The Exclusive Inside Story Of The Fall Of Overstock’s Mad King, Patrick Byrne

On Thursday, Patrick Byrne, the founder and longtime CEO of former e-tailing large, resigned, saying his involvement as a federal informant within the investigation of notorious Russian spy Maria Butina made performing his duties unattainable. That’s not the entire story. This is.

It’s early May and Patrick Byrne has simply gotten off the telephone with hip-hop artist Akon and is roaming barefoot within the elegant three-room suite on the highest flooring of the Jefferson lodge, a stone’s throw from Embassy Row in Washington, D.C. He grabs a Diet Coke, a pack of gummy bears and a few M&Ms from a minibar hidden in a tasteful armoire, settles on an opulent cream-colored couch and begins to boast in regards to the circumstances round which the Senegalese-American superstar sought him out. “I hear he’s a musician. We share ambitions for Africa,” says Byrne, popping a gummy bear into his mouth.

Byrne, who purchased in 1999 and ran it for twenty years, has all the time been a person of many ambitions. High on his record: reworking the African continent and its 1.three billion folks by way of blockchain know-how. Like an infomercial for the nascent decentralized, distributed ledger know-how that underlies cryptocurrencies like bitcoin, he waxes poetic a couple of future through which corruption is worn out, persons are free of poverty and growing nations can leapfrog forward by placing authorities capabilities like voting, property information and central banking on the blockchain. Characteristically low on his precedence record: The financial pursuits of the hundreds of shareholders in his publicly traded former e-tailing large.

For the final a number of years, Byrne, 56, spent no fewer than 220 days a yr on the highway spreading his blockchain gospel, even if Overstock was hemorrhaging money. “Over the next five years, we can change the world for 5 billion people,” says Byrne. “Well, at least a billion. Maybe 5 billion.”

Byrne is obscure about why he’s within the nation’s capital this week and mentions a gathering with representatives from Africa about his blockchain tasks. However, he later reveals that he had been assembly with the Department of Justice. Byrne claims he’s been serving as a authorities informant, feeding data since 2015 to the “Men In Black,” as he places it, on Maria Butina, a vivacious Russian grad pupil with whom he struck up a romantic relationship. She is presently serving an 18-month jail sentence after pleading responsible to conspiring to behave as a international agent, in connection together with her efforts to infiltrate conservative political circles earlier than and after the 2016 presidential election.

In his resignation letter, Byrne cited his involvement in “certain government matters” as complicating “all matters of business relationships from insurability to strategic discussions regarding our retail business.” Byrne says what he has finished (precisely what that was stays unclear) “was necessary for the good of the country, for the good of the firm.” Byrne concludes his letter by stating cryptically:

“Coming forward publicly about my involvement in other matters was hardly my first choice. But for three years I have watched my country pull itself apart while I knew many answers, and I set my red line at seeing civil violence breaking out. My Rabbi made me see that ‘coming forward’ meant telling the public (not just the government) the truth. I now plan on leaving things to the esteemed Department of Justice (which I have doubtless already angered enough by going public) and disappearing for some time.”

In a name from his automotive after delivering a farewell speech to his stunned staff, Byrne mentioned he had his baggage packed. “I will be sitting on a beach in South America shortly, and that is all I want to think about,” he says. “I want to focus on getting back into good shape, doing yoga and becoming a vegetarian.”

Welcome to Patrick Byrne’s weird world. The existential disaster Byrne is placing his Salt Lake City-based firm by comes after a formidable profession pioneering e-commerce. Nearly twenty years in the past, Byrne was lauded as “The Renaissance Man of E-Commerce.” The closeout retailer he took management of in 1999 for a mere $7 million was on its option to changing into an e-tailing phenom and ultimately got here to command a market capitalization of $2.2 billion. But within the hyper-competitive digital age, disruptive enterprise fashions don’t final lengthy, and in the present day Overstock—as soon as an innovator—is a has-been.

