Another Nail in Overstock.com's Coffin

My favorite corporate crime poster child, Overstock.com, which has been lying about its finances since this heap of ca-ca in 2000 (Overstock actually lost $21.5 million in 2000, and then 2001, and then 2002, and then.....), recently announced a change in its auditor.

A change in auditors is usually the first leg of a death march for slimy companies like Overstock. And believe me, they don't get any slimier.

White-collar crime fighter Sam Antar today begins a two-part series directed as an open letter to Overstock's hapless new auditors, Grant Thornton. Sam writes:

Overstock.com has been plagued with material accounting errors, restatements of financial reports, re-restatements of financial reports, and violations of SEC rules throughout its history. Worst yet, Overstock.com's unprincipled management team, led by masquerading stock market reformer CEO Patrick Byrne, has continually lied to investors about the company's financial performance. All of those lying members of the management team are still working for the company, despite serial lies about the company's financial performance, as I will describe below and in a series of blog posts to come.

It's informative reading for anyone with a strong stomach. He begins by harkening back to a 2001 interview with Fox News in which Byrne lied about his company's profitability, and it goes downhill from there.

I can understand why media outlets like Fox and, before he melted down on-air, CNBC would invite Byrne to pontificate--he's a CEO, and that's all some journalists seem to notice. But why hasn't the SEC called him to account for his lies? The word "incompetent" comes to mind.

© 2009 Gary Weiss. All rights reserved.

Message Board Positions Itself as Megaphone For Stock Touts

Ralph "Kramden" Kidd has a new business model in the works

As I've described in the past, the Investor Village message board has distinguished itself in the cause of investor poverty. It was a prime sounding board for perpetrators of the Novastar Financial subprime lending disaster, allowing investor hype to run rampant (as in this notorious post), to the point of drawing media attention. It was a forum for cyberstalking by Overstock.com's nauseating p.r. director Judd Bagley.

A couple of years ago, this ostensibly neutral investor forum banned white collar crime fighter Sam Antar from the Overstock.com message board for the crime of pestering CEO Patrick Byrne and Bagley with -- horrors! -- questions. He was first restricted to three posts a day, and then removed completely.

The move deprived investors of an opportunity for Antar to directly confront Byrne about his lies and accounting trickery. Overstock shares hit a high of $19 the month Antar was silenced. It's now trading at about $10.50, and has been much lower. Thank you, Investor Village!

But such ham-handed suppression of criticism is evidently insufficient to make Investor Village an antiseptic environment for corporate CEOs and their shills, and suitably hostile to critics.

Investor Village recently banned one of the few critical voices on the Overstock board, immediately after posting a response to Byrne on the message board. The response was deleted. No explanation was given. A message gloating about that was recommended by Bagley ("De Daumier Smith").

As a result, the board supposedly devoted to Overstock instead is dominated with nutty rants about everything but, and is silent on such material corporate events as its change in auditors. With its scant ranks of critics depleted, that subject has not been broached, and Byrne can now rant and rave without contradiction, at least from one persistent critic.

In an email to members, the site recently revealed that a new feature will allow users, including corporate managers like Byrne, to go back and delete or edit posts, forever and ever: "Unlimited Post Deletion and Editing, allowing you to correct mistakes when you need to." Since Byrne frequently changes his public announcements, as Lee Webb of Stockwatch has described, he can be expected to make good use of this new cover-your-tracks feature when he blurts out some incriminating admission, as he has in the past.

Cozy! Investor Village's operators, rather oddly it seemed at the time, anonymized its site registration a couple of year ago. Maybe it's not so odd after all.

Now, here's the funny part: Investor Village, which evidently hasn't made a go of it (don't ask me why), actually wants to start charging people.

I wish them luck. What the world needs now is another way for investors to pour their money down a black hole. But I really do think that the site operator, Ralph "Blue" Kidd, should call himself Ralph "Kramden" Kidd.

© 2009 Gary Weiss. All rights reserved.

AIG Bonuses and Collective Amnesia

Joe Nocera has a perceptive column today describing the problem with the hysteria that has surrounded the AIG bonuses. Sure the bonuses are outrageous--any child can see that--but Nocera points out that rage over the bonuses tends to obscure more significant issues.

But there is a much bigger issue that has barely been touched upon by Congress: the way tens of billions of dollars of taxpayers’ money has been funneled to A.I.G.’s counterparties — at 100 cents on the dollar. How can it possibly make sense that Goldman Sachs, Bank of America, Citigroup and every other company that bought credit-default swaps from A.I.G. should be made whole by the government? Why isn’t it forcing them to take a haircut?

I'd add to Joe's list of misgivings another factor, which I call "collective amnesia." I'd wager any sum of money that this entire issue is going to be forgotten in a year's time. I'd be delighted to lose that wager, but that is how things work with Wall Street related issues. People get upset, there is the predictable congressional braying, and then--nothing.

Don't forget that a million years ago, back at the turn of the year 2006-2007, there was an immense brouhaha about the bonuses doled out to Goldman Sachs executives and other rich guys on Wall Street. I remember appearing on CNBC at the time quite frequently, facing off against apologists for Wall Street from the usual lobbying groups and libertarian think tanks. I remember in particular an obnoxious dude from an Ayn Rand organization shilling for the Street back then.

At this time, the Street was raking in massive profits, and my argument was, and is, that the bonuses were obscene and immoral and had just gotten out of hand. To me, the very size of the bonuses was insane, that little of that was returned to the community, and that it was time to examine the morality of such massive compensation levels. (If someone can find a web link to these interviews, please let me know; I only have 'em on VHS.)

Of course, we now know that the bonuses were not only immoral, but that the bonus system encouraged excessive risk-taking. But one didn't have to realize how awful the bonus system was from a systemic standpoint. They just, prima facie, in a Sunday school morality sense, stank on ice.

