educational reforms.^[8] Byrne was the largest donor to political causes in Utah in the period 2003-2006, while his father was the third-largest.^[9]

Overstock.com

In 1999, Byrne was approached by the founder of D2-Discounts Direct, asking for capital. The company had generated slightly more than $500,000 in revenue the previous year by liquidating excess inventory online. Byrne found the idea of online closeouts intriguing, and invested $7 million for a 60 percent equity stake in the company in the spring of 1999. In September the same year he took over as CEO, and the following month the company was renamed Overstock.com.^[10][11]

Worldstock

During a vacation in Southeast Asia Byrne found that many village artisans were held back by the lack of retail channels, as their production was fragmented and the quantities produced were small. He decided that the Overstock model was perfectly suited for their needs. In 2001 he therefore set up the Worldstock division of Overstock.^[12][13] Worldstock searches through villages all over the world for people capable of producing quality products; by 2006 there were approximately 6,000 producers contributing. On average, about 70 percent of the retail price on all Worldstock items sold goes directly to the artist.^[8][14][15]

"Dutch Auction" IPO

Byrne initiated a Dutch auction IPO of Overstock.com in 2002. The company was one of the first to go public under a system advanced by WR Hambrecht + Co to retain a greater share of capital within the company rather than going to the investment bank underwriters used in conventional public offerings. Byrne has said that competing banks reacted against this, attempting to obstruct the success of the offering through negative reports and by shorting the company's stock.^[16] When Google later in 2004 went public via a Dutch auction IPO, Byrne commented that Wall Street firms similarly pushed negative stories, but did not keep it from going forward successfully.^[17] Four years after the OpenIPO, one official of Hambrecht, its now former co-CEO Clay Corbus was added to Overstock's board of directors.^[18]

Campaign against naked shorting and analysts

In a conference call with analysts in August 2005, Byrne said that "there's been a plan since we were in our teens to destroy our stock, drive it down to $6--$10 ... and even a plan for how the company would then get whacked up." He said that the conspirators were part of a "Miscreants Ball," headed by a "Sith Lord," who he refused to identify but said "he's one of the master criminals from the 1980s." Byrne said the conspiracy included hedge funds, journalists, investigators, trial lawyers, the SEC, and Eliot Spitzer. Fortune writer Bethany McLean said that Byrne had become a "hero to those who believe that short-sellers are the operators of Wall Street's ultimate black box, predators who destroy companies through innuendo, bullying, political connections--and sometimes through an illegal practice known as 'naked shorting.'" Byrne financed and largely wrote a full-page advertisement in the Washington Post which said "Naked short-selling ... is literally stealing money from the widows, retirees, and other small investors."^[19] In a letter to the Wall Street Journal in April 2006, Byrne contended that "blackguards have practiced 'failure to deliver'" of securities, were "destroying businesses and (probably) destabilizing our capital markets."^[20][21] Since 2005, Overstock has filed two lawsuits relating to the matters under Byrne's direction.^[22]

In the first lawsuit, filed 2005, Overstock.com filed suit against hedge fund Rocker Partners and the equities research firm, Gradient Analytics (formerly Camelback Research Alliance), saying they illegally colluded in short-selling the company while paying for negative reports to drive down share prices.^[23] The defendant (i.e. Gradient Analytics et al.) moved to have the case dismissed, however the California court ruled in August 2006 that the suit should be allowed to proceed.^[24] Gradient filed a counter-complaint against Byrne for libel.^[25] A portion of this suit was settled out of court on October 13, 2008, when Overstock.com and Gradient dropped the claims against each other after Gradient retracted allegations that Overstock's reporting methods did not comply with rules established by the FASB, stated they believed Overstock.com complied with GAAP standards, and that three directors were independent, and apologized.^[26][27] In December 2009, the suit against Rocker, whose name had since been changed to Copper River Partners, was settled by Copper River paying $5 million,^[28] payment of which Byrne stated he received on December 9, 2009.^[29]

Overstock.com filed a second lawsuit in 2007 against a number of large investment banks relating directly to alleged illegal naked short selling.^[30] Both cases remain in litigation.^[31]

Byrne's campaign against naked short selling and others who he feels have targeted him and his company has attracted controversy. In her article on Byrne's 2005 conference call, Bethany McLean said, "From a distance he seems like a bully, accusing people who depend on their reputations of corruption. The time is rapidly approaching when he will have to deliver--both the numbers to prove that the business can make money and the facts to prove that the Sith Lord exists." In a column in the New York Times February 2006, journalist Joseph Nocera described Byrne's actions as a "campaign of menace" and as an attempt to silence Overstock.com's critics.^[32][33] MarketWatch's Herb Greenberg has called Byrne the runner-up for Worst CEO of the Year two years running.^[34] One of Byrne's claims, that naked shorting can cause heavy dilution of a company's stock by creating sales untied to any specific shares, has been criticized by Wall Street Journal columnist Holman W. Jenkins. Byrne has cited Overstock.com as an example of a company whose shares have been more than 100% sold short in one quarter, but Jenkins suggests that this merely reflects Overstock.com's heavy trading volume and relatively small public float. Jenkins further argues that brokers are inherently cautious in using the practice, due to the high risk of trading shares that are not guaranteed to be available.^[35] Byrne has denied that his campaign is primarily about Overstock.com.^[36] However, Byrne has also received favorable coverage, and was featured in a Bloomberg Television show on Naked Short Selling, "Phantom Shares",^[37] in March 2007.

