Tom gets a reply from Patrick

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By Hannibal100
September 8, 2005

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Dear Tom,

Please pardon me for taking so long to respond to your messages. I have been abroad and largely incommunicado, but am now on my way back to the US and can give your arguments the attention they deserve. By extension, I am commenting on and replying to the many other Fools who have graced this board with their thoughts.

By way of preface, however, I wish to thank everyone who weighed in, pro or con, on this issue. Believe me, it is no easy question, and the debate on this Fool board mirrors my internal debate about the right course of action. So I am in debt to all, from both sides, who wrote thoughtful pieces that helped make explicit to me the choices I am making. I would also like to make clear that these comments concern the issue of naked shorting, and not the lawsuit which we have filed, as I am not accusing the defendants in the lawsuit of being involved in naked shorting (I am agnostic on that question).

In order to address your points correctly, Tom, I have distilled from your postings a set of quotes, which I believe roughly bound your various issues correctly, and respond to each.

1. "In the case of Regulation FD, our pursuit directly benefited our customers and, I argue, our shareholders. It was right in the sweet spot of our operations."

Tom �Your business model gave you a reason to fight for Reg FD in a way that mine does not. I grant that this defense is not one to which I may avail myself, and acknowledge your point is a good one.

2. "The question I've placed on the table is, 'Is this in the best interests of the non-controlling outside shareholders of' If there is a meaningful brand benefit AND there are damages which, combined, generate a net gain for shareholders, outstanding."

Tom � My actions could result in economic gain to the company, but I do not want my argument to rest on that. Thus, for the remainder of this response I will argue principles, not dollars. If it turns out that there is economic gain to be had, then it will be gravy.

3. "Hypothetical: Would you rather reveal a massive scandal on Wall Street and have suffer for your effort OR have deliver A+ results for the next decade yet play no part in unraveling the mysteries (and immoralities) of naked shorting? .....Would [Byrne] be more thrilled to deliver the next Den of Thieves into Wall Street's history books -- or is he more interested in helping earn a $5 billion valuation over the next ten years?"

Tom � The suggestion here is that I have some interest in "playing a part in unraveling" the mysteries of this scandal. You have got to be kidding me: don't you think that I knew I would be creating enemies for life out of a lot of Wall Street, and opening myself to charges of being idiotic, paranoid, delusional, etc.? "Playing a part" in solving this is something to which I assign 0 value: in fact, it is something to which I assign a high negative value. "Playing no part" is thus something to which I assign a positive value. Thus, I would far prefer to have the value of Overstock's A+ results, plus the value of playing no part in unraveling this.

However, your hypothetical captures my actual choice incompletely. I believe that a gang of miscreants of unknown dimensions has found a way to drain the public's money out of the market and destroy some viable small businesses in the process. The only people who had caught on were people dismissed as fringe players, and the regulators seemed oblivious, unconcerned, or captured. Thus, the real hypothetical I faced was between doing something about this (and eating the costs of time, money, and reputation that I knew would follow), or doing nothing about it and watching the practice continue.

4. "It's the question I ask whenever the Overstock debate comes up, which is not infrequently. I ask, 'What do you think Patrick's ultimate goal is?'"

Tom � Fair question. Anwer:

� My goal as CEO (actually, at Overstock we eschew "C" titles as being egocentric, so technically I am just, "president") is to build with my colleagues a company that serves tens of millions of households by allowing them to stretch their budgets further and live better than they would have had we not come along.

� My goal as a capitalist is, in the process of achieving the first goal, to build one of the great companies in the world, capable of earning an ungodly return on capital by generating billions of dollars of revenue and hundreds of millions in net income using capital as sparingly as possible.

� My goal as a citizen are to fulfill my civic obligations, in which I include this: when I see that thugs are mugging old ladies in the street, to straighten out the thugs.

One could argue that it is necessary to have only one goal, but this is incorrect. The first two goals mentioned above are mutually dependent: we could not build a great company without a desire to serve other Americans, and we could not serve other Americans to the desire we wish were we not fanatic capitalists. Is the third antagonistic to either of the first two? I can see that it might be. On the other hand, it is also allied with the first two: it is impossible to desire to serve one's fellow citizens while being willing to turn one's back on an old lady getting mugged; and should we ever need to raise more capital, we will not be able to do so sparingly if our stock is artificially suppressed.

You have, however, put your finger on the issue: I can see that some would say I am betraying my obligations as a CEO to fulfill what I feel are obligations incumbent upon any good citizen.

