Wednesday, May 26, 2010

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.

Monday, May 24, 2010

The Brutality of Non-violent Organized White-Collar Crime Groups

The most difficult crimes to deter, investigate, and prosecute are committed by organized crime groups who share the same race, religion, ethnic, and cultural backgrounds. The social cohesiveness of such criminal groups makes it relatively easy for them to coordinate their actions to effectively execute and cover up their crimes over long periods of time.

When most people think of organized crime, they think in terms of violent criminal groups such as the Mafia. However, not all organized crime groups use violence in the execution of their crimes.

Some of the most effective organized crime groups consist of white-collar criminals who do not use any violence at all. Such organized white-collar criminal groups can be found among primarily family based businesses, even after such businesses become public companies because their management is dominated by well coordinated and cohesive family members.

Members of the Antar family, myself included, who committed the Crazy Eddie fraud, used a combination of deceit, charm, and distraction to effectively commit our crimes over an 18 year period. While we didn’t kill people, we were just as brutal and caused just as much harm as if we were violent criminals by emptying the wallets of our victims. You can steal more with a smile than you can steal with a gun.

I was recently interviewed by Ilene Carrie (syndicated blogger, editor at Phil's Stock World, and attorney) about the Crazy Eddie fraud and the mind, motivations, and techniques of white-collar criminals. To read part 1 of this provocative interview entitled "No Redemption", please click here.

I warned her that by the time she finished the interview, I'd make her into a "paranoid schizophrenic" who would never trust another man again.

Written by:

Sam E. Antar

Special thanks to Phil Davis, fellow Seeking Alpha contributor and founder of Phil's Stock World for letting me share my views on white-collar crime with investors.

Recommended Reading

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

October 9, 2009: CNN.com - Financial fraud 101 -- Accounting for criminals by Kevin Voigt

March 9, 2010: Jr Deputy Accountant - The Wall of False Integrity Tour: Stanford (With Sam Antar) by Adrienne Gonzalez

May 3, 2010: Con Artist Hall of Infamy - Video clips of our interview with Sam Antar of Craaaazy Eddie! by Becca MacLaren

May 9, 2010: Simoleon Sense - GuestPost: Fraud Girl Interviews Convicted Financial Felon Sam Antar

May 23, 2010: Simoleone Sense - Guest Post: Fraud Girl “Learning From Frauds, Armstrong’s Denial, & The Body Language of Deceit

Other featured interviews

Selling America Short: The SEC and Market Contrarians in the Age of Absurdity by Richard Sauer (Wiley 2010)

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).

I do not own Overstock.com securities long or short. My exposure of financial reporting violations by Overstock.com was a freebie to securities regulators to get me into heaven, though I doubt that I will ever 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.

Wednesday, May 19, 2010

Barry Minkow Gives Medifast the Middle Finger

If Medifast (NYSE: MED) thought that a lawsuit and complaints to the Securities and Exchange Commission against certain critics would get them to back down and retreat from criticizing the company, they are badly mistaken. This morning, Fraud Discovery Institute co-founder Barry Minkow effectively gave Medifast the middle finger by releasing a very detailed and potentially devastating report by pyramid scheme expert Robert L. FitzPatrick detailing additional allegations of potentially serious improprieties concerning Medifast's business model, marketing practices, and financial disclosures to investors in reports filed with the SEC. (Robert L. FitzPatrick’s 18 page report can be downloaded here).

Note: Convicted felon Barry Minkow (co-founder of Fraud Discovery) has publicly disclosed holding short positions in Medifast securities. As a successful fraud investigator, Minkow has uncovered over $1.8 billion of fraud involving over twenty companies and has received an official commendation from the FBI for his work in uncovering crime. Minkow and I are close personal friends and I do research work for Fraud Discovery on InterOil and Medifast's auditors, but I do not own any securities in InterOil or Medifast, long or short.

FitzPatrick’s report alleges that Medifast has a "troubled history" of "making false and misleading claims regarding its products" and takes aim at the company's Take Shape for Life (TSFL) division, which is responsible for Medifast's recent growth in revenues and profits. Fraud Discovery's press release alleges that Medifast's TSFL division is effectively a multi-level marketing scheme involving:

... pyramid-style selling - is unsustainable and will lead to a revenue trajectory similar to other multi-level marketing companies: dizzying initial expansion followed by lackluster revenue or worse.....

