Saturday, June 27, 2009

Bernie Madoff's 'Hedge Fund'?

If you ever wondered how Mark Mitchell made the transition from editor of CJR's Audit column to former editor of CJR's Audit column, read the latest mass of drivel on the "Deep Capture" website of his employer Patrick Byrne, CEO of Overstock.com.

I'm referring to the fairy tale on Dendreon Corp., which begins by talking about Bernie Madoff's "hedge fund." Only problem is that he didn't run a hedge fund. He ran an "investment advisory business" that had clients from whom he stole.

This is not a semantic difference. Alex Berenson and Diana Henriques explained why in the New York Times, shortly after the scandal broke:

Mr. Madoff was not running an actual hedge fund, but instead managing accounts for investors inside his own securities firm. The difference, though seemingly minor, is crucial. Hedge funds typically hold their portfolios at banks and brokerage firms like JPMorgan Chase and Goldman Sachs. Outside auditors can check with those banks and brokerage firms to make sure the funds exist.
This fundamental boo-boo is then used to tie half the world, and particularly Michael Milken, to long-discredited reports of "naked shorting" of Dendreon shares. Since Dendreon itself has never complained of naked shorting of its stock, this particular conspiracy theory is even goofier baloney than is typical for Mitchell. I mean, if a company sincerely (or insincerely) believed it is being ripped to shreds by "naked shorts," wouldn't it say something about it? The only reference to naked shorting I could find in a Dendreon filing is this prospectus and several similar ones over the years, which talk about possible naked shorting by the underwriter of the issue, and in a benign fashion.

Heck, Dendreon should be chastised for failing to mention such a material fact, wouldn't you say?

I found Mitchell's latest claptrap interesting because, in addition to his Madoff blunder, he wandered back into my old stomping ground, microcap stock fraud, attempting to rewrite history to fit his conspiracy theories. He mainly does that by making up stuff. For example, slain stock promoter Alan Chalem suddenly becomes, without even attempting to prove that assertion, a "naked short seller."

As Byrne himself has pointed out, Deep Capture is a work of public relations in addition to being a work of fiction. For some reason--this man will do anything for publicity, even discrediting himself--Byrne recently quoted an email from the Society of American Business Editors and Writers in which the membership secretary made that point fairly clear:
In SABEW’s view, not all business blogs qualify as news publications just as all writing and editing doesn’t qualify as journalism. From its standpoint your activities and those of DeepCapture seem closer to corporate public relations, and SABEW isn’t open to PR professionals _ or of course to retail business executives.
But that's not free rein for Byrne to spread whatever fictions he finds appealing on the Internet. Public relations has a strict code of ethics. Astroturfing--pretending to be a "news" organization when you are p.r., is against the ethics of the p.r. profession. So is making stuff up.

Mind you, I'm not convinced that such ethical principles are actually enforced or that breaches are punished, but they do exist, at least on paper.

An even bigger problem is that Overstock.com itself has a code of ethics, astonishing as that may seem. As I've pointed out before, such as here, his sponsorship of Deep Capture and frequent use of lies and issuer retaliation against critics is a violation of Sarbanes-Oxley, since Byrne never received a waiver from the Board of Directors to allow him to violate the Overstock ethics code.

The SEC has been taking action against other corporate fraudsters who use naked shorting to excuse their own incompetence or dishonesty, such as CMKM Diamonds and Universal Expresss. It will be interesting to see if the newly reconstituted SEC has the guts to take action against Patrick Byrne and Overstock.com

© 2009 Gary Weiss. All rights reserved.

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