Monday, December 29, 2008

A New Year’s Message from a Convicted Felon: While you hope, criminals prey

My cousin Crazy Eddie Antar taught me that “people live on hope.” As white collar criminals, we preyed on your hopes and dreams by feeding you our spin and lies.

Investors demand confident leadership and strong financial performance from company managements. They want to hear management exuding confidence about their company’s future business prospects. Eddie and I built an image of strong and confident leadership by promising investors a prosperous future backed up by our phony financial reports.

As criminals, we considered the humanity of investors as a weakness to be exploited in the cold-blooded execution of our crimes. We measured our effectiveness by the comfort level of our victims.

My cousin Eddie and I built walls of false integrity around us to gain the trust of our victims. We claimed that Crazy Eddie's accounting policies were "conservative." In addition, we gave huge sums of money to charity and were involved in many popular social causes in an effort to make investors comfortable with us. While we were in effect, “helping old ladies cross the street,” we were heartlessly executing a massive fraud that wiped out the life savings of thousands of investors and ultimately caused a few thousand people to lose their jobs.

Eddie Antar and I never had a single conversation about morality or right and wrong. We simply did not care about the victims of our crimes. Our conversations only focused on the successful execution of our cold-blooded schemes to defraud investors.

At Crazy Eddie, we committed our crimes simply because we thought we could execute them successfully. We took advantage of investor's hopes, dreams, and aspirations for a better future. More importantly, we fully exploited investor's lack of skepticism that resulted from the wall of false integrity we built around ourselves.

Hope is a fine human quality that motivates us to build a better future. Unfortunately, criminals consider your hope as an exploitable weakness to aid them in the successful execution of their crimes.

Do not get mesmerized by neatly packaged story lines and well researched sound bites written by professional high paid media consultants. Criminals know how to “talk the talk and walk the walk” as they inspire you with false promises of a prosperous future.

In the New Year, please do not let criminals exploit your hopes and dreams. In addition, you are cautioned to apply the same advice to our elected officials from all sides of the political spectrum who exploit your hopes with inspiring rhetoric to sell you flawed solutions to major problems facing our nation.

Have a skeptical New Year.

Written by:

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Other blog posts of interest

Managing Earnings: Playing the Numbers Game

The Art of Spinning: How to Identify Possible White Collar Criminals or at Least Unethical and Deceitful People Who You Should Avoid

Advice about Trust from a Convicted Felon

Advice from a convicted felon: How the government investigates and prosecutes white collar criminal cases

A Warning to Wall Street Analysts from a Convicted Felon

Warning from a Convicted Felon: Don't Be Fooled by People Who Flaunt Their Integrity

Limiting Auditor Liability is Plain Dumb

Why White Collar Criminals Do Not Fear Today's FBI

Advice to President-Elect Barack Obama about Combating White Collar Crime From a Convicted Felon

Is there really more white collar crime today? No.

Saturday, December 13, 2008

Is there really more white collar crime today? No.

Advice about white collar crime from a convicted felon: A bad economy causes many white collar crimes to float to the surface.

Once, I asked a N.Y.C. police officer assigned to the harbor patrol, why are so many dead bodies are pulled out of the rivers around Manhattan every spring. He explained to me that many of these people did not actually die during the spring. Instead, many of these people really died during the previous winter.

During the winter, if a person is killed and the dead body is dumped into the river or if a person commits suicide by jumping into the river from say a bridge, their bodies will sink to the bottom of the river because the water temperature is cold. When spring arrives, the water heats up and the dead bodies float to the top of the river surface. The harbor police then retrieve those bodies that are also known as “floaters.” Therefore, just because we find dead bodies in the spring, does not mean they died at that time. Instead, they probably died during the winter.

The same principle applies to white collar crime. White collar crime is always around in both good and bad economic times. Such crimes are either less noticed during a good economic climate or more noticed during a bad economic climate, like the situation we face right now. In a relatively good economy, white collar crime is easier to execute and harder to uncover. In a relatively bad economy, many white collar crimes in progress implode upon themselves because they become unsustainable. Bad economies, like warm water for dead bodies, brings many white collar crimes to the surface.

It is unfortunate that the majority of white collar crimes are uncovered because they implode upon themselves, instead of the result of effective work by internal auditors, external auditors, and audit committees. We simply do not have enough adequate effective measures in place, to prevent most white collar crimes. Even when internal controls and checks and balances are present, they are often circumvented by criminals taking advantage of the lack of skepticism of those persons responsible for compliance and oversight.

Worse yet, during a strong economy, our regulators and policy makers often ignore or pay little attention to crime prevention resources and regulations that can actually reduce the amount of white collar crime. Often white collar law enforcement resources are reduced and regulations are watered down, in the name of efficiency and regulatory relief, to promote economic growth.

However, the consequences of such actions become apparent later, as the we enter into a recession. At that time, many white collar crimes implode upon themselves, become known to us, and are reported in the media. By the time we find out about a certain white collar crime, it is too late to undo the damages it caused and return lost money to its victims.

Many of the white collar crimes in the headlines today, were perpetrated for years, before they became known to us. We should measure the occurrence of white collar crime by the dates they were executed, instead of indictments and convictions that follow many years later. The crimes reported today, have roots far into the past. The same can be said about the problems facing our economy today, such as the credit meltdown.

In the mean time, think about the about the recently announced criminal investigation of Bernard L. Madoff and the problems at Freddie MAC (NYSE: FRE).

To be continued….

Written by,

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Disclosure: As the cold-blooded criminal CFO of Crazy Eddie, I committed my crimes simply because I could. I took advantage of the gullible trust of my victims and their lack of skepticism.

Other blog posts of interest

Managing Earnings: Playing the Numbers Game

The Art of Spinning: How to Identify Possible White Collar Criminals or at Least Unethical and Deceitful People Who You Should Avoid

Advice about Trust from a Convicted Felon

Advice from a convicted felon: How the government investigates and prosecutes white collar criminal cases

A Warning to Wall Street Analysts from a Convicted Felon

Warning from a Convicted Felon: Don't Be Fooled by People Who Flaunt Their Integrity

Limiting Auditor Liability is Plain Dumb

Why White Collar Criminals Do Not Fear Today's FBI

Advice to President-Elect Barack Obama about Combating White Collar Crime From a Convicted Felon

Wednesday, December 10, 2008

Barry Minkow Releases New Document to Show Microsemi Exec Peterson Lied

In a video posted on YouTube, a confident Barry Minkow, co-founder of the Fraud Discovery Institute, charged Microsemi Corp. (NASDAQ: MCSS) President and CEO and STEC Inc. (NASDAQ: STEC) Board Member James J. Peterson with "stock fraud."

Minkow said that Peterson knowingly "lied" in a Microsemi press release, when Peterson "categorically" denied Minkow's background report last week that he falsified his academic credentials in reports filed with the Securities and Exchange Commission. Minkow said that Peterson "knew it was a lie. He did it to salvage the stock price."

Minkow held in his hand a "Verification of Enrollment" that contained Peterson's birthday (information redacted), social security number (information redacted), and student identification number that was signed by the Brigham Young Registrar. The new document verified Minkow's background report that showed Peterson had falsified his academic credentials, stating there were "No degrees awarded at BYU as of December 9, 2008," to Peterson.

On December 3, 2008, Barry Minkow released a background report of Microsemi Chief Executive Officer and STEC Board Member James Peterson, showing that Peterson did not receive a "B.A. in business administration and an M.B.A. from Brigham Young University," as claimed in STEC's proxy filing with the SEC.

In response to Minkow's report, Microsemi issued a press release that same day stating:

I am working directly with the University to clarify this situation,'' Peterson said. "It appears that the background check there may have mistakenly been made with the name 'James J. Patterson,' not mine, as stated in a Seeking Alpha report.''

Peterson further questions the reliability of tipster Barry Minkow, a convicted felon who spent seven years in prison for fraud, as the source for the reports. Minkow uses his tips as a means to profit from "put options'' he buys on companies he researches. He uses a disclaimer on the factual accuracy of his reports.

"I have every reason to expect that Brigham Young will investigate this allegation shortly and officially confirm my degrees,'' Peterson said.

Minkow publicly discloses on his web site, to the media, and law enforcement agencies that he legally purchases put options before he issues his reports to bet a company's stock will decline after such reports are issued.

In addition, Peterson probably read my blog posted, earlier that day, which was also syndicated on Seeking Alpha. While I correctly spelled his last name several times, I misspelled his last name once in a paragraph towards the end of that post.

However, the background check by Minkow was done under the name "James J. Peterson" and not "James J. Patterson," as suggested by Peterson. The birthday and social security number (redacted from the report) is clearly Peterson's and does not belong to anyone else.

