ot- but this is more interesting
online.wsj.com
Regulators Review Complaints
About Hedge Funds' Research
Companies With Beaten Stocks Say
That Funds' Negativity Is to Blame
By RANDALL SMITH, HENNY SENDER and DAVID ARMSTRONG
Staff Reporters of THE WALL STREET JOURNAL
For decades, companies have complained that short-sellers were
ganging up unfairly to drive down the price of their stocks.
Now, they have the ear of regulators. In recent days, New York
Attorney General Eliot Spitzer and the enforcement staff of the
Securities and Exchange Commission have been listening to complaints
that hedge funds -- private-investment pools that typically cater to
wealthy investors -- could be working together behind the scenes to
push around stock prices in a bid to bolster their trading positions,
people familiar with the matter said.
While companies with soured stock prices have long blamed
short-sellers who bet on stock-price declines -- rather than any
missteps by the companies themselves -- Mr. Spitzer and the SEC are
examining complaints from companies whose stocks were hit after
negative research by hedge funds. The companies include MBIA Inc.;
Federal Agricultural Mortgage Corp., known as Farmer Mac; and
Allied Capital Corp.
The companies say various hedge funds were working in concert, at
times with Gotham Partners Management Co., to spread negative
information about their stocks, the people say. A lawyer for Gotham
declined to comment. The other hedge funds include Greenlight Capital
LLC, Aquamarine Fund Inc., and Tilson Capital Partners LLC, the
people say. Mr. Spitzer already has launched an investigation into
whether Gotham misled investors with inaccurate stock research; both
Gotham and its lawyer declined to comment, as did Mr. Spitzer's office.
(Gotham is unrelated to Gotham Capital LLC.)
It isn't clear whether or how actively the regulators would probe any
possible improper collusion or manipulation by hedge funds and
short-sellers, who sell borrowed securities in hopes of making a profit
by buying an equal number of shares later at a lower price to replace
the borrowed securities. Nor is it clear whether any of the alleged
conduct at issue would violate any rules, particularly because
communication among shareholders was liberalized a decade ago and
hedge funds are subject to less regulation than other Wall Street
players.
The complaints come as the SEC staff is wrapping up a broad review of
hedge funds with an eye toward boosting regulation or oversight. A
decision on what to do with the broader probe -- which includes pricing
of illiquid securities in funds, trading commissions, and how the funds
are marketed to investors -- awaits William Donaldson, the SEC's new
commissioner.
The latest batch of complaints could be a litmus test of whether
regulators will go after hedge funds in 2003 the way they did
stock-research analysts in 2002, in regulatory probes of allegations that
investment-banking fees led to overly bullish Wall Street research.
Eleven Wall Street firms have agreed to pay $1.4 billion under a
pending global settlement of those probes reached last month.
Hedge funds are "too big a temptation" for regulators to ignore,
especially given their proliferation and greater accessibility to individual
investors, said Michael Holland, a New York money manager. "It's only
a matter of when, rather than if."
Indeed, the SEC is probing whether one or more traders at SAC
Capital Advisors, one of the most successful hedge funds on Wall
Street, obtained improper access to research before its publication by
Lehman Brothers Holdings Inc. The SEC is studying whether Michael
Zimmerman, an SAC trader, may have gained access to the research
from Lehman analyst Holly Becker, whom he married in mid-2000. A lawyer for the couple has declined
to comment.
The companies have asserted to regulators that the hedge funds could have acted in unison based on
longstanding relationships, the people say. At least four managers at the hedge funds in question attended
Harvard Business School around the same time. They include Gotham's founding partners, William
Ackman and David Berkowitz (both Class of 1992) Guy Spier ('93) of the Aquamarine Fund and
Whitney Tilson ('94) of Tilson Capital Partners. Indeed, in November, Messrs. Ackman, Spier and
Tilson all spoke on a panel at the business school on "Starting a Hedge Fund."
A lawyer for Messrs. Ackman and Berkowitz declined to comment. Mr. Spier, who manages $30 million
at Aquamarine, declined to comment. Mr. Tilson didn't return calls seeking comment. A spokesman for
David Einhorn, founding partner of Greenlight Capital, wouldn't address questions about the hedge funds
working together.
Allied Capital invests in and lends to small and midsize businesses. Farmer Mac is a
government-sponsored enterprise that provides a secondary market for farm land and rural mortgages.
They are based in Washington, D.C. MBIA, which provides financial guarantees and asset-management
services, is based in Armonk, N.Y.
