Goodbye Marc Fagel, and Good Riddance

Routine news from the Securities and Exchange Commission yesterday: Marc Fagel, director of its San Francisco office, was leaving to become a partner with Gibson, Dunn & Crutcher, a leading securities fraud defense firm.

It just seemed like yet another twirl of the revolving door. But it wasn't. This was actually the long-overdue departure of a quintessential example of the "captured regulator."

Fagel was the driving force behind one of the darkest chapters of the SEC's recent history: Its 2006 probe of research firm Gradient Analytics and its client Rocker Partners, and the subpoena of reporters who told the truth about the company that inspired the probe, Overstock.com, and its crazy CEO, Patrick Byrne.

Gradient's "crime" was that it questioned Byrne's management and Overstock's accounting and  earnings capacity, which was richly borne out by future events.

The probe was based on trumped-up allegations of collusion between Gradient and Rocker, as became clear when it emerged that the former Gradient employees who were the SEC's star witnesses -- as well as Byrne's, in a civil suit he had filed -- had been fired for cause. After all the publicity died down, Gradient and Rocker were quietly exonerated.

It was bad enough that Fagel, who spearheaded this wrong-headed witch hunt, let himself be led around by the nose by a CEO who was so unhinged that he directed lewd and obscene remarks to a reporter for Fortune, Bethany McLean, and fantasized that a fictional character from the Star Wars movies had ruined his business.

All this was known to Fagel, and he should have been canned for poor judgment. But on top of that idiotic Keystone Cops routine, there was the little matter of the subpoenas.

They were issued to three leading financial reporters, Herb Greenberg of Marketwatch, Jim Cramer of TheStreet.com,  and Carol Remond of Dow Jones News Service, who had been  critical of the company's management and accounting..

The subpoenas, which were whipped up by Fagel and other SEC lawyers who swallowed Byrne's conspiracy theories, were such a major embarrassment that they made the front page of the New York Times when they were withdrawn by SEC chairman Chris Cox. 

The shamefaced Cox actually scolded his own enforcement division for doing such a harebrained thing.

But it was even worse than it appeared to be at the time. At the same time that Fagel & Co. were chasing their tails at the behest of a nutty CEO, Bernie Madoff was ripping off his customers and the major Wall Street bankers, including many with large operations in San Francisco, were stealing from everyone in sight.

So what happened to the official who dreamed up this absurd waste of government resources? He was promoted in May 2008, just in time to not cover himself in glory during the financial crisis that was in the process of unfolding.

And now he's where he belongs, defending bad guys. Which was pretty much his role in the Gradient/Rocker investigation. Don't let the door hit you on the way out, Fagel.

Byrne, meanwhile, has crawled back under a rock, emerging briefly in January when he was arrested for trying to carry a gun on a plane. Since he no longer can coax regulators to do his bidding, he has taken to crazy rants in his Deep Capture blog, which is run by the disgraced ex-journalist and fantasist Mark Mitchell.

Byrne and Mitchell are now ensconced in a libel suit in Canada that, I understand, will be keeping them both very busy through 2014. The suit against Byrne is such an open-and-shut case of craziness and fabrication -- a minor stock promoter was accused of Al Qaeda connections -- that none of Byrne's dwindling number of pals in the media, not even the Utah press corps, have taken up the cause.

Byrne has since stepped down for "medical reasons." I understand doctors have been probing a rupture in his conscience.

When Byrne was busted in that gun incident, a police report stated that he sleeps with a Glock by his side every night. That's odd. Why does he need a gun, or even a teddy bear, when he has an entire regulatory agency and the likes of Marc Fagel to do his bidding?

© 2013 Gary Weiss. All rights reserved.
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My latest book is AYN RAND NATION: The Hidden Struggle for America's Soul, published by St. Martin's Press. Click here to order the book from Amazon.com, and here to order it from Barnes & Noble. Follow me on Twitter: @gary_weiss

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Thomas Peterffy's Omission

Over the past few weeks, a gent named Thomas Peterffy has been bombarding the airwaves with a television commercial in which he says as follows:

America's wealth comes from the efforts of people striving for success. Take away their incentive with badmouthing success and you take away the wealth that helps us take care of the needy. Yes, in socialism the rich will be poorer. But the poor will also be poorer. People will lose interest in really working hard and creating jobs. I think this is a very slippery slope. It seems like people don't learn from the past. That's why I'm voting Republican and putting this ad on television.

