Thursday, June 25, 2009 Auditors Cited by PCAOB in Five of Thirteen Audits Sampled (NASDAQ: BIDZ) should seriously consider replacing Stonefield Josephson Inc. as its auditors. According to a March 2007 Public Company Accounting Oversight Board (PCAOB) Inspection Report, Stonefield Josephson, Inc. was cited for significant deficiencies in five of thirteen audits reviewed or about 38.5% of audits sampled. See below:

The scope of the inspection procedures performed included reviews of aspects of the performance of 13 of the Firm's audits of the financial statements of issuers. Those audits and aspects were selected according to the Board's criteria, and the Firm was not allowed an opportunity to limit or influence the selection process. The inspection team identified matters that it considered to be audit deficiencies. Full report here.

The deficiencies identified in five of the audits reviewed included deficiencies of such significance that it appeared to the inspection team that the Firm did not obtain sufficient competent evidential matter to support its opinion on the issuer's financial statements.

Unfortunately, the PCAOB report does not identify which company audits failed inspection, even though many people have questioned such a policy. However, failing to "obtain sufficient competent evidential matter to support its opinion," in five of thirteen audits inspected, raises a red flag about the overall quality of Stonefield Josephson's audits.

This blog has written extensively about's inventory accounting disclosures and possible violations of Generally Accepted Accounting Principles in the company's accounting for inventories (details here, here, and here). The SEC started investigating such disclosures after I alerted them. is besieged by a flurry of lawsuits, seeking class action status, alleging securities fraud by the company and David Zinberg (CEO and President), based on issues raised in reports by short seller Citron Research. In addition, the company is being sued for alleged shill bidding on its web site.

Written by:

Sam E. Antar

I am a convicted felon and a former CPA. I pleaded guilty to three felonies for my role in the Crazy Eddie fraud as the former criminal CFO of the company.

I do not own any securities long or short.

Thursday, June 18, 2009

InterOil Files False Disclosures With SEC (Redacted Version)

Note: My previous blog post was deleted by me and replaced by this redacted version because it included certain sensitive information that I subsequently decided to sent to law enforcement.

InterOil (NYSE: IOC) filed a deliberately false Form D with the Securities and Exchange Commission relating to a May 2008 $95 million private placement convertible debt offering and tried to conceal material details of the transaction in later regulatory filings. Worst yet, Wayne Kaufman of John Thomas Financial, a New York based brokerage firm and a party to the private placement, failed to make conflict of interest disclosures while appearing on CNBC and pumping Interoil’s future prospects.

The above revelations resulted from a month long investigation by convicted felon turned fraud fighter and short seller Barry Minkow (co-founder of the Fraud Discovery Institute) with key assistance from veteran securities litigator Howard Sirota, and additional research by me.

The information was pieced together from Court filings and affidavits involving a lawsuit brought by William Ziegler against John Dolan and two of his entities (Carey International Ltd and John Thomas Structured Finance - unrelated to John Thomas Financial above). Dolan had assisted InterOil in raising funds for the private placement and raised $20 million from Ziegler. However, Ziegler claims that he is owed certain fees from Dolan and his companies.


Download lawsuit here, download exhibits here, download John Dolan affidavit here, download Thomas Belesis (John Thomas Financial) affidavit here, and download Neil Dolinsky (InterOil Affidavit) here.

InterOil $95 million private placement

On May 12, 2008, InterOil announced a private placement of $95 million in convertible debt securities to institutional investors and issued the following press release:

May 12, 2008 — InterOil Corporation (IOL:TSX)(IOC:AMEX) (IOC:POMSoX), a Canadian company with operations in Papua New Guinea, announced that it has closed on gross proceeds of US$95 million from the sale to institutional investors of 8% Subordinated Convertible Debentures due 2013. InterOil used the proceeds today to fully repay all outstanding indebtedness (US$70 million) under its credit facility with Merrill Lynch Capital Corporation. InterOil will use any remaining proceeds to drill and develop oil and gas wells on the Elk/Antelope structures in Papua New Guinea and for general corporate purposes.
The Convertible Subordinated Debentures carry an 8% coupon rate with a conversion price of US$25.00 per share. In some cases, interest payments may be made in common shares. If the daily volume-weighted average price of the Company’s common shares equals or exceeds US$32.50 for at least 15 consecutive trading days, InterOil may require the investors to convert the debentures into common shares. InterOil may also be required to repurchase the debentures for cash, at 101% of the face value plus accrued and unpaid interest, upon the occurrence of certain change of control events.

