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.

Did the SEC Give Overstock.com the 'Allied Capital Treatment'?

The Washington Post had a great article yesterday describing a recently released -- if heavily redacted -- report by the SEC Inspector General David Kotz, describing how the SEC flubbed an investigation of a company called Allied Capital, instead turning its guns on short-seller David Einhorn, who had blown the whistle.

Allied filed for bankruptcy in October 2008, but not before Einhorn was the subject of a smear campaign by Overstock.com CEO Patrick Byrne's "Deep Capture" website. Byrne claimed that Allied was among the terrific companies (including Overstock, natch, but also including innocent companies like Bear Stearns and Lehman Brothers) that were "attacked" by horrid people like Einhorn.

The parallels between Allied and Overstock are startling:

• Both were probed for accounting irregularities at the instigation of short-sellers.

• Both managed instead to get critics investigated--Einhorn in the case of Allied, Gradient Analytics in the case of Overstock.
  

• Both were the subject of favorable treatment by the SEC, Allied getting a no-penalty wrist slap and the Overstock probe dropped entirely by Chris Cox's SEC, only to be renewed after the change in administration. Allied also got a pass for unlawfully gaining access to Einhorn's phone records, and probably doing the same thing to Herb Greenberg.
  

• Both engaged in issuer retaliation, including a campaign against Einhorn by Allied and Byrne's smear campaign against whistleblower Sam Antar, conducted by Byrne's employee Judd Bagley (right), a possible pederast noted recently for stalking the kids and spouses of Byrne's critics.
  

• Both were guilty as hell. Allied eventually succumbed to its own sliminess, and Overstock, under renewed SEC investigation, has recently admitted that its financial statements were completely fatuous. Antar's analysis of Overstock's accounting was completely vindicated.
  

The Post article focused on the SEC's malfeasance, including the excessive deference the SEC granted former SEC lawyers in the employ of Allied. The Post article notes that "Among other things, Kotz questions how SEC officials decide to open investigations and whether they are unduly influenced by outside lawyers -- particularly former SEC officials -- in conducting the probes."

It's not entirely clear if that's another commonality, though Overstock had on its payroll at least one ex-SEC lawyer, a proud lawyer for stock market thieves named Brent Baker. He worked for Overstock from 2004 until joining a Salt Lake City law firm in August 2006, and was at Overstock at the same time the SEC was probing critics of Overstock and subpoenaing reporters Herb Greenberg (also targeted by Allied) and Carol Remond, who had written critically of the company. The subpoeanas were later withdrawn.

As Joe Nocera observed in the New York Times at about the time those subpoenas were issued, Byrne sent Greenberg a gloating email three days before the subpoenas were issued. That stinks to high heaven. How did Byrne find out about the subpoenas?

Baker once belched forth the following creepy sentiments in his now-deleted blog "sectales.com," responding to a comment I once had made about issuer retaliation:

Guess what? Patrick and the DeepCapture folks are all correct. I saw it from within the belly of the beast and I can honestly tell you that "bent journalists" are more of a problem for our capital markets than "retailating issuers." Give me a break.

The SEC inspector general needs to explore the role that this character had in the whole Overstock mess.

David Einhorn wants the full, unredacted Inspector General report issued, but that's just a small part of what the SEC needs to do. In addition to finally taking action against Overstock for its in-your-face accounting violations, Kotz needs to thoroughly explore the SEC's conduct toward Overstock, and the dynamics that led to the abortive subpoenas being issued and the Overstock probe dropped.

The SEC needs to shut the revolving door that puts ex-SEC lawyers on the payroll of SEC targets as soon as they leave the employment of the agency. That makes the SEC less of an enforcement agency as it is a kind of training camp for the likes of Brent Baker, who make a fortune after they leave the SEC by working for the people they used to probe.

Byrne has withdrawn himself and his cronies from their usual cyberstalking duties for the past few weeks, because of what I presume are intense negotiations with the SEC over the firm's fate.

It will be interesting to see if the SEC takes a dive--again.

