Why the SEC should not be duped by Overstock’s excuses to avoid sanctions

After almost two years of investigation by the Securities and Exchange Commission, Overstock.com (NASDAQ: OSTK), also known as O.co, faces a possible enforcement action and sanctions arising from certain accounting violations reported in this blog. The company cannot deny that it violated various accounting rules. My accounting analysis was proven correct by its later revisions of financial reports. To avoid an enforcement action and possible sanctions, the company has no choice but to attempt to persuade the SEC that it acted in good faith and its misstatements of financial reports were unintentional. That excuse is simply untrue in light of the company’s actions.

Over the last several years, I've reported on a pattern of accounting shenanigans which helped Overstock.com materially overstate its earnings. From Q2 2007 to Q2 2008, the company used improper EBITDA calculations to materially inflate its financial performance in violation of SEC Regulation G. From Q4 2008 to Q3 2009, it violated Generally Accepted Accounting Principles (GAAP) and materially inflated its reported earnings. In both cases, I provided the company with detailed information about its accounting irregularities, but its management chose to vilify me rather than immediately correct its financial reports. Even after Overstock.com revised its financial reporting, it still continued to smear me in retaliation for exposing accounting irregularities.

If the company and its auditors want to claim they acted in good faith, it follows that this convicted felon and former CPA has more knowledge about SEC reporting rules and GAAP than any of them. I guess that I must be an accounting genius. I was able to find accounting irregularities missed by PricewaterhouseCoopers and Grant Thornton (the third and sixth largest accounting firms in the world) who unlike me, had access to the company’s books and records. PricewaterhouseCoopers was Overstock.com's auditors from 1999 to 2008 and Grant Thornton was its auditors from Q1 to Q3 2009.

Further, the Sarbanes-Oxley Act of 2002 eliminates the excuse that a company relied on the erroneous advice of its auditors. It clearly places the primary responsibility for poor internal controls and improper financial reporting on management.

Overstock.com has so far restated its financial reports three times due to GAAP violations. Every single financial report from 1999 to Q3 2009 had to be revised from one to three times due to GAAP violations. Every single internal control certification signed by the CEO and CFO of the company during that period turned out to be false. Every single audit by PricewaterhouseCoopers from 1999 to 2008 and review by Grant Thornton in 2009 turned out to be flawed.

The Sarbanes-Oxley Act is a law to be enforced. Companies and their auditors who violate that Act must be held accountable by the SEC. Compliance is not a performance goal where violations are shrugged off by the SEC and where companies and their auditors who violate that Act are asked to do better next time. It's the law! The integrity of financial information is the main pillar underlying our capitalist economic system. It is not supposed to be the cat and mouse game that seems to be going on today between the SEC on one side and public companies and their auditors the other side.

Early lies about profitability

Patrick Byrne

On December 11, 2001, Patrick Byrne appeared on Fox News claimed, “We're profitable.” On March 5, 2002, Overstock.com filed an S-1 report in connection with its planned initial public offering. It contradicted Byrne’s claim that his company was anywhere near “profitable.” In future years, Byrne’s deceptive behavior continued as Overstock.com resorted to violating accounting rules to materially overstate its financial performance and even report profits when it was actually losing money.

Overstock.com violated SEC Regulation G governing non-GAAP pro forma numbers

In April 2004, Patrick Byrne appeared on the CNBC and said “I don’t believe in EBITDA. If somebody talks EBITDA, put your hand on your wallet; they’re a crook.” In 2007, Overstock.com changed its tune and starting using EBITDA in its financial reports. In February 2008, the company even said, “A multiple of EBITDA is currently the most standard measure of valuation in the industry.” With that admitted knowledge, the company used an improper EBITDA calculation to materially overstate its financial performance from Q2 2007 to Q2 2008.

On December 3, 2007, I detailed how Overstock.com improperly started its EBITDA calculation with operating income or loss (rather than net income or loss) and improperly added back stock-compensation costs. Under Regulation G, EBITDA can only be computed by starting from net income or net loss and adding back net interest (interest expense minus interest income), taxes, depreciation, and amortization. On May 28, 2008, I detailed how the SEC Division of Corporation Finance reviewed similar improper EBITDA calculations by two other public companies and made them comply with Regulation G. During this period, I sent multiple emails with links to my blog posts alerting the SEC and Overstock.com about the improper EBITDA calculations. However, the company defiantly continued to use an improper EBITDA calculation and materially overstated its financial performance. (See the chart below. Click on image to enlarge.)

In Q2 2008 (period ended 06/30/08), Overstock.com reported a positive $1.117 million EBITDA using its improper calculation instead of a negative $0.430 million EBITDA had it complied with Regulation G.

During various conference calls, management made false comments in defense of its accounting policies and attacked me. On July 18, 2008, during the Q2 2008 earnings call, former CFO David Chidester falsely claimed that the company was justified in adding back stock compensation costs to compute EBITDA. He said “It’s completely the convention in our industry….” On October 24, 2008, during the Q3 2008 earnings call, Patrick Byrne falsely asserted that “The claim that EBITDA is not compliant with SEC definition, nonsense.” Byrne went on to call me, “Sam Antar the Crook.

Vindication

On November 7, 2008 Overstock.com filed its Q3 2008 10-Q and disclosed that it discovered errors in its accounting for customer refunds and credits. The company restated financial reports from Q1 2007 to Q2 2008 to correct those errors. In addition, it finally complied with SEC Regulation G and stopped calling its non-GAAP financial measure (operating income plus stock compensation) EBITDA. It warned investors that it was an “adjusted EBITDA” calculation.

On July 26 and September 12, 2010, I reported how seven other public companies used improper EBITDA calculations and violated SEC Regulation G. Unlike Overstock.com, those companies corrected their improper EBITDA calculations in their very next financial report and did not attack me for pointing it out.

Overstock.com violated GAAP


In February 4, 2009, I detailed how Overstock.com violated GAAP and materially overstated its earnings in Q4 2008. In that quarter, Overstock.com improperly reported a net profit instead of a net loss due to its GAAP violation. It was the company’s first reported net profit after 15 consecutive quarterly losses. I immediately notified the SEC and Overstock.com about its GAAP violations and urged the company to restate its financial reports to correct its illegal accounting practices. However, Overstock.com continued to violate GAAP and materially overstate its earnings from Q1 to Q3 2009.

Back in October 2008, Overstock.com discovered errors in accounting for customer refunds and credits. The company restated its financial reports from Q1 2007 to Q2 3008 and reduced its retained earnings by 8.2 million to correct those errors due to its overstatement of income during those periods. It also underbilled its fulfillment partners certain offsetting fees and reimbursements due the company arising from those errors. However, Overstock.com’s restatement of financial reports did not properly reflect adjustments for income that it already earned from those offsetting costs and reimbursements during those periods.

Public companies are required to use accrual basis accounting. Income is recognized in the period it is earned and not when it is later billed or when amounts are subsequently collected. Instead, the company recorded income as payments were received from its fulfillment partners on a non-GAAP cash basis in future accounting periods (Q4 2008 to Q3 2009). In other words, Overstock.com took income that should have been reported in prior reporting periods (Q2 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. The company effectively created a "cookie jar" reserve to inflate future earnings.