This ad is more than just a simple-minded, intellectually dishonest exercise in sophistry, equating concern about income inequality with advocacy of "socialism." It's also incomplete, in that Peterffy does not disclose how he is able to afford running a shrill, dishonest TV ad.

He is able to do so because of the very party that he is fighting against.

Peterffy is founder and CEO of Interactive Brokers, a publicly traded firm that is in the options trading business. The company's most recent 10-K annual report observes as follows:

The advent of electronic exchanges in the last 21 years has provided us with the opportunity to integrate our software with an increasing number of exchanges and trading venues into one automatically functioning, computerized platform that requires minimal human intervention. Three decades of developing our automated market making platform and our automation of many middle and back office functions has allowed us to become one of the lowest cost providers of broker-dealer services and significantly increase the volume of trades we handle.

In other words, Peterffy made his fortune largely because of Democratic policies favoring electronic trading--especially the policies of the Securities and Exchange Commission under Democratic president Bill Clinton.

Institutional Investor pointed out in a 2005 profile that Peterffy was close to Bill Clinton's deregulation-loving SEC chairman Arthur Levitt, who was an outspoken advocate of electronic trading.

II says that "after Peterffy demonstrated his system to then-­SEC chairman Arthur Levitt Jr. in 1999, the agency became convinced that U.S. options exchanges could link electronically to ensure that investors would always receive the best available prices. The SEC soon mandated such a linkage. Peterffy pressured exchanges that resisted moving from floor trading to automated execution. 

"Timber Hill [Peterffy's firm] quickly became one of the biggest market makers on the all-electronic International Securities Exchange when it debuted five years ago [in 2000]. "

That's a far cry from the image Peterffy paints of himself as a John Galt-like, regulation-hating capitalist. 

He looks like a crony capitalist to me. And a first-class hypocrite to boot.

© 2012 Gary Weiss. All rights reserved.
------------------------------
My latest book is AYN RAND NATION: The Hidden Struggle for America's Soul, published by St. Martin's Press. Click here to order the book from Amazon.com, and here to order it from Barnes & Noble. Follow me on Twitter: @gary_weiss
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Court Shuts Patrick Byrne's 'Deep Capture' Libel Factory

Patrick Byrne's website has a new look

UPDATE: Overstock.com CEO Patrick Byrne and his hireling Mark Mitchell lost the Nazerali lawsuit in May 2016. Details can be found here.

More evidence emerged yesterday that Overstock.com CEO Patrick Byrne definitely made a serious boo-boo when he published fairy tales about a Canadian stock promoter in his Deep Capture astroturf website. A Canadian court has issued an injunction shutting down the site.

The details are described here.

As I pointed out in my blog post yesterday, Byrne, his hireling Mark Mitchell, and other defendants (including his web host, GoDaddy), were sued by a stock promoter named Altaf Nazerali, who was named by Mitchell in a nutty conspiracy theory linking him with every crime since Jack the Ripper.

I have no idea why Byrne & Co. targeted Nazerali. His Middle Eastern name? Whatever the reason, they picked the wrong victim.

Conspiracy theorist/fantasist Mark Mitchell, Deep Capture blog

What makes this suit interesting is that we don't often see libel suits in which the defendant just simply makes stuff up from top to bottom. It's one thing to make mistakes or to exaggerate, but it's not every day that a court gets before it a libel suit in which stuff is simply fabricated without a shred of evidence. I'd say that blanking of the website is just the prelude to what is likely to be a messy and costly (for Byrne) bit of litigation.