Minkow's report that Peterson falsified his academic credentials was verified by a Brigham Young University spokesperson before it was released and reported in Bloomberg News and the Wall Street Journal. After, Peterson categorically denied Minkow's report, a Brigham Young spokesperson reaffirmed to Bloomberg News that Peterson did not obtain any degrees from the school.

On December 5, 2008, Microsemi issued another press release in support of its embattled President and CEO James J. Peterson. See below:

Microsemi Corporation (NasdaqGS: MSCC - News) announced today that its Governance Committee of its Board of Directors is currently reviewing the status of the academic credentials of its President and Chief Executive Officer, James J. Peterson, and intends to work to resolve such status. Microsemi Board Chairman Dennis Leibel emphasized that Mr. Peterson has the full support of the Board and there are no plans to alter his role as President and Chief Executive Officer of Microsemi. "I want to assure our shareholders that Jim's educational credentials in no way reflect on the strength of Microsemi, which has been an industry leader. The Board's continuing support of Jim Peterson re-affirms our backing of his strategies, operational excellence and proven executive leadership,'' he said.

Note: Bold print and italics added by me.

In his YouTube video, Minkow responded, "We decided to help the board of Microsemi" investigate the status of Peterson's academic credentials. He said:

We will post the document from the school on our web site, so maybe the Board of Microsemi will not have to work too hard to conclude their investigation that their CEO lied and put it on the wire.

The press release hinted that even if Peterson falsified his educational background, as reported by Minkow and reasserted by Brigham Young University, Peterson is still assured his job at the company.

Apparently, Board Chairman Dennis Leibel is trying to hedge the company's position, just in case Peterson cannot substantiate his educational credentials by saying, "I want to assure our shareholders that Jim's educational credentials in no way reflect on the strength of Microsemi...." In others words, he is implying that it is OK for the President and CEO of a public company to lie in SEC filings about his educational background and in a subsequent press release by denying that he lied in SEC filings.

With Barry Minkow's latest document from Brigham Young University, Microsemi Board President and CEO James J. Peterson faces increasing pressure to resign and the company's Board of Directors faces pressure to fire Peterson, absent his resignation. Meanwhile, Minkow has contacted the SEC and the FBI and forwarded his reports to them.

Minkow's YouTube Video is below:

Last week, Broadcom (NASDAQ: BRCM) fired Senior Vice President Vahid Manian and a day later Manian resigned from the Board of Directors of STEC, after Minkow issued a similar background report showing that Manian lied about receiving a “B.S.E.E and an M.B.A from the University of California, Irvine” as claimed in a Broadcom proxy filing and an STEC proxy filing with the SEC.

Vahid Manian and James Peterson are long-time friends dating back to when Peterson hired him at Silicon Valley in the mid-1990s. They both served on STEC's board of directors and were members of that company's audit, compensation, and nominating committees, before Manian resigned from the board. STEC faces the grim prospect of losing two of its six board members and two of four members of its audit, compensation, and nominating committees.

Written by:

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Other blog posts of interest:

12/03/08: Barry Minkow Reports More Corporate Scoundrels Misrepresenting Credentials

12/03/08: Broadcom Executive Fired Today For Phony Credentials, While Microsemi Executive Remains Under Scrutiny

12/04/08: Manian Resigns From STEC, A Day After Broadcom Fires Him For Phony Credentials

Disclosure:

I am not short or long any of the companies named in this blog post. However, the Fraud Discovery Institute and/or Barry Minkow may have a short position in the companies mentioned in this blog post. Please read the Full Disclaimer on FDI for Profit Status from Minkow's web site.

Over a year ago, I provided funds to Fraud Discovery Institute (FDI) to help pay costs of its investigations, though I had no control over any monies spent. I am not an owner, manager, employee, or consultant of Minkow or FDI and I have not received any compensation from them.

Index to White Collar Fraud Blog Posts

Other Blog and Media Reaction to my Blog

Monday, December 08, 2008

Does Democratic Leadership Inaction on Rangel Render Promises of "Change" a "Bait and Switch" Tactic?

Corruption and unethical behavior by politicians is a cancer that slowly and deliberately destroys the integrity of our government institutions and ultimately threatens the stability of our Republic.

The Democratic Party which will control the Presidency, the Senate, and the House of Representatives has a unique opportunity to show that they are really serious about possible corruption and changing the way Washington does business.

However, they must start in their own backyard and immediately remove Harlem Congressman Charles B. Rangel from his position as House Ways and Means Chairman, until a full and thorough investigation of his finances is completed for possible tax and ethics violations.

Otherwise the Democrats are sending a clear message – anything goes for our friends and allies, especially powerful friends in Congress. Worst yet, inaction by the Democratic leadership on issues of possible corruption and unethical behavior will render President-elect Barack Obama's much touted promises of "change," nothing more than a "bait and switch" tactic to get votes.

The House Ways and Means Committee is in charge of writing tax legislation, and bills affecting Social Security Medicare, and other entitlement programs and Charles B. Rangel (D – NY) is the committee’s powerful chairman. As I will detail below, an examination of recent financial transactions by Rangel shows a troubling pattern of him using his office to enrich his own personal self-interests at the expense of taxpayers and voters. In addition, it has been reported that he took certain tax exemptions that he was not entitled to and failed to disclose certain income on his tax returns and congressional disclosure forms.

Campaign money steered to Rangel's son

Politico reported that from 2004 to 2007, Charles Rangel steered almost $80,000 in campaign funds to his son Steven Rangel’s internet company for a pair of web sites. Those web sites were so poorly designed that an expert estimated that they should not have cost Rangel's campaign more than $100 to develop.

According to Politico:

Steven Rangel’s design for his father’s National Leadership PAC site appears to have been slapped together in a hurry, intermittently updated and never spell-checked. An apologetic note near the top of the site warns readers that the page is undergoing “routine maintenace [sic]” and cautions that “much of our content is currently unavailable.”Another button urges visitors to “Give Contribuition [sic].”

The site “is a one pager with a third party site taking donations,” said Jamie Newell of 7AZ Web Design, a company that creates sites for a wide array of businesses in Washington. “For something of that standard, I would not pay more than $100.”
Apparently, Mr. Rangel campaign overpaid his son $79,900 or about 790 times in excess of what he could have paid anyone else for similar work. During 2006 election cycle, Rangel paid more money than any other House member to develop web sites. Rep. Ralph Regula (R-Ohio) and since-ousted Rep. Christopher Shays (R-Conn.) were distant second and third “runners-up, shelling out $44,000 and $30,000 for their websites.”

Using a rent stabilized apartment in NYC as a campaign office

The New York Times reported that Charles Rangel used a rent-stabilized apartment as a campaign office in violation of New York State and City regulations that require rent-stabilized apartments to be used only as a primary residence by tenants. Meanwhile, in that same building, Rangel occupies not just one, but four rent stabilized apartments at below market rents.
According the New York Times article:

Mr. Rangel, the powerful Democrat who is chairman of the House Ways and Means Committee, uses his fourth apartment, six floors below, as a campaign office, despite state and city regulations that require rent-stabilized apartments to be used as a primary residence.

Mr. Rangel, who has a net worth of $566,000 to $1.2 million, according to Congressional disclosure records, paid a total rent of $3,894 monthly in 2007 for the four apartments at Lenox Terrace, a 1,700-unit luxury development of six towers, with doormen, that is described in real estate publications as Harlem’s most prestigious address.

The current market-rate rent for similar apartments in Mr. Rangel’s building would total $7,465 to $8,125 a month, according to the Web site of the owner, the Olnick Organization.

The Olnick Organization and other real estate firms have been accused of overzealous tactics as they move to evict tenants from their rent-stabilized apartments and convert the units into market-rate housing.
Since the landlord has discretion over renting the additional rent-stabilized apartments, amounts paid below current market value by Mr. Rangel may also violate House rules on accepting gifts in excess of $100.

Simultaneously, using both rent stabilized apartments and his Washington property as a primary residence

Worst yet, the New York Post reported that Charles Rangel claimed his Washington DC home as his primary residence and took a homestead exemption, while at the same time he used his rent stabilized apartments as his primary residence. As detailed above, NY rent laws require rent stabilized tenant’s apartments to be their primary residence. In Washington DC, only primary residences qualify for the homestead exemption. Rangel cannot it have it both ways.

Failure to federal taxes on rental income from a property he owns in the Dominican Republic

Another New York Times article reported that Charles Rangel failed to pay federal taxes, state, and local income taxes on rental income of $75,000 from a beachfront house he owns in the Dominican Republic. Rangel failed to disclose the rental income on both his personal income tax returns and his Congressional financial disclosure form. Yet, Mr. Rangel is chairman of the House Committee that writes tax legislation.

