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UPDATE 3-Overstock shares surge after CEO Patrick Byrne quits

Noel Randewich

(Adds detail on Aug. 11 letter, updates share move)

Aug 22 (Reuters) - Overstock.com's stock surged 9% on Thursday after Chief Executive Officer Patrick Byrne resigned, saying distraction and fallout related to his involvement in a Federal Bureau of Investigation Russian espionage probe made it difficult for him to lead the online retailer.

His resignation follows a drop of over 30% in Overstock's shares over two days earlier this month, with investors rattled after Byrne claimed in a statement that he had secretly been involved with the FBI, starting in 2015.

The stock briefly surged 15% after the resignation announcement.

"While I believe that I did what was necessary for the good of the country, for the good of the firm, I am in the sad position of having to sever ties with Overstock, both as CEO and board member," Byrne said in a resignation letter addressed to shareholders on Thursday.

"It has been an honor to serve you through thick and thin, threats grand and arcane, for the past 20 years."

In a letter to investors on Aug. 11, Byrne confirmed a report by Fox News contributor Sara Carter on her website https://saraacarter.com/russia-probe-twist-a-billion-dollar-ceo-a-convicted-russ i a n - a g e n t - a n d - t h e - f b i that he had a personal relationship with Maria Butina, a convicted Russian agent currently in a U.S. prison. Butina admitted to conspiring with a Russian official to infiltrate a gun rights group and influence U.S. conservative activists and Republicans.

In Byrne's Aug. 11 letter, which referred to the "deep state," he said that starting in 2015 he assisted federal law enforcement officials, whom he called "the Men in Black." He said he was involved in probes "about political espionage conducted against Hillary Clinton and Donald Trump."

A libertarian with a doctorate in philosophy from Stanford University, Byrne for over a decade has publicly battled short sellers targeting his company as it competes against larger rivals, including Amazon.com Inc and eBay Inc. He is known for making brash and freewheeling comments.

On Thursday, he lauded the remaining Overstock executive team with pop culture references, calling the chief marketing officer "Commander Data," after a Star Trek character. He said another executive called an artificial intelligence system "Skynet," after the Terminator movie series.

In a separate statement, Overstock said it appointed company veteran Jonathan Johnson as interim CEO.

Overstock is currently more targeted by short sellers than 99% of U.S. companies, according to Refinitiv. Total short bets against Overstock stand at $267 million, equivalent to almost 50% of its float, according to S3 Partners, a financial analytics firm.

Byrne is also a vocal proponent of blockchain technology and cryptocurrency.

In May, he lashed out at investors who questioned the motivation behind his sale of about 15% of his Overstock shares, saying he had to supplement his $100,000 a year salary and vowing never to "give such an explanation again."

The stock has fallen more than 70% from record highs in January 2018, when Overstock was benefiting from Byrne's plan to launch a digital token, and from hype around Bitcoin.

"On any normal day, my presence is not conducive to strategic discussions regarding our retail business. I believe that going forward my presence will definitely not be conducive to such strategic discussions," Byrne wrote in his resignation letter. (Reporting by Arjun Panchadar in Bengaluru; Editing by Shounak Dasgupta and Richard Chang)