On February 6, 2009, Patrick Byrne responded to my initial accounting analysis with his usual vindictive attack on the InvestorVillage message board. He claimed that “Antar's ramblings are gibberish. Show them to any accountant and they will confirm. He has no clue what he is talking about.”

On February 23, 2009, Overstock.com filed its 2008 10-K report and claimed that a "gain contingency" existed to justify its accounting practices. It said that, “When the underbilling was originally discovered, we determined that the recovery of such amounts was not assured, and that consequently the potential recoveries constituted a gain contingency.”

Judd Bagley

In April 2009, Patrick Byrne sent his paid hack Judd Bagley to spread false information my divorce, attempted to blackmail me into settling that case, and even tried to contact my ex-spouse in an attempt to intimidate me. At about the same time, Judd Bagley created a Facebook profile under the name of Larry Bergman and proceeded to con people into friending him. The company’s pretexting operation targeted me, journalists, bloggers, our families, and even minor children, too. Eventually, Facebook booted Bagley for violating its rules.

On July 22, 2009, during the Q2 2009 earnings call, Patrick Byrne called me “Sam Antar the Crook” because I dared to question his company’s claim that a "gain contingency" existed.

On August 5, 2009, I published a letter to the SEC that cited various accounting rules and pointed out that “No gain contingency existed.” Overstock.com had made the ridiculous assumption that all potential recoveries of underbilled fees and reimbursements owed to it from fulfillment partners (every single penny) were “not assured”. In addition, I noted that the company did not mention the existence of a “gain contingency” when it originally disclosed the underbilling error in its Q3 2008 10-Q report filed in November 2008. It waited until it filed its annual 2008 10-K report in February 2009 to claim that a gain contingency existed.

Further, I pointed out how Overstock.com used that same phony gain contingency rationale to further inflate its reported earnings in Q1 and Q2 2009. During 2009, the company found overbillings from vendors that occurred in 2008. When it corrected the 2008 overbillings from vendors in 2009, it inflated its reported income. It should have adjusted its 2008 financial reports to correct those errors.

SEC investigates

On September 17, 2009, the SEC Enforcement Division started investigating Overstock.com. On September 23, 2009, a Salt Lake Tribune article reported Patrick Byrne’s angry reaction with anti-Semitic overtones:

"Gary Weiss and Sam Antar are goniffs," Byrne declared, using a yiddish term that he says means "a con man, a hustler and a scoundrel." If the SEC is listening to them, their next step is to let Bernie Madoff write their indictment of me. 

Best-selling author and investigative reporter Gary Weiss had exposed Patrick Byrne’s dirty trick tactics against critics. Both Gary Weiss and I are Jewish.

In October 2009, Aaron Edelstein from Crain’s New York Business asked Patrick Byrne about my reporting of accounting irregularities. Byrne responded saying “He’s a criminal who works for short-sellers. He throws mud day after day. No matter what he says, he finds some spurious thing to jump up and down about.”

On October 1, 2009, the SEC Division of Corporation Finance started reviewing Overstock.com’s financial reports. It discovered that the company 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.  Grant Thornton, who replaced PricewaterhouseCoopers as Overstock.com’s auditors in 2009, claimed that it did not know about the 2008 overpayment and the Q1 2009 recovery from the fulfillment partner until October 2009. The SEC wanted Overstock.com to restate its financial reports to correct that error and other GAAP violations previously identified in my blog. Grant Thornton agreed.

The SEC reviewers also wanted to know why Overstock.com failed to report the existence of a gain contingency when it originally disclosed the underbilling error in its Q3 2008 10-Q report filed on November 7, 2008. The company waited until it filed its 2008 10-K report on February 23, 2009 to claim that a gain contingency existed. Overstock.com told them that as of November 2008 "...it would have been inappropriate to disclose a gain contingency." However, the 10-K report claimed that it determined that a gain contingency existed "When the underbilling was originally discovered...." back on October 24, 2008. If Overstock.com's 10-K disclosure was true, the company's explanation to the SEC could not be true. Likewise, if Overstock.com's explanation to the SEC was true, the company's 2008 10-K disclosure can't be true. Nevertheless, the SEC determined that no gain contingency existed, as I did my August letter.

On November 13, 2009, Overstock.com fired Grant Thornton rather than restate its financial reports. Three days later, Overstock.com defiantly issued an “unreviewed” Q3 2008 10-Q report without correcting its GAAP violations.

Jonathan Johnson

On November 18, 2009, Patrick Byrne falsely claimed that even if the company restated its financial reports, no previously reported profit would turn into a loss. Byrne said, “In fact, we as I understand it, this doesn't change any positive quarter to a negative quarter or any negative quarter to a positive quarter.

On November 24, 2009, the Salt Lake Tribune reported that Company President Jonathan Johnson said, “None of these changes that they [Grant Thornton] are talking about, or that people at the SEC are now asking about, make any of our quarters go from negative to positive or from positive to negative.”

Vindication

On December 29, 2009, Overstock.com hired KPMG to replace Grant Thornton. On January 29, 2010, Overstock.com warned investors that its financial reports “…. should no longer be relied upon.” On March 31, 2010, Overstock.com filed its 2009 10-K report and finally restated its financial reports to correct GAAP violations, as I recommended back in February 2009. The company also admitted that the "gain contingency…was an inappropriate accounting treatment.” (See the chart below detailing restatements. Click on image to enlarge.)

As it turns out, every comment made by Patrick Byrne and Jonathan Johnson were false. The company actually lost money in Q4 2008 rather than make a profit as previously claimed.

Back in February 2009, Byrne said “Antar's ramblings are gibberish. Show them to any accountant and they will confirm. He has no clue what he is talking about.” The "gibberish" was Overstock.com's illegal accounting practices and Byrne's ramblings in defense of his company's accounting shenanigans. I knew exactly what I was talking about.

Continued retaliation

In November 2010, District Attorneys from seven California counties filed a lawsuit alleging consumer fraud by Overstock.com. On April 12, 2011, I reported how the DAs complained to the court that Overstock.com was withholding personal contact information of former employees with possible knowledge of wrongdoing. That day, a Bloomberg reporter asked Patrick Byrne about the issue and he went on a disgusting rampage in his Deep Capture website:

The sounds of squealing could be heard over the low hum of the air recirculation machinery in the drab, windowless federal interview room.  “Please!” Sam Antar wimpered. “Let me write one more smear. Let me feel like I’m a player, one last time!”

The federal agent spoke sharply: “Silence!”  She turned to look at her colleagues with bemusement.  “Jesus, what is it with these finance gerbils? I haven’t seen someone break this pitifully since that bookkeeper in Reno. ” She set aside her Nutcracker Flail, took a long pull on her Gaulioses, and said, “OK, let’s give Sam the night off. We’ll get him cleaned up for the judge in the morning.”

With that, Sam Antar, still restrained in straightjacket, was hauled back to the Shower Room, where he spent the night toe-writing in excrement on the linoleum.