© 2010 Gary Weiss. All rights reserved.

The SEC Still Needs a Seeing Eye Dog

Gretchen Morgensen's New York Times column yesterday sticks a pin on the issue that the SEC will have to wrestle with, if it is to stem its slide into oblivion. Will it continue to ignore credible evidence of wrongdoing, or will it continue to be a tool of corporate interests and Wall Street?

Morgensen focused on Allied Capital, whose shares collapsed last week. That was no surprise to anyone who had followed the warnings of short-seller David Einhorn, whose struggle with Allied and the typically stone-headed SEC are chronicled in his new book Fooling Some of the People.

Chris Byron once referred to the media as the SEC's "seeing eye dog," but others have served in the role--thousands upon thousands of tipsters, mainly self-interested, and the SEC has worked very hard to ignore what they say.

Some are shorts, like Einhorn, and others are just disinterested but enraged citizens, such as the Bernie Madoff whistelblower Harry Markopolos. "Just as the S.E.C. failed Mr. Madoff’s investors as tipsters told the agency he might be up to no good, it also seems to have let down Allied’s shareholders by ignoring analyses of aggressive accounting at the company," says Morgensen.

But you'd never know that by reading through the lengthy, self-serving barrage of obfuscations and baloney provided to the Senate Banking Committee on Tuesday by SEC enforcement director Linda Thomsen.

Here's what Thomsen says about its thousands of seeing-eye dogs:

The Enforcement Division receives hundreds of thousands of tips each year from various sources. Some are from credible sources who provide detailed information in support of the tip, and some consist of nothing more than newspaper clippings or printed promotional material sent with no further explanation. Some come from industry competitors, some from disgruntled present or former employees, some from present or former investors, and others are totally anonymous. On the one hand, complaints, tips and referrals from the public often provide valuable information about potential securities violations; on the other hand, sources at times may be attempting to enlist the SEC's authority and resources in efforts to advance their own private interests, which may or may not be consistent with our enforcement mission.

Complaints, tips and referrals come to the Enforcement Division in every imaginable form. We get telephone calls, handwritten letters, thick bound dossiers with numbered exhibits and extensive accounting analyses, complaint forms from the Enforcement Division's Office of Internet Enforcement, newspaper articles with company names circled in red ink, formal referrals from other regulators, informal referrals from other Offices and Divisions of the SEC, notes from reformed fraudsters, anonymous scribbling, seemingly random pieces of a company's financial statements, and occasional lengthy and disjointed diatribes that make no discernible securities-related claims.

While we appreciate and examine every lead we receive, we simply do not have the resources to fully investigate them all. We use our experience, skill and judgment in attempting to triage these thousands of complaints so we can devote our attention to the most promising leads and the most serious potential violations. Because the process necessarily involves incomplete information and judgment calls made in a tight timeframe, we are also continually working on ways to improve our handling of complaints, tips and referrals to make optimal use of our limited resources.

There are a number of major channels through which complaints, tips and referrals flow in to the Enforcement Division. . . .

Notice how Thomsen dances around the elephant in the room, which is Markopolos, whose name she does not utter in all this extended blather. Markopolos was not some crackpot living in an abandoned car. He was a forensic accountant.

He did not, however, have the financial resources to employ a battery of lobbyists, and thus could not get his concerns taken seriously by the commission -- as does, for example, the naked shorting conspiracy nuts, which have a high paid Washington lobbying firm pleading their discredited cause, paid for by the trust fund of Overstock.com's wacky CEO Patrick Byrne. That has enabled this fringe issue to become a priority of the SEC under its chairman Chris Cox. The result was that the Madoff fraud and the Aillied ills (and numerous other significant issues) ignored by every SEC chairman since Arthur Levitt, while this fringe issue was the subject of thousands of wasted SEC man hours.

It is no coincidence that Einhorn and other opponents of fraud have become targets of Byrne and his paid cyberstalker, the nauseating former Jeb Bush flack Judd Bagley. Einhorn also was the subject of a smear campaign by Allied. Indeed, Byrne has embarked on a similar campaign against reformed felon Sam Antar, for dissections of Overstock accounting (such as this) that have also been ignored by the SEC.