My point here is not just to say "I told you so" (though that's part of it), but to point out that bonuses are an issue that is so old that is reeks. It is turning yellow with age. Where were the congressional loudmouths two years ago? Why didn't Congress pass a law taxing bonuses 90% two years ago? Where was their moral outrage then?

Hypocrisy stinks, and the reaction to the AIG stinks not only of hypocrisy, but of political pandering to popular outrage. That's not leadership.

It isn't leadership, that is, if collective amnesia sets in, as it did after Enron. Political contributions are sweet things, and Congress always has its hand out. When it's a collision between contributions and populism, contributions win and collective amnesia will set in.

© 2009 Gary Weiss. All rights reserved.

How the SEC Can Waste Its Resources More Efficiently

I've written a number of times about how the SEC has thrown its scarce resources down a black hole by pursuing the phony "naked shorting" issue, which is usually nothing more than a diversion for poor-performing CEOs such as its chief propagandist, Overstock.com CEO Patrick Byrne.

Well, today the SEC Office of Inspector General has a report on the subject, describing how the SEC can more efficiently waste its scarce resources running to ground crackpot NSS complaints.

The OIG report, which can be found here, does not produce much in the way of evidence that there is any actual naked shorting going on, only that it's been talked about a lot, even though it is before the SEC because of what the enforcement division calls a "small but vocal cadre of advocates" (bureaucratese for "nutcases").

The OIG found that the SEC has carried out very few enforcement actions that even tangentially involved naked shorting. And here's a clue as to why: of the 1.38 million email complaints the SEC received over a recent 17-month period, 5,000--a whopping 0.36% of the total--involved naked shorting, despite the organized email-writing campaign organized by stock market conspiracy websites.

Wow! Sounds like a really important issue if 3.6 out of every thousand complaints to the SEC involve naked shorting!

Kind of makes you wonder about the 99.64% of email complainers, genuine victims of investor ripoffs, that don't have the OIG's ear. I guess they don't have highly-paid lobbyists and astroturf organizations, with dishonest names like the "Coalition Against Market Manipulation," pushing their cause.

Still, the OIG said, attention must be paid! After all, it had received "numerous complaints" and hey, the squeaky wheel gets the wasted resources.

Accordingly, the OIG issued some fairly mild recommendations involving the processing of investor complaints involving NSS, which I'm sure will be amplified and twisted out of all proportions by the usual crackpot websites. The SEC's enforcement division. however, rejected all but one of those recommendations, in the view that tracking down the obsessions of NSS nutcases is a poor use of SEC resources.

The SEC enforcement division was right to be annoyed at the OIG's attention to this screwball issue--itself a pretty shocking waste of SEC resources--and its response warrants a full quote:

In recent months, a small but vocal cadre of advocates has emerged decrying the practice and suggesting that it has damaging market effects. But there is hardly unanimity in the investment community or the financial media on either the prevalence, or the dangers, of “naked” short selling. The Commission has repeatedly stressed the fact that the practice can provide needed market liquidity in certain circumstances. For instance, market makers sometimes engage in legitimate “naked” short selling when there is high buying demand in a security. Still others view the threat posed by “naked” short selling as wildly exaggerated, and point to instances in which allegations of abusive “naked” short selling were used to cover up other management malfeasance, like the dumping on the market of large blocks of unregistered shares. We have recently alleged such behavior in the widely-discussed CMKM Diamonds litigation. Other fraud defendants have also attempted to portray depressed stock prices as the work of clandestine short sellers.

Despite its assertions regarding the potential danger of “naked” short selling and the growing interest in the subject, the Report can cite to no bona fide studies or empirical data regarding the practice’s market impact. The Division of Trading and Markets debunks the theory that NSS creates “counterfeit” or “phantom” shares. The Report cites to the emergency orders, final rules, and interim final temporary rules addressing short selling, including “naked” short selling that the Commission issued in July, September, and October of 2008. When it issued each of these rules, the Commission noted in its releases that the purpose of the emergency actions was to address the lack of market confidence and investor fears that short selling, including legitimate short selling, could exacerbate the current financial crisis by creating downward price momentum unrelated to the fundamental financials of issuers. [emphasis added]

. . .The Division of Enforcement is called upon to police the massive U.S. securities markets with decidedly limited resources and, in order to fulfill our mission of investor protection, we must intelligently leverage those resources.

Note what I put in boldface. I'm no fan of the SEC's enforcement division, but in rejecting most of the OIG's recommendations, and thus inflaming the corporate-sponsored anti-shorting crusaders, it has shown some commendable guts.

UPDATE: CJR's Audit section has an excellent analysis of a moronic article in Bloomberg on naked shorting. I also had an online chat with Felix Salmon on the Portfolio website.

© 2009 Gary Weiss. All rights reserved.

The First Bernie Madoff Domino Falls

Bernard Madoff's auditor, David G. Friehling, just got the book thrown at him in a criminal complaint filed by federal prosecutors in Manhattan.

From the U.S. Attorney's announcement:

FRIEHLING failed to conduct audits that complied with
GAAS and GAAP by, among other things, failing to: (a) conduct
independent verification of BLMIS assets; (b) review material
sources of BLMIS revenue, including commissions; (c) examine a
bank account through which billions of dollars of BLMIS client
funds flowed; (d) verify liabilities related to BLMIS client
accounts; or (e) verify the purchase and custody of securities by
BLMIS. FRIEHLING also failed to test internal controls as
required under GAAP and GAAS standards. For example, FRIEHLING
did not take any steps to test internal controls over areas such
as BLMIS’s redemption of client funds, the payment of invoices
for corporate expenses, or the purchase of securities by BLMIS on
behalf of its clients. Further, commencing at least as far back
as 1995, FRIEHLING did not maintain professional independence
from his audit client, BLMIS.

