Sunday, February 21, 2010

First Jury Trial in Federal Corruption Probe Based on Informant Solomon Dwek Convicts Beldini: Are Some Defendants Living on Hope?

AP Photo: Government Informant Solomon Dwek
Updated:

Recently, the former Jersey City Deputy Mayor Leona Beldini was convicted on two of six felony counts in what is known as a “split verdict,” based on the testimony of government informant Solomon Dwek. She was the first person to go on trial as a result of a massive federal sting operation targeting political corruption and money laundering that resulted in the arrest of 44 persons last summer. Beldini was found guilty of accepting bribes, but was acquitted on the more serious charges of extortion and extortion conspiracy.

Some attorneys are trying to spin the Beldini split verdict as a problem for government prosecutors in future trials related to this massive corruption and money laundering probe. However, the split verdict in the Beldini case presents no substantive problem for the government and raises false hopes for some Defendants who may actually be guilty but are willing to take their chances in a criminal trial, as I will describe below.

In interviews with the Associated Press, certain defense attorneys tried to spin the split verdict in a positive light for their client's future prospects:

"It's actually a very confusing verdict," said Robert Fuggi, attorney for indicted former state Assemblyman Daniel Van Pelt, whose trial is scheduled for early May.

"She got convicted on the same counts she got acquitted on. The main thing I would take away is that the government is on tenuous ground by the way they conducted this investigation and by putting all their eggs in one basket, and the jury showed that yesterday," Fuggi said Friday.

[Snip]

Brian Neary, Beldini's attorney, said he would appeal. He said the verdict repudiates the informant, failed real estate speculator Solomon Dwek, who secretly recorded hours of meetings with public officials and was the government's chief witness at the trial.

[Snip]

The split verdict likely will give defense attorneys more confidence going forward, said Henry Klingeman, who represents indicted Hudson County political consultant Joseph Cardwell.

"It has to, for the simple reason that the government usually wins 100 percent of these cases, and in this one they won 33 percent," Klingeman said.

While it is true that the government "usually wins 100%" of corruption cases, many such cases are won with split verdicts, contrary to Klingeman's spin that they "won" only "33 percent" in the Belsini case.

There are two lessons that I learned back in the day as the criminal CFO of Crazy Eddie: (1) some defendants who are actually guilty as charged live on the hope of a full acquittal and (2) all the government has to do is to hang you once.

In other words, if the government charges a criminal Defendant with several felonies, all the prosecutor has to do is to win a conviction on a single felony count and the convicted felon ends up in prison, barring a successful appeal. It's little consolation for a convicted felon rotting in prison that their attorney landed them a partial victory by getting them acquitted on some other felony counts, especially when such counts could have been dropped if the Defendant had fully cooperated with the investigation and negotiated a plea bargain agreement.

Barring a successful appeal, former Jersey City Deputy Mayor Leona Beldini faces several years in prison as a result of her bribery conviction. She probably could have worked out a successful plea bargain agreement to plead guilty to lesser crimes and may have avoided the time and cost of a gruelling criminal trial if she cooperated with the corruption investigation.

The government's case against Beldini and other Defendants awaiting trial is bolstered by damning videos and tape recordings allegedly catching them in the act of accepting bribes, money laundering, and other schemes. See one sample below:

NJ corruption trial hidden camera video of Solomon Dwek talking to Leona Beldini


Leona Beldini's lawyer, Brian Neary, claimed that Solomon Dwek was a not a credible witness because he is an admitted life-long criminal. However, The Hudson Reporter correctly observes:

Cooperating witnesses such as Dwek do not have to be considered “nice people,” only credible, and other officials such as Secaucus Mayor Dennis Elwell, former Assemblymen L. Harvey Smith and Lou Manzo, and perhaps even former Hoboken Mayor Peter Cammarano, have to be shaken as they approach the opening of their own trials on similar charges.
The Hudson Reporter also notes:

Yet the fact that Beldini was cleared of several charges shows the cracks in the federal prosecutors’ case.
On that point, US Attorney Paul Fishman disgrees. He told the Associated Press:
"You can't speculate on why the jury reached one result on one count and one on another count," Fishman said. "What we do know is that jury found that Leona Beldini accepted bribes for official action, and we're pleased with that result."
Prosecutors often rely on criminals like Solomon Dwek to inform on other criminals to build their cases in a process known as "flipping" or plea bargaining. Juries usually convict Defendants based on the testimony of cooperating witnesses like Solomon Dwek as long as they are forthright and truthful about their own crimes. As I described above, Solomon Dwek's testimony was bolstered by very daming video tapes and tape recordings discussing the alleged criminal acts.

