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) 📕

Davis: “I don’t specifically recall that.”

Our lawyer: “Do you recall telling a reporter at Reuters the following statement: ‘Every single allegation without exception made by these short-sellers,’ referring to Mr. Einhorn, ‘are false and in many cases we can prove they are knowingly false.’”

Davis, after reviewing the article: “I believe I was referring to Mr. Einhorn’s charges made against both Allied Capital and Business Loan Express as being false, and in many cases I believed we could prove they were knowingly false.”

Our lawyer: “And have you to date ever proven those statements to be false?”

Davis: “Never filed a lawsuit against Mr. Einhorn, no.”

Our lawyer: “Have you ever provided any information to show those allegations are false?”

Davis: “Have I ever provided information to whom?”

Our lawyer: “To the SEC.”

Davis: “No.”

Sure, he didn’t. Greenlight’s lawyer asked him if he had seen the articles I wrote for TheStreet.com in 2002 criticizing Allied’s treatment of BLX. Davis didn’t recall ever seeing them. If he were telling the truth, how could he have complained to regulators and even gone on television to discuss my Big Lie when he had not read what I wrote?

Davis was then asked about the analysis we posted on our Web site in 2002. He vaguely remembered that he reviewed it, but didn’t “remember this specific document.”

Our lawyer: “And you don’t recall whether these were the allegations that you said ‘every single allegation without exception made by these short-sellers was false and in many cases we can prove they are knowingly false?’”

Davis: “I don’t remember if it’s this particular document, but I remember at the time the allegations made by Mr. Einhorn after examining all the evidence and interviewing all the individuals involved in the various companies that Mr. Einhorn claimed were being over inflated in value, that Mr. Einhorn’s charges were false. And I believe he was given a full documentation explanation as to why they were false and he repeated the allegations and that’s why I used the word ‘knowing[ly].’”

Incidentally, when Prosser was to prove his case against the RTFC, his star witness, Davis, did not show up to testify to support his claims, and Prosser withdrew his suit. The judge was not amused.

Allied released its year-end 2006 results on February 28, 2007. It announced that it wrote-down BLX by $74 million and put the investment on non-accrual. Allied said BLX might need to be restructured and recapitalized. On the conference call that day, management said BLX was now pursuing its non-SBA lending activities, and this required a secured lending agreement, as opposed to its current unsecured agreement. As a result, it was looking for a new bank lender.

Meanwhile, Allied injected another $12 million into BLX to help it remain “compliant with covenants” on its existing credit line. Management indicated that, otherwise, the debt-to-equity ratio would have fallen below the minimum threshold. It sounded as though the existing bank group had become unhappy with BLX, even though Allied guaranteed half the debt. It was clear that the banks would not permit Allied to extract additional management fees, interest, or dividends from its BLX investment. Even with the reduced value, Allied still determined BLX had an enterprise value of almost $600 million.

Walton tried to put his best spin on BLX: “And I think one of the pleasant surprises about BLX in 2006 was how they were able to transition from an SBA-oriented business primarily to a conventional real estate business. And I think that’s something that we think is potentially pretty valuable for the future.”

A few moments later, he added: “But we do think the [SBA] business has reached a nadir and it’s coming back from here, and we’re putting a lot of things in place we think this business was going to come back. And this is not the problem that it’s been portrayed as being. The business has gotten less profitable during 2006 because of the bank competitions for the loans. But it remains profitable, and we think as the business evolves in its new form is going to be very profitable again. And also I think the notion of keeping cash in there is a good idea because that’s—they’ve always generated good cash flow.”

Later on the call, management indicated BLX’s book value was between $180 million and $190 million. The previous time Allied disclosed BLX’s book value was at the end of 2004, when it was $155 million. Since then, Allied increased its equity investment by about $59 million through a combination of converting debt to equity and injecting fresh funds. I calculated that if BLX broke even, its book value should be about $215 million. Instead, it was $25 to $35 million less. Presumably, this is how much BLX has lost since the end of 2004. Considering BLX’s obviously deteriorating results—I don’t believe BLX “remained profitable”—and its legal and liquidity predicament, Allied’s valuation of BLX was far in excess of its unjustifiable June 2002 valuation—ridiculous!

During this Allied conference call, Brad Golding of Christofferson Robb asked: “My next question is, it was my understanding that up until recently that the senior management of Allied had been on the BLX board. I take it that’s no longer the case. What changed, why did you leave, and when did that happen?”

Walton responded: “There has been no change in the board of BLX. It’s been the same. And we think we’ve had an effective oversight at BLX. We’ve got a situation in Detroit that is what it is. And we continue to believe that BLX is a very healthy business with very high lending standards and good internal controls and has been and is and will be that, and we had problems in the Detroit office, and we think we took the BLX people took effective action at the time they knew things.”

Golding followed up: “Okay. Can you tell me who from Allied is on the board of BLX?”

Walton moved on: “We really don’t—I don’t want to—we really haven’t disclosed the board members of any of our portfolio