Troubling campaign contributions to further his personal interests

The Washington Post reported that Charles Rangel solicited “donations from corporations with business interests before his panel, hoping to raise $30 million for a new academic center that will house his papers when he retires.” Rangel and C.C.N.Y President Gregory H. Williams agreed to name the new academic center, the Charles B. Rangel School of Public Service at C.C.N.Y., in the Congressman’s honor.

Charles Rangel violated congressional regulations when he used his official letterhead to solicit contributions for his pet project. A New York Times editorial scolded Rangel, stating:

Mr. Rangel plainly violated congressional regulations when he used his official letterhead to solicit support for his academic center from scores of business and foundation leaders.
According to the Washington Post:

Ethics experts and government watchdogs say it is troubling that one of the nation's most powerful lawmakers would seek money from businesses that have interests before the committee he leads. Rangel's panel has broad jurisdiction over tax policy, trade, Social Security and Medicare.
It turns out that in one specific case, Mr. Rangel was instrumental in preserving a lucrative tax loophole that benefited Nabors Industries (NYSE: NBR). At the same time, the company’s chief executive, Eugene M. Isenberg, pledged $1 million to the project.

The New York Times reported, that originally, “Mr. Rangel was among dozens of representatives from both parties who bitterly opposed” the lucrative tax loopholes that companies like Nabors Industries was seeking. After receiving the pledge from Nabors CEO Isenberg, Rangel now fought to protect those tax loopholes “saving Nabors an estimated tens of millions of dollars annually and depriving the federal treasury of $1.1 billion in revenues over a decade, according to a Congressional analysis by the nonpartisan Joint Committee on Taxation.”

What should be done?

Charles Rangel claims that he welcomes an investigation into his finances. According to CQ Politics:

Insisting he has done nothing wrong despite a growing list of questions about his financial dealings, embattled House Ways and Means Chairman Charles B. Rangel said Monday he welcomes a thorough ethics committee investigation of all the allegations against him.

“Everything that’s been said they should look at ... bar nothing,” the veteran New York Democrat said.
However, Charles Rangel has not offered to step down as Chairman of the House Ways and Means Committee, while an investigation of his questionable transactions is conducted. Meanwhile, House Speaker Nancy Pelosi (D - CA) has resisted calls for Rangel to step aside as Chairman while the investigation continues.

Pelosi wants a quick investigation of Rangel's financial dealings. Instead, there should be a thorough investigation, even if it takes time to complete and Rangel should step down as Chairman of the House Ways and Means Committee, pending the outcome of such investigation. The New York Times reported that:

The relatively quick timetable that Mrs. Pelosi outlined was striking, given that previous internal inquiries in Congress have tended to drag out for years.
A hurried investigation is unacceptable and it will have no credibility, whereas a careful, detailed, and thorough investigation will have credibility.

If Rangel refuses to step down as Chairman of the House Ways and Means Committee and Pelosi continues to resist removing him from that post, it will have rendered Democratic Party promises of "change" to nothing more than a "bait and Switch tactic" to get elected.

At Crazy Eddie, we used to "bait" customers by promising to "beat any price" to get them into the store. Likewise, did the Democrats use the prospect of "real change" in Washington to bait voters to elect their candidates?

When the customer finally arrived at a Crazy Eddie store, our sales people used to "switch" them to higher profit merchandise. Likewise, will the Democrats, who will control the Presidency, Senate, and House switch back to politics as usual and give special preferences to their powerful friends and allies on issues of possible corruption and ethics violations?

In an editorial today, the Washington Times, pointed out:

Almost immediately after House Speaker Nancy Pelosi threw down the gauntlet Jan. 17, 2006, saying Democrats "[w]ill create the most open and honest government in history," would those words be put to the test.
To House Speaker Nancy Pelosi, talk is cheap and action speaks louder than words.

Written by,

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Disclosure

I am a registered Democrat in New York. Convicted felons have the right to vote in New York (but they don't serve on juries, which I don't mind). I have voted for both Democrats and Republicans and have written about questionable behavior by Democrats and Republicans.

Other Blog Posts of Interest

11/30/08: New York Democratic Party Leadership Takes Money from Same-Sex Marriage Supporters and Won't Deliver on Promises

11/16/08: Advice to President-Elect Barack Obama about Combating White Collar Crime From a Convicted Felon

08/18/08: Overstock.com (NASDAQ: OSTK) CEO Patrick Byrne Pays Utah Attorney General Mark Shurtleff to Defame a Blogger

Thursday, December 04, 2008

Manian Resigns From STEC, A Day After Broadcom Fires Him For Phony Credentials

Updated

This evening, STEC Inc. (NASDAQ: STEC) announced that Vahid Manian resigned as a director of the company, a day after he was fired from Broadcom (NASDAQ: BRCM) for falsifying his educational background in reports filed with the Securities and Exchange Commission. In an 8-K report filed with the Securities and Exchange Commission, STEC disclosed:

On December 4, 2008, STEC, Inc. (the “Company”) received notice from Vahid Manian of his resignation as a director of the Company to be effective as of the end of December 31, 2008. Mr. Manian is also a member of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. The Company has commenced a search for a replacement to fill the vacancy that will be created by Mr. Manian’s resignation.

On Wednesday, December 3, 2008, Fraud Discovery Institute co-founder Barry Minkow released details of a background investigation showing that Broadcom Corp. Senior Vice President and STEC Inc. Board Member Vahid Manian did not receive a “B.S.E.E and an M.B.A from the University of California, Irvine” as claimed in a Broadcom proxy filing and an STEC proxy filing with the SEC.

That evening, Broadcom fired Vahid Manian and issued a terse one-sentence statement:

On December 3, 2008, the employment of Vahid Manian, Senior Vice President, Global Manufacturing Operations of Broadcom Corporation and an officer and/or director of various Broadcom subsidiaries, was terminated. A search has commenced to find his successor.

Meanwhile, Microsemi Corporation (NASDAQ: MSCC) President and CEO James J. Peterson continues to categorically deny Minkow’s report that he has misrepresented his degrees from Brigham Young University in filings with the SEC. However, Brigham Young has re-verified that he did not receive a degree.

According to a Bloomberg News article by Ian King:

Microsemi Corp. Chief Executive Officer James Peterson didn’t receive any degree from Brigham Young University, according to the school’s registrar, repeating his position after Peterson said he expected to be vindicated.

“We have tried to look at everything that Mr. Peterson has said and tried to look for any possibility,” Jeffrey Bunker, registrar of the Provo, Utah, school, said today in a phone interview. “All of our records and information clearly verify and reverify what we stated earlier, that he did not receive a degree.”

James J. Peterson is a long-time friend of Vahid Manian, who was fired from Broadcom and resigned as a director of STEC after Minkow reported that Manian falsified is educational background. Peterson and Manian worked together at Silicon Systems in the mid-1990s and it was Peterson who hired and vetted Manian for that job. Both Peterson and Manian served together on the board of directors of STEC and were members of its audit, compensation, and nominating committees, before Manian resigned from STEC today.

Update:

Late this evening, Microsemi issued a press release supporting its embattled President and CEO, James J. Peterson. The press release hinted that even if Peterson falsified his educational background, as reported by Minkow and reasserted by Brigham Young University, Peterson is still assured his job at the company. See below:

Microsemi Corporation (NasdaqGS: MSCC - News) announced today that its Governance Committee of its Board of Directors is currently reviewing the status of the academic credentials of its President and Chief Executive Officer, James J. Peterson, and intends to work to resolve such status. Microsemi Board Chairman Dennis Leibel emphasized that Mr. Peterson has the full support of the Board and there are no plans to alter his role as President and Chief Executive Officer of Microsemi. "I want to assure our shareholders that Jim's educational credentials in no way reflect on the strength of Microsemi, which has been an industry leader. The Board's continuing support of Jim Peterson re-affirms our backing of his strategies, operational excellence and proven executive leadership,'' he said.

Note: Bold print and italics added by me.

Apparently, Board Chairman Dennis Leibel is hedging the company's position, just in case Peterson cannot substantiate his educational credentials by saying, "I want to assure our shareholders that Jim's educational credentials in no way reflect on the strength of Microsemi...."

In others words, he is implying that it is OK for the President and CEO of a public company to lie in SEC filings. The Microsemi board is advised to read SEC Regulations on compliance with a company's code of ethics.

To be continued....

Written by,

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Other relevant blog posts:

12/03/08: Barry Minkow Reports More Corporate Scoundrels Misrepresenting Credentials

12/03/08: Broadcom Executive Fired Today For Phony Credentials, While Microsemi Executive Remains Under Scrutiny

Disclosure:

I am not short or long any of the companies named in this blog post. However, the Fraud Discovery Institute and/or Barry Minkow may have a short position in the companies mentioned in this blog post. Please read the Full Disclaimer on FDI for Profit Status.