Attorney Robert Fuggi representing indicted former state Assemblyman Daniel Van Pelt, whose trial is scheduled for early May told the Associated Press:

The U.S. Attorney's Office has won more than 130 convictions or guilty pleas in corruption cases during the last eight years without a defeat. That could change.
It's a defense attorney's job to advocate for their clients and I respect them for doing their duties. However, I personally doubt that much will change because of the split verdict in the Beldini case. I believe that the government will continue winning its cases, notwithstanding the fact that some juries may render mixed verdicts by convicting Defendants on some felony counts and acquitting them on others.

The Hudson Reporter wisely speculates:

One of the most pressing questions as a result of the Beldini conviction is whether or not she will become the next Dwek and modify or eliminate her jail time by turning in someone else – if indeed, she has anyone she can turn in.
Whether or not Beldini does cooperate with investigators in the future is unsure at present. However, word is out that new witnesses are coming out of the woodwork to cooperate with the Feds. For now, I have some advice for certain Defendants awaiting trial: Don't lie to your attorneys. Tell them the whole truth. If you are in fact guilty as charged, don't make the mistake of living on hope.

I will have more to say about the ongoing and expanding Federal probe into political corruption and money laundering in future blog posts.

Written by:

Sam E. Antar

Previous media coverage of my comments on the ongoing an expanding federal investigation into political corruption and money laundering can be found here:

July 22, 2009: Jewish Week - UPDATED: Syrian Jewish Insider: “Not Surprised” by Arrest of Prominent Rabbis in Breaking FBI Investigation

July 24, 2009: New York Times - Brooklyn Blogs Buzzing With Talk About Rabbis by Paul Vitello

August 17, 2009: Atlantic City Press - Crazy Eddie's cousin stars in Republican hearing on corruption by Derek Harper

August 26, 2009: Jewish Daily Forward - ‘Crazy’ Eddie’s Cousin, a Former Fraudster, Speaks Out on Syrian ‘Subculture of Crime’ by Rebecca Dube

Disclosure:

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. I committed my crimes, simply because I could.

If it weren't for the efforts of the FBI, SEC, Postal Inspector's Office, US Attorney'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.

After two years of stonewalling government investigations, class action litigations brought by our victims, and lying to my former attorneys, I hired criminal attorney Anthony Mautone and civil attorney Jonathan D. Warner. They correctly advised me to cooperate with the government and the victims of my crimes, rather than risk a trial.

As a result of Mautone's and Warner's wise advice, I was sentenced to only six months of house arrest, 1,200 hours of community service, and paid some nominal fines and disgorgement. In addition, in my settlement with the victims of my crimes, I avoided all civil liability due to my cooperation in helping them recover over $100 million dollars in losses.

Today, I teach the Justice Department, Federal Bureau of Investigation, Internal Revenue Service, and other federal, state, and local government agencies about white collar crime, completely free of charge. I hope it gets me into heaven, but I doubt that I will ever get there because my crimes are unforgivable.

Friday, February 19, 2010

Open Memo to Medifast Board Chairman Bradley T. MacDonald and Chief Executive and CFO Michael S. McDevitt: Grow Some Hair on Your Chest

Updated:

To Bradley T. MacDonald and Michael S. McDevitt:

You both need to grow some hair on your chests and stop acting like whining cry babies to investors, securities regulators, and now, the federal courts. Yesterday, Medifast (NYSE: MED) and Bradley T. MacDonald filed a multi-million dollar lawsuit alleging defamation by Fraud Discovery Institute, its co-founder Barry Minkow, pyramid scheme expert Robert L. FitzPatrick, acclaimed forensic accountant and book author Tracy Coenen, best-selling author and former investigative journalist William Lobdell (who now writes for iBusiness Reporting, a blog funded by Fraud Discovery), and an anonymous Yahoo massage board poster (download lawsuit here and here).

Like your complaints to investors and securities regulators, your lawsuit fails to provide a detailed and credible substantive line-by-line rebuttal of serious allegations of improprieties concerning Medifast's business model, marketing practices, and financial disclosures made in reports issued by Fraud Discovery Institute, co-founded by convicted felon turned fraud fighter Barry Minkow.

