Thursday, May 28, 2009

SEC Complaint Confirms Gulling of Media on Pegasus Wireless

Yesterday I wrote about the sad but familiar tale of Pegasus Wireless, which was busted by the SEC in a fraud scheme. One of the more interesting aspects of the Pegasus tale is how the financial media gave p.r. support to the scam artists, by uncritically repeating the claims of CEO Jay Knabb--despite a Barron's article which totally discredited that same person.

This is an interesting example of how competitive pressures resulted in some truly awful journalism.

The SEC complaint is out today, and it shows the media's negligence in this area even more clearly than yesterday's press reports. Let's contrast the SEC complaint with the adoring press coverage by Liz Moyer in and the critical coverage in Barron's.

The SEC complaint:

Pegasus shares reached a high of$18.69 per share in May 2006, briefly giving Pegasus a market capitalization of approximately $1.42 billion. Knabb promoted Pegasus through word of mouth, as well as unique promotional events such as an appearance at a major sporting event and a concert by a world-renowned musician.

The stock, however, began a steady decline after that, in apparent response to press articles questioning Pegasus' valuation and reports that Knabb and [ex-CFO Stephen] Durland had headed other microcap companies whose stock rose and crashed in short periods of time.
The "press articles" is mainly a reference to this piece in Barron's, The Medusa Effect, by Leslie Norton. Norton's piece turned out to be prophetic:

In the past, shares of two Knabb companies — BIFS Technologies, formerly Biofiltration Systems, and Wireless Frontier — ballooned, then collapsed. Asked about last week's decline in Pegasus, Knabb shakes his head. "It's really a shame the true story of the stock is not being told," he says. "This is a real company with real technology, and real people. We will show the world the new video-streaming. I'm not looking to the Street for money. This is only hurting shareholders. We're growing at 40% organic growth a year. Why is it the business is doing $100 million with net profits and no [cash] burn?"

After his brush with Knabb, Babak Dowlatshahi borrowed money to start a new firm, Creative Computers, in Fayetteville. Last month, he made his final payment to the bank. "I bounced back," he says.

Others may have to face the music.

Shortly thereafter came this in, which described how Pegasus shares were under "constant attack" from, among other things, negative press coverage. That was followed by this even more disgraceful article that famously began that there's a "hit out on Pegasus Wireless." Knabb's outlandish claims were uncritically reported.

Seth Jayson was moved to observe at the time:

. . . in this day and age, even a CEO and CFO with an amazing record of microcap tomfoolery can find a sympathetic ear out there -- at least if they've got a market story with sufficient nudity.

Enter Forbes' Liz Moyer, who seems to have swallowed the Pegasus peanut gallery's short story hook, line, and sinker. Worse yet, she believes the Pegasus corporate party line -- that an unproven outfit like Pegasus is going to outmaneuver Apple (Nasdaq: AAPL), Hewlett-Packard (NYSE: HPQ), Cisco (Nasdaq: CSCO), and everyone else playing in the hotly contested PC-to-TV video-streaming market. I'm not kidding. She opens her Monday night article with this line, "Jasper Knabb and his streaming video technology is [sic] about to beat Steve Jobs to the punch."

As for that "hit out on Pegasus Wireless"--sure was. The hit men were the top execs of the company, who were touted in the piece. The SEC complaint said that just while this jousting in the media was underway, Pegasus was flooding the market with unregistered shares:

29. In August 2006, Pegasus began issuing massive amounts of supposedly unrestricted shares to Jones, Speer, Wilson, Aero-Marine, and others connected to Knabb and/or Durland. To convince Pegasus' transfer agent to issue the shares without restrictions on their immediate resale, Pegasus claimed it was issuing the shares to satisfy promissory not~s purportedly issued by a Blue Industries, Inc. subsidiary in 2003 and 2004.

