Friday, October 09, 2009

Patrick Byrne, Facing Dilemma, Lashes Out at Penson Financial

Sam Antar today describes the serious dilemma facing Patrick Byrne, the wacky CEO of Overstock.com. Thanks to an SEC investigation instigated by Sam, who has posted frequently about how Overstock has systematically inflated its financial statements, Byrne is caught between the proverbial rock and a hard place.

He has to either restate Overstock's recent earnings--including a much-ballyhooed "profit" in the fourth quarter that was actually a loss--or wait until the SEC forces him to do so. Sam writes:

If Overstock.com restates its financial reports it will be the third time in three years that the company had to correct financial reports due to violations of GAAP: (1) inventory accounting error - Q1 2002 to Q3 2005, (2) customer refund and credit error – Q1 2003 to Q2 2008, and (3) underbilled income from fulfillment partners – Q1 2003 to Q2 2009. Patrick Byrne will have the unique distinction being the CEO of a company that restated financial reports from overlapping prior accounting periods three times: Q1 2003 to Q3 2005.
As usual in such situations, Byrne has dispatched one of his underlings to stage a diversion, by posting an item in Byrne's Deep Capture blog entitled "On Rolling Stone, Penson Financial, the Mafia, and Naked Short Selling."

The Byrne employee to get this task is Mark Mitchell, former editor of the Audit column at Columbia Journalism Review online. Mitchell was forced out of his job at the Audit in the summer of 2006. This item gives a good idea why CJR was happy to see Mitchell walk out the exit door for the last time.

But phony "journalism" by PR hacks is sometimes first-rate propaganda, and what we have here is an excellent example of the tactics of the naked shorting conspiracy theorists. I don't know if what we have here is particularly good as propaganda, but I do know that the gullible lap up this kind of thing.

In this case, Mitchell targets Penson Financial Services, the subject of a famous hoax video posted on the internet by Matt Taibbi, and he uses insinuations, built on stuff he makes up, to drill his point: that Penson is up to no good, and that it is in the service of the Mafia.

Mitchell says as follows:

If I have anything to add to Taibbi’s terrific reporting, it is this: Penson Financial’s vice president in charge of stock clearing (that is, the head of the division that appears to have located stock that did not exist) is a man named Christopher Sandel. From 1985 to 1995, Sandel was a top executive at Adler Coleman, best known for being the clearing firm to the Genovese Mafia family.
There's only a few problems with this paragraph, as in "everything":

1. Adler Coleman cleared trades for a rotten brokerage named Hanover Sterling, and, as I reported a good 13 years ago in a Business Week cover story, The Mob on Wall Street, Hanover was connected to the Genovese crime family. But it's nonsense to claim that Adler "cleared" for the Genoveses, and there's no evidence tying Adler to the Mafia.

2. Sandel is not in charge of stock clearing at Penson. He left that position two years ago. See this press release.

Mitchell goes on to build on his lie:
... when some of America’s biggest financial companies collapsed under a barrage of short selling last fall, an enormous chunk of that trading was being cleared by a fellow who used to work for a company that seemed to specialize in clearing trades for the Mafia.
The "fellow" is Sandel, who left in August 2007, seven months before the financial companies starting collapsing. And they collapsed because of their swan dive into derivatives, not because of a "barrage of short selling."

Mitchell then proceeds to wander down memory lane, back into microcap stock-land in the 1990s, misquoting and fabricating, finding opportunities for lies in every sentence. What's interesting, to me at least, is that the source material he twists into fabrications is stuff I've written over the years, and the guy whom he misquotes and lies about is moi.

For example:

Mitchell:
He [me] wrote a great deal about Hanover Sterling, but not once did he mention that naked short selling was central to that case.

The only reason Mitchell can yammer on, inaccurately, about shorting of Hanover stocks is that I wrote about it in the BW cover story, in which I described how the mob was shorting those stocks. In Wall Street Versus America I delve into the shorting of Hanover stocks, and point out that it was naked short selling. What was central to "that case" was not the shorting, however, but brokers who were paid kickbacks ("chops") to sell worthless stocks to the public.

Mitchell:
In his book, “The Mob on Wall Street,” Weiss told the story of a Genovese Mafia broker, and mentioned that this Mafia broker claimed to clear his trades through none other than…Penson Financial.
The book is Born to Steal, it told the story of a broker tied to an associate of the Colombo crime family, and, when he set up a fictitious firm called United Capital, he forged statements indicating he cleared through Penson. United Capital was an imitation brokerage, just a vehicle for stealing. It didn't trade and there was nothing to "clear."

Mitchell:
Several traders tied to the Gambino crime family were charged with naked short selling companies that were underwritten by Hanover.
Nobody was ever charged with naked shorting companies underwritten by Hanover. However, traders tied to the DeCavalcante crime family did indeed short Hanover "house" stocks (not necessarily underwritten by the firm), as I described in Wall Street Versus America and first reported way back in 1996.

As a matter of fact, when former FBI director Louis Freeh praised my BW stories for aiding prosecutions in Florida, he was directly referring to the DeCavalcante prosections. So I guess you can say that I helped put a naked shorter in jail--though, as it happens, naked shorting was not part of the criminal case against the DeCavalcante crew.

There's more goofy, casual lies, which most people probably wouldn't notice unless they happen to have written a book on the subject:

Hanover Sterling, self-imploded in one of the greatest naked short selling scandals of all time.
Though there was naked shorting, what made this a scandal was that customers were sold worthless stocks.

That the Genovese Mafia brokers at Hanover were not charged in this case seems odd...
Sure is odd, because top Hanover brokers were charged, indicted, convicted and imprisoned.

Mitchell melodramatically concludes:
Might the Mafia have played some role in the collapse of the financial system? If I were more heavily armed, I would venture an opinion.
He does need to be more heavily armed. With the facts, not fantasies.

Usually I don't respond to Mitchell. If I did, I'd be doing nothing but responding to that psycho in this blog. But I think it's important in this instance to demonstrate the kind of moronic lies floating around the naked shorting world, most of them deliberately promulgated by Mitchell and other Byrne employees.

I think it's pretty plain now that the hoax video came from somebody in the naked shorting la-la land. Taibbi is only the most recent and best-known victim to be suckered by these idiots, and he won't be the last.

All of the above deliberate misrepresentations and lies are underwritten by Byrne, who founded and finances Deep Capture. But none of this is going to save Byrne from his day of reckoning with the SEC, if they have the guts to enforce the securities laws.

© 2009 Gary Weiss. All rights reserved.

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