Etcetra. Sounds like something that happens all the time, to tell you the truth, but I guess that it can get you in trouble with a client like Madoff. The hapless numbers-cruncher faces up to 105 years in jail.

How much time will it take for him to flip? My guess is "five seconds."

The dominoes are falling.

© 2009 Gary Weiss. All rights reserved.

It's Official: Patrick Byrne Admits Owning Smear Sites

Overstock's wack-a-doo CEO, Patrick Byrne, can always be counted on to insert his Florsheims in his mouth when given the opportunity. It happened again yesterday, when Byrne threw away all the carefully crafted corporate shells, repudiated earlier lies and admitted that he owned two astroturf websites created to attack critics, antisocialmedia.net and Deep Capture.

As previously, Byrne made these damaging admissions in an off-the-cuff posting on a stock message board, responding to my post on Friday describing how he had spat in the eye of Sarbanes-Oxley by violating the Overstock code of ethics for the umpteenth time.

Byrne helpfully corrected one error in my post--the email I described went to millions, not thousands of Overstock customers--and then proceeded to respond to other points in the article.

He denied being a conspiracy theorist, even though he pushes conspiracy theories.

He denied violating the code of ethics which was, I presume, a joke. He claimed that the prohibition on derogatory business communications, including emails (such as the one that was the subject of my article) relates only to "communicating inside our corporation," and that the same statements made publicly are just jim-dandy. The code of ethics, of course, makes no such distinction.

Byrne's next comment is a doozy. I'll quote from Byrne and a response subsequently posted in response, from one of the few non-Byrne aficionados using that board:

Byrne: "running his company into the ground"? A mischaracterization. The last quarter I checked was profitable, and we seem to be holding some pretty good cash flows for the last couple years, while much of the rest of retaildom is melting down. Things could be better, of course, but we're still chugging along better than most.

Reply: So, running your company into the ground is a "mischaracterization"? How so? I don't want to mischaracterize anything, so let's reiterate those working capital levels: end of 2004 - $ 267,640; 2005 - $79,561; 2006 - $59,475; 2007 - $62,621; 2008 - $39,679. (It's getting a little thin, isn't it? "Holding some pretty good cash flows for the last couple years" seems an odd characterization of those numbers, but I express no definite opinion.) Then there are those stockholder equity numbers: 2004 - $169,504; 2005 - $89,148; 2006 - $56,367; 2007 - $18,212; 2008 - ($2,985). All in thousands, of course, and ending with those embarrassing parentheses. It appears that Overstock has disposed of about $172.5 million in capital just in the last few years. I certainly hope that doesn't mischaracterize anything, since there's not much opinion involved in stating those numbers.

But the pièce de résistance was this slip of the tongue:

"...gleeful hopping on the get-Cramer bandwagon". A lie. Gary knows I have been at loggerheads with Cramer for years, was banned from CNBC over it. The video Jon Sewart used to destroy Cramer has been on antisocialmedia.net for a couple years, and DeepCapture.com for a year. Also, a year ago I published this lengthy critique of Jim Cramer's career ("Jim Cramer is a Complicated Man"). So by describing me now as "hopping on the get-Cramer bandwagon" Gary is lying through his teeth. [emphasis added]

Actually he disappeared from the CNBC screens in March 2006, after holding up a sign (right) promoting "thesanitycheck.com," a now-forgotten nutcase conspiracy site run by a former used medical equipment salesman named Phil Saunders.

But I stand corrected on the statement that he was "hopping on the get-Cramer bandwagon." Not true, he had done so years before via the websites he runs through proxies. How silly of me.

I can understand how Byrne might "forget" being persona no grata at CNBC after the oafish "sign" episode, but surely he had to remember his many tall tales he and his henchman Judd Bagley have told claiming that Byrne has no relationship with those websites. Byrne made that claim insistently concerning antisocialmedia, as analyzed by Sam Antar in this blog post. (For example, on Jan. 31, 2007, Byrne wrote: “Overstock and I have precisely 0 to do with AntiSocialMedia.”) And just a week ago, Bagley, "managing director" of Deep Capture, claimed that he didn't work for Byrne.

The lies, and the Florsheim-in-mouth episode, is old news from Byrne. But I'm a bit curious why Byrne bothered to go to the trouble of dredging up excuses for his flouting of Sarbanes-Oxley. Could he be concerned that the new regime at the SEC may not be as tolerant as it was under the do-nothing Christopher Cox?

© 2009 Gary Weiss. All rights reserved.

Patrick Byrne Spits in the Eye of Sarbanes Oxley--Again

Overstock.com's ethically challenged CEO Patrick Byrne, in what may be the most dramatic example of a sepia-toned cookware calling a similarly colored kettle black, has a new "come and get me" challenge to the SEC.

According to a blog post today, he's used an Overstock.com marketing email to millions of customers to call CNBC's Jim Cramer a "criminal."

Byrne, whose primary claim to fame is running his company into the ground and spouting conspiracy theories, is probably the last person on earth who should be calling any nonconvicted person a criminal. But his gleeful hopping on the get-Cramer bandwagon has the added quality of being a blatant violation of Sarbanes-Oxley.

Byrne violated Overstock's code of ethics by that email (see "derogatory remarks" under Section 8). Since a search of recent 8-Ks shows the Overstock board did not pass a resolution waiving the code--the SarbOx requirement--that puts Byrne in violation of what is probably the nation's most violated securities law. I sometimes think that Byrne thinks that Section 8 of his code of ethics actions mandates derogatory comments, rather than prohibiting them.

