"Fooling Some of the People All of the Time" [.]

[fiefoe]

It's possible that if I had studied to be an accountant, I would be a more jaded person.

• While a total enterprise value calculation makes sense for valuing equity securities-you determine the value of the firm and subtract the net debt to calculate the equity value-it does not make sense for valuing debt instruments because debt instruments have limited upside.
• Our subsequent review of the technical accounting literature indicated that investment companies are precluded from consolidating entities other than another investment company.
• No mutual fund strives to smooth and grow its tax distribution. No one would value a mutual fund based on the yield implied by its tax distribution.
• As a stroke of investor-relations genius, Allied breaks its tax distribution into four quarterly pieces and calls them "dividends."... Allied principally judges itself by how well it maximizes its taxable income rather than by its investment results. As a result, it sells its winners and keeps (and often supports) its losers.
• BLX split the SBA loans into a government-backed guaranteed piece and an unguaranteed piece, which retains credit risk. Historically, BLX sold the guaranteed piece to banks at a 10 percent premium... This front-loaded income and meant that BLX only had exposure to the junior residual, which it retained.
• The market generally rewards more conservative accounting with a higher multiple. Here, Allied imputed the relatively higher multiples of the portfolio lenders to BLX's lower-quality gain-on-sale-driven results.
• "Please ask your broker to move your Allied Capital shares out of a "margin" account and into a "cash" account. By doing this, you prevent the brokerage firm from lending your shares to short-sellers."
• Allied wanted to create a complete absence of sellers (if you sold, you would forfeit the rights), which, obviously, would make the stock rise. Then, Allied would price the rights offering at a modest discount to the artificially inflated price.
• Recall that residuals are the estimated present value of future cash flows.
• Also, because the sales would be to the company, there would be no presumed information disadvantage that insiders held over other share-holders. So, if management foresaw a bad ending to the investigations, they might not be held liable for insider trading in the same fashion as if they'd exercised their options and sold in the open market. {Don't follow this logic here.}

Other players:

• The government was certainly humiliated during the Civil War, when many war contractors were overcharging it for inferior goods. So Congress passed the False Claims Act during the war, which is commonly known as the whistle-blower law.
• Apparently, the Department of Homeland Security detected that some non-U.S. citizens questionable backgrounds received SBA loans in Detroit through BLX. This triggered the U.S. attorney's office to investigate, where it found the large BLX fraud.
• Enter Lanny Davis, now hired by Prosser... As part of the bankruptcy proceeding, we were allowed to depose Davis on February 1, 2007. This gave us the chance to question him under oath about Allied-an opportunity not to be missed.
• The media did not take interest in a story about one of their own being spied on by a subject of critical articles.
• The sad irony of judge Carnes's ruling, and Allied's public gloating, is that Allied won this round in the litigation only because the judge ruled that the massive fraud had been a matter of public record for years.
• At its most basic level, Allied Capital is the story of Wall Street at its worst. Relative to most stocks, it has little institutional ownership. With the enormous fees it generates for Wall Street, there are plenty of financial incentives to support the scheme.

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