Goldman Sachs and the Short Sellers

In my column today in TheStreet.com, I describe how the positive aspects of short-selling have been overshadowed by the general sliminess of Goldman Sachs.

The problem is not that Goldman went short, for instance, but that it went short while peddling mortgage-backed ca-ca to its clients.

Anyway, Goldman has another opportunity to commit hari-kiri tomorrow, as its top executives are called to testify before a congressional committee. What can they do? They can't plead the fifth, obviously. So they'll lie.

The question is whether their lying will result in repercussions. Based on the SEC's stance toward other frauds, such as especially Overstock.com, it's not altogether certain that fibbing alone will be enough to get the feds to act.

© 2010 Gary Weiss. All rights reserved.

Businessweek's No-Scoop Policy May Be a Problem

The newly redesigned Bloomberg Businessweek is out, and seems to be getting generally favorable reviews, such as this one by former BW chief of correspondents Joe Weber.

I've been jaded by constant BW redesigns--this has got to be at least the fourth redesign in recent years--but I think that this one may be the best. A lot of the junk added in the last editorial regime has been discarded, and the magazine has a much more substantial feel, with longer articles and less of a "Readers Digest" quality. Old-timers will find this new magazine reminiscent of the magazine in its salad days--with some exceptions, and they are substantial.

First, the magazine lacks a strong editorial voice. That may develop in the weeks to come, but seems contrary to the Bloomberg culture.

BW in the old days was noted for taking distinct, somewhat "reformist" positions on issues, both in its long-discarded editorial page and in staff-written commentaries accompanying news articles. It was a contrast to Forbes, which has always been right-leaning and libertarian.

When BW worked well as a magazine, for instance, a cover package as significant as the Goldman scandal would have been accompanied by a strong, staff-written commentary and/or editorial. In this issue there was a column by Michael Lewis, and it was, of course, a great piece of work. But Lewis is a freelancer with a point of view all his own, and doesn't speak for the magazine.

That's a quibble, however, compared to a far more substantive issue. In Stephanie Clifford's article in the New York Times today, she reported as follows:

Moreover, any breaking items from the magazine will appear elsewhere first. “Any scoop from anywhere in the world is going to run on the terminal,” [Bloomberg chief content officer Norman] Pearlstine said, adding “the terminal is the focus of everything we do at Bloomberg.”

To me, this is stunning. How can you have a news magazine that doesn't break news?

As far back as the 1990s, BW used to run certain time-sensitive, competitive articles online -- not on the Internet but on America Online, which used to carry BW exclusively back then -- a few hours before they ran in the magazine. However, this was done sparingly, for the simple reason that it eroded BW's franchise as a news magazine.

Indeed, one of the "ten commandments" of the former BW editor Steve Shepard was that BW breaks news. This was essential, for it was believed that otherwise BW would not be worth reading.

If a scoop runs in Bloomberg first, it is no different from any BW competitor getting to a story first.

I have no idea if there are any exceptions to the no-scoop rule, such as major investigations by the BW staff. What I do know is that a weekly news magazine that doesn't consistently break news is not going to be of much value to either readers or advertisers, no matter how many pages are run or how pretty it may be.

For the sake of my alma mater, I hope that Pearlstine was misquoted.

UPDATE (5/1): Apparently he wasn't misquoted. Bloomberg seems intent on scooping its new acquisition.

In the next issue, Bloomberg's James Sterngold had a devastating scoop in BW on Lehman's Dick Fuld not disclosing $200 million in compensation. His piece moved on the Bloomberg wire at 2 p.m. Thursday afternoon, several hours before BW went to press. It will be old news to BW readers by the time they get their copies of the magazine.

© 2010 Gary Weiss. All rights reserved.

Businessweek's Masthead -- At Last!

Most of the staff couldn't make it to the shelter

In previous posts I've commented on how BusinessWeek (n/k/a Bloomberg Businessweek) hasn't published a masthead as long as anyone can remember, which has made it hard to track the extent that the magazine has been decimated by layoffs.