I almost feel sorry for Mitchell. He's clearly a troubled person, and I don't want to poke fun, but I honestly don't think he has any idea of the ordeal that is ahead of him. I know a fellow who was the defendant in a libel suit who was subjected to two weeks of grueling cross-examination in a pre-trial deposition. The other side's lawyers probed his private life in grim detail. And in that case he was dealing with an American court, the plaintiff was guilty as hell, and he was telling the truth!

The same is true for any other person or entity associated with the site, including Byrne's loyal hatchet person Judd Bagley, a former company spokesman who was moved back to Overstock in late 2010, and former message board stalker Evan Karpak, who remains a principal of Deep Capture LLC and was, inexplicably, not named in the lawsuit. An oversight, I'm sure, that can be rectified in due course.

In Canadian courts, the usual burden is reversed and the defendant has to prove the truth of the libelous statements. Good luck, Mark.

So far, a single Canadian judge has shown considerably more fortitude in dealing with Byrne & Co. than the SEC, which ended an investigation into his financial-statement fabrications inconclusively, and has another probe dragging along for months without action.

The Deep Capture fictions are now dealt with, at least for the time being, but the fictions in his oft-restated financial statements remain unresolved and unpunished.

It will be interesting to see what happens next. I presume the website was shut by its web host, and of course there's nothing to prevent Byrne from moving the content to Iran or wherever -- or return DC to Overstock's own servers, where it used to be -- all the while bleating about how his right to make stuff up about people has been infringed by dastardly Canadians. The judge is just going to love that.

Golly, I wonder if Overstock or Byrne have any Canadian assets, or expect to have any in the future? Given the paper-thin corporate veil, and the interrelationship between Overstock and Deep Capture, it's going to be fun to see that litigated if Byrne should default. If he decides not to take it on the lam, I certainly expect to see an "O.co Coliseum" arising within proximity of the courthouse in Vancouver, as it has in Oakland.

For Overstock, this is looking more and more like a disclosable event, not that the fine print in the securities law has ever meant anything to Byrne. Stay tuned to this channel for more developments.

Meanwhile, I assume that certain Canadian lawyers are focusing on the links between Deep Capture and Overstock, a subject I have explored in the past. (See also this detailed blog post by Sam Antar.) Overstock is fast running out of cash, but it is a tempting target nonetheless.

© 2011 Gary Weiss. All rights reserved.
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AYN RAND NATION: The Hidden Struggle for America's Soul, will be published by St. Martin's Press on Feb. 28, 2012. Pre-order by clicking here.

Novastar and Overstock in the News

Patrick Byrne touting subprime lender Novastar, July 24, 2006

Two of my favorite corporate con jobs are in the news today.

The New York Times has a fascinating book excerpt from Reckless Endangerment, a new book by Gretchen Morgensen and Joshua Rosner. It describes the unsuccessful efforts by short-seller Marc Cohodes to get the SEC interested in the fast-falling subprime lender Novastar Financial.

Cohodes failed, and the company collapsed. Had the SEC listened to the man, investors could have saved millions of dollars.

I've written about Novastar at some length, in the context of the campaign by anti-naked-shorting conspiracy theorists. A loon by the name of Philip Ross Saunders, working under the pseudonym "Bob O'Brien," viciously attacked critics of the company and had an entire website, nfi-info.net, devoted to attacking critics. The site has been defunct for years, and Saunders is believed to be tracking UFOs from a trailer park in Costa Rica.

Among the company's most fervent supporters was Overstock.com's nutty CEO Patrick Byrne, who called the company "awesome" and was a major supporter of Saunders, at one time holding up a sign with the URL of Saunders' Novastar-boosting website in a CNBC appearance. After that happened, Byrne was banned from CNBC.

At one point Byrne flew in to New York with Saunders for a meeting with Forbes staffers. The meeting was a disaster, with apologies from the organizer - member of the Forbes family who knew Byrne from college - for wasting everybody's time, I'm told by one of the participants.

Overstock is similarly under SEC investigation, and the probe has dragged on inconclusively for years.