[Snip]

Despite heady starts, revenues from multi-level marketing companies usually slow or fizzle out all together because the business model relies mostly on an endless recruitment of independent salespeople, most of whom make little or no money.

[Snip]

"Only a business model that relies on recruitment of new sales associates by promising income in a down economy - and not the sales of its product - can explain Medifast's revenue anomaly and more importantly, that deviation from the norm is unsustainable and can't continue because Medifast will not be able to keep recruiting a large army of sales associates."

While Medifast sells hope to new sales associates (most of whom lose money), in 2009 Medifast insiders dumped $11.5 million of company stock and just a few days ago, Shirley MacDonald, wife of Medifast Executive Chairman Bradley T. MacDonald dumped 133,402 company shares and pocketed $4.69 million.

Medifast Filed Lawsuit

In February 2010, Medifast filed a multi-million dollar lawsuit alleging defamation by Fraud Discovery Institute, its co-founder Barry Minkow, pyramid scheme expert Robert L. FitzPatrick, acclaimed forensic accountant and book author Tracy Coenen, best-selling author and former investigative journalist William Lobdell (who now writes for iBusiness Reporting, a blog funded by Fraud Discovery), and an anonymous Yahoo massage board poster.

In an open letter Medifast Board Chairman Bradley T. MacDonald and Chief Executive and CFO Michael S. McDevitt, I suggested that they grow some hair on their chests and "stop acting like whining cry babies to investors, securities regulators, and now, the federal courts." I noted that:

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

The defendants have since filed, what is known as, Anti-Slapp motions claiming that Medifast is attempting to limit their First Amendment right of free speech under the United States Constitution (Details here and here). In her blog, Tracy Coenen noted:

SLAPP stands for Strategic Lawsuit Against Public Participation.  It’s basically when a big company tries to shut up a little guy with expensive litigation. In my opinion, Medifast sued me and others in an attempt to get us to stop publicly analyzing or criticizing the company and it’s multi-level marketing business model.

In filing an anti-SLAPP motion, we are essentially asking the court to rule in our favor and in favor of free speech. Consumers should have the right to discuss, analyze, and criticize companies without the fear of expensive lawsuits.

In 2008, Fraud Discovery and Minkow won a similar Anti-Slapp motion filed by USANA (NASDAQ: USNA) and they were awarded legal fees to reimburse them for defending that company's frivolous lawsuit.

Responding to Medifast's recent lawsuit against himself, FitzPatrick wrote in his report that:

Medifast has recently characterized inquiries and critical examinations of its business model and marketing tactics as “attacks.” It has sought to silence me and others by means of a lawsuit in which Medifast has accused me of defamation, vilified my character, publicly denigrated my credentials and sought to silence me and others. This lawsuit has had a chilling effect on my willingness to continue to report and has created fear and concern for those I might collaborate with. It has inhibited communications and placed a financial and administrative burden on me that interferes with continued research and writing.

However, because truth is an absolute defense and my speech involves issues of public interest, I refuse to be bullied from accurate reporting. Of even greater importance is that one of the goals of my research and writing is to provide findings of fact to governmental agencies responsible for protecting consumers from companies involved in questionable business practices. Producing accurate information on multi-level marketing schemes that may prove valuable to regulatory agencies such as the FTC, SEC or state attorneys general and which may lead to governmental actions in consumer protection is a compelling reason for my continuing to investigate, analyze and produce reports such as this one. [Emphasis added.]

Whistleblowers like Minkow, FitzPatrick, Coenen, and Lobdell have the balls that certain simpletons and pussies working at the SEC simply don't have. The SEC needs more knowledgeable and hard working people like Richard Simpson, who successfully prosecuted the Crazy Eddie fraud and is now lead counsel in the SEC's cases against Goldman Sachs (NYSE: GS) and Sponge Tech (NASDAQ: SPNG).

Instead, there are certain rogue elements within the SEC who would much rather intimidate or ignore whistleblowers such as David Einhorn, Harry Markopolos, and others. Those naughty elements reward whistleblowers by biting the hand that feeds them. It seems that no good deed goes unpunished by the SEC, while the regulator continues to allow many corporate miscreants to go unpunished, too.

