Friday, February 19, 2010

Medifast, Meet Barbra Streisand


Ms. Streisand, I'd like you to meet another dumb lawsuit plaintiff

In an item the other day I described how a lawyer for Shaquille O'Neal, suitably named "Roach," had sent a threatening "cease and desist" letter to blogger Tim Sykes, demanding that Tim remove all refrences to a company tied in to O'Neal called NXT Nutritionals Holdings Inc.

Doing so was dumb as hell, because all the Roach did was to amplify Tim's claim that NXT is a "pump and dump"--something known as the "Streisand Effect," after an equally dumb lawsuit the singer once filed. All the suit filed by Streisand accomplished was to disseminate a photograph she was trying to suppress.

Roach was pretty dumb, but I've found someone even dumber--a company called Medifast Inc. Repeat: Medifast Inc. (just want to be sure you noticed) that is suing Barry Minkow, his Fraud Discovery Institute, forensic accounting ace Tracy Coenen and a bunch of other people, including an anonymous person on a Yahoo! message board, for saying naughty things about the poor wittle dahling mutlilevel marketer.

Here is Tracy's post on the suit, and here is a post from Sam Antar asking Medifast why it hasn't responded to the allegations that have arisen concerning the firm.

As with NXT, I have no opinion on Medifast except that a suit like this is just plain stupid. All it is going to accomplish is to disseminate Minkow's claims to people like myself who don't follow such things and ordinarily couldn't care less.

Sam points out:
The lawsuit alleges that Barry Minkow orchestrated an illegal scheme to drive down the stock price of Medifast shares to profit from short selling. However, Minkow has a first amendment right to critique or to use your words "bash" Medifast, notwithstanding the fact that he publicly disclosed that he holds a short position in your company and is a convicted felon. Minkow's opinion and analysis is backed up by very detailed reports prepared for Fraud Discovery Institute by Mr. FitzPatrick and other data made fully available to the public for examination and scrutiny.

The Defendants will certainly assert "truth" as a defense to claims of defamation made against them in this lawsuit. That same kind of truth led a federal Judge in Utah to dismiss Usana's (NASDAQ: USNA) frivolous defamation claims against Fraud Discovery and Barry Minkow and award them legal fees covering their Court costs.

I remind you that discovery in civil litigation is a two-way street. Minkow and the other Defendants can now subpoena all of Medifast's books, records, and documents and closely scrutinize them to look for any possible improprieties and irregularities in defending themselves in this litigation. In addition, they can subpoena documents from Medifast's auditors, vendors, customers, and other business relationships. You and others will be subject to sharp questioning under oath in pre-trial depositions by the Defendant's attorneys. Now Medifast's business documents will ultimately become subject to close public examination and careful scrutiny if this case goes to trial.

Medifast, meet Barbra Streisand.

© 2010 Gary Weiss. All rights reserved.

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Wednesday, February 17, 2010

My Tim Geithner Fantasy


More Clooney, less Costanza

OK, I'll admit it. I have fantasies about Tim Geithner. I describe them in the New York Observer, on the stands today.
I imagine that we are in a different world, a movie world. Instead of the George Costanza character we have before us, making excuses, we have George Clooney, channeling Jimmy Stewart. He smiles that Clooney smile and interrupts whichever grandstanding Republican or phony Democrat is trying to rip him a new one.

“Congressman,” he says, “I’m not going to sit here and make any more excuses. You know as well as I do that I’m no good at this. Not only can I not help homeowners, I can’t even sell my own house in Larchmont. The banks have me in their clutches to such an extent that I can’t go to the bathroom without asking for a hall pass. You know that I am no Alexander Hamilton. I’m not even a good imitation of Hank Paulson. Let me to put it to you another way: I quit.”

More on my Geithner daydream can be found here.

© 2010 Gary Weiss. All rights reserved.

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Sharesleuth Hones in on a Naked Shorting Gasbag


Pitt is partners with a barred broker

Interesting article in Sharesleuth today, describing a cellular company's ties with a variety of shady characters--including a barred broker who has built a business catering to companies that use "naked short selling" to divert attention from their own wrongdoing.

The company at issue is called Lenco Mobile, and the site describes how the company is hooked up with a "recidivist SEC offender" named Michael Crow, and also is tied in with an odious character named Thomas C. Ronk.

Ronk is a regular on the naked shorting conspiracy carnival circuit:

Ronk operates several investment web sites, including BuyIns.net, which purport to identify companies whose stocks have been targeted by illegal "naked shorting'' and are poised for price jumps.

He also is partners with former SEC Chairman Harvey L. Pitt in RegSho.com, a site created to help short sellers locate shares to borrow so that they can remain in compliance with market rules.

Dealbreaker had an item a while back on Pitt's involvement in that creepy outfit, and how it constituted a conflict of interest. Pitt, arguably the worst SEC chairman in recent history, resigned in disgrace in 2002 after doing such a bad job that he just couldn't go on.

It's not news that Ronk has a regulatory history a mile long, or that he is in the business of helping crappy penny stock companies lure investors--as I described in this item in 2007--but Sharesleuth provides an interesting description of Ronk's pedigree.

Ronk was a stock broker in Southern California before running afoul of regulators.

In 1999, he was fined $50,000 and suspended for 30 days by the NASD. Without admitting or denying the allegations against him, Ronk consented to the entry of findings that he participated in private securities transactions without providing prior written notification to his firm, describing the proposed deals or his role in them.

Ronk's securities registration was later revoked for failure to pay the fine.

Ronk now is proprietor of several web sites, including BuyIns.net and SqueezeTrigger.com, that purport to identify stocks that have been the subject of heavy shorting and are poised to rise in price as traders cover their positions.

Ronk has been one of the most vocal proponents of a theory that a shadowy network of hedge funds and other investors have been driving down the stock prices of U.S. companies through so-called "naked shorting'' of their shares.

Two of the companies that complained most loudly about the issue - Universal Express Inc. and Pegasus Wireless Corp. - later became the subject of SEC cases alleging that they improperly dumped vast amounts of stock on the market, undercutting their own share prices.