Which would be altogether unremarkable, were it not for the fact that within hours, a Bloomberg reporter named Clyde Eltzrothis called, asking me to comment on it.

Patrick Byrne went on to accuse the California District Attorneys of not acting in good faith:

It is not our job to host DA’s on a no-limits fishing trip, especially when they have not acted in good faith in the past.

On May 18, 2011, Judge Robert B. Freeman granted the California District Attorney’s motion to compel Overstock.com to turn over the contact information of certain former employees. He rejected Byrne's argument.

Good faith?

Responsible companies that act in "good faith" fix their accounting errors and move on. They don't retaliate against whistleblowers who point out misstatements in financial reports. Patrick Byrne doesn't seem to be upset that Overstock.com violated accounting rules and had to restate its financial reports. Apparently, he's upset because his company's accounting irregularities were exposed. Byrne's disgusting prison fantasy involving me demonstrates his obsession to get back at me for pointing out his company's shenanigans. Byrne and his crew will make up anything and resort to any smear tactic in their attempts to punish me for uncovering their wrongdoing. But the fact remains that I uncovered violations of accounting rules which helped Overstock.com overstate its financial performance and the company made revisions in its financial reporting to correct those violations.

Final comments

Last year, the Dodd-Frank Act was signed into law and the SEC issued final regulations about whistleblower protections. On May 25, 2011, SEC Chairman Mary Schapiro said in a speech that, “… the final rules make clear that the statute’s whistleblower protections apply to anyone who provides us information, even if that information relates to a possible securities law violation, and regardless of whether it leads to a successful enforcement action.”

Here, the SEC has a whistleblower that correctly identified accounting violations which caused a public company to restate its financial reports. The SEC has clear evidence of blatant retaliation by the issuer against that whistleblower. The freedom to criticize accounting practices without fear of reprisal from public companies is essential to our democracy and the integrity of our capital markets. It’s time for the SEC to put its money where its mouth is. The ball is in their court!

Written by,

Sam E. Antar

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. In addition, I teach about white-collar crime for government entities, professional organizations, businesses, and colleges and universities.

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. My past sins are unforgivable.

I do not own any Overstock.com securities long or short.

Class Action Complaint against Amedisys uses Sarbanes-Oxley Act Corporate Governance Provisions to Battle Alleged Corporate Malfeasance

Updated at bottom of article

Last week, Pomerantz Haudek Grossman & Gross LLP filed a class action lawsuit against Amedisys (NASDAQ: AMED) charging the company, its CEO William F. Borne and its CFO Dale E. Redman with securities fraud.  In the next few days, Bernstein Liebhard LLP and Finkelstein Thompson LLP filed similar class action lawsuits against the company. The lawsuits allege that Amedisys abused Medicare's reimbursement system for at-home therapy care based on a compelling analysis of company revenues in an April 27 Wall Street Journal article.

In addition, the lawsuits innovatively utilize a provision under Section 406 of the Sarbanes-Oxley Act 2002 which provides a back-door way for investors to force ethical corporate governance and sue public companies for malfeasance. That provision requires Senior Financial Officers, such as the CEO and CFO of public companies, to abide by a strict code of ethics which broadly defines corporate malfeasance and effectively makes it easier for defrauded investors to prove misconduct by certain senior executives. Suing public companies for code of ethic violations can be a potent tool to insure good corporate governance and conduct.

Allegations that Amedisys intentionally increased patient visits to trigger higher Medicare reimbursements

According to the Pomerantz press release:

Specifically, the Complaint alleges that defendants made false and/or misleading statements and/or failed to disclose: (1) that the Company's reported sales and earnings growth were materially impacted by a scheme whereby the Company intentionally increased the number of in-home therapy visits to patients for the purpose of triggering higher reimbursement rates under the Medicare home health prospective payment system, as those excess visits were not always medically necessary; (2) that the Company's reported sales and earnings were inflated by said scheme and subject to recoupment by Medicare; (3) that the Company was in material violation of its Code of Ethical Business Conduct and compliance due to the scheme to inflate Medicare revenues; and (4) based on the foregoing, defendants lacked a basis for their positive statements about the Company, its prospects and growth.

On April 27, 2010, The Wall Street Journal ("WSJ") reported that Amedisys has been taking advantage of the Medicare reimbursement system by increasing the number of in-home therapy visits in order to trigger additional reimbursements.

The alleged scheme whereby Amedisys "intentionally increased the number of in-home therapy visits to patients for the purpose of triggering higher reimbursement rates under the Medicare home health prospective payment system" is based on a troubling pattern of Medicare reimbursements detailed by the Wall Street Journal below:

Medicare reimbursements are determined in part by the number of at-home therapy visits each patient receives, with an extra fee kicking in as soon as a patient hits a certain number of visits. Between 2000 and 2007, Medicare paid companies a flat fee of about $2,200 for up to nine home therapy visits. It paid an additional reimbursement of roughly $2,200 if the therapy surpassed nine visits. That incentive was designed so that agencies didn't "stint" on therapy visits, says Laurence Wilson, the director of chronic-care policy group at the Centers for Medicare and Medicaid Services, the agency that runs Medicare.

According to The Journal analysis, which was based on publicly available Medicare records, Amedisys provided many of its patients just enough therapy visits to trigger the extra $2,200 payment. In 2005, 2006 and 2007, very few Amedisys patients received nine therapy visits while a much higher percentage got 10 visits or more. In 2007, for instance, only 2.88% of patients got nine visits, while 9.53% of patients got 10 visits.

"I was told 'we have to have ten visits to get paid,'" says Tracy Trusler, a former Amedisys nurse for two years in Tennessee, who has since left the company. Her supervisors, she says, asked her to look through patients' files to find those who were just shy of the 10-visit mark and call their assigned therapists to remind them to make the extra appointment.

"The tenth visit was not always medically necessary," Ms. Trusler says.

In other words, Amedisys had a financial incentive to increase the number of patient visits from 9 to 10 "to trigger the extra $2,200 payment." The Wall Street Journal’s analysis shows that number of patients getting 10 visits far outnumbered the number of patients getting just 9 visits by a relative factor of 3.5!

Lightening Never Strikes Twice in the Same Place

In January 2008, Medicare changed its reimbursement rules and according to the Wall Street Journal the pattern of patient visits likewise changed to maximize reimbursements to Amedisys. It was as if lightening stuck twice in the exact same place on different dates!  See below:

Medicare changed its reimbursement rules in January 2008 in an attempt to blunt the incentive for home health-care visits it created. It eliminated the $2,200 bonus payment at 10 visits and now pays an extra fee of a couple of hundred dollars at six, 14 and 20 therapy visits. "What we felt we could do is try to create some better incentives in the system for providing the level of service that beneficiaries actually needed," says Mr. Wilson from Medicare.

[Snip]

The Journal analysis found a similar pattern: In 2008, the percentage of Amedisys patients getting 10 visits dropped by 50%, while the percentage that got six visits increased 8%. The percentage of patients getting 14 visits rose 33% and the percentage getting 20 visits increased 41%.

