Confidence Game - Christine Richard [29]
Several days after the Journal article ran, Einhorn received a request for information from Spitzer’s office titled “In the Matter of Farmer Mac.” Subsequent requests for documents were titled “In the Matter of Gotham Partners.” Tilson also got subpoenaed.
Within a few weeks, on February 7, 2003, an article appeared in the Wall Street Journal that described how Spitzer was directing his investigation toward Gotham’s use of credit derivatives. Because the market for contracts on some companies’ debt was quite thin, the article suggested that it would have been easy for a position such as Gotham’s to cause the spreads to widen as the fund bought protection on hundreds of millions of dollars of debt. What the attorney general’s office wanted to know, the article revealed, was whether the purchases themselves were aimed at creating the impression that the company was in financial danger. If that was the case, Gotham may have violated securities laws prohibiting market manipulation.
Then there was the issue of the Pre-Paid Legal report. Jim Cramer, the outspoken former hedge fund manager and founder of TheStreet. com, was livid over Berkowitz’s Pre-Paid posting that appeared on TheStreet.com’s Web site before Gotham decided to sell the shares. Andy Brimmer at Gotham’s then public relations firm Joele Frank told Ackman in an e-mail that Cramer believed that Gotham should have known it was going to run into problems in the First Union case and could have anticipated that it would need to sell its Pre-Paid shares.
“When you play with Jim Cramer, you’re playing with fire,” Cramer wrote to Brimmer, who passed along the message to Ackman’s lawyer, Aaron Marcu.
“Maybe suggest he take two lithium and calm down,” Marcu advised Brimmer in his reply.
Cramer, a long-time friend of Eliot Spitzer, wrote about the Pre-Paid hullabaloo in a column on The Street.com on February 18, which began by asking, “What’s the difference between the sales Ken Lay made in Enron and the sales Gotham Partners made in Pre-Paid Legal? I think there isn’t any.” He ended with this conclusion: “If you tell us you love a stock and subsequently sell it into your own hype, I don’t want to know your excuse. I just want an investigation and a prosecution if the sales were made simultaneous with the hype. That’s enough for me.”
With pressure mounting, Ackman and his wife took a break from the months of stress, heading for the upscale resort of Las Ventanas al Paraíso, or “the windows to paradise.” The hotel and spa is situated on the Baja peninsula in Mexico, nestled between desert sand dunes and the Sea of Cortez. It was the perfect place to get away from the stress of the investigation and the negative press.
Ackman didn’t know it yet, but Ian Cumming, the chairman of Leucadia, one of the largest investors in the Gotham funds, had also come to Las Ventanas that week to recover from recent hip surgery. As Ackman and his wife made their way around the pool, guests dozed in the sun while “pool butlers” hovered, ready to spritz them with Evian water. The quiet was suddenly shattered as Cumming, who was stretched out in a lounge chair, recognized the hedge fund manager: “Ackman!” Cumming yelled from across the pool, “What the fuck is going on with you?”
Chapter Five
The Worst That Could Happen
Our no-loss underwriting standard—no losses under the worst probable scenario—is the most important discipline that we have as a triple-A-rated, credit enhancement company.
—GARY DUNTON, PRESIDENT OF MBIA, 2000 ANNUAL REPORT
FOR MORE THAN half a century, visitors to Moody’s Investors Service’s offices in lower Manhattan passed beneath a giant bronze frieze titled “Credit: Man’s Confidence in Man.” The 1950s work showed two heroic figures clasping hands over a stalk of wheat, a scythe, a wheel—symbols of a prospering economy. The willingness of one man to lend to