True, but Ronk is even more closely tied in to stock scams than that. His Buyins.net suckers in hapless small investors looking for "short squeezes" in crappy penny stocks, including the Utah pump-and-dump Cyberkey Solutions, whose CEO, James E. Plant, was indicted for lying to the SEC about a pump and dump scheme involving his company. He pleaded guilty and was sentenced to 97 months in prison for promoting his bogus "homeland security" company, witness tampering and obstructing the SEC probe. (What's interesting about the latter charge is that he obstructed the SEC investigation far less blatantly than some other people I know.)

In this 2006 press release from Cyberkey, the now-imprisoned Plant uses Buyins.net "short squeeze" data in an effort to lure in more suckers. It's yet another indication of how the naked shorting conspiracy types provide a ready-made excuse for stock manipulators, or (as in the case of CEOs like Richard Altomare of Universal Express and Patrick Byrne of Overstock.com) are themselves cooking the books or otherwise ripping off shareholders.

Now, the one fly in the ointment here is that, as I've pointed out previously, Sharesleuth is financed by trading profits from shorting stocks mentioned in its articles. Such arrangements cross ethical boundaries. However, according to a disclosure in the article, "No one associated with Sharesleuth has any investment position, short or long, in Lenco Mobile."

Great. So why not make that a rule? My suggestion to Mark Cuban, who owns Sharesleuth, is that he drop this "profiting from shorting" stuff and figure out another way of financing the site. More frequent items would be nice, and, of course, exposing the naked shorting crooks on a regular basis would certainly put his website on the side of the angels.

Cuban is involved in an insider trading case (dismissed but still being pushed by the SEC) that is increasingly appearing to be a waste of SEC resources. If he removes the "legal insider trading" aspect from Sharesleuth -- and continues to crank out good stories like this one -- he's going to get a lot more public support.

UPDATE: A reader brings to my attention that Ronk used to work for the L.T. Lawrence chop house, one of the most notorious fraud factories of the 1990s, belatedly shuttered by the NASD in 2000. Lawrence was one of the numerous employers of Louis Pasciuto, the subject of my book Born to Steal.

It's not clear from the filings whether Cyberkey paid Ronk for its "research" (nondisclosure, of course, would be spitting on the sidewalk compared to the companies other crimes). Overstock.com paid him $18,910 in 2007, and other crummy little companies also pay him handsome "data fees."

© 2010 Gary Weiss. All rights reserved.

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Tuesday, February 16, 2010

'Naked Shorting' Scam Artist Indicted Again


About a year ago I described how one of the leading troubadours of the naked shorting conspiracy theorists, Joshua Lankford (left), had gone on the lam after a federal court indictment.

Lankford ran an Internet webcasting outfit called MN1.com, which had served as a sounding board for the likes of Patrick Byrne, the wacky, book-cooking CEO of Overstock.com, and Richard Altomare, the sticky-fingered chieftain of Universal Express.

A reader brings to my attention this press release from the FBI in Oklahoma City, announcing that Lankford and four other defendants were indicted in a $41 million pump and dump scheme. Lankford is still a fugitive, according to the FBI.

Late in 2006, while Lankford was running his schemes, Byrne sent his loyal acolytes to the crook-run MN1.com. He fed naive boobs to its pump-and-dump schemes by offering a "Club O membership worth $29" to listeners. All references to his support of the MN1 scam have been nuked from the Internet, but a mention of it can be found here.

Well, almost all references. After this item appeared, a sharp-eyed reader broad to my attention this Overstock press release extolling the virtues of MN1.com, with language cut-and-pasted from Lankford:

Market News First is an online, market news provider that brings investors current news on the market. Market News First is the only online, live radio web site that brings real market news to investors and features live interaction with companies from the Bulletin Board to NYSE.

Through daily, live interviews, we bring you up to date on all the established companies and inform the investors of the newest opportunities within the market. Market News First offers one-on-one interviews with the presidents and CFOs of companies to deliver answers to the questions that investors may ask and provides them insight into the companies present condition and future plans.

Seth Jayson at Motley Fool reviewed the MN1-Byrne relationship in this post in late 2007. Most of the links to which he refers, such as one from the Overstock community board in which Byrne praises MN1, have since been excised.

Byrne is enmeshed in criminal schemes of his own--sponsoring an Internet pretexting enterprise that stalked the spouses and kids of his critics. There is also a renewed SEC investigation into his own peculiar brand of "accounting," which created a "cookie jar reserve" allowing Byrne to manipulate his financials. And let's not forget that sales tax avoidance scheme he concocted during his failed attempt to bust into the diamond market a few years ago.

Byrne reported his 2008 results on Jan. 30, 2009, but reports that he would puke forth his latest set of phony numbers yesterday proved inaccurate. I guess he's still going back and forth with his latest auditors--he's on his third set of auditors in as many years--no doubt concerning how much phoniness is acceptable.

When Zero Mostel cooked the books in The Producers it was funny, but this long-running comedy is wearing thin. He really belongs in jail. Question is, will he go on the lam as Lankford has done?

Byrne, meanwhile, has yet to apologize for giving aid and comfort to the fugitive stock swindler Lankford. Of course, I imagine Byrne probably doesn't think the guy did anything wrong. Besides, what's that old saying, "Narcissism means never having to say you're sorry"?

UPDATE: One Byrne fan writes in to point out that it's not fair to tar Byrne with his association with Lankford, just on the strength of one appearance. Did I do that? Gee, I'm sorry. I should have pointed out that he appeared on MN1.com at least twice, and sent out an email (replicated here) to Overstock.com customers extolling Lankford's operation as "a kind of online CNBC."

Yet Byrne either knew or should have known that MN1.com was sleazy, as indicated by this follow-up post on its role as a stock promoter, and this one pointing out that it was an "analyst for hire shop."

Glad to correct the record.

© 2010 Gary Weiss. All rights reserved.

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The U.S. Chamber of Commerce's Dishonest War Against Consumers

My Portfolio.com column, the Weiss File, explores the U.S. Chamber of Commerce's dishonest campaign against the proposed Consumer Financial Protection Agency.

