Monday, February 23, 2009

How the SEC Missed on Stanford and Is Missing on

Two articles have appeared over the past couple of days that I view as bookends: one describing how the SEC missed out on the R. Allen Stanford's alleged Ponzi scheme, and the other describing how the SEC is missing out on an ongoing corporate trainwreck, and its flouting of accounting rules and Sarbanes-Oxley.

Here's the article on Stanford, by the AP's Marcy Gordon, and here is the Overstock analysis, which appeared on Stockwatch.

Note the parallel themes: SEC incompetence.

"Stanford's businesses were inspected and investigated several times, starting in 2006 by the SEC and in 2004 by the NASD, the brokerage industry's self-policing group, now called the Financial Industry Regulatory Authority, or FINRA. NASD's scrutiny resulted in several disciplinary actions: the regulator fined his brokerage company four times, with penalties totaling $70,000, for violations that included misleading investors in sales materials about the risks of the CDs."


[Overstock CEO Patrick] Byrne's claim, parroted by [Overstock president Jonathan] Johnson, that's "EBITDA reconciles to GAAP" is gobbledegook. EBITDA is presented as a specific number; GAAP is a set of accounting principles. It makes no sense to claim that a specific number reconciles to a set of accounting principles. A specific number must be reconciled to another specific number.

As [white collar crime crusader Sam] Antar properly points out, EBITDA, a non-GAAP financial measure that does not include an adjustment for stock-based compensation must be reconciled to a particular GAAP measure; specifically, net income or, in the case of, net loss.

As it turned out, after giving Mr. Antar such a dismissive public drubbing and insisting that's treatment of EBITDA was right, Mr. Byrne and his cohorts evidently reconsidered their position.

On Nov. 10, 2008, filed an amended annual report for 2007, amended quarterly reports for the first two quarters of 2008 and its third-quarter report. With nary a peep, the company abandoned its non-compliant EBITDA and substituted "Adjusted EBITDA" properly reconciled to its net loss.

"Antar the Crook" was clearly right and "Wacky Patty" was clearly wrong.

The company also defies Sarbanes-Oxley by flushing its code of ethics down the toilet and engaging unethical conduct and issuer retaliation , as I've pointed out.

Last year, Chris Cox's SEC dropped an investigation of Overstock. History repeats.

© 2009 Gary Weiss. All rights reserved.

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