Fooling Some of the People All of the Time a Long Short (And Now Complete) Story Updated With New Epilogue Read online

  Contents

  Foreword

  Who’s Who

  Introduction to This Edition

  Introduction: The Spark of a Speech

  Part One: A Charity Case and Greenlight Capital

  Chapter 1: Before Greenlight

  Chapter 2: Getting the “Greenlight”

  Chapter 3: Greenlight’s Early Successes

  Chapter 4: Value Investing through the Internet Bubble

  Chapter 5: Dissecting Allied Capital

  Part Two: Spinning So Fast Leaves Most People Dizzy

  Chapter 6: Allied Talks Back

  Chapter 7: Wall Street Analysts

  Chapter 8: The You-Have-Got-to-Be-Kidding-Me Method of Accounting

  Chapter 9: Fact—or Maybe Not

  Chapter 10: Business Loan Express

  Chapter 11: Disengaging and Re-engaging

  Chapter 12: Me or Your Lyin’ Eyes?

  Chapter 13: Debates and Manipulations

  Chapter 14: Rewarding Shareholders

  Chapter 15: BLX Is Worth What, Exactly?

  Part Three: Would Somebody, Anybody, Wake Up?

  Chapter 16: The Government Investigates

  Chapter 17: A Tough Morning

  Chapter 18: A Spinner, a Scribe, and a Scholar

  Chapter 19: Kroll Digs Deeper

  Chapter 20: Rousing the Authorities

  Chapter 21: A $9 Million Game of Three-Card Monte

  Part Four: How the System Works (and Doesn’t)

  Chapter 22: Hello, Who’s There?

  Chapter 23: Whistle-Blower

  Chapter 24: A Naked Attack

  Chapter 25: Another Loan Program, Another Fraud

  Chapter 26: The Smell of Politics

  Chapter 27: Insiders Getting the Money Out

  Part Five: Greenlight Was Right . . . Carry On

  Chapter 28: Charges and Denials

  Chapter 29: Charges and Admissions

  Chapter 30: Late Innings

  Chapter 31: The SEC Finds a Spot under the Rug

  Chapter 32: A Garden of Weeds

  Chapter 33: A Conviction, a Hearing, and a Dismissal

  Chapter 34: Blind Men, Elephants, Möbius Strips, and Moral Hazards

  Part Six: Epilogue

  Chapter 35: Looking Back: As the Story Continued

  Chapter 36: The Lehman Brothers Saga

  Chapter 37: If They Asked Me, I Could Write a Book

  Chapter 38: Just Put Your Lips Together and Blow

  Chapter 39: Some Final Words to and from the SEC

  Chapter 40: The Last Word

  Glossary

  Acknowledgments

  About the Author

  Index

  Fooling Some of the People All of the Time

  Copyright © 2008, 2011 by David Einhorn. All rights reserved.

  Published by John Wiley & Sons, Inc., Hoboken, New Jersey

  Published simultaneously in Canada

  No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/permissions.

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  Library of Congress Cataloging-in-Publication Data

  Einhorn, David.

  Fooling some of the people all of the time : a long, short (and now complete) story/David Einhorn; foreword by Joel Greenblatt.

  p. cm.

  Includes index.

  ISBN 978-0-470-07394-0 (cloth); ISBN 978-0-470-48154-7 (paper); ISBN 978-0-470-37149-7 (ebk); ISBN 978-0-470-37158-9 (ebk); ISBN 978-0-470-89329-6 (ebk)

  1. Allied Capital—Management—Evaluation. 2. Allied Capital—Accounting—Evaluation. 3. Small business investment companies—United States—Management—Evaluation. I. Title.

  HG3729.U5E44 2008

  332.6'20973—dc22

  2008011992

  In honor of my parents, Stephen and Nancy Einhorn, who demonstrated business success while maintaining high standards of personal integrity and good humor.

  Foreword

  You don’t have to be a financial expert to read a great detective novel. But since this story involves billions of dollars and an elaborate plan, it does help to have one of the world’s greatest investors around to lead you through all the twists and turns. In the end, the story is simple. It’s also thrilling and scary—even more so because, sadly, this isn’t a novel. It all actually happened, and as I write, the story continues.

  I read this book in two sittings. If eating and sleeping hadn’t gotten in the way, it would have been one. I was drawn into a world that few of us have experienced other than at the movies. It really is hard to believe how the legal system, government regulators, and the financial press can all come together and fail so miserably. Most great stories have good guys and bad guys. In simplest form, there are black hats and white hats, and you can tell which side the players are on. Not so in Fooling Some of the People All of the Time. Our hero is never quite sure whom he can trust.

  But that’s okay. As long as you can experience the excitement and intrigue vicariously in the comfort of a bed or couch, it doesn’t seem so bad. It’s also not so bad to lose some innocence about how the world sometimes works. In the short run, the good guys may get dragged through the mud and the bad guys may get away with millions. But in the long run, the good guys may get dragged through the mud and the bad guys may get away with millions. In the meantime, I will have to give the movie version of the book an R rating. I just don’t want my kids to lose their innocence too soon.

  Joel Greenblatt

  SEC lawyer: “At the time that you made the speech, did you anticipate that your position on Allied would become so public, or was it your thought that you would give this speech, say what you thought about the company, and then that
would sort of be it, and what would happen to the stock would happen to the stock?”

  David Einhorn: “If what you’re asking is did I feel that the reaction was much, much greater than I would have anticipated? The answer is yes.”

  Open and consistent accounting starts with an attitude of zero tolerance for improprieties. People need to see that people are rewarded for candor in reporting and punished for slipshod practices. The CEO really has to set the moral tone. Without that, nothing happens.

