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) 📕

sympathizers, one caller asked, “I’m just wondering whether you’re going to take some calls from the so-called shorts you’re complaining about.” To which, Sweeney’s reply was basically, “the line is open.” Once again: untrue. On this and the previous conference call, I tried to get into the queue to ask questions. Though the calls went for a long time, Allied did not take a question from me. The service that operates the conference calls provides the company with a real-time list of who is on the call and who is interested in asking questions. The company determines whose questions will be accepted, and no one gets through without its consent.

Sweeney added another untruth for good measure: “We’ve never had a call or visit from the two organizations who have written papers about us.” I couldn’t believe that Sweeney still claimed we had never called Allied. According to a Dow Jones Newswire story, “Allied Capital: Short-Recommendation Reasons ‘Unfounded’” (May 16, 2002), “The Company confirmed that investor relations director Sparrow and Chief Financial Officer Penni Roll both had spoken to the hedge fund manager [me] within the last month.” Despite this, Sweeney again insisted we never called. I continued to hear this lie repeated for years.

The next question related to my conversation with Doug Scheidt, the SEC official, which we detailed in the analysis on Greenlight’s Web site. Sweeney answered, “If you look at the question and answer between Doug Scheidt and I guess it was Mr. Einhorn, Doug answered the questions that were asked. They weren’t the right questions. The way Mr. Einhorn characterized what we do is not, in fact, what we do. So, if he wants to put a hypothetical in front of Doug Scheidt and get an answer, that’s one thing. But it’s not specifically Allied Capital.”

There was no dispute: I conducted my conversation without identifying Allied. However, we discussed what Allied said and wrote, and Scheidt responded that it was “inappropriate.” Sweeney knew this and, in my opinion, was kicking dust in the air.

A couple of days later, on June 19, Allied issued a press release announcing that Sweeney had met with Scheidt, who confirmed the conversation had been generic. Sweeney never revealed what else she and Scheidt discussed during their meeting. Did Allied ask Scheidt to comment on the white paper and accounting policies, and what did he say? Did the conversation with Scheidt cause Allied to change its description of its accounting methods, which it did in its next SEC filing? Had the answers to these questions been exculpatory to Allied, I believe Allied undoubtedly would have shared more details of Sweeney’s conversation with Scheidt in the press release.

At the end of the June 17, 2002, conference call, Walton promised to disclose more information about its control companies, including BLX’s gain-on-sale accounting assumptions. He said, “It’s the right thing to do.” And, of course he was correct that it was the right thing to do. Subsequent events, once again, revealed his unwillingness to do the right thing. Though Allied began providing summary information on BLX in the next 10-Q, it never revealed the promised detail on gain-on-sale, and Allied never provided more information about its entire portfolio of controlled companies, as Walton pledged.

Allied’s stock, which began to fall again after the Off Wall Street report, fell further, reaching $20 per share following the conference call. A few days later, Sweeney decided to turn up the volume on her personal attacks and said in a Bloomberg article that our plan was a strategy of “let’s scare the little old ladies.”

I told The Washington Post at the time, “We’re not critical of this company because we are short; we are short because we are critical of this company.” Ladies, be they little, be they old, or be they both, had nothing to do with it.

CHAPTER 10

Business Loan Express

In early June 2002, I heard from Jim Carruthers, a partner then at Eastbourne Capital Management in San Rafael, California. I had met him nine years earlier while working on my first short sale of a fraudulent company, Home Care Management, while at Siegler, Collery. Carruthers was a digger, an analyst who developed alternative sources and searched public records to gather valuable information not generally contained in press releases.

During our conversation, Carruthers told me he had discovered fraud at Business Loan Express, Allied’s largest investment. At March 31, 2002, Allied carried BLX at $229.7 million, or 17 percent of Allied’s net asset value. Furthermore, Allied had additional exposure through its guarantee of BLX’s bank debt. Again, Allied formed BLX by purchasing BLC Financial Services Inc., a publicly traded company, and combining it with its own SBA lending business, Allied Capital Express. (As I describe the various troubling and sometimes fraudulent BLX loans throughout this book, I am referring to BLX or either of its two predecessors.)

Carruthers identified BLX’s SBA loans that were the subject of court proceedings by searching through PACER, a legal database. He obtained the related filings and spoke to a number of the participants. One case related to loans extended to a woman named Holly Hawley for car washes in Michigan that, according to Carruthers’ interviews, “violated every convention and lending practice.”

Carruthers found that Hawley had previously been criminally charged and convicted of a federal crime involving the illegal conversion of Federal Housing Administration property in an embezzlement case. Carruthers found a transcript of Hawley’s sworn testimony that detailed her experience with BLX. To summarize: Prior to obtaining the loan from Allied, four banks cited her lack of operating experience—a requirement to obtain an SBA loan—in denying her application for construction loans to build car washes. Hawley’s loan broker introduced her to Allied (prior to the formation of BLX), which issued her an SBA loan. Hawley wanted to obtain more financing to build additional car washes, but was ineligible to borrow from the SBA, which permitted only one loan per person. Because she was “loaned up” at the SBA, Allied suggested that she form