By Alec Klein
Washington Post Staff Writer
Saturday, November 25, 2006; D01
They call it the Hundred Years' War.
Not because it involves brutish medieval unpleasantries like the battle axe. It involves only the sharp edge of cutting words between a Washington area company and a New York investor in a war of Wall Street that merely feels like it has lasted a century.
In the latest salvo, hedge fund manager David Einhorn has accused Allied Capital Corp., a company that lends money to and invests in private businesses, of fraud. He also suspects that Allied may have broken into his personal records in a mode of corporate espionage called "pretexting." Some unknown party, Einhorn said, illegally gained access to his telephone records and those of other Allied critics. "The only group of individuals with any motive to access my phone records and the records of four other prominent Allied critics is Allied management," Einhorn wrote in a Sept. 15 letter to Allied's board of directors.
Allied denied authorizing someone to use pretexting to access Einhorn's phone records. Rather, it continued its long-standing position that Einhorn has malevolent intent, saying he is trying to spread false information in an attempt to drive down the company's stock price. Einhorn is a well-known short seller of Allied, meaning that he's betting that the company's stock will fall. Short sellers borrow shares and sell them in anticipation of buying the shares later at a lower price, hoping to pocket the profit.
"David's motives are simple. He makes money if he can drive down the price of Allied Capital stock," said William L. Walton, Allied's chairman and chief executive, according to a transcript of the company's earnings conference call with Wall Street analysts on Nov. 8.
The basic plot of this battle begins in May 2002, when Einhorn told a conference in New York that he was shorting Allied's stock because he believed the company had overvalued some of its assets. Allied's stock price plunged, but then recovered when the company denied wrongdoing and continued paying high dividends to shareholders.
Einhorn and others who questioned Allied's accounting for some of its loans did not go away. They were joined in 2004 by the Securities and Exchange Commission and the Justice Department, which opened inquiries that neither will comment on but appear to be ongoing. Allied disclosed in its latest federal filing that the Small Business Administration's Office of the Inspector General has begun its own investigation into Business Loan Express, the same Allied unit that has drawn the attention of just about everyone else. BLX, as it is known, makes loans backed by the SBA to other businesses.
The SBA and Allied declined comment on the investigations. But Allied did disclose this: It has spent about $4 million this year and $36 million last year in legal and other fees dealing with these investigations.
Einhorn's allegations of pretexting are not the first that have emerged in this long-running feud.
Herb Greenberg, a senior columnist for MarketWatch.com, said that he, too, was a victim of pretexting. Greenberg wrote stories critical of Allied, including a piece that ran on Street.com in 2003 in which he questioned why Allied's BLX unit employed a convicted felon who had served time in prison in 1996 for securities fraud. Allied confirmed that the individual still works in its Richmond office helping borrowers through the lending process, but noted that the company received permission from the SBA to retain him as long as he didn't hold a position where he would be involved in the company's financial affairs.
After his 2003 story, Greenberg said that someone unknown to him opened an online telephone account using his name. "I felt violated," Greenberg said. "It felt like the house had been broken into." This happened long before pretexting emerged as a flashpoint at Hewlett-Packard Co. during revelations that the technology company had conducted a spy operation to ferret out media leaks.
In 2004, someone sought to examine the bank records of retired real estate developer James Brickman, another frequent critic of Allied. "Someone was asking about my deposit history," he said. Charles Gunther, a financial analyst who had written a negative report on Allied before retiring, was also a victim of pretexting but declined to comment.
Allied officials have denied any wrongdoing.
In Einhorn's case, the hedge fund manager first wrote to Allied's board in 2005 that someone pretending to be his wife opened an online account for his long-distance telephone service and "directed the phone company to send copies of our bills to an AOL account." He also accused Allied of inflating the value of its assets and violating other SBA rules.
Einhorn, 38, co-founded Greenlight Capital Inc. about five years after graduating from Cornell University, after being rejected from every PhD program in economics to which he applied. He started with $1 million, including contributions from his parents back home in Milwaukee. Ten years later, he oversees a hedge fund believed to possess more than $4 billion in assets.
A few years ago, Einhorn donated about a quarter-million dollars to a homeless charity as part of a winning auction bid to eat lunch with Warren Buffett. And earlier this year, Einhorn entered the World Series of Poker, winning more than $600,000 against, and then donating the proceeds to the Michael J. Fox Foundation.
His is mostly a private world. Hedge funds, a largely unregulated sector of finance, are commonly misunderstood but rapidly growing. They are private pools of capital, primarily from wealthy individuals and institutions, like endowments, that invest in various securities. Hedge funds often try to produce a profit regardless of market conditions, and they will frequently employ aggressive strategies, like short selling, that are only permitted on a limited basis to more regulated entities like mutual funds.
In its most recent letter to Einhorn on Sept. 29, Allied said it remains skeptical of his motives, given what it described as his "apparent financial motive to depress Allied's stock price." The company underscored that its investments have netted strong returns and its stock is hovering near its 52-week high of $32.26. "Allied Capital's performance over the past five years speaks for itself," said Walton, the company's chief. "Since the beginning of 2002, we have paid almost $11 per share in dividends and the stock has performed accordingly."
Einhorn remains skeptical as well. "We are short because there are problems here; we're not saying there are problems because we're short."
Staff researcher Richard Drezen contributed to this report.