On May 28, 2008, InterOil filed Form D with the Securities and Exchange Commission which required the company to disclose sales commissions and finder's fees paid in connection with the $95 million convertible debt offering (See Section C, Item 4 on page 5 of 10). InterOil estimated that no sales commissions or finder's fees would be paid in connection with the offering. However, Court documents show that Interoil had prior knowledge that such commissions or finder's fees were paid.

InterOil uses Clarion Finanz AG as a front for dealings with Carey International and John Thomas Financial

In a January 19, 2009 affidavit filed by Neil Dolinsky (InterOil Special Projects Manager) in connection with Ziegler's lawsuit against Dolan and his companies, Dolinksy said that as of April 24, 2008, InterOil agreed to pay Clarion $5.7 million in convertible securities for its role in helping the company raise $95 million in its private placement of convertible securities and:

IOC issued to Clarion 228,000 restricted shares of its common stock as a finders fee, valued at $25 per share, equating to a total value of $5.7 million.

On April 24, 2008, Clarion entered into a separate Investment Banking Consulting Agreement with Carey International for its role in helping Clarion Finanz raise funds for InterOil.

The agreement called for Carey International to "receive compensation in the amount equal to five and one half percent (5 1/2%) of gross proceeds...." of funds it helped Clarion Finanz raise on behalf of InterOil. In addition, the agreement stated that "Carey International Ltd and/or assigns will pay a royalty fee of approximately 20% to John Thomas Financial and/or assigns."

In May 2008, John Dolan and his company Carey International raised $20 million in funds from William Ziegler. In September 2008, Ziegler sued Dolan and his companies claiming that he was owed part of their fees.

Carey International received 44,000 of the 228,000 restricted common shares due to Clarion Finanz from InterOil. Those shares were issued directly from InterOil to Carey International and John Thomas Financial and were valued at $25 per share (total value of $1.1 million or 5.5% of the $20 million raised by Carey). From those 44,000 restricted common shares due Carey International, John Thomas Financial received 20% of such shares as a "royalty fee" or 8,800 restricted common shares valued at $25 per share or $220,000.

It turns out that brokers from John Thomas Financial were cold calling investors to buy InterOil stock and that on April 28, 2009, Wayne Kaufman appeared on CNBC and said (see video link):

Our favorite stock is something called InterOil which I recommended on the air before.

Note: Above quote appears 3 minutes and 55 seconds into video clip.

Worst yet, 4 minutes and 6 seconds into the video clip, CNBC shows a screen called "Analyst Disclosure" that checks off the following items as "no."

Stock Ownership:
Analyst: No
Analyst's Family: No
Analysts's Firm > 1%: No
Investment Banking Client: No
Other Conflicts: No

Contrary to the disclosure above on CNBC that John Thomas Financial had no investment banking relationship with InterOil, such relationship was cleverly hidden by InterOil using Clarion Finanz AZ as a buffer to raise $95 million for its private placement and by having Clarion deal separately with John Thomas Finance through Carey International as per their Investment Banking Consulting Agreement.

InterOil hides transactions with Clarion is various filings with the Securities and Exchange Commission

The $5.7 million finders fee payable to Clarion Finanz was not disclosed in Interoil’s May 12, 2008 press release (above) and Interoil’s May 24, 2008 Form D filed with the SEC (above).

In its 2008 annual report, InterOil finally disclosed that it paid $5.7 million pursuant to the $95 million convertible debenture offering without mentioning Clarion, Carey International, or John Thomas Finance (See footnote 23):

The placement fee of $5,700,000 paid to the investors in common shares of the Company was treated to be in the nature of a debt discount and was offset against the liability component. The transaction costs relating to the issue amounting to $219,966 has been split based on the percentages allocated to the liability and equity components; the costs relating to the liability component of $189,711 has been offset against the liability component, and costs relating to the equity component of $30,255 have been allocated against the equity component recognized. [Emphasis added.]

However, $1.1 million of such fees were not paid to "investors" as claimed by InterOil and was instead paid directly to Carey International and John Thomas Financial. Neither John Dolan nor Carey International invested any money in InterOil and therefore, such fees cannot possibly be a part of the $5,700,000 paid to “investors.” Yet, that is exactly where Mr. Dolan’s 44,000 shares, valued at $1.1 million, came from. Ultimately, Carey's shares were divided up into 35,200 shares made payable to Carey International (John Dolan’s company) and 8,800 shares John Thomas Financial (as a royalty fee).

In addition, InterOil provided no disclosure of Clarion’s role in the transaction unlike other material disclosures relating to Clarion such as on:

Page 37 “Midstream Liquefaction Operating Review” Page 47 “Financing Activities” Page 90 Footnote 19 “Secured loan”

Interoil’s “Annual Report Form” lists various disclosures under the caption, “Material Contracts.” However, InterOil ommitted any disclosure relating to Clarion's roles in the $95 million private placement while disclosing Clarion's role in other transactions.

