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) 📕

Wall Street Journal on September 24, 2004. The article, with the headline “A Retiree in Texas Gives a Firm Grief with Web Postings,” identified Brickman as having made over 2,000 postings on Allied’s Yahoo! message board under the moniker tellmeitsnottopsecret, having provided information to the SEC and convincing two securities analysts to turn negative on the stock. In response to Brickman’s claims of management dishonesty, Armstrong wrote, “Ms. Sweeney says she and Allied have always been truthful.”

Walton was quoted as saying, “Brickman works in concert with short-sellers led by David Einhorn to spread false or misleading information about Allied Capital.” The article said that Eliot Spitzer began looking into whether Greenlight had manipulated Allied’s shares in early 2003. No charges had been brought, but the inquiry “is still open,” the article said. That part really upset me, because we hadn’t heard from the attorney general’s office for more than a year, and it hadn’t really been much of an inquiry in the first place.

The article also retold the story of the SBA loan-parking arrangement. While BLX CEO Tannenhauser said the company agreed to the loan shift after Allied said it would buy back any loans that went sour, Sweeney offered a new story. Now, she said Allied hadn’t promised to buy back any bad loans, only to consider doing so. I suspect she realized that having a secret put agreement that isn’t taken into account in the financial statements was a problem.

In addition to Brickman’s being a regular poster on the Yahoo! message board, Allied seemed to be keenly aware of Yahoo! In our initial call with Suzanne Sparrow from Allied’s Investor Relations department in April 2002, I thought it was odd for her to lead off with a discussion of how she carefully watched the Allied message board on Yahoo! It is unusual for managements to express interest in anonymous message boards. Sparrow added, “We have a policy that we are not permitted to chat, and I think it has probably served us well.” I told her that I didn’t spend time reading message boards.

Shortly after my speech in May 2002, several people told me that a lively discussion emerged on the Allied message board. There were way too many posts to read them all, but a few were brought to my attention. One poster identified himself as “Dave Einhorn.” This was not me, but I give the guy credit because he had an excellent sense of humor. At one point, the fake Dave Einhorn even suggested that my Allied speech was the result of a bar bet. If the fake David Einhorn is reading this, feel free to contact me. I will take you out for a beer.

Based on Sparrow’s initial comments and my observations of the board immediately following my speech, I suspect Allied or its agents were also posting on the Yahoo! message board. Certainly, they were focused on it, because Walton routinely complained about the board. One poster under the name “stop_theft2002” posted repeated requests for investors to agitate for the SEC to act against Greenlight. They read as if a lawyer wrote them. The posts were headed, “How to suggest SEC look at Greenlight,” “SEC: Bring Sunlight to Shorts,” “SEC: Did Greenlight Manipulate?” “Tell SEC about Greenlight” and “SEC: Investigate Greenlight.” Though the postings had different headings, the message was repeated verbatim many times between May and October 2002. It read:

We wonder whether Greenlight’s actions (speaking engagements, publishing white papers, issuing press releases regarding issuance of their white papers, etc.) were designed to manipulate the price of Allied Capital stock. If you would like to suggest to the SEC that they investigate the possible market manipulation by Greenlight Capital, I suggest that you use the following addresses. A simple letter or email suggesting that the SEC should investigate the possible manipulation of Allied Capital’s stock by Greenlight Capital, and perhaps giving a few facts, should be adequate.

The message closed with detailed instructions to best reach the SEC and ended with “Thank you.” It lacked the individuality, humor, sarcasm, personality or lunacy of most personally posted messages.

In the fall of 2004, Sydran Foods, another Allied investment, filed for bankruptcy, and court records revealed that the company began its decline in 1999. The records stated, “By the end of 2000, significant declines in sales at the Debtors’ Burger King restaurants caused a liquidity crisis and defaults under the Debtors’ agreements with their principal lenders and under the leases with the Holding Companies.” On November 13, 2001, Sydran completed a restructuring wherein Allied exchanged debt for equity. Nonetheless, Allied carried its investment in Sydran at cost through June 2002. Over the following year, Allied gradually wrote the investment towards zero (see Table 22.1). This was another example of Allied taking its write-downs gradually and too late.

Table 22.1 Sydran Foods

On December 27, 2004, I got a phone call from our trader alerting me that Allied just announced that the U.S. attorney for the District of Columbia had launched a criminal investigation of Allied and BLX. The company once again blamed short-sellers for the news. Allied issued a statement that said the investigation “appears to pertain to matters similar to those allegations made by short-sellers over the past two and one-half years.”

However, this time there was no reason to blame us. We had not contacted the U.S. attorney. The SEC is a civil regulatory agency and can commence civil investigations and actions. However, it has no criminal prosecution authority. If it finds evidence of criminal behavior, it may refer the matter to the U.S. attorney’s at the Justice Department. We didn’t know what the SEC found in its investigation, but whatever made them pass this to the U.S. attorney we considered it to be a good sign.

While Allied’s press release announcing the SEC inquiry had read, “We welcome the opportunity to . . . demonstrate once and for all that the short-sellers’ allegations are false,” Allied’s release announcing the criminal investigation did not