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) 📕

months of meetings with our lawyers walking him through the evidence, Sachs decided to move the case forward. He asked and received permission from the court to lift the seal for the purpose of letting Allied and BLX know about the case, and to begin negotiating a settlement. As described earlier, four days after the DOJ notified Allied and BLX about the case, BLX filed for bankruptcy.

In early 2009, the DOJ entered settlement negotiations and mediation with Allied and BLX over our False Claims Act suit. We were excluded from participating in the mediation, and the government refused to tell us the result. The DOJ promised to “consult” with us before any final decision was made.

On October 16, 2009, we heard from the DOJ. It had the basic terms of a settlement of the case in hand and wanted our approval. The case would be settled for only $26.4 million, which included the money BLX had already reimbursed the government at the time of the Harrington indictment, plus $8 million more from BLX’s bankrupt estate. The government did not intend to seek damages from any of the individuals responsible for the losses.

As predicted, the government had decided not to use the various audits to estimate additional damages across the entire portfolio. According to the government, because the audits considered only early defaulted loans, they were not statistically reliable for extrapolation. The SBA’s earlier interference in the criteria selection had successfully compromised the audit’s usability.

Instead, the government tallied up the defaulted loans that it had determined were unqualified through the various investigations and audits. Even so, the amount totaled $112 million, which could be trebled under the False Claims Act; $336 million would make a dent in repaying taxpayers for BLX’s fraud. Unaccountably, the government decided that only single damages should be sought in this case, due to BLX’s bankruptcy. When asked, the government lawyers admitted that the DOJ’s usual policy is that bankruptcy does not prevent the DOJ from collecting trebled damages, but it had inexplicably decided to make an exception in this case.

And still, there was the question of their actual offer. There was no way to credibly explain how a $112 million claim that could be trebled could be reduced to the proposed $26.4 million settlement. Apparently, the government assigned a series of large discounts, taking into account the risk of losing or having trouble collecting damages. We later learned the government might have traded away part of the damages in exchange for resolving other disputes between BLX and the SBA. I also suspect the defendants and a recalcitrant SBA wore out the DOJ lawyers, and though the taxpayers would be the largest beneficiary of the settlement dollars, Brickman and Greenlight would collect as well. It was easy to see why they wanted to settle and move on.

Though it had taken the government years to reach this point, the DOJ informed us that we’d have just a week to decide whether we would support such a settlement. Surprised by the sudden urgency, we said we needed more time to evaluate our options. The reason for the government’s rush to settle became apparent soon enough. The following Monday, October 26, 2009, Allied announced that it had agreed to be acquired by Ares Capital for cash and stock valued at $3.47 per Allied Capital share. The government seemed to prioritize Allied’s sale over appropriate restitution for the taxpayers, and must have secretly hoped that we would agree to the settlement before the deal was announced.

The government also decided not to hold Allied responsible for the losses. We had argued that BLX was really an alter ego of Allied, and that the false claims had commenced at Allied prior to the formation of BLX. After Harrington was indicted, Allied had also publicly promised to “stand behind any financial commitments BLX makes to the SBA” to prevent any loss due to fraud, with the intended effect of allowing BLX to continue churning SBA loans. We wanted the government to hold Allied to its word.

Prior to the mediation, the DOJ sent a letter explaining to Allied that it could be held accountable for the false claims, yet the DOJ chose not to pursue any recovery directly from Allied. Gerald Sachs told us Allied was in a precarious financial position, and it was unclear whether it would be able to satisfy a large judgment even if it were found liable. The DOJ accepted no responsibility for the years that it had sat on the sidelines while Allied melted in value, nor did it consider that Allied was nonetheless about to be sold for hundreds of millions of dollars.

We argued as hard as we could against the settlement. After we made our case, the DOJ informed us it would “not re-open the settlement negotiations.” It appeared to us the DOJ was afraid reopening settlement discussions or unsealing the case would delay or even derail Allied’s proposed sale.

We arranged a final meeting with the government in Atlanta in February 2010. Sachs said the government had “thoroughly investigated the case.” There were more than 12 informal interviews of former Allied and BLX executives and many documents reviewed. The government was ready to settle.

Glenn Harris from the SBA was present again, and pointed out certain weaknesses he thought we had in the case. He said we would have to show that the loans were “not prudent” and that it might be hard to show that BLX knew it wasn’t acting prudently. I questioned how the government could have people sitting in jail because of loans that it was no longer convinced could be proven to be imprudent. Sachs said that “the standards are different” and the government might have a harder time proving imprudence on some loans than on others.

The government would not pursue damages against Allied, because it said it hadn’t found evidence that Allied made any of the loans itself.

We asked what investigation they had done into Allied’s responsibility. The government refused to answer. We asked