Attorney Michael F. Brown has sent a referral to the Securities and Exchange Commission (download here) and FINRA has also been contacted by me. Other details of Fraud Discovery Institute's investigation of InterOil are provided here.

Written by:

Sam E. Antar


I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar mastermind one of the largest securities frauds uncovered during the 1980s. I pleaded guilty to three felonies.

I assisted Barry Minkow and Fraud Discovery Institute in researching InterOil and both Minkow and Sirota are short on Interoil. I have no position in InterOil securities, long or short.

Saturday, June 13, 2009

Memo to President Barack Obama from a Convicted Felon: Be Prepared For an Unprecedented Onslaught of White Collar Crime

To President Barack Obama:

Within a couple of years, you can expect a massive crime wave on an unprecedented scale resulting from spending trillions of extra taxpayer dollars to stimulate the economy and bail out the financial sector in a relatively brief period of time. Not enough attention is being paid to effective internal controls to prevent such crimes. The FBI and other law enforcement agencies do not have enough resources to effectively investigate and prosecute such crimes.

The Republicans will run against you on a simple platform, “The Democrats are responsible for white collar crime, corruption, and waste on an unprecedented scale.” The Republicans will say that you should have cut taxes and simplified the tax system to stimulate the economy and reduce the incentive for criminals to commit fraud.

According to the Wall Street Journal:

The Federal Bureau of Investigation is braced for a potential crime wave involving fraud and corruption related to bank bailout money and the economic stimulus package, FBI director Robert Mueller warned Tuesday.
"These funds are inherently vulnerable to bribery, fraud, conflicts of interest and collusion. There is an old adage, that where there is money to be made, fraud is not far behind, like bees to honey," Mueller told an afternoon gathering of business executives.

According to MarketWatch:

Swindlers, con men, and thieves could siphon off as much as $50 billion of the government's planned stimulus package as the money begins flooding the economy in coming months, according to David Williams, who runs Deloitte Financial Services Advisory and counsels clients on fraud prevention.
"The rule of thumb typically is that of the about $500 billion worth of money that's going to run through the procurement process, somewhere between 5% and 10% of that usually finds its way into potential problems," Williams said. "That's sort of the benchmark that I use."
Companies will face increased pressure to try to stem the tide, and need to be prepared to safeguard data as well as the cash, according to Williams.

David Williams' estimate is too conservative. You can expect hundreds of billions in fraud and waste. Williams based his estimate just on the stimulus package and it does not include the extra trillions of taxpayer dollars to bail out Wall Street, banks, and the rest of the financial sector. According to FBI Director Mueller:

Given the trillions and trillions of dollars involved in the government's current moves to stem the economic crisis, "from the purchase of troubled assets to improvements in infrastructure, health care, energy and education -- even a small percentage of fraud would result in substantial taxpayer losses. [Emphasis added.]

The private sector and government do not have an adequate internal control structure to prevent white collar crime. We cannot rely on legislation mandating effective internal controls and accountability. We require experienced, competent, and well trained CPAs, internal auditors, external auditors, and compliance personnel to insure adequate compliance, transparency, and accountability to prevent white collar crime.

Current college curriculums do not offer enough training in internal controls, forensic accounting, auditing, and criminology for future CPAs, internal and external auditors, and compliance personnel entering the work force. Instead they are forced into battle with well prepared criminals, while slowly training on the job and taking courses in their spare time. We require more up to date education about how criminals execute their crimes, counter measures to prevent such crimes, and an effective streamlined means of disseminating such information to existing professionals in the field.
According to a recent New York Times article:

The F.B.I. is planning to double the number of agents working financial crimes by reassigning several hundred agents amid a mood of national alarm. But some people inside and out of the Justice Department wonder where the agents will come from and whether they will be enough.

Simply reassigning agents and hiring new agents fresh out of school will not solve the main problem of effectively investigating and prosecuting white collar crime. White collar crime investigations are increasingly complex cases that require enormous specialized resources and take long periods of time to successfully prosecute them. It takes years of specialized training for investigators to obtain the necessary skills to competently investigate such complicated crimes.

The FBI and other law enforcement agencies also need to recruit experienced specialized talent from the private sector. The government must offer employment incentives to bring back veteran investigators who left the FBI and other law enforcement agencies to seek better opportunities in the private sector. In addition, we require incentives for other seasoned anti-fraud professionals to leave the private sector for government employment.


Sam E. Antar


I am a convicted felon and former CPA. As the criminal CFO of Crazy Eddie, I helped mastermind one of the largest securities frauds uncovered during the 1980s. During the last ten years I have taught law enforcement, professionals, and students about white collar crime, free of charge.

