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Division of Enforcement,” Houck said. “I mean, look, anything is possible: SEC investigation; I hear what you’re saying, not a good event. But I’ll take my chances that Joan Sweeney knows the. . . rules and regs and is going to come out on the right side of the issue given her background.”

This wasn’t just Joel Houck speaking. This was Allied’s story. Repeatedly, I heard from shareholders and short-sellers Allied’s whispers that Sweeney’s experience at the SEC Division of Enforcement made it implausible that she would break rules, or, more cynically, if she did, that the SEC would give her a pass.

Even though my wife wrote for Barron’s, I didn’t have a lot of contact with journalists at other publications. Obviously, because of my wife, I could not bring the story to Barron’s; the editors and I had a policy that I would not discuss investments with anyone on the staff. I had recently met Jesse Eisinger, who wrote the excellent story about the fraud at Elan for The Wall Street Journal. Though the Journal is owned by Dow Jones, which also owns Barron’s, the publications are run separately. Eisinger told me to call if I ever had a story. I called and arranged a meeting, in which James Lin and I spent a couple of hours describing Allied. Eisinger expressed interest and asked for an exclusive until his upcoming vacation, which was to start in a few weeks. We agreed.

The next week, Hughes, the Merrill Lynch analyst, wrote another supportive report titled “Allied Capital Auditor’s Opinion—Much Ado about Nothing.”

Allied Capital’s stock price has been on a roller coaster for the last few days as the market sorts through a series of allegations including improper investment valuation procedures. During this period we have written that we believe these allegations are unfounded and uninformed and have attempted to produce as much factual rebuttal as possible. As outlined below, we believe we can now factually dismiss the allegation of a less thorough audit.

The report continued:

The AICPA (American Institute of Certified Public Accountants) audit guide was revised in May 2001. A key revision of the guide: auditors are no longer instructed to specifically comment on the reasonableness of a company’s investment valuation procedures if they find them acceptable. And the only audit opinion provided for use if the fair values are reasonable is exactly the audit opinion used in Allied’s report.

We knew this was wrong. James Lin got the pages from the Audit Guide that supported Merrill’s research. Merrill gave James pages with a fax header from BLX. The pages with the old language came from the 1993 Audit Guide. From this, Merrill had no way to determine that the change occurred in May 2001. I re-examined the Merrill report closer and saw that Merrill had footnoted the 1993 Audit Guide in an eye-doctorish microscopic font. The footnote indicated that Merrill must have noticed what BLX sent them and wrote the report anyway—proving that Merrill willingly participated in the spin job.

Greenlight’s auditors determined that the actual Audit Guide change occurred in 1997, not 2001. I complained to Hughes’s boss at Merrill about his apparent bias. His boss told Hughes to call me. Rather than acknowledge that Allied’s management misled him and reassess Allied’s credibility, Hughes dug in his heels. He asked, what if they argued that Andersen missed the change in the 1997 Audit Guide and only put in the new policy in 2001? I had the impression that Hughes wanted to create a story we could not refute. It seemed to me that it didn’t matter to him whether it was true or not; he had no interest in determining and analyzing the facts. I told him I knew this was wrong. Arthur Andersen had also been Sirrom’s accountant and made the same change to the audit language at Sirrom in 1997.

Then I turned to the point from his first report where he emphasized that Allied is supposed to mark its portfolio to “long-term value.”

“You’re going to have me on this one, because I know the technical language is fair-value,” he said.

We then debated whether it was permissible to carry Velocita bonds above the publicly traded market price. I told him, “You do not have an ability under Allied’s own policies as explained in the 10-K when there are quoted market prices to carry it at a premium.”

He replied, “It’s never been my reading of the ‘K,’ but I’ll have to get a lawyer to look at it.”

“I can read it to you verbatim if you like,” I offered. “Do you want to know what it is?”

“Actually, I’ve read it many a time,” he said. “I just didn’t have the same interpretation.”

“Here, let’s read it and let’s see how you might interpret it differently,” I said. “What it says is: ‘The value of investments of public securities is determined using quoted market prices discounted for illiquidity or restrictions on resale.’”

“Is there a sentence after that?” he asked.

“No.”

“Well, I’ll tell you what. I’m going to go back and read the whole thing.”

“I think, if you’re mistaken, I think you should publicly correct it,” I said.

“I think if I’m mistaken, I should publicly correct it.”

A week later, after I followed up with Hughes’s boss, Merrill published a follow-up acknowledging, “We were mistaken. The audit guide changed in May 1997.” But they did not admit or correct their error that Allied isn’t supposed to mark its portfolio to “long-term value” or that it can’t carry publicly traded securities above their quoted prices.

During the weeks following the speech, I received phone calls and e-mails from long and short investors who were trying to understand both sides. Many contacted Allied, as well. Even when the e-mails had an edgy tone, I tried to respond matter-of-factly. Through these dialogues, we kept up with Allied’s latest spin, and I believe they kept up with our views. Through these intermediaries, we debated without direct contact.

At Greenlight, we continued our research. We gathered the historical