Allied Capital Corp.'s stock price fell 10 percent yesterday after the Washington financial services company disclosed a Securities and Exchange Commission inquiry involving its small-business lending affiliate.

Allied officials said the agency's investigation was triggered by accusations made by short sellers, who enter into risky agreements which make money only if a stock price falls.

It was the second time in two years that Allied has become embroiled in a public struggle with short sellers, particularly New York's Greenlight Capital LLC and its manager, David Einhorn. "Over the last two years, we have consistently refuted frivolous allegations made by short sellers based upon false and misleading information and distorted facts," said Allied chief executive William J. Walton.

In a written statement yesterday, Einhorn said Allied's assertion that the SEC is acting in response to a campaign by him or other short sellers "is absurd."

"If Allied truly believes the 'allegations are false,' then they have the option to release to investors the SEC's entire document request so their investors can gauge the seriousness of the SEC inquiry," Einhorn said.

The SEC investigation was reported yesterday by the Wall Street Journal.

Allied lends money to and invests directly in mid-size private companies. It makes money from the interest on the loans, from fees it charges its borrowers for some services, and from the gain recognized when it sells its investments in companies. Since 2002, Einhorn has criticized Allied for its lack of transparency in how it values the loans it makes to businesses, and has alleged that many of its loans and other investments were inflated.

More recently, Einhorn has called into question transactions between Allied and Business Loan Express, a small-business lender of which Allied owns 95 percent.

Allied's current problems began in April after the company disclosed in documents filed with the SEC that it had transferred $9 million in troubled loans from Business Loan Express to Allied. New York-based Business Loan Express is a Small Business Administration lender, meaning the loans it makes to small businesses are guaranteed by the government as long as they meet certain requirements. A Wachovia Corp. analyst dropped coverage of the company and said he got "unsatisfactory" answers from Allied officials about the transfer.

According to Lanny Davis, an attorney hired by Allied in its public relations battle with the short sellers, the loans were originally owned by Allied's own small-business lending company. When Allied invested in Business Loan Express in 2000, Allied wanted to transfer the troubled loans to Business Loan Express. The loans were to financially troubled customers and did not fully comply with SBA rules because of the way they were structured. The owner of Business Loan Express agreed to take the loans on the condition that Allied would take them back if they ran into trouble, said Davis.

Allied increased its ownership stake in Business Loan Express in a $300 million recapitalization of the company in early 2003, Davis said. At that time, Business Loan Express transferred the troubled loans back to Allied, at face value, in repayment of debt that Business Loan Express owed to Allied. Allied immediately wrote down the loans by $6 million.

Einhorn, who has been investigating the operations of Business Loan Express in recent months and reporting his findings to the SBA, said the transfer was designed to hide fraudulent lending practices and pump up the value of Business Loan Express.

"It is our continuing belief that the fraudulent undisclosed transactions between Business Loan Express and Allied were designed to mislead the SBA, rating agencies, its auditors and investors," Einhorn said. "The sole purpose of this shell game was to hide defaulted loans from the SBA and materially inflate [Business Loan Express's] and Allied's earnings."

In an interview, Joan M. Sweeney, Allied's chief operating officer, said the transfer was not fully disclosed at the time because it was a immaterially small, non-cash transaction. . Allied Capital has about $1.7 billion in loans to or investments in companies.

Sweeney and Walton both said they were confident that the SEC would find nothing improper in either the transaction or how Allied disclosed it to investors.

"They've learned how to play the fiddle," Walton said of the short sellers. "And we want to break the strings."

Einhorn declined to disclose the extent of his short interest in Allied stock. Short interest by investors betting that the company's stock would fall peaked around 20 million shares in the spring and summer of 2002, then declined steadily until this spring. From March 1 to the first of June, short interest in the stock went from 12.9 million shares to 17.2 million shares, according to Bloomberg News.

Allied hit a year-long high of $30.85 in February, then began sinking in April and hit a low of $23.06 on May 10. It closed down $2.70 yesterday, at $24.25.