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) 📕

I have no idea how I got through my hour-long presentation to our partners and another half hour of questions that evening. I worked into the presentation my views of regulators looking into investors sharing ideas and noted that we received a related press inquiry. When I got home that evening, I checked The Wall Street Journal’s Web site and saw that there was an article set to appear in the next day’s paper. Armstrong and two other reporters wrote that the SEC and Spitzer would look into Gotham Partners Management Co., Tilson Capital Partners, the Aquamarine Fund, and Greenlight to see if we conspired to manipulate stock prices by publishing research and asking critical questions on conference calls. While I knew Gotham well, I had met Whitney Tilson only briefly and had never even heard of Aquamarine.

I knew we hadn’t done anything wrong and believed it appropriate to share investment analysis and opinion, positive or negative, about companies and ask challenging questions on conference calls. Everything we said or wrote about Allied was a combination of fact and good-faith belief. I had even asked Allied in writing to identify factual errors and promised to publicly correct any mistakes. How could it be manipulative to tell the truth?

With that in mind, I began to wonder how Armstrong knew about the investigations. I believed then and do now that the story started with a leak from Spitzer’s office. Spitzer may have accomplished many good things as attorney general; however, his office was well known for leaking the subjects of its investigations to the press prior to finding actual wrongdoing, a practice at odds with the grand jury system and prosecutorial ethics that enables the authorities to investigate possible criminal activity without the identities of the subjects becoming public until an indictment is delivered. Under this system, if the investigation does not turn up a crime, reputations are not harmed. In this case, I believe Spitzer sought headlines to bolster his image as a crime fighter—now taking on hedge funds—before he determined whether any crime had been committed.

The next morning, many of our partners began calling to find out what was going on. Some were nervous, but there wasn’t much more we could tell them because we didn’t know more than what the newspaper reported. No regulator had contacted us, and we had no way to know if we would hear from them. So we decided we had to adopt a “no comment” policy. We knew that we had done nothing wrong, but we didn’t want to update some partners and not others. The right way to update everyone would have been in writing. However, written correspondence has a way of getting into the media, and development-by-development updates could begin to spiral out of control. A fraction of a percent of our partners asked for their money back, but many called to express support. We had always been open with our partners on almost any topic other than what we were currently buying or selling. The “no comment” policy was tough on us, and it was tough on them. However, minimizing the media circus was in our mutual interest.

Allied, however, went running to the press. Bloomberg reported that Allied requested the investigation the previous week. Abernathy released a statement from me, saying, “We wish companies would address valid business issues, rather than attacking investors who raise them. We stand by our research on Allied Capital and would welcome a meaningful discussion with management on the facts.”

I raised the subject of a discussion with management because Allied’s management no longer even pretended to engage in the discussion. Management had recently come to New York for a “road show.” These are a series of one-on-one and group meetings for investors, often sponsored by investment banks. Some road shows are in connection with a securities offering, while others are called non-deal road shows. At its recent road show, Allied refused to permit us to attend. Even more, they refused to allow any hedge funds to attend. They were only willing to meet with long-only investors. Putting aside the issue of fair access to information, Allied quite simply didn’t want to be faced with any pointed questions. Over the subsequent years, Allied has maintained its policy of refusing to meet with hedge funds. In fact, one time it announced a one-day road show to be followed by an overnight stock offering led by Citigroup. Citigroup was unaware of Allied’s policy and scheduled management to come to our office and then to another hedge fund’s office. When Allied’s management saw the schedule, they canceled both meetings. Other times, various brokerage firms have hosted group events for Allied to meet investors. As a client of the brokerage firms, we have been invited to attend—only to be turned away at the door at the direction of Allied management.

On Friday, January 24, 2003, two days after The Wall Street Journal article, we received a letter from the SEC addressed to Greenlight Capital, LLC, referencing “In the Matter of Federal Agricultural Mortgage Corp.” (Farmer Mac). The SEC advised us of an informal inquiry and asked us to produce our research on Allied, all contacts we made to third parties about Allied and our research file on Allied. They also wanted all of our trading records, organization chart, contact information for all Greenlight employees and all documents to describe our compensation structure, a list of our bank and brokerage accounts, and our telephone records. They wanted all this information going back to January 1, 2002. The letter requested voluntary production of the information by the following Friday. Greenlight’s lawyers worked with the SEC to get more time, and we produced the information as promptly as we could.

The Journal article not only hurt my company’s reputation, but it also affected my wife. About a week after the article appeared, Cheryl was