Investigating Overstock and Their Various Ties

On August 22nd, 2019, news crashed through the cryptosphere (as well as the general media-sphere), revealing that Overstock CEO, Patrick Byrne, had resigned.

Below are examples of headlines that were shown throughout the day:

However, that is not what the focus of this report will be on.

Instead, it will be focused on:

  • Various subsidiaries of Overstock, Inc.
  • Individuals and entities that are involved with Overstock, Inc.
  • Overstock, Inc.’s investments
  • Overstock, Inc.’s offshore connections
  • Potential live SEC investigation into Overstock, Inc.
  • Overstock, Inc.’s involvement in the blockchain space.

Report’s Conclusions

This report will provide evidence that attests to the following:

Since there’s so much to unpack in this case, we’ll just start from the top and work our way down.

Nature of the Resignation

What makes the resignation of the Overstock CEO so newsworthy is the fact that it has been connected to an alleged romance with federally indicted and convicted Russian spy, Patrick Byrne.

https://www.nytimes.com/2019/08/22/business/overstock-ceo-patrick-byrne.html

The excerpts above from the New York Times concisely summarize all of the relevant points regarding the more dramatic and salacious details of Patrick Byrne’s exit from Overstock.

But that’s just the back story, and certainly not what we’re going to dig into in this report.

Since we’re focused on the world of blockchain and cryptocurrency, we’re going to take an in-depth look at Patrick Byrne’s business affairs in the cryptocurrency space (as well as beyond).

Overstock and tZero

As many know, tZero is a wholly operated subsidiary of Overstock, Inc.

Quick Review: What is tZero?

From the horse’s mouth:

Numerous public resources report that the project was able to raise a staggering $120+ million in their ICO. However, there are few means of reliably validating this information.

CoinDesk Disinformation

Curiously, an April 2019 CoinDesk report claimed that two of tZero’s largest prospective investors had backed out for various reasons.

See below:

Dissecting the Disinformation in the Excerpt Above:

  1. These prospective investments by GSR and Makara that the article mentions were not related to the tZERO token sale. These two firms were looking to purchase actual equity in the tZERO company itself.
  2. The funds that tZERO garnered from its ICO sale are wholly unrelated to the investments of the two companies mentioned above.
  3. There is no objective evidence to suggest that these companies ‘backed out’ of any arrangement with tZERO. Rather, it appears that tZERO (effectively, Overstock) simply overstated the total amount that these entities were looking to place into Overstock.

What’s notable about this article is the time of its publishing — April 2019, because this clarification of the actual amount these entities were investing into tZERO was only divulged to investors after the SEC had filed a subpoena for more information from tZERO.

Additionally, according to tZERO’s Form 10-Q, filed at the end of Q1, the modified contribution totals had been arranged and agreed upon several months prior (December 2018).

This report will discuss the specifics of these investments as well as the agreements made in a latter section.

Auditing tZero’s Smart Contract

The funding for tZero was initially done via ICO (Initial Coin Offering). For tZero, this was held on the Ethereum blockchain.

[Note for readers: If they do not understand blockchain, then this part will not make any sense to them. Nothing that we can do about that to dumb it down]

Contract Information

Contract name = ‘TZERO PREFERRED’

Contract address = 0x5bd5b4e1a2c9b12812795e7217201b78c8c10b78

Distribution address = 0xb8fa887e99e0bbc58c5e0bb6f13024a1f6c917a7

Contract Owner = 0xb8fA887e99e0bBc58c5E0BB6f13024A1f6C917A7

[Events are also notable]

Additional Smart Contract Information

Looking at the contract owner for tZero, it appears that the parent address was responsible for the distribution of tokens:

Source: https://etherscan.io/tokentxns?a=0xb8fa887e99e0bbc58c5e0bb6f13024a1f6c917a7&p=22

The image above shows 26.2 million tZero tokens being sent into the 0xb8fa address initially (which is the total supply of all tZero tokens that were created).

All transactions in the 0xb8fa address can be found in the airtable below:

Evaluating the Value of Tokens Distributed

According to public reporting by CoinDesk, the token was being sold for a value of approximately $10/token during the ICO:

https://www.coindesk.com/tzero-is-live-but-volume-is-light-and-its-tokens-price-is-down-sharply

Assuming that these tokens that were distributed were all distributed to investors that bought into the ICO, that would indicate that tZERO made $260M+ from the crowdsale.

Overstock and Ravencoin

Last year, circa February or March 2018, multiple reports came out about a hardly-known coin called ‘Ravencoin’.