Instead, the lawsuit reads like a cheaply produced late-night infomercial for insomniacs, rambles about the purported "health" benefits of Medifast products, and rants that Fraud Discovery Institute's reports are false. To support your claims of defamation, the lawsuit refers to self-serving claims on Medifast's website and disclosures in SEC filings which certain Defendants allege are false and misleading.

The lawsuit alleges that Barry Minkow orchestrated an illegal scheme to drive down the stock price of Medifast shares to profit from short selling. However, Minkow has a first amendment right to critique or to use your words "bash" Medifast, notwithstanding the fact that he publicly disclosed that he holds a short position in your company and is a convicted felon. Minkow's opinion and analysis is backed up by very detailed reports prepared for Fraud Discovery Institute by Mr. FitzPatrick and other data made fully available to the public for examination and scrutiny.

The Defendants will certainly assert "truth" as a defense to claims of defamation made against them in this lawsuit. That same kind of truth led a federal Judge in Utah to dismiss Usana's (NASDAQ: USNA) frivolous defamation claims against Fraud Discovery and Barry Minkow and award them legal fees covering their Court costs.

I remind you that discovery in civil litigation is a two-way street. Minkow and the other Defendants can now subpoena all of Medifast's books, records, and documents and closely scrutinize them to look for any possible improprieties and irregularities in defending themselves in this litigation. In addition, they can subpoena documents from Medifast's auditors, vendors, customers, and other business relationships. You and others will be subject to sharp questioning under oath in pre-trial depositions by the Defendant's attorneys. Now Medifast's business documents will ultimately become subject to close public examination and careful scrutiny if this case goes to trial.

I doubt that Minkow and the other Defendants are concerned about Medifast subpoenaing their documents and taking their sworn testimony. In any case, it will be interesting to see if Medifast is afraid to be transparent and moves for a protective order to quash any public examination and scrutiny of discovery information obtained by Minkow and the other Defendants.

One more thing, Medifast and MacDonald are suing an anonymous Yahoo message board poster known as "Medisdead" claiming for example, that:

Medisdead has defamed MacDonald by referring to him as "Pimp Daddy Brad."

You guys need to develop a "thick skin" rather than waste your time on message board postings. Some of your anonymous message board supporters have made anti-Semitic attacks and other libelous personal attacks on me and Minkow. Unlike you, Minkow and I are not complaining about them. At this time, we certainly don't blame you for such attacks, though some of those persons may be in contact with certain Medifast employees and/or business associates.

Instead of growing hair on your chests, it seems that you've chosen the route of premature baldness and grey hair. Regarding Medifast and certain of its business associates, I believe that this litigation will be disproportionately more time consuming, distracting, costly, and far more risky as compared to the Defendants in this legal action. You never know what kind of potential future trouble that a "needle in a hay stack" found in discovery by the Defendants can cause for Medifast and certain of its business relationships.

For a personal reference about me, just ask Overstock.com (NASDAQ: OSTK) CEO Patrick Byrne. Recently, Overstock.com was forced to eat crow by admitting to GAAP violations exposed in my blog and reported to the Securities and Exchange Commission. The company was forced to restate its financial reports for the third time in three years to correct those GAAP violations and is currently under SEC investigation as a direct result of reporting in my blog.

To borrow a quote from my dear friend Barry Minkow, similar efforts by other companies like Overstock.com and now Medifast to try to intimidate and silence their critics have been "tried and tossed."

Respectfully,

Sam E. Antar

Update:

Gary Weiss - Medifast, Meet Barbra Streisand

...I have no opinion on Medifast except that a suit like this is just plain stupid. All it is going to accomplish is to disseminate Minkow's claims to people like myself who don't follow such things and ordinarily couldn't care less.

Update - The Defendants Respond:

Fraud Discovery Press Release

The Fraud Discovery Institute, Inc. announced today in a response to a lawsuit filed recently inSan Diego federal court by Medifast, Inc (NYSE:MED) on Wednesday, February 17th, 2010 thatthe company is reopening their investigation of Medifast, Inc and will zealously continue torelease accurate and truthful information about the company. “This is a case study in a muchbigger picture,” said Barry Minkow, Co-Founder of the Fraud Discovery Institute, Inc.“The conspiratorial approach utilized by public companies like Medifast, Inc. needs to be seenfor what it is—an all-out attack using threat and intimidation designed solely to silence anyonefrom speaking critically about their business model, their compensation plan or their alleged misrepresentations.”