This isn’t any secret. By the time of his resignation, Byrne had all however given up making an attempt to compete with the likes of Amazon and Wayfair, and he had spent the final two years unsuccessfully making an attempt to unload Overstock’s retail enterprise. Just as e-commerce captivated Byrne on the flip of the millennium, blockchain was his shiny new obsession. So Byrne funneled Overstock’s dwindling sources into blockchain ventures—greater than $200 million since 2014. About 30% of that sum went into 18 early-stage firms which can be constructing a collection of blockchain know-how merchandise he needed to promote to governments. The relaxation has been seemingly squandered on a private vendetta: Overstock is making a blockchain model of Nasdaq, which Byrne believed might proper some the evils of Wall Street—notably the bare short-selling that he claims plagued his firm for a lot of the final 15 years. Byrne attracted an eclectic mixture of allies to his nook doing what he calls “God’s work,” starting from Akon and the World Bank to the notorious short-seller Marc Cohodes and the town of Denver.

But the partitions closed in on Byrne’s quixotic journey. Overstock’s closely shorted inventory plummeted from $87 to start with of 2018 to about $20 in the present day as some $1.5 billion in market capitalization has evaporated. Once reliably worthwhile, Overstock misplaced $206 million final yr and $110 million in 2017. In current months, Byrne fired some 400 folks.

Even worse had been the cracks forming in Overstock’s new technique. The firm’s prized crypto providing, Tzero, is the topic of an SEC investigation, and a highly-anticipated personal fairness funding into the alternate has withered away. Its blockchain funding arm, Medici Ventures, has but to generate significant revenues and racked up losses of $61 million in 2018. With many huge firms now embracing blockchain know-how—together with a daring new plan from Facebook—Byrne’s technique shift to blockchain out of the blue seems to be as difficult as Overstock’s on-line retailing enterprise.

Eventually even Byrne’s most loyal shareholders—blockchain believers amongst them— had been in open revolt. Fumed Byrne in May, after buyers bombarded him with calls and emails when he offered 900,000 shares of inventory, “Frankly, I had no concept that shareholders would demand explanations of why and the way I’d wish to use my money derived from my labor and my property to pursue my ends in life.”

Byrne is the son of the late John “Jack” Byrne, a University of Michigan-trained mathematician and famend insurance coverage govt credited with turning round Geico within the mid-1970s and persuading Warren Buffett to spend money on the auto insurer. Geico would ultimately turn out to be one of many greatest contributors to Berkshire Hathaway’s backside line, and Buffett as soon as described Byrne’s father as “the Babe Ruth of insurance.” When Byrne was in center college, he gravitated towards his father’s pals. Bethesda neighbor Gordon Macklin, the president of Nasdaq from 1975 to 1987 (and later the chairman of San Francisco funding financial institution Hambrecht & Quist), would drive Patrick to high school usually. Buffett was an occasional home visitor, and Byrne’s mother and father would permit him to skip college to spend time with the funding maven.

Says Byrne, “My mom would get a case of Pepsi, and Buffett, who is a teetotaler, always carried a hip flask of cherry syrup like a drunk. We’d sit there and over an afternoon polish off 18 Pepsis.”

Byrne’s father later went on to show round American Express’s Fireman’s Fund and ultimately created his personal insurance coverage holding firm, known as White Mountains Insurance. His stake, value tons of of hundreds of thousands at his retirement in 2007, shaped the idea of the household’s wealth.

Patrick was the youngest and most precocious of Jack’s three sons. In 1981, he headed to Dartmouth to check philosophy and Asian research. Shortly after his commencement, he was recognized with testicular most cancers. After therapy, he celebrated with a cross-country bicycle experience along with his two older brothers. The most cancers would come again two extra instances in fast succession and preserve him within the hospital for a lot of his 20s. To preserve his thoughts occupied whereas he was bedridden, he started pursuing a graduate diploma in mathematical logic from Stanford. In 1988 he headed to Cambridge University as a Marshall Scholar and ultimately acquired his philosophy doctorate from Stanford. Byrne speaks Mandarin and several other different languages and as soon as translated Lao Tzu’s Tao Te Ching (The Way Of Virtue) into English. “I was one of those guys who actually studied philosophy because I was trying to figure out man’s place in the universe,” says Byrne, whose dissertation explored the virtues of restricted authorities and drew from libertarian Robert Nozick’s Anarchy, State and Utopia.