5. ... But I wonder if it is optimal for executive leadership of a closeout retailer to be leading this charge?

Tom � No. It is incredibly sub-optimal. Optimal would be the government leading the charge. However, my leading the charge is better (maybe only slightly better!) than having no one charge.

6. "[Y]ou seem to be willing to subordinate the interests of shareholders in order to fight injustice on Wall Street....the sense I get is that the crusade extends beyond your company..."

Tom �I am not convinced that I am "subordinating the interests of's shareholders" to this other battle. However, suppose "some higher power" (as you put it) told me that I was. Then my answer would be that I have said in a number of interviews over the years, that in my household there were three sacred things: the Church, the US Constitution, and shareholder rights. Literally, that is the Holy Trinity According to Jack and Dorothy Byrne. And though I might change the labels a bit, I think my folks got the order right. So I guess that means, yes, if I had to choose, I would rank my duties as a citizen above my duties as a steward of other people's capital, but just one notch above.

7. "In my work, I'm tasked with helping others to allocate their hard-earned capital, often counted out carefully in small allotments. I feel duty-bound to focus their attention on companies that relentlessly drive toward better operations, better results, and better returns for their long-term owners. With that as my guiding principle, it is very difficult for me to recommend shares of I have come to the conclusion -- with mind open to the fact that I may be wrong -- that either you should turn the operating reins over to a team solely focused on operating excellence OR you should pass the crusade on to others, refusing to speak publicly about it again."

Tom � First, I will completely understand if you withdraw the Fool's recommendation of our stock. I understand why someone in your position might say, any endorsement of this stock may wrongly be read as an endorsement of Byrne's crusade. Or simply, the Fool cannot endorse a company while the CEO is off jousting at windmills. There will be no hard feelings on my part (though more than any Wall Street ever gave me or took away, the Fool's endorsement has brought me the most pride).

Secondly: my status as CEO is something that makes me chuckle a bit. I believe on your show I told the story of how I, in the height of the dot-com boom, went to 55 venture capitalists, and was turned down by all 55. I never mentioned their main reason for turning us down: me. They would say things like, "If we invest you are going to have to get yourself a rea[l] dot-com CEO." I was happy to oblige them, but the industry melted down in April before I could find one.

Ironically, for the last couple years one of the worries that most frequently hear is that I might be leaving someday. But now, I hear from you and some others that perhaps I should leave. So the world has gone from people thinking I was a handicap, to thinking I was indispensable, to now, it seems, viewing me as a potential handicap.

And the answer is.... I am, of course, a handicap. I have been saying it all along. And there are a lot of things I want to be doing (e.g., hiking the Appalachian trail) that this job prevents. Jason Lindsey could run this company better than I, but I have not been able to sucker him out of retirement. We have developed strength on the bench, both in the team of eight who report to me, and the ten beyond that: within this group of 18 there are several individuals who could run this company better than I and plenty of combinations of two people who could do so, but the median age of these folks is about 29, alas. There are three people outside Utah that I would trust to run it, but none are available (and one is named "Byrne" so I am not sure it would solve the distancing problem). So until one of those three becomes available, or our current execs get a little more seasoned, or Jason gets tired of golf, shareholders are stuck with me. But let us both take heart that it is not forever.

Tom, I thank you for giving me opportunity to respond to your gracious postings. In the end, your points are all completely fair, and I have grappled with them myself, and am not sure you are wrong. In the end, I wonder if all this philosophy is not simply rationalization on my part. Near the end of the book, "One Flew Over the Cuckoo's Nest," (where Big Nurse shames Billy into killing himself, and R. P. McMurphy foregoes a chance to escape in order to strangle her), Chief Bromden (the huge Indian telling the story), says something to the effect of: I have gone over what happened next in my mind, and wished it could have come out differently. But in the end it could not have, because eventually word would have reached McMurphy, and he could not have gone on playing poker in Reno, or hustling a skillo wheel, and giving Big Nurse the last round.

For my part, I cannot express how much I regret my role in this issue. I knew the costs in coin and reputation that I would pay to get involved, and would have far prefer to have ignored it. But for many months I have gone to bed knowing, "Somewhere in America there is a grandmother eating dog food tonight so that some ass... on Wall Street can drive a new Porsche." And I just decided it wouldn't happen on my watch.

I leave it to your readers to judge my sincerity.

Very respectfully,


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