The SEC Makes It Unanimous: It's Useless

A few days ago, discussing how Overstock.com CEO Patrick Byrne had called CEOs who use EBITDA -- that is, CEOs like himself -- "crooks," I suggested that the SEC make the judgment unanimous by concluding its protracted investigation of the company and its accounting.

Well, the SEC did conclude its investigation, but instead made the judgment unanimous about itself -- which is that it is utterly useless at protecting investor interests. The investor watchdogs have, for the umpteenth time, proved themselves useless by officially deciding to turn a blind eye toward Byrne's serial lies and deceptions.

Byrne, issuing a typically gloating press release, can now be expected to redouble his efforts to deceive investors and lie and stalk his critics, thanks to the SEC. As Tracy Coenen observed on Friday, "Does it mean the company’s troubles are over? Of course not. It is still a horribly run company that can’t turn a profit, and one which provides misleading and inaccurate financial disclosures to Wall Street. Eventually, something’s got to give."

Sam Antar adds that "SEC no-action letters do not close the book on Overstock.com’s misdeeds as Patrick Byrne has would like investors to believe."

It's hard to see how anyone can be surprised at the SEC's latest nonfeasance. This is, after all, not just any old office of the SEC that gave Overstock a pass but rather the Salt Lake City office, which sits in a cesspool of stock fraud and rarely takes action. Just a few months ago it decided to take no action against another Utah company, Usana Health Sciences, despite equally strong evidence of wrongdoing.

And as far at Utah's attorney general is concerned: fuhgetaboutit. Utah is a free-fire zone for fraudsters, and the Utah AG can be thanked for that state of affairs. Note this damning article in the Salt Lake Tribune today, in which a crucial player on behalf of stock fraud was Mark Griffin, now general counsel of Overstock.

I'd say that Overstock has hired just the right guy to head its legal team. Lawyers like Griffin, who have no qualms about switching from government service to representing fraudsters, are a crucial part of the process in which regulated entities like Overstock are captured by the government agencies that are supposed to watch over them.

Regulatory capture is one reason is why market forces -- short selling in the case of corporate creeps like this -- are required to keep the markets honest. Lamentably the SEC, at the urging of not just Byrne-inspired loons but the Washington Legal Foundation and U.S. Chamber of Commerce, has worked with crooked stock issuers to make short selling as hard as possible.

Interestingly, even supporters of Byrne have long argued that the SEC is useless and should be investigated. I've said that for some time, and the latest evidence of SEC uselessness makes it unanimous.

SEC nonfeasance is a running theme of Wall Street Versus America and about half the articles I wrote for Business Week. As a matter of fact, if I had a nickel for every time the SEC messed up on the job, in everything from 1980s boiler rooms to 1990s chop stocks to Enron to Worldcom, I'd have quite a fortune.

What makes things like this even more stinky is the whiff of political favoritism -- which in Byrne's case is more than just speculation. Byrne has gone to great lengths to throw his weight around in Washington, hiring lobbyists and ex-SEC lawyers. While he burned his bridges in Utah in pushing some nutty legislation that had to be dropped (a widely publicized tantrum didn't help), he clearly has friends in Washington. All that ancestral wealth has to be spent somewhere, after all. He is the biggest political contributor in Utah, and takes great joy at fiddling in political projects, mostly of the fringiest right-wing variety.

Gary Aguirre, the ex-SEC whistleblower, captured the situation well in an interview with The Guardian newspaper:

"What you have at the SEC is people rotating from jobs where you make $180,000 a year into jobs where you make over a million," Aguirre tells the Guardian in an interview, on what he sees as a mutually back-scratching relationship between the regulator and Wall Street. "It's very friendly - it's a club. I'm here, I'm inside, now I'm outside, now I'm inside again.

"When the SEC starts playing favourites and they decide not to go after Wall Street elite and focus on small fry, then they're not focusing on the players that really impact the capital markets. It's not the penny stock dealers that could trigger a credit crisis in this country."

Aguirre was talking about hedge funds -- a world in which Byrne himself is enmeshed -- but that same view applies, in spades, to its approach to corporate wrongdoing.

