Capital Markets

Fairfax Attacks Shorts, Then Restates

Were the short-sellers right about Fairfax Financial Holdings after all?
Stephen TaubJuly 28, 2006

One day after filing a $5 billion lawsuit claiming that a group of short-sellers and aggressive hedge funds were scheming to drive down its stock price, Fairfax Financial Holdings announced that it will restate its financial results. The announcement caused Fairfax’s stock to fall, and credit-rating agency Standard & Poor’s responded by putting the company on CreditWatch for a possible downgrade.

Officials at the Toronto-based insurance company said “non-cash accounting errors” were discovered dating back to before 2001, according to a press statement. It noted that although the restated amounts have not been finalized, the company estimates that it will decrease shareholders’ equity as of March 31, 2006, by between $175 million and $190 million, or about 5 percent of its year-end shareholders equity.

Fairfax also said it will include corrections of certain unrelated errors “of an immaterial nature” in the restatement.

As reported Thursday, Fairfax filed a lawsuit on Wednesday, alleging that a number of prominent and aggressive hedge funds participated in a scheme to manipulate the company’s shares.

Fairfax filed its suit in a New Jersey court against SAC Capital Management and several of its entities, SAC founder Steven A. Cohen, Lone Pine Capital, Rocker Partners, and Third Point LLC and its founder Daniel S. Loeb.

The suit alleges the defendants prepared “a massive and fraudulent disinformation campaign attacking Fairfax and other targeted publicly traded companies” using “biased, negative” analysts reports, and then made money by shorting the stock, according to Reuters.

In its subsequent restatement, the company explained that at the end of 2001, it converted its consolidation process to a new accounting system, which it asserts provided increased sophistication and control processes to deal with Fairfax’s growth in size and international scope. According to the statement, management discovered the accounting errors during a recent review of the accounting implications of a decision to commute a $1 billion corporate-insurance contract reinsured with a Swiss Re subsidiary.

“The restatement will not impact Fairfax’s cash flows or the fundamental strength of our business, as our operating and investment performance continues to be strong,” asserted Fairfax chief executive officer Prem Watsa in a statement, which made no reference to the lawsuit against the short-sellers.

In what would appear to be something of a victory for those short-sellers, Fairfax’s stock opened Friday down more than 5 percent from its previous day’s close, and off 11 percent since it filed the lawsuit.