An SEC rule promulgated under Section 406 of Sarb-Ox says:

Companies must comply with the code of ethics disclosure requirements promulgated under Section 406 of the Sarbanes-Oxley Act in their annual reports for fiscal years ending on or after July 15, 2003. They also must comply with the requirements regarding disclosure of amendments to, and waivers from, their ethics codes on or after the date on which they file their first annual report in which the code of ethics disclosure is required.

Clever, isn't it? The SEC basically made violating one's code of ethics a disclosure violation, unless one's board waives the code and discloses it. Byrne, as it its wont, does neither when he craps over his corporate code of ethics. He's chairman of the board, his father having quit in disgust a while back, and the other board members spend their days, like good sheep, grazing on a verdant hill north of Salt Lake City.

More on the subject can be found in this Sam Antar blog post (about an instance when the board actually did waive the code of ethics for Byrne),

President Obama's bad choice for SEC chairman, Mary Schapiro, might want to take time out from giving speeches in Congress and look into this. That would be a pleasant and, I daresay, unexpected surprise.

© 2009 Gary Weiss. All rights reserved.

Jim Cramer Did Something Wrong. I am Shocked! Shocked!

Watching Jim Cramer getting his ass kicked by Jon Stewart last night left me with mixed feelings, but mostly feelings of deja vu. I mean, is anyone really surprised by any of this?

It is nothing new that Cramer engaged in sleazy tactics when he ran a hedge fund. Hell, that was known years ago, and was admitted in his 2002 book Confessions of a Street Addict and one by a former employer, Nicholas Maier, Trading With the Enemy. It's also a matter of public record that as a fund manager he was the subject of an SEC inquiry, later dropped.

I reviewed both books for Business Week, and the title of my review, in BW question-y style, was "Brilliant Stockpicker--or Brazen Hustler?" and it was obvious from my review that I leaned heavily toward the latter. I had no choice--Cramer was very forthright on the subject. I wrote:

He then opened a hedge fund, Cramer Partners, where he developed a special approach to earning money. He describes this method with such candor that some readers may be taken aback. After all, controversy is now swirling around analysts. And they were at the core of Cramer's "formula for making money every single day, day in and day out." As developed in the early '90s, the system consisted of becoming "merchants of the buzz." Cramer writes: "We would work to get upgrades or downgrades because we knew, cynically, that Wall Street was simply a promotion machine."

Cramer would look for stocks likely to move quickly on good news. Then one of his staffers would begin calling the companies, looking "to find anything good we could say about them." When he discovered a stock that seemed ready to take off, or when his staff uncovered something favorable about the company that the analyst community didn't know, Cramer would load up on options and stock and then "give the good news to our favorite analysts who liked the stock so they could go do their promotion." That would get the buzz going, and "we would then be able to liquidate the position into the buzz for a handsome profit."

In other words, Cramer used his pals in the analyst community to engage in a kind of legal pump-and-dump scheme. Part of what makes his account compelling is that Cramer is so matter-of-fact, even proud. He sees absolutely nothing wrong or unfair about the practice. In fact, at one point he says that he sees himself as "the proverbial Boy Scout, never breaking any laws, never even getting a parking ticket," a man who had "nightmares about overdue library books. I was Little Miss Goody Two-shoes." Nope, introspection is not his strong point. [emphasis added]

Maier had accused Cramer of frontrunning short positions. That turned out to be wrong, and his book was withdrawn from circulation, pulped, and a new edition released.

But the publisher's retraction was not quite as sweeping as Cramer might have liked. HarperCollins says the only inaccuracy was the specific reference to Western Digital, which the new version of Maier's book doesn't mention. But the revised book does say that Cramer was the subject of an SEC inquiry, later dropped, concerning trading in options of an unspecified stock. "Our timing on this occasion may have been too perfect," Maier says in the post-pulping version. A call to Cramer was referred to his lawyer, who says both versions are inaccurate, and that there was no SEC inquiry at all.

So I guess I can't quite figure out why people, Stewart and his researchers included, are surprised by Cramer's sleaziness, since he admitted it himself in his book. As a matter of fact, watching Cramer's awful performance last night, I couldn't understand why he didn't admit that he came clean (more or less) in a book he'd written nine years ago.

I have only limited sympathy for people who buy stocks based on what Cramer or any other market guru has said. A financial genius named Burton Malkiel has been arguing against the very concept of stock picking for years, and wrote a book called A Random Walk Down Wall Street which became a best-seller.

Three years ago I made my own modest contribution to the genre in Wall Street Versus America, whose central point was that you had to listen to Malkiel and disregard the Cramers of this world. I also dwelled at length on the crookedness of Wall Street firms, particularly Bear Stearns.

I pleaded with people to avoid managed mutual funds, hedge funds and individual stocks, to buy stock indexes and disregard stock newsletters and market "wizards" like Cramer. As I argued in the book, there is no way to beat the markets, no way of getting rich unless everyone in the market is getting rich (and no way of escaping getting poor if the market goes into a slump).

Cramer has nothing to be ashamed of that he's hustled his way to a fortune, pushing a dream of riches that countless studies have shown to be illusory, since markets are reasonably efficient. But you can't get rich being a Cassandra, and the best way to make money is to lie that you can make money for other people. Cramer knows that as well as anyone, and now he is paying the price.

© 2009 Gary Weiss. All rights reserved.

Bernie Madoff's New Penthouse Suite

The accomodations are palatial, the cuisine sublime

Judge Denny Chin has remanded Bernie "the Shtunk" Madoff into custody, which probably means that he will be incarcerated at New York's Metropolitan Correctional Center, which is adjacent tot he federal courthouse. (I say"probably" because sometimes federal prisoners are farmed out to local institutions, which are not half as nice.)

So what quality of life does Madoff face in his new home?

