According to a WSJ news report, Greenlight Capital, a $4 billion New York hedge fund, has filed a federal False Claims Act lawsuit against Allied Capital Corp., alleging that a subsidiary of Allied known as Business Loan Express LLC, or BLX, “submitted fraudulent loan documents to the Small Business Administration, bilking the U.S. of millions of dollars. Greenlight and James Brickman, an individual working with the fund to bring the suit, are entitled to 25% to 30% of the proceeds if their complaint results in an award.” Aside from the novelty of a hedge fund’s getting into qui tam litigation (perhaps no real surprise, given the proven money-making scope afforded by that bounty-hunter’s statute) the even more noteworthy twist is that Greenlight has also taken a short position in Allied’s stock, so that it will profit if the stock falls independently of whether the litigation results in a successful recovery. (Carol S. Remond, “Greenlight Heads to a Courtroom”, Wall Street Journal, Jan. 29)(sub-only).
We’ve reported at some length previously (here and at Point of Law) about the evidence that plaintiffs and their lawyers sometimes short target companies’ stocks before filing lawsuits, and about the fairly grave implications of that both as a matter of legal/litigation ethics and for the “market integrity” rationale of securities regulation. See, for example, May 5, 2005 and Sept. 14, 2006, as well as (relatedly) Nov. 14, 2006, and at Point of Law, Feb. 6 and Mar. 3, 2006, and this Featured Discussion.