Well, the newly redesigned magazine has a masthead, for the first time since before the takeover I believe, and "decimated" seems to be an understatement. As a matter of fact, the image that I have in mind is a nuclear explosion, in which only editors above the rank of senior editor were able to make it into the shelter. Most of the rest seem to have been vaporized.

The masthead was thoughtfully scanned here, and it's a shocker. The once-mighty staff, 250 domestic and overseas personnel as of 2004, has been reduced to 69. I'm not counting Matt Winkler, who is off the masthead but listed as editor in chief, though I am counting the 12 members of the Fortune-like "board of editors."

Here's a somewhat clearer version of the masthead:



Here's the bottom portion of the masthead, showing BW Online:



Every single department editor and domestic correspondent is gone, either fired or absorbed into the Bloomberg wire, and there are now three New York-based writers. There are now just four overseas correspondents. Of the three New York writers, one is Peter Coy, who covers economics, but there is no longer a Chief Economist or an economics editor. Another is Roben Farzad, who is all that is left of my old department that covered Wall Street and finance.

But then again, the magazine will be drawing from the staff of Bloomberg, and includes vast hordes of experienced people, including Pulitzer-winning investigative journalists. It will be interesting to see if this total slash-and-burn of the BW corporate culture results in a magazine that lives up to the hype.

© 2010 Gary Weiss. All rights reserved.

Dick Fuld Gives the Sergeant Schultz Defense

Dick Fuld of Lehman Brothers is appearing before the House Financial Services Committee today, and his prepared testimony is already online. It's a riot. Fuld is giving the famous "Sergeant Schultz defense."

Repo 105? What Repo 105? He saw nothing! He heard nothing! Oh, and he also throws in the "Alzheimer's defense." He doesn't remember!

Meanwhile a former Leman exec named Matthew Lee -- his prepared testimony is here -- will be sitting at the same panel as his former boss, ready to put the lie to Fuld's excuses.

According to his prepared testimony, Lee raised concerns about Repo 105 with senior management, the Audit Committee of the board of directors, and its outside auditors at Ernst & Young. Within days of raising these concerns, he was canned.

It will be interesting to see what emerges at the hearing today. Stay tuned.

UPDATE: After hours of pabulum from Timothy Geithner, Mary Schapiro and Ben Bernanke, finally Fuld slimed his way into view -- not sworn in, for some reason, which is a shame, because this guy lies like a Persian rug. Asked why Lehman failed, Fuld blithered and blathered and talked out the clock.

The star was William Black, former litigation director of the Federal Home Lome Bank Board, speaking forthrightly about what needs to be done: Lehman needs to be charged with fraud.

Then came more questioning of Fuld, again blithering and blathering and evading even the most simple questions.

"Let me try to put this in some context," he would say, before launching into a filibuster--and these morons would let him.

Watching that gekko Fuld running rings around the committee, being allowed to evade and stonewall, it's easy to understand why we're in the mess we're in.

I'm sorry I titled this "Fuld Gives the Sergeant Schultz Defense." I should have made it, "Fuld Gives Congress the Finger."

UPDATE, 5:07 p.m.: The questioning is continuing, as do the evasions, the lies, the squirming. There was something vaguely familiar about Fuld's appearance today.

I couldn't quite put my finger on it, and then I remembered what Fuld's performance resembled: Frank Costello's famously evasive appearance before the Kefauver Committee.

I mean, the man can't even tell the truth about his No. 1 critic, David Einhorn, whose name came up toward the end of the hearing. Fuld was obsessed with shorts and particularly Einhorn, and Fuld today can't even tell the truth about Einhorn, bearly acknowledging his existence--or that he was right.

What a douchebag.

