Greenlight ‘Validated’ In Allied Fight, Demands Report’s Release

Mar 24 2010 | 12:30pm ET

A Securities and Exchange Commission report backs its claims against private equity firm Allied Capital, Greenlight Capital said. But the hedge fund isn’t satisfied with being “validated,” and called on the SEC to release the report in full.

“We call upon the SEC to immediately release the non-redacted version of the report,” Greenlight founder David Einhorn said. “The government-sanctioned culture of lawlessness that allowed this fraud to occur cannot continue.”

Einhorn alleges that Allied overvalued its holdings and questioned why the firm paid its dividends with the proceeds of stock offerings instead of cash it generated. Greenlight began shorting Allied stock in 2002.

But that was only the beginning of an increasingly nasty battle between Greenlight and Allied. According to the SEC inspector-general’s report, the latter successfully lobbied the regulator to investigate Einhorn “without specific evidence of wrongdoing.”  What’s more, Allied acknowledged that it may have obtained Einhorn’s phone records three years ago.

Allied’s lobbying also successfully steered the SEC away from looking into the p.e. firm, the inspector general found.

“There are questions about the extent to which Allied’s SEC connections and aggressive tactics may have influenced Enforcement’s and OCIE’s decisions in these matters,” the report found.

Despite an 18-month long investigation of Einhorn’s allegations against Allied, the SEC never went to Allied’s office. An SEC examiner on the case said she received considerable “pushback” from her associate director when she suggested that Allied’s dividend financing was “akin to a ‘Ponzi scheme.’”

The SEC inspector who oversaw the Einhorn investigation later left the regulator and became a lobbyist for Allied, allegedly telling the agency’s ethics office that he had not worked on any Allied-related matters.

“We agree with each of the report’s recommendations, have already implemented several of them, and expect to complete the process in June,” SEC spokesman John Nester said.

“This is the second time in as many weeks that an official report has substantiated claims made by Greenlight Capital,” the hedge fund crowed, referring to a court-appointed examiner’s findings last week that Lehman Brothers—whose capital sufficiency Einhorn called into question in the months before it collapsed—had used accounting procedures to make it appear less levered than it was. Greenlight, in its statement, went on to savage the regulator.

“The SEC seems more interested in needlessly investigating market participants rather than uncovering corporate malfeasance and protecting investors,” it said yesterday. “The SEC's failure to act, despite its own investigation pointing to fraud, enabled Allied to go on to raise over $1 billion of fresh equity causing investors additional harm. Yet, even though Allied's shareholders have lost billions, Allied management received extraordinary compensation and made millions of dollars from insider sales of Allied stock and options without any legal consequences.”

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