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) 📕

Perold promised to make things right, and we spoke for more than two hours as we went over the study point by point, telling him about the mismarkings, Allied’s lies, and the problems at BLX. It was a long, exhausting phone call.

“I warned you this was going to take some time,” I told him when we were about halfway through.

Perold expressed his willingness to continue the discussion and his enjoyment trying to sort out the contradictory claims.

I told him that I also had a problem with the study’s habit of calling this a short attack, which is Allied’s often-used terminology.

“We think this is inflammatory,” I said.

“Oh, go on,” he said, amused. “What the hell else is it?”

“It’s not an attack. We raised issues. We shared our research.”

Perold laughed. “Oh, God,” he said, sounding exasperated. “You didn’t sell the shares hoping the stock would go up.”

“That’s not an attack, that’s an investment,” I said.

He agreed to change it.

By the end of the call he agreed to take my points to Allied for its response. I asked if he would offer the similar courtesy to show us Allied’s response so we could comment on it before he published again. He declined. He indicated that it was customary in Harvard case studies to give the subject company involved a chance to comment. I pointed out there were two subject companies—them and us. It made no difference—this was a one-way street. Perold would offer only Allied the opportunity to comment in advance.

Yet, a larger problem still remained: that Perold had already distributed the first draft of the case study. I asked Perold if he could reclaim the erroneous copies from his students. Perold said he would try his best and would tell everyone that the study in its current form was just a draft, a work-in-progress. That process repeated itself a few months later when Perold released another faulty version of the case study to his students prior to soliciting Greenlight’s comments. We pointed out the errors and complained about the process. In each version, he incorporated many of our changes, while ignoring others.

I was still mystified as to why this process was so difficult. Then, out of the blue, one of Perold’s students informed me that Perold’s research assistant on the case study worked at the investment firm Capital Research and Management (CRM) the previous summer. CRM was Allied’s largest shareholder. After graduation, the research assistant rejoined CRM. I asked Perold to disclose the conflict or even the appearance of conflict in the report. He refused. When I pressed him, he could offer no other reason than it was his case study. The final version came out in early 2004 and was fairer.

CHAPTER 19

Kroll Digs Deeper

While all of this was going on, Kroll was making significant progress in its investigations into American Physicians Services (APS) and BLX. While Allied revealed nothing about the nature of APS, Kroll discovered APS was a “physician practice management company.” In the late 1990s, Wall Street thought companies that purchased doctor practices and provided back-office services, including scheduling, supply purchasing and billing, were the future of medicine. The problem was that most of these companies didn’t really improve the doctors’ lives and interfered a lot, which caused relations between the doctors and the corporate owners to deteriorate. Once companies got a bad reputation from the doctors, it became harder to acquire additional doctors to meet growth plans. As a result, the stock prices fell, which eliminated any remaining ability to use stock to acquire more doctors. The doctors, who accepted stock up-front to sell part of their practices, became even unhappier. Ultimately, most of these companies, including the industry leader, Phycor, failed. As discussed in Chapter 4, we had seen this happen at Orthodontic Centers of America.

Kroll found that APS fit into this bucket. TA Associates, a well-regarded venture capital firm in Boston, backed APS’s start-up, and Allied provided a subordinated loan. Kroll found that the majority of doctors and former executives interviewed did not believe APS would ever be successful or that Allied would recover its investment. A number of physicians interviewed were unhappy with their relationship with APS, using such words as incompetent, dishonest, and crooked to describe management.

Kroll concluded that ongoing losses due to the shrinking number of doctors would require Allied to continue to inject capital to keep the company afloat. Subsequent to Allied’s initial investment, results severely deteriorated and the number of doctors with the company declined from about one hundred at its peak to thirty-five in 2003. Kroll doubted APS generated profits. The company was in such bad shape that its bank lenders dumped its loans in June 2001 to Allied for about fifty cents on the dollar. TA Associates walked away. Despite purchasing the senior debt at a discount and equitizing some of the senior debt, Allied did not mark down its own junior debt investment in APS.

Instead, when Allied bought out the senior lenders, it took over APS and put Sweeney in charge. However, the business continued to crumble. Still, Allied carried its original loans to APS at full value on its books. It put the loan on “non-accrual” in April 2002, but didn’t begin to write-down the investment until December 2002, and then by only a small amount. Allied gradually wrote-down the value during 2003, before taking a large write-down in March 2004 just before APS went bankrupt. Allied had to take further write-downs through the balance of that year (see Table 19.1).

Table 19.1 American Physicians Services

In a September 2004 The Wall Street Journal article, Allied claimed that it was optimistic about APS until late 2003, when APS lost a malpractice lawsuit and then received bad publicity after one of its patients died in early 2004. Kroll’s work showed that APS was in deep trouble long before that.

Kroll’s investigation of BLX was trickier. It turned out that Jock Ferguson, the investigator working on the project,