Lehman bankruptcy examiner Anton Valukas testified that Fuld's pants were on fire: “A fact-finder concluded that he [Fuld] in fact did know and acted upon information he knew or should have known. There was at least one witness who testified that he discussed Repo 105 transactions with him and that there were document sent to him by e-mail and otherwise, which reflected the Repo 105 transactions.”

© 2010 Gary Weiss. All rights reserved.

Wall Street's Moral Twilight on Display at Goldman Sachs

This morning Goldman Sachs reported record earnings, in the latest example of how unmitigated gall has become the defining credo of Wall Street.

As William D. Cohan points out in the New York Times today, it’s hard not to see something obscene in how Wall Street reaped massive profits and bonuses in 2009, while ordinary people are struggling.

My Portfolio.com column today takes a look at Goldman's defense as exemplifying the moral twilight in which Wall Street resides. There's been a lot coming out today on how Goldman may actually win the case. That's possible, but it doesn't detract from the sheer sliminess of what Goldman did.

© 2010 Gary Weiss. All rights reserved.

Man Bites Dog, or Goldman Sachs Charged by the SEC

The SEC shocked and amazed the civilized world today, filing civil charges against Goldman Sachs & Co. -- charging it with fraud in the sale of subprime securities. And what a fraud! Friends, these charges, if they stick, are going to sink Goldman. This is pure sliminess.

It all has to do with a collateralized debt obligation that Goldman sold a bunch of institutional investors (a/k/a "suckers"). This was not any old fraud, according to the SEC complaint:

According to the Commission's complaint, the marketing materials for ABACUS 2007-AC1 — including the term sheet, flip book and offering memorandum for the CDO — all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management LLC ("ACA"), a third party with expertise in analyzing credit risk in RMBS. Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. ("Paulson"), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO played a significant role in the portfolio selection process. After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps ("CDS") with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure. Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. GS&Co did not disclose Paulson's adverse economic interest or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials.

Note what I've put in boldface. This is devastating. The Wall Street Journal says that "Goldman Sachs, which in a statement called the accusations 'completely unfounded in law and fact,' could face steep fines and be on the hook to repay nearly $1 billion of investor losses."

Now, I've long argued that short-sellers perform a valuable service to the markets, but this ain't an example of a short-seller performing a valuable service to the market. What it means is that Goldman entered into a slimy deal with a short to create a derivative that was ca-ca, and thus could create a profit opportunity for said short-seller, bigtime hedgie John Paulson.

It's a bit like designing a car in cahoots with an alternator manufacturer, for the purpose of being sure that it can break down so that it needs a new alternator. I can just see the anti-shorting nutcases going wild over this, and I can't really blame them. While nobody from the short side has been banged on this, yet, I expect that this is going to be like the Elgindy case: a big, fat black eye for short-sellers.

Paulson says it "is not the subject of this complaint, made no misrepresentations and is not the subject of any charges." JP is a quiet guy who doesn't care much for publicity, and is not happy with anything resembling negative press. Something tells me he's going to have to develop a thick skin, and fast, because a shit storm is coming. He didn't just sit back and smartly wager on a decline in the real estate market. This has him engaging in conduct that, morally speaking, is simply indefensible.

Interestingly, Paulson, as his statement acknowledges, wasn't charged. Whether he will be charged in the future is an open question. As I said a while back when I profiled him for Portfolio, this is one smart cookie. How he can escape from this with clean hands is beyond me. Fortune speculates on Paulson's possible exposure.

When I profiled Paulson for Portfolio, I said, " Left unexamined is the uncomfortable moral dimension of Paulson’s achievement. If he saw all of this coming, was it right for him to keep his own counsel, quietly trading while the financial system melted down?" According to the SEC complaint, he did considerably more than just see it all coming. Seems that he helped make it happen, by so generously helping Goldman design its toxic derivatives.

And now he's..... cooperating with the SEC, perhaps? Prepared to testify against Goldman, perhaps? If so, Goldman may be in major trouble.