The new SEC chairperson, Mary Schapiro, has an opportunity to prove that she is serious about reversing the SEC's decline by acting on credible tips, ignoring high powered lobbying campaigns, and punishing public companies that attack critics. "Issuer retaliation" was ignored by the SEC under Cox, despite early promises.

It's not just a question of resources. It's a question of political will, and a wholesale change in an SEC culture that genuflects to the rich, powerful and connected.

I have very little faith in Schapiro, as I've said before. Given her background, I don't expect her to actually reverse course. But who knows? Maybe she'll surprise everybody. We'll know she has when we start seeing some action.

© 2009 Gary Weiss. All rights reserved.

Fixing the Financial System

Michael Lewis and David Einhorn have an essay in the New York Times today, "The End of the Financial World as We Know It," which is one of the very best I've found on the current financial mess and how not to repeat it.

Actually we already know one way out of the mess, which is already happening because of the change in administrations: get rid of the appalling head of the SEC, Christopher Cox. In recent days, Cox has actually admitted that one of the centerpieces of his agency's reaction to the financial crisis, its assault on short-sellers, was a crummy idea.

His excuse was, in effect, that he was too weak-kneed and cowardly to put up with pressure from the Treasury and Federal Reserve, which in turn were no doubt knuckling under to pressure from Wall Street. Read all about this disgraceful bureaucrat's mea culpa here.

Indeed, Lewis and Einhorn note that "The task [the SEC] has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse."

The prescriptive part of their piece, broken out separately here, makes several excellent recommendations, among them that the government simply nationalize banks that are otherwise "too big to fail."

Their two final observations are less ambitious:

Close the revolving door between the S.E.C. and Wall Street. At every turn we keep coming back to an enormous barrier to reform: Wall Street’s political influence. Its influence over the S.E.C. is further compromised by its ability to enrich the people who work for it. Realistically, there is only so much that can be done to fix the problem, but one measure is obvious: forbid regulators, for some meaningful amount of time after they have left the S.E.C., from accepting high-paying jobs with Wall Street firms.

[I'd add to that a restriction on jobs with public companies, as they are regulated by an increasingly narcoleptic SEC.]

and...

But keep the door open the other way. If the S.E.C. is to restore its credibility as an investor protection agency, it should have some experienced, respected investors (which is not the same thing as investment bankers) as commissioners. President-elect Barack Obama should nominate at least one with a notable career investing capital, and another with experience uncovering corporate misconduct. As it happens, the most critical job, chief of enforcement, now has a perfect candidate, a civic-minded former investor with firsthand experience of the S.E.C.’s ineptitude: [Bernie Madoff would-be whistleblower] Harry Markopolos.

Sure, but how likely is it that Obama is going to do that? His choice for SEC chairman, FINRA chief Mary Schapiro, was an appalling endorsement of the status quo. That does not bode well for future SEC appointments.

As Susan Antilla pointed out at the time, "Schapiro comes to the job with the mindset that financial industry members should be part of the policing process." Her appearing on the cover of the penny stock-pumping organ "Equities" magazine, which she went out of her way to heartily endorse, indicates to me that she is more part of the problem than the solution.

As the lamentable Schapiro appointment indicates, it appears that Obama has surrounded himself with advisors that makes any significant change in market regulation unlikely. Still, I'd be delighted to be proven wrong.

© 2009 Gary Weiss. All rights reserved.

A Cure for the Bad-CEO Blues: Sue Your Shareholders

Stephen Taub has an intriguing brief article in CFO.com on the latest hot new trend among blame-shifting CEOs: Suing unruly shareholders.

Vaalco Energy is trying an unsual tactic to stave off a proxy fight: suing its shareholders.

The independent oil producer filed an action against New York City-based hedge fund Nanes Delorme Partners I L.P., and Pilatus Energy SA, of Zug, Switzerland, in federal court, alleging they violated securities laws by sending misleading information to shareholders in an effort to install three of their nominees on Vaalco's board, according to the Associated Press.