I'll have more to say about that issue, soon.

Written by:

Sam E. Antar

Recommended Reading:

TheStreet.com: SEC Doesn't Deserve to Exist by Gary Weiss

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 am planning to go straight to hell for my unforgivable crimes. However, certain other corporate miscreants won't meet me there due to indifference, incompetence, laziness, and a lack of balls by certain pussies and rogue elements working at the SEC.

Barry Minkow has publicly disclosed that he holds a short position in Medifast securities. From time-to-time, I do research for Fraud Discovery Institute on certain companies, such as InterOil and Medifast's former auditors. However, I do not own InterOil or Medifast securities long or short.

iBusiness Reporting is a division of Fraud Discovery.

Tuesday, May 18, 2010

Can We Trust Bidz.com’s Financial Reporting?

In Bidz.com's (NASDAQ: BIDZ) recent 2009 10-K and Q1 2010 10-Q reports, the company reported "material weaknesses in internal controls over financial reporting." Among the many weaknesses in internal controls cited by Bidz.com was "control deficiencies related... (iii) maintaining an effective control environment over management oversight and anti-fraud controls specifically in processing of financial transactions, vendor review and payment processing." However, management "concluded" its financial reports "are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States."

In other words, Bidz.com cannot effectively prevent anyone from robbing the company blind and cannot prevent material errors in paying its vendors. Yet, the company wants you to believe that its financial reports contain no material errors and comply with GAAP. Should we trust Bidz.com's numbers?

My personal opinion is to be very skeptical of Bidz.com's financial reporting because of such material weakness in internal controls, an SEC investigation of possible GAAP violations, and continuing auditor quality issues.

Possible GAAP Violations under Investigation by the Securities and Exchange Commission

Starting in March 2008, this blog detailed possible GAAP violations in Bidz.com inventory reporting and I notified the Securities and Exchange Commission of my concerns (Details here, here, and here). On February 23, 2009, the SEC responded to my reports and started investigating Bidz.com's inventory reporting. On October 27, 2009, the SEC expanded its investigation of Bidz.com to include "the Company’s co-op marketing contributions and minimum gross profit guarantees."

Auditor Quality Issues

Bidz.com claims that its auditors, Stonefield Josephson, performed "expanded procedures" to ensure that its financial reports are free from material accounting errors. However, sample audit inspections conducted by the Public Company Accounting Oversight Board (PCAOB) show a high pattern of significant deficiencies in audits conducted by Stonefield Josephson. Those deficiencies related to their failure to obtain "sufficient competent evidential matter to support its opinion on the issuer's financial statements."

According to a March 2007 PCAOB inspection report, Stonefield Josephson, Inc. was cited for significant deficiencies in five of thirteen audits reviewed or about 38.5% of audits sampled by them. According to the PCAOB report:

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

In October 2009, the PCAOB issued another inspection report citing Stonefield Josephson for significant deficiencies in a smaller sample of one of four audits reviewed or about 25% of audits sampled by them. Again, the SEC noted that the "Firm did not obtain sufficient competent evidential matter to support its opinion on the issuer's financial statements." So far six of seventeen Stonefield Josephson audits or about 35% of audits inspected by the PCAOB over the last several years reveal significant deficiencies.

A few months earlier, in June 2009, I recommended that Bidz.com consider replacing Stonefield Josephson as its auditors. However, Bidz.com recently recommended keeping Stonefield Josephson as its auditors for fiscal year 2010.

Closing comments

Another company plagued by internal control problems is Overstock.com (NASDAQ: OSTK). They had to restate their financial reports for the third time in three years due to deliberate GAAP violations exposed in this blog and reported to the SEC.

Public accounting firms are delusional if they think they can conduct a proper audit in the absence of adequate internal controls. Lax internal controls make it very easy for management and employees to commit fraud and Bidz.com acknowledges that it cannot prevent material fraud due to its weaknesses in internal controls.

