Hedge fund critics easing off, Fairfax says

Date: Friday, November 23, 2007
Author: Tara Perkins, The Globe and Mail

Insurer alleges funds and their employees undertook 'massive, illegal and continuing scheme' to target company

While the bizarre and twisted saga that has enveloped Canadian insurance firm Fairfax Financial Holdings Ltd. is far from over, the company says the alleged scheming against it has diminished.

"Generally, the dirty tricks, the disinformation, has subsided," said Paul Rivett, a spokesman for the Toronto-based firm.

Fairfax is suing a group of hedge funds and their employees in a New Jersey state court, alleging "a massive, illegal and continuing scheme that has targeted and severely harmed Fairfax," costing it more than $6-billion (U.S.).

The company alleges the funds conspired to drive down its stock price using a variety of tactics, including spreading false information through analysts. None of the allegations have been proven.

In September, a judge rejected a bid from the group of eight hedge funds and a number of well known money managers, including Steven Cohen, to have Fairfax's allegations tossed out. The case now appears headed for trial, possibly some time late next year, although there is a chance the two sides could settle.

A trial might lead to such big-name figures as Fairfax's chief executive officer, Prem Watsa, and Mr. Cohen, the head of SAC Capital Advisors LLC, testifying.

This week, some of the parties that were recently named in Fairfax's suit fired back with their own counterclaims, accusing the insurance firm of having its lawyers follow them and of making defamatory statements in a magazine article.

In its new countersuit, New York-based investment management firm Institutional Credit Partners (ICP) claims that Fairfax's lawyers, Kasowitz Benson Torres & Friedman LLP, have a "reputation for trespass, trash-stealing and wife-stalking."

Because of that supposed reputation, ICP and William Gahan, a portfolio manager at the firm, claim they took "emergency measures to protect their and their employees' property and families" after allegedly finding Fairfax's lawyers lurking outside their office and following employees home.

"ICP's employees have sought medical care for their injuries," it goes on to say, with no explanation.

Fairfax characterized the counterclaim in a statement to The Globe and Mail as "nothing more than a weak and transparent effort to distract attention from the racketeering charges against defendants ICP and Gahan."

Court documents say that the dispute with ICP involves a call that Mr. Gahan made, around September of last year, to Fairfax director Brandon Sweitzer.

Mr. Gahan says he made the call to ask about "accounting peculiarities." The following month, Kasowitz Benson sent a letter asking for any information and analysis that had been done.

"Soon after the KBTF [Kasowitz Benson] letter, employees and officers of ICP, including Gahan, were followed by members of KBTF and [KBTF Consulting]," ICP and Mr. Gahan allege in court documents.

For its part, Fairfax alleges in its suit that ICP and Mr. Gahan worked closely with others to disseminate "disinformation" about the company, and that Mr. Gahan called one of the firm's directors claiming to be a market observer who had conducted a six-month forensic investigation of Fairfax's accounting and uncovered evidence of fraud.

When Fairfax's lawyers asked for the evidence, Mr. Gahan did not respond, the insurance firm alleges.

It further alleges that ICP and Mr. Gahan contacted Citibank in 2006 and tried to dissuade it from participating in a secondary offering of shares of Odyssey Re, a subsidiary of Fairfax.

Meanwhile, ICP and Mr. Gahan acknowledged in court documents that Mr. Gahan signed a bond to help facilitate the release of Spyro Contogouris in the fall of 2006, after he was arrested on unrelated charges.

Mr. Contogouris is another of the defendants in Fairfax's lawsuit.

In other new court documents filed last week, Mr. Contogouris and another defendant, MI4 Investors, acknowledged that a letter was sent in the fall of 2005 to Mr. Watsa's pastor at St. Paul's Anglican Church in Toronto.

It claimed to be sent because of a concern over the church's finances. "Be aware Father, be skeptical and ask Mr. Watsa to make confession," it ended, with a signature from "P. Fate."