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) 📕

Zahraie testified that “Pat Harrington [BLX executive vice president in Detroit] and Al’Jafairi were sometimes business partners and had perpetrated fraudulent mortgage transactions in the past where Al’Jafairi greatly profited by the transactions and where the price of the transaction in question, including this one, was inflated because of his wrongful dealing with Plaintiff executive, Pat Harrington.”

In New York, the EPA cited White-Sun Cleaners for major environmental violations on April 12, 2001. The next month, BLX issued an SBA guaranteed loan for $1,330,000 for the property. Initially, 34th Street Associates owned it. The U.S. Department of Labor had sued one of 34th Street’s general partners for mob connections and breach of duty as trustee of Teamsters Union 363. In August 2001, 34th Street Associates sold the property to White-Sun Cleaners, the tenant. BLX issued a replacement loan to finance the purchase. In August 2003, BLX assigned the note to the SBA because White-Sun Cleaners defaulted.

In Illinois, BLX issued a $990,000 SBA loan to Inter Auto Inc. to bail out Witold Osinski, a borrower already in default on a $280,000 first loan to a local savings association. This violated SBA policy by transferring a credit loss from a private lender to the government. The loan was supposedly made to a body shop. Inside was an insurance scam. In 2004, Mr. Osinski was indicted for paying people to stage false auto accidents and submitting fraudulent claims to insurance companies. He reached a plea agreement with the U.S. attorney’s office, agreeing to cooperate on another case in return for a reduced sentence. He received up to 71 months in prison. Ingrid Osinski, his wife, pled guilty to one count of Frauds and Swindles and was ordered to pay $450,000 in restitution and sentenced to thirty-three months in prison.

These were just a few examples of Brickman’s discoveries. In January 2005, Kroll had a follow-up conversation with the SBA. Kroll reported that the Office of Inspector General’s (OIG’s) investigators, along with SEC investigators, were working together and had looked into many of BLX loan files and found many problems with its operating practices. The probe was focused on origination fraud, rather than accounting fraud. The OIG interviewed two former BLX loan origination employees, who provided good evidence of improper loan origination practices. The head SBA investigator met with the U.S. attorney in Washington, D.C., in early December to discuss their findings.

I thought Allied’s board should be made aware of our findings, so I wrote its directors a letter in March 2005, informing them that BLX engaged in a huge fraud against the SBA and United States taxpayers. I said that BLX maintained its loan origination volume by repeatedly flouting SBA lending regulations, including using inflated appraisals, failing to verify equity injections, permitting impermissible property splits and property flips and committing other violations. Allied used the fraud to receive income from BLX and increase its valuation of BLX. I also wrote the directors about my stolen phone records and reminded them of their obligation to investigate and ensure that those engaged in this sort of misconduct don’t serve in a management capacity in a publicly traded company or engage in this conduct at the company’s direction.

I explained to the directors how management had established a pattern of dishonesty. Walton and Sweeney were charismatic and I considered it possible that they had deceived the directors as they had Allied’s shareholders and others. Now that the company was under investigation, board members might begin questioning management. Perhaps they would now take our charges more seriously, and my letter was an attempt to open a dialogue with them.

I pointed the directors to Sweeney’s comments in the February 2003 conference call denying that she knew why, or even if, the SBA was gathering information about BLX. She had said that only days after she personally executed the agreement to unwind the loan-parking arrangement, while BLX simultaneously reimbursed the SBA $5.3 million in related guarantee payments for the parked loans. I noted the shoddy disclosure relating to the whole circumstance by saying, “This raises serious issues about the honesty of management with its shareholders and perhaps with the board. As the board of directors could not have sanctioned such public misrepresentations, the question you need to ask is, are they lying to you as well?”

A week later, Brooks Browne, the chairman of Allied’s Audit Committee, sent me a dismissive letter. The board said it asked Allied’s management and outside counsel for a response to Greenlight’s claims of misconduct. According to Browne, the information from Allied’s management did not support our accusations. Moreover, the letter didn’t mention any of the specific concerns I raised, including the theft of my phone records. Instead, it noted Greenlight’s short position against the company, implicitly attacking my credibility. The letter said if I could “provide (the board) with specific information upon which you base your allegations” then the Audit Committee could “determine whether further action is warranted.” I thought my letter was rather specific. It sure didn’t sound like they were terribly interested in getting to the bottom of the matter.

In Allied’s first SEC quarterly filing (for the first quarter of 2005), after receipt of my letter, the company dramatically reduced the summary information about BLX’s performance that it had provided since the middle of 2002. There was still enough information to track how much income Allied recognized from BLX and how fast BLX’s debt grew. However, Allied stopped disclosing origination volumes; revenue; earnings before interest, taxes, and management fees (EBITM); net income; the size of the loan portfolio; and the amount of residuals, among other things.

Brickman wrote a lengthy letter in June 2005 to Janet Tasker, the SBA associate administrator for lender oversight. Tasker was responsible for renewing BLX’s preferred lender status. The letter detailed many dubious loans and said that to protect the SBA and taxpayers from further losses, BLX’s preferred lender status should not be renewed. Despite the evidence, the SBA renewed the license for another six months.