Despite his years in academia, Byrne pivoted arduous to the pursuit of wealth within the late 1980s. “I had grown up in a very business-oriented household … I never anticipated staying in a university setting,” he says. In 1987 he purchased a bankrupt lodge along with his older brother known as the Inn at Jackson Hole for about one million , which they offered a number of years later for $four million. In 1989, they began shopping for distressed client debt at 5 cents on the greenback throughout the S&L disaster. In 1991, Byrne led a $1 million funding into the event of the Red Dolly Casino in Colorado, which was offered three years later for $5 million. He additionally invested in distressed strip malls, workplace house and condominium buildings throughout the nation. His dad usually loaned his sons cash and in later years put up mezzanine capital, accumulating a most popular, 15% return and half as a lot fairness.

Nothing stored Byrne’s consideration very lengthy. In 1994, he led an funding into Centricut, a New Hampshire-based industrial torch-part producer, and served briefly as CEO when the present administration fell ailing. In 1997, he left to run Berkshire Hathaway’s Fechheimer Brothers, which made uniforms for police, firemen and navy. In 1999, seeing a chance to promote leftover stock on-line, his funding holding firm, High Plains Investments LLC, acquired a majority stake in D-2 Discounts Direct for $7 million. He renamed it Overstock, and when 55 enterprise capitalists declined to fund the corporate’s progress, he turned to pals, household and his personal checkbook. His timing was good. The firm started scooping up stock from bankrupt dot-coms, whether or not it was client electronics, jewellery or sporting items, then promoting it on a budget. In 2002, Overstock’s income hit $92 million and Byrne took the corporate public by way of a Dutch public sale, which permits buyers (not bankers) to set costs for the inventory providing themselves. (Google went public the identical manner.)

By 2005, the corporate’s inventory, which had skyrocketed post-IPO, started to slip as its losses widened. Byrne grew to become satisfied it was due to bare short-selling, an unlawful observe through which buyers promote shares in an organization with out really borrowing the shares, sometimes utilizing leverage. In a now-infamous August 2005 convention name, he ranted about how hedge funds, journalists and regulators had been conspiring to push down the corporate’s inventory value beneath the route of some faceless menace he known as the “Sith Lord.” Overstock sued short-selling hedge fund Rocker Partners and analysis agency Gradient Analytics, which had been important of the corporate. Then, in 2007, he filed a $three.5 billion lawsuit towards 11 of the most important banks on Wall Street (Goldman Sachs, Morgan Stanley and Credit Suisse amongst them), accusing them of taking part in a “massive, illegal stock market manipulation scheme” that distorted the corporate’s inventory value by facilitating bare short-selling.

The campaign price him two administrators, plus the arrogance of his father, who threatened to step down from the board as a result of he believed his son was distracted from Overstock’s core enterprise. The litigation dragged on for over a decade and resulted in a handful of settlements, together with a $20 million fee from Merrill Lynch in 2016. “I think he won the battle but lost the war when it came to naked short-selling,” says Tom Forte, lengthy the lone analyst nonetheless overlaying the inventory. In the years Byrne spent chasing short-sellers, Overstock’s inventory sagged and income drifted slowly upward, hitting $830 million in 2008, $1.three billion in 2013 and $1.eight billion in 2018. And whereas the corporate by no means racked up large losses like Amazon or Wayfair, as Byrne likes to level out, its profitability has been modest. Overstock broke into the black in 2009, then eked out small earnings for the subsequent seven out of eight years.

In 2017 and 2018, as Byrne shifted his consideration to increasing in crypto and blockchain, the corporate started bleeding pink ink—a whopping $316 million over two years, which is greater than twice the earnings Overstock has ever delivered. Byrne chalked his market share declines as much as rivals with seemingly infinite piles of money to blow by. “The thing I never anticipated … was that I would be in an industry that tolerated people losing $500 million, $1 billion or $3 billion forever. We started drawing copycats who came in and seemed to have unlimited capital,” he says, not hiding his disdain for and jealousy of Wayfair.