30. To support Pegasus' claim to the transfer agent, Durland presented at least 33
supposed promissory notes to the transfer agent between August 2006 and February 2008. By February 2008, Pegasus had issued nearly 479,150,000 shares -75% of its outstanding shares - in this manner.
In one of her stories, Moyer said as follows: "Records held by Pegasus' transfer agent indicated there may be as many as 30 million more shares out there than it has on record. That suggests that short-sellers have been selling shares without actually borrowing them--a controversial practice known as naked short-selling."

In fact, it wasn't naked shorting at all. It was the people whose cause she was advocating selling unregistered shares.

As for why the shares declined so badly, the SEC complaint doesn't blame "short sellers"--including the "naked shorts" rapped by Moyer-- or "the media." It blames the management of Pegassus Wireless:

. . . Having received millions of Pegasus shares directly from Pegasus or indirectly through conduits, Speer, Wilson, Jones, and Aero-Marine proceeded to dump the shares and remit the bulk ofthe proceeds to Knabb. During the Commission's investigation, Speer, Wilson, Jones, and Aero-Marine's supposed manager declined to testify about the transactions or activities relating to Pegasus, asserting their Fifth Amendment privilege against self-incrimination.

Between June 2005 and September 2006, Jones sold at least 978,235 shares to
individual investors, including unaccredited investors, in the Myrtle Beach, South Carolina area, often through face-to-face meetings. Knabb often participated in the selling efforts, accompanying Jones in the face-to.:.face meetings and touting Pegasus' prospects. From the proceeds of these directly to investors, Jones wired to Knabb at least $2.2 million between January 2005 and September 2006. Investors who acquired Jones' shares sometimes wrote checks directly to Knabb.
I don't blame them, if they had read the two articles that talked up Pegasus Wireless and its CEO, thereby attempting to discredit the Barron's piece. It was a superb job of media manipulation, I must admit.

The SEC goes on to say that "Between approximately November 2006 and December 2007, relief defendant Aero-Marine sold approximately 125 million shares of Pegasus stock to the public, receiving proceeds of about $12.8 million." Note that the share sales commenced right after the two articles, which have never been retracted or followed-up.

Hey, we all get suckered sometimes. In Wall Street Versus America I described how Business Week was similarly gulled by a sob story by penny stock hustlers (and got called on it by Barron's).

I'm sure it will happen again. Con men are like that. But what makes this tale different is that a con man gulled a reporter after a story in Barron's indicated that Knabb, had a questionable track record. Instead of telling Knabb to take a hike, what happened here was an example of the age-old pastime of knocking down the competition's story. Sometimes that works. But sometimes it fails spectacularly, as it did with Pegasus Wireless.

The public is fed up with the financial press being manipulated by corporations. They're tired of stock market cheerleading. Hopefully the next reporter who is at the receiving end of a CEO's "the shorts are attacking me" sob story will remember Pegasus Wireless.

UPDATE: This evening Moyer produced this anemic, belated follow-up, mentioning one of her previous puff pieces without retracting or expressing regret for it. She then says as follows:
Pegasus investors, meanwhile, grew repeatedly frustrated by the late summer and fall of 2006 because of Knabb's growing elusiveness. He would eventually move the company's operations from Northern California to the Bahamas, but even there he, and Pegasus, appeared to drop off the map.
Funny, her stories never said anything about shareholder frustration. She totally swallowed the management line back then. She should acknowledge that and apologize.

But worst of all was her failure to acknowledge that the SEC found that all those unregistered shares she had talked about were not from naked shorting.

Putting that issue aside for a moment, one question that I have, after reading the serious allegations in the SEC complaint, is this: why haven't criminal charges been filed?

© 2009 Gary Weiss. All rights reserved.

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Wednesday, May 27, 2009

Another (Alleged) Naked Shorting Con Game is Busted

Could this be a trend? I hope so. The SEC has been stepping up its anti-fraud actions just a bit in recent weeks, and today nailed a particularly odiferous little company, Pegasus Wireless, one of the charter members of the baloney brigade anti-"naked shorting" con games.

