Confidence Game - Christine Richard [51]
“Why is that?”
“I don’t’ know,” said Ackman. “Because we’re being investigated?”
“You’re speculating?”
“Speculating, yes.”
The SEC lawyers asked why Gotham sent its reports directly to the GAO.
“Frankly, we wanted the SEC to take a look at Farmer Mac, and we didn’t have much success there,” Ackman said. “So we broadened the mailing to send to anyone we thought would be relevant or interested.”
Ackman said he believed the pressure he exerted on the company actually caused it to provide better disclosure. “Look at a side-by-side comparison of the company’s recent quarterly filing with one filed two years ago and you can see the improvement,” Ackman said. “Frankly, I think I should get an award from the SEC for improved disclosure at Farmer Mac.”
The SEC attorneys did not comment on the suggestion.
“After this improvement in disclosure,” the attorney asked, “would you change your investment strategy on Farmer Mac?”
“If I were still in business, I would short more. I have more conviction on the basis of the new disclosure.”
“Who else did you talk to about the company?”
“The auditors,” said Ackman. Farmer Mac had just changed its auditing firm to Deloitte & Touche, so Ackman took the opportunity to call them. The accountants told him they could only listen; they could not give feedback, Ackman explained. So he spent a few hours in a one-way conversation.
David Klafter, Gotham’s general counsel, later dubbed the ensuing monologue with the auditing firm “the wind tunnel,” an example of Ackman’s ability to bombard someone with “torrents of ideas and explanations.” The image it always conjures for Klafter is of the old Times Square billboard advertising Maxell cassette tapes, which showed a young man sitting in a large upholstered chair, bracing his arms against the arms of the chair while the sound flooded over him, blowing back his tie and hair. The auditors at Deloitte & Touche were hardly the only ones subjected to it. “He’s incredibly passionate about his views, and he always has a mountain of evidence to back them up, so when he wants to explain something, you can feel like you’re in a wind tunnel,” Klafter says.
The SEC attorneys’ questions moved on to a new topic: “Have you heard of a company called MBIA? How did you get interested in the company? What kind of research did you do?”
Ackman explained how he was drawn to look at other companies that were perceived to be low risk after his success with Farmer Mac. He got a trial subscription to Moody’s Investors Service and printed out about 15,000 pages on structured finance and the bond-insurance business. He searched for articles and everything he could find on LexisNexis that mentioned the company, and he looked at regulatory filings. “This was one of those cases where the more work I did, the more confident I got,” Ackman said. “The more people I spoke to, the more I learned, and the more conviction I had with respect to the investment.”
The attorneys reviewed Ackman’s trading records with him. “How many swap contracts did Gotham purchase on MBIA?”
“All told, $1.955 billion,” Ackman said.
“That was ‘billion’?”
“That is correct.”
As the morning wore on, the room became increasingly hot. Several weeks earlier, David Einhorn had suffered in silence over the uncomfortable heat, assuming it was the SEC’s way of sending him a not-too-subtle message. Ackman had no qualms about complaining. “It’s getting a little warm in here,” Ackman said, shortly after 10 a.m. “It started out cool. Is there any way to keep it cool?” The proceedings were halted for 15 minutes. When they resumed, Ackman had obtained a fan and water.
“Excuse me. I don’t mean to be a pain about this,” the court reporter said, “but when that fan’s on, it’s a little difficult to hear you.” There was a short recess while the attorneys rearranged the fan and the chairs.
The SEC lawyers had just raised a question about a conversation between Ackman and one