Over a year ago, I provided funds to Fraud Discovery Institute (FDI) to help pay costs of its investigations, though I had no control over any monies spent. I am not an owner, manager, employee, or consultant of Minkow or FDI and I have not received any compensation from them.

Index to White Collar Fraud Blog Posts

Other Blog and Media Reaction to my Blog

Wednesday, December 03, 2008

Broadcom Executive Fired Today For Phony Credentials, While Microsemi Executive Remains Under Scrutiny

Broadcom Executive Vahid Manian Fired

Broadcom Corp. (NASDAQ: BRCM) fired Senior Vice President Vahid Manian after a background report issued by Barry Minkow, co-founder of the Fraud Discovery Institute, uncovered him using phony educational credentials in filings with the Securities and Exchange Commission. Broadcom simply issued a terse one-sentence statement saying:

On December 3, 2008, the employment of Vahid Manian, Senior Vice President, Global Manufacturing Operations of Broadcom Corporation and an officer and/or director of various Broadcom subsidiaries, was terminated. A search has commenced to find his successor.

Broadcom could have at least thanked my dear friend Barry Minkow for uncovering lies by its Senior Vice President that the company was incapable of finding. No surprise in their lack of gratitude.

In my last blog post, I detailed how a background check by Minkow exposed that Broadcom Corp. Senior Vice President and STEC Inc. Board Member Vahid Manian did not receive a “B.S.E.E and an M.B.A from the University of California, Irvine” as claimed in a Broadcom proxy filing and an STEC proxy filing with the SEC.

So far, STEC (NASDAQ: STEC) has issued no statement about Manian’s status as a Director of that company. Marian also serves on STEC's audit, compensation, and nominating committees.

Microsemi Executive James J. Peterson "Categorically Denies" Falsifying Credentials, While Brigham Young Spokeswoman Reaffirms Findings in Minkow Report

In another press release issued today, Microsemi Corporation (NASDAQ: MSCC) President and CEO James J. Peterson categorically denied “published reports that he has misrepresented his degrees from Brigham Young University.”

According to another background check by Minkow, Microsemi Chief Executive Officer and STEC Board Member James Peterson did not receive a "B.A. in business administration and an M.B.A. from Brigham Young University" as claimed in STEC's proxy filing with the SEC.

According to that press release, Peterson said:

I am working directly with the University to clarify this situation. It appears that the background check there may have mistakenly been made with the name 'James J. Patterson,' not mine, as stated in a Seeking Alpha report.

Peterson probably read my earlier blog post this morning that was syndicated on Seeking Alpha. While I correctly spelled his last name several times, I misspelled his last name once in a paragraph towards the end of that post.

However, the background check by Minkow was done under the name "James J. Peterson" and not "James J. Patterson," as suggested by Peterson. In addition, the birthday and social security number (redacted from the report) is clearly Peterson's and does not belong to anyone else.

In Microsemi's press release, Peterson was also quoted as saying:

I have every reason to expect that Brigham Young will investigate this allegation shortly and officially confirm my degrees.

However, Bloomberg News went back and re-interviewed Brigham Young spokeswomen Carri Jenkins after Peterson's statements, above, denying that he falsified his educational credentials:

Brigham Young spokeswoman Jenkins said in an interview after the statement that she checked degree records again and couldn’t find any record of a degree for Peterson. She said she had been checking the right name.

“We are always very careful when we release this kind of information,” she said.

Note: Bold print and italics added by me.

Therefore, Brigham Young spokesperson Carri Jenkins reaffirmed background reports by Barry Minkow and his Fraud Discovery Institute that Peterson falsified his educational credentials.

Both Executives Also Serve on Board of Directors of STEC Inc.

Both Vahid Manian and James J. Peterson also serve on the board of directors, audit, compensation, and nominating committees of STEC Inc. As detailed above, while Broadcom fired Manian, STEC has taken no action, to date, to remove him from its board.

Worst yet, two of six board members of STEC Inc. and two of four members of its audit, compensation, and nominating committees used phony credentials in SEC filings, according to the Fraud Discovery Institute background reports.

According to today's Bloomberg article, "Peterson said he had vetted and hired Manian when the two worked for Silicon Systems Inc." Both Peterson and Manion worked at Silicon Systems in the mid-1990s.

As a minimum, Peterson failed to adequately vet the credentials of his long-time pal Manian, who lied to him about his educational background for several years. Is it possible that Peterson colluded with Manian to cover-up Manion's false educational background? Is it possible that they both colluded with each other to lie about both of their respective backgrounds?

To be continued....

Written by:

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Disclosure:

I am not short or long any of the companies named in this blog post. However, the Fraud Discovery Institute and/or Barry Minkow may have a short position in the companies mentioned in this blog post. Please read the Full Disclaimer on FDI for Profit Status.

Over a year ago, I provided funds to Fraud Discovery Institute (FDI) to help pay costs of its investigations, though I had no control over any monies spent. I am not an owner, manager, employee, or consultant of Minkow or FDI and I have not received any compensation from them.

Barry Minkow Reports More Corporate Scoundrels Misrepresenting Credentials

According to new background checks conducted by Barry Minkow, co-founder of the Fraud Discovery Institute, two more executives misrepresented their educational credentials in regulatory filings: Broadcom Corp. (NASDAQ: BRCM) Senior Vice President Vahid Manian and Microsemi Corporation (NASDAQ: MSCC) Chief Executive Officer James J. Peterson.

Worst yet, both executives sit on the board of directors of STEC Inc. (NASDAQ: STEC). Therefore, two of six board members of STEC Inc. and two of four members of its audit committee used phony credentials in SEC filings, according to the Fraud Discovery Institute background reports.

Vahid Manian

According to the first background check, Broadcom Senior Vice President and STEC Board Member Vahid Manian did not receive a “B.S.E.E and an M.B.A from the University of California, Irvine” as claimed in a Broadcom proxy filing and an STEC proxy filing with the SEC.

A Bloomberg News article by Ian King provides additional details:

Broadcom Corp. Senior Vice President Vahid Manian didn’t earn degrees from the University of California that are listed in his company biography, according to the school’s registrar.

Manian, who oversees global manufacturing at Broadcom, attended the University of California at Irvine between September 1979 and August 1983, but wasn’t awarded any degrees, said Mark Fonseca, who is responsible for privacy issues in the school registrar’s office, in an interview. Manian’s biography on Broadcom’s Web site says he has bachelor’s and masters of business administration degrees from the school.

Fonseca said Manian attended classes for four years, but didn’t graduate. He said he isn’t allowed by law to disclose why Manian didn’t receive a degree. Fonseca said the school had no record of Manian studying for an MBA.

Manian also sits on the board of STEC Inc., a Santa Ana, California-based maker of storage drives. A regulatory filing for that company also lists undergraduate and MBA degrees from UC Irvine in Manian’s biography.

Broadcom, based in Irvine, California, makes chips for flat-panel televisions, mobile phones and computer-game consoles. Manian joined the company in 1996 as director of operations, according to Broadcom’s Web site. Before Broadcom, he worked at chipmaker Silicon Systems Inc.

Broadcom spokesman Bob Marsocci said he was looking into the matter. A message left on Manian’s assistant’s voicemail wasn’t returned.

“I am sure that Vahid went to UCI and graduated, he was there with my brother,” Manouch Moshayedi, STEC’S chief executive officer, said in a telephone interview.

James J. Peterson

According to another background check, Microsemi Chief Executive Officer and STEC Board Member James Peterson did not receive a "B.A. in business administration and an M.B.A. from Brigham Young University" as claimed in STEC's proxy filing with the SEC.

Another Bloomberg News article by Ian King reports:

Carri Jenkins, a spokeswoman for Brigham Young University in Provo, Utah, said Peterson took classes from 1978 to 1980, but didn’t receive any degrees. A regulatory filing for STEC Inc., a company where Peterson serves as a director, said he has bachelor’s and master’s degrees in business administration from Brigham Young University.

A U.S. government security clearance application form provided by Peterson lists his position at Microsemi and states that he has bachelor’s and MBA degrees from Brigham Young.

Peterson was awarded an associates degree in arts, sciences and general education from Ricks College in Rexburg, Idaho in December 1978, said Kyle Martin, registrar of Brigham Young University -- Idaho. In 2001, Ricks College became Brigham Young University Idaho, which is separate from the school in Utah, he said. As a former junior college, it couldn’t have conferred a higher degree, he said.

“That’s not correct,” Peterson said, referring to the information provided by Brigham Young. “I’ll contact them immediately.”

Military Service

Peterson said in a telephone interview that he earned credits during his military service that counted toward the degree from Brigham Young. He didn’t provide a university transcript after earlier saying he would.