On August 5, 2009, I am scheduled to deliver a speech at the United States Securities and Exchange Commission Joint Conference on Fraud Detection in Washington, DC. The Joint Conference on Fraud Detection is a cooperative effort sponsored collectively by the CBOE, NASAA, FINRA and SEC.

On September 30, 2009, I am scheduled to make a fraud presentation at the United States Department of Justice Affirmative Civil Enforcement for Investigators and Auditors Conference in Columbia, South Carolina.

I am a registered Democrat. However, I vote for candidates of each party depending on who I believe is the best candidate. In New York, convicted felons can vote. However, we cannot get jury duty, which I am happy with.

Thursday, June 04, 2009

Children's Place Violates SEC Regulation G Governing Non-GAAP Financial Measures

The Children’s Place (NASDAQ: PLCE) is violating Securities and Exchange Commission Regulation G governing non-GAAP financial measures in its financial reports. In its most recent earnings release for Q1 2009, Children’s Place reported a non-GAAP financial measure known as “Adjusted income from continuing operations net of income taxes” which is computed by eliminating certain “unusual or one-time items” less the related income tax effect from “Income from continuing operations net of income taxes.”

However, as I will detail below, SEC Regulation G prohibits:

…adjusting a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when (1) the nature of the charge or gain is such that it is reasonably likely to recur within two years, or (2) there was a similar charge or gain within the prior two years.

Note: Bold print and italics added by me.

Two such "items identified as non-recurring, infrequent or unusual" by Children's Place, namely restructuring costs and impairment charges were improperly eliminated from the company's non-GAAP financial measure because the company reported such charges "within the prior two years." Based on my calculations, Children's Place improperly reported a $1.1 million increase in “Adjusted income from continuing operations net of income taxes,” rather than a $ 0.1 million decrease.

The company made the following disclosure:

Excluding the unusual or one-time items mentioned above from the first quarters of both years, adjusted income from continuing operations after tax was $21.8 million, or $0.74 per diluted share, in the first quarter of 2009, compared to $20.7 million, or $0.71 per diluted share, in the first quarter of 2008. The first quarter income from continuing operations excluding these items is a non-GAAP measure. The Company believes the excluded items are not indicative of the performance of its core business and that by providing this supplemental disclosure to investors it will facilitate comparisons of its past and present performance. A reconciliation of income from continuing operations as reported is included in this press release in Table 3.

Note: Bold print and italics added by me.

Excerpts from Table 3 (referred to above) are presented below:

Reconciliation of Non-GAAP Financial Information to GAAP (in $ millions)

First Quarter Ended May 2, 2009

First Quarter Ended May 3, 2008

Income from continuing operations net of income taxes



Significant one-time items pre-tax:
Restructuring Costs



Deferred financing fees write-off



Impairment charge



Professional fees



Aggregate expense from significant one-time items



Less income tax effect from significant one-time items



One-time tax benefit resulting from resolution of an IRS income tax audit



Adjusted (gain) expense from significant one-time items after taxes



Adjusted income from continuing operations net of income taxes



As detailed above, Children’s Place improperly eliminated “restructuring costs” and “impairment charges” from its non-GAAP “Adjusted income from continuing operations net of income taxes” because there was a “similar charge…within the prior two years.” Below is my computation of "adjusted income from continuing operations net of income taxes" based on my analysis of Regulation G.

Correcting adjusted income from continuing operations net of income taxes (in $ millions)

First Quarter Ended May 2, 2009

First Quarter Ended May 3, 2008

Adjusted income from continuing operations net of income taxes (improperly computed by Children's Place)



Deduct restructuring costs



Deduct impairment charge



Add estimated income tax effect of restructuring costs and impairment charges



Adjusted income from continuing operations net of income taxes (computed by me)



In Q1 2008, Children’s Place reported restructuring costs totaling $1.3 million (see 8-K disclosure above) and during fiscal year 2008, the company reported impairment charges totaling $14.8 million (Source: Q4 2008 8-K report). Therefore, both “restructuring costs” and “impairment charges” cannot be eliminated from “adjusted income from continuing operations net of income taxes” because such charges were reported within the previous two years.

Therefore, if Children’s Place properly computed “Adjusted income from continuing operations net of income taxes,” based on my calculations there should have been a reduction of $0.1 million in its non-GAAP financial measure instead of the $1.1 improvement, as improperly reported by the company.

Children's Place is now on notice to clean up its non-GAAP financial measures.

Written by:

Sam E. Antar


No position in Children’s Place securities, long or short.

I am a convicted felon and a former CPA. As the CFO of Crazy Eddie, I helped mastermind one of the largest securities frauds committed during the 1980's. I pleaded guilty to three felonies.