So all I can say to some of my friends who expected that the SEC was actually going to do something about Overstock and its wacky CEO: "I told you so."

© 2008 Gary Weiss. All rights reserved.

A Sad Tale of a Captured Agency

The New York Times today has a compelling article on the Gary Aguirre-Pequot Capital-John Mack mess at the SEC. It is a damming portrayal of an agency that has been pretty near completely captured by the institutions it is supposed to regulate.

The fact that the SEC is a captured regulator is nothing new, and I delve into the history of that phenomenon in Wall Street Versus America. But it is still galling to read the dirty details. The common denominator seems to be the revolving door between the SEC and the law firms that represent Wall Street and miscreant companies.

Corporate and Wall Street malfeasance has been a Full Employment Act for SEC lawyers, as they go through the revolving door at SEC headquarters.

The Aguirre mess, indeed, is good news for corporate wrongdoers -- because it indicates that cash-on-the barrel political influence and the "good old boy" network is continuing to shield Corporate America from the consequences of its actions.

What you get for hiring the right people is the right to have the SEC bungle the investigation of you, apparently:

Among the commission’s failings, the report said, were delays in the Pequot investigation, disclosure of sensitive case information by high-level S.E.C. officials to lawyers for those under scrutiny, a detrimental narrowing of its scope after a meeting with a Pequot lawyer, and the appearance of “undue deference” to a prominent Wall Street executive that resulted in the postponement of his interview until after the case’s statute of limitations had expired.

So every time you hear about delays in SEC investigations, ask yourself this question: Is the SEC slow because it is understaffed and overworked, or is it slow because it is understaffed and overworked and SEC lawyers are waiting out the clock? Or unwilling to antagonize future employers?

© 2007 Gary Weiss. All rights reserved.



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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site, gary-weiss.com.

Elephant on the Panel

The Senate Banking Committee's hearing today on hedge funds proved to be a dull pro forma exercise, with the three government witnesses amiably dodging both the good and the dumb questions. Makes you wonder why they even bothered to webcast the thing. A rerun of Flipper might have been more informative.

In contrast to the hysterical tone that dominated a previous hearing, this panel spent mercifully little time making a fool of itself. There was only one "baloney moment," and it slipped by quickly. That was when Chuck Hagel probed the imminent threat of research firms joining with hedgies in targeting fine companies like Overstock.com and Biovail. Overstock shares promptly rejoiced by hitting a 52-week low.

The elephant on the panel was the whistleblower Gary Aguirre, who was fired after trying to question Morgan Stanely's John Mack in a trading probe. Unless I missed it, as I may have dozed during the fascinating repartee, not one question about Aguirre emanated from the lips of the senators.

It's important, by the way, to distinguish between Aguirre's allegations and the effort to suppress him. As veteran financial journalist Don Bauder noted in a good wrapup on the subject, Aguirre's widely publicized allegations have been attacked as "flimsy."

Whether Aguirre is credible or not, this whole Mack business is troubling and should be investigated -- by actual investigators, not the U.S. Senate.

© 2006 Gary Weiss. All rights reserved.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

The Senate Hearing: A Mixed Bag

As expected, the Senate Judiciary Committee hearing today on hedge funds turned out to be a mixed bag: One part troubling description of a possible coverup at the Securities and Exchange Commission, and one part ritual short-bashing dog-and-pony show.

The troubling part was the testimony of ex-SEC lawyer Gary Aguirre. Obviously the SEC has a lot of explaining to do about its handling of an insider trading investigation involving (maybe) Morgan Stanley CEO John Mack. Those allegations are troubling, and if they're true, heads should roll.

The dog-and-pony show component featured the usual cast of characters that one finds in such things -- the whining CEO, the "outraged" lawyer, and of course, clueless senators.

Utah Republican Orrin Hatch, for example, babbled incoherently about short-sellers "registering" stock on the Berlin exchange. (That was apparently a reference to Berlin exchange listings being manipulated by naked shorters -- something that the NASD investigated and, as was discussed at a state regulatory conference, found to be "hysteria.") My hunch is that a particular Internet-retailing, Sith Lord-ranting Utahan was delighted by the spectacle of his senator making a fool of himself.

