Fairfax Judge Drops Rocker From Shorting-Scheme Suit

Date: Friday, September 26, 2008
Author: Thom Weidlich and Erik Larson, Bloomberg

Fairfax Financial Holdings Ltd., owner of U.S. and Canadian insurers, lost a bid to keep former hedge-fund manager David Rocker as a defendant in a suit accusing several funds of trying to drive down its share price.

Rocker and his former fund company, now Millburn, New Jersey-based Copper River Management LLC, were dropped from the case today by state court Judge Deanne Wilson, who ruled there wasn't enough evidence linking Rocker to a conspiracy.

``I do not want defendants in this case unless they belong here,'' Wilson said at a hearing in Morristown, New Jersey. ``There has to be some evidence against them in the complaint that will hold them in, and I don't see it.''

Fairfax sued a group of hedge-fund managers including Rocker, Jim Chanos of Kynikos Associates Ltd. and Steven Cohen of SAC Capital Advisors LLC in July 2006, alleging they spread false information to drive down the company's shares and profit from the decline. The defendants have denied the claims.

The hedge funds, according to the complaint, profited from disparaging Fairfax because they ``shorted'' the stock -- sold borrowed shares, betting they could replace them later with cheaper ones and pocket the difference.

Temporary Ban

U.S. and U.K. securities regulators on Sept. 19 temporarily banned short sales of financial companies, including Toronto- based Fairfax. The ``illegal actions'' of the hedge funds ``are precisely the type of egregious misconduct that is now front- and-center among the concerns of legislators and regulators in the wake of the country's current financial crisis,'' Fairfax lawyers wrote in an Aug. 5 court document.

Rocker and the fund, formerly called Rocker Partners LP, asked Wilson to rule in their favor on the evidence and the law without a trial -- a so-called summary judgment.

``They sued us, originally, without a good-faith basis,'' Rocker's lawyer, Gavin Rooney, told the judge today in court. ``There's nothing behind it.''

Wilson said she would allow Fairfax to revise its lawsuit. Fairfax lawyer Michael Bowe of Kasowitz, Benson, Torres & Friedman in New York said after the hearing he would do that to again try to link Rocker to the alleged conspiracy.

``There may very well be a reason for bringing Rocker back into the complaint,'' Wilson said. ``If Rocker belongs here, I will welcome him back with open arms.''

`$6 Billion Lawsuit'

In its complaint, Fairfax alleged racketeering, commercial disparagement, tortious interference with contractual relationships and conspiracy. Rocker traded more than $200 million in Fairfax shares, mostly related to its short- selling, the company said in court papers. Bowe called the case ``a $6 billion lawsuit'' at an Aug. 8 hearing.

Rocker, from 2002 through at least mid-2005, was ``a key architect and manager'' of the scheme, called the ``Fairfax Project,'' to drive down the company's stock price, according to the complaint. He recruited other hedge-fund managers, including Chanos; Cohen; Daniel Loeb, founder of Third Point LLC; and Adam Sender, founder of Exis Capital Management Inc., Fairfax said.

The hedge funds denied the allegations in court documents. On Sept. 8, defendants Institutional Credit Partners LLC and William Gahan, an ICP trader, countersued, saying Fairfax, Bowe and others subjected them to a campaign of harassment and intimidation. They said Fairfax sued the hedge funds to deflect scrutiny of its accounting problems.

Rather than shorting, ICP bet against Fairfax by buying credit derivatives that would rise in value if the company's financial condition weakened, according to court filings.

False Rumors

Rocker spread false rumors to regulators, analysts and reporters about Fairfax's reserve, cash and liquidity levels, according to the complaint.

In court papers, Rocker said the evidence showed he had no contact about Fairfax with the other hedge funds, other than four e-mails with his friend Chanos, the first in April 2003, months after Rocker first shorted Fairfax.

``The Chano-Rocker e-mails evidence a sincere and well- considered belief that the market had overvalued Fairfax's stock -- just as one would expect in communications between short sellers,'' Rocker lawyer Rooney of Lowenstein Sandler in Roseland, New Jersey, wrote in court papers.

Rocker denied having any influence over research by codefendants Spyro Contogouris, head of MI4 Reconnaissance LLC; Brett Lawless, an analyst at Fimilac's Fitch Ratings; and John Gwynn, an analyst at Morgan Keegan & Co., as Fairfax claimed. The three men, MI4 and Morgan Keegan are defendants and have denied wrongdoing.

Contogouris Financing

Rocker said in court papers there's no evidence he financed Contogouris -- a Fairfax claim -- and he hadn't heard Contogouris's name until Fairfax filed the suit.

Morgan Keegan, a Regions Financial Corp. unit in Memphis, Tennessee, fired Gwynn in August for giving research on Fairfax to selected clients before publication. The judge today ordered Rocker to produce trading records to address whether he ``traded in front of the reports leaked by'' Gwynn, Fairfax lawyer Bowe said in an e-mailed statement.

``The central issue of the Fairfax lawsuit is whether Mr. Gwynn was bribed to spread false information about Fairfax,'' Morgan Keegan spokeswoman Kathy Ridley said today in an e-mail. ``The evidence shows that Mr. Gwynn strongly believed in the accuracy of the facts in his report. We continue to believe that the lawsuit is completely without merit.''

`Continue to Deny'

``We continue to deny the allegations in the complaint,'' said Eugene Kaplan, a lawyer for Sender and Exis.

Jonathan Gasthalter, a spokesman for Cohen and SAC, and Elliot Sloane, a spokesman for Loeb and Third Point, declined to comment today. Lawless's lawyer, Kevin S. Reed, also declined to comment. Spokesman Pen Pendleton said ICP and Gahan didn't have an immediate comment.

Chanos didn't respond to an e-mail seeking comment. Stephen Rosenberg, a lawyer for Contogouris and MI4 didn't return a call seeking comment.

On Aug. 8, Wilson declined to dismiss Gwynn's defamation countersuit against Fairfax, filed in April. Wilson didn't rule on its merits. Gwynn claimed Fairfax defamed him by asserting he issued fraudulent research.

The case is Fairfax Financial Holdings Ltd. v. SAC Capital Management LLC, L-2032-06, Superior Court of New Jersey, Morris County (Morristown).

To contact the reporters on this story: Thom Weidlich in Los Angeles federal court at tweidlich@bloomberg.net; Erik Larson in state court in Morristown, New Jersey, at elarson4@bloomberg.net.