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) 📕

Also, while Allied Capital was gathering documents responsive to the subpoena, allegations were made that Allied Capital management had authorized the acquisition of these records and that management was subsequently advised that these records had been obtained. The management of Allied Capital states that these allegations are not true.

Allied Capital is cooperating fully with the inquiry by the United States Attorney’s office and will have no further comment concerning this matter until that inquiry has been concluded.

Almost poetically, a half hour later, Allied issued a second press release announcing a one-cent increase to the quarterly distribution.

I had not known that Allied also obtained Greenlight’s phone records—or at least the “purported” records. The release also stated that the board was forming a committee to investigate. Funny, Allied had said in response to my letters to the board that it already investigated and found nothing. For them to admit this, the evidence must have been extremely clear. Certainly, the press release was not. Who made the allegations? Presumably, it was either someone at Allied or the “agent” who obtained the records. Was Allied, as a corporation, denying that its management knew, or was only the management denying it, with the company staying silent? I thought the latter, but the press reported the former. If Sweeney didn’t know, then why did she duck Greenberg’s inquiries on this topic in 2005?

“After five years, Allied Capital has acknowledged a tiny piece of its rampant misconduct,” I told the press that day. “The evidence was clearly always there; the board simply neglected its fiduciary responsibility to supervise the company appropriately.”

The next day, Greenlight released a somewhat longer statement. After briefly reviewing Allied’s history of ignoring my letters and quoting Walton’s blistering attack against me on the last conference call, the statement continued, “Now that Allied has admitted that its agent pretexted my personal phone records and one of BLX’s long-time senior executives has been indicted for the very fraud that I alerted the Board to, it is time for Allied to stop its dismissive attitude toward concerns I have brought to its attention and stop its personal attacks on me.

“Instead, Allied continues on with its usual pattern. Allied admits nothing until they are forced to do so. Allied did not acknowledge the loan practices until a BLX executive was indicted. Allied did not admit the pretexting until Allied was subpoenaed by federal prosecutors.” I called for the dismissal of management.

We received a call from Steven Pearlstein, a business columnist with The Washington Post. A quick review of his history showed he did not like hedge funds. For example, he wrote a column in 2005 that summarized a handful of reported hedge fund frauds and concluded:

This is not a case of a few rotten apples. It’s a case of an industry that has become so rich and arrogant—and so littered with charlatans and con men—that government must step in to protect the public interest.

He wanted to meet with me to discuss Allied. I decided to have Steve Bruce at Abernathy, McGregor return the call. According to Bruce, he accused us of trading on inside information. Bruce asked if he knew when Greenlight traded. Pearlstein didn’t. “Then how can you accuse them of insider trading?” Bruce replied.

Then Pearlstein complained that a lot of the information contained in my letter to the board didn’t come out of Allied’s 10-Ks. Bruce pointed out that the information came from Allied’s public disclosures, news accounts, legal filings, government Web sites, and inquiries we made under the Freedom of Information Act. Pearlstein apparently thought it was unfair for professional investors to do in-depth research, including using time and resources that individual investors don’t have.

We braced ourselves for what would surely be an attack. On February 9, 2007, the Post published his column headlined, “A Slugfest Gets Uglier:”

After five years of nasty accusations and name-calling, lawsuits and investigations, it’s hard to find the good guy in the high-stakes feud between hedge fund manager David Einhorn and Allied Capital.

Einhorn is a Wall Street punk—tough, smart, cocky. In his campaign to discredit Allied Capital and drive down its stock price, he’s been wrong about several things, such as allegations that the company inflated the value of certain investments on its books. And he’s grossly exaggerated the significance of other problems of a company that continues to post respectable profits and pay hefty dividends. His big bet—that Allied stock would fall—looks to have been a loser for investors in Einhorn’s Greenlight Capital.

But even punks can sometimes be right. In this case, it turns out that Einhorn was on to something when he alleged in 2002 that there was a pattern of fraudulent lending at one of Allied’s portfolio companies. Since then, a former loan officer has been indicted, the office he worked in has been closed, loan losses have increased, and the Small Business Administration has increased its oversight of the company’s lending.

And Einhorn was also right when he alleged that private investigators acting on behalf of Allied had improperly obtained his phone records. Allied admitted as much this week, and in time, it is likely that we’ll learn that his were not the only phone records involved. These disclosures are more than simply a huge embarrassment for Allied, a Washington outfit that lends to and invests in small and mid-size companies. They also call into question the judgment and competence of chairman and chief executive Bill Walton, the outside directors, and the high-priced legal team brought in to manage the response to Einhorn and other short-sellers. From the beginning, Allied spent too much time and energy questioning the motives of its critics and too little digging into the substance of Einhorn’s allegations. Company executives’ responses were at times evasive, at other times incomplete.

For me, the clincher was this week’s Hewlett-Packard–like admission that Einhorn’s phone records were stolen. When the allegation was first