Meanwhile, we have the amazing spectacle of a major bank actually being charged with wrongdoing in something related to the financial crisis. And Goldman Sachs, no less. Talk about man bites dog. Oh, and here's something else: the lead counsel for the SEC is Rick Simpson, who worked on the Crazy Eddie case years ago. Sam Antar tells me that Simpson is a dedicated, dogged guy. Diane Tucker has more on Simpson here. Goldman won't get off easy.

Still, you might argue that Goldman is already getting off easy in this sense: it has been accused of a criminal offense--fraud--in a civil action.

If I gave a bank a rubber check for twenty dollars I would wind up in the can. Can someone please explain to me why it is that a bank gets accused of defrauding people for a billion bucks and it gets a civil lawsuit?

Sure, it's a significant step. But what we're seeing, again, is the decriminalization of securities fraud.

UPDATE: Reports are filtering out of Goldman Sachs that a new theme song has been adopted by the company:

The Party's Over - Nat King Co...

© 2010 Gary Weiss. All rights reserved.

Shia LaBeouf Disease and Other Wall Street Disorder

My inaugural column on TheStreet.com describes the Shia LaBeouf stock-picking disease and other incurable Wall Street disorders: Greenspan Cholera and Chamber Pot Disorder among them.

You can read up on the difficult medical details here.

© 2010 Gary Weiss. All rights reserved.

Struggling Financial Crisis Commission Readies Big Show

My Portfolio.com column today is a curtain raiser for the Financial Crisis Inquiry Commission's latest theatrics--a one man show by the Maestro, Alan Greenspan. This will be the first time Greenspan has appeared before an official body since October 2008, when he more or less said that maybe his thinking on regulation didn't work out.

The FCIC has been a big dud. It has issued no subpoenas, and is stumbling along, as the New York Times reported today.

Still, the Wednesday show should be illuminating.

© 2010 Gary Weiss. All rights reserved.

When is Good Publicity Not So Great?

The answer is: when you're investigated by the SEC, and you lie in the Washington Post.

Yesterday, Overstock.com's wack-a-doo CEO Patrick Byrne was the subject of a puff piece by the AP. White collar crime-fighter Sam Antar tells me that he was talking to the writer of the article for literally weeks--and yet the AP reporter, Paul Foy, omitted crucial facts, and allowed Byrne to tell a breathtaking lie.

The problematic passage is as follows:

Byrne, who owns nearly 30 percent of the company's shares, says Overstock's accounting errors were generally conservative. The latest involved 0.1 percent of revenue and gave the company no advantage, he said.

Foy left out entirely that correcting the "accounting errors" had turned a much-ballyhooed fourth quarter 2008 profit into a loss. It's right there in 10-K, in black and white.

That is not a small thing. When the phony fourth-quarter profits were announced in January 2009, it pushed up Overstock shares by 21%. The news agency to which I just linked, Reuters, has never revisited the subject.

Nor did the article report that Overstock had bitterly fought the restatements, firing one of its previous accounting firms, Grant Thornton, or that it is under a continuing SEC investigation. For a piece that took weeks to prepare, such omissions are inexcusable.

Foy also irresponsibly quotes Byrne as comparing whistleblower Sam Antar to Bernie Madoff, when it was Sam who had blown the whistle on Overstock's accounting gimmickry.

The problem, for Overstock at least, is that this lamentable journalism, containing a blatant lie by Overstock's CEO, was published today, lies intact, omissions glaring, in the Washington Post. Pickup of the AP story by the local Utah media can be ignored, but not splashed in the SEC's hometown daily.

The SEC may well be destined to give Overstock the Allied Capital Treatment, but the Post article doesn't help, unless the SEC officials involved are too busy writing their resumes to care.

This AP story, meanwhile, raises a journalistic issue that I thought had been settled a long time ago: when a CEO lies, and when the reporter knows it's a lie, is the reporter obligated to point that out?

