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The Confidence Man

Hedge-fund manager David Einhorn believes his public attack on Lehman Brothers wasn’t just about making money. So what was it about?

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Six years ago, hedge-fund manager David Einhorn made a speech at an annual investment conference about a stock he didn’t like—a mid-cap financial company called Allied Capital—and the world came crashing down on top of him. He was investigated by the Securities and Exchange Commission for conspiring with other investors to sink the stock. Allied stole his personal phone records in an attempt to prove the conspiracy. An article in The Wall Street Journal compared his treatment of Allied to “a mugging.” New York’s then–Attorney General, Eliot Spitzer, vowed to do his own investigation. And Einhorn’s wife, an editor at the financial weekly Barron’s, mysteriously lost her job.

The repercussions of that one speech dragged on for years, an experience that would have embittered most people, or at least have made them back off. But Einhorn kept digging at the company, ultimately finding evidence of fraud that made his initial report seem tame. Then Einhorn took a very unusual step for a hedge-fund manager, most of whom would rather you didn’t know their names, much less how they run their businesses. He wrote a very candid and illuminating book about his firm, Greenlight Capital, and the complete Allied ordeal. The purpose, he says, was not to become famous or to settle scores; it was to tell people that he had been right all along. He wanted them to see the Allied story as having a “bigger meaning”—that the political, financial, and media Establishments can, and do, conspire to quash truth-telling.

Fooling Some of the People All of the Time was published just in time for this year’s iteration of the same conference. His plan was to go there and give a talk about the book.

In the hedge-fund world, this event, known as the Ira W. Sohn Investment Research Conference, is a big deal. People pay up to $3,250 a seat to hear a dozen or so highly regarded investors pitch an idea. It’s a charitable event, benefiting pediatric-cancer programs, but it’s also a heavyweight Wall Street ritual, with serious profit opportunities at stake.

A few days before this year’s conference in May, Einhorn and his analysts at Greenlight had a private call with Erin Callan, the then–chief financial officer of Lehman Brothers. In two previous speeches at other investing conferences, Einhorn had raised doubts about Lehman; in April, he had explicitly stated that his firm was shorting Lehman, meaning that it had borrowed stock and sold it, with the idea that the firm would replace it at a later date when the stock declined in value (in essence, a bet that the stock would go down, not up). Very few people publicize their shorts, and when Einhorn did, it got Lehman’s attention. The conversation with Callan was to give her a chance to explain discrepancies he had uncovered between the firm’s latest financial filing and what had been discussed during its conference call about that filing.

That very week, a glowing profile of Callan had appeared in The Wall Street Journal, describing her in the headline as “Lehman’s Straight Shooter.” But she’d only been on the job six months and her background was as a tax lawyer, not in finance. She was evidently not prepared for the complexity of Einhorn’s questions and tried to bluff her way through. “The conversation was reminiscent of the ones I had with Allied,” says Einhorn. “We had our questions, we were organized, but she was evasive, dishonest. Their explanations didn’t make any sense.”

And so Einhorn, his sense of righteousness piqued, made a fateful decision: to use the conference to skewer Lehman Brothers. Given the abuse he’d received after he eviscerated Allied, he had to know that this might also have unpleasant consequences. But he was determined to out Lehman as emblematic of the greed and arrogance that had caused the credit crisis in the first place.

On the afternoon of Wednesday, May 21, he took the stage at the Rose Theater at the Time Warner Center to a rock-star reception. As an attendee told me later outside the auditorium, “He’s one of the guys who attracts the swarm.” Einhorn is something of a legend on Wall Street, not only for his investing prowess—25 percent average annual return for the twelve-year life of Greenlight—but also because of an unusual achievement: An accomplished bridge player who has played against Jimmy Cayne of Bear Stearns fame, he took up poker on a lark—and won $660,000 at the 2006 World Series of Poker. But Einhorn is entirely lacking in Vegas bravado. He’s mild-mannered to a fault. Which give his utterances all the more power.

Dressed conservatively in a dark suit and tie, Einhorn explained that he was there to speak, despite the possibility of legal and personal attacks, because “I believe it is important and the right thing to do.” The ratio of BlackBerrys to humans in the room was probably greater than one to one, and they all seemed to light up simultaneously. This was going to be good. Einhorn proceeded with a bracing analysis—including a recap of the Allied saga and a careful dissection of Lehman’s recent financial filing—that had all the moral fervor of a prosecutor’s closing argument. It was as if he were putting away a killer. His firm had a short position on Lehman Brothers, he maintained, not only because Lehman had fudged its numbers but because its recklessness had put the financial system as we know it at grave risk. He ended with a call to federal regulators to “guide Lehman toward a recapitalization and recognition of its losses—hopefully before federal taxpayer assistance is required.”


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