OT: Front Page WSJ article on a Yahoo MB Basher
Worth a read IMO.....
Mining Data on Allied Capital,
He Feeds SEC and Analysts
And Bets Against the Stock
Off Base, the Company Says
By DAVID ARMSTRONG
Staff Reporter of THE WALL STREET JOURNAL
September 24, 2004; Page A1
On a Yahoo chat board, messages bashing a company called Allied Capital Corp. flood in from someone styling himself "tellmeitsnottopsecret."
The postings, more than 2,000 of them over the past two years, can pop up at any hour of day or night. They delve into company operations in minute detail, pointing out weaknesses and assailing management.
A hedge fund that's betting against the stock? No, "tellmeitsnottopsecret" is James Brickman, a retired Dallas real-estate developer who says he got bored playing golf. Now the 52-year-old spends hours digging through court and other filings related to Allied. "It's a game for me," he says, "like playing bridge."
It's a serious one, though. Like some hedge funds, or investment pools for the rich, Mr. Brickman sometimes sells Allied stock short, selling borrowed shares in hopes of replacing them when they're cheaper. Moreover, he has provided information to two securities analysts who turned negative on the stock. And, claiming that Allied overvalues some of its investments, he visited the Securities and Exchange Commission and urged it to take a look. Although Allied says it values investments properly, word of an informal SEC probe this spring knocked its stock for a loop, as did the two analysts' moves.
Allied is one of the most "shorted" issues on the New York Stock Exchange. The number of shares investors have sold short equals 31 times daily volume, more than quintuple the average for Big Board stocks. Mr. Brickman didn't start this run on Allied -- hedge funds did. But he's been in the forefront of digging up and publicizing reams of negative information on the company. His voluminous postings and research show how much clout one investor, working from home, can have by taking advantage of the Internet's vast research and broadcasting power.
"Retired and bored," Mr. Brickman says, he took up investing four years ago after winding up a 20-year career as a residential developer. His focus on Allied has since become a near-obsession, what he jokingly calls a "sad illness." He declines to say how much he has earned from shorting the stock. He estimates he has dug up more than 14,000 pages of court filings related to the company.
There are a lot of those, because of the nature of its operation. Allied is a "business development company," or BDC, regulated under the same 1940 law that governs mutual funds. BDCs generally don't invest in publicly traded stocks but in privately held, small and midsize companies, to which they often lend money as well.
BDCs don't face corporate taxes as long as they pay out most of their profits in dividends. As a result, they tend to have fat dividends. Allied's stock currently yields 9% a year. Both this dividend and the way the Washington-based concern handles its $2.8 billion investment portfolio have drawn fire.
"I'd like to thank Joan Sweeney and management," began a typically slashing Web message from Mr. Brickman in May, citing Allied's chief operating officer. "Without your constant lies, deception, and postings from company shills I would be bored playing golf."
Ms. Sweeney says she and Allied have always been truthful. In a written statement, Allied Chief Executive William Walton says: "We believe that Jim Brickman works in concert with short sellers led by David Einhorn to spread false or misleading information about Allied Capital, and we have shared our concerns with the SEC."
Selling Spree
David Einhorn is a hedge-fund manager who set off a short-selling spree in May 2002, when he told a charity dinner -- attended by many investment pros -- that he was short Allied and volunteered to share any profits he made with a charity. The next day, Allied stock plunged 11% on tremendous trading volume. Mr. Brickman acknowledges he shares information with Mr. Einhorn and with other short sellers. But he says he doesn't work with them or get paid by them.
Early last year, New York Attorney General Eliot Spitzer began looking into whether several hedge funds, including Mr. Einhorn's Greenlight Capital, might be trying to manipulate shares of several companies, among them Allied. The inquiry hasn't resulted in any charges but is still open. Allied says that when asked, it told investigators the person behind a rash of negative Yahoo postings was Mr. Brickman. The retired developer acknowledges he has posted frequently about Allied but says he has never heard from the New York attorney general's office.
Allied stock recovered from its fall after the first bout of short-selling in 2002, surging to a high above $30 early this year. But it's had a choppy ride since then.
A major reason appears to be a Brickman posting on April 6. It concerned an Allied small-business lending unit called Business Loan Express, or BLX. The issue is arcane but illustrates the Web gadfly's tenacity and the level of detail at which he pursues his case.
Mr. Brickman, in scouring the bankruptcy files of a Colorado gas-station operator that borrowed from BLX, ran across a document showing Allied had purchased $9.1 million in loans from BLX in early 2003. The loans were in default. Yet Allied purchased them at their full face value of $9.1 million.
Moreover, in reporting the purchase to the SEC this past March 12, Allied didn't mention that it had bought the loans from a company it mostly owns. Allied holds 95% of BLX.
