Allied Capital Says Its 'Agent' Got Phone Data
Wednesday, February 7, 2007
Allied Capital, a Washington financial services firm, said yesterday that someone it hired had obtained the phone records of David Einhorn, a hedge-fund manager who has accused the company of fraud, and Einhorn's company, Greenlight Capital.
In a statement, Allied said it had received a subpoena from the U.S. attorney's office for the District of Columbia in late December requesting records regarding the use of private investigators hired by the firm or its agents.
Until yesterday's disclosures, the firm and its board had denied allegations by Einhorn and other Allied critics that the firm had engaged in a practice known as pretexting, which involves posing as a person or family member of that person to trick a phone company into giving out phone records.
"In the course of gathering documents responsive to the subpoena, Allied Capital has become aware that an agent of the company obtained what were represented to be telephone records of David Einhorn and which purport to be records of calls from Greenlight Capital during a period of time in 2005," the firm said.
Allied also said that while gathering the documents for investigators, "allegations were made" that management had authorized the acquisition of its critics' phone records and that it had been "subsequently advised that these records had been obtained."
"The management of Allied Capital states that these allegations are not true," the statement said. "Allied Capital is cooperating fully with the inquiry by the United States attorney's office and will have no further comment concerning this matter until that inquiry has been conducted." The company said its board had established a committee to review the matter.
The incident echoes the case of Hewlett-Packard, the Silicon Valley computer giant whose use of private investigators to obtain personal phone records led to criminal charges filed last year by the California attorney general and a criminal investigation by the Justice Department.
Pretexting for phone records violates wire-fraud statutes, according to some legal experts and former U.S. prosecutors. A new law, signed by President Bush in January, makes the act a crime. It is not retroactive.
Allied, located a few blocks from the White House and whose board includes a former chairman of the Republican National Committee, specializes in lending to and investing in smaller companies.
The firm's disclosures raise new questions in a long-running saga that began in 2002 when Einhorn, known as a short seller of Allied stock, accused Allied of inflating the value of its assets. Short sellers borrow shares and sell them, expecting to buy them back later at a lower price.
"After five years, Allied Capital has acknowledged a tiny piece of its rampant misconduct," Einhorn said in an interview yesterday.
Left unanswered, he said, are questions about who at the firm knew about the pretexting, who hired the agent responsible for obtaining the records and how widespread the activity was.
Several journalists and analysts who were critical of Allied also claim to be pretexting victims. One of those was Herb Greenberg, a senior columnist for Market Watch, who wrote an article in 2003 questioning why Allied employed a convicted felon who had served time for securities fraud. After the story, he said, an unauthorized person opened an online telephone account using his name and got his records.
Now Greenberg wants to know if other incidents will be investigated by the Justice Department.
"The company is acknowledging that it became aware that one of its agents got records of Einhorn's calls from Greenlight in 2005," Greenberg said. "The obvious question: Anything else in the subpoena?"
The battle between Einhorn and Allied is rooted in how a division of Allied, Business Loan Express, accounted for the loans it made to small businesses. In the past two years, the Securities and Exchange Commission and the Small Business Administration's inspector general opened inquiries into Allied's lending practices. Both agencies declined comment yesterday.
In December, a former Business Loan Express executive, Patrick J. Harrington, was indicted by a federal grand jury on charges that he defrauded the SBA of more than $76 million in guaranteed loans.
Einhorn said yesterday's disclosures suggest that the company had been engaged in a systematic attempt to silence critics to protect its share price. "This was an attempt to intimidate critics, chill free speech and chill investment research," he said.
Allied has long maintained that Einhorn has been deliberately spreading false information. William L. Walton, Allied Capital's chairman and chief executive, told analysts in November that Einhorn's motive is simple: "He makes money if he can drive down the price of Allied Capital stock."
Einhorn first raised concerns that Allied illegally gained access to his phone records in a March 2005 letter to Allied's board. He said that someone posing as his wife directed the phone company to send copies of their long-distance bills to an AOL account. In September 2006, Einhorn reiterated his concerns to the chairman of the board's audit committee, according to copies of letters he sent Allied.
The board dismissed his allegations, stating that it "looked into" it and "found no evidence to support" his claim, according to copies of letters he received.
Allied shares closed yesterday at $29.25, down 32 cents.
Staff researcher Rena Kirsch contributed to this report.