Who Are the Real Watchdogs?

The New York Times today discusses academic studies that prove what some of us have been saying for a long time: that whistleblowers of all kinds and the media -- and not regulators -- are the most prolific fraud-fighters in Corporate America.

Three academic researchers recently analyzed 230 cases of alleged corporate fraud at large companies. Their conclusion is that revelations of corporate fraud are dependent on a wide range of sometimes unlikely players, and that the way these people interact can play a major role.

The chart illustrating this story (left) is revealing. Note that the SEC is right at the bottom. Now, I should point out that this is not really a knock on the SEC, as the agency's resources are limited as corporate misconduct has spiraled out of control. It is, however, a statement of reality, and illustrates the need for citizen vigilance, as I pointed out in Wall Street Versus America.

Citizen volunteers, which fall under the "other" category in this chart, are emerging as a major source of information for the SEC and for other conventional watchdogs, such as the media. The Overstock train wreck, which one can track in real time by reading this blog, is an excellent example of how a few citizen activists are leading the charge against corporate malfeasance.

The patient, doggest investigative work of Internet sleuth "ScipioAfricanus" was instrumental in forcing Overstock's Judd Bagley to confess that he was running Overstock.com's antisocialmedia.net smear site for his boss Patrick Byrne.

Scipio also has tracked Byrne's and Bagley's contradiction-rife public statements (see, for example, the update to this post), and patiently recorded material from the public record (such as this timeline) that will be of great value to regulators as they probe this company. Or as Overstock puts it, the SEC's "investigation on Overstock.com." (You have to wonder: if this company can't even honestly disclose to its shareholders that the SEC is conducting an investigation of Overstock, what is it hiding from those investigators?)

Ex-scamster Sam Antar has also spent many hours working on Overstock's accounting techniques and bullying of critics. He has peppered Bagley and Byrne with sharp questions that, when not ignored, result in a hodgepodge of obfuscations, abuse, lies and evasions. Byrne and his lapdogs have tried hard to silence and intimidate these guys, but they keep hammering.

Other citizen activists are working behind the scenes to see to it that the SEC is up to speed on Byrne's and Bagley's outrageous conduct. Byrne has flailed out against his critics, through his usual gutter-level rhetoric and by siccing Bagley on message board posters, but all his desperate bullying does is attract still more scrutiny and bad press.

When the final story of Overstock is told, I expect that citizen activists will be getting the lion's share of credit, right alongside whichever regulators have stepped up to the plate.

© 2007 Gary Weiss. All rights reserved.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.