In other words, Amedisys no longer had a $2,200 financial incentive to give 10 at-home therapy patient visits, so that number dropped by 50%. The company received a financial incentive from Medicare at 6, 14, and 20 visits and the patient's getting such number of visits rose dramatically.

On May 12, 2010, the Senate Finance Committee started an investigation questioning whether Amedisys "intentionally increased utilization for the purpose of triggering higher reimbursements" and cited the Wall Street Journal article above.

Stuck Between a Rock and a Hard Place

Amedisys is stuck between a rock and a hard place. If the same patterns of Medicare reimbursements continue in Q2 2010, the company will be accused of continuing to abuse Medicare's reimbursement system. If those Medicare reimbursement patterns don’t continue, the critics will claim that the company changed its behavior after getting exposed by the Wall Street Journal.

Allegations that Amedisys violated its Code of Ethical Business Conduct

Perhaps the most interesting aspect of the class action lawsuits are allegations that Amedisys "was in material violation of its Code of Ethical Business Conduct and compliance due to the scheme to inflate Medicare revenues."

Under Section 406 of the Sarbanes-Oxley Act 2002, public companies are required to have a strict code of ethics covering its senior financial officers (principal executive officer, principal financial officer, principal accounting officer) and such companies must disclose any changes, waivers, or violations of their codes of ethics.

SEC rules broadly define the term “code of ethics” as:

… written standards that are reasonably designed to deter wrongdoing and to promote:

Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

Full, fair, accurate, timely, and understandable disclosure in reports and documents that a registrant files with, or submits to, the Commission and in other public communications made by the registrant;
Compliance with applicable governmental laws, rules and regulations;

The prompt internal reporting to an appropriate person or persons identified in the code of violations of the code; and

Accountability for adherence to the code.

An article entitled “Corporate Ethics and Sarbanes-Oxley” (article first appeared in Wall Street Lawyer – July 2003) by Frank Navran and Edward L. Pittman, re-published on Ethics.org, explained how Sarbanes-Oxley broadly expanded the scope of unacceptable corporate behavior under securities laws:

Of the five elements of the Commission's code, the only one that is specific to public companies relates to accuracy and timeliness of disclosure in public filings and other public communications. A more general statement of the requirement may be expressed as the value of "honesty." Honesty, for example, includes being candid, open, truthful, and free from deception and deceit--telling the truth, even when doing so may be difficult, and being forthcoming with all relevant facts and information. The core principle of telling the truth and coming forward with information in internal discussions is important.

SEC rules require public companies to promptly disclose any "amendments to, and waivers from, their ethics codes." If a public company fails to take prompt action regarding any possible material departures from its code of ethics by senior financial officers, SEC rules call it an "implicit waiver" which also must be disclosed to investors. See below:

2. For purposes of this Item:

a. The term "waiver" means the approval by the registrant of a material departure from a provision of the code of ethics; and

b. The term "implicit waiver" means the registrant's failure to take action within a reasonable period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer, as defined in Rule 3b-7 (§240.3b-7 of this chapter) of the registrant

As I detailed above, SEC rules define, "code of ethics" as “…written standards that are reasonably designed to deter wrongdoing and to promote Honest and ethical conduct…” If a senior financial officer (CEO or CFO) of a public company is dishonest or engages in unethical conduct and the company fails to act on such misconduct, it is considered an “implicit waiver.” Any waivers, even “implicit waivers” from a public company’s code of ethics by such officers are considered material reportable events.  A failure to report any such waivers violates securities law.

The SEC rules under Sarbanes-Oxley for public company codes of ethics broadly define corporate malfeasance by senior financial officers, requires such companies to promptly report any misconduct, prohibits companies from ignoring any misconduct, and makes it relatively easy for investors to sue for misconduct.

In the past, I’ve advocated holding Overstock.com (NASDAQ: OSTK) and its CEO Patrick Byrne accountable under Sarbanes-Oxley corporate governance rules for documented lies to investors, perennial GAAP violations, and stalking of critics. The SEC can take a lesson from the Amedisys complaint, too.

Hopefully, more lawsuits will cite code of ethics violations by public company senior financial officers in the future.

Written by:

Sam E. Antar

Update:

July 7, 2010: Open Letter to the Securities and Exchange Commission: Investigate Troubling Issues at Amedisys Missed by Wall Street Journal

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, here, and here). In addition, the SEC is investigating possible GAAP violations by Bidz.com (NASDAQ: BIDZ) after I alerted them the company's inventory accounting practices.

I do not own Overstock.com or Bidz.com securities long or short. My exposure of confirmed financial reporting violations by Overstock.com and possible financial reporting violations by Bidz.com was a freebie to securities regulators to 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. I plan on frying in hell with other white-collar criminals for a very long time. Lawsuits citing code of ethics violations will help me find plenty of company in hell.

I do not own any Amedisys securities long or short.

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

Updated to include today's announcement of David Chidester leaving the company

To KPMG:

Recently, your firm was naive enough to become Overstock.com’s (NASDAQ: OSTK) new auditors, after the company fired and publicly vilified Grant Thornton rather than properly follow Generally Accepted Accounting Principles (GAAP) as recommended by them. Prior to firing Grant Thornton, the Securities and Exchange Commission started investigating your new audit client as a result of reports in this blog detailing how the company improperly setup “cookie jar” reserves to materially inflate its financial performance in future accounting periods (Q4 2008 and thereafter).

Roddy Boyd's exposed new troubling issues in the Big Money

Overstock.com faces a probable investigation by the New York State Department of Taxation and Finance for its sales tax dodge scheme known as “Operation Heist and Freeze” that was exposed by investigative journalist Roddy Boyd in The Big Money.

In addition, the SEC will widen its investigation of Overstock.com based on internal company documents obtained by the Big Money that show that CEO Patrick Byrne and former CFO David Chidester knowing signed false Sarbanes-Oxley certifications. The Big Money obtained internal Overstock.com documents that revealed that the company's "software system couldn’t track its inventory well, its accounting staff had trouble deciphering how much it owed and whom it had to pay." Those documents contradict Sarbanes-Oxley certifications signed by CEO Patrick Byrne and former CFO David Chidester claiming that Overstock.com had effective internal controls over financial reporting.

Overstock.com and David Chidester part ways

A day after Boyd's article was published, Overstock.com and David Chidester parted ways by "mutual agreement." Just this morning, Overstock.com announced 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”).

In addition to signing false Sarbanes-Oxley certifications, Chidester made false claims to investors about Overstock.com's compliance with SEC Regulation G, governing non-GAAP financial measures, as I will describe in more detail later in this blog post.

The term "mutual agreement" usually means that the company does not want David Chidester around to answer your questions and Chidester does not want to be readily available to respond to your inquires. After all, David Chidester knows where the "black holes" are to be found in Overstock.com's financial reporting irregularities.

Fate seems to bring us together again

It seems like fate that our paths must cross again. Many years ago, KPMG was Crazy Eddie’s auditors.* While, I scammed you, your audit team was grossly negligent. Your eagerness to please us as an audit client made committing fraud quite easy at Crazy Eddie.

Unlike you, Grant Thornton was not eager to please Overstock.com by going along with its financial reporting charades. Grant Thornton was fired and vilified by the Overstock.com, for telling the company to restate its financial reports and comply with GAAP.