Expanded audit procedures did not work for Crazy Eddie's auditors back in the day or for PricewaterhouseCoopers, Overstock.com's former auditors. Such expanded audit procedures do relatively little to reduce risk of material misstatements of financial reports since auditors cannot be in all places at all times during the accounting cycle.

Written by:

Sam E. Antar

Recommended Reading

Going Concern - Accounting News Roundup: Bidz.com’s Financial Reporting Could Have Some Issues; Tax Planning Stays One Step Ahead Financial Reform; Accountant Denied Bail in Terror Case by Caleb Newquist

Economic Policy Journal - Shia Labeouf SEC Investigation? by Robert Wenzel

Gary Weiss - Reporter's Stalkers Aped Overstock.com Hood Judd Bagley

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 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.

I do not own Bidz.com or Overstock.com securities short or long. My research on Bidz.com and Overstock.com 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 because my sins are unforgivable.

In any case, there are certain naughty elements within the SEC who reward whistleblower freebies by biting the hand that feeds them. It seems that no good deed goes unpunished by the SEC as the regulator continues to allow many corporate scammers to go unpunished, too. That issue may be the subject of a future blog post.

Friday, May 14, 2010

More Nepotism and Undisclosed Shady Related Party Transactions Found at InterOil

In his second installment in a series of reports detailing undisclosed shady related party transactions by InterOil (NYSE: IOC) insiders, iBusiness Reporting investigative blogger William Lobdell takes aim at certain transactions between the company and Direct Employment Services Corp (DESC).

Note: iBusiness Reporting is a division of Fraud Discovery Institute. Convicted felon Barry Minkow (co-founder of Fraud Discovery) and former LA Times investigative reporter William Lobdell have publicly disclosed holding short positions in InterOil securities. As a successful fraud investigator, Minkow has uncovered over $1.8 million of fraud involving over twenty companies and has received an official commendation from the FBI for his work in uncovering crime. Minkow and I are close personal friends and I do research work for Fraud Discovery on InterOil, but I do not own any securities in InterOil, long or short.

According to Lobdell, InterOil did not disclose that Christian Vinson who owned 50% of DESC, was the brother-in-law of InterOil CEO Phil Mulacek and Phil's brother Pierre Mulacek was a vice president and director of the company. See excerpt of Lobdell's report below:
...over three years ending in 2005, InterOil paid Direct Employment Services Corp. (DESC) nearly $1.8 million for unspecified "services" for "executive officers and senior management." InterOil disclosed that 50% of DESC was owned by InterOil's then-chief operating officer and director, Christian Vinson.

But InterOil didn't reveal other related-party facts. First, Christian Vinson is Phil Mulacek's brother-in-law. Vinson, who has been with InterOil from the beginning, is now executive vice president of corporate development and government affairs, in charge of dealing with Papua New Guinea's corrupt government.
Was it nepotism or experience that landed Vinson the executive and director positions of an oil-and-gas exploration company? His previous job was manager of a modest, automated machine shop in suburban Chicago.

Also, InterOil didn't disclose that Phil's brother, Pierre Mulacek, was DESC's vice president and director (according to Texas corporate filings) for the three years InterOil spent $1.8 million with DESC.
In filings, DECS listed its headquarters in the same building as InterOil's corporate headquarters outside of Houston.

(In 2005, when Pierre Mulacek served as DESC vice president and director, InterOil purchased DESC for $1,000. Two former DESC executives now hold top posts at InterOil. Bill Jasper, InterOil’s president and chief operating officer, served as vice president of DESC. Another former DESC vice president, Collin Visaggio, is InterOil's chief financial officer. On InterOil's website, the biographies of Vinson, Jasper and Visaggio don't mention their work at DESC.)
Note: Bold print and italics added by me.
Apparently, InterOil insiders are apparently treating this publicly traded company as a personal piggy bank by engaging in a series of undisclosed transactions for the personal enrichment of themselves and relatives at the expense of company shareholders, going back to 1997. Minkow has called InterOil a "Tyco equivalent" while I have said that the company's acts of nepotism remind me of the Antar family who fraudulently ran Crazy Eddie, back in the day.