The column can be found here.
What makes the Chamber’s opposition especially potent—and disagreeable— is that it is purporting to represent the interests of small business. In September, the Chamber launched an ad campaign. One newspaper ad said, "Virtually every business that extends credit to American consumers would be affected—even the local butcher and the credit he extends to his customers."

The word credit is especially effective and evocative, because small businesses, like the consumers they serve, are among the hardest hit by the continual tight credit market. But the Chamber doesn’t want to do anything about that—such as by requiring that recipients of TARP funding make loans to creditworthy small businesses and consumers.
By the way, when was the last time you heard of a butcher extending credit to a customer? Mr. Glucksman, my family's butcher on Kingsbridge Road, used to do that--forty years ago. What bunk.

By the way, here is where Glucksman Brothers used to be, from James Shannon's terrific website. Sad.

© 2010 Gary Weiss. All rights reserved.

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Friday, February 12, 2010

Shaquille O'Neal, Meet Barbra Streisand


Shaq's lawyer wants a blogger to STFU

I must confess at the outset that I don't know a thing about basketball, nor am I much of a fan of Barbra Streisand. However, I would like to use this post in order to introduce Shaquille O'Neal to Ms. Streisand, as the basketball star's effort to silence a blogger is a classic case of the Streisand Effect.

In 2003, Ms. Streisand sued a photographer who photographed her Malibu home from an airplane. As The Guardian recounts in its article on this phenomenon:

In striving to protect her privacy, however, the actor only stirred up outrage among internet users – nearly half a million of whom looked up the offending image over a single month. And so, as Barbra might say, A Rule Was Born – that when a celebrity tries to take information off the internet, the selfsame nugget will receive exponentially more attention.
Now, Shaquille O'Neal is not suing anybody. But a gent identifying himself as Shaq's "general counsel," a lawyer in Los Angeles by the name of Dennis A. Roach, yesterday wrote what is known in the legal biz as a "cease and desist letter" to a blogger named Tim Sykes, who runs a blog that can be found at http://www.timothysykes.com/.

Tim focuses on penny stocks--he has a system that, he says, can produce profits from the trading of same--and he has been bearing down on a stock called NXT Nutritionals Holdings Inc. The stock symbol is NXTH.

I repeat, the stock is called NXT Nutritionals Holdings Inc. And its symbol is NXTH.

OK, I just wanted to be sure you noticed that.

Anyway, I have never heard of the stock and have no opinion on it. But in past blog posts, which you can find here. Tim has referred to NXTH as a "pump and dump," and has pointed out that the aforementioned Mr. O'Neal is its official spokesman. One post pointed out:

By the end of 2012, regulatory filings show, NXTH must give O’Neal 3 million shares of company stock in exchange for his publicity services. He was scheduled to receive the first 1 million shares back in November, filings show, and can start selling them at the beginning of February. At that point, he will be free to sell up to 20,000 NXTH shares a day (but no more than 100,000 shares a month) if he chooses to do so.

Clearly, NXTH could face some intense selling pressure – potentially crushing ordinary shareholders – if private investors like O’Neal start dumping their stock next month.

C’mon Shaq, aren’t you rich enough? Don’t you have any better financial advisors than your current ones who got you into bed with such snakes?
He went on to call the company a "blatant pump and dump."

Along comes Roach. Now, keep in mind that he does not represent the party that would presumably be offended by being called a "pump and dump," which is NXT Nutritional Holdings Inc. He represents O'Neal.

In his letter, Roach contends that in a Feb. 7 post entitled "Shaquille O’Neal’s Alleged Pump & Dump Is Up Nearly 100% Due To This $320,000 Promotional Mailer" (he added the word "alleged" to the title after getting the Roach letter). . .
. . .you state that Mr. O'Neal is involved in a pump and dump scheme. . . As you well know, 'pump and dump' is a fraudulent activity, consequently your public statements are false and defamatory, and greatly damage [sic] to Mr. O'Neal's reputation.
The Roach letter goes on to "demand that you immediately remove all of these postings from your website, blogs, Twitter accounts and any other form of public dissemination."

The letter says that time is of the essence, and these here posts gotta come down now!

It's a tough little letter with one deficiency: it doesn't point out anything inaccurate in Tim's blog posts.

Tim published another post today, you can find it here, asking, "Is This Shaquille O’Neal Penny Stock A Pump & Dump? Help Me Decide!"
. . . trust me when I say if you get a threatening letter (the first you’ve ever received in 2+ years writing this blog) from one of the richest and most powerful athletes in the world, no matter how true your statements are, you think about taking your little blog post down ASAP.

But as I reread my post I was reminded again of the importance of publically exposing pump and dumps and that I was providing my readers with information that was 100% true and supported by the publicly available sources which I quoted…after all, it’s not my fault that Shaq and/or his attorneys don’t understand that NXT Nutritionals Holdings Inc. (NXTH) looks very much like a pump & dump…perhaps if I educate them, while educating everyone else through this blog, perhaps then, the threats would disappear and Shaq and his attorneys, would not threaten me, but instead thank and congratulate me for teaching them, as everyone else does.
And on it goes. As for me, I've got a lot better things to do, but I'm now very interested in this little company and this big guy.

Shaquille O'Neal, meet Barbra Streisand.

© 2010 Gary Weiss. All rights reserved.

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Tuesday, February 09, 2010

Patrick Byrne Admits Ownership of Deep Capture


Not exactly a well-kept secret, yet Byrne still lied about it

Two posts on the corporate crime petri dish Overstock.com in one day! My goodness.

Overstock's loony CEO, Patrick Byrne, has been curled up under his desk since his company announced that its financial statements dating back to 2008 have been phony. But before the cone of silence descended, Byrne made a startling admission: he conceded that he owns the Deep Capture smear site. It just came to my attention, and nobody has picked up on it.