MBIA, for example, cited a negative research report and accompanying news release by Gotham on
Dec. 9 questioning whether MBIA deserved its triple-A credit rating. Gotham said at the time it was
selling the shares short. Around the same time, Mr. Tilson, a columnist for the Web site run by Motley
Fool Inc., posted a piece on his own Web site advocating the sale of MBIA stock, mentioning the
Gotham report. That article subsequently was removed, MBIA has told regulators. Mr. Tilson also
published a recommendation to sell MBIA on a Web site called "Margin of Safety."
Another hedge fund, Greenlight Capital, criticized MBIA in a letter to investors, and Greenlight's Mr.
Einhorn asked 10 separate questions, many about issues raised in Gotham's MBIA report, in a
conference call for investors on Dec. 19 held by Moody's Investors Service. Messrs. Tilson, Ackman
and another Greenlight employee asked several skeptical questions of MBIA on a similar call held by
Goldman Sachs Group Inc. on Dec. 17. And Messrs. Tilson, Spier and Ackman all posted skeptical
messages about MBIA on a Web site called valueinvestorsclub.com within a few weeks of the Gotham
report.
MBIA has complained to regulators that Gotham, Greenlight, Tilson and Aquamarine worked together in
spreading negative views of MBIA stock, with members of the group orchestrating conference-call
questions -- raising questions about possible manipulation or failure to disclose their efforts together -- the
people familiar with matter say. The SEC has asked MBIA and Farmer Mac for blow-by-blow accounts
of what happened. Mr. Spitzer's investigative staff heard in-person accounts from Farmer Mac
executives last week, and have attempted to schedule a meeting with Allied Capital officials.
Late last week, Gotham sent a memo informing its investors that the SEC and Mr. Spitzer have asked for
information about its holdings in MBIA and Farmer Mac and one other stock. Mr. Spitzer's office has
upgraded an informal inquiry into Gotham's research, focusing on possible inaccuracies, to a formal
investigation encompassing the allegations about the other hedge funds. Mr. Spitzer's office planned to
meet with Mr. Ackman for the first time Wednesday, according to people familiar with the matter. Both
Mr. Spitzer's office and Mr. Ackman's lawyer declined to comment.
On Dec. 27, faced with large redemption requests and one potentially huge money-losing investment in a
golf-course company, Gotham told investors it would wind down its principal funds. At the time, Gotham
had about $300 million in equity capital, Mr. Ackman said.
Farmer Mac complained to the SEC after becoming the object of short sales from several funds,
including Gotham, Aquamarine Fund and Tilson Capital Partners, according to Farmer Mac Chief
Executive Henry Edelman.
Mr. Edelman says he became suspicious when Mr. Ackman accompanied Aquamarine's Mr. Spier and
Mr. Tilson to a meeting April 8 which was arranged by a securities firm. Mr. Edelman, expecting a
meeting with long-term shareholders, instead says he was confronted by a series of hostile questions,
largely from Mr. Ackman. After a negative article about the company appeared in the New York Times
on April 28, Gotham posted a negative research piece on its Web site on May 23. Mr. Tilson also
panned the stock in his Motley Fool column; Mr. Spier sold the shares short as well, people familiar with
the matter said.
Mr. Edelman says the three funds also "participated prominently" in a conference call July 19 to explain
second-quarter results. The funds also repeatedly exchanged views about Farmer Mac on the same
valueinvestorsclub.com Web site as the later MBIA postings.
As for Allied Capital, Greenlight's Mr. Einhorn made a splash in May when he announced to other hedge
fund managers gathered for a charity event that Allied was a prime short target. The day after his
comments, Allied shares fell 11% in trading that was nearly 20 times heavier than the day before. Mr.
Einhorn next posted a lengthy critique of Allied on his Web site in June. Days later, Mr. Tilson warned his
Motley Fool readers to stay away from Allied Capital as well; Mr. Tilson also pointed readers to Mr.
Einhorn's Web site.
Allied contends Mr. Einhorn's research is inaccurate and designed to drive down its share price. The
Greenlight spokesman said the fund asked Allied to cite specific inaccuracies but received no response.
Still, deciding whether to pursue such complaints is a tough call for regulators. Even if the hedge funds
were communicating with one another, it isn't clear that such activities would violate securities rules. To
prove that informal chats and even identical timing in buying and selling constitutes market manipulation
can be difficult. Indeed, Gotham has faced similar allegations twice in lawsuits. A New York appellate
court and an Ohio state court found that Gotham's communication with other funds wasn't improper.
Write to Randall Smith at randall.smith@wsj.com, Henny Sender at henny.sender@wsj.com and David
Armstrong at david.armstrong@wsj.com |