One of the targets of this imbecilic junk lawsuit responded as follows:

Julien Balkany, a Managing Member of Nanes Balkany Partners LLC, the General Partner of Nanes Delorme Partners, stated: "We believe that VAALCO has great potential, but that the company will continue to materially underperform without new independent representatives on the Board. In addition, rather than provide a clear strategic plan to rebuild stockholder value, the company has chosen to evade the critical issues facing Vaalco by filing a desperate and baseless lawsuit aimed at disenfranchising stockholders and 'chilling' the democratic process and to defend its failures by launching a campaign rooted in misleading facts and unnecessary scare tactics designed to distract stockholders from the company's poor performance."

Just goes to show you how far we've come from Enron. Nowadays, bad companies add insult to the injury they inflict on shareholders by lashing out at analysts, the media, and now investors. The SEC and other regulators, meanwhile, are snoring loudly in the background.

As perfected by Overstock.com's wack-a-doo CEO Patrick Byrne, the name for this kind of toxic blame-shifting is known as "issuer retaliation." That was also the theme in David Einhorn's great new book Fooling Some of the People All of the Time.

Einhorn chronicled his battle royale with a scuzzy company called Allied Capital. Here's a cogent review by Jesse Eisinger in Portfolio.

UPDATE: A rep for Vaalco wrote to say that this item gives this company a bum rap. I asked for a reply that I could post verbatim, and was sent the following:

VAALCO’s Board and management team are active, engaged and successfully executing on the Company’s strategy. Nanes Delorme Partners’ claim to the contrary simply ignores the facts:

· VAALCO has delivered superior stock price performance. VAALCO has outperformed its peer group and the broader market as a whole over the last six month, one, three and five year periods. Indeed, our stock performance has exceeded our peers[1] by 25%, 20%, 23%, and 167% in each of those periods, respectively[2].

· VAALCO’s operating performance is among the best in the industry. Since 2000, 80% of the exploration and appraisal wells drilled by the Company have been successful. We also have a 100% success rate with our development wells on the Etame Block, our principal producing asset. These are exceptional drilling success rates in our industry.

· VAALCO’s financial performance is strong. Revenues, cash flows and earnings per share have consistently increased in nearly every year. VAALCO’s average return on invested capital (ROIC) over the last five years is 30.7% and in the top 5% of our industry.

We are confident in our ability to build on this strong operating and financial track record. We believe 2008 will be a break-out year for your company and for the value of your VAALCO shares.

· VAALCO’s exploration program, which includes seven planned exploration wells, will expose the Company to in excess of 50 million net barrels compared to VAALCO’s current 6.2 million barrels of proved reserves. This represents an eight-fold potential increase. We have rigs arranged to commence drilling this summer.

· We expect continued significant increases in stockholder value in the near-term. VAALCO’s stock price historically surges when the Company moves from the property acquisition and seismic phase to the drilling phase – and this is precisely where we believe we are now.

THE PUBLIC RECORDS OF nanes delorme partners and Pilatus energy ARE
RIFE WITH CONFLICTS AND SCANDAL

Nanes Delorme Partners and Pilatus Energy appear to be concealing what the public record makes clear – Nanes Delorme Partners and Pilatus Energy are conflicted and their ethics tainted by a scandal involving corruption, kickbacks, fraud and embezzlement. You deserve to know the following:

