Overstock’s real estate and naked short risks…

August 6, 2008

In a little less than two weeks, footnoted will celebrate its fifth anniversary and in all of that time writing about odd disclosures at all sorts of companies, I’ve managed to avoid writing about Overstock (OSTK). It was definitely a conscious decision, mostly because so many other people were beating the drum, including my friend Herb Greenberg, who’s now gone into the research business, leaving a gaping void, especially when it comes to Overstock. (The backstory is here for those unfamiliar with the details).

But the 10Q that Overstock filed on Monday was simply too interesting to ignore. That’s because the filing had lots of new warnings about the real estate business that it introduced back in May. In addition to regular listings, the site tries to bring some order to the chaos involved in searching for distressed properties and foreclosures, though my own quick experimentation with the site didn’t bring in nearly as many properties as I was able to find on Countrywide’s REO site, which only lists foreclosures for one institution. That could be because at least based on disclosures in the Q, people have to advertise to appear on the site and it’s unclear why banks that already have their own systems in place would sign up.

Indeed, the risk factors involved in the real estate business are fairly extensive, according to the Q, where they’re buried at the very end of the filing:

The law regarding the potential liability of an online listing service for real estate sales is not clear. The platform of the listing service will be accessible to those subscribers who will have the ability to feature their real estate for sale and will supply the text descriptions of the real estate, including the general condition of the real estate and other important information. We will have no ability beforehand to know if the information sellers provide is correct.

There was one other interesting new tidbit in the filing about naked short selling, which we last footnoted here:

Additionally, Dr. Patrick Byrne and the company have fostered and supported a national debate concerning illegal trading practices called “naked short selling” and have advocated regulatory changes and enforcement action designed to end these practices. The profile of the company and Dr. Byrne, and their positions on issues associated with the debate, may make the company and Dr. Byrne the target of criticism and derision in the financial markets and associated media, and this may prove to have an adverse effect on the company’s stock price.

Just don’t say you weren’t warned. It’s right there in the filing.

Photo credit: (AP Photo/Douglas C. Pizac)

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