Cliff Silver, a spokesman for Irvine, California-based Microsemi, referred inquiries to the CEO. The company makes chips for military and aerospace customers, according to its Web site.

On November 16, 2008, this blog reported that by Barry Minkow and his private investigation firm, the Fraud Discovery Institute, found eight instances company executives misrepresenting their academic credentials. According to Minkow, those individuals touting phony credentials are:

  • MGM Mirage (NYSE: MGM): Chairman and Chief Executive Officer Terry Lanni:
  • Trimble Navigation Limited (NASDAQ: TRMB): Executive Vice President and Executive Committee member Dennis Workman
  • Cabot Microelectronics Corp (NASDAQ: CCMP): Chief Information Officer James DeHoniesto
  • Tetra Tech Inc. (NASDAQ: TTEK): President Sam Wesley Box
  • Knight Capital Group Inc. (NASDAQ: NITE): Director and former Executive Vice President Robert M. Lazarowitz
  • Helix Energy Solutions (NYSE: HLX): President and Chief Executive Officer Owen Eugene Kratz
  • Life Partners Holdings (NASDAQ: LPHI): Director Harold E. Rafuse
  • PepsiAmericas (NYSE: PAS): President and Chief Executive Officer Kenneth E. Keiser

The Fraud Discovery Institute's background checks on the above executives can be accessed here.

Deceitful directors and officers of public companies have been forewarned by Barry Minkow:

If you lie about your resume, past experience, and qualifications for your present job and such lies show up in SEC filings, he will find out about it and expose you to investors and regulators.

Minkow and I believe that if you lie about your educational background, you are capable of lying about anything else, too. Investors require honesty from the fiduciaries running their companies. If Barry Minkow can find false credentials in corporate America where company gatekeepers have failed, what other more devastating internal control failures exist that we do not know of?

To be continued....

Written by,

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Disclosure:

I am not short or long any of the companies named in this blog post. However, the Fraud Discovery Institute and/or Barry Minkow may have a short position in the companies mentioned in this blog post. Please read the Full Disclaimer on FDI for Profit Status.

Over a year ago, I provided funds to Fraud Discovery Institute (FDI) to help pay costs of its investigations, though I had no control over any monies spent. I am not an owner, manager, employee, or consultant of Minkow or FDI and I have not received any compensation from them.

Sunday, November 30, 2008

New York Democratic Party Leadership Takes Money from Same-Sex Marriage Supporters and Won't Deliver on Promises

Many politicians from both sides of the aisle emulate the same character traits as criminals. Criminals consider your humanity as a weakness to be exploited in the execution of their crimes. First, criminals try to raise your comfort level by bonding with you to gain your trust. After gaining your trust, criminals take your money based on false promises of hope. As the criminal CFO of Crazy Eddie, I sold many gullible investors on the hope of a prosperous future by using phony financial reports to raise their comfort level and trust.

Apparently, the same holds true with the New York Democratic Party leadership. They exploited the aspirations of gay rights supporters by selling them the hope of promptly moving to legalize same-sex marriage in return for campaign contributions to get party members elected. Now they are telling those same voters that swift action on same-sex marriage legislation may make them unelectable in the future.

According to a New York Times article by Jeremy W. Peters:

After a pledge from New York Democratic leaders that their party would legalize same-sex marriage if they won control of the State Senate this year, money from gay rights supporters poured in from across the country, helping cinch a Democratic victory.

But now, party leaders have sent strong signals that they may not take up the issue during the 2009 legislative session. Some of them suggest it may be wise to wait until 2011 before considering it, in hopes that Democrats can pick up more Senate seats and Gov. David A. Paterson, a strong backer of gay rights, would then be safely into a second term.

The New York Democratic leadership collected millions of dollars from the gay community with false promises of prompt action on legalizing same-sex marriage and now they will not deliver on their promises. According to the New York Times article:

Daniel J. O’Donnell, an assemblyman from the Upper West Side who led the push for the bill in the Assembly.

Mr. O’Donnell added that expectations are high in the gay community that New York will be able to deliver the movement’s next victory. “The leadership of the Senate and others in our community collected a lot of money from a lot of people with the promise — spoken and unspoken — that if the Democrats won the Senate, they would take a vote,” he said.

Mr. O’Donnell plans to introduce a bill relatively early in the 2009 session, setting up a possible confrontation with the Senate.

However, Daniel J. O'Donnell's plan to introduce a bill faces a certain clash with the Democratic Party leadership who, as detailed above, "have sent strong signals that they may not take up the issue during the 2009 legislative session."

According to the New York Times article, some party leaders may even want to wait until 2011 when, Governor David A. Paterson "would then be safely into a second term." Unfortunately, when the New York Democrats raised campaign contributions for same-sex marriage supporters, they failed to disclose that action to legalize same-sex marriage would be contingent on Governor David A. Paterson getting re-elected in 2011.

In effect, the Democratic Party leadership is now saying to same-sex marriage supporters, “Wait a few year years. We need to get Governor David A. Paterson re-elected, before we try to legalize same-sex marriage.”

Apparently, the gay community is a victim of political expedience. The Democrats believe that quick action on same-sex marriage may penalize them in future elections. Liz Krueger, a Democrat who represents the Upper East Side, was quoted by the New York Times as saying:

We want to get there, but we want to get there the right way or else we risk setting ourselves back another decade.

Senator Thomas K. Duane, a leading advocate on gay and lesbian issues, was quoted by the New York Times as saying:

“I can’t even imagine before the budget’s done that we would do anything,” Mr. Duane said. The Legislature is required to pass its budget before the state’s fiscal year begins on April 1.

But even once the budget is passed, Mr. Duane said, other factors will have to be weighed, like whether the timing is too politically risky for the governor.

“We definitely want David Paterson to run for re-election and to win,” he said. “There’ll be a discussion. And we’ll have a point of view about time frame; he’ll have a point of view on time frame.”

People with knowledge of Governor Paterson’s position on gay marriage said the governor is wary of making a big push for the bill as the Senate leadership remains in flux.

So now we have the New York Democratic Party leadership attempting to con both supporters of same-sex marriage and opponents of same-sex marriage. They sold hope of "prompt action" to legalize same-sex marriage to proponents of same-sex marriage. Now, it seems that they are holding out the possibility of delay (code word - the hope of no action) to opponents of same-sex marriage. The party leadership wants to con opponents of same-sex marriage that holding back on prompt action to legalize same-sex marriage makes them electable for another term, by selling them on the hope of maybe never taking action.

To the supporters of same-sex marriage the New York Democratic Party leadership said in effect, “Give us your money, elect us, and we will move to quickly legalize same-sex marriage.”

To opponents of same-sex marriage they say in effect, “Elect us and ignore our rhetoric supporting same-sex marriage. We value your votes and even maybe your future money, too. So we won’t vote for it anytime soon. You still have a chance to change our minds on this issue.”

In New York, the Governor David A. Paterson is a Democrat, and the Democratic Party controls both the State Senate and Assembly. They are concerned that some Democrats may not vote in favor of a same-sex marriage law.

I say, "Baloney." This is about honoring a campaign promise to take "prompt action" on legalizing same-sex marriage in return for campaign contributions. The New York Democratic leadership should not make promises to voters that they will not keep.

I am not debating the merits of legalizing same-sex marriage. My point is that politicians often pander to the aspirations of trusting constituencies to get elected, only to make excuses to them after collecting their campaign money. Like many politicians, I preyed on the hopes and aspirations of gullible investors.

Let's bring the issue of legalized same-sex marriage to a vote in the 2009 legislative session for the sake of both constituencies – supporters and opponents of same-sex marriage.

Pandering rhetoric is cheap for politicians supporting each side of the issue. Politicians should show courage and vote on same-sex marriage, despite the political consequences and make good on their promises to voters.

To the Democratic leadership, I remind you of a quote from the movie "Mr. Smith Goes to Washington" by Senator Jefferson Smith, played by James Stewart:

I guess this is just another lost cause, Mr. Paine. All you people don't know about lost causes. Mr. Paine does. He said once they were the only causes worth fighting for. And he fought for them once, for the only reason any man ever fights for them; because of just one plain simple rule: 'Love thy neighbor.'... And you know that you fight for the lost causes harder than for any other. Yes, you even die for them.

Whichever side loses a vote in the current legislative session can live to fight another day by bringing it to a vote again, after the next election. That's what democracy is all about.

Written by:

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Other posts of interest from my White Collar Fraud blog:

Advice to President-Elect Barack Obama about Combating White Collar Crime From a Convicted Felon

Why White Collar Criminals Do Not Fear Today's FBI

A Crisis of Confidence: Some Small Steps We Can Take Now

Overstock.com (NASDAQ: OSTK) CEO Patrick Byrne Pays Utah Attorney General Mark Shurtleff to Defame a Blogger

Disclosure: I am a registered Democrat (in New York convicted felons have the right to vote), but I have voted for both Democrats and Republicans from the right to the left of the political spectrum.

