Are the Feds Going Insane?

Memo to White-Collar Criminals:

If the Feds come knocking, just tell them that you will conduct an “internal investigation” into your suspected wrongdoing. They may be gullible enough to believe whatever you report. At worst, you can throw them some crumbs and admit to some mistakes to avoid a wider investigation into your unlawful activities. I'm not kidding!

Sam E. Antar (Convicted Felon, Graduating Class of 1992)

Sarcasm aside, back in my criminal days at Crazy Eddie, we pulled that stunt on our auditors at Peat Marwick Main (now KPMG). They were dumb enough to believe the results of our internal investigation clearing us of wrongdoing. Now it seems that in certain instances, the Feds are drinking the same Kool-Aid as Crazy Eddie's former auditors. It's INSANE!

Yesterday, David S. Hilzenrath from the Washington Post reported:

As the U.S. government steps up investigations of companies suspected of paying bribes overseas, law enforcement officials are leaving much of the detective work to the very corporations under suspicion.

The probes are so costly and wide-ranging that the Justice Department and Securities and Exchange Commission often let the companies investigate themselves and then share the results.

The strategy is especially common in cases of foreign corruption but also extends to domestic investigations involving issues as varied as health-care fraud and shady accounting.

The corporations, sometimes at the request of the government, hire teams of lawyers and accountants to interview employees, gather electronic records and sift through documents. The government reviews the results and decides whether further legwork is warranted — and, ultimately, whether to pursue charges.

The private investigators help determine what evidence the government sees. They typically turn over only a small subset of the many documents they collect. Sometimes the lawyers who conduct the investigation are the same ones who represent the company in negotiations with the government over charges and penalties. [Emphasis added.]

Hilzenrath asked one insider about the government's reliance on internal investigations:

What prevents the internal investigators from airbrushing the facts or, say, omitting evidence that might implicate the chief executive?

“You mean other than integrity?” one former federal prosecutor replied. “Very little.” The former prosecutor, who now works on internal investigations, spoke on the condition of anonymity to avoid having his comments used against him in future cases. [Emphasis added.]

Further, Nathan Koppel reported in the Wall Street Journal Blog that:

In a recent proposal explaining how it plans to act on tips from corporate insiders and whistleblowers, the SEC said that it may “give the company an opportunity to investigate the matter and report back.”

“This has been the approach of the Enforcement staff in the past, and the Commission expects that it will continue in the future,” the agency said.

Are the people running the Justice Department and the Securities and Exchange Commission completely out of their minds? They should know better than to ever rely on anyone's “integrity” when conducting an investigation. White-collar criminals cloak themselves in a “wall of false integrity” to increase the comfort level of their victims and avoid action from law enforcement agencies and regulators. While the Justice Department and SEC are busy relying on the integrity of internal investigations by companies suspected of wrongdoing, they often ignore crucial information provided by whistleblowers.

For example, Bernie Madoff used his stature as the former Chairman of NASD to lure investors into a sense of false security and to avoid action by regulators. The Securities and Exchange Commission gave Bernie Madoff the benefit of any doubt and ignored warnings from whistleblower Harry Markopolos that Madoff was conducting a massive Ponzi scheme.

Like Madoff, sub-prime lender NovaStar Financial apparently used the "wall of false integrity" tactic to successfully avoid action from regulators, too. Last Sunday, Gretchen Morgenson and Joshua Rosner from the New York Times reported how the SEC repeatedly ignored warnings by short-seller Marc Cohodes about aggressive accounting tactics used by NovaStar to cook its books. The company hired Lanny Davis, former special counsel to President Clinton during the Monica Lewinski scandal to "run interference" with regulators:

So in February 2003, Mr. Cohodes started corresponding with the S.E.C. about NovaStar. He began “throwing things over the wall,” as he put it, to Amy Miller, a lawyer in the division of enforcement. 

[Snip]

Taking his pencil to NovaStar’s statements, Mr. Cohodes found a raft of red flags. “They made their numbers look however they wanted to,” he recalls. “Not even remotely realistic.”

One tactic gave the company lots of leeway in how it valued the loans held on its books. Another allowed it to record immediately all the income that a loan would generate over its life, even if that was decades. This accounting method ignored the possibility that some of the company’s loans might default. NovaStar assumed that losses on all of its loans would be nonexistent.