Tracy Coenen: Medifast files lawsuit, Fraud Discovery reopens investigation

The complaint filed by Medifast contains pages of self-praise, along with attacks on the character of those involved in the investigation of the company. In one example of the attacks, Medifast falsely refers to multi-level marketing expert Robert FitzPatrick as “… a self-claimed expert in pyramid schemes.” A brief look at FitzPatrick’s work clearly shows he’s not a “self-claimed” expert on pyramid schemes. In fact, regulators around the world have utilized his expertise. The Federal Trade Commission has received training from him. FitzPatrick has also testified in state and federal courts as an expert witness on pyramid schemes.

William Lobdell: Fraud Discovery Responds to Medifast Lawsuit; promises not to back down reporting the truth

Note:

At the original time of this blog post, Minkow and the other defendants had not yet publicly responded to this lawsuit. I've updated this open memo to include their responses and other links.

Additional information:

Open Memo to Medifast Chief Executive and CFO Michael S. McDevitt: Cut the BS and Address Troubling Issues Raised by Barry Minkow

Disclosure:

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. I committed my crimes, simply because I could.

If it weren't for the efforts of the FBI, SEC, Postal Inspector's Office, US Attorney'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 Medifast securities short or long. Barry Minkow and I are close personal friends. From time-to-time, I do research on scam companies for Fraud Discovery Institute. However, this open memo, like my previous open memo, is an unsolicited freebie. In any case, please feel free to subpoena me and otherwise complain about me, too. See if I care.

I do not own Overstock.com securities short or long. My research on Overstock.com 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.

Analyzing Overstock.com's financial reporting is a forensic accountant's wet dream and Patrick Byrne is about to become the SEC's new orgasm.

I do not own Usana securities short or long.

A few years ago, I helped fund Fraud Discovery Institute's investigations, including Usana.

Tuesday, February 16, 2010

The Mentality of White Collar Criminals: Providing Insight on "Connect with Mark Kelley"

Mark Kelley and Sam Antar
In the aftermath of Ponzi schemer Earl Jones sentencing today to 11 years years in prison, I was asked to provide insight on the mentality of white collar criminals on Canadian Broadcasting Corporation's (CBC) "Connect with Mark Kelley." It does "take one to know one."

Video link to watch interview

Video link to watch entire segment

Written by:

Sam E. Antar

Convicted felon, former CPA, and former Crazy Eddie CFO

Thursday, February 04, 2010

My Reporting of a Financial Statement Manipulation Scheme at Overstock.com is Vindicated by Latest Company Announcement

Updated:

This evening Overstock.com (NASDAQ: OSTK) announced that the company is restating all financial reports from 2008 to Q3 2009 as a result of material violations of Generally Accepted Accounting Principles (GAAP) and other SEC disclosure rules. This announcement vindicates my reporting of a financial statement manipulation scheme by Overstock.com and its unprincipled management team, led by CEO Patrick M. Byrne.

How it all started

In October 2008, Overstock.com restated its financial reports from Q1 2003 to Q2 2008 due to customer refund and credit errors. However, the October 2008 restatement did not include corrections arising from underbilled offsetting costs and reimbursements that were already earned from its fulfillment partners during those same corresponding periods, less a reasonable estimate of uncollectable amounts. In other words, Overstock.com should have gone back and corrected or restated its financial reports to reflect income already earned from offsetting costs and reimbursements due from its fulfillment partners, less a reasonable estimate for uncollectable amounts. (See SFAS No. 154 and SFAS No 5 paragraph 1, 2, 8 and 23). It didn’t.

Overstock.com created an illegal "cookie jar" reserve

Instead, Overstock.com improperly deferred income that it earned but underbilled its fulfillment partners during prior reporting periods (Q3 2008 and before) to by moving such income to future reporting periods (Q4 2008, Q1 2009, Q2 2009, and Q3 2009). In other words, Overstock.com took income that should have been reported in prior reporting periods (Q3 2008 and before) and moved it to future reporting periods (Q4 2008 and later) to materially overstate its financial performance in those later reporting periods.

In effect, Overstock.com violated GAAO by creating an illegal cookie jar reserve to materially inflate future earnings or reduce future losses from Q4 2008 to Q3 2009.