Note: KPMG's predecessor firms Main Hurdman and Peat Marwick Main were Crazy Eddie's auditors. They are the "M" and the "P" in KPMG.

Personal advice

Personally, I believe that you should cut your potential exposure and resign. Some clients are simply not worth the risk. Since I don't believe that you will resign, I feel that I owe you some advice just for old time’s sake to avoid another audit meltdown similar to what happened at Crazy Eddie. However, I have my doubts that any firm can properly audit Overstock.com given its apparent lack of effective internal controls, its management integrity issues, and its continued willingness to violate GAAP and SEC disclosure rules.

Statement of Auditing Standards No. 99 - Consideration of Fraud in a Financial Statement Audit

In particular, you must consider Statement of Auditing Standards No. 99 entitled, “Consideration of Fraud in a Financial Statement Audit” in both the planning and execution of your Overstock.com audit engagement. KPMG was hired by the company only eight days before its fiscal year ended. It is quite easy for Overstock.com's dishonest management team to lie to you, to mislead you, and conceal transactions from you as its auditors because you arrived late on the scene. Hopefully, you paid careful attention to the requirements of SAS No. 99, in particular the following guidance provided below:

Creating a Culture of Honesty and High Ethics

It is the organization's responsibility to create a culture of honesty and high ethics and to clearly communicate acceptable behavior and expectations of each employee. Such a culture is rooted in a strong set of core values (or value system) that provides the foundation for employees as to how the organization conducts its business. It also allows an entity to develop an ethical framework that covers (1) fraudulent financial reporting, (2) misappropriation of assets, and (3) corruption as well as other issues.

Setting the Tone at the Top

Directors and officers of corporations set the "tone at the top" for ethical behavior within any organization. Research in moral development strongly suggests that honesty can best be reinforced when a proper example is set—sometimes referred to as the tone at the top. The management of an entity cannot act one way and expect others in the entity to behave differently.

In many cases, particularly in larger organizations, it is necessary for management to both behave ethically and openly communicate its expectations for ethical behavior because most employees are not in a position to observe management's actions. Management must show employees through its words and actions that dishonest or unethical behavior will not be tolerated, even if the result of the action benefits the entity. Moreover, it should be evident that all employees will be treated equally, regardless of their position.

For example, statements by management regarding the absolute need to meet operating and financial targets can create undue pressures that may lead employees to commit fraud to achieve them. Setting unachievable goals for employees can give them two unattractive choices: fail or cheat. In contrast, a statement from management that says, "We are aggressive in pursuing our targets, while requiring truthful financial reporting at all times," clearly indicates to employees that integrity is a requirement. This message also conveys that the entity has "zero tolerance" for unethical behavior, including fraudulent financial reporting.

The cornerstone of an effective antifraud environment is a culture with a strong value system founded on integrity. This value system often is reflected in a code of conduct. The code of conduct should reflect the core values of the entity and guide employees in making appropriate decisions during their workday.

The “tone at the top” at Overstock.com is set by its CEO and major shareholder Patrick M. Byrne, who has lied to investors about the company’s financial performance dating as far back as the year 2000 and continues his unabated lies to them today.

Every single initial financial report for every reporting period issued by Overstock.com from the company's inception to date has violated GAAP and other SEC disclosure rules. So called "clean" audit opinions issued by PricewaterhouseCoopers (predecessor auditor to Grant Thornton) turned out to be wrong as the company has already restated its financial reports two times in the last three years. Overstock.com now faces a third restatement of such reports as a result of its improper use of "cookie jar" reserves under investigation by the SEC.

Rather than comply with GAAP and SEC disclosure rules, the company stubbornly continued to violate such rules and engaged in a campaign of harassment, intimidation, smears, threats, and pretexting directed at me and other critics (Details from my blog here and here and from investigative journalist and blogger Gary Weiss here). Overstock.com's independent audit committee has failed to enforce the company's Code of Business Conduct and Ethics and rein in management's improper and illegal behavior.

Therefore, I believe that it is nearly impossible for you to adequately increase the scope of your field work to conduct a proper audit of Overstock.com, as required by SAS No. 99. There are simply too many management integrity issues. The company's management has continuously lied to investors and has shown a willingness to issue financial reports that violate GAAP and SEC disclosure rules. On top of that, you cannot make up for the fact that you arrived on the scene only eight days before the fiscal year ended.

Below is a summary of management's continuous pattern of lying to investors and willful failure to follow GAAP and SEC disclosure rules.

Lies by Patrick Byrne prior to Overstock.com's initial public offering in 2002

From December 2000 to March 2002, Patrick Byrne lied about Overstock.com’s financial performance in a series of interviews on national television and in various publications prior to the company’s initial public offering in March 2002. Patrick Byrne deceptively used pro forma non-GAAP “gross value merchandise value sales” (instead of the lower GAAP commission revenue) to hype the company’s top-line performance in order to falsely claim that Overstock.com was profitable, when it never was profitable (Details here).

Overstock.com violated SEC Regulation G governing non-GAAP financial measures

From Q2 2007 to Q2 2008 Overstock.com improperly computed EBITDA by starting its calculation with operating income and adding back interest, taxes, depreciation, amortization, and stock based compensation. In other words, Overstock.com 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, Overstock.com 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 Overstock.com 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 Overstock.com improperly eliminating stock-based compensation from its EBITDA calculation, the company was materially overstating its reported EBITDA by such amount in each reporting period.

When I confronted management about its EBITDA violations, Patrick Byrne, Jonathan Johnson, and David Chidester lied about the company's compliance with SEC Regulation G during quarterly conference calls and Byrne vilified me for raising the issue. In Q3 2008, Overstock.com 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 involving customer refund and credit errors described below. 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 (Details here).

Overstock.com's history of GAAP violations

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

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

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 properly reflect income it already earned from offsetting costs and reimbursements due from its fulfillment partners, less a reasonable estimate for uncollectable amounts. Instead Overstock.com violated GAAP by improperly moving income that the company already earned in Q2 2008 and prior reporting periods to Q4 2008 and future reporting periods. In effect, Overstock.com improperly created a "cookie jar reserve" to materially inflate future earnings or reduce future losses (Details here).

In February 2009, I alerted both the Securities and Exchange Commission and Overstock.com's audit committee and management about the company’s improper use of a "cookie jar" reserve to inflate its financial performance in future reporting periods. Overstock.com continued to stubbornly refuse to restate its financial reports to comply with GAAP.

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

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 (Details here).

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 and comply with GAAP. On November 13, 2009, Overstock.com fired 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. (See details here).

SAS No. 99 clearly states:

The cornerstone of an effective antifraud environment is a culture with a strong value system founded on integrity.

If company management can lie to investors, what makes you think that they won't lie to you in their efforts to violate GAAP and SEC disclosure rules? Therefore, if you decide to maintain Overstock.com as your client, proceed at your own risk.

Warmest regards,

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, 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.