In a post on Stacie Kitts' excellent accounting blog on Jan. 18, Stacie had said in passing,
Now, if I am getting this right, Patrick Byrne is the CEO of Overstock.com and a purported owner of a website called Deepcapture.com.
Byrne materialized the following day with a comment:

Thanks for the story and the link. There are, however, some minor suggestions I’d make. You say:

“and a purported owner of a website called Deepcapture.com.”
Actually, for much of its existence we just put a big bubble on the upper right hand corner of the home page explaining that I am indeed the funder of DeepCapture.com; later, we added a whole page about it and who we are. So there is nothing “purported” about it. [Emphasis added]
Now, Byrne's ownership of Deep Capture was not exactly a well-kept secret. It used to be that users of that website could click on a link taking them to Overstock, and 5% of purchases would go to the site (see illustration at top of item).

But this is the first time he's fessed up and admitted owning the site, which is dedicated to personal attacks on the "criminal" journalists, bloggers and ordinary citizens who have dared to criticize Byrne: myself, Sam Antar, Roddy Boyd, Joe Nocera, Betany McLean, Susan Antilla, Herb Greenberg, and a host of others. Some of the targets are message board users, people you've never heard of, who hate crooks.

It's not clear why Byrne decided to let the cat out of the bag. Perhaps the subject came up in the SEC probe. Perhaps he's off his meds. Perhaps he's on his meds. Who the hell knows? All I know is that Byrne and his minions have lied about this in the past, and that if Stacie hadn't mentioned it in her blog today I might have missed it entirely.

Byrne had previously gone to great lengths to conceal his ownership of Deep Capture, initially listing a Byrne-controlled entity as owner in Utah corporate records, and then erecting a separate corporate shell. Ditto the bottom-feeding creep who runs the site, Judd Bagley. The latter denied that he worked for Byrne in a webcast last week. Byrne had admitted to the extent of his funding in a New York Observer article last month, but never came clean about actually owning it.

In a comment to an article in The Industry Standard in 2008, Byrne explictly denied that he owned Deep Capture.

The author of the article asked:

A few questions for you regarding your statement that Deep Capture is a work of "investigative journalism": Are the writers paid by you? Are they paid, full-time employees, or freelancers? Who pays their salaries? You describe yourself as a reporter, but are you also an editor? Do you assign and vet their work? Would you ever kill something that they wrote?
Byrne responded:

PS In direct answer to your questions: the employees of DeepCapture are paid by DeepCapture, LLC. I founded DeepCapture and gave it its initial capitalization, but then withdreww as a member of the LLC, and am not an employee. Yes, I am a reporter for DeepCapture, but I do not get paid. I am neither an editor nor do I "assign" stories. Occasionally I see stories before they go live and give my comments (which they are free to accept or ignore as they wish), but more often, I do not see the stories before they go live. And you did not ask, but I'll tell you anyway: yes, I enjoy being a reporter. [emphasis added]

I guess he forgot he said that. What's the old saying, something about "a liar requires a good memory"? Note that he wasn't even asked if he owned Deep Capture. He volunteered that information, while ignoring most of the questions.

The problem with lies like this is that they violate the securities laws (Rule 10b-5, to be exact) by deceiving shareholders about a material aspect of the company. The SEC can't regulate the morality of corporate officers, but fraud definitely falls within its purview.

In its filings, Overstock has never admitted that it has a link to Deep Capture, and a Deep Capture web page to which Byrne links in his recent blog comment does not disclose that he owns the website. Instead, it makes the misleading statement that "it is not part of Overstock" and refers to the three creeps who churn out attacks as "co-owners."

No, not directly. But under accounting rules--admittedly not one of Byrne's strong points--he is required to disclose his ownership of Deep Capture. As blogger Sam Antar pointed out in a blog post last month, the Overstock-Deep Capture relationship is covered by Statement of Financial Accounting Standards No. 57 (SFAS No. 57) governing "Related Party Disclosures":

Statement of Financial Accounting Standards No. 57 (SFAS No. 57) entitled "Related Party Disclosures" provides some "examples of related party transactions" such as:

transactions between... (d) an enterprise and its principal owners, management, or members of their immediate families; and (e) affiliates.

SFAS No. 57 defines an affiliate as:

A party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an enterprise.

In addition, SFAS No. 57 defines control as:

The possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an enterprise through ownership, by contract, or otherwise.

Furthermore, SFAS No. 57 defines related party transactions to include "services received or furnished" between such related entities. Deep Capture LLC furnishes services to Overstock.com in the form of retaliation against company critics.

I'm still uncertain that the SEC actually will take action against Overstock, but Byrne's admission on this point--especially considering that he's lied about this in the past--makes that possibility somewhat more likely.

UPDATE: It's not related to this, but Henry Blodget describes a problem he just experienced: the nauseating Judd Bagley appearing, unwanted, in his email box, which apparently is as pleasant as finding a dead mouse on the kitchen floor. "How do we get rid of him?" he asks. "You open up YOUR Buzz and see Judd Bagley tweeting at YOU and see how you feel about it."

Indeed. The only answer that comes to mind is the simplest: incarceration.

© 2010 Gary Weiss. All rights reserved.

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Can Overstock.com Get the SEC Off Its Back?


Utah Senator Bob Bennett with his favorite constituent

Going Concern today has a post describing the winners and losers in Overstock.com's admission last week that its financial statements going back to 2008 were as phony as a six-dollar bill--thereby vindicating whistleblower and blogger Sam Antar.

Sam and other Overstock critics and media people, including myself, had been viciously attacked by its nutty CEO Patrick Byrne and his toady Judd Bagley--a possible pederast employed by Byrne to stalk wives and kiddies as well as the people actually criticizing the company. And that brings me to the part of GC's post today which I found the most interesting.

Under the category of "jury is out," the respected accounting blog says as follows:

SEC: Everyone know that the Commission doesn’t have the best track record of late. They have managed to be the laughingstock of the entire bureaucracy and despite a lot of huffing and puffing about new divisions and putting together a dream team of enforcement and financial experts, we haven’t seen much for results. Overstock may be a chance to show everyone that they’re done taking shit and that they are going to start smacking companies around.
Indeed, and the question is whether the SEC will let itself be bulldozed, again, by this well-heeled and determined bunch of crooks.

Byrne took the humiliating step of announcing restatement of its financials--and promising to fix its accounting--in the hope of heading off serious penalties from the SEC, which is investigating Overstock's accounting and, ahem, undisclosed "other issues." The company, I'm sure, would love to get the SEC to simply shrug and say "no problem" as it did two years ago, in concluding a probe of the same issues.

