Institutional Investor's Alpha Magazine - May 2008 - (Page 56)

Book Excerpt David Einhorn Shoot the Messenger NO ONE LIKES TO BE THE BEARER OF BAD NEWS — and that can be tough on short-sellers like David Einhorn. In his new book, Fooling Some of the People All of the Time: A Long Short Story, Einhorn, the founder of $6 billion New York hedge fund Greenlight Capital, recounts his six-year ﬁght against Washington, D.C.–based lender Allied Capital. Despite uncovering evidence that he says clearly shows accounting fraud at Allied, Einhorn has had little impact on the share price, as the company has relentlessly defended itself against what it perceives to be an unjustiﬁed assault. The notion that short-selling is somehow unsavory goes back at least as far as 1906, when speculator Jesse Livermore made a fortune shorting Union Paciﬁc Railroad Co., whose shares plunged after the San Francisco earthquake. Companies targeted by short-sellers, who sell borrowed stock in hope of buying it back at a cheaper price, like to present themselves as ﬁghting the good ﬁght against money-grabbing mercenaries. “But proﬁt-motivated investors sorting out good companies from bad is the way markets are supposed to work,” Einhorn says. While he was clamoring for the Securities and Exchange Commission to review Allied’s business practices, he and other hedge fund managers came under investigation by the agency. That is how Einhorn found himself brought before the SEC, as recounted in this exclusive excerpt, to explain his dealings with Allied and his very public trashing of the company. — Imogen Rose-Smith W hen I arrived to testify at the SEC on May 8, 2003, I went through endless security, and then I was led to the basement. There, in a stark, white room with a bare floor and bare walls, I sat next to a court reporter and across from the SEC lawyers set to grill me. The room temperature felt like 85 degrees. There wasn’t much ventilation, and there was no drinking water. For that, there was a vending machine down the hall. The only amenity was a red ﬁre alarm box attached to a pipe. The environment was unsettling. It was supposed to be that way. Perhaps the austerity foreshadowed what might happen if your case didn’t go well. My testimony went well, at ﬁrst. I brought along three lawyers to advise me, and for a half hour the SEC lawyer, Kelly Kilroy, asked me basic questions about Allied and Greenlight. She asked me a lot of biographical questions. It was an easy back and forth. A second SEC lawyer, Mark Braswell, walked in and took over the questioning, almost in midsentence. The gist of his questions was: When did you start manipulating Allied stock? He was baldly aggressive and became incredulous over my answers. We would get into debates and he’d get angrier and angrier. I could see he was the “bad cop.” He obviously wanted to establish that I was in league with other fund managers to manipulate the market. “Have you ever met regularly or irregularly with a group of fund managers that would include Whitney Tilson [of Tilson Capital Partners] and Bill Ackman [of Gotham Partners]?” he asked. “Well, Bill Ackman was in the Richard Shuster group for a period of time,” I said, referring to an informal quarterly “idea dinner” of money managers, which I sometimes attend. Richard Shuster ran a small hedge fund called Arbor Partners and organized the dinners. Idea dinners are commonplace. Some, including Richard Shuster’s, are 56 • INSTITUTIONAL INVESTOR’S ALPHA • MAY 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - May 2008

Institutional Investor's Alpha Magazine - May 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Send in the Clones The Good Guys: Outside the Box Cover Story: Welcome to Oz Interview: The Tipping Point Regulation: When Sentinels Go Astray Strategies: Taking Credit Research Center: The Hedge Fund 100 Book Excerpt: Shoot the Messenger Alpha Bytes: VaR Enough? Unhedged: Commentary: Not Your Father's Activist

Institutional Investor's Alpha Magazine - May 2008

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