Also out this weekend is a blog post from white collar crime watchdog Sam Antar, describing how Overstock has lost a court fight in California to keep prosecutors from interviewing former Overstock employees without Overstock officials breathing down their necks. The company is being sued by prosecutors in seven California counties for rampant consumer fraud.

Apparently Byrne's strenuous effort to buy influence in Oakland -- by buying naming rights for a local stadium -- has not paid off. Where are corrupt local officials when you need them?

As Sam points out, the rather curt court ruling rejected a strenuous effort by Overstock to obstruct the investigation:

Overstock.com did not want the Alameda County District Attorney to directly contact any ex-employees with possible knowledge of alleged wrongdoing. The company wanted the District Attorney to use it as a go-between to contact its former employees. This way, the company could know in advance, exactly who the District Attorney was going to question. It potentially gives the company an opportunity to get to specific witnesses before the District Attorney questions them and obstruct the investigation.

It was such a transparent ploy that the judge didn't spend much effort rejecting it. So the always enjoyable Overstock saga goes on.

© 2011 Gary Weiss. All rights reserved.

How to Lie in Plain Sight, Overstock.com Edition

So here's an interesting question: how much does a publicly held company have to lie in order to merit SEC sanctions.

The the implicit question in the open letter to the agency that was released over the weekend by white-collar crime-fighter Sam Antar.

The post deals the ongoing saga of my favorite corporate crime petri dish, Overstock.com, and describes how the company has been backpeddling and juggling lies in its correspondence with the SEC, recently released in corporate filing.

It's all pretty technical stuff, but it all comes down to the company's constantly shifting excuses for creating a "cookie jar reserve" that allow it to manipulate its quarterly earnings.

Overstock evidently has been pretty blatantly lying. It's up to the SEC to determine whether financial statements are worth the paper they're printed on, or whether they're about as useful as... well, as the SEC, I reckon.

© 2010 Gary Weiss. All rights reserved.

The Right and Wrong Way to Commit Corporate Crime

In my Street.com column today I describe the parallels between Arthur Samberg and Kenneth Starr, how one represents the right way to commit an (alleged) crime, and one the wrong way.

It can be found here.

© 2010 Gary Weiss. All rights reserved.

Patrick Byrne Dumps His Overstocked Overstock Shares

Overstock.com's wack-a-doo CEO, Patrick Byrne, has apparently found a new kind of crud to foist on the his ever-suffering shareholder base--$3.1 million in Overstock.com shares.

White collar crime fighter Sam Antar has an analysis today of Byrne's dumping of the shares, which were shed by Byrne's wholly-owned hedge fund, High Plains Investments LLC.

Barry Ritholtz points out today that he owns shares in the company -- an example, I suggest, of the downside of quantitative investment strategies -- even though "I personally think it is a steaming pile of shit, that the CEO is an asshole, and that the entire company is probably corrupt."

He has some thoughts on the sale:

Is Byrne in possession of material insider information? Would he be so stupid as to sell the shares? (I doubt anyone could be that dumb).

Perhaps he sees a favorable outcome to the SEC investigation? Maybe he is raising money to pay a fine?

A favorable outcome of the SEC investigation is entirely possible. The agency, despite all the much-ballyhooed changes in its enforcement division, has retained the mantle of uselessness that it earned under Chris Cox and his predecessors. The Allied Capital fiasco certainly proved that. The question is whether Byrne's political connections and ex-SEC lawyers can prevent him from being penalized to the extent that he deserves.

Sam today provides a good review of the company's history of seeking to silence critics of its accounting -- which, of course, would make nonsense of any claim by the company that its serial book-cooking was "unintentional."

That would be obvious to any intelligent observer, which is why I have little hope that it will persuade the SEC. Still, the SEC pursued an enforcement action against Goldman Sachs when it was least expected, so perhaps another "man bites dog" moment is in the offing. Don't count on it.

© 2010 Gary Weiss. All rights reserved.

How to Make the SEC Even Worse

Another brilliant idea from Mary Schapiro

In Portfolio.com today I have a suggestion on how to make the SEC even worse than it is: merge it with the Commodities Futures Trading Commission.

