Howard B. Sirota

Wednesday, November 4, 2009 Litigation Analysis 2009-2010 Litigation Analysis 2009-2010’s pending litigation portfolio may have a material financial effect upon the Company’s financial statements for 2009-2010 with a scheduled February 9, 2010 jury trial of the claims by against Rocker et al. and the claims against by the defendants.

In addition, has pending the Great Naked Short Selling Conspiracy Case against the major broker-dealers in America, a sinkhole of e-discovery of enormous proportions to even attempt to prove the case, much less settle it, much less try the case. Throw in the usual cluster of business litigation of class actions to patent suits. Add a pending SEC investigation of the already thrice-restated financials for good measure. is incurring ramping-up legal expenses that will peak in the Rocker case over the next two quarters, concluding discovery, motions, and perhaps a trial. In 2009 has not been expensing all of its legal expenses, netting an unrelated settlement against the actual pending cases’ costs, thereby understating expenses and overstating reported net income. In the fourth quarter of 2009 and in 2010 legal expenses should not have such offsets and are likely to be at a run-rate of as much as $5 million in the fourth quarter 2009 and $10 million in the first quarter of 2010 if the Rocker case actually goes to trial.

Regardless of the outcome, on a cash basis, the Rocker case will require substantial legal and expert fees and expenses through 2010 and beyond. In my opinion, has overstated its claimed damages recovery if liability is proven, and there is no pot of gold awaiting in Marin County Superior Court in California. To the contrary, with David Boies representing Rocker, may be rendered insolvent by a verdict in favor of Rocker and Copper River.

The history of sketchy public companies suing short-sellers is ugly. To my knowledge, no issuer has ever recovered any substantial sum in such a case. In my opinion, it is very unlikely that will recover anything from Rocker and very likely that any settlement recovery will be nuisance value. If there is a trial, I would expect Copper River to prevail on its claims against I’m thinking Nemeroff v. Abelson and the Mazzeo fiasco reprised.

The Great Naked Short Selling Case involves enormous e-discovery of the major prime brokers in America who are the defendants, who include defunct Bear Stearns and Lehman, whose records will be extraordinarily expensive to obtain and analyze, and the show-stopper DTCC. Whether intended or not, the automated book-entry system of DTCC destroyed the ability to trace particular shares through the successive buyers and sellers of “those” shares. For example, public investors’ Section 11 rights in stock offerings is one year on paper and in the real world only 90 days until the first Rule 144 sale, at which point the fungible treatment of shares and book-entry netting of the DTCC systems makes it impossible to trace any after-market trade to any particular source. The courts have continued to follow the pre-DTCC requirement of tracing purchase back to the shares in the offering, even though that is today impossible.
The e-trail ends at DTCC, the “Bermuda Triangle” of particular shares, and with major hedge-fund prime brokers Bear and Lehman gone, you cannot ever have an even-incomplete record of short-selling that traces the trail of who sold which shares to whom over time. does not have any “magic grits” to trace particular shares through market participants at DTCC. The cost to attempt to do so would require a large staff of lawyers, paralegals, experts and computer vendors that would be in excess of $25 million over a period of years to come. In short, this case has been and continues to be a “crusade” rather than a rational economic decision by a fiduciary. is represented by a “consortium” of law firms that presumably are on a modified contingency arrangement re fees but unlikely to be advancing costs and expenses. Lead lawyer John O’Quinn recently passed away. Co-Lead Counsel Wes Christian was recently sanctioned in an unrelated short-selling conspiracy case in federal court in New York that sank like a rock. Ironically in light of Patrick Byrne’s kooky bigotry, Local Counsel for is Stein & Lubin, reminiscent that Archie Bunker’s lawyers were “Rabinowitz, Rabinowitz & Rabinowitz.”
In conclusion, faces rising cash outlays and large chunks of management time expended in futile litigation in which it is the plaintiff, significant expense and exposure in the cluster of business litigation in which it is the defendant, and a significant probability that it will incur extraordinary legal and audit fees regarding the pending SEC investigation of its financial statements. In my opinion, the new auditor, Grant Thornton, is likely to conduct additional procedures in light of the circumstances.

Disclosure: I became aware of Patrick Byrne and in 2007 through Sam E. Antar, and have spoken out about Patrick Byrne’s anti-Semitism since that time. While I believe that my analysis is accurate, I do have an axe to grind here. Time will tell.

Tuesday, October 20, 2009

How To Protect Public Investors In America

Here are ten ways to protect public investors in America:

1. End the practice of SEC and FINRA to permit settling defendants to deny the settled allegations in subsequent civil litigation by public investor victims, thus giving the investors collateral estoppel as a matter of law. The present practice is the defendant neither admits nor denies the allegations, but is barred from denying the allegations in any forum except the one where it court. While this may force more cases to trial and require more Enforcement staff, the end result is that anyone adjudicated to have violated the federal securities laws is ruined financially so, in the long run, there is a genuine deterrent effect.

2. Expand SIPC insurance coverage of public investors, excluding institutions, to cover losses up to $1 million in adjudicated open-market frauds by issuers and others through a de minimis per share surcharge of .00001 per share to be paid by the broker-dealer executing the buy side of the trade. This covers losses that cannot be recovered from the wrongdoers.

3. Increase required broker-dealer minimum net capital to $1 million.

4. Require auditors to carry $1 million of insurance coverage for every public company audit client.

5. Require every market-maker making a market in a Bulletin Board or Pink Sheet stock to file a Rule 15c2-11 form before commencing to make a market, and a quarterly update for each stock. Add an enhanced certification, to be personally signed by the head of trading and the chief compliance officer, stating: "I have thoroughly reviewed the most recent filings, press releases and financial statements of the issuer XYZ, and hereby certify that our quotations and the trades which we executed were made at prices which reasonably reflect the financial condition of the issuer and its business prospects."

