Mega-hedge fund manager Daniel Loeb recently disclosed a double-whammy to his investors: substantial losses early in the third quarter of 2008, and the initiation of a formal SEC investigation into the operation of Loeb’s fund, Third Point Partners.
Loeb blamed part of his firm’s losses on the unfortunate fact of being short financial stocks just when the SEC decided to temporarily enforce existing laws prohibiting illegal naked short selling of a handful of such firms.
Loeb blamed the SEC investigation on a perception that his communications with other hedge funds violate securities laws.
While nobody outside the SEC can know with certainty just what it is about Loeb’s communications with other hedge funds that might be problematic, based on my observations of Loeb’s stock message board postings, I do have a theory.
In this installment, we’ll examine apparent coordination between Daniel Loeb and David Einhorn, manager of mega-hedge fund Greenlight Capital.
According to his book, Fooling Some of the People All of the Time, Einhorn established his much-storied short position in Allied Capital (NYSE:ALD) in early May of 2002. Einhorn first publicly outlined his short thesis on the late afternoon of May 15, 2002. The next morning, Allied held a conference call to address Einhorn’s claims. Interestingly, Einhorn himself did not participate in that call, however the first several questions – which achieved a much greater level of specificity and detail than Einhorn offered the night before – were asked by Daniel Loeb.
Either Loeb is an unusually quick study, or he and Einhorn had communicated substantially on the subject of shorting Allied Capital in advance.
Interestingly, on Allied’s Yahoo Finance message board, one of the biggest proponents of the Einhorn thesis also turns out to be Daniel Loeb.
“Looks like Einhorn has this one nailed. Einhorn has one of the best reputations in the business. He would hate to be on the wrong side of this trade.”
And lest you think Loeb was just offering his buddy Einhorn moral support, consider this post, in which Loeb wonders aloud (in the third person) how he might spend the “millions He will make on his ALD short. He was considering purchasing Himself a new car. However He is torn between the Aston Martin DB9, the Bentley GT and the Ferrari 360 Spyder…Maybe if this thing goes bust He can buy Himself a Mercedes Maybach.”
In all, Loeb, with the direct support of known paid message board basher Yolanda Holtzee (using such account names as ms_mint_green_esq and regulators_have_been_notified) personally posted scores of such messages over three years.
This appears to be an example of Loeb and Einhorn coordinating their efforts on the short side.
Coming soon: a clear-cut example of Loeb coordinating efforts with another hedge fund manager in his role as a so-called “activist investor” (and in so doing, skirting key securities laws while holding a metaphorical gun to a target company’s head).