The idea is backed by the SEC's wretched chairman, Mary Schapiro, and by former chairman Artie Levitt. With these two geniuses favoring the move, how can it go right?

Levitt, of course, was the one who helped Alan Greenspan and his other pals sabotage the CFTC's effort to regulate OTC derivatives in the late 1990s. He has now graduated to become a consultant to Goldman Sachs. The man has no shame.

© 2010 Gary Weiss. All rights reserved.

Overstock.com Reports Profits! (By Juggling the Books....)

You have to admit: my favorite corporate crime petri dish, Overstock.com, may be many things, but one thing it is not is unpredictable. When last we left our heroes, they were reporting "profits" for 2009 by juggling the books, in the process manipulating its shares upward by one-fifth.

Yesterday, the company again announced profits, this time for the first quarter of 2010 -- and again, pulled off this fete by juggling the books, and again concocting a surge in the company's shares.

We know this is happening not because of the atrocious Utah media coverage of this company, but because of white-collar crime fighter Sam Antar, whose analysis of the latest Overstock smoke-and-mirrors show is linked above.

This time, Sam finds, Overstock was able to manufacture black ink by manipulating its return figures. Additionally, he notes, the company's internal financial controls remain FUBAR, making pretty much anything it says about its financials suspicious at best.

According to the company's latest quarterly report, the long-pending SEC investigation of these very issues is continuing. The issue before our securities watchdog is one of intent. There is now no doubt that Overstock has systematically cooked its books. The company admits to that. The question is whether the SEC will swallow Overstock's malarkey that it threw its financial statements into the stew pot strictly by accident.

Hey, that makes sense. Most fraud is an accident, right? At least it is, according to the fraudsters.

That defense is even sillier than usual, because it's a matter of record that Overstock CEO Patrick Byrne was repeatedly warned of those very accounting issues by Sam Antar -- and that Byrne responded by stalking, smearing and harassing Antar.

It remains to be seen whether the SEC will let itself be sold the Brooklyn Bridge by the con men at Overstock. Stay tuned.

© 2010 Gary Weiss. All rights reserved.

When is Good Publicity Not So Great?

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

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

The problematic passage is as follows:

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

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

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

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

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

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

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

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

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

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

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

© 2010 Gary Weiss. All rights reserved.

A Close-In Look at the SEC's Revolving Door

My Portfolio.com column today is a close look at the SEC's revolving door, and how it contributed to the disgraceful treatment of Allied Capital and David Einhorn. The column can be found here.

The inspector general report is an incredible document, and I quote from it at length in my article. Unfortunately it lives down to all the expectations some of us have had about the SEC for quite a while--particularly concerning the influence of the "revolving door" of ex-SEC officials representing companies before the SEC.

Companies are entitled to the best representation possible. But the taxpayers shouldn't be subsidizing what has become a training course for ambitious lawyers--or as the OIG report puts it, "aggressive counsel."

© 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 Problem With Overstock.com's Latest Problem

Byrne: Tried to pull a fast one in his SEC filing

In my blog item yesterday about the corporate street thugs at Overstock.com, I pointed out that that there was a problem with the "notice of late filing" that these child-stalking douche bags quietly slipped into the SEC's files a few minutes before deadline.

Leave it to Overstock.com to have a problem with a problem. Of course, to use the word "problem" in the same sentence with "Overstock.com" is a bit of an oxymoron in itself. Well, as promised, here's the problem with the problem: It lies.

Hey, they don't call Overstock.com's financial statements the "Quarterly Lie" for nothing. Today's installment, described in Sam Antar's blog this morning, is that Overstock slipped in "new previously undisclosed material violations of Generally Accepted Accounting Principles (GAAP) and other Securities and Exchange Commission disclosure rules."

The problem is that Overstock specifically says these were not previously undisclosed issues.