I'm sure that Byrne is intensely employing his trust fund (he is the son of billionaire GEICO ex-CEO John J. Byrne) in pursuit of that goal. He and his clan are the largest campaign contributors in Utah, and he has a particularly close relationship with the ultra-right Utah Sen. Robert Bennett. He has a phalanx of lawyers and lobbyists in Washington to do his bidding.

Bennett can't swing quite as much weight as he did when Republicans controlled the administration, but a senator is a senator.

I'm sure that Byrne, Bennett and his Washington suits will claim that it was all unintentional--that he didn't mean to create a cookie jar reserve. It was all an accident! Just the way Bagley is claiming on message boards now that it was all an accident, he didn't mean to stalk wives and kids as part of his work for Byrne. He just accidentally stole someone's photo, accidentally made up a phony identity and accidentally engaged in pretexting on Facebook by mistake. Someone really has to instruct the kiddie stalker that sometimes silence is golden.

Will these excuses work? I imagine they're hoping for either a total exoneration or the kind of easy treatment that was meted out to crooks in the Cox years, such as when Navistar got a wrist slap under similar circumstances--though its auditor Deloitte was targeted as well.

The problem, of course, is that the evidence of intent to commit fraud is overwhelming.

Byrne went on a widely publicized accountant-firing spree when confronted with the need to restate his financials, and then lied publicly about his dealings with his former auditors, Grant Thornton--to the point of being publicly contradicted by GT.

Another problem is that, as Sam has documented over the years on his blog, these were not minor accounting goofs. Overstock committed blatant GAAP and securities law violations, and they were timed in such a way as to boost Overstock share prices. (Such as by, for instance, claiming a fourth quarter 2008 profit that was actually a loss.)

Byrne, his top execs, and members of the Overstock audit committee were made aware of everything they were doing wrong, in real time. Sam's correspondence with Overstock, and the company's retaliation and smear campaign was carefully documented by Sam over the years, and made public on his blog.

For example, here is the first paragraph of Sam's blog on the fourth quarter book-cooking:
Last Friday, Overstock.com (NASDAQ: OSTK) reported a fourth quarter 2008 net profit of $1 million dollars. CEO Patrick Byrne proudly told investors, "After a tough three years, returning to GAAP profitability is a relief." However, Overstock.com's "returning to GAAP profitability" was simply accomplished by the company violating GAAP through its failure to restate prior period financial reports effected by a certain accounting error. Had Overstock.com properly followed acounting rules, it would have reported an $800,000 loss instead of a $1 million profit.
It's hard to find a more simple example of a company seeking to deceive investors in so blatant a manner. Accounting bloggerStacie Kitts observes: "Here is a lesson on making yourself an easy target, lie to the SEC and then file a lawsuit where your internal company documents will expose the lie. DUH"

Overstock's response--the vicious personal attacks on Sam--were proof of intent to commit fraud. As I pointed out in an April 2009 blog post for Portfolio.com, Byrne's minion Bagley (right) engaged in an all-out whispering campaign on his Deep Capture website against Sam, to the point of contacting his estranged wife (who rebuffed him) and attempting to dig up dirt on his divorce.

Bagley is ostensibly focusing on the "crime of naked short selling," but his assault on Sam belies that, proving that his focus is on critics of his boss. Sam has no interest in naked shorting, only in exposing crooks like Byrne.

Byrne himself makes no bones about his ownership of Deep Capture. Indeed, note this blog post today. Accounting blogger Stacie Kitts had said Byrne was "a purported owner of a website called Deepcapture.com.” Byrne's response (accompanying a link to an attack on Sam): "there's nothing purported about it."

This is part of a pattern of issuer retaliation going back years. If the SEC wants to make an example of Overstock on that issue, it can pursue a case under Sarbanes-Oxley, which requires companies to disclose waivers to their ethics rules.

Another factor the SEC can't ignore is the pattern of false statements made by Byrne and his minions on this and other issues, but particularly concerning his accounting. Only just the other day, Overstock president Jonathan Johnson gave an absurdly misleading account of the departure of a key financial executive to the Salt Lake Tribune. Byrne also also ignored Regulation Fair Disclosure on numerous occasions, using limited readership message boards to leak out corporate news. But that's like spitting on the sidewalk compared to everything else he's done.

And then, of course, there are the issues--such as the sales tax avoidance scheme and absence of internal controls--highlighted in a recent article in the Big Money. Can Bennett convince the SEC to ignore that?

The SEC can, and should, require that Byrne and the Overstock officials responsible for this mess step down and never become public officers of another company. While so doing, they may want to look at the executive compensation handed out. While the "humble servant" was too rich to draw pay--this was just a hobby for him anyway--other Overstock execs got jaw-dropping compensation packages. The SEC has required corporate execs to cough up their ill-gotten pay under similar circumstances.

Securities lawyer Howard Sirota observes in his blog:
Worse yet, the SEC has subpoenaed the Rocker litigants [the supposed source of the Big Money article] for the documents produced in discovery in Overstock.com’s lawsuit against Rocker et al. No confidentiality order in the prior civil case can immunize these documents from production to the SEC; by definition they were produced in discovery to the adverse party and so are not privileged. This expanded SEC inquiry coincided with Overstock.com’s firing of Grant Thornton in an acrimonious dispute, the engagement of KPMG, and the third restatement in three years as Overstock.com was forced to restate 2008-2009.

The expanded SEC inquiry is highly likely to bear fruit since the very first leaked documents immediately led to the ex-CFO resigning and Overstock.com filing that its prior financials cannot be relied upon. The SEC is highly likely to bring an enforcement proceeding against Overstock.com and certain officers regarding false financial statements and false Sarbanes-Oxley certifications.

In a filing just yesterday, Overstock had the gall to announce huge salary increases and bonus payments for the top officers of the company. Compare with the numbers announced in the 2009 proxy, and you can see that Johnson's base pay went from $250,000 to $350,000, and he got a $225,000 bonus for the terrific job he did helping Byrne run this company into the ground.

