Confidence Game - Christine Richard [50]
Ackman’s plight drew sympathy. When a college friend, having read coverage of Gotham’s problems in the newspaper, wrote to offer support, Ackman responded: “While it is a time-consuming process and I am not used to being perceived by anyone as having done something wrong, I have a clean conscience and am not afraid of any of the facts. Believe it or not, I actually enjoy testifying.”
He had no shortage of opportunities to do so. In June 2003, Ackman headed to Washington for two days of testimony at the Securities and Exchange Commission, accompanied by Mark Stein, an attorney with Fried, Frank, Harris, Shriver & Jacobson.
The SEC sent Gotham Partners an informal inquiry that it later upgraded to a subpoena shortly after news broke that the hedge fund was being investigated by the New York attorney general’s office. Eliot Spitzer had been setting the agenda for holding Wall Street accountable, and clearly the SEC didn’t want to be left behind on this one.
“This is an investigation by the United States Securities and Exchange Commission entitled ‘In The Matter of Gotham Partners Management Company, LLC,’ to determine whether there have been violations of certain provisions of the Federal securities laws,” the lead attorney told Ackman as questioning got under way in a windowless basement room at the SEC. Two attorneys and an accountant from the SEC were present.
Many of the questions were similar to those Ackman had been asked at 120 Broadway: Did he try to undermine confidence in Farmer Mac and MBIA? Did he exaggerate the possibility of losses? Did he try to create a liquidity crisis by saying the companies were vulnerable to one?
The SEC attorneys also were interested in Ackman’s use of the still relatively obscure credit-default-swap market to place his bets against the companies.
“What was the notional amount of credit-default-swap contracts Gotham bought on Farmer Mac?” one attorney asked.
“Two hundred twenty-five million dollars,” said Ackman.
“At what level did the fund start buying?”
“Fifty-five basis points,” Ackman said. That meant Ackman could buy protection against default on $10 million of Farmer Mac default for $55,000 a year.
“At what level did you start selling?”
“Three hundred basis points,” Ackman replied. That price indicated that the cost of buying protection on $10 million of debt had risen to $300,000 per year.
“And what caused you to take these profits?”
“I got a call from the head of the Merrill Lynch credit-default-swap desk begging me to take him out of the trade,” Ackman said. “And I thought it was particularly ironic that they wanted to unwind, because Merrill was one of [Farmer Mac’s] underwriters and the biggest seller of their bonds.”
“When did you buy the swaps?”
“Starting shortly after I stayed up until 4 a.m. reading the financial reports.”
“Why was your report issued? What was your intent?”
“I wanted to shine sunlight on the problem,” Ackman said. “My view was that if people were aware of the facts I knew about Farmer Mac, the stock would go down. We’d make money on our short position.” At the same time, the report had the added benefit of “being good for America,” Ackman explained. “I thought it was abusive that a government-sponsored enterprise was doing the things [it was] doing.”
Already, his efforts had roused some action, Ackman pointed out. The Government Accountability Office (GAO) launched a review of Farmer Mac as a result of the reports and the New York Times’s coverage of the company. Officials from the GAO attended a five-hour meeting with employees from Gotham to discuss points raised in their research reports, Ackman said. The lead investigator phoned the next day and “effusively thanked me not only for coming down and presenting but also for all of the work that we did on Farmer Mac.” Ackman told the SEC lawyers.
Officials at the GAO had initially suggested