Fooling Some of the People All of the Time, a Long Short (And Now Complete) Story, Updated With New by David Einhorn (tohfa e dulha read online TXT) 📕

Toward the end of the earnings conference call, in an unwitting slip, Walton offered up to his shell-shocked shareholders: “We will be back in three months hopefully with our next quarterly report.” Then he corrected himself: “That will certainly happen.”

In March 2009, the board of directors granted management options to purchase four million shares at $0.73 each; Walton received 900,000 of them. Steven Pearlstein, writing for The Washington Post, drily observed that these would prove “to be a pretty generous gratuity for somebody who drove the company into a ditch in the first place.”

In the year-end audit letter, Allied’s auditors expressed “substantial doubt about the company’s ability to continue as a going concern.”

Greenlight covered most of its Allied Capital short as the shares declined. All told, the total profits slightly exceeded $35 million; the Greenlight employees’ share was 20 percent or about $7 million.

I concluded my speech at the 2009 Ira Sohn conference:

“I have one final area that I’d like to cover. Seven years ago, I first spoke at this conference and, as you all know, discussed our short thesis on Allied Capital. The staff of Greenlight pledged half its share of any profits on that position to the Tomorrows Children’s Fund. In 2005, when the investment took longer than we imagined, we made a down payment on that pledge of $1 million, as we felt that the children should not have to wait.

“When I published Fooling Some of the People All of the Time, we promised the other half of any profits to two other worthy organizations: the Project on Government Oversight (POGO), which is an independent nonprofit that investigates and exposes corruption and other misconduct in order to achieve a more effective, accountable, open, and ethical federal government, and the Center for Public Integrity, which produces original investigative journalism about significant public issues to make institutional power more transparent and accountable.

“Now our short has finally paid off. Allied would no doubt argue that it took an enormous collapse in the credit market for that to happen. I would respond that it took a historic credit bubble to prop up Allied all those years.

“At the end of my book, I tried to explain why, even though I was embroiled in a ridiculously unpleasant controversy, I felt optimistic it would end well. With the collapse of Allied’s balance sheet and stock price the matter is now finally resolved. I am honored on behalf of every member of Greenlight, each of whom is a part of this contribution, to donate an additional $6 million, to make a total of $7 million—”

Before I could complete my sentence, I was interrupted by a standing ovation. I melted a little on the inside; it felt like the end of the movie.

CHAPTER 38

Just Put Your Lips Together and Blow

As described in Chapter 23, “Whistle-Blower,” qui tam cases under the False Claims Act are brought under seal, which means that until the court unseals a case, you are not supposed to disclose its existence.

Jim Brickman and Greenlight filed the shrimp boat qui tam in 2005. This suit involved fraudulent loans made by BLX under the SBA’s General Program and was dismissed on a technicality in December 2007. We appealed, and the appellate court rejected our appeal in February 2009. It was not, however, our only qui tam involving BLX and the SBA. Earlier, in December 2004, Brickman and Greenlight filed a separate suit in Atlanta against Allied and BLX for their fraud against the SBA. A discrete suit was necessary for loans made under the SBA’s Preferred Lending Program, and because the 2004 case was still under seal prior to publication, it was not mentioned in the hardcover edition.

When we filed the first suit, the Department of Justice (DOJ) nearly rejected it based on SBA claims of having lost only $3 million on BLX’s entire portfolio. After Brickman provided information suggesting that the losses were in the hundreds of millions, the DOJ agreed to do a limited audit of some of BLX’s loans.

Using the criteria that the loans be in excess of $85,000 and must have defaulted within 20 months, the DOJ audited 15 loans. In February 2006, the DOJ informed us that the audit had found serious problems with 14 of the 15 loans. Laura Bonander, the Atlanta DOJ lawyer assigned to the case, told our lawyer, “Their loan practices are so egregious that I can’t imagine them going to trial.” The DOJ said it would audit an additional 40 files and, based on the percentage of defaults it found from among those 40, they could extrapolate how many loans would be in default across BLX’s entire portfolio. That percentage would then provide the basis to approach BLX with a damage claim by June 2006. We were foolishly optimistic.

We expected the DOJ to do the audit using 40 randomly selected defaulted loans. Yet, without consulting the DOJ or Bonander, the SBA interfered in the loan selection by limiting the audit to loans that had defaulted within 18 months. Given that many fraudulent loans involved instances where not a single payment is made, it might have appeared that the SBA was doing us a favor—earlier defaults would produce an above-average number of fraudulent loans.

Unfortunately, that was the problem. By limiting the sample to early defaults, BLX would then be able to argue that the DOJ could not use the audit to extrapolate anything. And it was clear that the SBA preferred it that way. Bonander had told us that the SBA was fighting intervention by the DOJ, and that the DOJ lawyers had never seen an agency push back so aggressively. Without a useful sample, the DOJ would be forced to add up all the bad loans it could find, one by one, and calculate a damage figure accordingly. Rather than trying to help us recover the misused taxpayer money, the SBA was doing quite the opposite, determined to do whatever it could to protect its reputation.

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