6. Ban "Flash" Trading or any other arrangements to pay for order flow as inside market information that is simply legalized front-running of public customer orders.

7. End mandatory arbitration of investor claims against their broker including an industry representative as a mandatory included arbitrator, making the panels exclusively public arbitrators unaffiliated with the industry.

8. Make securities class actions like Federal False Claims Act or other qui tam actions re original whistleblower cases claiming to uncover a securities fraud. The case is filed under seal for 90 days. The SEC can choose to take over and litigate the case itself and the whistleblower get a flat 15% of the recovery, or the SEC declines and the private litigant goes forward for a flat 30% of the recovery.

9. A flat-out ban on any form of "pay-to-play" direct or indirect in connection with the purchase or sale of a security. Prohibit any payment to anyone for introducing or finding business from any public or union pension fund PERIOD.

10. Require adjudicated securities violators to register with the SEC and provide a quarterly update of a complete report of any direct or indirect relationship with any public company or broker-dealer or hedge fund, including a list of all securities purchased or sold.

Tuesday, September 29, 2009

How To Avoid Stock Market Frauds

How To Avoid Stock Market Frauds

Stock market fraud is rampant throughout history and widespread today. There is no magic bullet to avoid becoming a victim of stock market fraud, because frauds are committed by the "brand name" investment banks and "prestigious" public companies. A number of the most-recognizable names on Wall Street are crooked to the core. Some of the most prominent businessmen in America have committed outright fraud, been slapped on the wrist, and continued their previous ways while sprinkling out funds to worthy causes to polish up their public image. The name-brand auditing firms regularly have audit failures where the sheer magnitude of the fraud defies explanation except that the auditors simply failed to examine the records to verify the claims of management and failed to obtain confirmation with third-parties.
That said, the vast majority of stock frauds are committed by small-time crooks in small-time companies in the micro-cap market. With few exceptions, principally small local banks, each and every stock traded on the Bulletin Board and the Pink Sheets is a worthless company being promoted by crooks and a manipulated stock. The auditors are small-time no-name accountants who are literally in on the fraud and act as the auditors for every fraud by the same promoters and boiler rooms.
The SEC and FINRA not only permit the major investment banks to commit fraud, but actually actively protect and defend the members of the "Too Big To Fail Club." When that fails, a slap on the wrist suffices for the SEC and FINRA, and the public be damned. The SEC and FINRA vigorously prosecute the small fish after the fact, which is little or no comfort to the victims. The small-cap swamp's denizens are serial swindlers; the brand-names are intermittent miscreants.
Public investors must be on their guard because the stock market is often a crooked craps game. The following tips are not perfect protection against stock market frauds, but, in my experience, filter out the vast majority of stock frauds.
1. Stop and think. Be skeptical. Why are you being solicited to invest your money in this stock or deal by this promoter or broker-dealer? Because you're special? Lucky? They like you? Is that why they're letting you in on the ground floor of this remarkable opportunity and not keeping it to themselves? Remember that Warren Buffett isn't calling you to share the gains in his proprietary ideas; to the contrary, Warren Buffett has been granted by the SEC a special exemption from the reporting requirements applicable to everyone else in the world permitting The Worlds's Greatest Investor to delay disclosing his stock purchases. Warren Buffett doesn't need your money.
2. Never accept or reply to cold calls or unsolicited mail. Register your phones with and hang up on any violators. These are callers from boiler-rooms, many run by organized crime, and the person calling you about the Next Great Opportunity will, after the shift, commute home by public transit if he or she has carfare home.
3. Never open an account with a no-name broker-dealer. Pay special attention to names similar to a brand name or names that sound WASPY or British. A.S. Goldmen was not Goldman Sachs. D.H. Blair was a name with more flair than its principal's own name.
4. Never buy stock in an issuer being promoted by a no-name broker-dealer.
5. Never buy a stock traded on the Bulletin Board or the Pink Sheets.
6. Never invest with people or firms with a history of wrongful conduct. Check each and every name of the people and firms involved on under Litigation Releases, on under Broker Check, on and
7. Never buy stock in an issuer using a no-name auditor. The difference between arithmetic and accounting is that, in accounting, the result can be any number you want.
8. Never buy stock of a foreign issuer, even if listed on The New York Stock Exchange. You cannot enforce your legal rights in Russia, The People's Republic of China, Argentina, India or anywhere else outside America. Canada has always been and remains today a hotbed of stock fraud. Every Canadian penny stock is a fraud. Every Canadian small-cap issuer with a fabulous resource discovery is a fraud. Particularly avoid companies based in secrecy and tax-haven jurisdictions such as The Bahamas, Bermuda, The Cayman Islands, The Isle of Man, Lichtenstein, Switzerland, etc.
9. Never buy stock of an issuer based in Salt Lake City, Utah. Historically the epicenter of worthless penny stocks and crooked transfer agents for shell companies, Salt Lake City has morphed into the world capital of pyramid schemes and phony vitamin and supplement hucksters, plus assorted other miscreants. Law-enforcement in Utah is non-existent due to rampant corruption and the indifference of the leaders of Utah to inflicting damage upon people outside the insular confines of Utah.
10. Stick to public companies which are actively traded on the NYSE or NASDAQ, have meaningful revenues and earnings, significant institutional shareholders, and analyst buy recommendations by several brand-name brokerage firms. Another alternative is to buy DIA, SPY and QQQQ to be diversified over 600 major public companies with minimal transaction costs.
The SEC and FINRA don't protect you. You have to protect yourself in The Wall Street Jungle.