Fooling Some of the People All of the Time
by David Einhorn
“A rare and revealing look into the dark corner of finance and politics where you find fraudsters, investors, politicians, and regulators all gaming the system. Einhorn’s memoir is a gripping and informative tale, told with verve and passion, that carries a powerful message for anyone who cares about the future of our economy.”
The Hedge Fund Manager Who Went to War Over Accounting
Imagine you’re a professional investor and you stumble upon something that just doesn't add up. A company, respected by the market, seems to be valuing its assets in a way that defies logic. You dig deeper, and the small discrepancy starts to look like a crack, and the crack reveals a rot that seems to run through the entire foundation of the company. You decide to bet against the firm, and you share your reasoning with the public. What happens next? A rigorous debate? A regulatory investigation into the company?
Not quite. Instead, you become the target. The company’s executives attack your character, powerful PR firms work to discredit you, and the official market umpires—the regulators—spend more time investigating you than the evidence you’ve presented. This isn’t a Hollywood thriller; it’s the real-life story told by hedge fund manager David Einhorn in his gripping book, Fooling Some of the People All of the Time. It's a detailed, personal account of his firm Greenlight Capital's six-year war against a company called Allied Capital, and it serves as a masterclass in forensic accounting, intellectual courage, and the dark side of Wall Street.
What You'll Learn
The true story of one of the most famous activist short-selling campaigns in modern history.
How to spot the red flags of deceptive accounting in a company’s financial reports.
Why Wall Street’s “umpires”—analysts, auditors, and regulators—can sometimes miss the most obvious calls.
The immense personal and professional pressure that comes with betting against a powerful company.
A practical guide to thinking critically, trusting your own research, and asking the tough questions.
The Discovery: A Red Flag in Plain Sight
In 2002, Einhorn’s firm, Greenlight Capital, began looking into Allied Capital, a Business Development Company (BDC). BDCs are firms that lend to and invest in small and mid-sized private companies, which are inherently risky. What first caught Einhorn's eye was a simple but glaring anomaly: Allied was consistently valuing its loans to these often-troubled small businesses at or near 100 cents on the dollar.
Think about that. A small, private company to which you’ve lent money is struggling, maybe even missing payments. Common sense dictates that the loan is now worth less than its original value. Yet, Allied's books suggested everything was fine. For Einhorn, this was the thread. He pulled on it, and the entire sweater began to unravel. He suspected that Allied was using questionable accounting to hide losses in its portfolio, creating a deceptively smooth and profitable picture for investors who were collecting a handsome dividend.
The Speech that Started a War
At the prestigious Ira Sohn Investment Conference, Einhorn was asked to share his best investment idea. He didn't pitch a stock to buy; he laid out, in meticulous detail, his case for shorting Allied Capital. He explained how Allied’s subsidiary, Business Loan Express (BLX), was making questionable loans guaranteed by the Small Business Administration (SBA), and how Allied wasn't writing down the value of its investments even when the underlying businesses were failing.
The reaction was immediate and volcanic. The next day, Allied’s stock plunged. But rather than addressing the substance of Einhorn’s claims, Allied and its CEO, Bill Walton, launched a massive counter-offensive. They didn't just disagree with his analysis; they attacked his integrity. A friend of Einhorn’s who worked at a brokerage firm was fired for simply forwarding the presentation to a client. This was no longer a simple investment dispute; it was a bare-knuckle brawl. As Einhorn writes, it became a "long, strange, and expensive trip down the rabbit hole."
The Forensic Deep Dive
For the next six years, Einhorn and his team engaged in a relentless forensic investigation. They weren't just trading stocks; they were investigative journalists. They dug through obscure SEC filings, tracked down former employees, and pieced together a mosaic of deception.
One of their key discoveries involved how Allied accounted for "Level 3" assets. These are investments, like loans to private companies, that don't have a ready market price and whose value must be estimated by management. This creates a huge potential for abuse. A manager can simply assert an investment is worth "X," and it's difficult for outsiders to prove otherwise. Einhorn's team did the hard work of investigating the individual small companies in Allied's portfolio, demonstrating that many were in dire straits even as Allied carried them on the books at full value. In one egregious case, Allied valued its debt in a company at 100%, even as more senior lenders had written their own investments down to zero.
The book is a testament to the power of persistence. Despite being stonewalled by Allied, ignored by many journalists, and even investigated by the SEC for market manipulation (an investigation that ultimately cleared him), Einhorn refused to back down.
A Short-Seller's Toolkit: Key Concepts
Einhorn's battle provides a crash course in key financial concepts. Understanding these terms is crucial to grasping the story.
Short-Selling: The practice of selling a borrowed stock in the hope of buying it back later at a lower price. The short-seller profits from the decline in the stock's value. It’s a high-risk strategy that pits the investor against a company’s management and prevailing market optimism.
Business Development Company (BDC): A publicly traded company that invests in small and medium-sized private businesses. Because they must pay out most of their income as dividends, there is immense pressure to report smooth, consistent earnings.
Forensic Accounting: The use of accounting, auditing, and investigative skills to examine the finances of a business for irregularities or fraud. This is the core skill Einhorn and his team deployed against Allied.
Level 3 Assets: Financial assets or liabilities that are difficult to value because they don't have a readily available market price. Their valuation relies heavily on management's own models and assumptions, creating a major potential for manipulation.
Form 10-K & 10-Q: Annual and quarterly reports that public companies are required to file with the SEC. For Einhorn, these documents were not just compliance paperwork; they were treasure troves of clues, contradictions, and buried red flags.
A Guide to Thinking Like Einhorn
You don't need to be a hedge fund manager to benefit from Einhorn's methods. His approach is fundamentally about critical thinking and healthy skepticism. Here are some lessons you can apply:
Read the Footnotes: The headline numbers of a financial report can be misleading. The real story—about accounting methods, risks, and management assumptions—is often buried in the footnotes. Make them your first stop, not an afterthought.
Question "Too-Good-to-be-True" Performance: If a company in a risky industry reports perfectly smooth, ever-increasing earnings, be skeptical. Real business is lumpy and unpredictable. Unnatural consistency can be a red flag for earnings management.
Follow the Cash: The income statement can be shaped by accounting assumptions. The Statement of Cash Flows is much harder to fake. If a company reports high profits but isn't generating actual cash, you need to find out why.
Listen to What Isn't Said: During investor conference calls, pay attention to the questions that executives dodge or answer with vague corporate-speak. Evasiveness often signals that a question has hit a nerve.
Have the Courage of Your Research: Einhorn faced immense pressure from the company, the government, and the market. He prevailed because he had done the work and was confident in his analysis. Don't be swayed by authority or consensus if your own diligent research tells a different story.
Final Reflections
Fooling Some of the People All of the Time is more than just an epic financial story. It’s a profound cautionary tale about the systemic frailties of our financial markets. It reveals how powerful insiders can manipulate information, how the umpires can be slow to act, and how the truth can take years to come out. Ultimately, Allied Capital crumbled during the 2008 financial crisis, its stock price collapsed, and it was acquired for a fraction of its former value, vindicating Einhorn's long and costly battle. The book is a powerful testament to the importance of independent thought, rigorous analysis, and the vital role that skeptical, truth-seeking investors play in keeping markets honest.
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