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have reduced the fair value of Allied’s investment. Allied valued its $16.5 million subordinated debt investment in Company B at $14.3 million in its Form 10-Q for the quarter ended March 2003. Allied subsequently wrote down its subordinated debt investment in Company B from $14.3 million to $50,000 in its Form 10-Q for the quarter ended June 30, 2003.

Company C—During the relevant period, Allied held a subordinated debt investment in Company C, an office supply company. Allied was unable to produce contemporaneous documentation, in reasonable detail, to support the basis for its valuation of Company C from the quarter ended September 30, 2001 through the quarter ended March 31, 2002. For example, Allied’s written valuation documentation failed to include all relevant facts available to it regarding Company C’s deteriorating financial condition, including the fact that Company C had lost one of its largest customers as a result of the terrorist attack on the World Trade Center. Allied valued its subordinated debt investment in Company C at $8 million in its Forms 10-Q and Form 10-K for the quarters ended September 30, 2001 through March 31, 2002 and subsequently wrote that investment down to $50,000 in its Form 10-Q for the quarter ended June 30, 2002.

Continuing through the order, the SEC found:

There were certain instances where Allied did not provide its Board (or its valuation committee) with sufficient written information to support the Board’s determinations of fair value. For example, in several instances, the written valuation documentation presented to the Board was incomplete or inadequate to support the fair value recorded by Allied (e.g., enterprise values were listed on worksheets without any explanation; necessary inputs and/or calculations were either missing or incomplete). In other instances, Allied’s valuation documentation during the relevant period contained unexplained departures from, or changes to, key inputs from quarter to quarter.

The SEC found that September 2001 and March 2002:

Valuation processes consisted of quantitative worksheets that failed to provide an adequate explanation of the various inputs. For example, changes in valuation from quarter to quarter were not always explained in reasonable detail in the written documentation. Moreover, Allied did not prepare a written description of the quantitative and qualitative analyses used to develop its valuations until the quarter ended June 30, 2002. During this period, Allied also failed to maintain, in reasonable detail, written documentation to support some of its valuations of certain portfolio companies that were bankrupt. While Allied maintains that its Board members and employees engaged in discussions before and during the Board meetings to satisfy themselves with the recorded valuations for Allied’s private finance investments, the written documentation retained by Allied does not reflect reasonable detail to support the private finance investment valuations recorded by Allied in its periodic filings during the relevant period.

Finally, the SEC order found:

During the relevant period, Allied private finance department personnel typically recommended the initial valuations on the investment deals on which they worked. While there were some existing independent checks of Allied’s valuation process, these checks, standing alone, did not provide a sufficient assessment of the objectivity of valuations of the private finance investments. For example, the valuation committee assigned to review each investment on a quarterly basis was comprised, in large part, of private finance managing directors and principals.

All in all, the SEC found Allied to have violated three sections of the Exchange Act of 1934.

The SEC confirmed our analysis that Allied could not support its valuations. Further, the agency found that Allied made undocumented—certainly self-serving—changes to its valuations metrics. Documents were “not retained.” Allied did not even have documentation procedures to support its valuation analyses at the time of my speech; those began the following quarter, presumably in response to the speech. Allied did not consider negative information and events, such as its investments going bankrupt. Allied held an investment at a higher value based on the idea that Allied might buy the company. The SEC provided three clear examples and indicated it found a dozen others. Now, it was no longer just Greenlight and a few others pointing to Allied’s shoddy accounting. The SEC gave our analysis its stamp of approval.

For this, what was Allied’s punishment? The order noted Allied’s cooperation in the investigation and said Allied had improved its valuation process through more detailed record keeping, obtaining third-party valuation assistance and establishing a new “chief valuation officer” position to oversee the valuation process. Without admitting or denying any of the SEC’s findings, Allied agreed to “cease and desist” from violating the Exchange Act, (e.g., to keep better records) and for the next two years to continue to use outside valuation assistance for its investments under the supervision of an internal “chief valuation officer.”

That was it. There were no fines. There were no penalties. There were no actions taken against Allied employees or directors. In the next day’s Washington Post, the SEC’s associate enforcement director said, “The valuation of those securities in the portfolio are not easily quantifiable. The message here is, we want to make sure companies adhere to the standard that has been laid out.”

The consequence of Allied’s illegal action was the lightest tap on the wrist with the softest of feathers. The SEC’s order did not make even a passing reference to BLX or to any of management’s conduct, including the many false statements to inflate Allied stock price. There was a gaping disconnect between the findings and the order. It was as if the SEC said, “Greenlight was right. Allied was wrong. Have a nice day.” It was an unimaginable Pyrrhic victory.

Back in spinland, Christopher Davies, a partner at Allied’s outside counsel at WilmerHale, told Reuters, “Nothing in the SEC findings calls into question the accuracy or reliability of Allied Capital’s valuations of its portfolio companies.” The findings actually found the opposite—again, a Big Lie is more palatable than a small one.

Different punishments for different people? It took Brickman about an hour to find the SEC’s release from August 26, 2004, in which it announced an action against Van Wagoner