[Snip]

The company hired Lanny Davis, a well-connected lobbyist and public relations operative, to run interference. Mr. Davis was used to operating in a crucible; he had been special counsel to President Bill Clinton during the Monica Lewinsky scandal. [Emphasis added].

Ultimately, NovaStar's stock price collapsed and shareholders unnecessarily lost over a billion dollars because of SEC inaction:

At the end of 2009, NovaStar management concluded that the company’s financial reporting was “not effective.”

NovaStar had, in essence, confirmed what Mr. Cohodes had been telling the S.E.C. all along. The company’s financial reports just couldn’t be trusted. [Emphasis added}

The Feds listened to Lanny and ignored Cohodes.

Our government is making it easier for criminals to commit white-collar crime. The Obama Administration is permitting the Justice Department and SEC to rely on internal investigations by suspected wrongdoers. Republican Congressman Darrell Issa wants to gut the SEC to make it completely ineffective in policing the capital markets. Republican Presidential hopeful Michelle Bachmann wants to completely repeal Dodd-Frank, so white-collar criminals will never have to worry about potential whistleblowers. Small cap companies have been exempted from certain internal control provisions of Sarbanes-Oxley .The Supreme Court has narrowed the definition of honest services fraud. New York City has ten times more cops than the SEC has employees and twice as many cops than Special Agents employed by the FBI.

I should have been a criminal today, rather than in the 1980s. I could have avoided prosecution for my crimes. Maybe, it's time to end my retirement from white-collar crime?

Written by,

Sam E. Antar

Recommended reading

Reuters - Special Report: From Hannibal Lecter to Bernie Madoff by Matthew Goldstein

Dag Blog - "Crazy Eddie" Fraudster Sam Antar To Return To Crime - Thanks to Darrell Issa & Anti-Regulation Republicans by William K. Wolfrum

Gary Weiss - Novastar and Overstock in the News

Crowe Horwath - Putting the Freud in Fraud: Focus on the Human Element, Catching a Crook Isn't Only a Numbers Game By Jonathan T. Marks, CPA/CFF, CFE, CITP

Disclosure

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped my cousin Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes in cold-blood for fun and profit, and simply because I could.

If it weren't for the heroic 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.

There is a saying, "It takes one to know one." Today, I work very closely with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify and catch white-collar criminals. Often, I refer cases to them as an independent whistleblower. I teach about white-collar crime for professional organizations, businesses, and colleges and universities.

Recently, I exposed GAAP violations by Overstock.com which caused the company to restate its financial reports for the third time in three years. The SEC is now investigating Overstock.com and its CEO Patrick Byrne for securities law violations (Details here, here, and here).

I do not seek or want forgiveness for my vicious crimes from my victims. I plan on frying in hell with other white-collar criminals for a very long time.

I do not own any Overstock.com securities long or short. My investigation of this company is a freebie for securities regulators to try to get me into heaven, though I doubt I will ever get there. My past sins are unforgivable.

Reuters on FBI Efforts to Profile White-Collar Criminals

Matthew Goldstein from Reuters wrote a fascinating article "Special Report: From Hannibal Lecter to Bernie Madoff" about FBI efforts to profile white-collar criminals (PDF link, video link).

(Reuters) - Bernard Madoff -- the architect of history's biggest Ponzi scheme -- and Gary Ridgway - the Green River killer -- would seem to have little in common aside from being branded as "monsters" in the tabloids.

But a team of FBI agents, the same ones who specialize in helping local police track down serial killers like Ridgway, are using their expertise in behavioral profiling to target white collar criminals like Madoff.

For about two years now, agents with the Federal Bureau of Investigation's Behavioral Analysis Unit have been consulting with their colleagues in New York who specialize in securities fraud detective work. The BAU agents are going over the case files put together by the FBI for Madoff and other convicted scammers like Bayou Group's Samuel Israel, whose $400 million hedge fund turned out to be Ponzi scheme, and former Democratic fundraiser Hassan Nemazee, who stole nearly $300 million from Citigroup and two other big banks.

The hope is the BAU agents, whose work in profiling serial killers has been popularized in books, movies and on TV, can get into the minds' of fraudsters and see what makes them tick.

In cinematic terms, substitute Gordon Gekko, the insider trader in "Wall Street," for Hannibal Lecter, the cannibalistic serial killer in The Silence of the Lambs, and you get an idea of what the FBI is trying to do.