Pegasus and two ex-officers of the company was nailed by the feds, who said that they

...illegally sold hundreds of millions of Pegasus shares they secretly controlled and lied about the sales in company filings, the SEC said today in an e-mailed statement. The sales were used to support [ex-CEO Jay] Knabb and ][ex-CFO Stephen] Durland’s lavish lifestyles and purchases of boats, sports cars and homes, the SEC said.

“The public had no idea that insiders were controlling the shares and dumping them,” Bob Leach, chief of the SEC’s San Francisco branch, said in a phone interview. “It was all smoke and mirrors.”

Indeed, while there was some good coverage of the company in the media, there was also some pretty bad stuff, with Pegasus planting crap (like this and this) in the media describing how this poor, downtrodden company was being targeted by shorts, particularly of the naked variety. Here some of the hooey that came down the pike from the two articles I just linked:

Sept. 25, 2006:

The technology that Knabb is scheduled to unveil days from now, he says, will beat Apple Computer (nasdaq: AAPL - news - people ) to market by several months.. . .

. . .Meanwhile, Pegasus shares are under constant attack. What’s striking about the activity affecting the company’s stock are the concurrent volume spikes in trading, the build-up of short interest from almost nothing to about half the available float, and the sharp decline in the price. All of this has occurred in the last three months.

Oct. 3, 2006:

There's a hit out on Pegasus Wireless.

As if a 95% plummet in its stock price since May weren't enough, signs of trouble were already popping up before the Fremont, Calif., wireless equipment maker moved its stock from the over-the-counter bulletin boards to the Nasdaq national market in April.

. . .

Negative news reports started appearing, even as the company reported positive earnings and made plans to unveil its promising new technology that allows video streaming from a home computer to television sets throughout a house. In late August, Pegasus customers and suppliers began getting strange e-mails attempting to warn them away from Pegasus, claiming mismanagement in one of its majority-owned subsidiaries.

Records held by Pegasus' transfer agent indicated there may be as many as 30 million more shares out there than it has on record. That suggests that short-sellers have been selling shares without actually borrowing them--a controversial practice known as naked short-selling.

Oh no! Horrors! But the SEC has another perspective on this said story:\

"Knabb and Durland were basically printing Pegasus shares to enrich themselves at the expense of investors," said Marc J. Fagel, Director of the SEC's San Francisco Regional Office, in a statement.

According to the SEC's complaint, Knabb and Durland created Pegasus from a dormant shell company around June 2005 and through "touting several acquisitions" briefly got the company's stock price to soar, giving Pegasus a market value of more than $1.4 billion.

But the SEC said Knabb and Durland secretly controlled hundreds of millions of Pegasus shares, which they sold to individual investors and dumped on the open market through 2008. Knabb and Durland, the SEC said, did not report any of these transactions and instead "falsely told investors they owned only minimal amounts of stock and received no compensation from Pegasus."

Unfortunately, thanks in large measure to some pretty abysmal journalism, Lord knows how many investors were lulled into thinking that this dog's breakfast of a company was actually a "victim of short-sellers." Hey we all make mistakes, but the pumping of Pegasus demonstrates that sometimes the media can become, unintentionally, an ally of bad companies ripping off investors.

© 2009 Gary Weiss. All rights reserved.

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Tuesday, May 26, 2009

High Court Nominee Not From 'Shadow of Yankee Stadium'

The route from Yankee Stadium (A) to Bronxdale Houses (B)

I'm sure that all sons and daughters of the Bronx, such as myself, are delighted to hear that Bronx native Sonia Sotomayor has been nominated for the Supreme Court. What's not so delightful is how news reports continue to screw up exactly where she lived in the Bronx--in an example of the media's ignorance of the borough.

Evidently, all the outside world knows about the Bronx is that it has got Yankee Stadium in it, so therefore if she grew up in a housing project in the Bronx it would have to have been "in the shadow of Yankee stadium."