If you turn to "Part III - Narrative," Overstock's chief can't-count-to-save-his-life officer, Stephen J. Chestnut, recounts a bunch of "errors" that need to be fixed before these geniuses can file their 10-K for 2009. Chestnut prefaces this list of goofs by saying, very nonchalantly, "As announced on January 29, 2010, Overstock.com, Inc. . . "

He then goes on to list some serious GAAP and disclosure issues that weren't announced on Jan. 29.

Overstock.com's wack-a-do CEO Patrick Byrne has been hiding under his desk while all this is going on, dodging a demand by Sam Antar that he apologize for lying about Sam correctly identifying Overstock's fraudulent accounting.

Not only that, but Byrne attacks Sam on the Overstock website, as Sam describes in his blog today.

That's a pretty clear case of issuer retaliation. I wonder if the SEC will wake up long enough to take action against these hoodlums? Banning its management from ever coming within 500 feet of a public company would be a good start.

UPDATE: Barry Ritholtz and Jr. Deputy Accountant weigh in. Love that graphic.

© 2010 Gary Weiss. All rights reserved.

How Patrick Byrne Can Apologize to a Whistleblower

The Going Concern blog today has an amusing item describing how Overstock.com CEO Patrick Byrne can apologize to Sam Antar--the convicted felon and former Crazy Eddie scam mastermind whose sharp analysis of Overstock.com's fraudulent financials has been vindicated.

The accounting blog has three suggestions, among them:

Overstock.com gift cards – Nothing says I’m sorry like free stuff that the aggrieved party can pick themselves. Bonus, the overhead on Byrne’s own inventory must be low. You know, because it’s his, not because there is any monkey business going down on OSTK’s financials.

To me, an even better gift would be a candygram--containing a truthful answer to the following email, which Sam sent Byrne the other day:

from Sam E. Antar
to PByrne@overstock.com
cc:
jtabacco@bermanesq.com
date Tue, Mar 9, 2010 at 2:12 PM
subject FW: Overstock.com Restatement

To Patrick M. Byrne:

Having not received a response from last night’s email (see below), I am asking for a response to the following question I asked you in that email:

Will you finally admit that I was correct when I reported in my blog that Overstock.com violated GAAP by using a phony gain contingency in light of the company’s recently announced restatement?

In addition, I have the following questions:

Will you finally admit that I was correct when I reported in my blog that Overstock.com used an improper EBITDA from Q2 2007 to Q2 2008 in violation of SEC Regulation G to materially inflate its financial performance, in light of its later amended disclosures?

Will you publicly admit that I was right about Overstock.com’s violations of GAAP and other SEC disclosure rules (such as Regulation G)?

Will you publicly admit that you were wrong when you claimed that the company was complying with GAAP and other SEC disclosure rules, while at the same time you were publicly defaming me and other critics?

Will the company admit that I notified audit committee member Joseph J. Tabacco about Overstock.com’s GAAP and SEC disclosure violations (such as Regulation G) and continued to issue improper financial reports until it was forced to make corrections in its financial reporting?

As the CEO of Overstock.com you owe me a public apology.

Respectfully,

Sam E. Antar

The ordinarily voluble Byrne hasn't responded. As the Gipper used to say, he can run, but he can't hide.

© 2010 Gary Weiss. All rights reserved.

"No One Would Listen" to Harry Markopolos -- Including the Media

Harry Markopolos's book No One Would Listen has zoomed to No. 19 at Amazon.com and I can see why: it's a fast-paced thriller that is clearly the best book so far on the Bernie Madoff scandal. Markopolos sheds new light on how the SEC screwed up its Madoff probe--and how the media also dropped the ball.

Markopolos's book (marred only by, arghhhhh, reconstructed quotes) describes in detail his contacts with the late John Wilke of the Wall Street Journal, which fizzled out after a year. Forbes and the New York Times also were contacted and did nothing, but Markopolos had placed all his eggs in the Journal basket, which was a mistake.

Markopolos writes:

The question I wrestled with for a long time was: Why? When the newspaper that existed only to cover the financial world was handed a detailed explanation of the biggest fraud in Wall Street history, why wouldn't someone at least conduct a cursory investigation? Three phone calls, two phone calls, that's all it would have taken to verify that I wasn't some kind of nut, that the accusations I was making were based on fact. A half hour, that's all.