Lobdell has traced a consistent pattern of nepotism at InterOil going back to the founding of the company. See the chart below (Click on image to enlarge):



In other blog posts, I have detailed how InterOil's disclosures to investors in various reports were contradicted by other disclosures made by the company and insiders in various court cases. In other words, InterOil apparently made certain false disclosures to investors in violation of SEC Rule 10b-5 which prohibits false and misleading disclosures.

In a June 2009 blog post entitled, "InterOil, John Thomas Financial, and Clarion Finanz: Anatomy of a Stock Market Manipulation Scheme," I detailed how InterOil filed a false report with the Securities and Exchange Commission claiming that the company paid no fees for a private placement $95 million convertible debt offering. However, documents submitted in another court case reveal that Clarion Finanz (a major shareholder of InterOil) had in fact received $5.7 million in fees, contrary to InterOil's SEC filings.

In another blog post, entitled, "Did InterOil Commit Securities Fraud?" I detailed how CEO Phil Mulacek made sworn statements in that court case which conflicted with InterOil's financial disclosures to investors. In his sworn court testimony, Mulacek claimed that a $50 million judgment against InterOil would bankrupt the company, while InterOil's financial disclosures to investors claimed that a judgment in excess of $125 million would have a material adverse impact on the company.

Written by

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 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.

I do research on InterOil for Fraud Discovery Institute. However, I do not own any InterOil securities, short or long.

I am planning to go straight to hell for my unforgivable crimes and I expect to meet InterOil CEO Phil Mulacek and some of his cronies there, too.

Sunday, May 09, 2010

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.

Wednesday, May 05, 2010

Is InterOil Another Tyco or Crazy Eddie?

iBusiness Reporting investigative blogger William Lobdell has published the first installment in a series of reports detailing undisclosed shady related party transactions by InterOil (NYSE: IOC) insiders that apparently include such favorable terms to enrich their relatives at the expense of company shareholders.

In an accompanying press release, Fraud Discovery Institute (co-founded by convicted felon turned fraud buster Barry Minkow) compared InterOil's related party transactions to another well known fraud involving Tyco years ago and is asking the Securities and Exchange Commission to investigate the company for possible misconduct. The undisclosed InterOil related party transactions detailed by Lobdell remind me of how the Antar family treated Crazy Eddie as a personal piggy bank, back in my criminal CFO days.

Note: iBusiness Reporting is a division of Fraud Discovery Institute. Both Barry Minkow and William Lobdell have publicly disclosed holding short positions in InterOil securities. I do research for Fraud Discovery on InterOil, but I do not own any securities in InterOil, long or short.

In March 2010, William Lobdell went to a Texas courthouse to examine documents filed in a certain litigation by the original investors of InterOil against CEO Phil Mulacek alleging fraud by him dating as far back as 1997. In his first report, Lobdell found documents backing up allegations by investors of InterOil CEO Phil Mulacek engaging in "self-dealing and secret alliances" to enrich himself and other family members at the expense of InterOil's original investors. Details of Lobdell's follow up reports can be found here and here.

In his first part of a new three part series, William Lobdell describes the lurid details of five shady undisclosed related party transactions involving InterOil insiders and their family members from 2001 to 2004 (full details of Lobdell's report here).

Undisclosed Related Party Transactions

Fraud Discovery's press release summarizes certain related party transactions and reminds us of the infamous Tyco fraud:

...iBusiness Reporting unwinds four InterOil transactions involving the relatives of director Gaylen Byker which include a multi-million-dollar deal with an investment group headed by Byker’s brother and a two-month loan from Byker’s brother that was repaid with what penciled out to be 67.5% annual interest.
The report also includes a $12.3 million investment from a mysterious company based in the Barbados that used the same mailing address and attorney as InterOil Corp.

[Snip]

“The information shows a clear pattern of fraud by InterOil,” said Barry Minkow, co-founder of the Fraud Discovery Institute. “Once or twice might be generously characterized as an honest mistake. But iBusiness Reporting has collected many blatant examples of undisclosed nepotism by InterOil.

“In our opinion, there is no difference between Frank Walsh, who plead guilty to securities fraud, wrongly receiving a $20 million payment from Tyco while serving on the board as an independent director and Gaylen Byker’s self dealing at Interoil.”

