Tarragon's Bitter Taste

Inside Tarragon Corp.'s(TARR) investor day at its New York City office last week, the housing developer's bow-tied chief executive, William Friedman, pitched his company as one of the bigger value stories being missed by the stock market today.

The solution to creating value, he said, is to separate the apartment and homebuilding divisions into two separate companies.

To back up his claim, Friedman pointed to several slides with fancy pictures but unaudited financial results, since the company was delinquent in filing its annual report. Tarragon's chief financial officer, Erin Pickens, was nowhere in the room to answer questions.

This lack of clarity is no surprise to those who follow the $300 million market-cap company, which builds condos and apartment buildings in the Northeast and Florida. Short-sellers say the reason the CFO is usually missing is that Friedman is running Tarragon as an overly complex and financially tenuous enterprise that only he can explain.

Helping some of the shorts' claims is the fact that Pickens, who is based in the company's Dallas office and not the New York City headquarters, has said a total of eight words on the company's past two quarterly earnings calls.

Hedge funds have piled into the stock over the past year, creating a 22% short interest in the company. The shorts also say that Tarragon could be facing near-term liquidity issues. The company has a debt-to-equity ratio of 5, compared to 2 at WCI Communities(WCI), another troubled Florida condo builder.

Friedman himself has a tarnished past. He was barred from the savings and loan industry by the Office of Thrift Supervision in 1994 for his involvement as vice chairman of Southmark Corp., a real estate investing fund that went bankrupt in the early 1990s.

Several of the larger short-sellers of Tarragon, who spoke on the condition of anonymity, portray Tarragon as a case of "where there is smoke, there is fire."

"I know how this ends, I just can't tell you when," says one short, who says he made a fortune betting against Friedman and Southmark in the late 1980s.