The deal struck Mr. Brickman as an improper move to avoid a hit to BLX's valuation. Allied carries its BLX stake on the books at $353 million. Mr. Brickman figured Allied ought to mark that down by as much as $100 million and take a charge for that amount against earnings.
His posting of the loan details -- two weeks after he told chat-board readers he was "short" Allied -- quickly led to a price drop. The day after he described the loan transfer on Yahoo, Allied's stock fell 3.5% on heavy trading volume.
Then in late April, another Brickman posting asserted that Allied "knows fraud is a problem at BLX and is trying to hide it and or cover it up."
Mr. Brickman shared his views and information with an analyst at Wachovia Securities, helping the analyst craft questions for Allied. In an April 26 report, the analyst, Joel Houck, termed Allied's answers and disclosures inadequate and said he would no longer cover the stock. The shares sank 11% in the next three days.
To get regulators interested, Mr. Brickman turned to an acquaintance, Texas Republican Sen. John Cornyn. Sen. Cornyn's office wrote to the SEC asking if someone there would be willing to meet with Mr. Brickman. On April 27, Mr. Brickman met with SEC staffers including enforcement chief Walton Kinsey. Two months later, Allied announced it was the subject of an "informal" SEC inquiry that sought documents on the loan purchase. The stock fell 10%.
Nothing public has come of the inquiry as of now. The SEC won't comment.
Allied says the loan purchase from its BLX unit was innocuous and handled properly. Allied says it was simply reclaiming loans that another of its units originally made, and that it shifted to BLX when it acquired BLX in early 2000.
BLX had resisted the loan shift in 2000, says its CEO, Robert F. Tannenhauser, out of concern that the loans were improperly underwritten and that guarantees they had from the Small Business Administration might not hold up. He says BLX agreed to the shift after Allied said it would buy back any loans that went sour.
By early last year, loans totaling $9.1 million had gone sour. Allied bought them back. It says it paid for them by forgiving $9.1 million that BLX owed it.
Allied subsequently wrote down the loans' value steeply, to the amount it figured it could recover from borrowers. (The SBA ended up honoring its guarantee after all, but BLX paid the SBA back, Mr. Tannenhauser says, to maintain good relations with the agency.)
Allied says the effect on its balance sheet was negligible, because the debt it forgave BLX increased the value of its own investment in the lender.
Even if BLX had had to eat the bad loans, this wouldn't have affected BLX's value on Allied's books, contends Allied's Ms. Sweeney. "We would have looked at it as an isolated incident and wouldn't have dinged [BLX] for this loss," she says. In what she calls a "minor discrepancy" with the BLX chief's recollection, she says Allied hadn't promised to buy back any bad loans, only to consider doing so.
As for the SEC filing in which Allied neglected to reveal that one of its units was the seller of the loans, Ms. Sweeney says disclosure wasn't required because the event wasn't material.
A Penn State accounting professor, Edward Ketz, disagrees. After the case was described to him, he said that an agreement even to consider buying back loans should have been disclosed when made, because it involved a related party.
Dividend's Safety
In a posting July 6, Mr. Brickman drew attention to a new analyst report on Allied, this one from Farmhouse Equity Research LLC, a small independent firm in Portsmouth, R.I. It urged selling the stock, saying Allied might have to cut its dividend in 2005. The report was a blow to Allied because its rich yield is one of its attractions to investors. The stock fell some more.
Mr. Brickman's posting didn't mention that he had worked with the analyst on the report, sharing his negative view on the loan purchase and of how Allied valued its holdings.
The analyst, Charles Gunther, mailed Mr. Brickman a copy of his report nearly a week before his firm released it. Mr. Brickman says he was traveling at the time, didn't read the report until it was published, and didn't time any of his trading around it. The founder of Farmhouse Equity, J.P. Mark, said it isn't the firm's policy to send out reports ahead of public release, and "in 20/20 hindsight, we shouldn't have done it this way."
Mr. Gunther yesterday issued a correction, saying he "mistakenly asserted that Allied's dividend was in danger of being cut in 2005." In an interview, he said he erroneously believed Allied could pay the dividend only out of earnings and investment gains, and not out of capital it had raised.
Mr. Brickman said he had closed out his short position in Allied in July, after the stock had fallen about 20% in about 3½ months. But he isn't done with the company. In an e-mail on Aug. 1, he wrote that he expected a package of "new obscure public" documents concerning Allied to arrive, and that his "current position of having no short interest in Allied may change." This week, Mr. Brickman said he has been trying to short Allied again but hasn't been able to borrow any shares to sell.
Write to David Armstrong at david.armstrong@wsj.com
AI