However, former staff say Byrne was distracted by his short-selling campaign and didn’t take rivals severely. Internally Byrne’s ADD administration model—enthusiastically beginning up new tasks however then dropping curiosity—has been jokingly known as the Overstock “ovolution.” In 2004, the corporate spent a few million to develop an internet public sale platform akin to eBay, however it struggled to show a revenue and was shut down in 2011. (Byrne later mentioned he wished he hadn’t deserted it.) In 2014, Overstock invested $400,000 to facilitate pet adoptions by working with shelters, which it nonetheless runs however describes as a “public service.” The firm began promoting house, auto and small enterprise insurance coverage in 2014, too, which Byrne described as “a long-term play” earlier than trashing it as not doing “particularly well” three months later.

“Patrick gets very focused on something, and then when he sees the financials didn’t work out, he basically forces layoffs,” says Chad Huff, a former software program developer. “Initiatives would get started, then shelved. Or they’d be half done and not in a great state but rolled out anyway.”

Acouple of months earlier than his resignation, as sheets of rain blanket Overstock’s new headquarters on the base of Utah’s Wasatch Mountains—a constructing designed to resemble a peace signal when seen from above—Byrne has completed sitting by a scheduled enterprise luncheon and gone lacking. Several minutes later, after his assistant tracks him down, he glides into his workplace, the place posters of Bob Marley and Pulp Fiction give it a dorm-room really feel. He sits down and begins ruminating on his twenty years working Overstock. “It’s kind of imagination land,” says Byrne, wearing a black long-sleeve T-shirt, denims and tennis sneakers.

Strangely, Byrne’s Overstock was lengthy immune from activist shareholder campaigns and boardroom coups and what in the end prompted his sudden departure remains to be murky. Investors like Marc Cohodes had known as for Byrne to step apart as CEO and transfer into a boss place. Despite current inventory gross sales, Byrne stays the corporate’s largest shareholder, with a 14% stake and says he wasn’t pushed out. “This is not about pressure from shareholders. The only pressure—or actual issue— was that the insurance companies were having conniptions,” he says.

Byrne started chasing crypto in late 2013 when he requested dozens of staffers to work over the vacation break to fast-track a bitcoin fee characteristic. The value of bitcoin had skyrocketed that yr from about $13 to greater than $1,000, and in January 2014, Overstock grew to become the primary main retailer to just accept bitcoin as fee.

Before lengthy, Byrne started tapping Overstock’s steadiness sheet to fund greater and larger blockchain initiatives. The crown jewel: a digital inventory alternate known as Tzero, which is in search of to permit buyers to commerce so-called safety tokens that characterize conventional securities, like shares, bonds, actual property, personal fairness and artwork on the blockchain. Proponents say it will enhance entry and liquidity for sure investments, plus lower down settlement instances for shares and bonds from as much as two days to mere seconds. A bonus: The system would make bare short-selling unattainable as a result of there is no such thing as a longer a lag time between a purchase and promote order.

On the plus aspect, Tzero has happy a set of fearsome regulatory necessities, most notably buying an organization licensed instead buying and selling system. The drawback is, with simply two tokens—representing Overstock’s and Tzero’s personal shares—accessible to commerce on Tzero’s platform, virtually nobody makes use of it. The firm says it’s aiming for five to 10 tokens by the tip of the yr. In May, it introduced partnerships with Saudi actual property large Emaar Properties, to record $2 billion in actual property, and Securitize, a startup that packages common belongings into digital tokens that may be traded on the blockchain. While it hopes to generate revenues from itemizing charges, buying and selling commissions, curiosity on lending belongings and extra, it first must create liquidity by attracting high quality issuers and buyers to its platform.

Byrne was additionally growing a securities lending platform as a part of Tzero, which might join asset-rich institutional buyers like pension funds (who earn money by lending their inventory) instantly with short-sellers (who borrow inventory to make trades). Both events stand to profit from decrease charges, plus will obtain a blockchain-enabled digital find receipt that proves the shares have really modified arms. The service takes lifeless intention at banks like Goldman Sachs and Morgan Stanley, which presently sit in the course of these transactions. It’s been tried earlier than: An organization known as Quadriserv created an analogous inventory lending platform named AQS in 2006, however alleged in a current lawsuit that banks conspired to “boycott AQS and starve it of liquidity.” In 2016, AQS was offered in a hearth sale for $four million.

“It’s the last great business on Wall Street,” says Byrne. “Pension funds are going to understand they have been deprived of tens of billions of earnings a year. That money is turning into Maybachs in the Hamptons.”

