Fooling Some of the People All of the Time, a Long Short (And Now Complete) Story, Updated With New David Einhorn (best classic books of all time .TXT) 📖

I didn’t see the judge’s ruling as an important development. No one had looked at Allied’s valuations and related evidence. The procedural ruling to dismiss the case under such circumstance could not vindicate Allied’s accounting. But it did show that Allied had talented lawyers.

CHAPTER 17

A Tough Morning

When 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 eighty-five 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 mid-sentence. 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 self-formed, while institutional salesmen or the investment banks sponsor others. Generally, at an idea dinner each participant presents one or two investment ideas and gets grilled by the group. “He hasn’t come for a while, maybe several years,” I responded.

“Was Mr. Tilson part of the Richard Shuster group?”

“I don’t think so.”

“What about Guy Spier [of the Aquamarine Fund]?” Braswell asked.

“I don’t think so.”

“David Berkowitz? [Bill Ackman’s partner at Gotham]”

“I really don’t know.”

“Are there any other forums, organizations, or informal groups that you participate in that also include Mr. Ackman?”

I said I couldn’t think of any.

Kilroy jumped in with a bunch of similar questions.

“How do you know Mr. Ackman? Do you know David Berkowitz as well? Did you meet Mr. Ackman before you met Mr. Berkowitz? And do you recall when you met Mr. Berkowitz? And can you describe your relationship with Mr. Ackman? Are you social friends or just acquaintances? What about Mr. Berkowitz? Do you know one of them better than the other?”

I basically answered that, yes, I know these guys. We went out to dinner once. I knew Ackman better.

A few minutes later Braswell asked, “Mr. Einhorn, have you ever compensated Gotham Partners, Mr. Berkowitz, and Mr. Ackman for providing you with an investment idea?”

“Except in-kind, no,” I answered.

“Have they ever compensated you for providing them with an investment idea?”

“The same answer.”

Then one of Greenlight’s lawyers, Bruce Hiler, jumped in.

“Can I have a minute?” We went into the hallway. I had made a mistake. I needed to make it clear that there was no financial compensation. While it is true that I share investment ideas with other fund managers, this works best as a two-way street. No one likes a freeloader. So as a general matter, I share more ideas with others who share back. I don’t keep score about who shares what with me, and the practice is quite informal. My first answer was incorrect, as there is no “compensation” arrangement.

I re-entered the room and answered the question again.

“I think the more correct answer to your question is that there’s been no compensation for the ideas.”

“Are there any other relationships between you and/or Greenlight and Mr. Ackman and/or Gotham Partners?” he asked.

“I don’t think so.”

“Let me ask you the same question about relationships that you and/or Greenlight have with Whitney Tilson?”

“I don’t know of any.”

“What about Mr. Spier of Aquamarine Fund?”

“I don’t think so.”

Soon, the questioning switched to Allied Capital. Kilroy asked me how I first heard about the company. I said other fund managers introduced me to the idea.

“And when did you first have discussion with those individuals about Allied?”

“I think it was around last March.”

“And what was the substance of those discussions?” she asked.

“They thought this was something of merit, and they wanted to get our view on it also, they thought this was something we should look into, and they came over to our office and told us what they thought they knew and maybe provided us with some materials of their analysis.”

Braswell wanted to hear about my Allied speech.

“Had Greenlight already taken its short position in Allied prior to the May 15th speech?” Braswell asked.

“We were short Allied at the time of the speech.”

“And you said the purpose of focusing or talking to them about Allied in this presentation was because you wanted to share one of your better ideas at the charity event. Was another purpose of your speech about Allied to inform others of your thoughts in the hopes that it would put downward pressure on Allied stock?”

There it was: Was I manipulating?

There were ten other speakers that day. Needless to say, the SEC wasn’t going to call Bill Miller in to ask if his recommendation to buy Nextel stock, of which his fund was a