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Fooling Some of the People All of the Time
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Fooling Some of the People All of the Time

A Long Short Story

David Einhorn
Wiley, 2008
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Editorial Rating

8

Qualities

  • Innovative

Recommendation

Call hedge fund manager and author David Einhorn a glutton for punishment. In 2002, he first became skeptical of Allied Capital, a small business lender based in Washington, D.C. He shorted the stock, publicly criticized the company and earned the enmity of its management. Over the next six years, Einhorn feuded with Allied, growing increasingly outraged over what he considered bogus accounting. He repeatedly brought his findings to the attention of regulators and reporters, with little result. For years, Allied shares held steady or gradually rose. It wasn’t until after this book was published in 2008 that Allied stock cratered. Einhorn’s tale of his battle with Allied is often riveting, although at times he veers into levels of detail only a forensic accountant could appreciate. Still, getAbstract recommends the book to investors seeking an inside look at high-level chicanery, a short seller’s strategy and a Wall Street war story.

Summary

Shady Accounting, a Short Position and a Speech

In early 2002, hedge fund manager David Einhorn of Greenlight Capital met with managers of another fund who thought they had spotted an opening for a short sale of the shares of Allied Capital Corp. Allied, a business development firm that had been public since 1960, made loans through the Small Business Administration’s 7(a) program and ran a real-estate investment trust that invested in small-business mortgages. Late in 1997, Allied had $800 million in assets, including a $200 million portfolio of investments in other firms. When Einhorn and Greenlight’s analysts began to look into Allied’s books, they spotted a worrisome trend. Allied marked down the value of troubled assets only reluctantly. When one of its companies ran into problems, Allied reduced the value of its equity kickers, but held the loan at cost. Then it took a small write-down, often followed by another small write-down. This seemed to be a clear example of accounting fraud. Einhorn thought Allied’s practices, when exposed, would send its shares tumbling.

Suspicious that Allied was hiding bad news from investors, Einhorn recorded phone calls with the...

About the Author

David Einhorn is president and founder of Greenlight Capital, a long-short hedge fund launched in 1996 that has earned returns of more than 25% a year for its partners.

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