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) 📕

Either they were with Allied or they were with the manipulator. That way investors didn’t need to pay attention to the substance of what we said or critically judge the adequacy of Allied’s responses.

The USA Today article continued by describing Allied’s “campaign” against me:

“Allied Capital has launched a very unusual and very aggressive shoot-the-messenger campaign,” Einhorn says. “I suspect it’s because they don’t have adequate answers to serious questions about their business and accounting.”

Davis shoots back: “Allied has answered every assertion Einhorn’s made. Einhorn has a record of using innuendo as a surrogate for facts.”

Now, Lanny Davis wanted the ability to launch similar campaigns against others. As Jim Chanos, a prominent short-seller, observed, the sponsors of the Full Disclosure Coalition have insisted on anonymity—an Orwellian twist too rich for fiction. Allied may or may not have been its largest financial backer. However, aside from the USA Today article, I never saw another public reference to the Full Disclosure Coalition. A recent Google search for “Full Disclosure Coalition” only showed twelve results, including the USA Today article and a couple of short-sellers commenting on the story.

To my relief, my second day of SEC testimony was less stressful than the first. We went through the parts of Greenlight’s published report where Allied disagreed. I almost enjoyed getting to explain why the PIK income forced Allied to raise capital to support its tax distribution; how I determined Allied mismarked 35 percent of its investments; why Allied’s ability to exit certain investments at their carrying value didn’t prove Allied valued the portfolio properly; how Allied changed its business model and accounting; why Allied’s relation to BLX was analogous to Enron’s relation to its Raptor partnership; why Allied had no reasonable basis for its valuation of BLX; and how Allied designed the rights offering to manipulate the market. These were all easy topics for me. They asked some more questions about Gotham and our short sales of Farmer Mac and MBIA. Finally, they asked about Todd Wichmann of Redox Brands, who had told us of Allied’s bad behavior with his company.

At the end of the day, they asked me if I wanted to add anything to the record. At the time, the SEC was considering regulating hedge funds in an effort to curtail fraud. I said that I couldn’t see how hedge fund regulation could be effective when the SEC allowed an already regulated investment company, Allied, to complete additional public offerings prior to the SEC fully investigating and resolving the issues we brought to its attention.

We were done. We even finished before lunch. I left feeling like I had just gotten out of class on the last day of school. I went back to New York and waited for the fallout and my turn with Spitzer. His office set up dates for interviews twice, but canceled both times. Since then, we’ve heard from neither the SEC nor the New York attorney general’s office about investigating us.

We did hear again from David Armstrong, one of The Wall Street Journal reporters who had written the article about regulators investigating Greenlight. He said he wanted to write the Allied/Greenlight story, I suspected at Allied’s suggestion. So James Lin and I sat down with him. Armstrong had already met with Allied and came armed with questions. Like the SEC lawyers, Armstrong asked questions on topics that were upsetting Allied, and James and I answered them all. We watched the video of the charity speech together. Armstrong remarked that it didn’t seem like a big deal. When we were through, I thought Armstrong believed we had the stronger argument and raised some good points about Allied’s valuations and accounting practices. He seemed to leave with an understanding of our criticisms of Allied.

The Journal soon published a multipart series on hedge funds. The series graphically depicted hedge funds with a pair of fuzzy dice. The series didn’t contain a positive word about anyone in the field. I suspect Armstrong targeted his work with us to fit into that anti–hedge fund series, but couldn’t because the facts were on our side. I believe this ran contrary to his purpose and personal bias in working on the subject. Rather than writing a story that supported our view, he wrote none at all.

We next heard from Professor Perold from Harvard Business School, who completed his case study of Allied. I was surprised because he hadn’t contacted us since I spoke to his class in October 2002. Though he had not yet shown it to us, he’d given the case study to his students and already taught from it. The case study was also “in the market,” because a mutual fund called to inquire about it.

The study read like Lanny Davis wrote it. I was dumbfounded. Why would a professor at the Harvard Business School, who seemed like an intelligent guy, write a case study that resolved everything in Allied’s favor? The study was full of errors and told only Allied’s side of the story. The study described many of our arguments as false and having been “refuted.” It misunderstood Allied’s accounting, how the company treated BLX on its books, and implied that the company’s critics were involved in a conspiracy against it. The case study accepted Allied’s contention that it did not change its accounting in 2002 and had been consistent all along. The study even repeated Allied’s claim that we barely spoke to management before I made the speech.

I worried that this study could become the “history” of the event from Allied’s point of view, but with Harvard’s name on it! Perold completed the report on July 3, 2003, and sent us a PDF version by e-mail. We asked if he would send us a version in Word so we could intersperse comments into the text of the document. He refused, so I had to have an assistant retype the whole case study so we could note the errors to send Perold. James Lin and I followed up with a phone call