I was interviewed by Reuters for this article and explained that while I am a fan of FBI efforts to profile white-collar criminals, it won't be an easy task for them.

In a recent interview, Antar told Reuters that FBI profilers are right to be wary of putting too much stock into interviews with white collar felons because they'll often say what a questioner wants to hear. In his view, once people become a scamster it's hard for them to ever really change.

"People like to ask me if I am redeemed," said Antar. "I like to say that I am possibly retired. The only reason I stopped was because I got caught."

Most white-collar criminals are very clever in evading detection by law enforcement and avoiding skepticism from their their victims. They build walls of false integrity around themselves to increase the comfort level of their victims. According to various studies conducted by the Association of Fraud Examiners (ACFE), over 90% of white-collar criminals don't have previous criminal records (see page 69). The higher the economic value of the crime, the less likely it is that the perpetrator had a previous criminal record.

Additional insights into white-collar criminals can be found in the Reuters video interview clip below (Interviewer Jen Rogers):



Hopefully, the study of criminology won't be limited to the FBI, other law enforcement agencies and a few academics. I'd like to see all colleges and universities require every student take at least one course in criminology. Criminals know much more about exploiting human nature than society knows about how they do it.

Written by:

Sam E. Antar

Reaction to Reuters Article

Clinical Forensic Psychology - Criminal Profiling: From Hannibal Lecter to Bernie Madoff by Patricia Zapf

Fraud Files - Implied credibility given to white collar criminals (and others!) by Tracy Coenen

Keep Your Eye on Fraud - Profiling Today’s White Collar Criminal by the FBI – Voodoo Law Enforcement? by Bruno Pavlicek

Daily Speculations - Profiling Ponzi-ists, from Pitt T. Maner III


Disclosure

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped my cousin Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes in cold-blood for fun and profit, and simply because I could.

If it weren't for the heroic 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.

There is a saying, "It takes one to know one." Today, I work very closely with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify and catch white-collar criminals. Often, I refer cases to them as an independent whistleblower. I teach about white-collar crime for professional organizations, businesses, and colleges and universities.

Recently, I exposed GAAP violations by Overstock.com which caused the company to restate its financial reports for the third time in three years. The SEC is now investigating Overstock.com and its CEO Patrick Byrne for securities law violations (Details here, here, and here).

I do not seek or want forgiveness for my vicious crimes from my victims. I plan on frying in hell with other white-collar criminals for a very long time.

I do not own any Overstock.com securities long or short. My investigation of this company is a freebie for securities regulators to try to get me into heaven, though I doubt I will ever get there. My past sins are unforgivable.

Patrick Byrne Pockets $3.1 Million from Dumping Overstock.com Shares While Trying to Stave Off Possible SEC Enforcement Action

Patrick Byrne intoxicated after drinking too much alcohol

Amidst an ongoing Securities and Exchange Commission investigation into financial reporting violations by Overstock.com (NASDAQ: OSTK), CEO Patrick Byrne's 100% controlled High Plains Investments LLC dumped 140,000 company shares and collected over $3 million in proceeds during the last several days, according to SEC filings. This marks the first time that Patrick Byrne has ever sold any Overstock.com shares under his control, not a bullish signal to investors.

Meanwhile, the company is desperately trying to stave off an enforcement action by the SEC. Before I discuss that issue, let's review some recent history.

Why the SEC is Investigating Overstock.com

So far, each and every initial financial report for every reporting period issued by Overstock.com from the company's inception in 1999 to Q3 2009 violated GAAP or some other SEC disclosure rules. Likewise, every single audit report issued by PricewaterhouseCoopers, Overstock.com's former auditors, from 1999 to 2008 was wrong turned out to be false, too. In addition, information uncovered by investigative journalist Roddy Boyd shows that managment deliberately concealed material weaknesses in internal controls over financial reporting as far back as 2005.

More recently, during 2009, I detailed how Overstock.com deliberately violated Generally Accepted Accounting Principles (GAAP) in recognizing income for recoveries from underbilled and overpaid fulfillment partners by improperly claiming that a “gain contingency” existed when it did not actually exist under accounting rules.

