Banking Critic David Einhorn

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Einhorn and others brought Allied’s issues to the attention of regulators and law enforcement agencies, who either weren’t up to the task of taking on the company or whose sanctions came too late. So when Bear Stearns collapsed because of its own foolish risk-taking, blaming shadowy rumors for its demise, and the Securities and Exchange Commission started a witch hunt to investigate those “rumormongers,” who could have been surprised?

THE SIX YEARS’ WAR

After Einhorn’s speech that May, Allied mounted a counteroffensive. Company executives organized a conference call to refute his contentions. And they attacked Einhorn’s motives, since he was, by his own admission, shorting Allied stock.

The Wall Street machinery kicked in to defend Allied. Merrill Lynch, Allied’s main banker, backed up the company, even to the point of misstating an accounting rule to justify the company’s bookkeeping. (Merrill declined to comment.) When Mark Alpert, a Deutsche Bank analyst, issued a rare “sell” rating on Allied, the New York Stock Exchange investigated his report. A few months later, Alpert left the bank, and a few months after that, Deutsche Bank underwrote the first of at least five Allied stock offerings.

Einhorn was investigated by the S.E.C., and documents related to his Allied speech and positions were subpoenaed. (Then-New York attorney general Eliot Spitzer’s office also looked into Einhorn’s activities but took no action.) One of the S.E.C.’s lawyers eventually left and registered as an Allied lobbyist. Through pretexting—pretending to be someone else—an Allied investigator went on to snatch Einhorn’s phone records, a case that generated much less attention than a similar breach at ­Hewlett-Packard that involved pretext­ing journalists. (Allied eventually admitted to having the records but denied authorizing pretexting.)

For years, the financial media, if it covered the story at all, wrote only obligatory pieces, without delving into details. I’m no exception; Einhorn approached me early on with some material about the company. But it was complicated, and Allied aggressively refuted the allegations, so I backed off. Though I would later take critical looks at Allied, I wish I had initially persevered.

Eventually, the S.E.C. turned away from investigating Einhorn and started to look into the company. The agency ultimately sanctioned Allied for failing to preserve documents supporting its valuations between 2001 and 2003. Allied received no fines or penalties. The S.E.C. woefully, I think, pulled its punches. Other investigators, including the Department of Justice, found a pattern of fraudulent lending, indicting an employee of Business Loan Express. (He pleaded guilty.) The office of the inspector general of the Small Business Administration criticized the agency’s handling of BLX. Belatedly, the S.B.A. effectively put Allied out of the government-backed-loan business.

WAS IT WORTH IT?

Greenlight’s New York offices reflect Einhorn’s finance-geek personality. The conference rooms are named after accounting gimmicks: The Nonrecurring Room, for example, references some companies’ practice of taking gains that have nothing to do with their ongoing business.

In addition to managing money, Einhorn serves on a couple of prominent charity boards and has played in the World Series of Poker, grabbing a moment in the limelight in 2006 when he came in 18th out of 8,773 participants in the main event. He donated his winnings, $659,730, to the Michael J. Fox Foundation for Parkinson’s Research.

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