The initial report by CoinTelegraph indicates that Overstock had been mining the coin several months prior, despite it not having any substantive value on any secondary market at that point in time:

What are your thoughts on Ravencoin? from r/CryptoCurrency

https://www.reddit.com/r/CryptoCurrency/comments/7yriiw/what_are_your_thoughts_on_ravencoin/ ^^ (embed for the comment that mentions that Overstock had been mining the coin for months already)

Another report from ‘Crowdfund Insider’ in March 2018 indicated that Overstock had already spent $1.8 million on 60 million shares of Ravencoin (valued at $.03 par per share). Notably, the report also states that Overstock had “assisted with platform development” as well.

Digging Deeper Into Overstock

The primary motivation for looking deeper into Overstock are the cryptocurrency projects that they have investigated significant resources into — namely Ravencoin and tZERO.

As stated above, it has been reported that tZERO was able to successfully raise over $100 million during their ICO.

Additionally, Ravencoin now has a value of $.035 per token at the time of with 4.2 billion coins outstanding at the time of writing, giving the coin a market valuation of $150 million.

Given Overstock’s heavy investment into the creation of the coin as well as its ecosystem and maintenance, it stands to reason that Overstock has a substantial stake in the 4.2 billion coins that are currently circulating.

Curiously, despite the news of the Overstock CEO’s resignation following the revelation that he allegedly was in a romantic relationship with a convicted Russian spy, the price of Ravencoin appears to be unaffected in the 24 hours following the breaking of this news.

In fact, a current look at the coin’s price on CoinMarketCap shows that it has gained +5% over the last 24 hours. , outperforming many of its peers in the T100 cryptocurrency (by market cap) list.

There May Be Multiple Federal Investigations into Overstock

In tZERO’s Form 10-Q (quarterly report; Q1 2019), filed by Overstock, Inc., it was revealed that tZERO has been under investigation by the SEC, among other unnamed regulatory bodies.

Revelation of Ongoing SEC Investigation

Specifically, the form states:

“In February 2018, the Division of Enforcement of the SEC informed tZERO and subsequently informed us [Overstock, Inc.] that it is conducting an investigation and requested that we and tZERO voluntarily provide certain information and documents related to tZERO and the tZERO security token offering in connection with its investigation. In December of 2018, we received a follow-up request from the SEC expanding the scope of the investigation into certain public statements made by us. We are cooperating fully with the SEC in connection with its investigation.”

Revelation of Ongoing Investigations by Other Unnamed Enforcement Agencies in Unidentified Jurisdictions

The form also states:

“As a result of tZERO’s projects seeking to apply distributed ledger technologies to the capital dealer markets, tZERO’s subsidiaries have been, and remain involved in, ongoing oral and written communications with regulatory authorities.”

“tZERO’s broker-dealer subsidiaries are currently undergoing various examinations, inquiries, and/or investigations undertaken by various regulatory authorities; as appropriate or required, we will provide further information to such regulatory authorities regarding such matters. Any failure by tZERO’s broker-dealer subsidiaries to satisfy regulatory authorities that they are in compliance with all applicable rules and regulations could have a material adverse effect on tZERO and on us.”

Revelation That tZERO is Currently Engaged in Two Different Lawsuits

Lawsuit #1

According to the form, a lawsuit was filed against tZERO on January 31st, 2019 in the Southern District of New York. tZERO states that the Plaintiff has filed suit “alleging that our website violates the Americans with Disabilities Act (‘ADA’) in addition to other New York specific laws, beacuse it is not accessible to blind and visually impaired people.”

Lawsuit #2

The form identifies that another lawsuit was filed against tZERO on March 15th, 2019, by ‘Consolidated Transaction Processing, LLC’ in Delaware’s U.S. District Court. tZERO states, “We are alleged to have infringed patents covering electronic transaction processing methods.”

tZERO Reveals it Accrued Over $20 Million (USD) in Liabilities Over a Four Month Span

The form states, “At March 31, 2019 and December 31, 2018, we have accrued $10.6 million and $10.3 million, which are included in Accrued liabilities in our consolidated balance sheets.” The form goes on to state that, “It is reasonably possible that the actual losses may exceed our accrued liabilities”, which is troubling.

(quick informative insert that defines what liabilities and losses are)

Significant Spending by Overstock, Inc., to Defend Itself Against the SEC

According to an article published on financial news site, ‘MarketWatch’ (published August 14th, 2019), “Byrne noted that Overstock has spent about $10 million to $13 million on the [SEC] investigation so far.”

This total is fairly remarkable when considering the fact that the SEC has not initiated any formal proceedings against tZERO at this point in time.

This also may explain why tZERO was forced to take on over $20 million in debt in two separate $10+ million disbursements in December 2018 and March 2019, respectively.