This "Yankee shadow" business has spread through the media like wildfire. A New York Times blog reported that she grew up "near Yankee Stadium in the South Bronx." Even a Bronx news blog placed her in the path of what must be an extremely long shadow cast by the stadium.

Geez, don't any of these people have a map? She grew up in Bronxdale Houses, which is way over in Soundview, across the borough from Yankee Stadium. If Judge Sotomayor wanted to travel there when she was a kid, it would have taken her ten minutes to traverse the 6.1 miles (via the fastest route, the Bruckner Expressway) in zero traffic, and there is of course never zero traffic on the Bruckner Expressway.

Only a Daily News columnist has raised the issue, so far to no effect.

© 2009 Gary Weiss. All rights reserved.

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Thursday, May 21, 2009

Message Board Stock Scammers Busted

There's a special twist to an federal court indictment and SEC complaint announced today: among the defendants is a character named Matthew Brown, who runs the message board.

I've written a bit about another sleazy stock message board named Investors Village, which claims to be a high-toned forum "where serious investors connect," but is in reality a happy hunting ground for promoters of dreck like Novastar Financial and corporate goons for the corporate crime petri dish.

But it seems that IHub was even worse, according to the SEC complaint. The feds say that IHub was not only a locale of rampant stock touting, was also was a place where stock promoters hooked up. Now, that's what I call "serious investors connecting"!

One of the stocks touted by these scam artists was Xtreme Motorsports of California, a naked shorting victim, naturally.

It's as I've said repeatedly: these stock message boards are a one-way street to the poorhouse, if you're dumb enough to use them for stock research. They're not places where "serious investors connect," unless you're a stock promoter seeking to network with other stock promoters. They're places where the naive are skinned alive.

© 2009 Gary Weiss. All rights reserved.

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Wednesday, May 20, 2009

Want the Hairs on the Back of Your Neck to Crawl?

Brent Baker, proud lawyer for slime

If so, read about how legal brain Brent Baker crowed to the Salt Lake Tribune about his poor, downtrodden, misunderstood client, Stanford Financial's CFO Laura Pendergest-Holt.

Hold on to your barf bags, folks. The woman is innocent. Yessir. A victim of overzealous regulators. And that's not all. Innocent people like Pendergest-Holt and Overstock's fabulously inept CEO Patrick Byrne know that they can get great representation at popular prices!
"We took on the representation knowing the assets were frozen but it goes to the reason why I get a lot of national cases," said Baker. "It's because we can take the risk because I don't have outrageously high overhead. I don't have to have to get millions and millions of dollars up front. If I believe in a client, I'll take a chance."
Baker goes on to wax rhapsodic about his former client Byrne, who waxes rhapsodic right back.

I had been wondering why the stock market conspiracy websites, which ordinarily tie in every Wall Street crime into a grand naked shorting conspiracy, failed to lasso in the Stanford defendants. Now I know why. Pendergest-Holt is good people, as are other ex-clients Baker believes in like Byrne and the Universal Express ripoff crew.

Baker learned to "believe in" these nightcrawlers while working for the SEC. Your tax dollars at work, folks, providing training for lawyers of white collar defendants in years to come.

Baker is a real piece of work. He once had a blog called in which he said the following in response to a post of mine talking about his role at Overstock and 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.
He signed this post "Fraudstopper." Seriously. This guy views himself as a "fraudstopper" by mouthing crap like this and by charging popular prices to represent the likes of Stanford's CFO, Patrick Byrne and the Universal Express bunch.

Baker (or his law partners) decided to be the ones to give him a break, by nuking these brilliant comments and what would have been a very interesting blog.

P.S. Baker's ex-colleagues feel that Pendergest-Holt is a "flight risk" who should continue to wear an electronic monitoring device, Reuters reports. I'm sure that in a few years they'll be finding a lot to "believe in" when it comes to the creeps and hoods of Wall Street and Corporate America.

© 2009 Gary Weiss. All rights reserved.

