Confidence Game - Christine Richard [23]
Ackman and Berkowitz decided to wind down the funds, liquidating the assets over time to maximize the return of capital to all investors. The hedge fund managers would need time to sell assets such as the Maxwell House Coffee factory, a 25-acre site on the Hoboken waterfront; a stake in Hallwood Realty Partners LP; a legal judgment against the government of Nicaragua; and Memorial Properties, LP, a mausoleum in Short Hills, New Jersey. The pair immediately began to sell Gotham’s publicly traded securities, including shares of Pre-Paid Legal Services, a holding that David Berkowitz had championed.
Speculation around Gotham that the First Union merger may have been scuttled because of Gotham’s aggressive attack on MBIA was fraying Berkowitz’s relationship with Ackman. Berkowitz preferred to remain out of the limelight, even in good times, whereas Ackman actively courted the press. It was Berkowitz, however, who took the first blow in what would become a string of negative articles about the fund.
Whitney Tilson, the hedge fund manager who oversees T2 Partners, spotted the article first as he was reading the New York Times on a Sunday morning just before Christmas in 2002. Pulitzer Prize-winning business commentator Gretchen Morgenson’s column that week was titled “It Still Pays to See Who Did the Research.” It described how Gotham began to liquidate its Pre-Paid Legal shares several weeks after posting a positive research report on its Web site that said the fund held more than 1 million shares.
At the request of TheStreet.com, Berkowitz had written the report, which was posted on the Web on November 19, in response to an avalanche of negative commentary on TheStreet.com about the company. TheStreet.com would not publish Berkowitz’s 26-page report, but it did publish the executive summary, which provided a link to the full report.
Morgenson’s article explained that the hedge fund had sold more than a quarter of its Pre-Paid shares beginning around the second week of December while the upbeat report remained on Gotham’s Web site. The article, which included a graph of Pre-Paid share sales titled “Cheering and Selling,” suggested that New York Attorney General Eliot Spitzer’s work in cleaning up dishonest research wouldn’t be complete as long as tactics such as Berkowitz’s went unchecked. The article didn’t mention that Gotham began to sell the shares of Pre-Paid and its other liquid securities only after Judge Ramos’s preliminary injunction blocked the First Union and Gotham Golf merger and led to Gotham’s decision to wind down its funds.
When Tilson called Ackman to alert him to the article, Ackman explained that Gotham had been selling everything it could, including the Pre-Paid shares, after the decision was made to wind down the fund. Berkowitz still thought the stock was a “buy,” Ackman added, telling Tilson: “We were so busy dealing with the First Union thing and dealing with investor redemptions—and things were going absolutely haywire—that we just weren’t focused on what was on our Web site.”
“I was horrified,” Tilson later told the New York attorney general’s office when it investigated Ackman. “You feel for anybody that has their reputations dragged through the mud on the front page of the business section of the New York Times.”
“What was it about the article that made them look so bad?” an attorney wanted to know.
“It said that they wrote favorably about Pre-Paid. The stock went up a couple of bucks and they sold it.”
“Isn’t that what happened?” the lawyer asked.
“Well, I guess partial truth can be as misleading as outright fabrication,” said Tilson.