Why Abolishing or Weakening Sarbanes-Oxley is Insane! Lessons from the Crazy Eddie Fraud

A message to any Democrat, Republican, or Independent lawmaker who is thinking of abolishing or weakening the Sarbanes-Oxley Act of 2002. As a convicted felon, who committed his crimes in cold blood and with callous disregard for my victims, I will publicly endorse each and every one of you as a champion of the white collar criminal class that are a cancer on the integrity of our great capitalist economic system. If you abolish or weaken Sarbanes-Oxley, you will make it much easier for corporate white collar criminals to cook their books and defraud investors.

According to Floyd Norris's column in the New York Times column:

The House Financial Services Committee this week approved an amendment to the Investor Protection Act of 2009 — a name George Orwell would appreciate — to allow most companies to never comply with the law, and mandating a study to see whether it would be a good idea to exempt additional ones as well.

In a new series of blog posts over the next few months, I will document why Sarbanes-Oxley should be strengthened with added reforms to protect the integrity of our capital markets. For starters, please read a letter that I submitted to the SEC and PCAOB Roundtable on Internal Control Reporting Requirements in 2006.

Respectfully,

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

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

The main pillar of our capitalist economic system is the integrity of financial information. When the markets loose faith in the integrity of financial information, the collective market capitalizations of all companies suffer. Today, we a suffering a loss of faith and confidence in the integrity of the financial information reported by public companies and the result has been a downward spiral in stock prices and a tightening of credit that threatens to destroy our economy.

There are some small steps we can do now to restore faith in our markets and get our economy back on track.

Continuity: We immediately need a new Treasury Secretary that both Democrats and Republicans can agree on now, to provide continuity no matter who wins the November election. That means that President George Bush, Democratic Party candidate Barack Obama, Republican Party candidate John McCain, Speaker of the U.S. House of Representatives Nancy Pelosi, and other leaders should stop their silly posturing and get together right now to select a mutually agreeable Treasury Secretary for the long haul to get us out of this mess.

Capital Formation: The government should declare a capital gains holiday for all new investments made during the next six months and held for at least three years. A capital gains holiday will result in a major infusion of badly needed capital and bolster our economy. It will reward risk taking during our uncertain times.

Bankruptcy Laws: Bankruptcy laws should be amended to allow financially responsible homeowners to regain their financial footing. Subject to certain guidelines, they should be permitted to make reduced payments on their mortgages and the amount of any reduction in payments can be added to their principal balances to be repaid over time.

I believe that the above steps will be better than the ill conceived $700 billion plus bail out plan offered. The current bail out plan should be scrapped. America requires a Sarbanes-Oxley II to enhance corporate financial disclosures, controls, and governance. For additional information about Sarbanes-Oxley, start here.

Blog Update

The Stupid Nation Blog adds:

Our allegedly "conservative" led government seems hell bent for leather to nationalize the U.S. economy, and in significant measure, dismantle capitalism (whether temporarily or permanently remains to be seen).

Later, the blog goes on to say:

We need calm, deliberate, thoughtful Congressional action consistent with capitalist principles to help right the markets. Throwing capitalism out with the rest of the bad debt trash is not the answer. The world is littered with failed socialist states, and the graveyards of Europe and Asia are chock full of the victims of socialism and it's hideous derivatives. Some deregulation may have played a part in this confluence of horrid events, but we maintain that it was big liberal government meddling in the mortgage market which is the epicenter of this calamity. Without disastrous Government intervention, the sub-prime market would never have been able to become the monster that swallowed the world.

I agree and the Stupid Nation Blog is recommended reading for every concerned voter looking for a well analyzed and informative view of events.

More to come in future blog posts.

To be continued....

Written by:

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

Disclosure: No preference in the election at this time. Just disgusted with the lack of leadership from both political parties and the pandering that is going on.

Barry Minkow Finds Herbalife President Falsified Credentials

According to a Wall Street Journal article by Keith J. Winstein published today, Gregory Probert, the president and chief operating officer of Herbalife Ltd. (NYSE: HLF) does not have a Masters of Business Administration degree from California State University as claimed in at least nineteen SEC filings by the company. My good friend, former fraudster turned fraud fighter, Barry Minkow, co-founder of the Fraud Discovery Institute hired a private investigator to examine and verify the biographies of Herbalife executives.

According to the Wall Street Journal:

In response, Mr. Probert, 51 years old, said he nearly completed an M.B.A. at Cal State, but "the truth is that my vanity prevailed and I did not take action" to correct Herbalife's biography of him "even though I was aware it was not accurate."

"I suppose that some of us who have been blessed with a certain degree of good fortune are tempted to see the paths we took in romantic versus strictly factual ways," Mr. Probert wrote in an email. "I was wrong for succumbing to my vanity and apologize for doing so."

Barry Minkow has publicly acknowledged that he is shorting Herbalife and has provided law enforcement with online access to his trading account. The Fraud Discovery Insititute has exposed over twenty frauds totaling in excess of a billion dollars.

Herbalife told the Wall Street Journal that the company would correct its disclosures and remove any mention of Mr. Probert's falsely claimed M.B.A.

Gregory Probert's lie about obtaining a Masters of Business Administration degree from California State University violates Herbalife's Corporate Code of Ethics and Business Conduct. See the quote below:

Under various laws, the Company is required to maintain books and records accounting for the Company's transactions. It is mandatory that these books and records be accurate and that they include all pertinent information on a timely and understandable basis. In addition, reports and documents that the Company files with or submits to the Securities and Exchange Commission (SEC), as well as other public communications, must contain full, fair, accurate, timely and understandable disclosure.

Dishonest reporting, or failure to disclose material terms of a transaction on a timely basis, is strictly prohibited. An individual cannot knowingly report information that is inaccurate or organize it in a way intended to mislead or misinform those who receive it.

Employees must not make false or misleading statements in external financial reports, SEC filings or submissions, environmental monitoring reports, other documents submitted to or maintained for government agencies, or other public communications. Dishonest reporting can lead to civil or criminal liability, including significant monetary fines for the Company and possible jail sentences and/or fines for you.

Message to Gregory Probert: You should immediately resign and hire a good securities law attorney. How long did you really think you could continue with your charade knowing that the Fraud Discovery Institute was carefully examining Herbalife's SEC dislosures? If you don't resign, Herbalife Chairman and CEO Michael O. Johnson should fire you. You can read the SEC's Code of Ethics requirements under the Sarbanes-Oxley Act here. There is a saying, "It takes one to know one."

In a previous blog post, I detailed the Fraud Discovery Institute's "Top Ten Red Flags for Fraud at Herbalife."

Disclosure: In the past, I have provided funds to the Fraud Discovery Institute to cover costs of investigations. At the time of this blog post, I am not short or long Herbalife.

Written by:

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

Open Letter to Public Company Accounting Oversight Board

Dear Public Company Accounting Oversight Board:

According to Section 104 of the Sarbanes-Oxley Act you are required to “conduct a continuing program of inspections of registered public accounting firms.”

I am trying to determine how many such inspections you conduct with your limited resources by each individual accounting firm and the scope of each inspection. In addition I would like you to provide the public with the percentage of how many such inspections result in audit deficiency citations by each firm. If you can further classify such audit deficiency citations by degree of seriousness as it relates to the total number of inspections conducted that too would be appreciated.
If you have any questions, please call me (my phone number is listed on my web site http://www.whitecollarfraud.com/).