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Blue Chip Publicity For an (Alleged) Racketeering Enterprise

Manhattan District Attorney Robert Morgenthau today announced the indictment of sixteen people--including the owners--at a defunct brokerage firm called Joseph Stevens & Co., which was also indicted. Morgenthau said that these people ran a racketeering enterprise from 2001 through 2005 that raked in $6.2 million in illegal commissions.

That's small potatoes by Madoff era standards, though the scope was serious enough:

During that period, the defendants defrauded 800 victims in more than 5,000 trades valued at $151,286,804.44. By manipulating the market value of carefully selected stocks, the defendants generated more than $6.2 million in unlawful, undisclosed commissions, in violation of New York law and the trust of their customers.
Now, by any chance does the name "Joseph Stevens" sound familiar? It may. For quite a few years, at precisely the time the crimes were allegedly being committed, these alleged racketeers have presented a legitimate front with the aid of the financial media.

Thus we had Donald Selkin, head of equity research at the firm (and not accused of any wrongdoing), chatting it up with CNNfn back in 2004. A quick Google shows a host of financial publications similarly chewing the fat with Selkin as recently as last year (see this and this).

Selkin is now with National Securities, which boasted recently: "Frequently quoted in financial media including Bloomberg, CNN/FN, and CBSMarketwatch websites, Newsday, Quick Nikkei News, and Asia Market News, Mr. Selkin has provided CNBC’s 'Fair Market Report' for the past twenty-six years." What a guy. Earns his keep, to be sure.

Richard Suttmeier, who was chief market strategist at Stevens (and also not accused of nuthin'), was also all over the media.

Hey, these two gents didn't do anything wrong--and neither did the financial media that, unknowingly, buffed up the image of a firm at the same time that it was allegedly ripping off people. Happens all the time, I suspect. No big deal, unless you were one of those 800 victims.

© 2009 Gary Weiss. All rights reserved.

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The Times Flip-Flops on Credit Cards

The New York Times yesterday ran a simply atrocious front-page article on the credit card legislation that is sailing through Congress. CJR's Audit column has a good rundown of the article's deficiencies, which included omission of a basic fact--that credit card companies make money from every transaction, through fees paid by merchants.

The article basically swallowed the credit card industry's line that the pending card legislation would hurt good customers who pay off their balances every month, since such "deadbeats" are subsidized by the absurd fees and charges paid by millions of consumers.

By not mentioning the transaction fees, which let the card companies profit from "deadbeats" and interest-payers alike, the article was downright misleading.

Today, the Times ran what was tantamount to a front-page correction, in the form of a column by Ron Lieber. He points out allt he stuff that yesterday's article didn't have, and downplays the possibility that card issuers will withdraw all the perks cardholders currently get. After all, there are transaction fees!

Nowhere is yesterday's article mentioned, which is understandable I suppose. But still, the Times has run two contradictory front-page articles on consecutive days, and the overall impression is a bit rancid--and odd, considering that the Times has pushed hard for card reforms in its editorial page.

© 2009 Gary Weiss. All rights reserved.

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Monday, May 11, 2009

The Latest Naked Shorting Conspiracy Hoax

Byrne's hatchet man Judd Bagley goofs up

As I've detailed in various blog posts, CEO Patrick Byrne spends gobs of his inherited wealth on behalf of his lifelong goal: investor impoverishment. He has cooked the books of his company, lied at investor conference calls, and hired a former Florida Republican go-fer named Judd Bagley to harass his critics and spread "naked shorting" conspiracy theories.

Bagley's latest venture is a video purporting to show $10.5 billion in "naked shorting" at Refco, entitled "Naked short selling - redefining systemic risk"

It is a slick, expensively produced video, replete with musical score and sophisticated graphics that took considerable time to produce. "It's hard to believe that something that took up so much of my life will only take up 18 minutes of yours," Bagley said in a message board post. He then proceeded to spread it like ragweed across the web, spamming everywhere, including here.

Take a look at that video. Convincing, right? The "smoking gun" is a financial statement (below) showing $10.5 billion in shares "sold but not delivered."