Other Troubling Financial Reporting Issues at InterOil

In my June 2009 blog post entitled, "InterOil, John Thomas Financial, and Clarion Finanz: Anatomy of a Stock Market Manipulation Scheme," I detailed how InterOil filed a false report with the Securities and Exchange Commission claiming that the company paid no fees for a private placement $95 million convertible debt offering. However, documents submitted in another court case reveal that Clarion Finanz (a major shareholder of InterOil) had in fact received $5.7 million in fees, contrary to InterOil's SEC filings.

InterOil CEO Phil Mulacek
In another blog post, entitled, "Did InterOil Commit Securities Fraud?" I detailed how CEO Phil Mulacek made sworn statements in that court case which conflicted with InterOil's financial disclosures to investors. In his sworn court testimony, Mulacek claimed that a $50 million judgment against InterOil would bankrupt the company, while InterOil's financial disclosures to investors claimed that a judgment in excess of $125 million would have a material adverse impact on the company.

In both of the situations cited above, InterOil told one story to investors in its SEC filings and financial reports and its management told a conflicting story to the courts in sworn statements. If one story is true, the other story simply cannot be true. In each of the cases cited above, InterOil misrepresented or omitted material information in its financial reports to investors, as evidenced by its management's conflicting disclosures to the courts.

Closing Comments

Beware of fraud, whenever public company insiders deceptively treat their company's resources as a personal piggy bank at the expense of other shareholders and their company has a consistent pattern of contradictory financial disclosures. Phil Mulacek and his cronies at InterOil remind me more and more of the Antar family, including myself, in the infamous Crazy Eddie fraud.

Written by:

Sam E. Antar

Recommended Reading:

William K. Wolfrum: InterOil A (unreported) family affair?

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 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.

I do research on InterOil for Fraud Discovery Institute. However, I do not own any InterOil securities, short or long.

I am planning to go straight to hell for my unforgivable crimes and I expect to meet InterOil CEO Phil Mulacek there, too.

Can Investors Rely on Overstock.com's Reported Q1 2010 Numbers?

A close examination of Overstock.com's (NASDAQ: OSTK) Q1 2010 10-Q report financial disclosures reveals that the company still failed to remediate serious material weaknesses in internal controls that have resulted in three restatements of financial reports in four years to correct GAAP violations. In addition, a close examination of the company's financial disclosures reveals serious questions about the quality of its reported Q1 2010 earnings of $3.7 million.

Continuing Weaknesses in Internal Controls

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 from 1999 to 2008 was wrong and every single Sarbanes-Oxley internal control certification signed by management turned out to be false, too.

In its Q1 2010 10-Q report, Overstock.com disclosed that the company has not remediated serious weaknesses in internal controls:

...the Chief Executive Officer (principal executive officer) and Senior Vice President, Finance (principal financial officer) concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Quarterly Report on Form 10-Q due to the following material weaknesses:
  
• We lacked a sufficient number of accounting professionals with the necessary knowledge, experience and training to adequately account for and perform adequate supervisory reviews of significant transactions that resulted in misapplications of GAAP. 
 • Information technology program change and program development controls were inadequately designed to prevent changes in our accounting systems which led to the failure to appropriately capture and process data.
[Snip]

As of March 31, 2010, we had not remediated the material weaknesses. [Emphasis added.]

Based on Overstock.com's past history of accounting irregularities and financial reporting violations, we cannot be reasonably assured that Overstock.com's current Q1 2010 financial report is free of GAAP and SEC disclosure violations due to continuing reported material weaknesses in internal controls.

Quality of Earnings Issues for Q1 2010

In Q1 2010, Overstock.com reported a net profit of $3.72 million compared to a net loss of $3.96 million in Q1 2009 or a $7.68 million improvement in earnings. However, Overstock.com's reported Q1 2010 $3.72 million profit was helped in large part by a $3.1 million reduction in its estimated allowance for returns or sales returns reserves when compared to Q1 2009 and other one-time profits as I will describe below.

According to Overstock.com's Q1 2010 10-Q report:

The allowance for returns was $7.4 million and $11.9 million at March 31, 2010 and December 31, 2009, respectively. The decrease in the sales returns reserve at March 31, 2010 compared to December 31, 2009 is primarily due to decreased revenues due to seasonality. [Emphasis added.]

