KEY POINTS:
One morning in 2005, an unusual letter arrived for the Rev Barry Parker at St Paul's Anglican church in Toronto. The news: A member of his flock was out to swindle the parish.
"Dear Father," the note begins. "The attached documents are being sent to you out of
my concern for the church's finances."
The letter goes on to say that the allegedly wayward parishioner, an insurance executive named Prem Watsa, was bilking shareholders of Toronto-based Fairfax Financial Holdings.
"I am perplexed by the mystifying, spectacular rise of this insurance medusa," the typed letter reads. "Be aware, Father, be skeptical and ask Mr Watsa to make a full confession." The note was signed P. Fate. The return address was that of St Patrick's Cathedral in New York.
Stranger still is what Fairfax says is the source of the letter: A cabal of hedge fund managers - among them James Chanos, Steven Cohen, Daniel Loeb, David Rocker and Adam Sender - hoping to profit from a slump in Fairfax stock. Fairfax, which has a history of accounting lapses, sued eight hedge fund firms for racketeering in July 2006, demanding US$6 billion ($8.5 billion) in damages.
The insurer says the letter to Parker, excerpts of which were included in its complaint, was just one of many dirty tricks the fund managers used to smear the company, which has 8000 employees and US$26.8 billion ($38.1 billion) of assets. The hedge funds deny wrongdoing.
At the heart of this story is a freelance research analyst named Spyro Contogouris, whose previous - and often contentious - dealings have ranged from Houston real estate to Nigerian natural gas. Until recently, Contogouris, 46, ran a firm that sounded more cloak-and-dagger than stocks-and-bonds: MI4 Reconnaissance, based in New Orleans.
Fairfax says the hedge fund firms paid Contogouris and MI4 employee Max Bernstein to send out slanderous reports about the insurer and to harass its executives.
Contogouris, like the hedge funds, has said the insurer's allegations are false. In November, Contogouris was arrested on unrelated embezzlement charges to which he has pleaded not guilty.
In court this week Contogouris and the hedge funds will argue to have the Fairfax complaint dismissed.
The Fairfax fight is one of several bitter battles between companies and independent research firms.
The cases raise questions about the integrity of securities research four years after several Wall Street firms settled claims that their analysts issued biased reports to win investment banking business. The 2003 settlement helped boost business for analysts who aren't affiliated with big investment banks.
In its complaint, filed in the New Jersey Superior Court in Morris County, Fairfax alleges hedge funds hired Contogouris to beat up its shares. The hedge fund firms say Fairfax sued to silence critics.
Fairfax has been a tempting target for short sellers. The company headed by Watsa, a former door-to-door air conditioner salesman who built his property-casualty insurer through acquisitions, has been plagued by erratic earnings and accounting errors.
In a flurry of reports issued in 2005 and 2006, MI4 said Fairfax used a web of European subsidiaries to conceal a cash crunch. Contogouris likened the insurer to Enron and said a "Friends of Fairfax" club made up of analysts and investors conspired to drive up its stock.
Most critics of Fairfax have gone quiet since the company filed its racketeering complaint.
In all, Fairfax sued eight hedge fund companies: Red Bank, New Jersey-based Copper River Management , the successor to Rocker Partners LP that was formerly run by Rocker; Sender's Exis; Chanos' Kynikos Associates; and Loeb's Third Point, all based in New York. Two others are in Greenwich, Connecticut: Lone Pine Capital and SAC Capital. Another, Trinity Capital of Jacksonville , is based in Jacksonville, Florida.
The last, Sigma Capital Management, is a New York-based division of SAC.
Several of the managers are named personally, including Chanos, Cohen, Loeb, Rocker and Sender. In addition, Fairfax sued Morgan Keegan & Co. analyst John Gwynn; Christopher Brett Lawless, a former analyst at Fitch Group in New York; Bernstein; and Contogouris. Fairfax says Gwynn and Lawless conspired with the hedge fund firms.
Most of the defendants remain mum. Copper River, Kynikos, Lone Pine and SAC declined to comment. Third Point and Trinity didn't return calls. Messages left at a New Jersey listing for Lawless weren't returned.
To beat the hedge funds, Fairfax has enlisted public relations maestro Michael Sitrick and uber-litigator Marc Kasowitz, whose New York-based law firm Kasowitz, Benson, Torres & Friedman has battled class action asbestos claims and helped cigarette maker Liggett Group avoid penalties imposed on Big Tobacco.
