Fooling Some of The People All Of The Time

David Einhorn, “Fooling Some of The People All Of The Time” (A Long Short Story), John Wiley & Sons, 2008, 362 Pages

Fooling Some of the People All of the Time is written by the David Einhorn President of Greenlight Capital, a hedge fund that buys long and short investments. He wrote this book because he could not get any financial publication to take it on and could not get the SEC or SBA to investigate the fraudulent accounting he had uncovered at Allied Capital. This book shows the failings of Wall Street: its investment banks, analysts, journalists, and especially our government regulators. Einhorn explains how he uncovers the fact that Allied Capital is basically run as a ponzi scheme: the company pays its shareholders (mostly retail investors) a fat dividend yield which it makes up by constant capital raising exercises and disposal of assets. It also shows the extreme danger anyone puts themselves in if they criticize such a politically well-connected company.

I began this book with little admiration for short-sellers. I finished book convinced that short-sellers are the only effective barrier we have against the Enron’s of this world. It was short-sellers that brought Enron’s abuses to public notice. Einhorn fought Allied Capital from 2002 up to the publication of this book in 2008 and had presumably had minimal effect (see my addenda for update). It was not until after this book that Allied finally met its’ end and this was more due to the economy crashing than any prosecution. Allied was bought out by Ares Capital.

Addenda: May 6th 2010 News release:
NEW YORK, May 6 (Reuters) - Ciena Capital LLC, a New York City business lender (former parent Allied Capital Corp), has settled U.S. Justice Department fraud claims over its small-business lending practices for $26.3 million, in an agreement that also resolves a whistleblower lawsuit by a prominent hedge fund run by David Einhorn. The settlement resolves allegations that Ciena and its Business Loan Center unit falsely certified their compliance with Small Business Administration regulations when they sought payments on federally backed loans they made and serviced. Some of these loans defaulted soon after they were made because Ciena and Business Loan Center violated SBA rules and underwriting requirements, the Justice Department said. Ciena changed its name from Business Loan Express LLC, which was the parent of Business Loan Center, in January 2008.

Einhorn's hedge fund, Greenlight Capital Inc, as well as co-plaintiff James Brickman, will receive $4.3 million of the recovery, the Justice Department said. The accord also includes a $18.1 million credit previously paid to the SBA.
One former Business Loan Center executive vice president has pleaded guilty to conspiring to defraud the United States and was sentenced to 10 years in prison, the department said.

Allied was acquired on April 1, 2010 by Ares Capital Corp (ARCC.O), a New York-based specialty finance company.

The settlement requires approval of a Manhattan bankruptcy court, where Ciena filed for Chapter 11 protection from creditors on Sept. 30, 2008. Greenlight had sued Business Loan Center and its parent, Business Loan Express, in Atlanta federal court under the whistleblower provisions of the federal False Claims Act, which let private citizens sue on behalf of the United States and share in recoveries.

Einhorn drew headlines in 2002 when he said Allied shares were overvalued and should be shorted because the company was slow to mark down depressed assets and stretched accounting rules. "Allied was the tip of an iceberg," Einhorn told Reuters in a March 2009 interview. "This kind of questionable ethic, philosophy and business practice was far more widespread than I recognized at the time."

The Ciena bankruptcy is In re: Ciena Capital LLC, U.S. Bankruptcy Court, Southern District of New York, No. 08-13783. The whistleblower lawsuit is U.S. ex rel. Brickman et al v. Business Loan Express LLC et al, U.S. District Court, Northern District of Georgia, No. 04-3789. (Reporting by Jonathan Stempel; Editing by Ted Kerr)
Source of this article: http://www.reuters.com/article/idCNN068102320100506?rpc=44