False "gain contingency" claim

Overstock.com ridiculously claimed that the collection of the entire amount of its underbillings (every single penny) “was not assured” and instead falsely claimed that a "gain contingency" existed rather than make a reasonable estimate of uncollectable amounts as required under SFAS No. 5. Therefore, Overstock.com improperly recognized income from underbilled fulfillment partners as amounts due to the company were collected on a non-GAAP cash basis, rather when they were earned under accrual accounting or GAAP.

In Overstock.com's 8-K report released this evening, the company finally acknowledged that its gain contingency was phony:

Once discovered, the Company applied “gain contingency” accounting for the recovery of such amounts, which it has now determined was an inappropriate accounting treatment.

Note: Bold print and italics added by me.

Starting in February 2009, I contacted both Overstock.com and the Securities and Exchange Commission and reported to them that the company had set up an illegal "cookie jar" reserve to materially inflate its future financial performance from Q4 2008 to Q3 2009.

Instead of properly restating its financial reports to correct its intentional breach of Generally Accepted Accounting Principles and other SEC disclosure rules, Overstock.com CEO Patrick Byrne responded by orchestrating a massive corporate sponsored retaliation campaign against me and other critics who agreed with my findings.

In addition, Patrick Byrne, company President Jonathan Johnson, former CFO David Chidester, and others blatantly lied to and misled shareholders during various conference calls and vilified me in an attempt to cover up their financial reporting manipulation schemes.

In September 2009, the SEC Enforcement Division and later the Division of Corporation Finance started parallel probes of the company.

Overstock.com improperly concealed an overpayment error to a fulfillment partner

In October 2009, the SEC Division of Corporation Finance discovered that Overstock.com overpaid a fulfillment partner $785,000 during 2008. The company recovered that overpayment in Q1 2009 and improperly reported the overpayment recovery as income in that same quarter, rather than properly restate its 2008 financial reports to correct that error. In addition, Overstock.com improperly concealed the recovery of the overpayment by including that amount in recoveries from underbilled fulfillment partners in Q1 2009 instead of separately disclosing the overpayment recovery in its financial reports.

Grant Thornton claimed that it did not know about the 2008 overpayment and Q1 2009 recovery from the fulfillment partner until October 2009. After learning about the overpayment, Grant Thornton told Overstock.com that it must restate its prior financial reports to correct that error to comply with GAAP.

On November 13, 2009, Overstock.com fired and vilified Grant Thornton, rather than restate its financial reports and later filed an "unreviewed" Q3 2009 10-Q that finally disclosed the overpayment to the fulfillment partner. In this case too, Overstock.com improperly claimed that a "gain contingency" existed as justification for not restating its financial reports to correct the overpayment error. Overstock.com now acknowledges that its accounting treatment for the overpayment recovery from a fulfillment partner was wrong, too.

As a result of its improper accounting for underbilling and overpayment recoveries from fulfillment partners, Overstock.com is:

...expected to shift approximately $1.7 million of income recognized in fiscal year 2009 back to fiscal year 2008.

In addition, the company will be required to restate its 2008 quarterly financial reports. In Q4 2008, Overstock.com reported its first quarterly net profit after 15 consecutive quarterly losses. The company is now expected to report a net loss in Q4 2008.

More improprieties exposed by Roddy Boyd

On January 19, 2010, The Big Money published an article by investigative reporter Roddy Boyd that exposed how Overstock.com purposely withheld information from investors during 2005 and 2006 about its inadequate internal controls and engaged in a New York State sales tax dodge scheme known as "Operation Heist and Freeze." A day later, former CFO and Chief Information Officer David Chidester left the company. The company faces a certain probe by the New York State Commissioner of Taxation and Finance into its sales tax dodge scheme.

Vindication

Today's news is a complete vindication of my analysis of Overstock.com's financial reports and shows that the company willfully engaged in a financial reporting manipulation scheme. The company is restating its financial reports to correct GAAP violations, exactly as I have recommended in this blog. To date, every single initial financial report issued by Overstock.com throughout the company's entire existence has violated GAAP or some other SEC disclosure rule. The company now has the dubious distinction of having to restate its financial reports three times in the last three years to fix GAAP violations.

The Securities and Exchange Commission and the Department of Justice must prosecute these fraudsters

I urge the Securities and Exchange Commission Enforcement Division to bring civil charges against Overstock.com, Patrick Byrne, and other members of the company's management team for securities fraud. In addition, I recommend that the SEC make a criminal referral to the Department of Justice and that Overstock.com's management be prosecuted for their financial frauds on investors and retaliation against their critics.