Well, I can only speak from the standpoint of a onetime visitor to the facility, where the subject of my book Born to Steal was confined at one point, so my perspective is limited and a bit dated. But I can say that it's not nice at all.

Back in 2003, when I was there last, a visitor to the facility had to pass through several intrusive, unpleasant level of security before arriving at the prisoner holding pens. The atmosphere is a bit like the Port Authority Bus Terminal, reduced in size by a factor of 5000. It is antiseptic but cramped, oppressive, altogether suicide-inducing.

But not to worry. I'm sure the Shtunk will be on suicide watch, and that he will have no ready way of killing himself unless he decides to beat himself to death.

As for cuisine: I'm told that nutricious, fine baloney sandwiches are the main bill of fare.

Madoff's lawyers say they will appeal his incarceration before trial. Hopefully it will be swiftly rejected.

As for his permanent accomodations, I'm sure that his able lawyers will try to get the Shtunk confined to something other than the maximum security prison that he deserves. Bloomberg suggests today that he is in for some hard time, with other prisoners blaming him for the crash.

Fat chance. I'm sure that, as a nonviolent offender, the Shtunk will be segreated from inmates who can do him any harm.

© 2009 Gary Weiss. All rights reserved.

Why Have Madoff's Accomplices Not Been Arrested?

There are conflicting reports in the media about the all important Bernie Madoff Unanswered Question: Who else gets charged? Not "who else is involved," as clearly there were others involved, but who else is going to be nailed, and why the feds haven't nailed 'em yet.

The Daily Beast reported a couple of days ago that 20 people were targeted by prosecutors, including the Shtunk's wife, Ruth. But the criminal information did not include a conspiracy count, and Bloomberg reports today that a plea deal (ugh) fell through because Madoff wouldn't admit to a conspiracy.

Bloomberg says:

Madoff’s decision not to negotiate a deal means the government won’t have his help in determining whether his employees assisted in the fraud, the people said. Madoff, 70, will plead guilty today to all 11 counts he faces without any promise of leniency or anything else in return. He could receive 150 years in prison at sentencing on charges including fraud, perjury and money laundering.

Assuming this report is correct, I find it astonishing. Since when have prosecutors expeced the mastermind of a conspiracy to "rat down" on his underlings?

The usual procedure is for the feds to bear down on the underlings, to force them to rat out other members of the conspirascy.

Looking from the outside--and this is pure speculation on my part--it appears, at least superficially, that the feds have pussyfooted around the Madoff family, have not applied sufficient pressure on them, and instead have hoped that Madoff would turn them in himself and save them the trouble of doing their job.

That's a bit like arresting Vito Genovese and hoping he'll turn in the bookies who used to work for him.

I hope I'm wrong. But I'm puzzled why Bernard Madoff is the only person arrested so far in the biggest white collar fraud case since Cain embezzled from the Estate of Adam and Eve.

UPDATE: A CNBC commentator just summed up the conventional wisdom, which is that we won't know the full extent of the conspiracy if the shtunk doesn't talk about it.

If that were the case, then the government's prosecutions on organized crime--and Madoff's scheme is in that category, in my opinion--would go nowhere. Since the days of Capone, prosecutors have attacked organized crime by putting the heat on underlings. Grand jury probes have been one effective tactic, though that has perils because witnesses receive immunity for their testimony.

So, in other words, a "single bullethead" outcome for the Madoff case is simply not acceptable.

© 2009 Gary Weiss. All rights reserved.

'A Tsunami of Excuses'

William D. Cohan's op-ed today in the New York Times, "A Tsunami of Excuses," needs to be committed to memory by members of Congress considering an overhaul of financial regulation--and, above all, needs to be read and, if possible, understood by President Obama's bad choice for SEC chairman, Mary Schapiro.

They've been blaming the destruction of their firms on circumstances beyond their control, such as short selling. Cohan stomps out those excuses for the bullfeathers that they are.

The tsunami of excuses began shortly after the Bear Stearns collapse, continued through the Lehman Brothers debacle and has continued through today, promoted by the CEOs of both companies and exploited by conspiracy theorists, con men and hustlers like Overstock.com CEO Patrick Byrne (who is a bit of each). Cohan, who has written a well-received book on the debacle, "House of Cards," observes as follows:

It’s been a year since Bear Stearns collapsed, kicking off Wall Street’s meltdown, and it’s more than time to debunk the myths that many Wall Street executives have perpetrated about what has happened and why. These tall tales — which tend to take the form of how their firms were the “victims” of a “once-in-a-lifetime tsunami” that nothing could have prevented — not only insult our collective intelligence but also do nothing to restore the confidence in the banking system that these executives’ actions helped to destroy.

. . .In fact, although they have not chosen to admit it, many of these top bankers, as well as Stan O’Neal, the former chief executive of Merrill Lynch (who was handed $161.5 million when he “retired” in late 2007) made decision after decision, year after year, that turned their firms into houses of cards.

I've dealt with all of these themes in this blog and in two of my articles on the financial crisis: my profile of Tim Geithner last June and my recent article on John Paulson, in which I described how Bear Stearns CEO Alan Schwartz tried to get short seller Jim Chanos to appear on CNBC to vouch for his firm just before the collapse.

Cohan concludes by saying that "there can be no restoration of confidence in the banking system — and therefore no hope for an economic recovery — until Wall Street comes clean. If the executives responsible for what happened won’t step forward on their own, perhaps a subpoena-wielding panel along the lines of the 9/11 commission can be created to administer a little truth serum."

I agree but would go further, as I argued here. The difference is that I think there should be a 9/11-type commission whether the bankers come clean or not.

© 2009 Gary Weiss. All rights reserved.

What Mary Schapiro Left Out

The penny stock rag cover girl is living down to expectations

Mary Schapiro, President Obama's bad choice for SEC chairman, testified before the House Financial Services committee today, deploying all the usual platitudes and increasingly rresembling a kind of Chris Cox Jr.

