Utah-based online retailer Overstock.com, Inc. (NASDAQ:OSTK) reported its third quarter earnings on October 25. During the July-September quarter, Overstock revenues increased by 7 percent and gross profits were up 21 percent compared to a year ago quarter. Surprisingly, Francis Chou of Chou Associates Management reduced his stake in the company one day later.

Overstock logo

The company said that the surge in revenues was driven by an increase in site visitors and average order size. Overstock.com, Inc. (NASDAQ:OSTK) also increased spending on promotional activities by 8 percent, which helped drive more sales. Additionally, technology and G&A expenses (general and administrative expenses) were down 6 percent and 10 percent respectively, due to reduced staffing and lower legal fees.

Francis Chou bought Overstock.com, Inc. (NASDAQ:OSTK) shares for the first time in the fourth quarter of 2007 and currently holds a 10 percent stake in the company. After the third quarter earnings report, he reduced his stake from 2.6 million shares to a little over 2.2 million shares on October 26. Maybe, the highly respected investor did so because Sam E. Antar, an expert fraud buster, recently revealed that Overstock is a fraud, which has been overstating its earnings.

Antar claims that Overstock.com, Inc. (NASDAQ:OSTK) used improper EBITDA calculations to inflate its financial performance between Q2 2007 and Q2 2008, thus violating the SEC Regulation G. When he brought these accounting irregularities to the attention of Overstock management, the company started bullying him instead of correcting the mistakes.

According to the Regulation G of the SEC, EBITDA is calculated by starting with net income or net loss, and then adding back the net interest, taxes, depreciation, and amortization. But Overstock.com, Inc. (NASDAQ:OSTK) computed EBITDA starting with operating income or operating loss (instead of net income or loss as stated in Regulation G), and it improperly added back stock compensation costs. By doing so, the company inflated EBITDA by the sum of losses from discontinued operations, plus by the amount of stock compensation costs.

Back in April, Francis Chou was seen giving his insight on Overstock during a Fairfax shareholder dinner, hosted by Sanjeev Parsad of Corner Market Capital. During the dinner, Hamblin-Watsa’s Sam Mitchell said that Fairfax Financial’s decision to buy Overstock shares was a wrong move, because it “did not stick to its value proposition, which was ‘great stuff at low prices.”

Chou responded to Mitchell by mentioning Overstock’s market value and approximately $40 million in excess cash. He said, “Legal expenses will likely fall, and [Fairfax]’s results will be much better without them – a good value.” Chou was talking about the legal expenses incurred during the legal battle against many of its financial servicers and brokers, including Morgan Stanley (NYSE:MS) and Goldman Sachs Group, Inc. (NYSE:GS).

In February 2007, Overstock.com, Inc. (NASDAQ:OSTK) had sued them, alleging the brokers of manipulating the securities market that resulted in a decline in Overstock share prices. On January 10, 2012, Judge John E. Munter of Superior Court of California slapped Overstock by saying, “the parties being sued presented competent, affirmative evidence showing that the plaintiffs [Overstock] cannot establish that any of the defendants engaged in acts of market manipulation in California.”

Later, Francis Chou blamed Overstock.com, Inc. (NASDAQ:OSTK), along with two other companies, for his fund’s negative performance in the first half of 2012. Today, Overstock shares are down 2 percent to $15.10 a share, giving it a market capitalization of $363.3 million.