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) 📕

fired from her job as a writer and editor at Barron’s, the weekly financial magazine owned by the Journal’s publisher. Her boss told her that they had huddled with the company lawyer, who suggested that they part ways with Cheryl until the investigation was over. He told Cheryl that they were worried about appearances. “It’s difficult to be married to someone in the investment business,” he told her. She had worked there for about ten years. It was a bad few days. It is never a good thing to get your spouse fired.

Lanny Davis appeared on CNBC’s Kudlow and Cramer on January 30, 2003, to suggest shareholders directly sue short-sellers. Echoing Allied management’s wording in the Davis-scripted conference call the previous June, Davis talked about short-sellers spreading the “Big Lie” about his clients. Jim Cramer asked Davis, “Why don’t the companies sue the short-sellers, and if the stuff—you know the libel laws—if it’s reckless disregard of the truth, sue the entities that are printing it on behalf of the shorts?”

Davis answered, “Actually, Jim, I’ve looked at that in several instances where I’ve been able to demonstrate to my own satisfaction, to a flatly false statement damaging to the company’s share value. Where we gave notice to the short shareholder, to say this is false, please correct. And afterwards, the retraction was not actually printed, but further the falsehood was repeated. The problem in a defamation action is that you have to prove damage to the company. And a shareholder is the one that could really bring that suit more than the company.” This seemed like a not-so-veiled suggestion to Allied’s shareholders to sue us, despite the fact that a shareholder probably would not have standing to bring such a suit. Allied probably would have liked for us to be sued, but the company was probably too scared about letting us have legal discovery into the company’s business records to risk starting a lawsuit itself.

Davis continued by calling for Congressional action to impose additional rules on short-selling. Larry Kudlow asked, “It’s not really personal. It’s about—these research reports are presumed to be just business. It seems to me that if you can show a conspiracy, both for positive stock research or negative stock research, you’ve got a case for fraud or criminal legality. But if there’s no conspiracy, Lanny, I don’t understand it. It’s just one person’s opinion—why prosecute?”

Davis responded, “Well, first of all, it’s a crime for one person to put out false information, manipulating the market by doing so, and then profiting. But the conspiracy that I believe that Attorney General Spitzer and I believe others are looking at, are when short-sellers and publications engage in spreading misinformation. And I have evidence in the case of several clients, where false information has been spread. And they are cashing out and making a profit, I think, based on misinformation. Now, the bar is very high, Jim and Larry, to prove that case, and I would not want any of my clients to make that charge unless we can demonstrably prove that there has been false information put out.” I wondered whether Davis would agree that management should be similarly prosecuted if it said anything that was false.

News of the investigations also caused the former BLX executive to stop replying to my e-mails. One of the last things he told me was that Keith Hohimer from the Office of Inspector General of the SBA contacted him to inquire about BLX. He questioned whether the investigation was serious, because Hohimer complained about the amount of work a thorough investigation would require. Nonetheless, at least something was happening.

On February 4, 2003, Allied announced two significant transactions at BLX. First, it purchased $122 million of performing SBA loans from Amresco Independence Funding. Adding a group of performing loans enabled BLX to mask the high delinquency and loss rates in its existing portfolio. Allied increased its investment in BLX by $50 million and converted $43 million of its subordinated debt investment in BLX to equity. Apparently, BLX needed an equity infusion and a debt-to-equity conversion to keep going. Nonetheless, Allied did not reduce the carrying value of its investment in BLX. Second, BLX changed its own corporate structure to an LLC, “for tax purposes and greater flexibility, should the company default,” as Allied management explained on its earnings conference call held the following week.

On that same call, I was allowed to ask another question. Since Allied had a habit of not disclosing bad news until forced to, I decided to put them on the spot, querying, “Could you comment at all relating to the Office of Inspector General in the SBA that I understand has been calling around to people close to Business Loan Express? What do you think they are looking into, and is there an investigation, and, if so, what do you believe the status to be?”

After a pregnant pause, Sweeney responded, “Yes, David, I don’t know. I mean, clearly, BLX is a regulated entity by the SBA. I know that the Office of Inspector General typically works with the SBA looking at its lenders. It is usually a routine, they are usually routine inquiries, if there is an inquiry. So that’s about all I can say. We don’t know the nature of any sort of inquiry. So, you know, again this happens routinely in the SBA lending markets.”

In March 2004, we discovered that Sweeney’s “play dumb” answer came only days after she had personally signed an agreement to shift defaulted loans from BLX to Allied. The SBA had determined that the loans were improper, demanded, and received a refund of over $5 million. Yet, she claimed to have no idea about this when I asked her about it.

Later that afternoon, after Allied’s conference call, I got a call from the SEC Division of Enforcement, asking me what my basis was for asking the question on the conference call. Obviously, Allied had the ear of the regulators and had