Hedge funds paid trickster, insurer alleges

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 Ltd.

"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 $6 billion in damages.

Dirty tricks

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 8,000 employees and $26.8 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. The skirmish took a strange turn last November, when Contogouris was arrested on unrelated embezzlement charges. He has pleaded not guilty in that case. Contogouris and the hedge funds say they will argue Sept. 5 to have the Fairfax complaint dismissed. Contogouris didn't respond to messages left at his New Orleans home.

Research integrity

The Fairfax fight is one of several bitter battles taking place 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 complaint tells a story of people playing by a whole different set of rules," says Michael Bowe, a lawyer at New York-based Kasowitz, Benson, Torres & Friedman, which represents Fairfax.

The hedge-fund firms say Fairfax sued to quiet critics.

"This case involves a spurious attempt by Fairfax, a publicly traded Canadian company, to use New Jersey's anti-racketeering statute to silence all stock-market analysts critical of Fairfax and to deter investors from 'shorting' its stock," wrote lawyers for Sender in a memorandum supporting the motion to dismiss.

Tempting target

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.

Contogouris says in court documents that he did work for six different hedge-fund firms. In a sworn affidavit in an unrelated civil complaint against him, he names several firms that Fairfax later sued, including Exis Capital Management, which is run by Sender.

Exis did indeed buy research from MI4 and shorted Fairfax stock in 2005, based in part on Contogouris' analysis, according to Sender's lawyer, David Zensky, of Akin Gump Strauss Hauer & Feld in New York. "Exis vigorously denies the charges of wrongdoing in the complaint," Zensky says.

Embezzlement arrest

Contogouris's war with Fairfax took an odd turn on Nov. 13, 2006, when he was arrested on federal charges of embezzling money from an unnamed former employer. News of the arrest sent Fairfax soaring 10 percent in a day. Contogouris pleaded not guilty to a four-count indictment filed in Manhattan federal court in New York.

Most critics of Fairfax have been silent since the company filed its racketeering complaint. In all, Fairfax sued eight hedge-fund companies. Several of the managers are named personally, including Chanos, Cohen, Loeb, Rocker and Sender. Most of the defendants remain mum.

Lone voice

Only one Fairfax detractor is still talking: William Gahan, a trader at Institutional Credit Partners, a New York-based fixed-income manager. Gahan, 41, says he has accountants and tax lawyers delving into Fairfax.

Gahan says Fairfax used transactions with a Cayman Islands-based subsidiary of Bank of America to dodge U.S. taxes. Fairfax says the deals were proper. After Gahan began asking questions about Fairfax, the insurer included him and his firm in its racketeering suit. "Anyone who questions the company gets sued," he says.

Gahan fueled Fairfax's allegations of a conspiracy in November when he and Bernstein posted a $200,000 bond to guarantee that Contogouris would appear in court on the separate embezzlement charges. Gahan says he did it because he thinks Contogouris is innocent. He says he's skeptical about all the dirty deeds that Fairfax alleges, too.

Controversial character

Lawyers for Contogouris and Bernstein say their clients are protected by the First Amendment to the U.S. Constitution, which guarantees the right to free speech. On those grounds, they say, the complaint should be dismissed.

It's been a wild ride for Contogouris, a controversial character who took up stock research after his other ventures. He met Sender through a friend or a relative, Sender's lawyer Zensky says.

For now, at least, Contogouris' days as an analyst are over. MI4 has stopped doing research, for fear of getting sued again, his lawyers said in court documents.

As of mid-August, his separate trial on embezzlement charges had yet to be scheduled. None of his former clients would step forward to help when he was arrested.

"No one would take his call," Gahan says. It seems Contogouris, one-time head of MI4, has been disavowed by the hedge-fund firms that now stand accused of paying him to do their dirty work.