Sunday, June 08, 2008

The SEC Makes It Unanimous: It's Useless

A few days ago, discussing how CEO Patrick Byrne had called CEOs who use EBITDA -- that is, CEOs like himself -- "crooks," I suggested that the SEC make the judgment unanimous by concluding its protracted investigation of the company and its accounting.

Well, the SEC did conclude its investigation, but instead made the judgment unanimous about itself -- which is that it is utterly useless at protecting investor interests. The investor watchdogs have, for the umpteenth time, proved themselves useless by officially deciding to turn a blind eye toward Byrne's serial lies and deceptions.

Byrne, issuing a typically gloating press release, can now be expected to redouble his efforts to deceive investors and lie and stalk his critics, thanks to the SEC. As Tracy Coenen observed on Friday, "Does it mean the company’s troubles are over? Of course not. It is still a horribly run company that can’t turn a profit, and one which provides misleading and inaccurate financial disclosures to Wall Street. Eventually, something’s got to give."

Sam Antar adds that "SEC no-action letters do not close the book on’s misdeeds as Patrick Byrne has would like investors to believe."

It's hard to see how anyone can be surprised at the SEC's latest nonfeasance. This is, after all, not just any old office of the SEC that gave Overstock a pass but rather the Salt Lake City office, which sits in a cesspool of stock fraud and rarely takes action. Just a few months ago it decided to take no action against another Utah company, Usana Health Sciences, despite equally strong evidence of wrongdoing.

And as far at Utah's attorney general is concerned: fuhgetaboutit. Utah is a free-fire zone for fraudsters, and the Utah AG can be thanked for that state of affairs. Note this damning article in the Salt Lake Tribune today, in which a crucial player on behalf of stock fraud was Mark Griffin, now general counsel of Overstock.

I'd say that Overstock has hired just the right guy to head its legal team. Lawyers like Griffin, who have no qualms about switching from government service to representing fraudsters, are a crucial part of the process in which regulated entities like Overstock are captured by the government agencies that are supposed to watch over them.

Regulatory capture is one reason is why market forces -- short selling in the case of corporate creeps like this -- are required to keep the markets honest. Lamentably the SEC, at the urging of not just Byrne-inspired loons but the Washington Legal Foundation and U.S. Chamber of Commerce, has worked with crooked stock issuers to make short selling as hard as possible.

Interestingly, even supporters of Byrne have long argued that the SEC is useless and should be investigated. I've said that for some time, and the latest evidence of SEC uselessness makes it unanimous.

SEC nonfeasance is a running theme of Wall Street Versus America and about half the articles I wrote for Business Week. As a matter of fact, if I had a nickel for every time the SEC messed up on the job, in everything from 1980s boiler rooms to 1990s chop stocks to Enron to Worldcom, I'd have quite a fortune.

What makes things like this even more stinky is the whiff of political favoritism -- which in Byrne's case is more than just speculation. Byrne has gone to great lengths to throw his weight around in Washington, hiring lobbyists and ex-SEC lawyers. While he burned his bridges in Utah in pushing some nutty legislation that had to be dropped (a widely publicized tantrum didn't help), he clearly has friends in Washington. All that ancestral wealth has to be spent somewhere, after all. He is the biggest political contributor in Utah, and takes great joy at fiddling in political projects, mostly of the fringiest right-wing variety.

Gary Aguirre, the ex-SEC whistleblower, captured the situation well in an interview with The Guardian newspaper:

"What you have at the SEC is people rotating from jobs where you make $180,000 a year into jobs where you make over a million," Aguirre tells the Guardian in an interview, on what he sees as a mutually back-scratching relationship between the regulator and Wall Street. "It's very friendly - it's a club. I'm here, I'm inside, now I'm outside, now I'm inside again.

"When the SEC starts playing favourites and they decide not to go after Wall Street elite and focus on small fry, then they're not focusing on the players that really impact the capital markets. It's not the penny stock dealers that could trigger a credit crisis in this country."
Aguirre was talking about hedge funds -- a world in which Byrne himself is enmeshed -- but that same view applies, in spades, to its approach to corporate wrongdoing.

So all I can say to some of my friends who expected that the SEC was actually going to do something about Overstock and its wacky CEO: "I told you so."

© 2008 Gary Weiss. All rights reserved.

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