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) 📕

the judge gave us to serve BLX with the shrimp-boat False Claims suit, so we also told the board about the unsealed suit in the letter. We described other SBA fraud, Matthew McGee, and the Bill Russell USDA fraud. We described our compilation of the SBA and USDA default data.

Then, we pointed out that management responded dishonestly about the recent events. In summary, we challenged the spin that BLX had only recently learned of the fraud, that it involved a single rogue employee, that Allied’s risk was limited to its investment in BLX, that BLX was financially strong, and that management acted promptly and fully to disclose the event. “Each new revelation about the fraud . . . is met with escalating denials from Allied’s management and deafening silence from the Board,” I wrote.

Allied responded the same evening via a press release, saying my letter was “yet another example of his long-running attempts to manipulate the price of Allied Capital’s stock.” The company also said my letter had numerous inaccuracies. Of course, the company didn’t say what they were. “While Mr. Einhorn busied himself with repeated attacks against Allied Capital over the last five years, Allied Capital’s board of directors and management have maintained their focus on creating shareholder value and building the company.” In the press release, the company made a thinly veiled threat that it was going to sue us.

A friend joked, “My stock is up. Therefore, I am not a crook.”

The stock fell $2 per share to $28 on January 22 after my letter to the board became news. The next morning the stock fell another $1.50 a share, but began recovering when Allied spread word that it would come out with a point-by-point response to my letter. In contrast to the barrage of analyst reports following the Harrington indictment, almost all the analysts remained silent about my letter and Allied’s vague response. It seemed they would wait until Allied told them what to say.

One of the few analysts who didn’t defend Allied was Rick Shane of Jefferies & Co. The day after my letter, he wrote, “While some of our competitors have viewed recent declines as an attractive entry point, we remain more circumspect. The indictment of a BLX employee appears to have triggered both internal and external inquiries. As outsiders, we are uncomfortable predicting the outcome of these inquiries and feel that recommending ALD stock at this time based on valuation ignores incremental risk.”

On the other hand, the A. G. Edwards analyst, Troy Ward, was undeterred: “While Mr. Einhorn’s negative opinion of BLX seems to be in line with the Harrington indictment on fraud, in our opinion this does not substantiate his larger supposition that there is [sic] ‘wide-spread’ underwriting issues at BLX. We do not believe that fraud at the BLX Detroit office is necessarily an indication that BLX’s underwriting standards are sub-par.” Ward added, “We have difficulty believing that KPMG and third party valuation firms would approve ALD’s valuation methodology of BLX if there were rampant indications of fraud through BLX.”

Two weeks later, I heard that Allied’s point-by-point response to my letter would be “delayed.” Allied’s lawyers wouldn’t let them release it because it might offend the regulators they were trying to work with.

On January 25, 2007, Carol Remond reported on the Dow Jones Newswire that, “BLX has agreed not to resell loans on the secondary market, a move that could hamper its ability to make future loans. A spokesman for the SBA said BLX ‘voluntarily suspended’ sales of loans on the secondary market until a number of conditions set by SBA are met.”

For some reason, this article did not get picked up in any other news service that I saw. No analyst commented on the development, and Allied did not issue a release announcing the negative development.

Remond’s Dow Jones article included an interesting SBA perspective on how the Detroit investigation developed:

SBA said that its staff in Detroit reported suspicious irregularities in BLX’s loan portfolio to the Inspector General’s office as early as 2002. SBA’s Inspector General led the multi-year investigation resulting in the arrests announced on January 9, 2007. SBA’s Loan Monitoring System alerted SBA and BLX to the abnormally high default rate.

Following The New York Times article on January 13, 2007, which said the House Small Business Committee “will be investigating SBA’s involvement and how the agency could have failed to detect this,” I asked Greenlight’s lawyers from Akin, Gump to contact Chairwoman Velázquez’s staff to offer our assistance in helping them understand what happened. On January 26, 2007, our lawyers met three of her staffers, including Michael Day, her chief of staff. The staff was “stone-faced.” They were open to receiving information, but were not interested in seeking it out. It was clear they were moving slowly. It didn’t seem that Ms. Velázquez would get to the bottom of this, after all. I wasn’t surprised, remembering the contributions Velázquez received from BLX CEO Tannenhauser, his family, and other Allied executives, including Sweeney.

Just before I left my house for the train on February 6, 2007, I took a quick peek at my home computer for any news on Greenlight’s portfolio. At 7:03 a.m., Allied issued a press release titled “Allied Capital Comments on Recent Events.” I figured they were putting out the point-by-point response, after all.

Instead, though the press release was incredibly convoluted, it appeared they were admitting they stole not only my home phone records, but also Greenlight’s. The release read:

Allied Capital Corporation announced today that, in late December 2006, it received a subpoena from the United States Attorney’s Office for the District of Columbia requesting, among other things, the production of records regarding the use of private investigators by Allied Capital or its agents. The Board established a committee, which was advised by its own counsel, to review the following matter.

In the course of gathering documents responsive to the subpoena, Allied Capital has become aware that an agent of the Company obtained what were represented