So far there are two alternative, contradictory explanations of what happened.

One, from Joe Nocera, is that Wilke "spent a little time rummaging around the Madoff story, but he didn’t really have any way to get at it, other than to take Mr. Markopoulos’s word for it, and that wasn’t good enough for either John or The Journal."

The other is that Wilke was eager to do the article but was stymied by his editors.

There's now an alternative theory being floated. A Wall Street Journal review yesterday concedes that "the press also did not cover itself in glory," but goes on to suggest that it was at least partly Markopolos's fault that he was ignored.

Former Journal editor Richard Tofel writes:

The author of "No One Would Listen" is fond of describing himself as "slightly eccentric," but he is not exactly self-aware. By his account, the fault for his having been ignored throughout eight years of warnings is everyone else's. But that conclusion requires ignoring much of his story.

Tofel goes on to recount some eccentric behavior by Markopolos and concludes his review as follows:

None of this behavior makes Mr. Markopolos's case against Mr. Madoff any less convincing. Nor does it excuse the SEC. But it does provide a fuller picture of the author than the cardboard cut-out of the lonely hero we've been hearing about for the past 15 months. With his book, Mr. Markopolos sheds more light than he intends on just why no one would listen.

Indeed. If Markopolos's case was convincing, that doesn't excuse the SEC--or the media.

I have a better explanation for why Markopolos didn't make any headway in the press: he just failed to contact enough reporters.

When Wilke began to lose interest, Markopolos should have gone back to Barron's, which ran an early account raising questions about Madoff, or approached Fortune or BusinessWeek, or other people at the Times or Journal. Or any number of other publications.

In other words, Harry Markopolos could have used a good press agent--which says a hell of a lot less about Markopolos than it does about the financial press.

© 2010 Gary Weiss. All rights reserved.

The SEC Botches Decade-Long Amex Probe

My Portfolio.com column today examines one of the longest-running legal disputes in SEC history--a ten-year-long struggle to decide how weak a penalty to impose on the American Stock Exchange and its CEO, Salvatore Sodano.

The SEC found in 2000 that the Amex had done an awful job of keeping its floor traders honest, and directed that it shape up. The Amex did nothing. The SEC reacted to that act of nonfeasance by engaging in a little nonfeasance of its own.

In the end it decided to impose a penalty that was not only weak, but nonexistent.

© 2010 Gary Weiss. All rights reserved.

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.

Business as Usual at Overstock.com: Lying About Their Auditors

My two favorite Overstock-watchers, Sam Antar and Tracy Coenen, have blog items out over the weekend describing how it's business as usual at my favorite corporate crime petri dish, Overstock.com. Their blogs describe lies, opinion shopping--in other words, business as usual.

Sam's latest post describes how conflicting disclosures by Overstock reveal improper opinion shopping by the company, a theme I explored in a recent post.

Tracy Coenen delves into the significance of this revelation: "It’s clear that [Overstock.com CEO] Patrick Byrne and Overstock have been lying, based on the company’s own statements."

Since this is evident from the company's own financial statements, a question again arises: why hasn't the SEC taken action?

Later in the day,the company announced it "has removed from its site all apparel and accessory products which feature exotic animal skins, including snake, alligator, crocodile, lizard, ostrich, stingray, eel, shark or kangaroo" from its website.

Too bad there is no prohibition against reptilian management behavior.

© 2010 Gary Weiss. All rights reserved.

Overstock.com Goes Opinion Shopping

The holiday season is upon us, and the always-predictable Overstock.com has gone shopping -- for an auditor.

Although it did not surprise readers if the Going Concern blog, I was a bit startled to read that Overstock,com's ever-wacky CEO Patrick Byrne would have the gall to auditor-shop as he did, hiring KPMG, after firing his last auditor, for daring to tell Wacky Patty that he has to restate his financials.

White collar crime-fighter Sam Antar observes that Byrne reneged on previous assurances that he would not not hire new auditors until after the SEC Division of Corporation Finance completed its review of the firm's accounting practices.