The public needs to know the relative quality of the audits of public companies by the accounting profession. After reviewing your web site I believe that inadequate data exists to make such a determination.

The inspection reports are too vague to get any meaningful quantifiable information as to the overall quality of audits conducted by individual firms. For example there is no direct information on any of the inspection reports that tells of the total amount of audit inspections conducted. It only gives the total amount of field offices visited.

I sent you an e-mail requesting certain information below:

• Does the PCAOB release statistical information as to how many such inspections are conducted? (By each Auditor and overall)
• Does the PCAOB release statistical information as to the scope of the inspections done? (By each Auditor and overall)
• Does the PCAOB release statistical information as to the percentage of inspections that result in deficiencies? (By each Auditor and overall)
• Does the PCAOB release statistical information of the possible or potential economic impact of deficiencies as a percentage of each audit and total audits inspected? (By each Auditor and overall) (By each Auditor and overall)
• Would the PCAOB release any of the above information if available? (By each Auditor and overall)
• Would the PCAOB release any statistical analysis as to the overall quality of the audits it inspects? (By each Auditor and overall)

I received the following reply from you:

The PCAOB has determined what information is to be made public via the public portions of the inspection reports, which can be found on the PCAOB’s website: http://www.pcaob.org/ and the annual report it issues.

Thank you

After receiving the e-mail I found out that the PCAOB in its Annual Report does release the total number of inspections but does not break down the information by individual firm. It is impossible to derive that information by individual firm since the PCAOB does not provide individual audit firm inspection amounts. The PCAOB should have such information readily accessible.

As an entity that is supposed to promote transparency in financial information I find such an answer both unsatisfactory and appalling. I do not believe you need to be lectured by an ex-felon whose very actions helped contribute to the creation of the Sarbanes-Oxley statute and your agency.

However, you should know that unlike most CPAs (many of whom serve in your entity) who passed the CPA exam being members of the (300 club with the curb) my average was 91.25% so I know a little bit about accounting. From my experience as a criminal I know a lot about white collar crime and your reason for being.

If I sound a little upset at you I am. Please do not play the side step with a felon like me who knows the game all to well. Be forthright and present your information front and center. If it is hidden some where on your website show it up front.

Now if it’s the law that is preventing such disclosure write a letter to Congress and change it. It should take about a week to get your people together to get the signatures. You have had years to do it. If the data is available it takes one of your people about a couple of days with an Excel spreadsheet to put it on your website front and center so every can read it and analyze it without going around circles.

Others are questioning your constitutionality. I have been a staunch ally. Maybe we should start from square one. If that actually happens, God help us all.

Respectfully,

Sam E. Antar (former Crazy Eddie CFO & ex-felon)

Financial Fraud: We Don’t Want These Companies to List Here

Let the markets with less “regulation” have them - those companies that do not want to meet our standards of corporate governance, accounting, and internal controls. We do not want them or need them here.

The London Market in particular with lower standards attracted these companies and now look what has happened to them.

An article in the New York Post entitled “Brits Get Bit” by Paul Tharp says:

London is paying a steep price for poaching a slew of new stock listings from Wall Street last year - financial fraud in the United Kingdom rose 40 percent.

Later the article reports:

British market watchers believe that shrewd charlatans, whose financial tricks are well known to U.S. authorities, are having a field day in the laid-back London scene.

The article is based on a report by BDO Stoy Hayward.

Remember all that talk about IPOs going overseas because of the regulatory burdens of the US markets. Many like the Paulson Committee Capital Markets Regulation blamed Sarbanes-Oxley.
Others like financial journalist Herb Greenberg said in his Market Blog in a commentary entitled "Why a Slow Down in IPOs May not be Bad" perhaps we are better off not letting certain companies go public in the US:

Has anybody stopped, for just a moment to ask whether fewer IPOs might actually be a good thing? Seriously, maybe some of these companies shouldn't go public in the first place, especially if they fear or don't want to pay for laws that are attempting to crack down on skullduggery.

Kevin LaCroix said in the D & O Diary Blog in his commentary entitled “Is London’s Light Touch Attracting Fraudster’s:

…perhaps the U.S. securities markets may be better off without at least some of the companies that are avoiding the U.S. exchanges’ tougher listing requirements

Perhaps Jack Ciesielski said it best in the AAO Blog in his commentary entitled "Known By The Company You Keep":

So - is worth it to be in that particular game? If you’re known by the company you keep, it might be a lot more costly to try to pacify the kind of stuff that’s moved to London. Investors should be thankful that seedier companies have found the U.S. markets too difficult to easily game because of Section 404.

May I say that it drives me “insaaane” as a former criminal when I see many of my victims and potential victims taking steps that would undermine the protections they require to prevent white collar crimes that may harm them?

The great American capitalist economic machine requires integrity in financial reporting.

When Regulatory Relief Really Means Relaxing Standards of Transparency and Integrity

The Committee on Capital Markets Regulation released its interim report this week. According an article in USA Today entitled “Group: Sarbanes-Oxley needs to loosen up” written by Greg Farrell and published on November 29, 2006:

…the study was funded by the Starr Foundation, a group headed by former AIG chairman Maurice "Hank" Greenberg, and a philanthropist who didn't want to be named.

Floyd Norris commenting in his New York Times blog “Notions on High and Low Finance” wrote in a post entitled “Who Paid for the Anti-Regulation Report?”

The report of the Committee on Capital Markets Regulation…has a distinct anti-regulation tinge, arguing that excessive regulation is hurting the United States competitively.

I wrote the following comment in Mr. Norris’s blog:

Perhaps a more appropriate name for the “Committee on Capital Markets Regulation” would be the “Political Action Committee on Reduction of Standards for the Integrity of our Capital Markets.” 

Members of this Committee under the guise of seeking regulatory relief from burdensome rules are seeking to relax standards of transparency and integrity which are vital to our financial markets. Need I remind you the about the disastrous results of loosening educational standards in America a generation ago?

If this Committee whose purpose is to help capitalism by promoting transparency and integrity in our capital markets wishes to lift itself of the “Political Action Committee” designation, it should start by making full disclosure of its funding sources at the very least.

Many of the solutions offered in the report are downright defeatist. Rather than seeking liability protection for external auditors and outside directors, the report does not address the basic issues that cause these litigations to occur – auditor and outside director negligence.

The Committee recommends “risk based approach” to regulation and audits. However, we have an education system that does not adequately prepare our Certified Public Accountants to be sufficiently judgment oriented in their professional responsibilities. That is why we have an audit process that is nothing more that “fill in the blanks” and “check the boxes.”

Most CPAs will never take a single specific college level course in fraud, internal controls, securities law, and many other crucial subjects prior to graduation. After graduation and obtaining a CPA license the American Institute of Certified Public Accountants only “recommends” but does not require that 10% of annual continuing education courses be taken in the subject of fraud – hardly enough.

Audits are over-used as training grounds for relatively inexperienced, under skilled, and under trained staffers who are not adequately supervised by more knowledgeable senior accountants.

