Patrick Harden

Cure for the Bad-CEO Blues: Sue Your Shareholders

FACT: Allied Capital is a Unit Investment Trust eligible under Regulation M of the Internal Revenue Service to pass capital gains, dividends, and interest earned on fund investments directly to its shareholders to be taxed at the personal level. To qualify as a regulated investment company, the fund must meet such requirements as 90% minimum distribution of interest and dividends received on investments less expenses and 90% distribution of capital gain net income.

FACT: Allied, as a regulated investment companies must have a debt-to-equity ratio of no greater than 1:1. As a result, Allied must consistently do secondary offerings in order to increase the amount it is able to borrow to grow its portfolio.

FACT: The dividends Allied have paid have been either ordinary taxable income or capital gains -- not a return of capital.

Book Review: David Einhorn's 'Fooling Some of the People All of the Time'

I have not read Mr. Einhorn's book, so I can't comment as to the allegations therein. However, I can provide some relevant facts about Allied Capital. Allied Capital is a Unit Investment Trust eligible under Regulation M of the Internal Revenue Service to pass capital gains, dividends, and interest earned on fund investments directly to its shareholders to be taxed at the personal level. To qualify as a regulated investment company, the fund must meet such requirements as 90% minimum distribution of interest and dividends received on investments less expenses and 90% distribution of capital gain net income. To avoid a 4% excise tax, however, a regulated investment company must pay out 98% of its net investment income and capital gains.

Per Allied's tax information, the dividends it has paid have been either ordinary taxable income or capital gains -- not a return of capital. For Allied to truly be a Ponzi scheme, its dividends would have to be a return of capital.

In addition, regulated investment companies must have a debt-to-equity ratio of no greater than 1:1. As a result, Allied must consistently do secondary offerings in order to increase the amount it is able to borrow to grow its portfolio.