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Allied And Hedge Fund Still Going At It

It hasn’t been an easy year so far for buyout financier Allied Capital Corp.

After receiving a subpoena from the U.S. Attorney’s Office for the District of Columbia, publicly-traded Allied Capital admitted in a statement that a private investigator working on behalf of the firm had obtained the phone records of hedge fund manager David Einhorn, one of the firm’s most public antagonists. That development came less than a month after a separate incident in which a former executive of Business Loan Express—an Allied Capital portfolio company—was charged in a 14-count indictment concerning fraudulent loans. Thanks in part to the bad news, Allied Capital’s per-share trading price fell by more than $4, to $29.25 at press time. Shares traded at a 52-week high of $33.07 on Jan. 05.

Both developments come in the wake of a long-running altercation between Allied Capital, a Washington, D.C.-based business development company that provides senior and junior financing to support LBOs, and Greenlight Capital Inc., the New York hedge fund led by Einhorn, its president and founder. Greenlight, which has an affinity for short-selling stocks, has been betting against Allied Capital (NYSE:ALD) for about five years, while at the same time publicly raising questions about the firm’s accounting methods and integrity. Allied Capital has taken the stance that Greenlight is simply trying to make a profit at the expense of its public shareholders.

Allied Capital received the subpoena in late December requesting that it turn over any documents relating to the use of private investigators. In a statement released Feb. 6, Allied said that in the course of looking for documents it “has become aware that an agent of [the firm] obtained what were represented to be the telephone records of David Einhorn” during a period of time in 2005. Allied Capital said its management team had not authorized the private investigator to obtain the phone records, nor was it aware they were obtained.

However, the fact that Allied apparently found Einhorn’s phone records contradicts an earlier statement made by Allied Capital Chairman and CEO William Walton, according to David Chiaverini, an analyst at BMO Capital Markets who’s been tracking the situation. On Nov. 08, 2006, during Allied Capital’s third quarter earnings conference call, Walton claimed that Allied Capital never received such records.

“This is certainly a ding on Allied’s credibility,” Chiaverini told Buyouts.

Einhorn, meantime, was not impressed with Allied Capital’s explanation for how it obtained his phone records. “It was a criminal attempt by a company to chill and intimidate its critics,” he wrote in an open letter to Allied Capital’s board of directors. Calls to Allied Capital and Greenlight Capital were not returned by press time.

Feuding between the two firms began as far back as 2002, when Einhorn raised questions about Allied Capital’s accounting methods while speaking at a public conference. The gist of his thesis was that Allied Capital overstated the value of its investment portfolio, which had the effect of artificially inflating its stock price. That’s also the same year that Einhorn first called attention to Allied Capital portfolio company Business Loan Express (BLX), in effect calling it a “sham company,” according to a June 2002 statement released by Allied Capital.

On Jan. 9, the U.S. Department of Justice announced that Patrick Harrington, a former executive vice president of Business Loan Express (BLX) was indicted in federal court in connection with more than $76 million in loans guaranteed by the Small Business Administration. Charges in the 14-count indictment include conspiracy, wire fraud, tampering with witnesses, making false declarations before the grand jury, and making false statements to a bank. As of Sept. 30, 2006, Allied Capital’s investment in BLX totalled $284.9 million, or 6.2 percent of Allied Capital’s assets.

Einhorn believed that at least some people at Allied Capital knew of the corruption and looked the other way. In an open letter sent Jan. 22 to Allied Capital’s board of directors, Einhorn called for the board to “exercise its duty of care” to shareholders by removing the present management teams of both BLX and Allied Capital. Later that same day, Allied Capital fired back stating, “Allied Capital finds it ironic that Mr. Einhorn claims to be speaking on behalf of shareholders’ interests, when he continues to work against those interests and may profit from declines in the company’s stock.”

Allied Capital’s board of directors has established a committee, advised by its own counsel, to review developments regarding Einhorn’s phone records. Allied Capital is cooperating fully with the U.S. Attorney’s inquiry, the firm said in a statement.—A.N.