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Msg  31210 of 44342  at  2/12/2009 5:38:29 PM  by


Chanos, SAC Saw Nonpublic Fairfax Research, Court Papers Show

Say it so Matilda?

Feb. 12 (Bloomberg) -- Jim Chanos’s Kynikos Associates Ltd., a short seller of Fairfax Financial Holdings Ltd., learned of negative analyst research on that company before it was published, according to unsealed court documents.

Chanos, Steven Cohen’s SAC Capital Advisors LLC and other hedge-fund managers were accused in 2006 by Fairfax of cooperating to drive down the firm’s shares through short sales, according to a complaint by Fairfax seeking $6 billion in damages. Toronto-based Fairfax owns U.S. and Canadian insurers.

Chanos forwarded an e-mail about research by John Gwynn, an analyst with brokerage Morgan Keegan & Co., to rival SAC Capital, the documents show. Morgan Keegan fired Gwynn for telling clients before publication that he planned a negative report. Morgan Keegan and Gwynn were also sued. All defendants denied Fairfax’s claims. Fairfax filed that e-mail and others provided by the defendants with a New Jersey state court to support its claims.

“Last night John Gwinn at Morgan Keegan faxed over to me an outline detailing the issues at FFH, basically those he will be publishing,” Mark Heiman, then an analyst at Kynikos, wrote in a Dec. 21, 2002, e-mail to Chanos that was filed in the case.

FFH is Fairfax’s stock ticker. Gwynn’s name is misspelled.

“Kynikos rejects any claim that it participated in a conspiracy or that it did anything improper when it decided to sell short Fairfax stock,” Peter Haveles, an Arnold & Porter LLP lawyer for Kynikos said in an interview.

Jonathan Gasthalter, a spokesman for SAC Capital, declined to comment. Gwynn didn’t immediately return a call for comment.

Morgan Keegan spokesman Eric Bran said the company didn’t have an immediate comment. Memphis, Tennessee-based Morgan Keegan is a unit of Regions Financial Corp., Alabama’s biggest bank.

Racketeering Claim

Fairfax filed its complaint in New Jersey Superior Court in Morris County. Fairfax accuses the defendants of racketeering, commercial disparagement, tortious interference with contractual relationships and conspiracy.

The company accused Gwynn of collaborating with the hedge funds to write negative reports on the insurer. The funds knew when the reports would be released and what they would say, Fairfax claims.

When he learned of Gwynn’s research, Chanos began increasing his bet that Fairfax’s shares would fall, a Fairfax lawyer said at a Sept. 25 hearing in the case. A Kynikos lawyer disputed him.

Gwynn sued Fairfax in April. He said Fairfax defamed him by asserting that he had issued fraudulent research. Judge Deanne Wilson, overseeing the Fairfax case, in August ruled against the company’s request to dismiss Gwynn’s suit.

‘Speaks for Itself’

“The evidence demonstrating that Gwynn leaked his research to hedge funds before publication, and his subsequent termination for that misconduct, speaks for itself,” said Marc Kasowitz, a lawyer for Fairfax. “It further proves his prior denials about such misconduct and counterclaim were utterly without merit.”

On Dec. 11, 2002, Heiman wrote his boss Chanos that an insurance analyst at another investment firm told him that Gwynn was going to initiate Fairfax coverage “at ‘underperform,’ with the thesis being that they are extremely under-reserved in the $3-$5 BN area,” according to an unsealed e-mail.

“Just spoke to John Gwinn at Morgan Keegan, and he was more critical of FFRX than I’ve ever heard a sell side analyst,” Heiman told Chanos in a Dec. 16, 2002, e-mail, using Fairfax’s former ticker symbol. “Everything from underwriting to accounting to dishonesty.”

Chanos, on Dec. 18, 2002, forwarded that e-mail to Jeff Perry, then of New York-based SAC Capital, who’s also a defendant. Perry didn’t return a call for comment.

Gwynn’s first report on Fairfax was dated Jan. 16, 2003, and released the next day.

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 reporter on this story: Thom Weidlich in New York at

Last Updated: February 12, 2009 17:18 EST

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