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SEC Busts SafeNet for Regulation G Violations. Will be Next?

The Securities and Exchange Commission settled charges against SafeNet Inc. (SNFT.UL) for backdating of stock options and violations of Regulation G which governs non-GAAP financial measures such as EBITDA (earnings before interest, taxes, depreciation, and amortization). The various defendants agreed to injunctive relief and civil penalties ranging from $15,000 to $1,000,000. It was the first time that the SEC took an enforcement action for violations of Regulation G.

Will be next?

Another blatant violator of Regulation G is (NASDAQ: OSTK). As I have detailed throughout my blog, every single financial report issued by for every reporting period has initially violated Generally Accepted Accounting Principles (GAAP) or other SEC disclosures rules. is facing two parallel probes by the SEC Enforcement Division and the SEC Division of Corporation Finance into financial reporting violations by the company based on reporting in this blog. In addition, the company unexpectedly delayed the release of its Q3 2009 10-Q due to material disagreements with either the SEC or its auditors over proper accounting for an overpayment to a vendor.

In April 2004, Patrick Byrne appeared on the Kudlow and Cramer show on CNBC and said:

Well, first of all, I’m all about GAAP. I have been so critical of the companies that do–I don’t believe in one-time charges; I don’t believe in EBITDA. If somebody talks EBITDA, put your hand on your wallet; they’re a crook.

However,'s financial reports were never "about GAAP. The company has twice restated its financial reports due to GAAP violations and faces a third restatement for continued violations of GAAP. Also, in a previous probe by the SEC Division of Corporation Finance, it was determined that's revenue accounting never complied with GAAP from the company's inception.

Three years later, the company went on to report EBITDA, even though Byrne said, "I don’t believe in EBITDA. If somebody talks EBITDA, put your hand on your wallet; they’re a crook." To make matters far worse, violated Regulation G by using an improper EBITDA calculation that caused the company to materially overstate its financial performance.

From Q2 2007 to Q2 2008 improperly computed EBITDA by starting its calculation with operating income and adding back interest, taxes, depreciation, amortization, and stock based compensation. In other words, improperly defined EBITDA as operating income before interest, taxes, depreciation, amortization, and stock based compensation.

However, SEC Regulation G requires EBITDA to be computed as net income (not operating income) before interest, taxes, depreciation, and amortization (and not stock-based compensation). Therefore, was not permitted by Regulation G to use operating income as the starting point to compute EBITDA and the company was not allowed to eliminate stock-based compensation from its EBITDA calculation.

Since had reported losses from discontinued operations in various reporting periods, by improperly using operating income as the starting point to calculate EBITDA, it was materially overstating EBITDA by the amount of loss from discontinued operations. Likewise, by improperly eliminating stock-based compensation from its EBITDA calculation, the company was materially overstating its reported EBITDA by such amount in each reporting period.

In addition, when I confronted management about its EBITDA violations, they lied about their compliance with SEC Regulation G during quarterly conference calls.

In Q3 2008, finally corrected its improper EBITDA calculation by calling it "adjusted EBITDA" when it restated financial reports and amended its filings with the SEC to correct certain GAAP violations. However, the company improperly failed to disclose in amended SEC filings that the reason for changing its EBITDA calculation was because of violations of Regulation G.

More details are provided in my blog post entitled, " Rule 10b-5 Exposure from Disclosure Violations."

Hopefully, the SEC will soon start an enforcement action against and its officers for serial violations of GAAP and SEC disclosure rules such as Regulation G.

Written by,

Sam E. Antar

Note: Please read my guest article in Newsweek entitled, "Bernie Madoff's Giant Ponzi Scheme."


I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. If it weren't for the efforts of the FBI, SEC, Postal Inspector's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.

I do not own securities short or long. My research on and in particular its lying CEO Patrick Byrne is a freebie for securities regulators and the public in order to help me get into heaven, though I doubt that I will ever get there anyway. I will probably end up joining corporate miscreants such as Patrick Byrne in hell. In any case, exposing corporate crooks is a lot of fun for a forcibly "retired" crook like me.


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