Patrick Byrne and his cronies should start planning ahead and visit the following web sites:

Federal Prison Camp Tour

The Ultimate Guide to Surviving Life Inside Federal Prison

Special thanks to all those people who stood by me, many of whom were illegally pretexted by the creepy "possible pedarast" Judd Bagley at the direction of Patrick Byrne in an effort to bully me and other critics of the company.

I will provide more details about frauds committed by Overstock.com, certain members of its management team, and others colluding with them in my blog, soon.

Regards,

Sam E. Antar

For more details, please read:

Gary Weiss: Overstock.com Admits its Financial Statements Were Phony

William K. Wolfrum: Overstock.com and Patrick Byrne Help Define Cookie Jar Reserve

Barry Ritholtz: Overstock.com to Restate Earnings

Howard Sirota: Overstock.com Litigation Update 2010

Christopher Faille: An Overstocked Cookie Jar

Recommend Reading:

10/04/09: Crazy Like a Fox by Aaron Elstein in Crain's New York Business (Download) about my battle with Patrick Byrne to force Overstock.com to comply with GAAP and SEC disclosure rules.

My previous open letters to the SEC (please note that each letter is based on Overstock.com's deliberately vague, incoherent, and inconsistent, and often contradictory disclosures at the time each one was issued):

08/05/09: Open Letter to the Securities and Exchange Commission: Stop Overstock.com GAAP Violations Now!

11/22/09: Open Letter to the Securities and Exchange Commission Part 2: New Information on Overstock.com's GAAP and SEC Disclosure Violations

11/23/09: Open Letter to the Securities and Exchange Commission Part 3: Overstock.com Lied About Grant Thornton and Concealed Error

11/26/09: Open Letter to the Securities and Exchange Commission Part 4: Patrick Byrne Ignores Real Issues As He Vilifies Grant Thornton

12/14/09: Open Letter to the Securities and Exchange Commission Part 5: Issuer Retaliation Complaint Against Overstock.com

01/03/10: Open Letter to the Securities and Exchange Commission Part 6: Conflicting Disclosures by Overstock.com Reveal Improper Audit Opinion Shopping

02/02/10: Open Letter to the Securities and Exchange Commission Part 7: Why Overstock.com and David Chidester Parted Ways

Open Letters to Overstock.com's Auditors:

03/30/09: To Grant Thornton, New Auditors for Overstock.com

01/25/10: Open Letter to KPMG: A Warning About Overstock.com, Your New Audit Client

01/27/10: Open Letter to KPMG: The Ties That Bind Overstock.com, Patrick Byrne, and Deep Capture LLC

Disclosure:

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. I committed my crimes, simply because I could.

If it weren't for the efforts of the FBI, SEC, Postal Inspector's Office, US Attorney'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 Overstock.com securities short or long. My research on Overstock.com 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. Analyzing Overstock.com's financial reporting is a forensic accountant's wet dream and Patrick Byrne is about to become the SEC's new orgasm.

Tuesday, February 02, 2010

Open Letter to the Securities and Exchange Commission (Part 7): Why Overstock.com and David Chidester Parted Ways

Updated

To the Securities and Exchange Commission:

I believe that it is no coincidence that David Chidester left Overstock.com (NASDAQ: OSTK) while KPMG continues to audit its financial reports amid your ongoing investigation of the company and a day after Roddy Boyd's damaging article was published in The Big Money. Recently, both CEO Patrick M. Byrne and former CFO David K. Chidester refused to comment to the Salt Lake Tribune and company President Jonathan E. Johnson gave evasive and misleading answers to them about Chidester's departure from the company.

As an eleven year veteran of the company, David Chidester knows where the "dead bodies" are to be found in Overstock.com's continuous failure to issue financial reports in compliance with Generally Accepted Accounting Principles (GAAP) and other SEC disclosure rules. Overstock.com claims that David Chidester and the company parted ways by "mutual agreement." I believe that their so-called "mutual agreement" is based on Patrick Byrne not wanting David Chidester to stay around and David Chidester not wanting to be around to answer questions as KPMG continues its audit of the company's financial reports.

Instead, Overstock.com is using an "ignorance is bliss" approach to dealing with KPMG, its new auditors. Current CFO Steve Chesnut, who joined the Overstock.com in January 2009, was not around when most of the financial reporting improprieties under investigation were committed by management. Simply said, Chesnut was not around when the "bodies were buried" and would not know where to find all of them. He is not even a CPA.