  There’s enormous pressure on public companies to maintain quarterly earnings momentum, and it’s probably growing worse. The bigger thing that firms get punished for are surprises, particularly negative ones. It’s better to face up to bad facts and reporting the business as it is, rather than trying to hide things and make it far worse later on.

  If you develop a reputation for candor with securities analysts and investors, that’s about the best you can do. At the end of the day, investors understand that building a business is not an uninterrupted, smooth road. First, you have to determine whether it’s a systematic problem or a people problem. If there’s a dishonest person involved, you get rid of the person.

  —Bill Walton, CEO of Allied Capital, 1999

  Allied Capital Stock Price 2002-2005

  Allied Capital Stock Price 2006-2010

  Who’s Who

  GREENLIGHT & ADVISERS

  Steve Bruce Outside PR adviser for Greenlight

  Jock Ferguson An investigator with Kroll

  Bruce Gutkin Greenlight head trader

  Bruce Hiler Outside lawyer for Greenlight

  Alexandra Jennings Greenlight analyst

  Jeff Keswin Greenlight co-founder

  James Lin Greenlight analyst

  Daniel Roitman Greenlight COO

  Ed Rowley Outside PR adviser for Greenlight

  Richard Zabel Outside lawyer for Greenlight

  ALLIED & ADVISERS

  Steve Auerbach Former BLX workout specialist

  Allison Beane Member of Allied’s Investor Relations department

  Lanny Davis Outside PR adviser for Allied

  Seth Faison Outside PR adviser for Allied at Sitrick and Co.

  David Gladstone CEO of Gladstone Capital and former CEO of Allied

  Patrick Harrington Former executive vice president of Allied and BLX

  Robert D. Long Allied managing director

  Dale Lynch Head of Allied’s Investor Relations department

  Matthew McGee Head of the Richmond, Virginia, office of BLX

  Bill McLucas Former SEC Enforcement Chief and Allied lawyer

  Penni Roll Allied CFO

  Marc Racicot Director of Allied, former governor of Montana and head of Republican National Committee

  Deryl Schuster BLX executive

  Suzanne Sparrow Former head of Allied’s Investor Relations department

  Joan Sweeney Allied COO

  Robert Tannenhauser BLX CEO

  William Walton Allied CEO

  George C. Williams Allied Capital founder and chairman emeritus

  Tim Williams Former BLX workout specialist

  GOVERNMENT OFFICIALS & REGULATORS

  Jonathan Barr Federal prosecutor

  Amy Berne Department of Justice lawyer

  Laura Bonander Department of Justice lawyer

  Rene Booker Department of Justice lawyer

  Mark Braswell SEC lawyer, Allied lobbyist

  Kathleen L. Casey SEC Commissioner

  Christopher Cox chairman of the SEC

  William Donaldson Former chairman of the SEC

  Gene A. Gohlke SEC Associate Director in the Office of Compliance, Inspections and Examinations

  David R. Gray Counsel to OIG of the SBA and later to the OIG of the USDA

  Glenn Harris SBA Office of Inspector General lawyer

  Keith Hohimer Investigator, SBA’s Office of Inspector General

  Senator John Kerry Chairman of the Senate Committee on Small Business and Entrepeneurship

  Kelly Kilroy SEC lawyer

  Kevin Kupperbusch Investigator, SBA Office of Inspector General

  Tedd Lindsey FBI agent

  Steven Preston SBA administrator

  Gerald Sachs Department of Justice lawyer

  Doug Scheidt Associate director of the SEC’s Division of Investment Management

  Senator Olympia Snowe Ranking member of the Senate Committee on Small Business and Entrepeneurship

  Eliot Spitzer New York attorney general

  Janet Tasker SBA associate administrator for Lender Oversight

  Eric Thorson SBA inspector general

  Congresswoman Nydia Velázquez Chairwoman of the House Small Business Committee

  WALL STREET ANALYSTS

  Mark Alpert Deutsche Bank analyst

  Ken Bruce Merrill Lynch analyst

  Henry Coffey Ferris Baker Watts analyst

  Meghan Crowe Fitch analyst who covers BLX

  Don Destino Bank of America and later JMP Securities analyst

  Robert Dodd Morgan Keegan analyst

  Faye Elliot Merrill Lynch analyst

  Charles Gunther Farmhouse Securities analyst

  Joel Houck Wachovia analyst

  Michael Hughes Merrill Lynch analyst

  Robert Lacoursiere Bank of America analyst

  Greg Mason Stifel Nicolaus analyst

  Robert Napoli Piper Jaffray analyst

  John Stilmar Friedman Billings Ramsey analyst

  David Trone Fox-Pitt, Kelton analyst, Lehman Brothers

  JOURNALISTS

  Jenny Anderson Reporter for The New York Times

  David Armstrong Reporter for The Wall Street Journal

  Julie Creswell Reporter for The New York Times

  Kurt Eichenwald Reporter for The New York Times and author of Conspiracy of Fools

  Jesse Eisinger Reporter for The Wall Street Journal

  Herb Greenberg Columnist for TheStreet.com and CBS Marketwatch.com

  Holman W. Jenkins Jr. Columnist for The Wall Street Journal

  Jerry Knight Columnist for the Washington Post

  Floyd Norris Columnist for The New York Times

  Terrence O’Hara Reporter for the Washington Post

  Steven Pearlstein Columnist for the Washington Post

  Carol Remond Reporter for Dow Jones Newswire

  Louise Story Reporter for the New York Times

  Thor Valdmanis Reporter for USA Today

  PROFESSIONAL INVESTORS

  Bill Ackman Manager of Gotham Partners

  David Berkowitz Manager of Gotham Partners