Fooling Some of the People All of the Time, a Long Short (And Now Complete) Story, Updated With New Epilogue
Authors: David Einhorn
Tags: #General, #Investments & Securities, #Business & Economics
Contents
Introduction: The Spark of a Speech
Part One: A Charity Case and Greenlight Capital
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 7: Wall Street Analysts
Chapter 8: The You-Have-Got-to-Be-Kidding-Me Method of Accounting
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 18: A Spinner, a Scribe, and a Scholar
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 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 31: The SEC Finds a Spot under the Rug
Chapter 33: A Conviction, a Hearing, and a Dismissal
Chapter 34: Blind Men, Elephants, Möbius Strips, and Moral Hazards
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
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
.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002.
Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our Web site at
www.wiley.com
.
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