CFO Steve Chestnut, who aided Byrne in showing how you can turn dry financial statements into material for standup comics, saw his base pay climb from 200K to $300,000--yup, a 50% salary increase for this dude--plus a 180K bonus. All also got the usual restricted stock grants, including the humble servant.

If that's not a wad of spittle in the face of the SEC, I don't know what is. What it indicates is that if the feds don't take action, a company that openly violates the securities laws--and compensates its execs handsomely for doing so--will get away scot free.

© 2010 Gary Weiss. All rights reserved.

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Monday, February 08, 2010

How Wall Street is Killing Job Growth

Pam Martens, a central figure in the fight against sexual harassment on Wall Street, has a perceptive post today in CounterPunch on how Wall Street is killing job growth.

I was really taken with her description of some of the death-related imagery that the Street uses:

Wall Street is so steeped in destruction that the symbols of death are everywhere. Wall Street calls the big newspaper ads they take out to herald the launch of their market offerings a “tombstone.” (To understand how appropriate that is, consider the billions in bond and stock offerings they raise for Big Tobacco.) What does Wall Street call the completion of a buy or sell order: an “execution” . . . Wall Street calls an order to complete a trade without any reduction in quantity a “fill or kill.” This could just as reasonably be called a “fill or cancel” order but it’s so much more fun for the thundering herd to race around a trading floor screaming “kill it, kill it!”

It's a long and exceptionally nuanced piece, and is must reading.

© 2010 Gary Weiss. All rights reserved.

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Friday, February 05, 2010

Restatements Highlight Overstock.com's Lies to Salt Lake Tribune

Overstock.com's stunning admission yesterday that its recent financial statements were phony --vindicating years of hammering by whistleblower Sam Antar-- highlights an issue that I think could loom large in the SEC's probe of this creepy little company.

It all has to do with a fish story that Overstock.com president Jonathan Johnson gave to the Salt Lake Tribune, which appeared in the paper on Tuesday. Of all the lies that have spewed forth from this corporate crime petri dish over the years, these were among the most blatant and, I think, could be damaging to him personally, and to the company.

Johnson told the Trib that David Chidester, the senior vice president for internal controls, had not departed from the company because of any material issue. Johnson piled on the hooey, saying that Chidester had left because... well, because. No particular reason. He had been there for ten years, and it was time to move on.

Yet at the same time that Johnson was giving that rubbish to the Trib--the article appeared online the evening of Monday, Feb. 1--Johnson already knew that a decision had been made to restate all the recent financials, and that the Overstock board's Audit Committee had specifically determined, three days earlier, on Jan. 29, that its financial controls had been deficient for an extended period of tiem.

In the Form 8-K filed with the SEC yesterday, Overstock disclosed that the Audit Committee said the following on Jan. 29:

The Audit Committee has instructed management to prepare a comprehensive review and analysis of the causes of the errors identified above. The Audit Committee has further instructed management to submit to the Audit Committee a comprehensive detailed plan for the remediation of the underlying cause of the errors and for the implementation of stricter policies to avoid errors or deficiencies in accounting procedures and application going forward.

. . . In connection with the restatement of the Company’s fiscal 2008 consolidated financial statements, management has reassessed the Company’s controls and procedures including internal control over financial reporting as of December 31, 2008. Management has concluded that there was a deficiency in the operating effectiveness of the Company’s controls in place related to accounting for billings to drop ship fulfillment partners which constituted a material weakness. Accordingly, management’s report on internal control over financial reporting for fiscal 2008 can no longer be relied upon. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
Johnson surely knew all of this--it had happened on Friday, Jan. 29--at the time that he fed the following ca-ca to the Trib three days later concerning the exit of the exec who was CFO through the end of 2008, and afterwards head of internal financial controls:

"David had been with us over 10 years. It felt like for both David and the company it was time to move to something new.

"I don't know who said what first, but it was clearly a mutual agreement. We've grown a lot in 10 years. We are a big organization and thought it was time for both parties to move on."


Johnson was right in one sense. No, Chidester hadn't left because of a recent Big Money article describing a sales tax avoidance scheme and FUBAR internal controls. He left because of something considerably more important. But Johnson--who, remember, wasn't obliged to say a thing to the Trib--decided to mislead and lie by withholding a material fact, which was that Chidester was in hot water with the board of directors. He wasn't walking away from a 300K job because he felt like going out into the job market in a recession.

Johnson's motivation in not lying would not be something as old-fashioned as "telling the truth," but a more primal urge called "self preservation." Rule 10b-5 of the securities laws forbids corporate officers not just from lying, but make it verboten "to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading."

Johnson once famously said about Sam Antar that he "can’t read his blog because it’s so full of lies." He clearly meant to say "full of truth."

I'll be interested to see if the Trib ever gets around to reporting Overstock's disclosures yesterday. And if it does, will it describe its own role in Overstock's scheme to mislead the media, the public, and its shareholders.

Most newspapers would be upset about being lied to this way, let alone to be used by a company to commit securities fraud. But remember that this is Utah, and evidently the rules of journalism don't apply there. Remember that there is another statewide paper, the Deseret News, and it hasn't breathed a word about any of the travails of this open sore in its neighborhood.

Another thing I'll be interested to see is if either Salt Lake City newspaper adjusts its heretofore uncritical view of Overstock and its wacky CEO, Patrick Byrne, in light of recent events. Byrne has so far been out of pocket, but I'm sure he'll deploy his possible-pederast fetchit boy, Judd Bagley, on a diversion mission fairly soon. Plenty of kids out there for these two douchebags to stalk.

UPDATE: The Going Concern accounting blog has this to say about the SEC finally taking action against these bums:
So while this appears to wrap up the SEC’s Division of Corporation Finance investigation, one little problem that still remains is that the SEC’s Enforcement Division has not wrapped up its probe of the company. Yeah; so there’s that. Considering the the track record of the SEC, we’d typically give a company a 50/50 shot of coming out of a probe by the Enforcement Division unscathed but in the case of Overstock, we’ll be going with Schape’s {SEC chairperson Mary Schapiro's] crew.
© 2010 Gary Weiss. All rights reserved.