Hey, there it is, in black and white. The problem is that the "securities" in that line item don't signify naked shorting, or even ordinary shorting, but rather Treasuries. Bagley could have figured out for himself what that line item meant by spending a few minutes on Google.

To be sure, a great deal of what Bagley puts out there is based on misunderstandings, extrapolations on stuff he picks up off the web and just plain lying. What makes this one different is that it is such an elementary misunderstanding that a fellow conspiracy theorist pointed it out back in 2005, after making the identical goof in a blog post:

Note: When this was first published late at night two days ago, I had bounced the $10.5 billion liability marked Securities Sold But Not Yet Purchased off a few savvy folks, and first pass was that it was likely partially FTD's. Upon reviewing the prior filings, it became obvious that it was neither mostly FTD's, nor mostly legitimate short sales - both takes were incorrect. The prior filings articulate much of it as Treasuries, which to his credit, Alan Newman caught early on, or rather hypothesized early on, and the next day's digging confirmed it. [emphasis added]
I have no idea how much money Byrne lavishes on Bagley, the ex-CJR editor Mark Mitchell and the other idiots he has put on his payroll to put out lies on the web. Evidently he gets the same return on his money as Overstock's long-suffering shareholders, so I guess there's a kind of rough justice in that.

(One of the few remaining Overstock critics who has not been purged from the Investor Village message board, "rashomonusa," points out that he raised this issue on that board. I was remiss in not crediting him in this item, though I must point out that Bagley's goof was brought to my attention over the weekend by someone else.)

UPDATE: Bagley later revised downward his original mythical number to $450 million, saying:

The keystone to the argument is the $450-million mystery liability. The $10.5-billion line item, and the concern expressed by "investigators" that there might have been a lot of naked shorting going on at Refco, merely underscores the high liklihood that the $450-million was a barrell full of failed trades.
In fact, there is no "mystery liability." According to the SEC, the $450 million referred to the shifting of receivables to a third party (hat tip: the ever-vigilant investor activist Floyd Schneider).

I usually don't take the time to respond to Bagley's fairy tales, but this is a particularly well-documented example of how he and his employer spread lies on the Internet.

© 2009 Gary Weiss. All rights reserved.

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Friday, May 08, 2009

The Financial Press & the Meltdown

Dean Starkman's excellent article on the financial press is in the current issue of Columbia Journalism Review, not online at present. It's a detailed and relentless account and I'm sure it will engender quite a bit of controversy.

Dean found that the media "did everything but take on the institutions that brought down the financial system." To his credit, he emphasizes that this was a failure of leadership. He concludes by saying:
...never, ever underestimate the importance of editorial leadership and news ownership, for in them rests the power to push back against structural conflicts and cultural taboos fostered by industry, to clear a space for business journalism to do the job it is clearly capable of, the one job that really needed doing.
Dean does not go into specifics on this point, and I think it deserves another article.

© 2009 Gary Weiss. All rights reserved.

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Thursday, May 07, 2009

Requiem for a Stress-Test Lie

In my late, lamented Portfolio blog, I described how a bigot named Hal Turner had turned the markets on their head with a phony report on a supposed "leak" of stress test results. Turner supposedly had information showing that sixteen of the nineteen banks were insolvent.

Well, the results of the stress test are out, and while it shows that banks need billions in capital, absolutely none of them were insolvent or even close.

Reuters reported that "U.S. Treasury Secretary Timothy Geithner said on Wednesday that none of the 19 banks being examined under stress tests are at risk of insolvency."

So it's now fairly plain that Turner spread a lie for the purpose of increasing hits to his website.

The SEC is said to be investigating. Good. Hopefully it will show greater than usual efficacy, and find grounds not just for civil proceedings, but for a criminal referral to the Justice Department.

© 2009 Gary Weiss. All rights reserved.