It is normal for sales return reserves to drop from Q4 2009 to Q1 2010 "due to seasonality" issues such as decreased revenues from an earlier quarter (Q4 2009) compared to a later quarter (Q1 2010). However, in many cases such reserves drop due to changes from previous reserve estimates that artificially increase reported profits in later periods when such estimates are adjusted.

As the chart demonstrates, Overstock.com's reduction in allowances for returns may not be seasonal at all, but instead due to a change of estimate. As I detailed above, Overstock.com claimed that its reduction in sales return reserves was "primarily due to...seasonality" and the company did not claim any other factors such as operating improvements as a significant reason for the drop in reserves.

After Q4 2008, Overstock.com's allowance for returns steadily dropped in total dollars from $16.2 million to $7.4 million in Q1 2010, or a 54% reduction in the dollar amount of reserves. On a relative basis, Overstock.com's allowance for returns steadily dropped from 6.38% of revenues in Q4 2008 to a mere 2.8% of revenues in Q1 2010, or a 56% drop in relative reserves.

If Overstock.com's return allowance had not dropped in dollar amounts from $10.5 million in Q1 2009 to $7.4 million in Q1 2010, the company would have reported a Q1 2010 profit of only $2.672 million instead of a $3.72 million profit, before taking into account other one-time profits.

In Q1 2010, Overstock.com's allowance for returns was 2.80% of revenues compared to 5.65% of revenues in Q1 2009. If Overstock.com's return allowance had not dropped in dollar amounts from $11.9 million in Q4 2009 to $7.4 million in Q1 2010, the company would have reported a Q1 2010 profit of only $2.12 million instead of a $3.72 million profit, before taking into account other one-time profits.

If we use the same percentage of revenues in Q1 2010 that Overstock.com used in Q1 2009 (5.65%), the company's allowance for reserves would have been $14.9 million, instead of $7.4 million as reported by the company. In such case, Overstock.com would have reported a Q1 2010 $1.02 million profit, instead of a $3.72 profit, before taking into account other one-time profits.

One-time Items Help Boost Reported Earnings

Other one-time items helped Overstock.com's reported Q1 2010 earnings, too:
  • $0.600 million reduction of legal expenses in Q1 2010 due to a settlement of a legal matter in Q1 2009
  • $0.126 million restructuring credit in Q1 2010
  • Total: $0.726 million
Therefore, if Overstock.com's allowances for returns on a percentage of revenue basis remained constant at 5.65% from Q1 2009 to Q1 2010, the company would have reported a Q1 2010 profit of only $294k.

Another peculiar issue is that unlike previous reporting periods, Overstock.com failed to disclose the amount of inventory reserves at the end of Q1 2010.

In any case, based on Overstock.com's historical failure to produce financial reports free from material errors and GAAP violations, the company's Q1 2010 reported profit is highly suspect.

Other Earnings Quality Issues

In previous periods when Overstock.com reported losses, the company instead focused in improvements in operating cash flows by showcasing them in the key metrics portion of its press releases announcing quarterly financial results (See an example, here). In Q1 2010 operating cash flows were reported at negative $28.2 million compared to negative $27 million in Q1 2009. In its press release announcing Q1 2010 financial results, Overstock.com left out the $1.2 million decline in operating cash flows in its key metrics section.

In addition, Overstock.com reported negative free cash flow of $32.6 million in Q1 2010 compared to negative $28.8 million in Q1 2009 or a decline of $3.8 million in that financial measure.

Loss Contingencies

In its Q1 2010 10-Q report, Overstock.com disclosed loss contingencies that could put a big hole in its corporate pockets in future periods:
  • District Attorneys of Marin and four other counties in Northern California to settle criminal investigation into fraudulent advertising practices: $8.5 million.
  • Ohio taxes: $613k
  • Total potential future losses: $9.13 million
Update: In June 2010 or about a month after my this blog post was published, the SEC Division of Corporation Finance required Overstock.com to make the following additional disclosure about its loss contingencies:

The Company establishes liabilities when a particular contingency is probable and estimable. The Company believes the $1.1 million accrued at June 30, 2010 in its consolidated financial statements is adequate in light of the probable and estimable liabilities. It is reasonably possible that the potential losses may exceed our accrued liabilities.

