An SEC Office of the Inspector General (OIG) Report

I've been reading through the report by the SEC's Inspector General about the Allied Capital matter.

It is, as the saying goes, "heavily redacted." All those smudges from a magic marker covering up names and facts we aren't supposed to know about yet get annoying. But if you persevere, there is a fair amount that is legible.

Sports fans will remember: back in the spring of 2002, short seller David Einhorn gave a speech about Allied Capital, a publicly traded company PE investment firm. You can see the whole speech for yourself by clicking here.

Word of Einhorn's bearishness on Allied Capital got out of that hall at light speed (many audience members using their blackberries to get the word out as he spoke), and the following day the NYSE closed trading in Allied shares because they had received too many sell orders to process in an orderly fashion. Allied's suits were understandably unhappy about this. They began immediately demanding that Einhorn be investigated over his alleged manipulation of their stock price.

Their unhappiness was understandable, but characterizing truth-telling as market manipulation is pathological. Shorts are as entitled to talk their book as longs. If Einhorn had been lying about Allied for the purpose of driving down its price and making money, that would have been another matter. That does not appear to have been the case. Indeed, the OIG report is a vindication of Einhorn's position.

One of the names that seems to have been redacted is that of Mark Braswell. But you just read it here. [Let them redact THIS.] Braswell, as I noted three months ago was a lawyer for the SEC during the early period of the Allied/Einhorn brouhaha, who left the SEC in September 2003 to join the Venable law firm. Thirteen months after that, Braswell registered as a lobbyist for Allied Capital, according to Einhorn's book, published by Wiley in June 2008.

Einhorn quite sensibly asks, "How could it be proper, or even legal, for a lawyer who obtained confidential material from us, including e-mails, trading records and testimony about Allied, to leave the government and go work for Allied while our dispute was ongoing?" Much of the IG report addresses this question.

On p. 33 of the report (p. 40 of the pdf) we read: "Directly after leaving the SEC [redacted] joined the law firm Venable [redacted]. ...[Redacted] told the SEC that he went to work for Venable because he followed [redacted] and [redacted] in Enforcement, with whom he had worked at the SEC."

Later, we learn that starting in October 2004, this individual (psssst, Braswell), "became a registered [redacted] for Allied on behalf of Venable."

There is no evidence, the OIG says, that this individual's lobbying for Venable "violated any specific rule, regulation, or statute." Also, an ethics official told the OIG that even if Mr. Braswell/redacted had specifically worked on the Allied Capital matter for SEC and then gone to work as a lobbyist for Allied, this would not be an ethics infringement, since lobbying [or whatever this redacted activity might be!] "typically involves some prospective action that the company wants Congress to take," rather than interference with ongoing administrative proceedings.

Just about makes you want to deterg yourself, doesn't it?