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) 📕

Over on the Yahoo! message board, the most aggressive poster in defending Allied’s views and attacking me personally posted as sharonanncrayne. This poster, claiming to be an individual investor, made 1,370 posts between May 20, 2002 (five days after my speech) and November 17, 2004. Many were quite vicious, and I suspected from their detail that they came from an Allied insider, trying to walk a fine line about providing inside information. Once the criminal investigation was announced, sharonanncrayne never appeared again. While we can’t know for sure, it made sense that she was an insider acting outside the lines and would stop at the sound of a criminal investigation.

Finally, two years after my speech and immediately following the criminal investigation announcement, a major media outlet actually looked at the debate between Allied and us and picked our side. USA Today posted on its Web site an article by Thor Valdmanis with a headline that read, “Is Allied Capital Just Another Victim of Unscrupulous Short-Sellers?” The Web site indicated that the article was intended for page 1B of the paper’s December 30, 2004, edition. The article talked about the recent investigations and Allied’s blaming us for “a vicious disinformation campaign.” The article cited a person with knowledge of the Allied case, pointing out that it isn’t unusual for the SEC to initiate a probe and then ask for Justice Department help.

“Businesses often go to their graves blaming short-sellers,” Valdmanis wrote, before concluding that “short-sellers, who often produce the best Wall Street research, can be the market’s first line of defense against corporate fraud.” After seeing the story online the night before, the next morning I bought a USA Today. The article wasn’t on page 1B. It wasn’t anywhere in the business section. It wasn’t in the main section. In fact, it wasn’t anywhere. I went back to the paper’s Web site—the article was gone.

In writing this book, I contacted Valdmanis, who left the paper shortly after the story was pulled, and asked him what happened. He said, “I can’t remember my editors ever explaining why the story was zapped from the Web site (and didn’t run in the print edition). But it is fair to say that kind of thing almost never happened. All I know is that Lanny (Davis) was working extremely hard at that time behind the scenes to burnish Allied Capital’s image. And we all know Lanny can be very persuasive—particularly in the face of uncomfortable facts.”

CHAPTER 23

Whistle-Blower

The federal government doesn’t like being ripped off—or at least doesn’t like the humiliation that comes with discovering it is being ripped off. The government was certainly humiliated during the Civil War, when many war contractors were overcharging it for inferior goods. So Congress passed the False Claims Act during the war, which is commonly known as the whistle-blower law. It allows people who discover fraud against the federal government to report it, and, if wrongdoing is found, to share in the money the government collects. The law also protects whistle-blowers from retribution.

Most false claim suits involve either Medicare or defense contractor fraud. The qui tam (the Latin abbreviation for “Who sues on behalf of the king as well as for himself”) provision of the law would allow Greenlight to file suit against Allied/BLX on behalf of the federal government and to share in any money that it recovered from BLX’s fraud. Whistle-blowers can receive from 10 percent to 35 percent of the recovery.

Between Kroll’s work and our own, we had a well-documented case of fraud at BLX. Under the False Claims Act, the case is filed under seal, which would prompt the Justice Department to investigate it and decide whether to intervene. If it intervenes, it takes over the case. If not, we would have the option to pursue the case ourselves. As we were preparing to file a case, Brickman was updating me on his latest discoveries of fraud at BLX and venting his frustration with the government, when he said, “I’m going to file a whistle-blower case.” He hired a lawyer to pursue it.

That was a problem, because there could be only one case. Under federal rules, you have to be the first case to file or your case gets dismissed. Rather than have a competition to see who would file a suit first, Greenlight’s lawyer indicated it was permissible to have multiple whistle-blowers in the same suit. I called Brickman back, admitting we were pursuing the same thing and suggested that we team up. Happily, he agreed.

Brickman researched dozens of additional apparently fraudulent BLX loans. To detail them all would be frighteningly tedious. However, here are a few lowlights:

In Michigan, there were a number of loans to affiliates of Imad Daeibes (whose name is spelled differently in various documents). One of the bad loans in the loan-parking arrangement had been to Dibe’s Petro Mart. In pursuit of collecting on that bad loan, Allied took legal action and obtained a judgment in June 2002. Daeibes failed to show up for a creditor’s exam, and an arrest warrant was issued. Notwithstanding this history, BLX extended at least five additional loans in transactions that involved Daeibes. For example, on December 8, 2003, Daeibes purchased a gas station for $350,000 and resold it the same day to Tawfiq Alfakhouri for $1.2 million. BLX financed the inflated purchase. This was an obvious sham transaction called a property flip. Several of the other loans appeared to be related to similar property flips.

There were several additional fraudulent loans involving Abdulla Al-Jufairi in additional property flips and in “piggyback” loans, where the SBA was placed in a subordinated position. Brickman also found evidence of loans where the borrower didn’t make the required equity injection. The SBA requires equity in its loans to ensure that the buyer has “skin in the game.” In one court record, Daryoush Zahraie was asked about a $240,000 down payment. He said it wasn’t made due to a verbal agreement at closing. In the same case,