David Einhorn is a man who believes in checking out companies carefully. When he saw that Allied Capital wasn't following accounting rules and was making lots of bad loans, he smelled an opportunity to make money as the company collapsed. After investing, he had an opportunity to share his idea at a charity event. Allied Capital's stock quickly dropped in response.
This book describes six years of battling to get the story out of what he had learned, to persuade regulators to crack down on Allied Capital so the rules would be followed, and to stop any illegal activities at Allied Capital. The book is written from Mr. Einhorn's perspective.
Along the way, Allied Capital decided that it had to discredit Mr. Einhorn's allegations and his motives.
After many years of battling, Mr. Einhorn learned a number of important lessons:
1. Policing small capitalization companies is a low priority for reporters, analysts, institutional investors, and regulators.
2. If a company keeps paying a dividend (even if it's not smart to do so), many individual investors will be attracted and will be loyal.
3. The Small Business Administration is more interested in shoveling out money to small businesses than it is in ensuring that fraud isn't being perpetrated on the tax payers.
4. Wall Street investment banks will help defend any company that pays a lot of fees.
5. With enough new capital, large mistakes can be smoothed over.
I'm sure that if he were faced with the same investment opportunity today, Mr. Einhorn would run rather than take a short position.
I highly recommend this book to people who learned about perfectly efficient markets and active, honest regulators in school. "Let the investor watch out for himself or herself" would be a better motto in describing the capital markets.
This book will be boring to those who want to a quick take. But you need to read all of the misrepresentations, misstatements, and personal attacks to get a true sense of how the game is played.
If you want a more recent version of this problem, just look at securitized mortgages.