Confidence Game - Christine Richard [26]
Some people close to Ackman, such as his friend Whitney Tilson, thought it was time for Ackman to defend himself in response to the accusations regarding Pre-Paid Legal. In an early morning e-mail the following day, he told Ackman, “I think you’re getting terrible advice to sit quietly, say nothing, and hope this blows over. Your good name is getting dragged through the mud. I’m hearing people say, ‘Jeez, those Gotham guys are sleazy,’ or ‘Jeez, those Gotham guys are so stupid. How could they have let this happen?’ Neither of these statements is true, yet by remaining silent, you are signaling to the world that they are true. Otherwise, why wouldn’t you defend yourself? Silence implies that you have something to hide, feel guilty about. Yes, the media attention will blow over, but the damage to your reputation will not unless you act now.”
Tilson suggested that Ackman draft a letter explaining Gotham’s position, telling the world that the fund had not blown up but was liquidating. Be clear that the fund still stands behind its research, he told Ackman, and that it sold Pre-Paid because it needed to meet redemptions and that it was not part of a pump-and-dump scheme. Put the Web site back up. Let everyone read the research, Tilson advised. “This really looks bad—promoting PPD [Pre-Paid Legal] while you sold it, which is what this looks like—and this is the reason Spitzer is going after [stock analysts Jack] Grubman and [Henry] Blodget. Do you really want your name to be seared into people’s memories alongside theirs for eternity?” Grubman, a Salomon Smith Barney telecom analyst, and Blodget, a Merrill Lynch technology analyst, were implicated in Eliot Spitzer’s investigation into misleading Wall Street research that was used to drum up investment-banking business.
Ackman forwarded Tilson’s e-mail to his lawyer Aaron Marcu at Covington & Burling: “Please explain to me what is wrong with this logic, that is, not talking to the media but putting out a press release. I know that it’s likely to create more news, but I just want to consider everything at this point.”
Marcu balked. “Issuing a public statement will certainly lead to more press, which at a very minimum will repeat the allegations and make the story look like it is a growing scandal,” Marcu answered. The MBIA and Farmer Mac research will stand on its own, said Marcu, who was more worried about Pre-Paid Legal. Gotham would have to say it was okay for the hedge fund to be selling its Pre-Paid shares while still touting the stock on its Web site, Marcu continued, “which definitely would increase the attorney general’s taste for you.” It was not clear at this point that Spitzer would pursue the fund, but he was certainly considering it, if the Reuters article was any indication.
“Talking to folks like Mr. Tilson here may make you feel better or like you’re defending yourself,” Marcu wrote, “but it will ultimately only raise the risks of further press damage and inflaming the attorney general.”
Press coverage of Gotham’s doings showed no signs of abating. Later that day, January 9, 2003, Ackman got a call from Henny Sender, the reporter at the Wall Street Journal who had written on Gotham’s CDS position on MBIA. The Journal planned to run another article on Gotham, Sender told him. This one would say that Spitzer was investigating the hedge fund. “Do you have any comment?”
It was clear to Ackman that the press knew more than he and Berkowitz did about Spitzer’s interest in Gotham. Sender knew Gotham was being investigated before the subpoena arrived at Gotham’s offices. An MBIA spokesman gave Sender the name of a contact in Spitzer’s office with whom she could confirm the investigation, Sender told Ackman. Morgenson knew how many Pre-Paid shares the firm sold and when. “How does she know that we are selling the stock?” Berkowitz later asked prosecutors when he was called to testify in Spitzer’s regulatory probe of Gotham