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The on-again, off-again spat between business development company Allied Capital and hedge fund Greenlight Capital took on new life last month as Greenlight upped the ante with its latest letter to Allied's board and an accompanying lawsuit seeking damages and penalties on behalf of the federal government.
Greenlight's strategy of pursuing an activist campaign against Allied while at the same time being openly short would seem to go against convention. What also makes the Allied/Greenlight rivalry stand out is its endurance.
"It's an incredibly unique situation," says one analyst who preferred anonymity. "I've seen similar things happen, but never something that lasted so long with so many different turns."
The fight between Greenlight and Allied is rooted in perceived discrepancies over how BDCs value their portfolios. Greenlight head David Einhorn alleged in 2002 that Allied Capital was marketing shares that exceeded the book value of the businesses it owned. The theory was that the proceeds from these offerings were used to pay out "inflated" dividends that would in turn attract in new investors. The allegations never did stick, as third-party appraisers and liquidity events helped debunk the Ponzi-scheme assertions.
For Allied, though, these were just the first lobs in what has turned out to be a protracted battle with its short sellers, Greenlight in particular. In 2004, the war of words was reignited by pair of regulatory probes into Allied, purportedly over an off-the- books, noncash transfer between the firm and its portfolio company, Business Loan Express (BLX). The investigations, led by the SEC and the US attorney for the...