Capital Markets

Hedge Funds Accused of Shorting Scheme

Fairfax Financial says it was the target of "a massive and fraudulent disinformation campaign" that included negative analyst reports and personal ...
Stephen TaubJuly 27, 2006

A Canadian insurer is seeking at least $5 billion in damages in a lawsuit alleging that a number of prominent and aggressive hedge funds participated in a scheme to manipulate Fairfax’s shares.

Toronto-based Fairfax Financial Holdings Ltd., which is traded on the New York Stock Exchange, filed a lawsuit in a New Jersey court against a number of prominent players, including SAC Capital Management and several of its entities; SAC founder Steven A. Cohen, who is legendary for his secretiveness and aggressive trading style; Lone Pine Capital, one of the most successful long-short equity investors; Rocker Partners, a prominent short-selling specialist that is also the target of another similar lawsuit; and Third Point LLC and its founder Daniel S. Loeb, who is known for his aggressive activist strategy.

According to Toronto’s Globe and Mail, the lawsuit claims that SAC, several other funds, a research analyst, and a pair of hedge fund “operatives,” among others, schemed to drive down the price of the company’s stock in order to make large profits.

The suit also 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.

The group was also accused of spreading stories that Fairfax chief executive and founder, V. Prem Watsa, had placed his assets in his wife’s name and fled the country, according to the Toronto paper.

Fairfax also alleges in its lawsuit that the Royal Canadian Mounted Police were about to raid his offices, according to the Toronto paper.

“Defendants went to such lengths to try to destroy Fairfax that they threatened, harassed and sought to intimidate Fairfax’s high-level executives and their families, and they disseminated widely in the market false and defamatory rumors,” the suit alleged, according to the Globe and Mail.

The Toronto paper added that Fairfax’s lawsuit alleges that one of the hedge fund’s operatives delivered a package to the Anglican church in Toronto that Watsa attends, comparing Watsa’s appearance to a fugitive who had defrauded the Catholic Church. An accompanying 30-page document in the package described that fugitive as engaging in “sadomasochistic and group sex and other sensational activities,” according to the paper.

According to the wire service, an SAC spokesman said, “The allegations are without merit and SAC will defend itself vigorously.”

The lawsuit evokes memories of a suit filed earlier this year by Biovail alleging that SAC and others engaged in stock manipulation. SAC has denied those charges.