As I indicated in a previous item in this blog, congressional hearings that cater to blame-shifting, short-bashing corporate types are nothing new.

Amid all the serious allegations and short-bashing, one little snippet of testimony stood out. It came from Jonathan Boersma, Director, Standards of Practice, at something called the CFA Centre for Financial Market Integrity. The subject was an issue -- a genuine issue, unlike naked shorting -- that Congress and regulators have completely avoided: the growing, troubling field of company-paid research.

Boersma testified forthrightly that "Client-sponsored or even issuer-paid research (whereby a company with little or no research coverage hires a firm to write a report on their company) is certainly not independent."

That is certainly true. Yet, as I pointed out in Wall Street Versus America, such research is routinely touted as "independent" by its purveyors, and foisted on investors as such.

Paid research is an area that Congress might want to investigate, once it satisfies its appetite for "naked shorting" baloney. I'd say it OD'd on that today.

UPDATE: Rounding out a day that positively reeked of baloney, the Depository Trust Clearing Corp. issued a press release concerning a central focus of the anti-shorting nuts -- "fails to deliver." Seems that the widely quoted $6 billion in "fails to deliver" is actually $3 billion, because that figure includes both failure to deliver and to receive. ("Fails to Deliver" are commonly mistranslated by anti-shorting loons as equivalent to "naked shorting," which they ain't, as the DTCC has pointed out a bunch of times.)

Nice of DTCC to clarify. But what I wonder is this: what took 'em so long? To me, this is a prime example of how the Street establishment feeds the conspiracy theorists, who thrive on seemingly conflicting data as they advance their flat-earth theories.

Something as basic as double-counting -- always an issue when quantifying trading -- should have been caught by the DTCC long ago.


© 2006 Gary Weiss. All rights reserved.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

A Gap in the Witness List

The witness list for Wednesday's Senate hearings on hedge funds has just come out, and as expected the lead-off witness is Gary Aguirre, former SEC enforcement lawyer and whistleblower. This is terrific. What was expected to be a dreary anti-shorting dog-and-pony show is starting to get exciting.

Aguirre, of course, has raised serious questions concerning a possible high-level coverup in an investigation of alleged insider trading by the Pequot hedge fund. So I certainly would be curious to hear Aguirre's allegations, under oath, and the responses of SEC officials, under oath.

Only one problem: nobody from the SEC has been called to testify.

Seems like a pretty glaring omission to me. The senators should call Cox, and force him to respond to Aguirre's charges-- under oath.

While Aguirre's allegations may or may not have substance, he is making a serious charges and the SEC chairman should address them forthrightly, whether he wants to or not.

© 2006 Gary Weiss. All rights reserved.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.

A Horror Story of Co-opted Regulators

See the New York Times front-page article today. If true -- and this is all very much in the "allegedly" stage -- it would be one of the most awful stories in memory of the Securities and Exchange Commission being co-opted by the people it is supposed to regulate.

If he had any role in the firing of the SEC whistleblower described in the piece, SEC chairman Christopher Cox has got to go. Ditto if he stopped the agency from issuing a subpoena to Morgan Stanley's CEO John Mack.

As I described in Wall Street Versus America, the SEC and the self-regulatory "pyramid" are hopeless. Investors need to watch out for themselves against the Street's greed.

UPDATE: Houston Chronicle journalist Loren Steffy, in his blog, equates the above, with all its horrific implications, with Cox's previous decision to pull back on idiotic subpoeanas to journalists who fell afoul of blame-shifting CEOs. I wrote about that some months ago, here. I'm not sure that he entirely appreciates the difference between the two situations.

Anyway, we haven't heard much of the dumb journo subpoenas, and hopefully Loren will join me in seeing to it that they remains forever deep-sixed.

© 2006 Gary Weiss. All rights reserved.

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Wall Street Versus America was published by Penguin USA on April 6.
Click here for its Amazon.com listing and here for more information on the book, from my web site.