1) "Pariah for Life on Wall Street"

In 2002 Overstock went public using the Hambrecht Dutch Auction method. How did that come about?

The conventional IPO system is corrupt. I have given the full explanation numerous times in B-school talks, and will write it out here another day, but this is the basic principle: when people are in a position to allocate guaranteed profits they demand kick-backs, and that is true whether one is talking about Customs officials in Paraguay, or white-shoe Wall Street bankers.

In late summer of 2001 one of our early board members, Gordon Macklin, an honest, straight-laced guy from Findlay, Ohio who had gone on to be the first CEO of NASD, asked me to the Bohemian Grove for a long weekend. Several times over the weekend he told me, "You gotta meet this guy Bill Hambrecht. He's your cup of tea. He's really Left, a limousine liberal, pals around with Nancy Pelosi and Dianne Feinstein, but you two are gonna love each other. You are both 'up the organization' type of guys. He's really your cup of tea." Gordon must have said that three times.

Gordon explained that Bill Hambrecht had come up with a way to defeat the principle outlined above, by removing the need for bankers to make IPO allocations, and use an action to make the allocations instead.

By Christmas Eve 2001 we were working with Hambrecht on organizing an IPO for Spring 2002.

During 2001 numerous banks (e.g., Goldman, Lehman, CSFB, and half-a-dozen second and third tier banks) had been sniffing around (e.g., visiting us in Utah, having me come speak at their conferences) in anticipation of running our IPO. As things got rolling with Hambrecht, we let them all know the train was leaving the station, and Hambrecht would be involved. Goldman let us know immediately that they were not interested, but all the others expressed interest in participating. However, they all raised the same three objections:

 The deal was too small (≈ $25 million), whereas even though the IPO market was dead that year, they claimed they had recently raised their minimums to ≈ $50 – $60 million;

The fees Hambrecht was willing to share (≈ 3%?) were too small, whereas they all demanded 7% (precisely 7%, no "≈" about it);

They would not "go to the right" of Hambrecht. The lead banker in an IPO puts its name in the upper left of the cover of the prospectus, and the space goes to any of the (then five) bulge bracket bank involved, and then the names step down and to the right in order of posh-ness: second tier banks, third tier banks, etc. If two or more banks from the same tier are involved in the IPO, they squabble amongst themselves, but a bulge bracket (for example) does not "go the right" of a second tier bank.

Throughout the months of run-up to the IPO road show, we tried to get the non-Hambrecht banks to join in, and even though the IPO market was dead-as-disco, no bank would budge on their demands.

Our company lawyer from Wilson Sonsini (who was part of all these discussions) advised me, "Patrick, you've got to be smoking crack if you go public with Hambrecht when you could go public with Lehman or CSFB."

Simply to satisfy my own curiosity (and only after receiving Bill Hambrecht's permission), a few days before the finalization of the deal, I caved on all three points.

I called each of the other banks who had expressed an interest, and told them we change the deal to meet their needs. We would raise the deal to $60 million, we would raise the fees to 7%, and Hambrecht would go to the right of all the other banks. Just one thing (I added): Hambrecht's Dutch Auction does the allocation.

Every single bank said, "No." That was odd, as I had caved on all the of the points that had ostensibly separated us.

Finally one banker said aloud what I had just proven surreptitiously: "Patrick, we will not be involved in any deal with Hambrecht."

Another team of bankers flew to Utah, and delivered the same message, adding, "There would be repercussions for us in other syndicates if we worked with Hambrecht."

An SVP of a well-known bank (and himself a good guy) flew out to Utah to meet myself and Jason Lindsey (then CFO of Overstock), to say, "Patrick, if you go through with this you will be a pariah for life on Wall Street".

I thought about the short story I read in junior high school, something about a guy showing up at a party with a Black friend, and being told, "You can come into the party, but you're friend cannot." And I decided, "Screw it, we'll do it alone with Hambrecht."

When the IPO was over, I sent a dozen roses to the SEC examiner who had been on our issue. I don't know if they got through, and I never heard back. But I mean this: odd as it may sound now, I revered the SEC and its mission. I was raised to see a capital market as a web of millions of promises that people make to each other, and the SEC as the organization that makes those millions of promises be kept in good faith.