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Thursday, February 04, 2010

Overstock.com Admits its Financial Statements Were Phony


Overstock CEO Patrick Byrne was too busy cyberstalking to comment

(Updated 10/4 evening)

It's official: Overstock.com is now the Overstock Stock Fraud.

The corporate crime petri dish put out an SEC filing this afternoon. after the market closed, announcing that its 2008 and 2009 financials will have to be restated.

What that means can be summed up very simply: all of its recent financial statements are lies. It also means that white collar crime-fighter Sam Antar, who has previously blogged on how Overstock has systematically falsified its financial statements--and was viciously attacked in return--was right in every detail.

The usually voluble CEO Patrick Byrne was believed to be in a bunker with Eva Braun.

As usual, Byrne acted like a kid waiting till the last moment before telling Mummy that he broke the bathroom window. The decision to make the restatements--something Byrne had previously, vehemently said was unecessary, to the point of firing his previous auditor--was made on Jan. 29. He waited until the expiration of the time period set by those pesky securities laws.

Sam has blogged voluminously on this issue, and justifiably gloats in this post tonight. Sam summarizes the case he had previously laid out for regulators, which is that Overstock manipulated its earnings by using a "cookie jar reserve."

Here's a chart from Sam describing just what the restatements mean--something Overstock deliberately concealed in its deliberately murky filing today:



Be sure to compare the top row of numbers with the bottom row. Note that a much-hyped fourth quarter "gain" was actually a loss.

One of my favorite war movies, Above and Beyond, about the bombing or Hiroshima, was playing on Turner Classic Movies at the time the 8-K was filed. But you didn't have to be watching TCM to see a mushroom cloud--the one rising over whatever credibility Overstock may have previously had. It also puts a fresh light on the disgusting activities of Byrne's employee Judd Bagley (right), a possible pederast, as he was eloquently termed by one his victims, who has cyberstalked the wives and kids of his critics and people in the media, on Facebook and elsewhere.

These people have behaved with all the class of kids in sixth grade who spy on the girls' bathroom, and there is now no possible doubt as to the reason: they were covering up for the cookie jar reserve that Patrick Byrne's instituted to manipulate his quarterly financials.

All the attacks on Antar, all the claims that its accounting was a product of "Mormon eagle scouts," have all turned out to be lies to divert attention from fraud.

The SEC is investigating Overstock.com. I hope that this investigation examines the whole range of wrongdoing by this rotten little company and the creeps who run it.

The voluble Byrne, meanwhile, was last found on a stock message board, doing his usual stalking shtick. He's bored and repelled anyone who's taken a close look at his reptillian self, but not to worry, I'll hang around until he is an odoriferous memory. I don't think that will be too long.

Barry Ritholtz summed up the situation well in a post tonight:

Their whole campaign against naked shorting, the bizarre cyberstalking — all of that junk has been nothing more than a grand case of misdirection to hide the fact that Overstock has been cooking their books for who knows how long.

Let’s look at what preceded their latest 8k filing with the SEC:

• Price Waterhouse Coopers was fired after 8 years of failed audits;

• Grant Thorton recommended restating financial reports to correct material misstatements; They were fired soon thereafter;

• Grant Thorton files letter with SEC stating material misstatements ont he part of Overstock (SEC)

• CFO resigned January 20th; (SEC)

• SEC begins examining Overstock’s financial reporting;

And where has that led us?

• In the most recent 8k, Overstock admits having to restate quarterly financials from Q1 2008 to Q3 2009;

. . . I suspect there will be more shoes to drop in the future. I also have a suspicion that a few execs and former employees will be getting fitted for state issued orange jumpsuits.
Stay tuned.

Related posts:

Restatements Highlight Overstock.com's Lies to Salt Lake Tribune


Can Overstock.com Get the SEC Off Its Back?

© 2010 Gary Weiss. All rights reserved.

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Wednesday, February 03, 2010

A $5.4 Billion Deal Predicated on Breaking the Law

The New York Observer has two interesting stories today: the first is, of course, a guest column by yours truly on insider trading, but what caught my eye even more than that was a fascinating inside account of how the $5.4 billion Stuyvestant Town/Peter Cooper Village mega-deal fell apart.

As I've pointed out previously, the nation's biggest real estate deal was also its most odious, because it was predicated on breaking the law--tossing out tenants in defiance of New York's tough rent control laws.

That aspect also made it the nation's dumbest real estate deal, because you can't break New York's rent control laws if the tenants fight, and anyone with half a brain could have told these real estate geniuses that any effort to force out tenants from the two complexes was doomed.

Central to [a real estate broker's] pitch for the complex was that it could be unshackled from rent stabilization (at the time, three-fourths of the apartments were rent-regulated). The offering book repeatedly refers to the complex's future as a "market rate master community." [emphasis added]
Sure, and by the same token if you "unshackle" New York's buildings from the fire codes you avoid the need for useless stuff like fire escapes and fireproof building materials, creating a "firetrap master community."

So the new owners embarked on a program of evicting the tenants, law or no law, and importing yuppies in their place:

Implicit but not specifically stated in these projections was that the rate of deregulation could be dramatically accelerated, a necessarily abrasive effort that tenants dislike. "I think it was pretty clear that the information was projected on what it could be if you managed to get everybody out-that's how people bought it," said one executive familiar with the marketing of the deal in 2006. "When you look at those numbers, the only way it makes sense is if you got rid of the current tenants."

And that was the idea of Stuy Town's eventual buyers. In their loan documents, the Tishman Speyer-led team assumed they could deregulate more than 3,000 units in the four years following the sale, a goal that proved wildly unattainable.
It proved "wildly unattainable" because it was against the law. The tenants fought back, and every since cent charged from the illegal evictions is being recouped, along with punitive damages. The tenants get their bucks no matter what, even in case of bankruptcy.

I'm delighted to say that when the Tishman-Speyer people did indeed succeed in forcing out tenants, they had trouble getting yuppies to move in to these super-ugly housing complexes, which look more like something the Soviets built in postwar Kiev than a yuppie paradise.

