David Einhorn of Greenlight Capital wrote a book called Fooling Some of the People All the Time, John Wiley & Sons , 2008. Mr. Einhorn runs a hedge fund called Greenlight Capital

An issue in the book is what should the regulators be doing? Mr. Einhorn went to the regulators on a regular basis to show his evidence. Financial fraud is relatively easy to do, but it takes a lot of work to bring action against the abusers. Allied Capital was dealing in small business loans which the government policy makers wanted done.The program was to give out money, not how well the money was received back, as long as Allied Capital paid a dividend or gave its distribution, it was generally assumed the company was doing what the normal standard is. Greenlight and others proved Allied Capital was fixing the books to look like they were doing what is normal, for Allied’s normal turned out to cost the government millions of dollars.

The Securities and Exchange Committee which should be interested because Allied would go into the capital markets to issue stocks and bonds, were not really interested until millions was at issue, not thousands. The questions for financial fraud is would a bureaucrat risk his/her job for thousands in fraud? Sometimes the answer is yes, most of the time the answer is no. By the time fraud throughout the organization is proved and acknowledged larger sums will have been lost. The bureaucrats look to their political masters and senior people who deal with the great side of doing small business loans including ribbon cutting, new jobs and donations.

Lessons for dividend stock owners – the system is imperfect. Regulators try but often the mechanisms to search, prove and track fraud are not high priority when programs are introduced and running. This is especially true if the programs involve a higher goal of the government and consistent fees. Most program systems are designed believing the users are honest, ethical and only a little fraud with go on. Honest people do not like to do much paperwork and those involved in fraud are happy to do even less. In countless programs, it seems fraud creeps in and affects many programs. Thank goodness for short sellers and whistle blowers. If the first reaction of management is to go against the short sellers, it is a sign to move on to other investments.

There are more questions than answers, till the next time – to raising questions