TWO events occurred last week that seem unrelated. But, as often occurs in our interwoven world, connecting the dots is revealing.
First was Linda Chatman Thomsen’s testimony last Tuesday before the Senate Banking Committee. Ms. Thomsen, the director of enforcement at the Securities and Exchange Commission, offered her take on how the nation’s top securities cop missed the Ponzi scheme Bernard Madoff is said to have run for decades, noting how assiduously the S.E.C. chases tips it receives.
“Without fear or favor,” she said.
The next day, shares in Allied Capital, a business development company that invests in small to midsize concerns, plummeted almost 50 percent. Allied, whose stock was favored by small investors for its rich dividend, said it was trying to renegotiate its own loans amid the credit crisis. Dividend in danger, Allied’s stock closed at $1.56 on Friday; last September, the shares touched $16.
The two events are linked by this: Just as the S.E.C. failed Mr. Madoff’s investors as tipsters told the agency he might be up to no good, it also seems to have let down Allied’s shareholders by ignoring analyses of aggressive accounting at the company.
Critics of Allied — primarily short-sellers — who did such work said the company’s accounting inflated assets and put investors at risk.
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It wasn’t until five years after critics began questioning Allied’s books that the commission moved against the company. In a June 2007 action, the S.E.C. found that Allied violated record-keeping and internal-controls provisions of securities laws relating to the valuation of illiquid securities it held. In a settlement, Allied neither admitted nor denied the allegations; not a nickel in fines or penalties was assessed.
Less than two years later, Allied is trying to weather the credit storm. Dale Lynch, executive vice president at Allied, said the company was working with its lenders “so that we can continue to serve the needs of America’s midsized businesses, many of whom depend upon business development companies to fuel their growth.”
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It is a tale recounted engagingly in the book “Fooling Some of the People All of the Time,” by David Einhorn, founder of the New York hedge fund Greenlight Capital. Published last year, it is a compelling account of his five years battling Allied and trying to interest regulators in the company’s practices.
“Fooling Some of the People” should be required reading for Mary L. Schapiro, the new chairwoman of the S.E.C. Ditto for anyone else interested in assessing our nation’s broken-down regulatory apparatus.
H. David Kotz, the new inspector general of the S.E.C., already seems to have paged through Mr. Einhorn’s book. Mr. Kotz’s most recent report to Congress indicates that he is investigating the problems Mr. Einhorn encountered with the S.E.C. when he gave it information about Allied’s aggressive accounting.
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