The Company has other contingencies which are reasonably possible; however, the reasonably possible exposure to losses cannot currently be estimated.

Therefore, Overstock.com has total potential future losses of $9.13 million and has established reserves covering only $1.1 million of such potential losses. According to the company, the other unreserved loss contingencies are "reasonably possible; however, the reasonably possible exposure to losses cannot currently be estimated."

SEC Investigation

The Securities and Exchange Commission continues to investigate Overstock.com for GAAP violations, such as those issues described below.

In a series of blog posts during 2009, I accurately reported that Overstock.com deliberately violated GAAP in its accounting 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.

Degenerate Judd Bagley
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.

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 and orchestrated a smear campaign to discredit me.

Patrick Byrne sent his paid stalker Judd Bagley to interfere with my divorce involving my ex-spouse and spy on my family (including minor nieces and nephews) using a fake Facebook name. The Big Picture (over 140k subscribers) blogger Barry Ritholtz labeled Judd Bagley "A career douche bag (and possible pedarast)" because of Bagley's efforts to stalk his children, my children, and the children of other Overstock.com critics on behalf of Patrick Byrne.

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

Closing Comment

Aside from Overstock.com's serial GAAP violations, smoke and mirrors accounting, and stalking of critics and their families, just take another look at those scary images of Patrick Byrne and "possible pedarast" Judd Bagley above and think hard about trusting any financial reporting by this company.

Written by:

Sam E. Antar

Update Note:

In June 2010 or a month after this blog post was originally published, the SEC Division of Corporation Finance asked Overstock.com to explain, clarify, and revise certain financial disclosures. On October 30, 2010, this blog post was revised from its original version to its current form to reflect new information obtained from Overstock.com's responses to the SEC Division of Finance.

Typically such responses are added to the SEC website months after the Division of Corporation Finance completes its review of company disclosures. The Division of Corporation Finance operates separately from the Enforcement Division which is investigating the company for securities law violations.

Recommended Reading

Gary Weiss: Overstock.com Reports Profits! (By Juggling the Books....)

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 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.

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 because my sins are unforgivable. I expect Overstock.com CEO Patrick Byrne and "possible pedarast" Judd Bagley to join me to fry in hell. In any case, analyzing the company's financial reporting is a forensic accountant's wet dream.

Sunday, May 02, 2010

Bomb Found in New York City's Times Square: A Warning from a Convicted Felon

Behind the symbol of our freedom was a parked van with a bomb inside
Usually the bustling streets of Times Square in Manhattan are overflowing with pedestrians on a warm Saturday evening. However, tonight those streets were emptied as police found a bomb in a parked van. Mayor Bloomberg said, "We are very lucky. We avoided what could have been a very deadly event.”

America cannot afford to be "lucky" when it comes to any terrorism and crime.
 
The Paradox of Law, Morality, and Crime

The same foundations of law, justice, and freedom that help make America great are also exploited by cold-blooded criminals to help them effectively execute their crimes. Your laws, your morality, your ethics, and your decency limit your behavior as a society, while giving heartless criminals the initiative and the relative freedom of action to commit their crimes.

Criminals have no respect for the law, society, and their victims. The more humane you become as a society, the more bold and arrogant the criminal element within that society becomes, too.

While You Hope, Criminals Prey and While You Sleep, Criminals Plan

While President Obama, Mayor Bloomberg, and other elected officials sell law-abiding and decent citizens hope, the criminals prey. While America sleeps, the criminals plan their crimes. We need to have a serious debate in America about terrorism and crime, unless citizens want to continue being "lucky".

Good night America and pleasant dreams. Keep on hoping.

Written by:

Sam E. Antar

Picture taken by: Sam E. Antar

Recommended reading: A New Year’s Message from a Convicted Felon: While you hope, criminals prey

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. I had no empathy whatsoever for the victims of my crimes.

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 teach law enforcement, government entities, professionals, businesses, and students about white collar crime and train them to catch corporate miscreants. I do not seek forgiveness for my unforgivable sins and I expect to fry in hell for my crimes. My only comfort is that the criminals responsible for the bomb found in Times Square will burn in hell along with me.