We have outside directors who can still have stock options and own stock in the company of the Board’s they serve on.

Many of these Board Members have very nice resumes. However, they have no experience in the company’s industries whose Board they serve on. They have no relevant experience and education to fulfill their role of effective Board Members. In fact, their sole reason for being appointed as Board Members with their nice looking but irrelevant resumes is purely “window dressing.”

The external auditors are supposed to be monitored by the Audit Committee of the Board of Directors. In practice such Audit Committees are no better prepared (if not worse) to handle their responsibilities than the external auditors they oversee.

Many Audit Committee members receive compensation in stock options or own company stock of the Board they serve on which provides a disincentive to effective independent oversight and can affect their objectivity and professional skepticism.

In addition, many members of Audit Committees have no formal accounting, auditing, internal control, and fraud education or backgrounds. Their requisite education, skills, training, and experience required to fulfill their responsibilities are lacking.

The convergence of “ill trained” auditors and “window dressed” Audit Committees creates ineffective oversight of the financial integrity of companies and provides a “perfect storm” for more massive frauds to come.

My message to the Committee on Capital Markets Regulation and the readers here is that transparency and financial integrity while difficult is necessary and achievable.

Companies obtaining capital from public markets have a fiduciary duty not only to their shareholders but to the integrity of our great capitalist free market economic system to invest resources in good internal controls and oversight to provide comfort as to the transparency and integrity of their financial reports.

The accounting profession talks about an “expectations gap” regarding the public perception of what audits are supposed to achieve. Most problems arising today involve material fraud which has nothing to do with such an excuse.

I challenge the accounting profession to self evaluate and improve itself and move away from the defeatist attitude of looking to cut your losses. With educational reforms you can capably perform your tasks and reduce your risks.

The SEC should revise corporate governance rules regarding the qualifications of Board Members (especially Audit Committee Members) and not permit such members to own stock, receive stock options, and receive earnings based compensation in the company of the Board they serve on.

Response to Senator Schumer and Mayor Bloomberg Commentary on Sarbanes-Oxley “Reform”

Dear Senator Charles E. Schumer and Mayor Michael R. Bloomberg:

I read with great interest you commentary entitled “To Save New York, Learn from London” published in the Wall Street Journal on November 1, 2006.

While your commentary raises many valid issues, there are some issues I respectfully ask you to consider before you decide on any “reform” of the Sarbanes-Oxley Act.

In your commentary you wrote:

Since its passage, auditing expenses for companies doing business in the U.S. have grown far beyond anything Congress had anticipated.

Prior to Sarbanes Oxley accounting firms used to offer consulting services to the client’s they audited. I ask you to consider that prior to Sarbanes Oxley accounting firms would keep audit fees artificially low (as a loss leader) so they could attract higher margin consulting business from their current and future clients.

In addition I would caution against “turning back the clock” and having the inherent “conflict of interest” of having such accounting firms offer consulting services to the client’s they audit.

I agree with your commentary that:

…we must not in any way diminish our ability to detect corporate fraud and protect investors.

However, any “reform” of Sarbanes Oxley must include higher educational standards for the accounting profession.

Today a significant majority of accounting students prior to obtaining their CPA license never take a single specific college level course in white collar crime, fraud, securities law, internal controls, criminology and other crucial subject areas they require to be effective auditors. Even as licensed certified public accountants they are only recommended (and not even required) by the American Institute of Certified Public Accountants (AICPA) to take 10% of their continuing education requirement courses in fraud (at most 4 hours a year). We must require as a minimum more a more educated, trained, skilled, and experienced accounting profession as part of any “reforms.”

Legislation like Sarbanes-Oxley can only be as good as the profession who is called on to police it – our accounting profession.

Senator Schumer, you may seek the advice of your brother Robert B. Schumer now a partner at Paul, Weiss, Rifkind, Wharton, and Garrison. Before, becoming a partner he handled Crazy Eddie’s securities issues on behalf of his law firm.

Robert Schumer and the other attorneys at Paul, Weiss, Rifkind and Garrison asked many important questions to Crazy Eddie management and its auditors. Such questions made my co-conspirators and I fear the consequences of their determined efforts to obtain the truthful answers.

However, at almost every turn we found our auditors unwittingly aiding us because the corrosive affects their lack of independence (from consulting work which impeded their objectivity and professional skepticism) and their lack of enough education, skills, training, and knowledge which caused them to give inaccurate answers to the attorney’s very good questions.

While the law firm of Paul, Weiss, Rifkind, Wharton, and Garrison was rightfully never held in any way responsible or negligent regarding the Crazy Eddie fraud, as innocent victims of our lies, they paid a heavy price in legal fees defending their competence.

Senator Schumer and Mayor Bloomberg, I am quite sure you agree that the main pillar of great free market capitalist economic system is the integrity and reliability of financial information.

As an ex-felon I caution you to be very careful that any steps taken to “reform” Sarbanes Oxley do not have the unintended result of later causing our financial markets to lose faith in the reliability and effectiveness of external audits performed by competent independent external auditors. Any loss in the faith of our financial markets in the integrity of financial information will cost much more than the compliance costs of Sarbanes-Oxley that certain people are trying to reduce.

Respectfully,

Sam E. Antar (former Crazy Eddie CFO and ex-felon)

Skilling's Sentence: What It is Good For and What Is Still Required

White collar crime while not a violent crime can be in many ways more brutal in the collective harm in inflicts on our society. White collar crime harms not only the company and its direct victims (shareholders, employees, and company creditors) but the integrity of our financial markets.

When there is any doubt as to the reliability of financial information the collective market capitalization of our public companies suffer resulting in lost wealth such as reduced pensions benefits to retirees, higher costs of capital, and higher costs of debt. Higher costs of doing business reduce employment and taxes. Therefore, white collar crime is a scourge that destroys our economic fabric.

The sentencing of Jeffrey S. Skilling to 24 years and 4 months in prison recognizes these important facts. White collar crime must be taken seriously for what it is – a brutal crime which inflicts collective harm on the innocent and often inflicts collateral damage on society.

However, while we must hold white collar criminals fully responsible and accountable for their actions long prison terms do not by themselves prevent white collar crime.

The sentencing of Mr. Skilling will not stop any crimes in progress or cause any criminal to wake up the next day with any new found morality. Criminals can only be prevented though effective deterrents though barriers such as strong internal controls, effective oversight, and “checks and balances.”

We must require all organization types (businesses, non-profits, and governmental organizations) to have strong and verifiable internal controls. Such internal controls must be monitored, evaluated, and audited by competent fully independent external auditors.

We cannot retreat from the reforms legislated under Sarbanes-Oxley as some persons have proposed but must instead strengthen them with increased educational standards on the accounting profession that enforces this important law. Auditors must do no consulting work for their clients.

We must require the internal audit function to report to an Audit Committee made up of only independent members of the Board of Directors and not report to the CEO or CFO. The internal audit profession must be licensed by the states similar to way CPAs are.

Punishment and prison are important. However, unless integrated with prevention, professionalism (competence), and power (legislation) there will be many more Enron’s to come.