Salt Lake Tribune article by Paul Beebe

According to an article published yesterday in the Salt Lake Tribune:

Why did a top executive of Overstock.com suddenly leave the Internet retailer after 11 years?

David Chidester resigned Jan. 20 amid an ongoing investigation of Overstock by the Securities and Exchange Commission and one day after an unflattering article about CEO Patrick Byrne appeared in The Big Money, a business Web site by the editors of Slate.

In a document filed with the SEC five days later, Overstock said only that "Chidester left by mutual agreement, effective immediately, from his position as senior vice president of internal reporting and information."

On Monday, Jonathan Johnson, president of Salt Lake City-based Overstock, added this about the departure of Chidester, the company's chief information officer and former chief financial officer:

"David had been with us over 10 years. It felt like for both David and the company it was time to move to something new.

"I don't know who said what first, but it was clearly a mutual agreement. We've grown a lot in 10 years. We are a big organization and thought it was time for both parties to move on."

Efforts to reach Chidester for comment were unsuccessful, and Byrne was unavailable.

Later, the article goes on to say that:

Johnson called allegations that Chidester was forced out because of the article "conjecture" that is "just wrong."

Patrick Byrne was uncharacteristically "unavailable" to comment to the Salt Lake Tribune on Chidester's departure from the company. In the past, the local Salt Lake Tribune has conveniently chosen to largely ignore Patrick Byrne past transgressions against investors and has given him a friendly platform to spread malicious smears against his critics. A certain source told me that the Salt Lake Tribune had been working on that article for several days and another source told me that Byrne was deliberately dodging the Tribune (information to be sent privately). See Gary Weiss's blog post, here.

Also troubling is Johnson's evasive comment to the Salt Lake Tribune that "I don't know who said what first....." As the President of Overstock.com, Johnson certainly must know all the details of what transpired between the company and Chidester.

Apparently, Johnson wants to deceive investors into believing that David Chidester's sudden resignation was just a mere coincidence and is unrelated to the ongoing SEC investigation and damaging article by Boyd. However, the timeline provided below shows that Chidester's departure was not a mere coincidence but instead resulted from damning evidence of wrongdoing uncovered by Roddy Boyd.

Chidester's tenure of Overstock.com CFO

During Chidester's tenure as CFO, every single initial financial report for every reporting period issued by Overstock.com from the company's inception to date has violated Generally Accepted Accounting Principles GAAP and other SEC disclosure rules.

In February 2006, Overstock.com restated financial reports from Q1 2002 to Q3 2005 to correct inventory accounting errors.

In February 2008, the SEC Division of Corporation Finance discovered that Overstock.com's revenue accounting from the company's inception to Q3 2007 violated GAAP.

In addition, from Q2 2007 to Q2 2008 Overstock.com violated SEC Regulation G by using an improper EBITDA calculation to materially inflate its financial performance. After I wrote a series of blog posts detailing how management lied about the company's compliance with SEC Regulation G, Overstock.com finally corrected its improper EBITDA calculation (Details here).

In October 2008, Overstock.com restated its financial reports from Q1 2003 to Q3 2008 due to customer refund and credit errors. It was the second time in two years that Overstock.com had to restate its financial reports due to accounting errors.

In January 2009 David Chidester was replaced by Steve Chesnut as CFO and was moved to the position of Senior Vice President Internal Reporting and Information. In addition, Grant Thornton replaced PricewaterhouseCoopers as Overstock.com's auditors.

Overstock.com still kept David Chidester around

After two restatements of financial reports in two years and a history of issuing financial reports that turned out to violate GAAP and SEC rules, Overstock.com still kept David Chidester on the payroll in the key position of Senior Vice President Internal Reporting and Information with no reduction in salary (See Proxy Report page 17).

At that point, Overstock.com had no problem keeping David Chidester around since the SEC was not investigating the company and Boyd had not yet published his article providing new details of wrongdoing at Overstock.com. Chidester stayed employed by Overstock.com until January 20, 2010 and left the company "effective immediately," a day after Boyd's devastating article.

In September 2009, the SEC Enforcement Division started investigating Overstock.com I reported to you how the company used an improper "cookie jar" reserve to material inflate its financial performance from Q4 2008 to Q3 2009.

