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) 📕

protect myself . . . I was asked to do things that violated GAAP. . . . I can’t give specifics, but it was nothing that could be debated. . . . Our CFO sent a sternly worded memo [to Allied] that said it was a black-and-white issue.”

Wichmann indicated that Allied wanted to sell Redox. He suggested that we pose as a buyer of the company and discover evidence of Allied’s malfeasance during our due diligence. I had no appetite for that. Instead, I informed the SEC of Wichmann’s story and hoped it would discover what Allied had tried to do. I have no idea if the agency ever followed up. Rather than having a conversation with the authorities, more and more it felt as if we were “having” a monologue. I worried that the audience had dozed off.

PART THREE

Would Somebody, Anybody, Wake Up?

CHAPTER 16

The Government Investigates

Late in 2002, I received a cold call from Kroll, the private investigation firm, which recently started a group to provide field research for money managers and wanted to pitch its services. Kroll impressed me and sparked the idea that a good public-data search and some active feet on the ground could aid our research on Allied. We hired Kroll to look into two of the Allied investments that were troubling us: BLX and American Physicians Services (APS). I wanted an independent third party to look into what was happening at BLX.

Allied’s pattern of investment and valuation made its APS investment suspicious. The investment started in 1999 as a $16 million investment in debt securities, preferred stock and warrants. In December 2000, Allied wrote-down the preferred stock and warrants to zero, signaling a problem. In the second quarter of 2001, Allied increased the investment to $40 million and reclassified the prior equity components of preferred stock, convertible preferred and warrants into common stock. Though this suggested that APS had been recapitalized, Allied continued to value its debt investment at cost. The history looked suspect, so I asked Kroll to see what it could find out.

Just as Kroll began its work in December, The Wall Street Journal reported that Eliot Spitzer, the New York attorney general, would investigate Gotham Partners, a hedge fund run by David Berkowitz and Bill Ackman. Specifically, Spitzer wanted to see whether Gotham intentionally manipulated stock prices by publishing research discussing its investment opinions. Prior to Spitzer’s investigation, Gotham announced it was closing, having suffered a mildly disappointing performance while concentrating its portfolio in illiquid positions. Gotham had a thin investor base, and when a few key investors lost patience, Gotham had to either sell all of its liquid securities to meet the redemption requests or shut the fund to achieve an orderly wind-down of the entire portfolio.

Because selling the liquid part of the portfolio would unfairly prejudice the remaining investors by leaving them with disproportionate stakes in the illiquid holdings, Gotham did the right thing by shutting down. I spoke with Gotham often because I thought highly of its principals. Though our styles were different, we had some overlapping positions, including short sales of MBIA and Farmer Mac, about which Gotham had published compelling analyses. My immediate reaction was that this type of investigation would have a chilling effect on the sharing of ideas among investors.

In an e-mail to another manager, I wrote, “It seems that at the end of the bear market, people would love to blame short-sellers for the misery. The establishment is very anxious to blame the corporate malfeasance on the ones that have already blown up (Tyco, WorldCom, Adelphia, and Enron) and hope that by everyone swearing that the financials are accurate and putting the known bad guys in jail, that it will all go away. After all the talk, the SEC doesn’t have funding. The Bush Administration doesn’t want the SEC acting as a tough cop. Try to get The Wall Street Journal to write a scandal story where there isn’t already blood in the water. They won’t do it. Even ‘Heard on the Street’ goes nowhere that could expand the scandal culture.”

Many investors share analysis and opinions on both longs and shorts. This discussion and debate helps make the markets efficient. I never considered that publicly sharing Greenlight’s research, particularly because it clearly disclosed our short position, was likely to provoke regulatory interest. Just to be safe, though, we removed our Allied analysis, the BancLab report, and my TheStreet.com article from our Web site. We thought it was a shame, but we did not want to invite extra attention as the world looked for bear market scapegoats after three tough years.

We held our seventh annual partner’s dinner on January 21, 2003. This dinner was unusual because instead of enjoying meeting with our partners, I spent much of the cocktail hour off to the side on a borrowed cell phone answering a series of pointed questions from David Armstrong, a reporter from The Wall Street Journal. I had never spoken to him before, but I knew who he was. He had recently written an article about hedge funds shorting retailer JCPenney that caused a minor uproar in the fund community for its heavy-handed, anti–short-seller slant. The story blamed short-sellers for causing a decline in the stock by working with class-action lawyers. Armstrong’s story failed to broach the possibility that JCPenney’s stock might have fallen because it twice announced disappointing earnings during the period in question.

We had recently hired Abernathy McGregor, a public relations firm, to help with the media relating to our buyout of Greenlight’s original partner, Jeff Keswin, at the end of 2002. With Abernathy’s help, and Greenlight’s lawyer’s input (he happened to be with me at the dinner), I answered Armstrong’s questions about Allied, MBIA, and Greenlight’s relationship with Gotham. Armstrong thought Gotham was a large investor in Greenlight and implied that Gotham’s wind-down would cause it to redeem its investment in Greenlight and put Greenlight at risk. That was not true—Gotham wasn’t an investor in Greenlight. He also