Fooling Some of the People All of the Time, a Long Short (And Now Complete) Story, Updated With New Epilogue (29 page)

O’Hara covered the story in the next day’s
Washington Post
. Again, the coverage made us the focus of the news. The story began:

Allied Capital Corp.’s stock price fell 10 percent yesterday after the Washington financial services company disclosed a Securities and Exchange Commission inquiry involving its small-business lending affiliate. Allied officials said the agency’s investigation was triggered by accusations made by short-sellers, who enter into risky agreements which make money only if a stock price falls. It was the second time in two years that Allied has become embroiled in a public struggle with short-sellers, particularly New York’s Greenlight Capital LLC and its manager David Einhorn. (©2004,
The Washington Post.
Reprinted with Permission.)

This was an SEC investigation, not a public struggle with short-sellers. I couldn’t believe that the “risky” nature of short-selling made it into the lead of the story. The article discussed the $9 million loan transfer and Allied’s explanation that it wasn’t a big deal. The article then reported we had investigated BLX and reported our findings to the SBA and quoted me explaining why the $9 million transaction was fraudulent, undisclosed, misleading and led to BLX and Allied inflating their results.

Walton was quoted in the
Post
discussing the short-sellers, “They’ve learned how to play the fiddle, and we want to break the strings.” Rather tough talk from a guy who just received news that his company was the subject of an SEC investigation.

PART FOUR

How the System Works (and Doesn’t)

CHAPTER 22

Hello, Who’s There?

Later in the summer of 2004, Herb Greenberg, a reporter who had written several critical articles about Allied for
TheStreet.com
and CBS
Marketwatch.com
, called and asked if I paid my phone bill online.

“No,” I said. “Why?”

“You should check to see if someone has opened an online account to get your phone records,” he told me.

“How would I do that?”

Greenberg explained, “If someone else opened up an online account, if you try to open one yourself, it won’t let you and will say that an account is already open.”

“Why are you asking about this?”

Because it happened to him—he was calling his sources to see if the same thing had happened to any of them. I agreed to check, and when I tried to open an account at Verizon, my local phone service provider, there was no problem. In light of that, I forgot all about it.

About a week later, Jim Carruthers of Eastbourne called me at home. He asked me the same questions as Greenberg, telling me, “My cell phone and home phone records have been taken,” he said.

Now, I was curious. While Carruthers held on our call, I checked my cell phone account. Again, no problem. Then I tried AT&T, my long-distance provider. It denied me access—someone had already created an online account. I asked my wife, Cheryl, about it. Nope, it wasn’t her. Since we hadn’t opened the account, someone else did. Whoever that “someone” was had obtained access to our entire calling history.

“Wow. I’m amazed that somebody would actually do this,” I told Carruthers. I doubted anyone wanted to know how many times my wife calls her sister.

A couple of days later, Greenberg told me that Charles Gunther, a research analyst with Farmhouse Equity Research, who issued a report with a “Sell” rating on Allied, also had his records taken. I asked others at Greenlight and other people I knew to check. I found that Ed Rowley, who had been quite involved in the Allied matter working with Steve Bruce of our public relations firm Abernathy McGregor, had his cell phone records taken the same way. During my testimony, the SEC had asked me to identify Rowley and his role. In all likelihood, Allied complained about him. Brickman said that he already paid his phone bills online, so it wasn’t possible for someone else to open an account for him, but said his bank notified him that someone had accessed his bank records using his Social Security number. I had never spoken with Gunther, but knew that Brickman had. The only thing connecting Greenberg, Gunther, Carruthers, Rowley, and me was Allied Capital. Equally indicative was the fact that none of Greenberg’s sources on other topics reported phone records being taken.

Why might Allied want our records? First, the company alleged various conspiracies among short-sellers, class-action lawyers, the media (in particular Greenberg), and Allied’s former CEO, Gladstone. Additionally, I believe Allied was surprised at how much information we were able to gather about its investments and wondered whether it had a leak from the inside. Finally, Allied might have been looking for information about our personal lives so it might extort us or intimidate us into silence.