Under GAAP, Overstock.com is required to recognize income from underbilling and overpaying its fulfillment partners when such income was actually earned (before Q3 2008). By improperly claiming that a “gain contingency” existed, Overstock.com improperly recognized income as monies were recovered from the underbilled and overpaid fulfillment partners in future reporting periods on a non-GAAP cash basis. Therefore, Overstock.com improperly shifted income earned before Q3 2008 to future accounting periods (Q4 2008 to Q3 2009). In Q4 2008, Overstock.com improperly reported a $1.014 profit, instead of a $750k because of GAAP violations.

Creepy Judd Bagley

I notified both the company and the SEC of Overstock.com's improper accounting for recoveries from underbilled fulfillment partners and later on, for overpaid fulfillment partners. Instead of properly complying with GAAP, Overstock.com CEO Patrick Byrne defamed me in various quarterly conference calls with analysts and investors, sent his paid internet stalker Judd Bagley to interfere in my divorce proceedings, and even had Bagley and spy on my family and other company critics (including our minor family members) using a fake Facebook name.

In September 2009, the SEC re-opened a previously closed investigation of Overstock.com after I notified them of violations of Generally Accepted Accounting Principles (GAAP) in the company's reporting of recoveries from previously underbilled fulfillment partners.

In November 2009, Overstock.com fired Grant Thornton as its auditors after they recommended that the company restate its financial reports to correct GAAP violations, as I previously called for in my blog. In December 2009, KPMG replaced Grant Thornton as Overstock.com's auditors.

On January 29, 2010, Overstock.com finally admitted that its accounting for recoveries from underbilled and overpaid fulfillment partners was "inappropriate" and that no gain contingency existed, as I previously reported in my blog.

On March 31, 2010, Overstock.com's 2009 10-K report restated the company's Q4 2008 financial report to show a properly reported net loss rather than an improper net profit, as I correctly said it should in my blog more than a year earlier. However, a few days later, Patrick Byrne falsely claimed to AP reporter Paul Foy that "Overstock's accounting errors were generally conservative...and gave the company no advantage."

In its Q1 2010 10-Q report, Overstock.com reported continuing material weaknesses in internal controls.

Overstock.com's Current Discussions with SEC

According to certain sources, Overstock.com is currently trying to stave off an enforcement action from the Securities and Exchange Commission by claiming that management had no "intent" to violate GAAP and other SEC disclosure rules and that its history of financial reporting problems was a result of incompetent staffing. I find it hard to believe that any rational person the SEC could be so stupid as to believe such nonsense from company paid lawyers.

How can Overstock.com claim a "lack of intent" when its management defiantly failed to promptly correct GAAP violations when notified by me and later fired Grant Thornton as its auditors, rather than correct those GAAP violations? Worse yet, the company engaged in a vicious campaign to stalk, harass, and intimidate me and other media critics. The company even spied on me, other critics, and our families.

If the SEC fails to take action against Overstock.com, it will send a clear message that whistleblowers who correctly point out securities law violations are still not welcome despite the regulator's widely publicized bungled investigation of Bernie Madoff, after they ignored whistleblower Harry Markopolos.

As I said in my last open letter to Chairperson Mary Schapiro, "The SEC has an excellent chance on its second investigation of Overstock.com to regain that lost public confidence by bringing a successful enforcement action against Overstock.com, its Audit Committee, and its management team for securities law violations, including Rule 10b-5."

Written by:

Sam E. Antar

Recommended Reading (Especially for the SEC Commissioners, Lawyers, and Investigators)

Gary Weiss - Patrick Byrne Dumps His Overstocked Overstock Shares by Gary Weiss

The Big Picture - Long OSTK, Short Byrne by Barry Ritholtz
May 26, 2010: Going Concern - Why Did Patrick Byrne Sell $3 million in Overstock.com Shares? by Caleb Newquist

May 26, 2010: Jr Deputy Accountant - It's Not at All Suspicious That Patrick Byrne Just Unloaded a Bunch of Overstock Shares by Adrienne Gonzalez

Selling America Short: The SEC and Market Contrarians in the Age of Absurdity by Richard Sauer (Wiley 2010) - Chapter 12: The Overstock Flame Wars

Stockwatch - Overstock.com faces another shoddy accounting challenge by Lee M. Webb

Crain's New York Business - Crazy Like a Fox by Aaron Elstein (Download)

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. However, I doubt that I will ever get into heaven anyway, because my sins are unforgivable. I will probably end up joining corporate miscreants such as fifth rate crooks like Patrick Byrne in hell.

