Thursday, November 12, 2009

Eureka! The SEC Enforced Regulation G!


Will wonders never cease?

This isn't likely to get much notice, but it's pretty big news: the SEC actually enforced one of the most crucial regulations preventing public companies from cooking the books, known as Regulation G. The agency reached a settlement today with SafeNet Inc. and two former senior officers, for Reg. G and options backdating.

Reg. G is designed to protect investors whenever companies stray from Generally Accepted Accounting Principles. Shamefully, the SEC has never gotten around to enforcing this rule until today. It dates back nearly a decade to the Enron era.

Reg. G also figures in the ongoing Overstock.com circus, in which the company has repeatedly strayed from GAAP and brazenly manipulated its earnings. The latest chapter in the Overstock saga came on Monday, when the company--increasingly behaving like a sleazy penny stock shop--announced that it was going to miss the legal deadline for filing its third quarter 10-Q.

White collar crime-fighter Sam Antar, who has been repeatedly stalked and harassed by Overstock for scrutinizing the company, pointed out in his blog that the typically ambiguous filing may disclose yet more Regulation G-GAAP delinquency.

Overstock.com's wacky CEO Patrick Byrne, who refused to field any questions from Sam at a sham conference call on Nov. 3, was asked by Sam flat-out if Overstock was in compliance with Reg. G. Instead of responding with his typical bluster and bullying, Byrne meekly hid behind Regulation FD--ironic, since he has routinely violated that other unenforced rule numerous times, releasing material information on bulletin boards and blog posts.

Here's what I think is interesting about the late filing notice. It says that Overstock "is continuing to analyze the proper accounting treatment for $785,000 the registrant received during the first quarter of 2009." It goes on to say that the company "believes the amount is properly recognizable in the first quarter of 2009, when the cash was received. However, the registrant is continuing to review the issue, and may ultimately conclude that the amount should have been recognized in 2008."

As one longtime watcher of this sleazebag company pointed out to me, "if you believe an accounting treatment is correct, then why would you be analyzing it to determine if it is in fact correct?" One can only imagine what's going on behind the scenes. From what I've heard (and you'd be surprised who's talked with me), Overstock's executive offices have the atmosphere of a loony bin.

Sam has made this company's Reg. G violations crystal clear in his blog. It's now up to the SEC to, for the second time in its history, enforce that crucial investor-protection rule.

Oh, I almost forgot SafeNet. The allegations against that company read as if they were taken out of Sam's blog, if you substitute "Overstock" for "SafeNet." It's all there--manipulating earnings, using non-GAAP measures to mislead investors. Its top officials got slap-in-the-wrist fines, promised not to do it again, all the while neither admitting nor denying liability.

Wouldn't it be great if the SEC, one of these days, actually forced one of thee crumb-bum companies to actually admit that they did something wrong?

© 2009 Gary Weiss. All rights reserved.

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