The answer, which I think is pretty obvious, is "of course." Otherwise the media becomes embroiled in what is, in effect, a pump-and-dump scheme. Reuters can't be held responsible for its January 2009 article reporting the phony Overstock financials, but the same can't be said for the AP.

The other question that it raises, which I've broached before: To what extent are puff pieces like the AP's motivated by a desire to avoid Byrne's well-known penchant for attacking the press?

Barry Ritholtz calls the AP story some of the worst business reporting he's ever seen. It's hard to argue with that.

© 2010 Gary Weiss. All rights reserved.

Out Google! Out AdBrite!

I'm delighted to report that today I have ousted Google ads and Adbrite from this blog.

The reason is simple: the bucks that they bring in just don't justify the way they clog the blog with text and intrusive scripts. No one complained, but I found it annoying myself to have to navigate an ad before accessing the blog. Besides, those blog ad services were ridiculously stingy. I was getting just a fraction of what they were bringing in.

So to hell mit 'em, as my grandmother would have said.

© 2010 Gary Weiss. All rights reserved.

The Utah Newspapers Fail -- Again

Overstock.com, best known for its Facebook pretexting campaign against journalists, yesterday restated its financials for 2008 and 2009, turning a much-ballyhooed fourth quarter 2008 profit of $1.014 million into a $705,000 loss--vindicating critics, especially Crazy Eddie mastermind-turned-crime fighter Sam Antar.

At the time the now-retracted "profit" was announced in January 2009, Overstock shares climbed 21% in one day. The company had "beaten analyst expections" of a loss, Reuters reported at the time. I am amazed that Overstock has not been prosecuted criminally for this blatant securities fraud. Yet an ongoing SEC investigation has produced not so much as a slap on the wrist.

Also yesterday, Overstock announced a $7 million profit for 2009 that would have been a loss were it not for paper-shuffling and nonrecurring items. It faces a serious criminal probe of its advertising practices in California, for which it is on the hook for as much as $8.5 million, and its internal controls are a shambles.

All of the above is plainly disclosed in the company's filings with the SEC yesterday. But you wouldn't know about any of this by reading Overstock's hometown newspapers, the Salt Lake Tribune and Deseret News, or by reading an AP puff piece that was subsequently churned out of its Salt Lake City bureau.

Sam today recounts how Overstock.com CEO Patrick Byrne and its president Jonathan Johnson systematically lied about their financials over the past few months--lies they were officially forced to disavow yesterday, as they issued restatements for four financial statements in 2008 and 2009.

Sam describes in detail how Byrne used nonrecurring items to turn his latest loss into a profit -- thereby engineering a 20% rally in the stock yesterday. Thus Overstock shareholders and employees, who are concentrated in Utah, had to read Sam's blog, this one or the Jr. Deputy Accountant to find out what really happened yesterday, thanks to the sheer cowardice of the Utah media.

The Deseret News picked up an AP rewrite of the press release. (The puff piece followed a few days later.) Neither the AP in its two articles nor the Trib article today mention that Overstock's fourth-quarter 2008 "profit," trumpeted by Byrne at the time in a gloating press release-- pumping up the shares by 21%-- was a big phony. It was, as restated yesterday, a loss. The brief Deseret News item doesn't even mention the restatements.

The Trib makes no mention of how it trumped the fourth-quarter 2008 "profit" in this article by the same reporter, which turned out to be a load of hooey.

Instead, the Trib quotes Overstock president Jonathan Johnson uttering this drivel: "When you look at what this restatement is really, it is positive."

Positive? Overstock admitting that its profit was a loss is a "positive"? Indeed, reading the Trib article, you'd think that the restatements were a triumph and not an admission of incompetence at best or, more likely, intentional fraud.

Nor does the Trib or Deseret News point out that California law enforcement authorities want either $8.5 million or $7.5 million from Overstock to settle a criminal investigation of its advertising practices. Both contradictory numbers are used in the 10-K released yesterday. Not only is the contradiction not mentioned in the papers' coverage, but this entire mess is not even mentioned.