In March 2006, John (Jack) Byrne, chairman of Overstock.com and father of Patrick Byrne, said that he was thinking of stepping down in disagreement over the campaign against naked shorting.^[38] In April 2006, John Byrne stepped down to become vice-chairman, and in July of that year he resigned from Overstock's board of directors. In August 2008, Jack Byrne said that after "much initial skepticism" he believed his son was "right all along" about the battle and lawsuits with short-sellers and analysts.^[39]

Byrne was instrumental in Utah's passage of a law aimed at curbing naked short selling. The legislation was repealed in February 2007, after state representatives were advised that it probably would not withstand judicial scrutiny due to federal preemption.^[40] Byrne criticized the repeal,^[41] but Senate Majority Leader Curtis Bramble said that legal advisers believed that the state would lose any litigation over the law.^[41]

A Securities and Exchange Commission investigation of Gradient was initiated but then dropped in February 2007.^[42][43] In July 2007, two American Stock Exchange options market makers were fined and suspended for using Regulation SHO exemptions to "impermissibly engage in naked short selling" in trades involving options and stocks for their own account. Overstock shares were believed to be among the stocks traded. The market makers settled without admitting or denying the allegations. None of the defendants sued by Overstock were named in the decision, but the Dow Jones News Service said that the decision was likely to be used by Byrne in pursuing his case.^[44][45][46]

After the crisis in the North American markets in 2008, Byrne received positive press. A Salt Lake Tribune article reported that "These days, when people talk of Byrne, the word 'vindication' comes up a lot."^[47]

Byrne was criticized by the Lex column of the Financial Times in November 2009, after Overstock.com fired its second auditor in nine months and filed an unreviewed quarterly financial statement with the Securities and Exchange Commission. Referring to his campaign against naked shorting, the newspaper said that "The weirdness of his message and his attacks on respected journalists who dared to disagree have not helped his cause."^[48]

Defamation Lawsuit

Patrick Byrne was named in an antidefamation lawsuit by Altaf Nazerali in a Canadian Court. "^[49]

Awards and Media attention

Since Byrne launched Overstock.com in 1999, he and his company have garnered attention from numerous national media outlets in addition to its coverage of his campaign against naked shorting. Among them are the Wall Street Journal, ABC News with Peter Jennings, Fortune, CBS Marketwatch, and BusinessWeek, among others. He has also appeared on Bloomberg TV, CNBC, and Fox News shows such as Your World with Neil Cavuto. In 2002, Byrne was named to BusinessWeek’s list of the 25 most influential people in e-Business in 2002: the magazine cited survival strength and vision as qualities that qualified Byrne for the list.^[50] and Ernst & Young awarded Byrne the "2002 Milestone Award Winner Utah Region."^[8][51] Also in 2003 Overstock came no.1 in MountainWest Capital Network (MWCN) Utah100 award for the fastest growing company in Utah. Fastest Growing category are based on percentage revenue increases in the five preceding years.^[52] Byrne also won the first-ever Utah Best of State Awards for Community Development in 2003.^[53]

Education lobbying

In 2005, Byrne provided financial backing to form the advocacy group Class Education, whose goal is to change state laws to require schools to spend at least 65 percent of their operating budgets on classroom expenses. Proponents of the standard contend that it would free up money to increase teachers' salaries without requiring tax increases. Critics say that many services deemed "non-classroom" are necessary for education, including librarians, school nurses, guidance counselors, food service workers and school bus drivers.^[54][55][56]

Byrne also serves as co-chair (with Rose Friedman) for The Friedman Foundation for Educational Choice. The non-profit organization was founded by Milton and Rose Friedman and promotes school vouchers and other forms of school choice.^[57]

Byrne and his family contributed most of the funds in support of House Bill 148 in Utah, a bill that would allow the state to provide funding vouchers for students who decide to leave public schools for private schools.^[58] In January 2008, it was reported that Byrne and his parents contributed about $4 million to the pro-voucher campaign, or three-quarters of its $5.4 million funding. Opponents of vouchers, funded mostly by the teacher unions, spent $4 million; approximately $3 million came from the National Education Association.^[59][60] When that bill was defeated in a statewide referendum (62% opposing vs. 38% favoring),^[61] the Salt Lake Tribune reported that Byrne "called the referendum a 'statewide IQ test' that Utahans failed." He said, "They don't care enough about their kids. They care an awful lot about this system, this bureaucracy, but they don't care enough about their kids to think outside the box."^[62]

Byrne criticized Utah governor Jon Huntsman for not sufficiently supporting the voucher campaign. According to Byrne, Huntsman had before he was elected stated that he was "going to be the voucher governor," and Byrne had donated $75,000 to Huntsman's campaign for governor in 2004. However, to Byrne's disappointment, the moment Huntsman was elected he went missing from the debate, and Byrne told the Associated Press that he would now bankroll anyone who could defeat Huntsman at the polls, "even a communist".^[63]

During the school voucher debate, Byrne said of high school dropouts, "Right now, 40 percent of Utah minorities are not graduating from high school. You may as well burn those kids. That's the end of their life. That's the end of their ability to achieve in this society if they do not get a high school education. You might as, just throw the kids away." He was criticized for the comment by the Utah NAACP, but rejected their demand for an apology.^[64]

See also

• Overstock.com

References

• Marquis Who's Who Online

External links

• Deep Capture, a financial blog by Patrick Byrne
• Overstock.com website
• Interview with Byrne on NPR July 4, 2003
• CNET interview with Byrne March 6, 2006
• "CEO with a Cause" interview on NBC Universal's Ivillage.com June 27, 2007
• "A day in the life of Overstock CEO Patrick Byrne", interview on The Register website, Mar. 10, 2008
• Daily Show Interview with Patrick Byrne on Naked Short Selling (humorous), March 16, 2009
• "NAzerali v. Mitchell," by Bethany McLean, In The Supreme Court of British Columbia, Oct. 19, 2011