The Public Record on Nanes Delorme Partners*	The Public Record on Pilatus Energy*
Nanes Delorme Partners only recently purchased its VAALCO shares and more than half of its shares were transferred from Pilatus Energy on 02/14/2008. Source: Nanes Delorme Partners definitive proxy statement filed with the Securities and Exchange Commission on 05/07/2008	Pilatus Energy is a limited partner of Nanes Delorme Partners. It recently purchased 2,700,000 shares of VAALCO between 11/28/2007 and 01/30/2008. Source: Nanes Delorme Partners revised preliminary proxy statement filed with the Securities and Exchange Commission on 05/05/2008. (Notably, Nanes Delorme Partners’ prior preliminary proxy statement filed on 04/25/2008 did not mention Pilatus Energy by name, but only referred to an unnamed “limited partner.”)
Nanes Delorme Partners I LP is a New York based hedge fund that invests primarily in the oil and gas exploration and production sector. Source: Nanes Delorme Partners press release, 04/24/2008	Pilatus is comprised of Pilatus Energy and Pilatus Ressources (sic) which are two companies based in Zug, Switzerland. Pilatus has positions in the majority of the African and Middle East countries. Source: Pilatus Energy press release, 01/31/2008
Julien Balkany, a 27-year old French citizen, paid Nanes Delorme Partners employee, and nominee to your board is leading Nanes Delorme Partners’ proxy campaign. Source: Nanes Delorme Partners revised preliminary proxy statement filed with the Securities and Exchange Commission on 05/05/2008; Nanes Delorme Partners press release, 05/08/2008	“…Pilatus Energy and Pilatus Resources, two companies run from behind the scenes by France's Loik Le Floch-Prigent…” Source: Africa Energy Intelligence, “Abbas I. Yousef Al Yousef,” 12/19/2007 “The name of the former Elf CEO doesn't appear on their list of executives but it is he who makes all of their investment decisions.” Source: Africa Energy Intelligence, “Le Floch-Prigent's New Incarnation,” 12/05/2007
Nanes Delorme Partners is paying its two other nominees $25,000 simply to stand for election and additional monies if they fail. Source: Nanes Delorme Partners definitive proxy statement filed with the Securities and Exchange Commission on 05/07/2008 (While Nanes Delorme Partners’ nominees may have no affiliation with your company, these payments show that they are by no means independent from Nanes Delorme Partners.)	“France's mammoth Elf corruption case, probably the biggest political and corporate sleaze scandal to hit a western democracy since the second world war.” Source: The Guardian, “Gigantic Sleaze Scandal Winds Up as Former Elf Oil Chiefs Are Jailed,” 11/13/2003 “Le Floch-Prigent, 60, and a former Elf director, Alfred Sirven, 76, are both already serving time after losing appeals earlier this year against separate convictions over corruption at Elf, since absorbed into the Franco-Belgian oil company Total. Both have admitted some of the charges against them during the four-month trial.” Source: Associated Press, “Verdicts Expected in France's Biggest-Ever Graft Scandal,” 11/12/2003
Nanes Delorme is a broker for the sale of oil and gas assets, including those of VAALCO’s competitors. “In recent years, Nanes Delorme advised Afren on buying up the stake of Gulf Energy Resources in Angola’s Cabinda Central concession and on acquiring Heritage’s interests in Congo-Brazzaville.” Source: Africa Energy Intelligence, “The New African Oil Trail Blazers,” 02/20/2008	“In a matter of months, the small Swiss group Pilatus Energy has built up an African portfolio with the help of a few middlemen who can knock on presidential doors…In September, it was awarded the Ngoki concession in the Mossaka region thanks to the advice of the former chief executive of Elf, Loik Le Floch-Prigent, who negotiated with the Congolese officials on Pilatus’ behalf.” Source: Africa Energy Intelligence, “Pilatus Has Right Connections,” 11/29/2006 (These activities are competitive with VAALCO’s core operations.)

Ask yourself: If this information is available simply from the public record, what else about Nanes Delorme Partners and Pilatus Energy has yet to be revealed?

---

[1] VAALCO peer group as defined by the independent governance and proxy advisory firm RiskMetrics (ISS)

[2] Based on closing stock prices on May 13, 2008

* Permission to use quotations neither sought nor obtained.

So there! The formating of the chart ain't so good, but I can't seem to fix it.

Incidentally, it's nice to get a dignified response to an item, one that takes issue with the facts and does not engage in mudslinging. A refreshing change, even while I disagree with their actions here.

© 2008 Gary Weiss. All rights reserved.