Not a word about issuer retaliation, and an obligatory sop to short-haters. According to her prepared testimony:

The SEC adopted a package of measures designed to strengthen investor protections against naked short selling, including rules requiring that “fails” from short-sales be closed out in a significantly shorter time; eliminating the options market maker-exception of Regulation SHO; and expressly targeting fraud in short-selling transactions. As we move forward, the Commission will consider other steps necessary to eliminate manipulative and illegal activity in our markets, as well as limit market volatility.

What Schapiro left out of her testimony is that fails to deliver, both the mythical practice of naked shorting combined with fails caused by the zillions of other reasons--such as deliberate nondelivery by scammers--has dropped to negligible levels.

Daily Reg SHO threshold list data, posted on stock exchange websites, show that stocks with persistent fails on Nasdaq and the NYSE are down to just a handful of barrel scrapings. Just two stocks are on the NYSE threshold list, one of which is General Motors. Now, there's a "victim of naked shorting" if I've ever seen one.

But instead of pronouncing the death of an issue that never existed in the first place, Schapiro mouths the usual platitudes about this and other issues, while pleading for more money for her inept staff of bureaucratic do-nothings. If she's shown any sign of breaking from the discredited past of the Bush administration, it sure isn't obvious.

© 2009 Gary Weiss. All rights reserved.

Exposing the Overstock.com Swiftboat Campaign

William K. Wolfrum, who exposed the Martin Eisenstadt hoax--a widely quoted personage on Sarah Pailin who did not exist--produced a detailed post today on a subject known well to readers of this blog, which is the ongoing smear campaign of Overstock.com's ethically-challenged CEO Patrick Byrne.

Diane Tucker has a worthwhile follow-up in the Huffington Post.

What's interesting about Tucker's and Wolfrum's analysis is that they place Byrne, and his loyal stooge Judd Bagley, in the long tradition of Internet hoaxes and fraudsters, in this case hoodwinking the Daily Kos. So is their idea for an Internet truth squad.

These are two gutsy people. I'm sure they'll pay a heavy price for their posts in terms of vilification and abuse from Byrne's crew of paid stalkers.

By the way, one interesting point in Wolfrum's post was Bagley's outright lie about the connection between Byrne and his Deep Capture smear site. Bagley, he says, "denies working for Byrne."

Yeah, right. It would be more accurate to say that he works for a partnership that is owned by a hedge fund that is controlled by Byrne, as I described a while back. In other words, he works for Byrne. The dipsy-doodle CEO is pretty direct in stating his control of the website in two recent posts on a stock chat board, which can be found here and here.

Can't say I totally blame Bagley for clinging to lies so tenaciously. They're all he has left.

© 2009 Gary Weiss. All rights reserved.

Bernie Madoff and the Single Bullethead Theory

Could one bullethead have caused all that damage?

The eleven-count criminal complaint against Bernie Madoff is a satisfactory document on one level, because it is now very obvious that the Shtunk is going to jail for the rest of his life. Hopefully prosecutors will get Madoff thrown immediately in the can when he pleads guilty tomorrow, so that the spectacle of his "penthouse confinement" will come to an end.

Scot Paltrow has a thorough examination of how Madoff did it on Portfolio.com. But what Scott and everybody else examining this subject have left out, because there is nothing on the subject in the complaint, is the crucial question of who else is involved. There are no conspiracy counts in the charges against Madoff, not even with "John Does" if the precise identity is unknown. Nothing about the culpability of his wife Ruth, and how she wound up with millions of dollars now supporting hubby's lifestyle.

So what we have, so far, is a sort of an equivalent of the JFK assassination's "single bullet theory." Now, don't get me wrong--I happen to believe in the JFK single bullet theory. But the idea that a single bullethead named Madoff could perpetrate this crime--now, that I don't believe.

White collar crime-fighter Sam Antar of Crazy Eddie fame, appearing on Fox Business News today, says that Bernie is now protecting the other conspirators who must surely exist--the people who knew about it and the people who turned a blind eye.

So who are they and why have they not been indicted? Or are prosecutors going to push a "single bullethead theory" of the Madoff crimes? That's implied by the criminal charges talking about the clerical employees of the firm being ignorant and inexperienced.

Baloney.

© 2009 Gary Weiss. All rights reserved.

Try to Do as Much Time as You Can, Bernie

Seems that all the talk about plea bargaining, including a front-page headline in the New York Daily News, is for naught. The U.S. Attorney's office just charged Bernie Madoff with eleven counts of securities fraud and other felonies, and faces up to 150 years in jail. (To quote an old joke, the Shtunk, if he is upset about that prospect, should try to do as much time as he can.)

It's right here in black and white from the U.S. Attorney's announcement: "There is no plea agreement between the Government and the defendant." So evidently he seems to be moving toward a guily plea without a plea deal, as first suggested by the Wall Street Journal. His lawyer said today that he will probably plead guilty on Thursday.

I can't say I'm surprised that there's no plea deal here. His crimes are so massive, with Madoff himself as the ringleader, that I just could not see what he could possibly offer prosecutors. Who would he be able to rat out? He was in charge. He may be trying to protect his wife and other family members, but I can't see anything coming of that.

Plenty of interesting details in the criminal information, including a statement that the fraud began back in the 1980s. Lots of goodies, such as that Madoff siphoned off stolen funds toward his market-making business. One disappointment: no one else charged or implicated.

But the big news is that the U.S. Attorney didn't cut a deal. There's a letter discussing sentencing guidelines, but Madoff gets nothing from that except the prospect of 150 years in prison.

© 2009 Gary Weiss. All rights reserved.

