Contents Foreword Who’s Who Introduction to This Edition Introduction: The Spark of a Speech Part One: A Charity Case and Greenlight Capital Chapter 1: Before Greenlight Chapter 2: Getting the “Greenlight” Chapter 3: Greenlight’s Early Successes Chapter 4: Value Investing through the Internet Bubble Chapter 5: Dissecting Allied Capital Part Two: Spinning So Fast Leaves Most People Dizzy Chapter 6: Allied Talks Back Chapter 7: Wall Street Analysts Chapter 8: The You-Have-Got-to-Be-Kidding-Me Method of Accounting Chapter 9: Fact—or Maybe Not Chapter 10: Business Loan Express Chapter 11: Disengaging and Re-engaging Chapter 12: Me or Your Lyin’ Eyes? Chapter 13: Debates and Manipulations Chapter 14: Rewarding Shareholders Chapter 15: BLX Is Worth What, Exactly? Part Three: Would Somebody, Anybody, Wake Up? Chapter 16: The Government Investigates Chapter 17: A Tough Morning Chapter 18: A Spinner, a Scribe, and a Scholar Chapter 19: Kroll Digs Deeper Chapter 20: Rousing the Authorities Chapter 21: A $9 Million Game of Three-Card Monte Part Four: How the System Works (and Doesn’t) Chapter 22: Hello, Who’s There? Chapter 23: Whistle-Blower Chapter 24: A Naked Attack Chapter 25: Another Loan Program, Another Fraud Chapter 26: The Smell of Politics Chapter 27: Insiders Getting the Money Out Part Five: Greenlight Was Right . . . Carry On Chapter 28: Charges and Denials Chapter 29: Charges and Admissions Chapter 30: Late Innings Chapter 31: The SEC Finds a Spot under the Rug Chapter 32: A Garden of Weeds Chapter 33: A Conviction, a Hearing, and a Dismissal Chapter 34: Blind Men, Elephants, Möbius Strips, and Moral Hazards Part Six: Epilogue Chapter 35: Looking Back: As the Story Continued Chapter 36: The Lehman Brothers Saga Chapter 37: If They Asked Me, I Could Write a Book Chapter 38: Just Put Your Lips Together and Blow Chapter 39: Some Final Words to and from the SEC Chapter 40: The Last Word Glossary Acknowledgments About the Author Index Fooling Some of the People All of the Time Copyright © 2008, 2011 by David Einhorn. All rights reserved. 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For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our Web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data Einhorn, David. Fooling some of the people all of the time : a long, short (and now complete) story/David Einhorn; foreword by Joel Greenblatt. p. cm. Includes index. ISBN 978-0-470-07394-0 (cloth); ISBN 978-0-470-48154-7 (paper); ISBN 978-0-470-37149-7 (ebk); ISBN 978-0-470-37158-9 (ebk); ISBN 978-0-470-89329-6 (ebk) 1. Allied Capital—Management—Evaluation. 2. Allied Capital—Accounting—Evaluation. 3. Small business investment companies—United States—Management—Evaluation. I. Title. HG3729.U5E44 2008 332.6'20973—dc22 2008011992 In honor of my parents, Stephen and Nancy Einhorn, who demonstrated business success while maintaining high standards of personal integrity and good humor. Foreword You don’t have to be a financial expert to read a great detective novel. But since this story involves billions of dollars and an elaborate plan, it does help to have one of the world’s greatest investors around to lead you through all the twists and turns. In the end, the story is simple. It’s also thrilling and scary—even more so because, sadly, this isn’t a novel. It all actually happened, and as I write, the story continues. I read this book in two sittings. If eating and sleeping hadn’t gotten in the way, it would have been one. I was drawn into a world that few of us have experienced other than at the movies. It really is hard to believe how the legal system, government regulators, and the financial press can all come together and fail so miserably. Most great stories have good guys and bad guys. In simplest form, there are black hats and white hats, and you can tell which side the players are on. Not so in Fooling Some of the People All of the Time. Our hero is never quite sure whom he can trust. But that’s okay. As long as you can experience the excitement and intrigue vicariously in the comfort of a bed or couch, it doesn’t seem so bad. It’s also not so bad to lose some innocence about how the world sometimes works. In the short run, the good guys may get dragged through the mud and the bad guys may get away with millions. But in the long run, the good guys may get dragged through the mud and the bad guys may get away with millions. In the meantime, I will have to give the movie version of the book an R rating. I just don’t want my kids to lose their innocence too soon. Joel Greenblatt SEC lawyer: “At the time that you
