Overstock.com 2015 Annual Report Download - page 33

Our majority-owned subsidiary Medici has created a novel system able to provide short sellers of publicly-traded securities with evidence of their
identification of securities available to be borrowed. Although Medici has conducted limited initial tests, this project is novel and Medici has limited or no
experience in this area. The system is subject to technical, legal and regulatory requirements. Further, Medici faces the risk that it may be unable to market,
license or sell its technology successfully or profitably. Any significant problems Medici encounters with this project could have a material adverse effect on
our business.
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Broker-dealer and other financial services firms are subject to extensive regulatory requirements under federal and state laws and regulations and
self-regulatory organization (“SRO”) rules. The broker-dealers Medici acquired in January 2016 are registered with the SEC as broker-dealers under the
Exchange Act and in the states in which they conduct securities business and are members of the Financial Industry Regulatory Authority (“FINRA”) and
other SROs. They are subject to regulation, examination and disciplinary action by the SEC, FINRA and state securities regulators, as well as other
governmental authorities and SROs with which they are registered or licensed or of which they are members.
The SEC, FINRA and other governmental authorities and SROs may bring enforcement proceedings against firms and place other limitations on
firms subject to their jurisdiction, as well as their officers, directors, employees and independent contractors, whether arising out of an examination or
otherwise, for violations of the securities laws, regulations and rules. Sanctions can include cease-and-desist orders, censures, fines, civil monetary penalties
and disgorgement, limitations on a firm’s business activities, suspension, revocation of FINRA membership or expulsion of the firm from the securities
industry. Criminal actions are referred to the appropriate criminal law enforcement agency. Any such proceeding against any of the broker-dealers that
Medici has acquired, or any of their associated persons, could harm our reputation, cause them to lose clients or fail to gain new clients and have a material
adverse effect on our business.
Financial services firms are subject to numerous conflicts of interest or perceived conflicts of interest. The SEC, FINRA and other governmental
authorities and SROs have increased their scrutiny of potential conflicts of interest. The broker dealers have adopted and will regularly review and update,
policies, procedures and controls designed to address or limit actual or perceived conflicts, but there can be no assurance of the effectiveness of these
protocols. Addressing conflicts of interest adequately is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to identify
and successfully manage these conflicts of interest. The development and implementation of policies, procedures and controls to address or limit actual or
perceived conflicts may also result in increased costs. Failure to identify and successfully manage conflicts of interest procedures could subject the broker-
dealers or Medici or us to disciplinary sanctions or litigation or could harm our reputation.
Financial services firms are also subject to rules and regulations relating to the prevention and detection of money laundering. The USA PATRIOT
Act of 2001 (the “PATRIOT Act”) mandates that financial institutions, including broker-dealers and investment advisers, establish and implement anti-
money laundering (“AML”) programs reasonably designed to achieve compliance with the Bank Secrecy Act of 1970 and the rules thereunder. Financial
services firms must maintain AML policies, procedures and controls, designate an AML compliance officer to oversee the firm’s AML program, implement
appropriate employee training and provide for annual independent testing of the program. Failure to comply with AML requirements could subject the
broker-dealers and/or us to disciplinary sanctions and other penalties.
Financial services firms must also comply with applicable privacy and data protection laws and regulations. Any violations of laws and regulations
relating to the safeguarding of private information could subject the broker-dealers and/or us to fines and penalties, as well as to civil action by affected
parties.
Our ability to comply with applicable laws, rules and regulations is largely dependent on our establishment and maintenance of compliance,
supervision, recordkeeping and reporting and audit systems and procedures, as well as our ability to attract and retain qualified compliance, audit and risk
management personnel. While the broker dealers have adopted policies and procedures intended to comply with applicable laws, rules and regulations, these
systems and procedures may not be fully effective, and there can be no assurance that regulators or third parties will not raise material issues with respect to
their past or future compliance with applicable regulations.
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The law relating to the liability of providers of online payment services is currently unsettled. In addition, governmental agencies could require
changes in the way this business is conducted. Under our seller programs, we may be unable to prevent sellers from collecting payments, fraudulently or
otherwise, when buyers never receive the products they
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