In any case, exposing Overstock.com's financial reporting violations is a lot of fun and analyzing the company's financial reporting is a forensic accountant's wet dream.

Straight Talk about Brutality of White Collar Crime from a Convicted Felon

Updated to include another interview

If you want to truly understand the brutal nature of white collar crime in all of its gory detail, please listen to my videotaped interview below that is featured on the Con Artist Hall of Infamy website (here). In part one and two of a series of chilling interviews with journalist Becca MacLaren, I discuss the basic tactics that white collar criminals use to exploit and scam their victims:

White collar criminals consider your humanity, ethics, and good intentions as a weakness to be exploited in the execution of their crimes.

White collar criminals measure their effectiveness by the comfort level of their victims.

White collar criminals build a wall of false integrity around them to gain the trust of their victims.

Sam Antar Interview, Part 1: The Rules of Criminality



Sam Antar Interview, Part 2: Humanity, or the lack thereof
.


The Con Artist Hall of Infamy was founded by Warren Hellman and Arthur Rock, two billionaires with a fascination of white collar crime and a passion dedicated towards educating the public about the cold-blooded brutality of criminality.

The interview was videotaped last March during my visit to teach at Stanford Law and Business Schools. In future blog posts, I will show more video clips of my interview with Becca MacLaren on white collar crime.

Special thanks to the Con Artist Hall of Infamy and Stanford for inviting me to share my views on white collar crime.

Interviewed by "Fraud Girl" from Simoleon Sense Blog

Recently, I was contacted by a very bright forensic accounting blogger who writes under the pseudonym "Fraud Girl" for the Simoleon Sense blog, which is administered by another bright analyst and investigative blogger Miguel Barbosa. "Fraud Girl" wanted to know about my mindset as a forcibly "retired" criminal. A full transcript of the interview can be read here.

Here's a sample Q & A from the interview:

Question: How can people go acquire the experience to really understand financial criminals? Do courses help? Is it just real life experience? What will help forensic accountants get through it?

Answer: It’s a combination of both. For example, The Going Concern blog recently did a thing about what is takes to become a forensic accountant. The problem is before you even get to the skill set to be a good forensic accountant you need to get a double set of iron clad balls and triple thick skin because criminals fight back. We don’t play fair. We have no respect for you. We have no respect for your laws. We don’t have respect for your customs. In fact, your laws and customs make it easier for us to commit our crimes. It’s a paradox. The more humane the society is, the easier it is to commit the crimes. Humanity limits your behavior but it doesn’t limit our behavior because we’re immoral human beings.

[Snip]

Question: It’s a huge problem. The cases I’m looking into are getting bigger and are getting worse…

Answer: You’re seeing most of these cases now because of a faltering economy. If the economy were good you wouldn’t even have known who Harry Markopolos was. He would still be writing letters to the SEC and they would still be ignoring him.

Until society learns about the psychology of white collar crime and the tactics used by criminals to defraud their victims, society is doomed to be victimized over and over again by ruthless thugs like I was, as the criminal CFO of Crazy Eddie back in the day.

Special thanks to "Fraud Girl" and Miguel Barbosa for seeking my input on white collar crime.

Written by:

Sam E. Antar

Recommended Reading

Going Concern: Sam Antar at Stanford: Jr. Deputy Accountant Gets a Live Dose of the Criminal Mind by Adrienne Gonzalez

White Collar Fraud: The Real Reason Behind Danny DeVito’s Crazy Eddie Movie Project Meltdown from Eddie Antar’s Cousin and Criminal CFO Sam E. Antar

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 in cold-blood for fun and profit, and 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.

There is a saying, "It takes one to know one." Today, I work very closely with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify and catch white-collar criminals.

Recently, I exposed financial reporting violations by Overstock.com (NASDAQ: OSTK) as an independent whistleblower.  The Securities and Exchange Commission is investigating Overstock.com and its CEO Patrick Byrne for securities law violations (Details here, and here).

My pro bono work for the federal government is a freebie to law enforcement in order to help get me into heaven, though I doubt that I will ever get there.

I do not seek or want forgiveness for my vicious crimes from my victims. Anything that I may do in helping law enforcement does not undo any of my heinous crimes. I plan on frying in hell with other white collar criminals for a very long time.