Was this what Walton meant when he promised shareholders at Allied’s annual meeting in May 2004, “We are also going to work to expose the market manipulation activity whenever it occurs, and we’re looking at every option available to us to protect the company and your shareholder value?”

Cheryl called AT&T. She learned that on December 7, 2003, a woman calling as “Cheryl Einhorn” used Cheryl’s Social Security number to open an online billing account for our home phone. The records were sent to
[email protected]
. AT&T noted that they received a “bounce-back message” from that e-mail account on May 28, 2004.

Greenberg had already called his local FBI office in San Diego. The rest of us reported the incident to the agent assigned to Greenberg’s case. It took the FBI a long time to make progress. The agent, Tedd Lindsey, was enthusiastic and diligent, but he needed to subpoena each of the phone companies for the records. It took seemingly forever to receive responses and compile the information. Eventually, Greenberg became frustrated by the lack of progress. He decided to write an article about the experience. In a February 2005 column, he wrote, “The only thing any of these people appear to have in common—me included—is that they’ve all been snooping around Allied Capital,” referring to the other people whose records were stolen.

In this column, Greenberg said that someone opened his online phone account on July 8, 2004. Greenberg wrote that it happened only “six hours (coincidence of coincidences) after I wrote a piece headlined, ‘Is Allied Capital’s Dividend Vulnerable?’ The piece quoted Farmhouse Equity Research analyst Charles Gunther, who had initiated coverage of Allied with a ‘sell.’”

Greenberg also wrote that he had no evidence that Allied was involved. However, he wrote, “Joan Sweeney, Allied’s chief operating officer—and normally its chief spokesperson—didn’t return two calls I placed to her in recent weeks, even though she was in the office both times. The most recent call, last week, included a voicemail with an explanation of what had happened and several questions. It was followed by an e-mail.” Greenberg expected this to become a national story. It didn’t. The media did not take interest in a story about one of their own being spied on by a subject of critical articles.

Meanwhile, David Armstrong from
The Wall Street Journal
tried to re-engage us. But this time we chose not to help—too much water under the bridge. As mentioned previously, he had ambushed us in January 2003 before publishing the news that we would be investigated; failed to write an article a few months later after spending hours with us (possibly because he couldn’t bash us); and ambushed us again the night before he wrote that the SEC was investigating Allied, but focused the article on short-sellers rather than the investigation. Now, he asked about someone’s hiring Kroll to investigate Allied. We wanted no part of him.

Armstrong also contacted Carruthers for his article. His firm, Eastbourne Capital, was also wary of Armstrong and would accept questions only in writing. Armstrong’s questions made Carruthers suspicious. In particular, he was bothered by a question about his relationship with a former BLX employee, who had become his key source. Shortly after Carruthers noticed that his phone records had been taken, the former BLX employee, who until that time had a pleasant relationship with Carruthers, called and was extremely angry with Carruthers. Plainly, BLX got to him. But how did BLX know he was talking to Carruthers? How did Armstrong know to ask about this relationship? Someone had stolen Carruthers’ phone records. Things were getting curiouser and curiouser.

Armstrong also was strangely suspicious about Brickman’s communications with Gunther. Brickman decided to engage him, despite the evidence of Armstrong’s bias. Not only did Brickman believe he was right, he thought he could convince others. Not only does he think it, he’s done it: I believe he convinced Houck to change his mind and approach Allied about the SBA loan parking. Now, Brickman took on Armstrong.

That made Brickman the subject of a front-page article in
The Wall Street Journal
on September 24, 2004. The article, with the headline “A Retiree in Texas Gives a Firm Grief with Web Postings,” identified Brickman as having made over 2,000 postings on Allied’s Yahoo! message board under the moniker
tellmeitsnottopsecret
, having provided information to the SEC and convincing two securities analysts to turn negative on the stock. In response to Brickman’s claims of management dishonesty, Armstrong wrote, “Ms. Sweeney says she and Allied have always been truthful.”