Overstock.com Covers Up Demise of 'Omuse'

Don't expect this list of blank Omuse pages to last much longer

More fun and games at my favorite corporate crime poster child, Overstock.com.

In previous blog items I've described how Overstock CEO Patrick Byrne set up Omuse, a kind of Wikipedia wanna-be, to provide corporate cover for his employment of an ex-Jeb Bush dirty trickster, a nauseating creep named Judd Bagley.

Omuse was a waste of shareholder resources from the start, and Byrne has made it progressively harder to see just how big a flop Omuse truly is. In February 2007 he made it impossible to see all "recent changes" in Omuse--which had indicated that few people were editing the site. Though that was gone, you could still see the number of new pages, and when they were created. In this July 2008 post I described how how Omuse was dying, based on the almost total absence of new pages.

Here is a display of the number of new pages as of July 2008:



But today, if you go to the site and click on the display of new pages, you see this:



Poof! History has been erased, Stalin-style. The "new pages" function has been disabled, to make it difficult (but not impossible, as we will see) to see just how badly Omuse is doing.

However, another page that Byrne neglected to delete, "Newest Guides," tells the story.

If you look at the history of the newest guides, you can see that a grand total of three guides, all of them blank starter pages, have been created since the beginning of 2009. The three most recent guides, all empty, were created on Feb. 4 and Feb. 6.

There were no Omuse pages in January 2009, one created on Dec. 25, and other pages created on Dec. 3, Nov. 24, Sept. 15, Aug. 25, and two on Aug. 13. All except the last two, a polemic on "poverty and hunger" and something on "MLA Format Works," were blank.

Don't expect the "newest guides" page to last much longer.

The only guides with any detail aren't "guides" at all, but a polemic on naked shorting written by Byrne and conspiracy theorist Phil Saunders, and a lengthy attack on me by Byrne. The latter is a blatant violation of Sarbanes-Oxley, which is designed to prevent CEOs from engaging in misconduct. Unless, that is, Byrne received an explicit waiver from the corporate code of ethics from his board of directors for that little act of issuer retaliation.

The Overstock board is as dumb as it is lacking in guts and integrity, but not so dumb as to move from a "see no evil" stance to active complicity.

Chris Cox's SEC has ignored Byrne's accounting tricks and Sarbox violations. It will be interesting to see if the new administration takes a dimmer view of corporate wrongdoing.

© 2009 Gary Weiss. All rights reserved.

CNBC Fracas Unveils Financial Journalism's Dirty Little Secret

An article in the New York Times today describes how CNBC has blurred the lines (such as they are) between business punditry and journalism, and says:

CNBC is now a place for politics, to borrow a phrase from its sister channel MSNBC. The network’s journalists have been encouraged to speak their minds, making the line between reporter and commentator almost indistinguishable at times.

This seems a bit odd coming from the Times, which has deployed some of its best reporters, from Tom Friedman to Joe Nocera, into writing columnists that are deeply opinionated. But I guess the thing about the article that interested me is how it almost, but didn't quite, touch upon financial journalism's dirty little secret.

Which is, of course, that financial journalists tend to be a bit more conservative than journalists in general. You might say that NBC has both flanks covered, with MSNBC on the left and CNBC on the right. Not that there's anything wrong with that.

© 2009 Gary Weiss. All rights reserved.

So.... is Bernie Madoff Copping a Plea or Not?

So what's on tap for The Shtunk's plea party on Thursday?

The media had some interestingly contradictory coverage of the Bernie Madoff Plea-Copping Situation today. All everybody can agree on is that he is facing a "plea proceeding" on Thursday.

The AP reported that "a person close to the case, who spoke on condition of anonymity because the plea has not yet occurred, said Madoff was expected to plead guilty." A court filing yesterday, "was the latest sign pointing toward a possible plea deal with Madoff."

Sure seems that way. The New York Times had no source whispering in its corporate ear, but instead cited on-the-record sources on his waiver of grand jury proceedings:

Numerous former federal prosecutors said that such a waiver almost invariably signals that the defendant is going to plead guilty rather than go to trial.
“The defendant has to agree to the waiver,” said Thomas M. Durkin, a former federal prosecutor and now a partner at Mayer Brown. “If he’s agreed to that, that means he’s agreed to plead guilty — or at least, that’s what happens 99.9 percent of the time.”

And in return he gets..... what? Nothing in the Times or AP on that.

However, we get an intriguing tidbit in the Wall Street Journal. The Journal was cautious, saying The Shtunk "appeared to be moving closer to a guilty plea." It added the following on the question that has a lot of people boiling, which is the possibility of this insect-in-human-form getting a plea deal of some kind:

White-collar criminals often plead guilty with no deal in place, lawyers say. In cases where a defendant won't cooperate against other individuals, and the government will only do a plea deal in which it recommends a long sentence, "you might as well take your chances with the judge," says Christopher Clark, a criminal-defense lawyer and former prosecutor. By pleading guilty, defendants can argue they saved the government time and resources, and judges typically give them some leniency for that, lawyers say.

Aha! Now that's interesting. Bloomberg added:

As a result of any guilty plea, Madoff would have to explain how he broke the law, and Chin has authority to pose additional questions.
[Attorney Jacob] Frenkel said Madoff appears to be aiding the government in its investigation.
“There is no question that he’s been cooperating because of both the plea to the information and because his lawyer has said as much,” Frenkel said, referring to prior comments by Sorkin that Madoff is talking to prosecutors.

But that's not what the Journal says:

Mr. Madoff, who was arrested in December, has told prosecutors he acted alone in committing the fraud. But the government believes other individuals were likely involved and that Mr. Madoff may be trying to protect them, according to the person familiar with the matter.

If so, that sounds more like The Shtunk is obstructing justice. That's not what I would call "cooperation."

