A Hedge Fund Manager's Crusade To Expose Losses Six years ago, hedge fund manager David Einhorn launched a battle to expose accounting problems at Allied Capital, a financial company. In a new book, he says the experience revealed how the media and financial regulators can sometimes fail investors.
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A Hedge Fund Manager's Crusade To Expose Losses

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A Hedge Fund Manager's Crusade To Expose Losses

A Hedge Fund Manager's Crusade To Expose Losses

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Well, now to hedge funds and the people who run them. They tend to be pretty secretive, not David Einhorn. He founded Greenlight Capital, which manages about $6 billion in assets. Recently, Einhorn waged a public battle against Lehman Brothers, claiming it was losing more money than it admitted and he turned out to be right.

And now, he's written a book about a six-year battle against another company, Allied Capital. Einhorn says the experience shows how the media and financial regulators can fail investors.

NPR's Jim Zarroli reports.

JIM ZARROLI: Each May, hundreds of Wall Streeters show up at Ira Sohn Investment Research Conference in New York's Lincoln Center. They pay up to $3,200 to hear advice from investors like Carl Icahn and Wilbur Ross. Today, one of the speakers is the brainy, boyish, 39-year-old David Einhorn whose hedge fund has racked up some impressive gains over the years. Einhorn began his speech with some unfinished business:

Mr. DAVID EINHORN (Founder, Greenlight Capital): I want to go outside the usual format for this investment and ask - for this conference and ask this audience by applause who agrees with me that there should be some significant consequence to the folks at Allied Capital for what they have done.

(Soundbite of applause)

Mr. EINHORN: Thanks. There's a lot of people here. There's a lot of media up here. I want them to hear…

ZARROLI: You might say David Einhorn is on a kind of crusade. Six years ago at this very conference, he began talking about accounting problems at Washington, D.C.-based Allied Capital. He's still doing so today, at some personal costs.

Mr. EINHORN: Oh, yeah, the effects of a pushback have been tremendous. There's no question about it. It's expensive. It's been not that pleasant. Certainly it's a deterrent towards other people standing up and discussing critical research about companies.

ZARROLI: In a dressing room after the speech, Einhorn says he first heard about the company when he was researching stocks to buy. Allied is a business development firm that makes loans to medium-sized companies. Einhorn concluded that Allied was using accounting tricks to misstate the value of loans it had issued. Einhorn, who's also a well-regarded poker player, figured that when he laid out his case against Allied, regulators in the media would go after the company.

Former journalist Herb Greenberg, who runs a research firm, believes Einhorn made a strong case against the company and its stock price fell, but then Einhorn himself came under attack.

Mr. HERB GREENBERG (Former Columnist, MarketWatch): What so many people on Wall Street don't want to even think about is what the risk is, and that's what David was doing, he's playing out the risk.

ZARROLI: Allied denied Einhorn's allegations. It noted that Einhorn had shorted the company's stock that meant he would benefit if its value fell. They said by going public with his charges, he was trying to manipulate the price. Einhorn replied that, yes, it was true, he wasn't exactly a disinterested observer, but neither were the managers defending the company, they own stock and wanted to see it rise.

That argument aside, Einhorn found himself called in for an interview with the Securities and Exchange Commission.

Mr. GREENBERG: He was very Kafkaesque. It was just backwards. It was, you know, investigating the whistleblowers, so to speak, rather than investigating the claims.

ZARROLI: The SEC wouldn't comment about the case and never brought any charges against Einhorn, but Einhorn has paid a price. A Wall Street Journal columnist likened him to a mugger. He says his wife was asked to leave her job and Einhorn discovered that an agent hired a company employed by Allied had illegally accessed his phone records. Allied says it didn't know the agent did this.

Allied also says despite federal investigations and shareholder lawsuits, no third party has ever validated Einhorn's claims about the company.

Christopher Davies, an attorney for Allied, says the SEC did cite the company for bookkeeping violations, but they were minor.

Mr. CHRISTOPHER DAVIES (Seattle Lawyer): Neither of those findings supports Mr. Einhorn's inflammatory allegation that Allied has overvalued its investment portfolio. In fact, the SEC did not impose any penalties or other financial disgorgement, nor did it require that Allied to restate either its historic financial results or any evaluations of its investments.

ZARROLI: Einhorn replies that the SEC has an indifferent record of pursuing fraud at companies unless they've clearly imploded, like Enron.

Mr. EINHORN: So investors should be aware of this, and they should realize that the only person watching out for them are not these Wall Street analysts and not these corporate managements, but they themselves. And so they need to have appropriate skepticism as they put their money at risk in the market.

ZARROLI: After six years, Einhorn continues to hold a short position on the stock, betting it will drop further. But Einhorn's campaign against Allied has had mixed results. He notes that since that first speech six years ago, Allied has issued new stock numerous times. Einhorn has done his best to lay out a strong case against the company. But so far, at least, a lot of investors have been willing to look the other way.

Jim Zarroli, NPR News.

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