Walton was quoted as saying, “Brickman works in concert with short-sellers led by David Einhorn to spread false or misleading information about Allied Capital.” The article said that Eliot Spitzer began looking into whether Greenlight had manipulated Allied’s shares in early 2003. No charges had been brought, but the inquiry “is still open,” the article said. That part really upset me, because we hadn’t heard from the attorney general’s office for more than a year, and it hadn’t really been much of an inquiry in the first place.

The article also retold the story of the SBA loan-parking arrangement. While BLX CEO Tannenhauser said the company agreed to the loan shift after Allied said it would buy back any loans that went sour, Sweeney offered a new story. Now, she said Allied hadn’t promised to buy back any bad loans, only to
consider
doing so. I suspect she realized that having a secret
put agreement
that isn’t taken into account in the financial statements was a problem.

In addition to Brickman’s being a regular poster on the Yahoo! message board, Allied seemed to be keenly aware of Yahoo! In our initial call with Suzanne Sparrow from Allied’s Investor Relations department in April 2002, I thought it was odd for her to lead off with a discussion of how she carefully watched the Allied message board on Yahoo! It is unusual for managements to express interest in anonymous message boards. Sparrow added, “We have a policy that we are not permitted to chat, and I think it has probably served us well.” I told her that I didn’t spend time reading message boards.

Shortly after my speech in May 2002, several people told me that a lively discussion emerged on the Allied message board. There were way too many posts to read them all, but a few were brought to my attention. One poster identified himself as “Dave Einhorn.” This was not me, but I give the guy credit because he had an excellent sense of humor. At one point, the fake Dave Einhorn even suggested that my Allied speech was the result of a bar bet. If the fake David Einhorn is reading this, feel free to contact me. I will take you out for a beer.

Based on Sparrow’s initial comments and my observations of the board immediately following my speech, I suspect Allied or its agents were also posting on the Yahoo! message board. Certainly, they were focused on it, because Walton routinely complained about the board. One poster under the name “stop_theft2002” posted repeated requests for investors to agitate for the SEC to act against Greenlight. They read as if a lawyer wrote them. The posts were headed, “How to suggest SEC look at Greenlight,” “SEC: Bring Sunlight to Shorts,” “SEC: Did Greenlight Manipulate?” “Tell SEC about Greenlight” and “SEC: Investigate Greenlight.” Though the postings had different headings, the message was repeated verbatim many times between May and October 2002. It read:

We wonder whether Greenlight’s actions (speaking engagements, publishing white papers, issuing press releases regarding issuance of their white papers, etc.) were designed to manipulate the price of Allied Capital stock. If you would like to suggest to the SEC that they investigate the possible market manipulation by Greenlight Capital, I suggest that you use the following addresses. A simple letter or email suggesting that the SEC should investigate the possible manipulation of Allied Capital’s stock by Greenlight Capital, and perhaps giving a few facts, should be adequate.

The message closed with detailed instructions to best reach the SEC and ended with “Thank you.” It lacked the individuality, humor, sarcasm, personality or lunacy of most personally posted messages.

In the fall of 2004, Sydran Foods, another Allied investment, filed for bankruptcy, and court records revealed that the company began its decline in 1999. The records stated, “By the end of 2000, significant declines in sales at the Debtors’ Burger King restaurants caused a liquidity crisis and defaults under the Debtors’ agreements with their principal lenders and under the leases with the Holding Companies.” On November 13, 2001, Sydran completed a restructuring wherein Allied exchanged debt for equity. Nonetheless, Allied carried its investment in Sydran at cost through June 2002. Over the following year, Allied gradually wrote the investment towards zero (see
Table 22.1
). This was another example of Allied taking its write-downs gradually and too late.