Instead we get vague references in the Trib to "questions about its finances," without any mention made of the fact that those questions have been answered. Nor is it mentioned that the company's auditors at KPMG said in the 10-K yesterday that the company's internal controls were FUBAR.

Probably the worst omission in the coverage is this: neither newspapers points out that the $7.7 million profit for 2009 would have been a $6.5 million loss were it not for (as Sam points out):

• Gain from extinguishment of debt (Consolidated Statement of Cash Flows): $2.8 million
• Gain from settlements of legal matters (Footnote 16: Commitments and Contingencies): $7.1 million
• Reduction of sales return allowances $4.3 million (Page F-16)
• Total: $14.2 million

This is not the first time the Utah media has failed to do its job, or been used by Overstock to mislead its shareholders. Byrne and Johnson were quoted by the Tribune in November 2009 misstating the magnitude of the financial problem that it corrected yesterday. Johnson was quoted as saying as follows:

Johnson said the company believes its 2008 year-end financial statement was accurate and that its accounting firm at that time, PriceWaterhouseCooper, agreed and signed off. . . .

"None of these changes that they [Grant Thornton] are talking about, or that people at the SEC are now asking about, make any of our quarters go from negative to positive or from positive to negative," he said.

Byrne said much the same thing in a conference call with analysts.

There's no mention of any of this in the Trib's article, even though the same reporter wrote both articles. It's almost as if the Trib was covering up for the fact that it was used by Overstock.com to spin the dreadful condition of the company.

Now, we can't expect reporters to be accountants. But we do expect reporters to call accountants when confronted with companies that have a history of making false or misleading statements--particularly to their own newspapers.

The lesson for Utah's newspapers, and other newspapers in similar situations, is Journalism 101: Call an expert. Read the 10-Ks. Sure, you had to go to page F-53 of the 10-K to read about just how significant the 4Q 2008 restatement was -- and how much the company had lied in the past. Given the company's history of lies, evasions and misstatements, what else could they expect? Relying on the press release of a company like Overstock is simply inept.

Years ago you had to pay document retrieval services big bucks to get SEC filings. Now they're on the web, instantaneously. Sure these are big documents. So? If you can't figure them out, there are people who can do so.

The bottom line is that there is no excuse for incompetence nowadays in covering corporate slimeballs like Overstock.com. All it takes is Internet access, a telephone, and something lacking in Salt Lake City's media--a little backbone.

Yes, it's true, the company has a history of smearing the media and whistleblowers like Sam, and there's no doubt at all that Byrne will sic his hired thug, the kiddie stalker and possible pederast Judd Bagley, on any Utah reporter who doesn't toe the company line. Bagley once got in touch with Sam's estranged wife to dig up dirt on him --I mean, the guy will stop at nothing. To quote Barry Rithholtz, he is a "career douchebag." Harassing reporters is his job. He belongs in jail, but meanwhile he's on the loose, and he is doing a great job--just read the Salt Lake City papers today and you can see what I mean.

The journalistic malfeasance in Utah is understandable--but not excusable.

UPDATE: The AP's Paul Foy moved on the wire this atrocious article today, containing the following whopper from Byrne:

Byrne, who owns nearly 30 percent of the company's shares, says Overstock's accounting errors were generally conservative. The latest involved 0.1 percent of revenue and gave the company no advantage, he said.

Seems to me that a profit that really was a loss is an "advantage."

What makes this odd is that Foy knew that Byrne was dissembling. It's in the 10-K that the restatement had changed the fourth quarter 2008 gain to a loss, and Sam tells me he pointed that out to Foy, by phone and in writing.

More on the AP's messed-up reporting can be found in this follow-up.

Also, the Going Concern accounting blog weighs in.

Going Concern also live-blogged the Overstock conference call on Monday. Always a great show.

© 2010 Gary Weiss. All rights reserved.