Sunday, November 23, 2008

Overstock.com: Rule 10b-5 Exposure from Disclosure Violations

In this blog post, I will detail how certain members of Overstock.com's (NASDAQ: OSTK) unprincipled management team conned investors into believing that the company's non-compliant EBITDA disclosures were in compliance with Securities and Exchange Commission Regulation G, governing non-GAAP disclosures. I believe that Overstock.com's non-compliant EBITDA disclosures that materially overstated the company's financial performance, together with other false and misleading representations by management, expose them to possible violations of anti-fraud Rule 10b-5.

In my last blog post, I detailed how Overstock.com finally amended its financial reports to comply with SEC Regulation G, almost a year after it was notified by me of its violations. This blog was first in exposing how Overstock.com used a non-compliant EBITDA measure to overstate its financial performance from Q2 2007 to Q2 2008.

Other bloggers, such as forensic accountant Tracy Coenen, NY Times columnist Floyd Norris, and investigative reporter Gary Weiss also reported about Overstock.com's non-compliant EBITDA measures, too. However, the company stubbornly refused to correct its non-compliant EBITDA measures and continued to materially overstate its financial performance. Instead, CEO Patrick Byrne retaliated with a malicious smear campaign directed at his critics in an effort to discredit them.

Even as Overstock.com finally attempted to correct its non-compliant EBITDA disclosures in its latest Q3 2008 10-Q report and other amended reports recently filed with the SEC, the company continued to violate certain other disclosure requirements under Regulation G by failing to fully disclose its change from using a non-compliant EBITDA measure to a compliant renamed "Adjusted EBITDA" measure.

It should come as no surprise that Overstock.com is unable or rather unwilling to provide accurate financial disclosures and comply with securities laws. Throughout Overstock.com's entire history, there has been a continuous pattern of untrue, false, deceitful, inconsistent, and contradictory disclosures made by the company and certain members of its management team led by CEO Patrick Byrne.

Overstock.com Has a History of False and Misleading Financial Disclosures

In a previous blog post, I provided details dating back to 2000, how Patrick Byrne deceptively used non-GAAP revenues to hype Overstock.com's top-line performance, while at the same time claiming that Overstock.com was GAAP profitable, even though the company was not profitable at all.

In February 2006, Overstock.com disclosed inventory accounting errors and restated financial reports from 2002 to Q3 2005.

In January 2008, the Securities and Exchange Commission discovered that Overstock.com's revenue accounting failed to comply with Generally Accepted Accounting Principles (GAAP), since the company's inception. The company provided the SEC with a flawed and misleading materiality analysis to convince them that its revenue accounting error was not material. The company wanted to avoid a restatement of prior affected financial reports arising from intentional revenue accounting errors uncovered by the SEC. Instead, the company used a one-time cumulative adjustment in its Q4 2007 financial report, apparently to hide the material impact of such errors on previous affected individual financial reports. This blog detailed how Overstock.com's materiality analysis was seriously flawed and misleading and called on Overstock.com to restate its financial reports. Despite emails to Overstock.com, the company stubbornly refused to restate its financial reports.

On October 24, 2008, Overstock.com's Q3 2008 press release disclosed new customer refund and credit errors and the company warned investors that all previous financial reports issued from 2003 to Q2 2008 “should no longer be relied upon.” This time, Overstock.com said it would restate all financial reports dating back to 2003. In addition, Overstock.com reversed its one-time cumulative adjustment in Q4 2007 used to correct its revenue accounting errors and instead restated all financial statements to correct those errors, too, as I previously recommended.

However, Overstock.com continued to violate Regulation G and report a non-compliant EBITDA measure in its Q3 2008 press release. During the Q3 2008 earnings call that followed, Overstock.com CEO Patrick Byrne and President Jonathan E. Johnson responded to questions in my blog, posted the day earlier, about the company's non-compliance with Regulation G. Byrne and Johnson made untrue material statements and omitted material facts at they attempted to con investors into believing that its EBITDA disclosures complied with Regulation G. Afterwards, I again called on Overstock.com to change its non-compliant EBITDA measures to comply with Regulation G.

Finally, on November 10, 2008, Overstock.com amended its financial reports from Q2 2007 to Q3 2008 to comply with SEC Regulation G. However, Overstock.com still violated Regulation G by failing to fully disclose its change from using a non-compliant EBITDA measure to a compliant renamed "Adjusted EBITDA" measure.

In addition, Overstock.com warned investors in its 10-Q report that the company may be subject to future regulatory action from the Securities and Exchange Commission and litigation from shareholders seeking damages:

As a result of these errors, we may become subject to litigation and regulatory action. Although we would vigorously defend against any such actions, there can be no assurance that we would prevail. An award of damages in such suit or a regulatory penalty imposed as a result of regulatory action could be substantial and harm our business. The financial costs and the dedication of the time of management to defend such actions could also harm us financially and disrupt our business.

Note: Bold print and italics added by me.

Below, I will describe why Overstock.com and certain members of management may be "subject to litigation and regulatory action," including Rule 10b-5 violations, due to their willful failure to comply with SEC disclosure requirements.

Overstock.com and its Management Cannot Claim Ignorance of Disclosure Violations

Starting in November 2007, I notified Overstock.com of its Regulation G violations and material overstatements of its financial performance from using a non-compliant EBITDA in emails Cc’d to the SEC. Read receipts for those emails were acknowledged by both Overstock.com and the SEC. However, Overstock.com stubbornly continued to report a non-compliant EBITDA disclosure until November 10, 2008, when released its latest Q3 2008 10-Q report.

During the same period that Overstock.com used a non-compliant EBITDA to materially overstate its financial performance, company President Jonathan E. Johnson and CFO David Chidester unloaded stock at huge profits. During certain earnings calls, Patrick Byrne, Jonathan Johnson, and David Chidester made outright false and deceptive statements to investors in order to mislead them into believing that the company's reported EBITDA did not violate Regulation G. Their actions show a clear intent to "deceive, manipulate, or defraud investors" and should satisfy scienter requirements for a Rule 10b-5 violation.

Overstock.com Violated SEC Regulation G governing Non-GAAP Disclosures Such as EBITDA

In financial reports issued from Q2 2007 to its recent Q3 2008 press release, Overstock.com improperly reconciled its non-compliant EBITDA to operating loss, rather than net loss (the most directly comparable GAAP measure required under Regulation G guidance), and improperly removed stock-based compensation costs from its non-compliant EBITDA disclosure. As a result of Overstock.com's violations of Regulation G, the company materially overstated its non-compliant EBITDA in financial reports from Q2 2007 to Q2 2008, including comparable non-compliant EBITDA numbers for each period.

Since Overstock.com improperly reconciled its non-compliant EBITDA to operating loss, rather than net loss, EBITDA was materially overstated by the amount of non-operating items such as losses from discontinued operations in certain periods. In addition, since Overstock.com improperly removed stock-based compensation from its non-compliant EBITDA during each period, the company materially overstated EBITDA by such amounts. Therefore, Overstock.com's non-compliant EBITDA disclosure was "materially deficient" under Regulation G.

According to Regulation G, a "materially deficient" non-GAAP disclosure, such as Overstock.com's reported non-compliant EBITDA disclosure, can give rise to Rule 10b-5 violations:

Disclosure pursuant to Regulation G that is materially deficient may, in addition to violating Regulation G, give rise to a violation of Section 10(b) or Rule 10b-5 thereunder if all the elements for such a violation are present. In this regard, we reminded companies in December 2001 that, under certain circumstances, non-GAAP financial measures could mislead investors if they obscure the company's GAAP results. We continue to be of the view that some disclosures of non-GAAP financial measures could give rise to actions under Rule 10b-5.

Section 3(b) of the Sarbanes-Oxley Act provides that a violation of that Act or the Commission's rules thereunder shall be treated for all purposes as a violation of the Exchange Act. Therefore, if an issuer, or any person acting on its behalf, fails to comply with Regulation G, the issuer and/or the person acting on its behalf could be subject to a Commission enforcement action alleging violations of Regulation G. Additionally, if the facts and circumstances warrant, we could bring an action under both Regulation G and Rule 10b-5.

Note: Bold print and italics added by me.

One specific issue cited by the SEC that could give rise to a Rule 10b-5 violation is that "under certain circumstances, non-GAAP financial measures could mislead investors if they obscure the company's GAAP results." One way that a non-GAAP measure can "obscure the company's GAAP results" is for a company to report a GAAP net loss while using a non-compliant EBITDA measure to produce positive financial performance.