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Wednesday, May 06, 2009

CNBC's Effective Publicity Stunt

Here's a big shout out to my friends at CNBC, for proving yet again that its "multiple heads, talking over each other" format is working wonders in getting free publicity and the all-important "buzz."

I'm referring, of course, to Rick Santelli's yelling at Steven Liesman. Here's the link.

Oh gosh! Sorry. Wrong link. That was another Rick Santelli yelling at Steve Liesman (or vice versa). Here's the link.

Oh my goodness. Wrong again. OK, here is a Huffington Post blog item with the latest Santelli-yelling-at-Liesman-or-vice-versa. And just to show how CNBC has been able to get mileage from the other side of the political spectrum, here's a blog item from NewsBusters on the same yelling.

Bravo! Yelling works.

© 2009 Gary Weiss. All rights reserved.

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Bernie Madoff's Protectees

Bernie Madoff's secretary, who co-wrote a 9,000-word article in Vanity Fair, said on TV today that Madoff is keeping silent to protect others:

Eleanor Squillari, Madoff's secretary of more than 20 years, told NBC's "Today" that she thinks her former boss carefully orchestrated his arrest and that he's protecting others who might have been involved in his multibillion-dollar scheme by not cooperating with investigators. She declined to speculate as to whom he might be protecting.
It's perfectly credible that Madoff is protecting somebody. What isn't especially credible is that Ms. Squillari would not know who that is. I hope that she is more forthcoming in her talks with prosecutors that she was in her Today show appearance.

© 2009 Gary Weiss. All rights reserved.

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GAO Confirms: The SEC Let Companies Commit Fraud

Under Chris Cox, this was official SEC policy

Readers of this blog won't be the slightest bit surprised by the findings of a GAO report released today.

Bloomberg reports:

Under former SEC Chairman Christopher Cox, the agency instituted policies that slowed cases and led enforcement-unit lawyers to conclude commissioners opposed fining companies, the Government Accountability Office said in a report today. An unidentified attorney said it was “widely felt” commissioners prevented the division from “doing its job,” according to the report.

“Some investigative attorneys came to see the commission as less of an ally in bringing enforcement actions and more of a barrier,” the GAO said. Cox’s policies “contributed to an adversarial relationship between enforcement and the commission.”

The GAO report will solidify Cox's reputation as the worst SEC chairman in, possibly, its entire history:

When Cox became chairman in August 2005, he stepped into a partisan dispute among SEC commissioners over whether it was appropriate to sanction public companies for violating securities laws. Democratic commissioners argued that fines helped deter misconduct. Republicans countered that shareholders ultimately paid SEC penalties.

The SEC issued guidelines in January 2006, stipulating that the agency would consider how much an alleged fraud benefited the company and the impact on shareholders before imposing a fine.

Cox, now 56, set up a procedure in 2007 that required enforcement attorneys to seek approval from commissioners before negotiating corporate penalties. Previously, SEC investigators could enter into settlement talks without obtaining permission.

“The pilot program was designed to test ways to speed up cases and improve oversight, and was tried in only nine of more than 1,000 cases that were all approved by the commission,” Cox wrote yesterday in an e-mailed statement. “The GAO analysis supports the chairman’s decision to end the pilot and pursue other approaches.”

The GAO report doesn't specify the names of companies given a "get out of jail free" card by Cox's new policy, which "led to 'fewer and smaller' corporate fines, reduced incentives for corporations to cooperate with SEC investigations and generated a backlog of cases." But one beneficiary is perfectly obvious: the corporate crime petri dish

Last year, the SEC announced that it was dropping a lengthy investigation of the company despite evidence of blatant accounting improprieties.

Overstock, encouraged by the SEC's negligence, ratcheted up its use of smoke and mirrors to fictionalize its recent financial statements, as described in an item the other day.

SEC chairperson Mary Schapiro said in response to the GAO report that the SEC sent the “wrong message to enforcement staff and to the public at a time when the SEC needs to be sending a message that corporate wrongdoing will not be tolerated.”