Breakdown of Funds Raised in ICO by Overstock

Under the Table of Contents section in the tZERO Form 10-Q, Overstock, Inc. issued the following statement regarding the investment it accrued from the tZERO token sale:

“At December 31, 2018, cumulative proceeds since December 18, 2017 from the security token offering totaling $104.8 million , net of $22.0 million of withdrawals, have been classified as a component of noncontrolling interest within our consolidated financial statements.”

Breaking this down, the above statement means that tZERO earned $104.8 million from its ICO after subtracting the $22 million Overstock had extracted (withdrawals).

Thus, in total, $132.8 million (worth of Ethereum) was raised in the crowdsale.

The form alleges that the $21.5 million of offering costs associated with the security token offering were “classified as a reduction in proceeds within noncontrolling interest of our consolidated financial statements.”

Warrants

  1. Overstock indicates that they issued warrants to two of their investors for $6.5 million, ‘net of issuance costs’. Essentially what this means is that Overstock inked an agreement with two of its investors that allowed them to buy up to $6.5 million worth of tZERO’s stock (3,722,188 shares; common stock) at a fixed price of $40.45 per share.
  2. The Form states that one out of the two purchasers of the warrants had exercised said warrant in full, allowing them to purchase 2.472 million shares of common stock in the company. At the predetermined fixed price of $40.45/share, the total purchase value was $100 million.
  3. The second purchaser of the issued warrants exercised their warrant in full on January 17th, 2018, purchasing 1.25 million shares in tZERO at the same fixed price, valuing that transaction at approximately $50.6 million.

Combined, the two executed warrants resulted an additional $150.6 million in investment that tZERO received on top of the $132 made during its ICO, yielding a total of $182.6 million in investment between the two.

GSR Agreement

GSR entered into contract (Token Purchase Agreement) with Overstock in August 2018 to purchase $30 million worth of tokens at the fixed price of $6.67 on May 6th, 2019, specifically.

However, the report states that,

“On May 8, 2019, the parties agred to replace the Token Purchase Agreement with an executed Investment Agreement with which GSR purchased 508,710 shares of tZERO which represents approximately 0.5% of the issued and outstanding Common Stock of tZERO. In exchange, GSR agreed to transfer to tZERO a total of $5.0 million in consideration, consisting of $1.0 million U.S. dollars, $1.0 million U.S. dollars’ worth of Chinese Renminbi, and securities traded on the Hong Kong Stock Exchange with a market value of $3.0 million U.S. dollars.”

The modified agreement between GSR and Overstock, outlined in the statement above, indicates that a serious devaluation in tZERO’s value had taken place in the span of just four months.

Breaking Down the Rapid Decrease in tZERO’s Valuation by tZERO

Overstock and GSR Capital Agreement Breakdown:

The report states that the 508,710 shares of tZERO that GSR purchased represented approximately 0.5% of the issued and outstanding Common Stock of tZERO. Thus,

Based on this statement, it can be said that there were roughly 100 million issued and outstanding common stock of tZERO.

According to the quarterly report, this equity was distributed to GSR Capital for an aggregate of $5 million USD in value (paid with a basket of securities/foreign currency/USD).

Thus, the agreement between Overstock and GSR Capital valued tZERO at $100 million.

Overstock Issued Warrant Redemptions

As noted in the prior section, the 3.7 million stock in tZERO that was offered at a fixed price of $40.45/shares were purchased by two different investors that had redeemed their warrants in full in December 2018 and January 2019, respectively.

Based on the information provided about the agreement between GSR and Overstock indicating that 508,710 shares represented approx. 0.5% of all outstanding shares in tZERO, it can be determined that there are approximately 101,742,00 shares outstanding.

Thus, the 3,722,188 shares that were cumulatively exercised by the two warrant holders represents approximately 3.65% equity in tZERO.

Thus, at the combined purchase price of $150.6 million, cumulatively, to fulfill the two warrants, tZERO was valued at $4.126 billion at the time of the warrants’ execution (December 2017/January 2018).

Calculating Depreciation

Based on the calculations outlined above, we now know that tZERO went from a $4.126 billion valuation in December ‘17/January ’18 to $100 million by May 2019.

This represents a -97.5% depreciation in the valuation of tZERO in just 1.5 years — totaling a loss of -$4 billion in value over the same timespan.

tZERO’s Broker-Dealer Subsidiaries

tZERO identified two broker-dealer subsidiaries in their Form 10-Q.

They are listed below:

  1. PRO Securities LLC (and, by extension, the subsidiary of this company, which is PRO Securities ATS)
  2. SpeedRoute LLC