2) Salting the Wound

In early 2004 Google revved up to do their IPO, and (as part of their "Don't Be Evil" spirit) they chose to be the second Dutch Auction IPO.

They came under intense pressure from Wall Street to back down, but while Wall Street walked away from us, no banker could afford to walk away from Google's IPO (with the exception of Goldman, who was not involved, so adamant were they not to see a Dutch Auction IPO get any traction).

Due to quiet period restrictions Google was not able to explain their thinking to the world. I received a call from someone on the Google Board of Directors, asking me to explain to the public why Google was making the choice that they were making. I did so extensively on TV and in print , explaining why the conventional IPO system was corrupt, why a Dutch Auction was better, and that Google's "Don't Be Evil" ethic was what had made them choose the Dutch Auction.

I started being asked to speak in business schools on the subject, and did so repeatedly.

In 2004, the SEC contacted me to ask me about the criticisms I was making of the IPO process. I went in to their San Francisco office without a lawyer, went under oath, and told them everything I had learned about the IPO process by doing one. The superb Mark Fickes and his boss Tracy ______ were the ones deposing me, and when the day was over, they told me that I may have been the first CEO in history to do such a thing.

In 2004, a plaintiff's attorney named "Roger Kirby" (memory) filed a class action suit against the Wall Street banks for price fixing, on the grounds that all IPOs always went at 7% fees, with no variation. He asked me to testify. On Good Friday, I sat in New York City around a table with Kirby plus ≈ 20 lawyers from all the major banks, explaining what was wrong with the standard IPO process. I said that the 7% price fix was small potatoes, and that the grift was in the allocation process. I did not try to bury a knife in anyone's back: I told the truth about my experience, and when I had exculpatory information, I went out of my way to share that, too. Goldman's lawyer, an attractive brunette, glared at me for hours. I left the room knowing that "pariah" was too weak a word for what I had become.

3) The Opening Bell

Summer of 2004: Lehman Brothers hosted a luncheon for me. A fellow named David Rocker showed up. Glenn Krevlin (a hedge fund manager specializing in Retail) was there, and told me he was going to dump his stock, explaining that, "It does not matter what you do now, once this guy Rocker gets involved there is no way for you to win. He and his buddies will sink you. They have ways of taking you down." Another person at the luncheon suggested to me that Rocker was Mobbed-up.

An "independent research" shop in Phoenix, Arizona named "Camelback" began publishing scurrilous "analyses" of our firm. I ignored them until they attacked my 77 year old friend, Gordon Macklin, at which point I began rebutting them.

At Thanksgiving 2004, I happened to be in Scottsdale, Arizona, and three whistle-blowers from Camelback got in touch and came to my hotel. They explained that Camelback, "journalist" Herb Greenberg, and Rocker (along with many other hedge funds) were all involved in a scheme whereby those hedge funds took short positions in stocks, instructed the Camelback "analysts" (who were actually kids hired from Burger King) to write hatchet jobs (sometimes the hedge funds drafted the reports themselves), instructed Herb Greenberg to prepare identical news stories to release on TheStreet.com and through CNBC, and that the hedge funds were controlling not just the content but the timing of the release of those reports to maximize the benefit of their front-running.

Within days of that meeting I got a phone call from a hedge fund macher named Chase Coleman (from one of the Baby Tigers) as he was dashing for a jet to whisk him and his team to China. He told me, "Don't let these Camelback guys get to you. Look, it's just their business model. Hedge funds pay them $25,000/year, for which they get to pick up the phone and order a hatchet job  twice per year. If you are a client you get to dictate the reports, and even write them yourself, you tell them when to publish them, and a few days before they publish you build up a big short position, the report gets published, the stock drops, you cover, and you clean up. It's a quick way to make a couple million bucks. Don't take it personally. We're client ourselves." I remember thinking for a moment before replying, "Gosh, Chase…. I'm not sure that's…. right."

And thus was launched my mitzvah (which wall Street knows as my jihad). In September, 2004 I was working on getting a waiver to join the Army as an 11-Bravo, and figured the mitzvah would take me four months. Little did I know that the Camelback stuff was small potatoes, perhaps even just misdirection, and that the main event was buried in the issue of securities settlement. Unraveling it would take me 10 years.