In this exchange at the company's recent conference call, Wacky Patty himself admitted that hiring an auditor before the SEC does its work would be opinion shopping:

Q. Since you've dismissed your auditor for a very specific accounting choice, when you go to select a new auditor, how do you prevent yourself from being accused of opinion shopping?

Jonathan Johnson (Overstock.com President): That's a great question, Louis, and that's part of the reason that we've decided not to select a new auditor until this -- until we resolve this issue with the SEC.

We do not want to be accused of opinion shopping. We'd like the SEC to help us figure out -- we'd like them to say we've done it the right way or we've done it the wrong way. Once they say one of those two, we don't need to opinion shop.

Byrne: But, so, I would even say to the point that when people have contacted us, we have discouraged any communication on the grounds that we got -- for just that reason -- well, I have the -- no matter who we talk to now, then whoever we ultimately pick, people are going to say, well, you did this because you opinion shop.

So we're really not having discussions with anybody. It's nice to get phone calls, but we're not talking to anybody until we get through this just to prevent -- just as a prophylactic measure.

So Byrne is, by his own definition of opinion shopping, engaged in precisely that practice.

Going Concern notes:

Sorry, dear reader but apparently the high profile cat fight between the company and Grant Thornton wasn’t enough to scare KPMG off. Not even the very public revelation of Patsy’s creepy-ass stalking of Overstock critics in the financial media and blogosphere caused the KPMG partners in SLC to turn this client down.

Oh, and not to mention a management team who thought that filing unreviewed 10-Q was the best course of action.

Hey, somebody had to get the job eventually. Bernie Madoff's auditor is unavailable, so Byrne chose the next best hing -- the auditors who, as Sam points out, let Crazy Eddie's get away with murder.

Another accounting blogger notes: "KPMG just sold its own ass up the river."

It wouldn't be the first time. Let's not forget New Century Financial.

Over the holiday season, while it was opinion-shopping, Overstock did something almost equally amazing: announcing a "line of credit" with U.S. Bank that is the kind given to welfare mothers in Brownsville. The company has to keep an equivalent sum on deposit.

That's hardly noteworthy, but this is: Overstock president Johnson had the audacity to tell the Salt Lake Tribune that "the terms of the new financing agreement with U.S. Bank are better than the terms of the Wells Fargo financing that it replaces."

Less money? A deposit requirement? File that under "baldfaced lie."

© 2009 Gary Weiss. All rights reserved.

The SEC Nails Investools

One of the subjects I dealt with in Wall Street Versus America was how investors had been preyed upon by phony investment seminars, which were little more than schemes that parted investors from their money. One of the grimier efforts was "Investools," which put on seminars using tie-ins, now severed, with CNBC and BusinessWeek.

After an investigation that dragged on for over a year and a half, today the SEC announced that it settled securities fraud charges against Investools for "misrepresentations at investor workshops." The fine is the usual SEC wrist slap, with Investools pledging to stop doing stuff that it didn't admit to doing in the first place.

The Commission's complaint alleges that from 2004 to approximately June 2007 at Investools how-to-trade-securities workshops former Investools employees Drew and Miller misleadingly portrayed themselves as expert investors who made their living trading securities. They did so to mislead investors into believing that they too would make extraordinary profits trading securities if they purchased expensive Investools instructional courses and other products and followed Investools' securities trading strategies. The complaint further alleges that in reality, neither Drew nor Miller made the trading profits they claimed. For example, in 2005 and 2006, while Drew was portraying himself as a successful investor, he had hundreds of thousands of dollars in net trading losses. In 2006 and 2007, while Miller was portraying himself as a successful investor, he had tens of thousands of dollars in net trading losses.

What made Investools especially interesting was its murky corporate history, as successor to a company called Ziasun that used to intimidate critics through lawsuits against critics on message boards.

That was one hell of a red flag, and the SEC got right on the case. How long did it take since Ziasun was on the warpath.... ten years?

© 2009 Gary Weiss. All rights reserved.