Only one Fairfax detractor is still talking: William Gahan, a trader at Institutional Credit Partners , a New York-based fixed-income manager. Gahan, 41, correctly predicted the 2003 collapse of scandal-plagued Italian dairy company Parmalat Finanziaria. Now, he says he has accountants and tax lawyers delving into Fairfax.
It's been a wild ride for Contogouris, a controversial character who took up stock research after working in real estate and on energy investments. No one involved in the Fairfax case seems to know much about what Contogouris did before 1993.
For a time, he lived large in Hollywood. In 2000, he bought a house just above Sunset Boulevard, according to property records. He and his brother Chris, an executive producer on Eminem's 8 Mile soundtrack, bought a Los Angeles music club called the Mint.
Before its battle with short sellers, Fairfax was a press-shy insurance company. Watsa, the founder, was born in Hyderabad, India. He graduated in 1972 from the Indian Institutes of Technology with a degree in chemical engineering and moved to Canada. He sold air conditioners to put himself through the University of Western Ontario, earning an MBA in 1974.
He did a stint as an investment analyst at an insurer, then established his own money management firm, Hamblin Watsa Investment Counsel, in 1984. A year later, he bought his first insurance company, Markel Financial Holdings, a struggling trucking insurer. He renamed it Fairfax, short for "fair, friendly acquisitions."
Fairfax thrived until the late 1990s, when it bought two US insurers: Crum & Forster Holdings, for US$565 million, and TIG Holdings, for US$847 million. Both got swamped by unexpected liabilities, including claims tied to the September 11 terrorist attacks.
The bears pounced, selling 2 million shares short by January 2003. The "Fairfax Project" - a name the band of hedge funds used, according to the company - had begun.
In that letter, the writer identified only as P. Fate tells Parker that Watsa bears a striking physical resemblance to Martin Frankel, who in 2004 was sentenced to 17 years in prison for stealing more than US$200 million from US insurers. Fate goes on to tell Parker that Frankel also stole a fortune from the Catholic Church.
"While these coincidences are surprising, they do not compare to the similarities between the massive money-laundering schemes perpetrated by Marty Frankel and the massively convoluted paper shuffle created by Watsa," Fate says.
Attached was a 26-page article detailing Frankel's fraud, his flight from US authorities and his supposed interest in sadomasochistic orgies. Parker didn't return calls seeking comment.
Watsa got the same package via email, Fairfax says in its complaint. It claims that computer code at the bottom of the document shows P. Fate is in fact Bernstein.
The same day Watsa got the email, someone phoned Fairfax and left a message. "Tell Watsa that when he goes to jail next year we will visit him and bring him some treats," the caller allegedly said.
The originating phone number was listed to Exis, says Fairfax.
The harassment was relentless, says Paul Rivett, Fairfax's chief legal officer. For months, he says, he had to turn off his home phone periodically because of crank calls. Fed up, Rivett says he convinced Watsa to hire a law firm to investigate. Michael Bowe of Kasowitz Benson in New York had useful experience. In February, his firm had sued SAC Capital and several other hedge fund firms and analysts, alleging a plot to drive down shares of Biovail.
Like Fairfax, Biovail was under investigation by the SEC.
The attack on Fairfax intensified. In May 2006, Contogouris arrived at the London offices of a Fairfax unit, and got past the building's security personnel by saying he was a reporter, the complaint says. Inside, he tried to get executives to talk by saying that Watsa had sold the subsidiary.
"Special Situations Research Consultant, MI4 Reconnaissance," read the card he left behind. The phone number on the card rang through to Exis, Fairfax says.
Interest in Fairfax's US shares surged to 4.2 million shares in July 2006 from 3.3 million that June. On July 26, seven months after the letter arrived for Parker, Fairfax sued the hedge fund firms, Bernstein, Contogouris and the others, alleging a vast conspiracy.
Then came a twist: Two days later, Fairfax said it would restate earnings to correct five years of errors. That August, Fairfax quantified the restatement, lopping off US$235.3 million of shareholders' equity.
The hedge funds say in court documents that Fairfax sued to blunt criticism of its accounting. Bowe calls that claim "silly".
After Fairfax filed its suit, many Fairfax critics shut up.
- Bloomberg
