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) 📕

opportunity to view the full report on our Web site. The analysis included our concerns over the accounting, valuation, Allied’s white paper, controlled company transactions, specific valuations, our conversation with the SEC, the payment-in-kind income, and the strange history of the Arthur Andersen audit letter.

The afternoon conference call had a different tone than the earlier ones, where management had spoken almost off-the-cuff. This call was organized, scripted and apparently well rehearsed. I believe having an advance copy of my analysis aided management. They had a clear message, and management’s confident, forceful presentation compensated for its lack of veracity. The phone call was quite a significant event, because the company recanted virtually all of its previous claims about how appropriate its accounting was. It capitulated by agreeing with the SEC, and with us, that it should use fair-value accounting. It removed its previously trumpeted white paper from its Web site.

Allied hired a world-class spin expert, Lanny Davis, to guide management’s presentation of the change. Management was effective at completely changing its story, while claiming it was “consistent.” Many listeners apparently fell for it and accepted Allied’s assertion that it had been the victim of a manipulative “Big Lie.” The hiring of Davis, known for spinning the Monica Lewinsky affair as White House counsel for President Bill Clinton, seemed to me like an admission of wrongdoing. “When you parachute him in, you know you’ve got a serious problem,” Ed Mathias of the Carlyle Group told The Hill, the newspaper that covers Congress, about hiring Lanny Davis generally. Davis’s clients have included Seitel, the seismic data shooting fraud discussed earlier; Lernout & Hauspie, a European speech recognition technology company that perpetuated a multibillion-dollar fraud; and HealthSouth, a significant accounting fraud. It was clear that Allied’s problems required a political-style spin job, and Davis was a perfect choice.

In the conference call, Walton recalled Allied’s forty-year history and described the issue as a battle between a great company and a group of stock manipulators. Walton’s description of the situation was, to my mind, blatantly misleading and scurrilously dishonest. Yet, his introduction to the subject represented a brilliant distortion of the facts:

The purpose of today’s call is to set the record straight in response to a systematic campaign by certain individuals who have been circulating statements about Allied Capital in recent weeks that are either misleading or downright false. Many of these individuals appear to be motivated by personal profit because they have taken substantial short positions in Allied Capital stock and, thus, stand to benefit by driving our stock price down.

Their core charge is that Allied Capital has deliberately and thus fraudulently inflated values of companies in our investment portfolio in order to inflate the value of our stock. That is a lie and the facts will prove it is a lie. Indeed, this is a classic example of the Big Lie, which repeated so many times and in so many different versions to so many different constituencies, usually behind closed doors, using whispers and rumors that the victims have had little chance to catch up and defend themselves with the truth.

Many public companies have been faced with systematic attacks by short-sellers. Sometimes those attacks have performed a public service when, for example as in recent months, they have helped to uncover an actual fraudulent financial reporting of wrongdoing. This has led to an unfortunate but understandable skepticism by many investors to the integrity of financial reporting by many public companies. But those engaging in the current misinformation campaign against Allied Capital are cynically trying to take advantage of the current post-Enron environment by tarring a great and honest company like Allied Capital with the broad brush of a Big Lie.

[Some] . . . companies under such attack choose to ignore such cynical short attacks out of a concern for dignifying them or publicizing them. Well, we at Allied Capital have made a fundamental decision. We are not going to let them get away with it. We owe it to our shareholders, we owe it to ourselves and we owe it to our famil[ies]. We are going to confront our accusers in the daylight with the facts and the truth until the truth prevails. Transparency goes both ways. It is time for our accusers to be held accountable in the light of day for the misinformation they are circulating. We would certainly welcome a full inquiry by the SEC and the New York Stock Exchange concerning the use of such misinformation to manipulate the market.

Walton continued his defense that Allied used fair-valuation methods and didn’t inflate the value of its investments. He repeatedly criticized the motivations of short-sellers. Here is Walton’s description of what he claimed to be a coordinated, greedy, and “tortious interference” attack against Allied by the short-sellers, lawyers, and the media:

I think it’s . . . [created a] whole industry of hedge funds who . . . [, now that the] stock market’s not going up, they’re trying to find things to go down. And they’re trying to find things that they can help go down and there seems to be a pattern. You develop a position; you then have some sort of an event; in our case it was a speech. One is closely linked with law firms who then very quickly file suits, everybody says the company’s been sued, so therefore, something must be wrong. . . .

There’s been a lot of rumors out there about articles that are going to get published, or this is going to happen or that’s going to happen. We’ve had hedge funds call the SBA to find out, to tell them we’re in trouble. We’re seeing a lot of things that I’d characterize as tortious interference of our business model and that sort of thing should be outlawed. And we’re going to do the best we can to be part of that process, and I think the fact that we’re speaking out the way we are I hope sheds some light on that, and