In Q2 2008, Overstock.com originally reported a net loss of $6.463 million before its later disclosed adjustments due to accounting errors. In that same quarter, Overstock.com originally reported a non-compliant EBITDA of positive $1.117 million. If Overstock.com had reported EBITDA in compliance with Regulation G, EBITDA should have been reported at negative $430K, before adjustments due to accounting errors. Therefore, Overstock.com's non-compliant EBITDA measure in Q2 2008 clearly does "obscure the company's GAAP results."

Worse yet, later accounting errors disclosed by Overstock.com caused a further overstatement of EBITDA in the amount of $896K. Therefore, a compliant EBITDA, after adjusting for accounting errors, should have been reported at negative $1.326 million, rather than positive $1.117 million, as originally claimed by Overstock.com.

See the charts below:

EBITDA computed in compliance with Regulation G (in thousands $)

Q2 2008

Net loss as originally reported before accounting errors

-6,463

Depreciation and amortization

5,887

Interest expense

888

Interest income

-740

Other income (net)

-2

EBITDA, computed according to Regulation G before accounting error restatements

-430

Adjustments for accounting errors

-896

EBITDA, computed according to Regulation G after account error restatements

-1,326

Non-compliant EBITDA reported by Overstock.com (in thousands$)

Q2 2008

Net operating loss as originally reported before accounting errors

-6,317

Depreciation and amortization

5,887

Stock-based compensation expense

1,068

Stock-based compensation to consultants for services

329

Stock-based compensation relating to performance shares

150

Treasury stock issued to employees for compensation

0

Non-compliant EBITDA before restatement due to accounting errors

1,117

Adjustments for accounting errors

-896

Non-compliant EBITDA after adjustment for accounting errors

221

Securities and Exchange Commission Rule 10b-5

Before we continue, let's review Securities and Exchange Commission Rule 10b-5:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

a. To employ any device, scheme, or artifice to defraud,

b. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

c. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

Note: Bold print and italics added by me.

Rule 10b-5 is the bedrock upon which federal securities law is built. According to Rule 10b-5, it is the presentation of "untrue statement of a material fact" or the omission of a "material fact" that gives rise to a securities fraud.

Since Overstock.com's non-compliant EBITDA measure violated Regulation G and materially overstated the company's financial performance, there is an "untrue statement of a material fact" in violation of Rule 10b-5. In addition, Overstock.com's willful failure to disclose that its non-compliant EBITDA violated Regulation G, qualifies as "unlawful...to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading," under Rule 10b-5.

How Rule 10b-5 Applies to Regulation G Violations

SEC Regulation G states, "... if the facts and circumstances warrant, we could bring an action under both Regulation G and Rule 10b-5." According to the "General disclosure requirement" under SEC Regulation G:

Regulation G includes the general disclosure requirement that a registrant, or a person acting on its behalf, shall not make public a non-GAAP financial measure that, taken together with the information accompanying that measure, contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the presentation of the non-GAAP financial measure, in light of the circumstances under which it is presented, not misleading (23).

Note: Bold print and italics added by me.

The language of Regulation G's general disclosure requirement above, is almost the same language in Rule 10b-5. Both Regulation G and Rule 10b-5 prohibit "an untrue statement of a material fact" or the omission of a "material fact" that causes a financial disclosure to be "misleading."

Despite prior notice by me of Overstock.com violation's of Regulation G, certain members of management continued to make "untrue" statements of "material facts" and omitted other material facts in an attempt to deceive investors into believing that the company was in compliance with Regulation G. Those actions expose them to potential rule 10b-5 violations.

Untrue Statement of a Material Fact and Omission of a Material Fact during the Q2 2008 Earnings Call and Q2 2008 Financial Reports

During the Q2 2008 earnings call, both CEO Patrick Byrne and CFO David Chidester made "untrue" statements of a "material fact" and omitted other material facts in an effort to mislead investors about Overstock.com's failure to comply with SEC Regulation G and overstate the company's financial performance. See below:

Patrick Byrne

Great. Slide number 10. EBITDA and this excludes stock based compensation. Do you want to mention that Dave? Do you want to – ?

David Chidester

Just – there is different ways people calculate EBITDA I think. We just want to make sure it’s clear that our calculation of EBITDA does include stock based compensation.

Patrick Byrne

Is that the convention?

David Chidester

It’s completely the convention in our industry and I think because it’s a new – it only came about a couple of years ago, everybody pretty much excludes it when they talk about EBITDA and talk about cash earnings.

Note: Bold print and italics added by me.

What both Patrick Byrne and David Chidester failed to tell investors was that Overstock.com improperly reconciled its non-compliant EBITDA to operating losses, rather than net losses (the most directly comparable GAAP measure required under Regulation G guidance). In addition, Chidester falsely claimed that stock-based compensation costs can be properly excluded from EBITDA. Under Regulation G guidance, any such non-GAAP measure cannot be called EBITDA. In other words, EBITDA is strictly net income or loss (not operating income or loss), before interest, taxes, depreciation, and amortization (nothing else can be excluded from EBITDA).

David Chidester tried to explain that:

There is different ways people calculate EBITDA I think… It’s completely the convention in our industry and I think because it’s a new – it only came about a couple of years ago, everybody pretty much excludes it when they talk about EBITDA and talk about cash earnings.

David Chidester cannot claim that following the accounting practices of other non-compliant companies validated Overstock.com’s non-compliant EBITDA disclosures. Contrary to David Chidester’s comment above, SEC Regulation G was issued more than “a couple of years ago” and became effective on March 28, 2003. Worse yet, SEC Staff Accounting Bulletin No. 99 issued way back in August 1999, expressly states that “Authoritative literature takes precedence over industry practice.” In this case, authoritative literature (Regulation G) already existed and took precedence over the so-called "industry practice" of non-compliant companies.

During the same Q2 2008 earnings call, Patrick Byrne described Overstock.com’s EBITDA performance as follows:

Well, okay. Well, EBITDA fourth consecutive quarter of positive EBITDA. Again, I am not a huge fan of this number but it is meaningful in some circumstances and it does describe something for us.

Slide 11, trailing twelve month EBITDA is now at $9.6 million. I think that has a – that’s the valley of death and we seem to be climbing out the far side.

Contrary to Patrick Byrne’s false claims above, Overstock.com did not achieve its “fourth consecutive quarter of positive EBITDA" and was not climbing out the far side" of the "valley of death."

If Overstock.com had reported EBITDA in compliance with Regulation G in Q2 2008, the company would have reported a negative EBITDA compared to a positive EBITDA in the previous quarter. Therefore, EBITDA would have dropped in Q2 2008 compared to the previous quarter. If we also take into account adjustments for subsequent accounting errors, Overstock.com would have reported a negative EBITDA in two of those four quarters (Q4 2007 and Q2 2008).

In Q2 2008, Overstock.com’s properly computed EBITDA, before subsequent accounting errors, should have been reported as $-430K and not positive $1.117 million, as originally reported. If we include later disclosed accounting error adjustments, Overstock.com should have reported a $-1.326 million EBITDA.

Overstock.com's “trailing twelve month EBITDA, before subsequent accounting errors, should have been reported at $5.145 million and not "$9.6 million" as hyped by Byrne. If we include later disclosed accounting error adjustments, Overstock.com should have reported a meager $1.229 million EBITDA. In other words, Overstock.com overstated EBITDA over seven-fold!

See the charts below:

EBITDA computed in compliance with Regulation G (in thousands $)

Q3 2007

Q4 2007

Q1 2008

Q2 2008

Trailing 12-months

Net loss as originally reported before accounting errors

-4,704

-5,160

-3,909

-6,463

-20,236

Depreciation and amortization

7,080

6,670

6,497

5,887

26,134

Interest expense

1,029

1,103

901

888

3,921

Interest income

-1,291

-1,429

-1,304

-740

-4,764

Other income (net)

92

0

0

-2

90

EBITDA, computed according to Regulation G before accounting error restatements

2,206

1,184

2,185

-430

5,145

Adjustments for accounting errors

-895

-1,310

-815

-896

-3,916

EBITDA, computed according to Regulation G after account error restatements

1,311

-126

1,370

-1,326

1,229

Non-compliant EBITDA reported by Overstock.com (in thousands$)

Q3 2007

Q4 2007

Q1 2008

Q2 2008

12-months

Net operating loss as originally reported before accounting errors

-4,874

-5,486

-4,312

-6,317

-20,989

Depreciation and amortization

7,080

6,670

6,497

5,887

26,134

Stock-based compensation expense

1,176

1,136

1,184

1,068

4,564

Stock-based compensation to consultants for services

140

-91

-14

329

364

Stock-based compensation relating to performance shares

350

-900

150

150

-250

Treasury stock issued to employees for compensation

213

-434

19

0

-202

Non-compliant EBITDA before restatement due to accounting errors

4,085

895

3,524

1,117

9,621

Adjustments for accounting errors

-895

-1,310

-815

-896

-3,916

Non-compliant EBITDA after adjustment for accounting errors

3,190

-415

2,709

221

5,705

Statement of a Material Fact and Omissions of Material Facts during the Q2 2008 Earnings Call and Q3 2008 Press Release