I hope that everyone involved in perpetrating this mammoth eviction scheme suffer some real pain. They participated in this deal either out of complete stupidity or malice, knowing that the deal was predicated on breaking the law. They ought to be prosecuted, not pitied.

© 2010 Gary Weiss. All rights reserved.

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Tuesday, February 02, 2010

What Would Safra Do?

In my column for Portfolio.com today, I write about one of the more interesting people I've ever met: Edmond Safra, the international banking tycoon and former head of Republic Bank, now part of HSBC.

As I say in the column: Whenever I read about bankers being taken to the woodshed, losing enormous sums of money, or otherwise acting like fools, my thoughts go back to Safra. I think to myself, what would Safra do?

Safra died tragically a decade ago, and what's even more tragic is how bankers have failed to live up to the principles that he applied in his operation of Republic. It's been fifteen years since I profiled Safra for BusinessWeek, and I had almost forgotten some of the things that Safra had told me. One stands out in my mind:

"My father taught me that if you loan a man too much money, you turn a good man into a bad man."

If more bankers acted like Safra, and not like Nathan Detroit in Guys and Dolls, the banking industry might not be in a gawdawful mess.

© 2010 Gary Weiss. All rights reserved.

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Man Bites Dog in Salt Lake City

A week ago I described how Utah's two statewide newspapers, the Salt Lake Tribune and Deseret News, had inexplicably failed to cover the departure of a key exec from the corporate crime petri dish in their backyard, Overstock.com.

Today, a week late, the Tribune decided to clue in its readers on the departure of David Chidester, head of internal financial controls, with this article in its business section. It's so lame that the Trib might just as well not have bothered.

Chidester left a day after an article in the Big Money described how Overstock's wacky CEO Patrick Byrne had concocted a sales tax avoidance scheme, "Operation Heist and Freeze," and how the SEC-investigated company had pretty much no internal controls. Both involved Chidester, who was CFO when that was happening.

Byrne was, uncharacteristically, "unavailable," but the Trib quoted Overstock president Jonathan Johnson mouthing this pap:
"David had been with us over 10 years. It felt like for both David and the company it was time to move to something new.
"I don't know who said what first, but it was clearly a mutual agreement. We've grown a lot in 10 years. We are a big organization and thought it was time for both parties to move on."
It's understandable that the Trib would publish this hooey, but less understandable why there is no evidence of a follow-up question, such as "Who is going to take his job?" I mean, he didn't even have to ask the guy anything obvious like, "OK, what's the real reason?"

Apart from that, the Trib did not clue in its readers on just why the Big Money story was relevant. It says only that the Big Money article "said [Byrne] is frequently in the news for alleged 'outrageous pronouncements,' especially connected with his efforts to stop naked short-selling of the company's stock and his battle with" a hedge fund.

"Alleged" outrageous pronouncements? Naked shorting? The article had nothing to do with that, or its junk lawsuits. Actually, the Big Money said that he attacks critics and the media, to prevent journalists from publishing critical reporting on Overstock. I realize the Trib doesn't cover Overstock--that's a given--but at least it could report the truth about Overstock's reaction to the reporters who do write about the company.

Nor is there a mention of what the Big Money did report that was relevant to Chidester: the sales tax scheme or its discussion of the absence of internal controls. It talks about emails involving Chidester and documents, but doesn't describe what they say. But it does quote Johnson as saying that
"allegations that Chidester was forced out because of the article [are] 'conjecture' that is 'just wrong.'"

Sure, they would be conjecture, if the Big Money article hadn't specifically dealt with accounting issues, and just had dwelled on Byrne's attacks.

By the way, just assuming for a moment that there is a connection with the Big Money article, or it was other than a happy-as-a-lark mutual thing, this latest Johnson pronouncement means that Overstock has yet another shareholder-disclosure issue. It's not copacetic for a company to publicly lie about why key execs leave.

I really don't know any other statewide newspaper in the country worth its salt that does such a shoddy job of covering a major newsmaker within its borders. Was the Trib deliberately taking a dive for Overstock or does it simply not know how to do its job? I honestly don't know. I will say this about the Deseret News: it's not worried about appearances. It wouldn't write anything negative about Byrne if he was arrested for a triple homicide.

Except for the Big Money and occasional articles in non-Utah newspapers, the only time Overstock's sliminess is ever analyzed is by blogs, notably white collar crime expert Sam Antar. He has a further analysis today of what Chidester's departure means.

I have to admit the explanation Johnson gave is funny. Imagine the following exchange between Chidester and Byrne:

Chidester: Hi there, Patrick. How's it going? You know, I've been with the company for 10 years. I make $300,093 a year, nice stock options, pension plan. Real cushy job. I've really grown a lot.

Byrne: Yeah, you have. Big organization!

Chidester: Yeah, big organization. So I was thinking, hey, cushy job. Grown a lot. No problem, right?

Byrne: No problem at all. Love your work.

Chidester: You do. I mean, you didn't even cut my pay when you demoted me a year ago! I love the work, grown a lot, I'd say it's time to move to something new.

Byrne: Yes! I was thinking the same thing. So shall I issue the customary press release saying what a great job you've done?

Chidester: Naah. Just wait five days and issue a one-line 8-K. That way they'll think I'm being pushed out or quit cause I was mad or something.

Byrne: Yeah! By the way, where are you going to get another cushy 300K job in Salt Lake City?

Chidester: Beats me.
Funny, huh? Too bad for Utahns that the Salt Lake Trib decided to be part of the joke, rather than letting in its readers on the punchline.

Seriously, though, Utahns, whether or not they are shareholders or employees of Overstock, really are short-changed by the neglect of its two major papers. A company is going straight to hell right in their backyard. A little effort could produce some significant journalism--I know that from the trans-continental communications I personally have received. But they just don't have the guts, or competence, to do their job.

It doesn't have to be this way, you know. Years ago, when I was working in Connecticut for the Hartford Courant, we used to get our asses kicked daily in coverage of local businesses (such as General Dynamics and Pfizer) by the The Day of New London. A hometown paper doesn't have to suck.

© 2010 Gary Weiss. All rights reserved.

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