So I guess the bottom line is that we just don't know what's going to happen on Thursday. It sure would be nice if the reporters covering this for the dailies would just come out and say that.

© 2009 Gary Weiss. All rights reserved.

Bernie Madoff's Impending Plea Bargain

The Shtunk, uber-crook Bernie Madoff, is moving ever-closer to a plea bargain with federal prosecutors in New York. He just waived a grand jury review of the allegations against him, which means dickering is underway.

Given the intense publicity focused on this case, it's hard to believe that prosecutors are engaged in plea bargain out of the goodness of their hearts. Clearly The Shtunk has something to give in return. But what?

There's been some speculation, I call it the Serial Killer Theory, that Bernie has stashed away some bucks somewhere, and that he is offering to the feds the location of where the bucks are buried. But that seems to be a remote possibility, since the feds presumably have other and better ways to get at the Shtunk's cash, to the extent any is left (such as by seizing that g---damn penthouse).

Or he could be ratting someone out. But who? The inflexible law of copland is that you "rat up," you don't "rat down." So that also doesn't seem likely.

The only other possibility is that the feds just don't have a strong enough case against the guy to guarantee a guilty verdict. That sounds a bit hard to believe, but I can't think of any others.

I'm excluding the possibility of sheer prosecutorial incompetence, though that can never be entirely ruled out.

Personally, and mind you I'm not a lawyer so I really am not qualified to say this, I can't understand why the feds haven't thrown the entire Madoff clan in jail—starting with wifey (see this post by Alexandra Penney) and the kids and including all the other people who were just shocked, shocked to find out there was a world-class Ponzi scheme operating a few feet away.

Ms. Penney is positively eloquent on the subject of wifey: "Mrs. MF (aka motherfucker), sweet innocent little Ruthie, the MF’s life-partner for over 50 years, may possess more colossal cojones and be a more repulsive sociopath than even the MF—although this is difficult to conceive of." Personally I think The Shtunk is a better handle for Bernie than mother-------, given the affinity-fraud nature of his crimes, though functionally synonymous.

I also don't see what would be wrong with putting the man on trial for his life. Sure it would take years to happen, and meanwhile The Shtunk would be living in a penthouse. So? Take away the penthouse.

© 2009 Gary Weiss. All rights reserved.

Rick Santelli's Superb Publicity Stunt

Yessir, you can't buy publicity like this

I think that Dan Mitchell has the best take so far on Jon Stewart's hilarious evisceration of Rick Santelli and CNBC.

Mitchell says as follows:

If you watch Stewart's attack carefully, you might notice something: It was completely unfair. Not inaccurate, but unfair. Stewart did a bunch of things that no journalist could, or should, ever get away with. He showed ultra-short clips of anchors and reporters saying things that, by themselves, sounded really stupid but, in context, may not have been quite as dumb as they seemed (though some surely were). And he included clips of interviewees saying dumb things, something for which CNBC bears no blame (unless they went totally unchallenged, which I assume in some cases they did).

This is all fine—for a satirist. The overall vibe of CNBC—with its "money honeys," Jim Cramer's inane frothing, and the lunkheaded fratboys on Fast Money treating economic news like a football game—is stupid. So showing clips that make the network look stupid works just fine—for a satirist.

What's remarkable about this whole episode, aside from tapping into a kind of wellspring of hostility toward CNBC, is how it is a quintessential publicity stunt gone awry. Rick Santelli was engaged in a spur-of-the-moment rant, and CNBC later picked up on it as "Santelli's tea party." He was then attacked by pretty much every non-conservative columnist east of the Mississippi, and then came Stewart's satire to top off an immense P.R. debacle for CNBC.

Here's more from a Philadelphia Inquirer blog and CJR.

© 2009 Gary Weiss. All rights reserved.

Are Leonard Cohen Fans Being Gouged?

An old colleague I know on the west coast had an unwelcome surprise when he tried to get some tickets for the Leonard Cohen concert tour I mentioned a few days ago.

He went online the moment tickets went on sale and found that they were sold out, and that the only tickets available were from scalpers at absurd markups.

Evidently this is not a new problem. See this article about a lawsuit against Ticketmaster in Canada involving Bruce Springsteen, and this post on the Leonard Cohen message board.

Cohen himself, I surmise, doesn't get a nickel from this kind of price gouging, which takes advantage of his amazingly loyal fan base (which includes moi). The irony is that Cohen himself is a ripoff victim, as his manager made off with his life savings. Indeed, that's why he has to go on tour.

© 2009 Gary Weiss. All rights reserved.

Obama Needs to Channel Richard Nixon

Nixon's the one to emulate.

I just listened to President Obama's latest pronouncement on the economy, delivered live on CNN. All good stuff, as usual. But with one element missing: Obama again didn't say anything that was particularly helpful to the markets. As a matter of fact, it may be unrelated but the market declined during his remarks.

What's missing is the kind of helpful nudge that came from none other than Richard Nixon in 1970, during the depths of what then seemed like a pretty deep recession. Nixon said: “Frankly, if I had any money, I’d be buying stocks right now.” The market soared.

Roger Cohen archly suggested in the New York Times in October that if Bush said that, "the market could tank in ways that would make this week’s one-day 777 point plunge look paltry." Maybe, but I'd like to see Obama give it a try. What has he got to lose? Things can't get much worse. Besides, he has only a 50% chance of being wrong.

UPDATE: Obama must be channeling me, because he talked up buying stocks (albeit in his usually carefully hedged manner) in an impromptu press briefing a couple of hours after this item appeared. I think that he needs to make that point again during one of his addresses to the nation, and he needs to sing out loud and strong "buy stocks!" Just as Warren Buffett did a few months ago, to no effect.

© 2009 Gary Weiss. All rights reserved.