Schapiro can prove she's serious by reexamining the cases dropped by Cox, and seeing to it that the Overstock.coms of this world stop getting away with inflating their financial statements.

© 2009 Gary Weiss. All rights reserved.

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Tuesday, May 05, 2009

Will the 'Financial Markets Commission' Probe Congress?

Congress is moving closer to creating a "Financial Markets Commission," similar to the 9-11 Commission, to study the origins of the financial crisis.

That's a good idea, and long overdue. As I argued in my blog a few weeks ago and in my Portfolio article on Bernie Madoff, an independent commission is urgently needed tto sort through how we got into this mess, and how to prevent another one.

What's not clear is whether this commission will examine the actions of one of the key players: Congress.

The Senate provision creating the commission -- the text is here -- is pretty broad, encompassing everything from compensation to short-selling, and, thankfully, the role of regulatory agencies. But what about Congress? As I pointed out in my Portfolio blog item, there's plenty of evidence that Congress was far from a passive bystander. Congress should be explicitly mentioned in the charter of the financial markets commission.

© 2009 Gary Weiss. All rights reserved.

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Monday, May 04, 2009

The Reliable Unreliability of Financial Statements

There are few certainties in this world: gravity, the speed of light, and, more obviously every quarter, the utter unreliability of financial statements.

That became starkly evident today, as white collar crime-fighter Sam Antar released the latest of a series of blog items showing that Overstock has systematically inflated its quarterly financials.

Sam reported:

In Q1 2009, reported a net loss of $2.1 million compared to $4.7 million in Q1 2008 and claimed an earnings improvement of $2.6 million. However, the company's reported $2.6 reduction in net losses was aided by a violation of GAAP (described in more detail below) that reduced losses by $1.9 million and buybacks of Senior Notes issued in 2004 under false pretenses that reduced losses by another $1.9 million.
In other words, you have to deduct $3.8 million from the $2.6 million earnings "improvement," which equals a $1.2 million un-improvement.

Sam lays out a very convincing case of blatant fraud.

What's fascinating are three things:

1) that it happens every quarter,

2) that it is so blatant,

and most importantly,

3) that the SEC knows about it and has done absolutely nothing about it.

The ball is in Mary Schapiro's court. So far, the SEC has demonstrated that it either does not employ competent accountants, or that the SEC has consciously ignored blatant securities law violations at this company.

© 2009 Gary Weiss. All rights reserved.

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Friday, May 01, 2009

Goodbye to Naked Shorting

Floyd Norris today makes a point that I have made several times in the past, beginning with Wall Street Versus America and most recently here, which is that naked short selling -- to the extent it has ever existed -- has pretty much vanished from the market.

Floyd goes on to say:

So are those who used to bitterly complain about naked shorting praising the S.E.C. for solving the problem?

Not a bit. Dozens of letters blaming naked shorting for the decline in share prices have poured into the S.E.C. in recent weeks, in response to a request by the commission for comment on the possibility of imposing rules to make it harder to sell stocks short when share prices are falling.

.... and he also points out that despite claims that shorting has destroyed "thousands" of companies, people who say that are hard-pressed to cite a single one.

I pressed Wes Christian's law firm (the major suers on naked shorting) on this same point during research for WSVA, and got a very loud silence.

What Floyd did not explore is the why the NSS myth is continuing, and why there is political pressure to waste regulatory resources on this issue.

The reason, of course, is that the people pushing this phony issue have a great deal to gain.'s Patrick Byrne, the standard-bearer of the Baloney Brigade, gets to divert attention from his proven incompetence as a CEO. The people and and astroturf groups he bankrolls, ranging from "consultants", lobbyists and "economists" to paid stalkers like the nauseating Judd Bagley, have paychecks to protect.

As I pointed out in WSVA three years ago, a phantom menace has no cure. So the Baloney Brigade will be marching on for as long as it can get financing for its lobbying and campaign contributions, and as long as it can find dupes to hoist its colors.

© 2009 Gary Weiss. All rights reserved.

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