Risk & Compliance

Allied Capital: Son of HP?

An agent of Allied Capital may have obtained phone records of secretive hedge fund manager David Einhorn, a critic of the company.
Marie LeoneFebruary 6, 2007

It looks like Hewlett-Packard was not the only company caught snooping into the phone records of people it was investigating. Allied Capital Corp. said that in late December 2006, it received a subpoena from the United States Attorney’s Office for the District of Columbia requesting, among other things, records regarding the use of private investigators by Allied Capital or its agents.

Allied, which has about $4 billion in assets under management, said in a press release that it became aware that an agent of the company obtained telephone records of hedge fund manager David Einhorn, “which purport to be records of calls” made from Greenlight Capital during 2005. Einhorn, president and founder of Greenlight has been critical of some of Allied’s accounting practices, particularly the company’s Business Loan Express (BLX) unit. Einhorn and has been shorting Allied’s stock for several years.

Allied also said that while it was gathering documents so it could respond to the subpoena, allegations were made that the financing company’s management had authorized the acquisition of these records and that management was subsequently advised that these records had been obtained. “The management of Allied Capital states that these allegations are not true,” it stated in the press statement. Allied assured investors that it is cooperating fully with the U.S. Attorney’s inquiry and will have no further comment concerning this matter until that inquiry has been concluded.

In a statement, Einhorn said that for two years, Allied’s board had dismissed his charges that someone had obtained his phone records, adding that, “The evidence was clearly always there; the [b]oard simply neglected its fiduciary responsibility to supervise the company appropriately,” reported Reuters.

In January, Patrick Harrington, who until last August was an executive vice president of BLX, was indicted on charges that he defrauded the Small Business Administration on 76 loans valued at $77 million, according to marketwatch.com. In response, Allied fired off a press release stressing that “it is important to put the potential financial impact of this matter into its perspective.” It pointed out that BLX is one of Allied Capital’s approximately 140 portfolio companies. “In addition, it is our understanding that if the allegations against Mr. Harrington are proven true, BLX will also have suffered losses on account of Mr. Harrington’s conduct,” noted the company. “It is our understanding that BLX is cooperating fully with the SBA and Department of Justice in their investigations, and we will continue to monitor the situation closely.”

Einhorn subsequently issued a letter to Allied’s board calling on it to remove the company’s management team “that has presided over the metastasizing fraud at BLX and Allied” and by “quickly moving to take remedial steps to end the dishonest culture perpetuated by current management.”