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Fairfax Claims in Lawsuit Third Point Chief Lied to Investors

*By Thom Weidlich and Anthony Effinger - March 6, 2011 00:01 EST *


March 6 (Bloomberg) -- Fairfax Financial Holdings
Ltd.<http://www.bloomberg.com/apps/quote?ticker=FFH:CN>claims Daniel
Loeb<http://search.bloomberg.com/search?q=Daniel+Loeb&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>,
head of hedge fund Third Point LLC, “lied” to his investors when he told
them that extensive stock research led him to bet against the Canadian
insurer, according to court documents obtained by Bloomberg News.

In a letter to investors “Loeb represented that the decision to short
Fairfax-related positions was one of the ‘most thoroughly researched
investments in the firm’s history,’” lawyers for Toronto-based Fairfax said
in documents filed late last year in state court in New Jersey.

“Loeb could not identify any such research,” Fairfax lawyers wrote in the
documents. “Third Point has never produced any such internal research, and
Loeb was forced to admit in his deposition that he did not know what finite
reinsurance was, despite the fact that he cited this as one of the bases for
believing Fairfax was a fraud.”

The accusations are the latest salvo in a five-year court fight between
Fairfax and a group of hedge funds including Third Point, SAC Capital
Advisors LP, Kynikos Associates Ltd. and Exis Capital Management Inc.

The hedge funds have previously denied Fairfax’s accusations.

“Third Point stands by its investment research process and, specifically the
years of research it conducted on Fairfax Financial Holdings,” the hedge
fund said in an e-mailed statement yesterday. “Third Point’s research
regarding Fairfax was borne out when the company was forced to restate its
financial statements, erasing over $235 million of shareholder equity just
one day after this lawsuit was launched in 2006.”

2006 Lawsuit

Fairfax sued the group in 2006 in New Jersey Superior Court in Morristown.
It seeks more than $8 billion in damages from the hedge funds, saying their
activities depressed its credit ratings, diminished its ability to make
acquisitions, and reduced the amount it could raise in debt and equity
offerings, according to the documents. An amended complaint filed in 2008
pegged the damages at $6 billion.

The group sold Fairfax shares short, then conspired to drive them down
through a campaign that allegedly included harassing Chief Executive Officer
Prem Watsa<http://search.bloomberg.com/search?q=Prem+Watsa&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1>,
intimidating executives, and distributing slanderous research to investors,
Fairfax claims in court papers.

In a short sale, a trader borrows shares of a company and sells them,
speculating that the price will drop so he can buy the shares back at a
lower price, repay the loan, and keep the difference as a profit.

‘Loeb Lied’

“One can also only conclude that Loeb lied to his investors -- including his
New Jersey investors -- in order to cover up the illegal conduct in which he
participated,” Fairfax claimed in the documents.

Loeb has $5.7 billion in four funds. His biggest, the Third Point Offshore
Fund Ltd., returned 34 percent last year.

Loeb gave pretrial sworn testimony in the case at a deposition in July,
according to the documents.

“This frivolous litigation was an obvious attempt to deflect attention from
the company’s own financial shortcomings,” Third Point said in its
statement. “Third Point adheres to the highest standards of investor
transparency, and any suggestion otherwise is an irresponsible attempt to
disparage Third Point and distract from the glaring deficiencies in this
more than five year old litigation.”

800 Pages

The documents, almost 800 pages, were filed by Fairfax in November after the
hedge funds sought to have the case dismissed based on the court papers.

Third Point made one of the biggest bets against Fairfax during the alleged
activities, Fairfax said in the documents. Between May 30, 2006, and July
24, 2006, Loeb sold short almost 700,000 Fairfax shares, the company said.

Loeb took the position because he knew a story critical of Fairfax was about
to run in the New York Post, and because Spyro Contogouris, an independent
analyst paid by the hedge funds, told the group that the Federal Bureau of
Investigation was examining the company, Fairfax alleged in the documents.

The FBI began its investigation after Contogouris presented agents there
with research claiming that Fairfax was engaged in fraudulent accounting,
the company said.

“Loeb was trading while in possession of, and based on, material non-public
information concerning the FBI investigation and upcoming New York Post
story about that investigation,” Fairfax said in the documents.

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


*Joan K. Peugh***

*Rosemont Seneca Partners*

1010 Wisconsin Avenue, NW

Suite 705

Washington, DC 20007

T:(202) 333-1880

F: (202 333-1886

M: (202) 841-8543

jpeugh@rosemontseneca.co