During Overstock.com’s Q3 2008 earnings call, both CEO Patrick Byrne and company President Jonathan E. Johnson III, made outright materially false and misleading statements in defending the company’s non-compliant EBITDA disclosures, in response to questions raised in my blog the day before the call. The company did not permit me to participate in the call and rebut the untrue statements below:

Patrick Byrne:

The claim that EBITDA is not compliant with SEC definition, nonsense. Our EBITDA reconciles to GAAP. The SEC says you have to reconcile EBITDA to GAAP. We follow, I believe, the general industry practice and the A in EBITDA, amortization of stock-based compensation, our EBITDA excludes it. Moreover we reconcile everything to GAAP. Sam Antar the Crook has pointed out as a couple of people have received comment letters. They were people who had not reconciled to GAAP. In any case, we’ve gone through this over and over with our lawyers. They’re saying you’re doing this right. Jonathan, do you want to add anything?

Jonathan Johnson:

No. Our EBITDA reconciles to GAAP. End of story.

Note: Bold print and italics added by me.

Patrick Byrne misled investors by claiming that, “Our EBITDA reconciles to GAAP.” A non-GAAP measure, such as EBITDA, is required to be reconciled with the most “directly comparable GAAP measure” under Regulation G, and not just any GAAP measure that management feels like using.

As described above, Overstock.com improperly reconciled its non-compliant EBITDA measure to operating loss, rather than net loss, which is the most directly comparable GAAP measure under Regulation G. In addition, Byrne’s claim that following “general industry practice” somehow validated Overstock.com’s non-compliant EBITDA disclosure was utter nonsense, too. SAB No. 99 clearly requires a company to follow authoritative literature (Regulation G) over industry practice.

Patrick Byrne had claimed that, “Sam Antar the Crook has pointed out as a couple of people have received comment letters. They were people who had not reconciled to GAAP.” Patrick Byrne’s claim is untrue.

As I described in a previous blog post, the SEC required CKX Inc. and CGG Veritas to change their non-compliant EBITDA measures to conform to Regulation G. CKX Inc., like Overstock.com, reconciled its non-compliant EBITDA measure to operating income or loss (a GAAP number) but not to net income or loss which is the most directly comparable GAAP financial measure” as required by SEC Regulation G. CGG Veritas, like Overstock.com, improperly eliminated stock-based compensation expenses from its non-complaint reported EBITDA.

Patrick Byrne wanted investors to believe that stock-based compensation costs are properly excluded from EBITDA as an amortization expense. However, as cited in the SEC comment letter to CGG Veritas, the SEC did not agree with Overstock.com's claim that stock-based compensation costs are properly excludable from EBITDA.

Patrick Byrne claimed that "In any case, we’ve gone through this over and over with our lawyers." However, just two weeks later on November 11, Overstock.com issued its Q3 2008 10-Q report and changed its non-compliant EBITDA disclosures to comply with Regulation G. Therefore, the findings of this blog that Overstock.com used a non-compliant EBITDA in violation of Regulation G were vindicated by Overstock.com's revised disclosures in its Q3 2008 10-Q and other amended financial reports.

Still, Overstock.com violated Regulation G again, since the company did not fully disclose its change from a non-compliant EBITDA measure to a compliant "Adjusted EBITDA" measure.

Inconsistent EBITDA Calculations without Explanation Give Rise to Further Violations

Overstock.com simply renamed its non-compliant EBITDA disclosure to "Adjusted EBITDA" as it finally sought to correct Regulation G violations on its Q3 2008 10-Q report. The company now reconciled "Adjusted EBITDA" to net loss (the most directly comparable GAAP measure required under Regulation G), rather than operating loss, as it did in the past. By renaming its non-compliant EBITDA disclosure as “Adjusted EBITDA,” the Overstock.com can now properly eliminate stock-based compensation costs and losses from discontinued operations from “Adjusted EBITDA.”

However, the company ran afoul of Regulation G again and possibly Rule 10b-5, since it deliberately failed to make a material disclosure about changing its non-compliant EBITDA to a compliant "Adjusted EBITDA." Footnote number 23 of Regulation G, addresses the requirement of the consistent application of non-GAAP financial measures, such as EBITDA:

... registrants should consider whether a change in the method of calculating or presenting a non-GAAP financial measure from one period to another, without a complete description of the change in that methodology, complies with the requirement of Regulation G that a registrant, or a person acting on its behalf, shall not make public a non-GAAP financial measure that, taken together with the information accompanying that measure, contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the presentation of the non-GAAP financial measure, in light of the circumstances under which it is presented, not misleading.

Note: Bold print and italics added by me.

Therefore, a company cannot change its “method of calculating or presenting a non-GAAP financial measure from one period to another, without a complete description of the change in that methodology.” If a company fails to make such a disclosure, it violates Regulation G and possibly Rule 10b-5. Overstock.com simply amended its previous financial reports to rename its non-compliant EBITDA disclosure to "Adjusted EBITDA" without any "description of the change" in that non-GAAP financial measure.

In addition, during other periods Overstock.com used inconsistent calculations to compute its non-compliant EBITDA disclosures and failed to disclose "a complete description of the change" in "methodology" used to calculate EBITDA. For example, Overstock.com’s Q2 2007 10-Q and Q3 2007 10-Q does not eliminate restructuring charges from both is reported quarterly and year-to-date reported EBITDA. I note that during fiscal year 2007, all of restructuring charges totaling $12.283 million occurred in Q1 and Q2 2007 and no other quarters. In contrast, in Overstock.com’s fiscal year 2007 10-K , the company's year-to-date EBITDA eliminates $2.169 million of the $12.283 restructuring charges that were included in previously reported year-to-date EBITDA calculations in Q2 2007 and Q3 2007.

Other False and Misleading Disclosures Relating to Overstock.com's Use of EBITDA

In Overstock.com's Q3 2008 press release, the company made materially false and misleading disclosures in describing why it used EBITDA in its financial reports:

We believe that, because our current capital expenditures are lower than our depreciation levels, discussing EBITDA at this stage of our business is useful to us and investors because it approximates cash used or cash generated by the operations of the business.

However, in its "current" period Q3 2008, Overstock.com's capital expenditures were higher than depreciation expenses, contrary to the company's disclosure above. During Q3 2008, Overstock.com's capital expenditures of $8.8 million exceeded depreciation and amortization expenses of $5.6 million by $3.2 million or 57%. In Overstock.com's Q3 2008 10-Q report issued about two weeks later, the company changed its misleading disclosure.

EBITDA is Used as a Measure of Valuation by Investors

In a letter (page 18) to the SEC, Overstock.com acknowledged:

A multiple of EBITDA is currently the most standard measure of valuation in the industry.

Various analyst reports issued by Scott W. Devitt from Stifel Nicholas, Shawn C. Milne from Oppenheimer, and Justin Post from Merrill Lynch have valued Overstock.com in terms of multiples of EBITDA. Therefore, a material overstatement of reported EBITDA by Overstock.com results in a materially significant over-valuation of the company and causes investors to buy stock and allows insiders to sell stock at overvalued prices.

Insiders Unload Shares as Overstock.com Reports Materially Overstated EBITDA

During the same period that Overstock.com used a non-compliant EBITDA and materially overstated its financial performance, both company President Jonathan Johnson and CFO David Chidester sold stock at substantial profits. In April 2008, Jonathan Johnson unloaded 55,922 shares at an average price of $17.11 per share (Source: Form 4 here and here). In May 2008, David Chidester sold 2,766 shares of common stock at an average price of about $27.80 per share and pocketed about $77,000 in gross proceeds. Last Friday, Overstock.com closed at just $6.80 per share.

Recent stock sales this year by CFO David Chidester are subject to the clawback provisions under Sarbanes-Oxley Section 304. David Chidester's false and misleading comments during the Q2 2008 earnings call described above, certainly qualify as "misconduct" under Sarbanes-Oxley 304. It is unfortunate that Section 304 only applies to CEOs and CFOs and not necessarily to Jonathan Johnson, as President of the company.

The SEC and shareholders seeking damages will have to sue the company, its board of directors, and management to recover damages and seek to enjoin the company and its officers from making up new lies to investors and stop further securities law violations. Overstock.com's D & O carrier may have substantial future claims to contend with.

To be continued....

Written by:

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Disclosure: Not long or short Overstock.com