Fooling Some of the People All of the Time (Allied Capital Short)
David Einhorn / Greenlight · 2002
"Einhorn's claim: Allied Capital used aggressive accounting to overstate the value of its illiquid investments."
In 2002, David Einhorn publicly shorted Allied Capital, a private finance company, accusing them of systematically overvaluing their illiquid assets. Rather than answer the financial questions, Allied went after its critic — it later admitted that people acting for it had obtained Einhorn's phone records under false pretences. In 2007 the SEC found Allied had violated record-keeping and internal-control rules in valuing some of its holdings.
Allied Capital was a Business Development Company (BDC) that provided debt and equity to private middle-market companies. Because these private assets had no public market price, Allied used 'mark-to-model' accounting, aggressively inflating their valuations. When their portfolio companies went bankrupt, Allied refused to write down the assets, keeping up the illusion of a strong balance sheet to continue issuing new shares and paying dividends.
According to Einhorn, why could Allied Capital keep the poor performance of its portfolio companies out of view for so long?
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The explanation above is written with AI assistance. These are the originals — go to them to check it.
- Review of Einhorn's Allied Capital shortCFA Institute (Financial Analysts Journal)
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