At the corporate’s annual shareholder assembly in May, Byrne fielded powerful questions from buyers. While the value of bitcoin had climbed some 60% within the final 5 months, Overstock’s shares continued to slip. And after months of delays, Overstock simply dropped a bombshell: Tzero would obtain a measly $5 million within the type of Chinese renminbi, U.S. and different Hong Kong-traded securities from Asian funding agency GSR Capital, after the corporate initially touted a deal dimension of as a lot as $404 million.

Over time Byrne developed a dilettante’s fame for overpromising and underdelivering. In 2016 Byrne boldly instructed buyers that Overstock could be issuing the world’s first fairness safety utilizing the blockchain. “The history of capital markets is entering a new era,” he mentioned. Byrne personally ended up shopping for 50% of the $2 million most popular inventory providing.

In 2017, Byrne introduced a three way partnership with Peruvian economist Hernando de Soto Polar that may “challenge global poverty and inequality” by making a blockchain-based world land registry. But when the 2 couldn’t agree on phrases, Byrne ended up contributing $7 million of his private capital to take a 43% stake within the newly shaped Medici Land Governance.

Overstock started exploring a sale of its retailing enterprise in 2017, however up to now no consumers have materialized. There was additionally Tzero’s troubled “initial coin offering,” which got down to elevate $250 million however, in the end as crypto costs had been dropping, generated $105 million in August 2018 at an expense of $21.5 million to company dad or mum Overstock. The providing is now being investigated by the SEC as a part of a broader ICO crackdown.

Many buyers grew bored with Byrne’s guarantees. “Basically, every initiative they put forward, they promised or signaled to the market that this is an incredible layup and they will get it done in three to six months,” says Kevin Mak, a lecturer at Stanford Business School who invested within the firm in 2017 and offered his shares final fall. “I ultimately exited when I found that the information I was getting from management was no longer—I want to pick the right words—reliable.”

In the tip, Byrne was pressured to spend a substantial period of time trying to find contemporary funds to maintain his dream alive. In November 2017, Overstock borrowed $40 million from his mom (trusts in her title personal 5% of the corporate) and brother at an rate of interest of eight%. Over the subsequent few months, throughout the peak of crypto-mania, the corporate acquired $150 million from two buyers, together with George Soros, after they exercised warrants in alternate for inventory (the buyers have since dumped their shares). In August and September 2018, the corporate raised one other $95 million by issuing new shares of widespread inventory in an “at the market” providing.

The drawback is, in contrast to most firms that purchase again shares as costs decline, Overstock is promoting, diluting the corporate’s fairness. Shares excellent have climbed to 35 million from 25 million within the final two years. In the primary quarter of 2019 Overstock dedicated to a different fast inventory sale, elevating $31 million to partially offset a $51 million money burn.

Meanwhile, Overstock’s unique enterprise is working on fumes. “It was kind of a fight to run retail because it was never his priority,” says Stormy Simon, former president of the operation who left in 2016. Since then, there have been a number of rounds of layoffs within the retail enterprise, leaving a raft of empty desks in Overstock’s new $100 million headquarters. And but, to his blockchain staffers, Byrne was like Daddy Warbucks. Tzero CEO Saum Noursalehi was paid $four.eight million final yr, whereas his brother and Tzero vice chairman Nariman earned $1 million. Tzero chief know-how officer Amit Goyal made $1.eight million—and his brother Sumit earned a further $765,000.

In Overstock’s current quarterly filings, it signifies that it ought to be capable of fund its present obligations for one more 12 months, however after that, further capital could also be wanted “to be able to fully pursue some or all of our strategies.” The ominous disclosure appears to have had little impact on Overstock’s languishing shares, as a result of by now many buyers have given up on the corporate.

Byrne by no means confirmed a lot respect for Wall Street or small-minded shareholders—and possibly that’s what acquired him in the long run. “We’re like a Russian icebreaker trolling across the Arctic ice field. It’s three or four yards at a time and enormously expensive,” says Byrne. “When you’re talking about the kinds of numbers we’re talking about and freeing up trillions of capital … I think there is going to be so much money in it it’s kind of silly to try and model it.”

Photograph by Tim Pannell for Forbes

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