In November 2009, Overstock.com fired Grant Thornton after new material accounting errors and omitted disclosures were uncovered during a separate probe by the SEC Division of Corporation Finance. Grant Thornton wanted Overstock.com to restate its financial reports, like I had called for in my blog. Instead, Overstock.com fired and publicly vilified Grant Thornton and filed an unreviewed Q3 2009 10-Q report.

On December 23, 2009, Overstock.com hired KPMG to replace Grant Thornton.

As I will describe below, it was the fallout from new damaging information revealed in Roddy Boyd's article that caused Overstock.com to mutually agree to part ways.

Fallout from Roddy Boyd article

On January 19, 2010, The Big Money published an article by investigative reporter Roddy Boyd that exposed how Overstock.com purposely withheld information from investors during 2005 and 2006 about its inadequate internal controls and engaged in a New York State sales tax dodge scheme known as "Operation Heist and Freeze."

The next day, Overstock.com and David Chidester parted ways and the company issued a tersely worded statement saying that:

On January 20, 2010 Mr. David K. Chidester left by mutual agreement, effective immediately, from his position as Senior Vice President, Internal Reporting and Information, of Overstock.com, Inc. (the “Company”).

Unlike other departures of key insiders, there were no "farewell" tributes or words of praise for Chidester from Byrne or the company. Chidester left the company "effective immediately." There was no transition period. He simply left the building in a hurry and ran like hell. The company faces a probable probe from the New York State Department of Taxation and Finance and new evidence of wrongdoing by its management for the SEC to investigate.

A separate examination of Overstock.com's SEC filings by me found that both CEO Patrick Byrne and David Chidester deliberately signed false Sarbanes-Oxley certifications for financial reports claiming that the company had effective internal controls over financial reporting. Internal company documents obtained by The Big Money contradict their signed certifications to investors.

So far, those same financial reports that were certified by Byrne and Chidester were later restated two times: in February 2006 due to inventory accounting errors and in October 2008 due to customer refund and credit errors. Overstock.com faces a third restatement of those same financial reports as a result of its use of improper "cookie jar" reserves under investigation by the SEC.

In September 2009, the SEC also subpoenaed Overstock.com for documents related to those two prior restatements in 2006 and 2008 before Roddy Boyd broke his damning article. In June 2008, the SEC concluded an earlier investigation of Overstock.com and took no enforcement action against the company. In that earlier investigation, the SEC subpoenaed documents relating to Overstock.com's 2006 restatement of financial reports. In other words, you are re-examining certain issues from your first investigation: the 2006 restatement of financial reports by Overstock.com.

Based on the fact that both Byrne and Chidester knowingly signed false Sarbanes-Oxley certifications, it's reasonable to assume that you are looking into how they obstructed your earlier investigation of the company. In addition, they probably lied to and misled PricewaterhouseCoopers, Overstock.com's former auditors. However, I have other information suggesting that PricewaterhouseCoopers may have been complicit in helping Overstock.com hide certain material accounting errors. That will be the subject of another blog post.

Written by:

Sam E. Antar

My previous open letters to the SEC (please note that each letter is based on Overstock.com's deliberately vague, incoherent, and inconsistent, and often contradictory disclosures at the time each one was issued):

08/05/09: Open Letter to the Securities and Exchange Commission: Stop Overstock.com GAAP Violations Now!

11/22/09: Open Letter to the Securities and Exchange Commission Part 2: New Information on Overstock.com's GAAP and SEC Disclosure Violations

11/23/09: Open Letter to the Securities and Exchange Commission Part 3: Overstock.com Lied About Grant Thornton and Concealed Error

11/26/09: Open Letter to the Securities and Exchange Commission Part 4: Patrick Byrne Ignores Real Issues As He Vilifies Grant Thornton

12/14/09: Open Letter to the Securities and Exchange Commission Part 5: Issuer Retaliation Complaint Against Overstock.com

01/03/10: Open Letter to the Securities and Exchange Commission Part 6: Conflicting Disclosures by Overstock.com Reveal Improper Audit Opinion Shopping

Disclosure:

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. I committed my crimes, simply because I could.

If it weren't for the efforts of the FBI, SEC, Postal Inspector's Office, US Attorney'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 Overstock.com securities short or long. My research on Overstock.com 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 and analyzing Overstock.com's financial reporting is a forensic accountant's wet dream.

KPMG has sponsored at least two of my free speaking engagements to universities and colleges.