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) 📕

required questions to be submitted on 3" × 5" index cards. Suzanne Sparrow, the head of Investor Relations, collected the card pile and selected softball questions to paraphrase to Walton. I filled out about four cards and signed them. Sparrow didn’t pick any of my questions.

Sparrow asked Walton whether he would sign the financials under the newly enacted Sarbanes-Oxley laws. He indicated that he would have no trouble doing so. In for a penny, in for a pound.

In this Q&A format, Allied had nothing to worry about. Walton had such a good time pounding the fat pitches out of the park that when time expired, he looked over to Sparrow and said, “I’d be willing to take a few more.” There was a grumble from the room; people were plainly ready for lunch.

Lunch was more interesting. Robert D. Long, a managing director of Allied and one of the speakers at the event, came up to me as we were breaking to eat. He told me that we have a mutual friend, Chris Fox, over at Cramer Rosenthal McGlynn. I have known Fox since 1994. Long sat down and joined us for lunch.

In addition to Long, our table included a young, aggressive analyst from a mutual fund that held Allied shares. He was not shy in telling me that we were wrong about the company. He said that Allied was soon going to announce big news that would bury the shorts and implied that his close ties to management gave him an informational edge. Long sat next to me and also tried to convince me that our take on the company was wrong. At least he was a real gentleman about it. He conceded we made many good points in our analysis.

I asked about the sudden large number of mark-ups and mark-downs in the portfolio. He told me that Allied applied a sharper pencil. He went on to say that Allied was under a lot of heat from its regulators. Allied had told everyone that the SEC approved everything it did and our complaints were completely off base. Now I knew from the inside that Allied had not applied the valuation method consistently. And better yet, the SEC was doing something!

I pressed him on the related-party fees, interest from BLX and pointed out how circular this was. As I wrote in Chapter 11, he told me that BLX should be consolidated. There is a way that Allied could do that if it wanted to. His admissions were the highlights of my day. I left the meeting optimistic the system was working and Allied would get its just desserts.

Shortly after the investor day, I received a call from another professional investor. He had read our research and had wondered about Allied for years. He knew about Allied’s investment in ACME Paging.

According to Allied’s SEC filings, its original investment in ACME was in place by the end of 1997. At that point, Allied thought that the equity portion of its investment called “Limited Partnership Interests” had a gain. Allied reversed the gain in the March 2000 quarter and wrote the Limited Partnership Interests to zero in the September 2000 quarter. Meanwhile, it held its debt investment at cost. Allied invested additional equity in the December 2001 quarter and increased its debt and/or equity investment each quarter through September 2002.

The investor told us what had happened. He said ACME was a troubled Brazilian paging operation. Competition from cell phones and the devaluation of the Brazilian currency hurt the company. Brazil had also experienced severe economic turmoil. ACME Paging had been shopped for sale in 2001, but there were no buyers, so the company was recapitalized.

The equity holders essentially walked away and handed Allied the keys, and, as noted, Allied increased its investment. According to its SEC filings, Allied continued to value ACME at cost. The fellow’s view that Allied deferred recognizing a loss in this investment proved out, as Allied gradually wrote-down the investment beginning in the December 2002 quarter, with further write-downs each quarter through March 2005, at which point, Allied carried ACME at zero value (see Table 13.1).

Table 13.1 Acme Paging

CHAPTER 14

Rewarding Shareholders

In an impersonal and anonymous market, we like to know what people on the other side of our investments are thinking. To succeed, we like to feel that we have an edge through deeper analysis or better information than those who disagree with our views. We knew most of Allied’s investors are individual investors. Some have held the shares and collected the tax distributions for years. They had probably not engaged in the analysis we had done and would probably hold the shares, at least until the company admitted a problem.

Allied often pointed to its institutional shareholder base as proof that sophisticated professionals held the stock. Shortly after the investor day, Ed Painter, our institutional salesman from UBS, arranged a meeting with another of his clients, Wasatch Advisors. Wasatch is a mutual fund and was the second largest Allied shareholder with five million shares. Wasatch had a great track record and an excellent reputation. Painter thought that the fund manager in charge of its Allied position and I would both benefit by hearing each other out. The fund manager turned out to be Dr. Sam Stewart, the founder of Wasatch.

Wasatch’s office was just down the street, so James Lin and I walked over with a briefcase full of our research. We met with Painter and Stewart in the conference room. Stewart brought nothing but a legal pad and pen. “Okay,” he said, “go ahead.”

I thought this was supposed to be a two-way dialogue. “First, what did you think of our analysis?” I asked him. “Do you see anything wrong with it?” He said he hadn’t read it.

While I could believe that Allied’s shareholders might generally be too busy to have read the lengthy analysis we put on our Web site, it was hard to imagine a professional, who was the second-largest Allied holder, would come to a meeting