Allied Capital Corp. executives yesterday said the company spent $25 million in legal expenses in the first half of the year on government investigations that have required it to produce "millions of pages" of company e-mails and documents.

The Department of Justice and the Securities and Exchange Commission have been investigating the District company's relationship with Business Loan Express, a New York-based small-business lender, since last year.

Publicly traded Allied makes loans to, and invests in, private mid-size businesses. The company owns more than 90 percent of Business Loan Express, and it is the biggest single investment in Allied's $2.6 billion portfolio of business investments.

Joan M. Sweeney, Allied's chief operating officer, told analysts participating in Allied's second-quarter earnings conference call yesterday that the investigations by the U.S. attorney's office in Washington and the SEC involved "the restoration and review of millions of pages of e-mails and other requested documents" in recent months. She did not further describe the documents.

In many high-profile cases involving accounting and corporate fraud in recent years, internal company e-mail traffic has been a key part of the evidence, including investigations of insurer American International Group Inc., accounting firm Arthur Andersen LLP and Wall Street research analysts.

Allied disclosed in December that the U.S. attorney in Washington is conducting a criminal investigation focusing on transactions between Business Loan Express and Allied. The SEC began investigating the two companies last June, particularly how certain transactions between Allied and Business Loan Express may have affected the value of the New York company, and whether those transactions were properly disclosed to shareholders, according to sources with knowledge of the investigation who spoke of the inquiries on condition of anonymity.

Though Allied controls Business Loan Express, the New York company is considered a stand-alone investment of Allied's, and how Allied values that investment affects the company's financial results.

The transaction in question involved Allied's assumption of $9 million of badly performing loans from Business Loan Express in 2003, removing the problem loans from the company's balance sheet.

Sweeney yesterday said the government requests for documents were running up big legal fees because many involved sensitive issues concerning communications between attorneys and company officials.

"There are a large number of potentially privileged e-mails and documents that we have had to review for attorney-client privilege prior to their submission," she said. "It's a time-consuming and laborious process. We are managing the costs of these investigations as prudently as possible." She said the company hopes that the expenses associated with the investigation will decline for the rest of 2005, but that is "still difficult to predict."

Allied has said it is cooperating with the investigations. Chief executive William L. Walton said in June 2004 that the investigations began with charges made by short sellers -- investors who make bets that a company's stock price will fall -- with whom Allied has fought publicly for several years over allegations that Allied was not valuing its investments properly. Walton said then the investigations would "demonstrate once and for all that the short sellers' allegations are false." He said, "Allied Capital is a great company and as the facts are understood we expect to put this short attack behind us."

In the second quarter, Allied earned $311.9 million ($2.29 a share), which included a $227 million gain on the sale of Allied's real estate debt investment business. That compared with a profit of $95.3 million (73 cents) in the three months ended June 30, 2004. During the second quarter this year, Allied made $389 million of new investments.

The results would have been better were it not for $13.5 million in legal and other expenses associated with the investigations during the quarter, with much of the cost related to document production.

Allied Capital stock dropped 59 cents yesterday to close at $27.51. It is up more than $3 since the criminal investigation was disclosed Dec. 27.

Joan M. Sweeney is Allied Capital Corp.'s chief operating officer.