Authors: David Einhorn
Tags: #General, #Investments & Securities, #Business & Economics
The judge found:
. . . Even when plaintiffs provide a reason that an investment’s value should have been reduced, such as the company’s bankruptcy, they do not explain why that factor should have been accorded significance or allege that Allied’s policy did not take that factor into account. Therefore, the complaint establishes nothing more than that the plaintiffs disagree with some of Allied’s investment valuations—but given the difficulty of valuing illiquid securities, and the multitude of factors that may appropriately be taken into account, alleging disagreement with some of Allied’s valuations does not equate to alleging fraud. . . .
Because the case was thrown out before the plaintiffs were able to take discovery, the plaintiffs were never able to take testimony, see Allied’s books and records, or see how Allied justified its valuations. In other words, the case was dismissed before the plaintiffs could get their hands on the Allied documents that would have shown the fraud the judge said he couldn’t see.
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 large owner, was an effort to create upward pressure on that stock. The difference appears to be that
saying something
that makes a stock go up is unquestionably accepted, but the opposite is potential manipulation.
“I disagree with the second part of what you said. Definitely inform others.”
“Did you not anticipate that others, other fund managers and Wall Street types who were at this dinner, would short Allied in response to your presentation?”
“I would have thought that based on what I said at the conference, people would have looked into Allied, and I think given what I said and what I believed the facts to be that people very well could have decided to sell or sell short Allied . . . on the basis of the merits of the situation at the time.”
“Okay,” Braswell said. “Isn’t it a true statement that you had a reasonable expectation that other participants at that meeting would either short Allied based on the idea they heard from you or exit a long position?”
Then Hiler, Greenlight’s lawyer, interrupted. “I think he already testified to that. Now you’re asking him something that has ‘reasonable expectation’ in it and I don’t know if you’re trying to get at some legal standard or not, but he’s answered your question as to what he thought. People could decide that he’s all off base and buy more, too, once they heard him. So people could make their own decisions, and I don’t know what the ‘reasonable expectation’ standard is you’re trying to put on here.”
“Well, I’m not referring to a particular legal standard, Mr. Hiler, but I am asking the witness a different question,” Braswell responded.
“He said what his expectation was.”
“No,” Braswell said. “He said that other people might do their research.”
“Well, he didn’t—he didn’t adopt your answer. That may be the answer you want, but he did say what his answer was to your question of what did he expect people to do.”
This went on for a bit more until the SEC got into the issue of the active Blackberries during my speech.
“Mr. Einhorn,” Braswell said, “the record reflects from our investigation that there were people sitting at that dinner and as you spoke, they were on their Blackberries shorting Allied at that very moment.”
“Then they must have found what I said to be persuasive.”
“And did you have any anticipation that people would do that?”
“No. I heard those stories, too, and I was surprised when I heard that. I wouldn’t have expected people to be calling from the conference.”
“So in making this presentation,” Braswell asked a few minutes later, “you had no intent to try to convince the listener that your analysis was in fact correct?”
“I thought my analysis was correct. And I thought I gave an analysis that I thought was correct, and I attempted to tell people things that I thought were correct.”
“And so isn’t it reasonable to say that you intended to—”
At that point, Hiler had had enough.
“Look, I really think, if you want him to say he was trying to move the stock, he’s not going to say that,” Hiler said.
“No, that’s not what I’m asking him.”
“You’re going over this question six times. This witness has said that this was a charitable event that he was asked to attend and give an idea on a stock. He wanted to give a good idea, he said, because he felt people there deserved it because it’s a charitable event.
“He’s not saying he worked backwards from ‘let me intend to do this,’ and go forward to the speech. He’s told you as much as he can,” Hiler said. “‘I went in there to give them what I thought was a good idea and to give them my thoughts on that. They can decide whatever they want to decide.’ And that’s all.”
“I am not asking this witness to jump in the mind of anyone who was listening to that speech,” Braswell said. “I am simply trying to understand”
“He has told you what his intent was, what his purpose was, and what he did,” Hiler finished.
“Actually, Bruce, you’ve told me more of what his intent was than the witness has. And I would appreciate it if you wouldn’t testify.”
“I’m not testifying, but I do not want this witness badgered because this has been gone over six times,” Hiler said. “It’s obvious you want some answer you’re not getting, and I think we should be done with this topic.”
Braswell persisted, “Did you have any intent that your speech would have an effect on the market price of Allied securities?”
I answered, “That was not the purpose of the speech.”
“That was not the purpose. Did you have an intent?”
Now, I was confused, “What’s the difference between a purpose and an intent? . . . My intent was to do what the organizers of the charity asked me to do. . . .”
Then Braswell got back to the Blackberries.
“While you were giving the speech, did you witness people in the audience using their Blackberries?”
“I did not witness that, no.”
“When did you first hear that others had been trading Allied securities during the course of your speech?”
This wasn’t correct. My speech occurred after the close of trading. The Blackberry messages were requests to borrow shares in anticipation of shorting them the following day. I answered, “Some weeks later I had a meeting at Goldman Sachs and they told me that they were receiving questions during the meeting about the availability to borrow Allied shares, that that had happened during the meeting.”
Then suddenly we broke for lunch. I was dizzy and sick to my stomach. I felt that my testimony was not going well. Braswell was confrontational, and I didn’t know how many more arguments over the difference between
purpose
and
intent
I could stand. I was not looking forward to going back into that depressing room. They were hammering at me, and I knew I had to somehow get through the rest of the day and the following day. I had already made a mistake (“in-kind compensation”) and I was worried about making more as they wore me down.
After lunch, though, and for the rest of the next day of testimony, the questioning became gentler. It was as if Kilroy had told Braswell to cool it. When we returned, the SEC lawyers went through all the main issues that Allied was sensitive about: the press, my supposed dealings with class-action lawyers, and my relationship with David Gladstone, Walton’s predecessor and the CEO of Gladstone Capital, in which Greenlight had held a small position. Actually, the SEC seemed very interested in Gladstone.